You Say Tomato and I Say Tomate; Let’s Call this Whole Antidumping Racket Off

Last month, on the day the president was addressing audiences in the auto-parts-factory-rich state of Ohio, the administration filed a formal trade complaint before the World Trade Organization alleging that China is subsidizing exports of automobile parts.

Last week, at the request of domestic tomato producers operating preponderantly in the state of Florida, the Commerce Department agreed to terminate a 4-year-old agreement, which has allowed tomatoes from Mexico to be sold in the United States under certain minimum price conditions.

Of course it would be cynical to believe that these actions have anything to do with an incumbent candidate wielding Executive branch authorities to curry favor with special interests in major swing states before an election. So let’s make this latest episode a teaching moment about the perils of the antidumping status quo.

The long-standing – but vaguely understood – "trade agreement" between the United States and Mexico that was terminated last week was an agreement between Mexican tomato producers and the U.S. Department of Commerce to "suspend" an antidumping investigation that had been initiated at the request of U.S. tomato producers back in 1996. At the time, U.S. producers alleged that they were being materially injured by reason of tomatoes imported from Mexico and sold at "less than fair value." The U.S. International Trade Commission agreed, preliminarily, on the issue of injury and the Commerce Department had calculated that the Mexicans were, in fact, dumping – selling in the United States at prices below "fair value." (Here and here are two of many Cato exposés of what passes for objective administration of the antidumping law at the Commerce Department.)

But instead of carrying the investigation through to the final stage which likely would have included the imposition of duties, a "suspension agreement" was reached under which the Commerce Department would suspend the antidumping investigation if the Mexicans agreed to certain terms – most importantly, that they sell their tomatoes above a minimum benchmark price.  Understanding why the parties would agree to suspend an investigation – and why there are only seven suspension agreements among 240 active antidumping measures – is important to understanding one of the most anti-consumer, anti-competitive aspects of the U.S. antidumping law.

In an antidumping investigation, the Commerce Department calculates a dumping "margin," which is purported to be the average difference between the foreign producer’s home market prices and his U.S. prices of the same or similar merchandise sold contemporaneously, allocated over the average value of the producer’s U.S. sales, which yields an ad valorem antidumping duty rate. That rate is then applied to the value of imports, as they enter Customs, to calculate the amount of duty "deposits" owed by the importer.

So, if a Mexican tomato producer’s rate has been calculated to be 14.6% and the value of a container of tomatoes from that producer is $100,000, then U.S. Customs will require the U.S. importer of those tomatoes to post a deposit of $14,600. Why is it called a deposit? Because the final duty liability to the importer is still unknown at the time of entry. The 14.6% is an estimate of the current rate of dumping based on sales comparisons from the previous year. But the actual rate of dumping for the current period – and, thus, the actual cost of importing tomatoes from Mexico – is unknown until completion of an "administrative review" of the current period’s sales by the Commerce Department, which occurs after the period is over.

In other words, because of the unique retrospective nature of the U.S. antidumping law, importers DO NOT KNOW the amount of antidumping duties they will ultimately have to pay until well after the subject products have been imported and sold in the United States. The final liability might be larger, much larger, smaller, or much smaller than the deposit. If smaller, the importer gets a refund with interest. If larger, the importer owes the difference plus interest.

How many business ventures would be started – or even qualify for a loan – with so much uncertainty about its operating costs? Imagine your local supermarket operating on the same principles. Imagine ringing up your basket-full of groceries, paying $122.45, and then waiting a year to find out whether you get a rebate or have to issue a supplemental check. Gamblers might enjoy the thrill, but this kind of uncertainty is anathema to business. Most grocery shoppers would buy their groceries somewhere else, where the prices are final.  Likewise, importers and other businesses in the supply chain are likely to stop doing business altogether with exporters who are subject to antidumping measures.

Such is the consequence of our "retrospective" antidumping system. Every other major country that has an antidumping law has a "prospective" system, whereunder the duties assessed upon importation are final.  And this brings us back to Mexican tomatoes.

The suspension agreement terminated last week had been in effect since 2008 and required Mexican producers to sell their tomatoes at prices above $0.17 per pound between July 1 and October 22 and above $0.22 per pound between October 23 and June 30.  (That agreement was actually the third suspension agreement governing the terms of Mexican tomato sales in the United States since 1996.  The previous two were terminated at the request of the Mexican producers, presumably because market conditions had changed, and they were seeking better terms.)

The advantage of a suspension agreement is that it brings a degree of certainty -- even if prices are higher.  It would be collusion but for the fact that the deal is struck between foreign producers and the Commerce Department and not between foreign producers and U.S. producers.  Occasionally, domestic producers desire certainty because its always possible that antidumping rates will decline in subsequent years. But foreign producers are more inclined to covet the certainty of a suspension agreement because the uncertainty that would otherwise confront their customers -- U.S. importers -- is often enough to chase them away entirely. And that helps explain the dearth of suspension agreements.

The retrospective nature of the U.S. law is just another example of how the antidumping regime is punitive and not remedial.