Commentary

Anti-Dumping Law Is Discriminatory

This article appeared in American Metal Market on November 12, 2009.

The U.S. anti-dumping, law certainly has important friends in high places. Friends in Congress like Rep. Phil English (R., Pa.) are pushing new legislation to make the law even tougher on imports than it is today. Meanwhile, friends at the U.S. Trade Representative’s office are working hard to keep anti-dumping issues off the negotiating table in the upcoming round of World Trade Organization talks; they want to prevent representatives of other countries from even discussing proposals that could require liberalization of U.S. law.

It is clear that these friends are serving the interests of U.S. steel producers and other industries that use the anti-dumping law frequently against foreign competitors. But are they serving the broader national interest?

In a recent article in American Metal Market entitled “Myths and facts about trade laws and consumers,” Barry D. Solarz of the American Iron and Steel Institute advanced the standard defense of the anti-dumping law. (AMM, Oct. 4). He argued that the law was needed because “less-efficient foreign producers often rely on government subsidies, closed home markets, anti-competitive practices and dumping to obtain an artificial competitive advantage over more-efficient U.S. firms.” In other words, antidumping duties offset market-distorting practices abroad and thereby ensure a “level playing field.”

That’s the usual rhetoric of anti-dumping supporters. The reality of actual anti-dumping practice, on the other hand, is something very different. The law allegedly targets “unfair” pricing practices — price discrimination and below-cost sales — that reflect protectionism, cartels, subsidies or other structural defects in foreign markets. In fact, the law fails in this task at two different levels.

First, as currently written and enforced, it does not reliably identify either price discrimination or below-cost sales. Furthermore, the law lacks any mechanism for determining whether the pricing practices it condemns as unfair have any connection to market-distorting policies abroad. Consequently, the anti-dumping law frequently punishes foreign companies for unexceptionable business practices routinely engaged in by U.S. companies. Price discrimination between home and export markets — the classic definition of dumping — supposedly signals the existence of a protected “sanctuary market.” With the home market shielded from competition, prices — and profits — are abnormally high. Those above-normal profits then provide a war chest that allows a foreign producer to undersell its rivals in overseas markets.

Most of the methodologies used by the U.S. Commerce Department to calculate dumping, however, have no bearing on the existence of such price discrimination. For example, Commerce sometimes compares U.S. prices with prices in third countries; even if price differences are found in such cases, they say nothing about conditions in the producer’s home market. Also, Commerce frequently compares U.S. prices with “constructed value,” or cost of production plus profit. Obviously, such comparisons cannot reveal price discrimination for the simple reason that actual price data are not used for one side of the equation. And when Commerce does compare U.S. prices with home-market prices, it often examines only above-cost home-market sales. Any resulting findings of price differences are worthless, since all the lowest-price home-market sales have been systematically excluded from the comparison.

In a study of the U.S. anti-dumping law published recently by the Cato Institute. I examined all Commerce Department final dumping determinations through the end, of 1998 in anti dumping investigations initiated since Jan. 1, 1995 — a total of 141 company-specific dumping findings in 49 different cases. Out of 107 affirmative dumping findings, only two were based strictly on a comparison of U.S. and all home-market prices — the only methodology that bears any possible connection to the existence of market-distorted price discrimination.

Meanwhile, even when price discrimination between home and export markets is reliably established, a sanctuary market is only one of many possible explanations. Companies charge different prices in different markets for all kinds of reasons. For example, a company may have a strong reputation at home as a reliable supplier of high-quality products, while abroad it is less well known and may have to accept lower prices on its export sales. And even if the home market is open, such price differences will not necessarily be arbitraged away. Look, for example, at the billions of dollars of “gray market” imports that come into the United States every year. Those imports occur because U.S. prices for those goods are higher than prices abroad; the persistence of gray market imports demonstrates that price differences can be maintained indefinitely.

Dumping has another definition besides international price discrimination: a company is also said to dump when it sells in export markets at prices below the cost of production. Such below-cost sales allegedly reveal the existence of foreign government policies that allow the company to sustain losses and ignore normal market signals. The U.S. anti-dumping law, however, does an even worse job with below-cost sales than it does with price discrimination. Not a single methodology used by Commerce in calculating dumping margins measures whether U.S. imports are sold at a loss. The closest Commerce comes is when it compares U.S. prices to constructed value, which is equal to the cost of production plus profit. In constructed value cases, the criterion for finding dumping is not the existence of losses but insufficient profitability. And in the Cato Institute study mentioned above, I found that Commerce sometimes uses a profit rate in excess of 20 percent. In those cases, a company selling in the U.S. market at a 15-percent profit would be found guilty of dumping.

More fundamentally, the usual reason for below-cost sales is nothing other than a normal, healthy, competitive marketplace. Corporate giants like General Motors Corp. and IBM Inc. lost billions of dollars a year in the early 1990s; Internet upstart Amazon.com is losing hundreds of millions, even as its sales skyrocket. Red ink, standing alone, is no proof of an unlevel playing field.

For the anti-dumping law to live up to its supporters’ rhetoric, dramatic reforms are required. First, methodologies must be changed so that the law targets only real price discrimination and below-cost sales. Second, if those pricing practices are found, Commerce must then determine whether they are really due to foreign market-distorting practices, not just normal business behavior. Until such changes are made, the claim that the. U.S. anti-dumping law guarantees a level playing field cannot be taken seriously. In its present form, the law actively discriminates against foreign goods by subjecting them to requirements not applicable to U.S. products. Such protectionist discrimination is clearly not in the national interest.

Brink Lindsey is vice president for research at the Cato Institute.