Straight out of Mad Men: US markets import protection as export promotion

Michael Moore, Thomas Prusa

08 November 2010

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“We will double our exports over the next five years, an increase that will support two million jobs in America.”

President Barack Obama, State of the Union Address, 2010.

“US Commerce Secretary Gary Locke today announced proposed measures [that will] strengthen trade enforcement [and] support President Obama’s National Export Initiative.”

US Department of Commerce Press Release, August 2010

Undercutting Obama’s trade agenda

Last month the Department of Commerce announced a series of proposals to strengthen the enforcement of US trade laws. But these proposals will directly undercut President Obama’s announcement in his 2010 State of the Union Address of his signature trade policy initiative to double US exports. Such a change in US trade laws will reduce access to critical inputs for US firms operating in a global economy and increase the chances that US exporters face similarly toughened trade remedy laws in partner countries. These new proposals also fly in the face of President Obama’s explicit agreement in the post-crisis G20 summit to avoid actions that increase protectionism.

A far better approach to achieve the Obama goals would involve bringing US trade remedy laws into WTO compliance, re-establishing the president’s commitment to the rule of law and multilateral solutions to trade problems. Moreover, US adherence to WTO commitments as interpreted by the Dispute Settlement Body would provide incentives for other countries to live up to their own responsibilities with regard to US exporters. Reforming its own antidumping laws to make the US more open would promote President Obama’s export initiative.

Background

Existing US trade remedy procedures are already among the most aggressive in the world. The Department of Commerce finds dumping in over 95% of all cases filed by domestic firms. Since 2000, the average US dumping duty is 47%, compared to average bound rates of about 3%. Chinese exporters face particularly onerous US antidumping duties. Bown (2010a) finds that the average antidumping margin applied on China is 148%. US antidumping actions are also long lasting. Contrary to the spirit of WTO obligations, the US generally does not sunset trade remedies within five years (Moore 2006 and Liebman 2004). In short, claims that the US antidumping system needs strengthening seem misplaced.

More aggressive US antidumping efforts directly undercut President Obama’s trade agenda in at least four ways.

  • Restrictions to imported inputs cannot help medium-sized US firms break into the global market place.

For example, higher costs of imported steel through a “strengthened” antidumping system cannot help US auto exporters in their efforts to increase exports to South Korea.

  • Second, the US is now the third most targeted country for antidumping, trailing only China and South Korea (WTO 2010).

At least as troubling, Bown (2010b) finds there has been a recent 20% increase in US products targeted by other countries. If other countries “strengthen” their unfair trade laws following the US lead, US exporters will suffer. For example, the US decision to broaden the definition of “unfair pricing” to include the constructed cost method, resulted in adoption of this method worldwide within five years. Similarly, the US use of the cumulation provision, which sharply increased the likelihood that countries with small market shares would be caught in the unfair trade system (Hansen and Prusa, 1996), was added to antidumping systems throughout the world, with harmful consequences for US exporters.

  • Third, if these proposed changes are adopted by our trading partners, US firms may service foreign markets by FDI rather than encouraging exporting (Blonigen and Ohno 1998).

As a result, the Department of Commerce proposals could result in fewer US exports.

  • Fourth, reducing access to the US market will adversely affect US firms’ competitiveness in other markets.

If foreign firms perceive that the US market will be closed to them through antidumping, they may redirect their sales to other markets, thereby undercutting US export opportunities. Bown and Crowley (2007) find strong evidence that US antidumping protection results in such “trade deflection.”

Specific proposals

None of the proposals can plausibly promote exports. The changes include:

  • Expanded use of random sampling to select companies as individual respondents in antidumping investigations and reviews rather than choosing the largest exporters.

This change would put more burdens on small foreign firms that do not have the resources to respond adequately to the request for information. This proposal is a transparent attempt by the Department of Commerce to change the rules in a way that results in higher duties.

Suppose three large firms account for 90% of the subject imports while 20 others account for the remaining 10%. Under current rules the Department of Commerce samples the big three firms. Under the proposed rules, it can instead sample the pricing by firms with, say, 1% of the imports. What is the logic of focusing on such small firms? The reason is that small firms may not have the resources to spend the $2 million (or more) required to participate in a proceeding. Failure to respond to all questions allows the Department of Commerce to use “facts available” (i.e. domestic firms’ allegations) when computing margins. Blonigen (2006) finds that using “facts available” increases the average computed margin by 30 percentage points.

This proposal clearly would hurt small US firms trying to increase exports if other countries adopt this approach.

  • Eliminating the practice of allowing individual companies to seek removal from an antidumping or countervailing duty order based on their ability to show zero dumping margins or subsidy rates for three (antidumping) or five (countervailing duty) consecutive years.

This change makes little sense if the goal is to induce foreign firms to change their pricing practices. Under current rules, firms that can show zero “unfair” pricing over multiple years can have their order revoked. The existing rules incentivise foreign firms to raise prices and eliminate dumping. The proposed change eliminates this important incentive for individual foreign firms to comply. In effect, the US is saying it will ignore “good behaviour” when deciding whether to continue the penalty. Instead, the best that the foreign firm could hope for would be a zero dumping duty but with the order remaining in effect. The spectre of duties rising in future years (with no attendant injury determination by US authorities) will discourage US companies from buying from subject suppliers – even if those suppliers are selling far above “fair value.”

This change also has potential adverse consequences for small- and medium-sized US exporters. Foreign governments will be tempted to introduce similar policies for US exporters, in effect continuing to punish those firms even if their own behaviour does not justify a continuing antidumping duty.

  • Considering whether importers will be required to post cash deposits rather than bonds for imports that fall within the scope of an investigation

This change is aimed at the perceived problem that the bond requirement does not discourage foreign firms from exporting during an investigation sufficiently. This belief is surprising given that the empirical evidence on the issue shows the exact opposite. For example, Staiger and Wolak (1994) argue that the trade restraint that occurs during the investigation period under existing rules is sufficient to make it worthwhile for US firms to seek protection simply in order to receive the protection during the investigation period.

In short, the proposed rule would tend to increase the price of imported goods, which would be beneficial for import-competing US firms but would undercut any other firm that might use this good as an input – most notably medium-sized companies trying to export for the first time.

Many of the other proposed changes are aimed at making the existing non-market-economy rules even more restrictive, which is primarily directed at China. The critical question is whether these additional measures are needed in light of the incredibly high duties that the existing rules already imposed on China noted above. Under existing rules, the Department of Commerce already calculates that the average Chinese exporter subject to antidumping investigations is selling at a 150% below cost. Does anyone believe that duties of 250% instead of 150% on Chinese imports would stimulate US exports?

An opportunity for presidential leadership

Despite its problems, President Obama’s trade agenda is certainly a step in the right direction. A US manufacturing sector focused on engaging in the international market through expanded exports is a critical part of a long-term job creation plan. Keeping the world’s markets open to developing country exports can not only raise incomes for the poorest of the poor but can also enhance US national security through providing needed economic growth abroad.

Naturally, President Obama is looking at the overall national interest when establishing a trade agenda. Unfortunately, the Department of Commerce is focused on the narrow interests of a relatively small group of industries that use antidumping and countervailing duty investigations to thwart competition. They may talk about supporting “fair trade” but it is an open secret that the legal definition of unfair trade bans all sorts of normal, profitable economic activity. As a result, antidumping and countervailing duty law serves to reduce competitiveness both here and abroad.

We sincerely hope that the Department of Commerce will therefore reconsider the changes recently proposed and work to help rather than undercut Obama’s trade agenda.

References

Blonigen, Bruce A and Yuka Ohno (1998), “Endogenous Protection, Foreign Direct Investment, and Protection-building Trade”, Journal of International Economics, 46:205-227.

Blonigen, Bruce A (2006), “Evolving discretionary practices of US antidumping activity”, Canadian Journal of Economics, 39(3):874–900.

Bown, Chad P (2010a), “China’s WTO Entry: Antidumping, Safeguards, and Dispute Settlement”, in Robert C Feenstra and Shang-Jin Wei (eds.), China’s Growing Role in World Trade, University of Chicago Press for the NBER, 281-337 (chapter 8).

Bown, Chad P (2010b), “Taking Stock of Antidumping, Safeguards, and Countervailing Duties, 1990-2009,” World Bank Working Paper 5436.

Bown, Chad P and Meredith A Crowley (2007), “Trade Deflection and Trade Depression”, Journal of International Economics, 72(1):176-201.

Hansen, Wendy L and Thomas J Prusa (1996), “Cumulation and ITC decision-making: The sum of the parts is greater than the whole”, Economic Inquiry, 34:746-769.

Liebman, B (2004), “ITC Voting Behaviour on Sunset Review”, Review of World Economics/Weltwirtschaftliches Archiv, 140 (3):2004.

Moore, Michael O (2006), “An Econometric Analysis of US Antidumping Sunset Review Decisions”, Review of World Economics/Weltwirtschaftliches Archiv, 142(1):122-150.

Staiger, Robert W and Frank A Wolak (1994), “Measuring Industry Specific Protection: Antidumping in the US”, Brookings Papers on Economic Activity: Microeconomics, 1:51-103

WTO, Antidumping Statistics, last accessed on 12-October-2010.

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Topics:  International trade

Tags:  US, international trade, antidumping, protectionism

Michael Moore

Professor of Economics and International Affairs, Elliott School of International Affairs and the Department of Economics, George Washington University

Thomas Prusa

Professor of Economics at Rutgers University

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