A Trade Story IPE Folks Should Love

This NY Times article is over a month old now, but I'm highlighting it anyway because it is illustrative of trade politics dynamics that we often emphasize in IPE. It would make a good case study for an introductory class. Here's the issue:

The United States on Thursday announced the imposition of antidumping tariffs of more than 31 percent on solar panels from China.

Here's the ostensible policy process:

The American decision was made by civil servants in a quasi-judicial process that is heavily insulated by law from political interference and does not represent a deliberate attempt by the Obama administration to confront China on trade policy. But that distinction has been largely lost in China, where the solar panel issue has been one of many causes embraced online by the country’s vociferous ultranationalists, who put heavy pressure on Chinese officials to respond forcefully to perceived snubs to China.

Here's the materialist policy process:

SolarWorld Industries America, which led the coalition of manufacturers that filed the solar dumping case, welcomed the department’s ruling. The decision “is a very positive step in the process. It’s also in line with what we expected,” said Ben Santarris, a company spokesman. “We consider this a bellwether case. It underscores the importance of manufacturing to the U.S. economy.”

Here's the opposing domestic force:

Many solar panel installers in the United States have opposed tariffs on Chinese panels, contending that inexpensive imports have helped spur many homeowners and businesses to put solar panels on their rooftops. The new tariffs are likely to mean a substantial increase in the price of solar panels here.

Here's the opposing foreign force:

“This is really a surprise,” he said in a telephone interview. “It’s really dangerous.” Mr. Li said that Chinese companies would “certainly” retaliate by filing a trade case at China’s commerce ministry accusing big American chemical companies of dumping polysilicon, the main ingredient in solar panels, on the Chinese market.

Here's the supporting ideational force:

“China’s method is straightforward: it sets forth industry-specific Five-Year Plans and then uses all forms of national and local subsidies and other governmental support to quickly transfer jobs, supply chains, intellectual property and wealth, to the permanent detriment of U.S. and global manufacturers,” he said. “China’s ability to ramp up and overwhelm an industry is unique and particularly devastating with new and emerging technologies, where global competitors may be less established and can be knocked out more easily and quickly.”

Here's the opposing ideational force:

Chinese officials have been indignant at American criticism of their solar power industry, pointing out that the United States has urged China for years to embrace renewable energy as a way to reduce air pollution, combat climate change and limit the need for oil imports from politically volatile countries in the Mideast.

There's more good stuff at the link, including a bit of historical context. Pedagogically speaking, it would be nice if this ends up being settled at the WTO. Then we could bring in all of interests, ideas, and institutions into one nice, compact little story.

U.S. Loses W.T.O. Dumping Appeal

This is positive:

The World Trade Organization’s top court rejected on Tuesday an American appeal in a long-running case on antidumping measures, clearing the way for Japan to threaten trade sanctions against Washington.

The final ruling by the Appellate Body of the W.T.O. in the case, which Japan started in 2004, dealt another setback to a controversial American method of dealing with unfairly priced imports.

But it also highlighted sensitivity about antidumping measures. The measures impose additional duties on imports that are sold for less abroad than they cost at home, but can be abused for protectionist purposes. ...

The case turned on a controversial method known as “zeroing” used by the United States to calculate duties on goods imported for less than they cost in the originating country.

The way the United States handles its antidumping measures was also at issue. Washington argued that it could continue to levy duties on goods that entered the country before a W.T.O. ruling finding such duties illegal — a stance rejected by the court.

The United States is the only one of the W.T.O.’s 153 members to back zeroing, which the Appellate Body has ruled against consistently.

The U.S. is clearly in the wrong here, and I'm happy to see the W.T.O. put its foot down. I discussed how anti-dumping protections often make trade less free and fair before.

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

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.]