June 20, 2012 1:36PM

New Antidumping Rule Magnifies Trade Distortions

The Commerce Department always seems to have more tricks up its sleeve when it comes to increasing the protectionist impact of existing antidumping law.  Yesterday, Commerce announced a new rule that will increase antidumping duties on imports from China and Vietnam if the goods were charged export taxes when they left their country of origin.  The new policy is another example of Commerce cherry-picking how to recognize that these countries are no longer "nonmarket economies" in a way that ironically enables it to increase the discriminatory impact of the inaccurate label.  Moreover, although the move increases pressure on China to decrease or eliminate market-distorting export duties, it does so by ignoring the economic rationale for opposing such duties in a way that highlights the incurable folly of the U.S. antidumping regime.  Antidumping duties supposedly offset the detrimental impact of foreign trade distortion, but this new rule will actually magnify the distortions caused by export taxes.

When China and Vietnam negotiated their accessions to the WTO, they accepted that other members could ignore certain rules in the WTO Antidumping Agreement when using such measures against Chinese or Vietnamese imports and instead apply what is known as nonmarket economy methodology.  The practice of treating nonmarket economies differently for antidumping purposes originated during the Cold War when some Soviet-bloc countries controlled all commodity prices within their territories.  This frustrated both the traditional antidumping methodology as well as the countervailing duty regime designed to offset the benefits of foreign government subsidies.  For decades, Commerce applied a highly subjective and discretionary methodology in antidumping investigations on imports from these countries while, for practical reasons, exempting them from anti-subsidy laws.

This balance was altered in 2007 when the United States decided that China's economy was sufficiently market-driven so as to be subject to the anti-subsidy regime despite the fact that China was still exposed to use of the nonmarket economy methodology in antidumping investigations.  Now Commerce has reasoned that if it can determine the level of a subsidy in China, then it can measure the level of a tax too.  But because of how nonmarket economy methodology ignores actual domestic prices, taking an export tax into account will simply result in an increase in the duty without regard to the tax's mitigating effect on the competitiveness of China-based manufacturers.  The bizarre consequence is that both an export subsidy and an export tax can result in higher duties on Chinese imports.

By using the antidumping regime to impose a tax on goods based on the amount of tax they've already been charged upon export, the new policy reveals the absurdity of the entire antidumping law.  The United States has been challenging China at the WTO over its export duties on certain rare earths and pointing out that these duties increase the cost of those minerals, making it more difficult for U.S. industries that rely on imports to compete with Chinese firms.  If an increase in the price of imports due to Chinese export taxes is detrimental to U.S. competitiveness, then an increase in price due to U.S. import taxes via antidumping duties is equally detrimental.  (See here and here for Dan Ikenson's take on this dizzyingly obvious hypocrisy.)  The new policy has the possible effect of making counterproductive import taxes even worse by doubling up the effect of the already harmful export tax.  Rather than creating a "more level playing field," the result will be an increase in market distortion caused by overlapping taxes, benefiting some inefficient, politically-connected industries at the expense of everyone else.