Wednesday, August 5, 2009

WTO: Protectionist Anti-"Dumping" Tariffs on the Rise

. Wednesday, August 5, 2009

This shouldn't surprise anyone who has paid any attention to anything in the past year, but WTO's 2009 World Trade Report indicates that many states have responded to the financial crisis by ramping up protections for domestic firms. We know all about the bailouts and subsidies, but as the World Bank PSD blog notes, the WTO report highlights the rise in anti-dumping duties:

The WTO Report notes that the use of protectionist measures such as Anti Dumping (AD) duties is already on the rise. Specifically, in 2008, the number of AD initiations increased by 28 percent compared with 2007. Eighteen WTO members reported initiating a total of 208 new investigations compared with 163 initiations reported for 2007. The number of new measures applied also increased by about the same rate in 2008. A total of 15 members reported applying 138 new AD measures, 29 per cent higher than the 107 new measures reported for 2007 (WTO Annual Report 2009, page 133).


The International Economic Law and Policy Blog recently highlighted an on-going case between China and the E.U., and Greg Mankiw criticized one U.S. anti-dumping policy before the economic crisis hit.

So what is "dumping"? Dumping occurs when a manufacturer in one country sells its products in other country at prices below the production cost or below the price in the home market. Dumping is considered an unfair trade practice because it explicitly seeks to gain market share by driving producers in the importing country out of business through predatory pricing (note: the same thing can happen in purely domestic markets; Walmart is often accused of this sort of predatory pricing). After the domestic producer has been driven out of business the foreign producer will raise prices and benefit from a lack of competition. Makes sense, right?

In practice, however, things often work much differently. Most "dumping" tariffs are not about predatory pricing, but are rather about preserving local industries through maintaining artificially high prices. As Mankiw and Swagel wrote in a 2005 Foreign Affairs article [pdf]:

The ostensible purpose of antidumping law is to help ensure competition by punishing foreign firms that sell their products at “unfair” prices in U.S.markets. In practice, however, antidumping has strayed far from this purpose, becoming little more than an excuse for special interests to shield themselves from competition at the expense of both American consumers and other American companies.


Moreover, when companies dump their products they are doing consumers a favor. Consumers are able to gain more surplus from the transaction, while producers lose surplus from the added competition. When dumping occurs the new equilibrium price is rarely higher than the pre-dumping price. This happens either because domestic producers become more efficient (or sacrifice some of their surplus) and remain in the market, or new entrants keep the industry competitive. In either case, the new equilibrium price is lower than the old one, which benefits consumers.

In the cases where "predatory pricing" succeeds in driving competitors out of business and also succeeds in limiting future competition, it is an inefficient and costly practice. But such cases are very rare. It is much more common for inefficient domestic producers to use dumping laws as a crutch to ward off competition. Thus, anti-dumping laws can actually facilitate the very situations they are intended to prevent!

The U.S. antidumping statute dates to 1921, before the GATT or WTO or modern era of globalization. Most other countries have similar policies, and exceptions for dumping tariffs have been written into WTO agreements. But that doesn't make it a good practice, and the world would be better off if dumping tariffs were truly reserved for the type of predatory pricing that lead to less (rather than more) competition.

[Edit: My original title was nonsensical.]

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WTO: Protectionist Anti-"Dumping" Tariffs on the Rise
 

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