An Introduction to the Law and Economics of Antidumping

James P. Durling
Vinson & Elkins LLP Washington DC

Thomas J. Prusa
Rutgers University and NBER New Brunswick NJ

Overview
Goals for the presentation:
Focus on AD Basic concepts of AD Practical impact of AD measures Emerging issues to consider

Approach for presentation:

Assume no prior knowledge No technical jargon

AD The Trade Remedy of Choice

Key trade remedies
Safeguard Actions (escape clause): Countervailing Duty (CVD): Antidumping (AD):
injury injury & govt subsidy injury & pricing

AD is the dominant law

More AD disputes than all other trade laws combined Between 1995-2005, WTO members reported:
2,851 antidumping disputes initiated 181 countervailing duty disputes initiated 142 safeguard disputes initiated

Worldwide Use of Antidumping, 1980-2003

350 300 250 200

80% 70% 60% 50% % by New Users

# cases

40%
150

30%
100 50 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002

20% 10% 0%

AD in International Context
International framework:
AD rules included in Kennedy, Tokyo, and Uruguay Rounds

Distinctive domestic laws implement this broader international framework To adapt the old phrase, the devil is often in the domestic details

What is Antidumping?
Dumping: charging an export price below normal value
Lower export price than domestic price price discrimination Sales below cost

It is not illegal or criminal It is not economically unfair:

domestic price discrimination & sales below cost is often implied by standard microeconomic theory

But it does trigger a legal right to offsetting duties

Key Substantive Elements

An export price below normal value
Domestic prices in the exporting country The most comparable third country prices Constructed value cost of producing the item

Injury to the domestic industry Caused by the low-priced imports

Key Procedural Elements

A petition to start the case. A finding of unfairly low prices A finding of injury caused by imports Preliminary and final findings Sometimes more than one agency U.S. antidumping practice as an example

AD Case Filed (Day 1)

(5-7 months)

Preliminary Injury
Affirmative to 2/3 (often higher for new users)

Preliminary LTFV
Almost always affirmative & large
(9-14 months)

Final Injury

Final LTFV AD Duties

Average margin rises from 15% to over 50%

(compare with MFN tariff levels)

Also a steady increase in affirmative injury decisions (but not as sharp)

Before case filed (threat)

AD Case Filed (Day 1)

Preliminary Injury When does AD begin to matter? Final Injury

Preliminary LTFV
(5-7 months)

After preliminary LTFV

Final LTFV AD Duties

After duties imposed (e.g., tariff)
(9-14 months)

Answer?
AD impacts trade before, during, and after investigation U.S. estimates: AD imposes larger costs than any other protective measure except MFA (which is now defunct) EU estimates: AD about as costly as agriculture protection

Pre-Duty Impact
Before the case:
Rumors or explicit signaling Exporters pull back (even with antitrust risk)

During the case:

Importers and exporters get nervous Some systems have great uncertainty

Post-Duty Impact
AD impacts trade flows regardless of outcome
Duties Levied Settled Cases (price/quantity agreements) Rejected Cases

Value of Trade Subject Countries

10%

%Change from year t0

0% t0 -10% -20% -30% -40% High Duty (Affirmative) -50% -60% t+1 t+2 Low Duty (Affirmative) t+3 t+4

Time

AD induces trade diversion

100%

%Change from year t0

80% 60% 40% 20% 0% -20% -40% -60%

High Duty Cases

Non-subject countries

t0

t+1

t+2

t+3

t+4

Subject Countries

Time

Measured Post-Duty Impact

Value Fall 50-60% Rise 20-40% Quantity Fall 60-70% Rise 40-80% AUV Rise 20-25% Fall/Rise

Subject

Non-subj

Measured Investigation Effects

Once preliminary AD duties imposed, trade volumes fall dramatically Estimates are that at least half the impact on trade occur during the investigation Trade impact can be significant enough that the investigation effectalone makes the case profitable

Emerging Issues
Proliferation of AD users The treatment of so-called non-market economies The changing dynamics of multi-lateral negotiations

Implications for EU & U.S.

EU & U.S. have long been the biggest advocates for AD protection and the driving force behind the weakening of AD rules Will they regret making AD so easily abused? Filing trends suggest Yes

Drop Steel Industry

Non-Market Economies
China is the most important NME Many countries use special rules:
Export prices determined same way Use of surrogate values: Chinese unit quantities and surrogate unit values Enormous unpredictability

Some countries have graduated China to market economy status.

The Next Frontier for NMEs

For more than twenty years, no CVD against NMEs like China. U.S. has its first case: AD and CVD cases against coated paper from China. Enormous uncertainty about whether and how the U.S. will proceed with this case.

Negotiating Dynamics
Doha Round has been stalled; prognosis uncertain due to the major issues. The rules negotiations have been proceeding slowly. Large increase in AD users has shifted roles played by different countries. Political support for concept of AD without understanding the details.

Conclusions
AD and trade remedies of growing importance. Crucial for all involved to understand at least the basics. Important for decision-makers to begin thinking about the broader implications.