Since securing trade promotion authority from Congress last summer, the Bush administration has been on a pro-trade tear. Recently, free trade agreements with Singapore and Chile were concluded, and negotiations on several other fronts were started. But perhaps the most laudable initiative is a proposal, announced last month, to end all non-agricultural tariffs worldwide by 2015.
For a variety of reasons, though, this proposal has been met with skepticism around the world. A common concern is that it doesn't matter how low tariffs are if the United States continues to hamper imports with antidumping measures. Products subject to zero tariffs will remain vulnerable to whimsical antidumping suits, which can result in triple-digit duties with the flimsiest of evidence.
The antidumping law, perhaps the most arbitrary and disruptive U.S. trade barrier, is defended as a means of ensuring "fair" trade and maintaining a "level playing field" for domestic producers. Tough antidumping rules, its defenders claim, facilitate freer trade by providing assurances that "unfair" trade will be punished and thus deterred.
But that dubious justification is a smokescreen, pure and simple. The fact is that the antidumping law is protectionist, contradictory and unfair. Its overzealous application routinely punishes U.S. importers and foreign exporters who transact fairly, and ultimately undermines the administration's broader trade agenda.
The Import Administration (IA) is part of the U.S. Department of Commerce. According to its Web site, the IA "[e]nforces laws and agreements to prevent unfairly traded imports and to safeguard jobs and the competitive strength of American industry." It is a classic case of the fox watching over the henhouse. The IA's concern for American industry extends only to those industries seeking to squelch foreign competition. The consequences for downstream producers and U.S. exporters are systematically ignored.
The IA's methods of determining dumping are rigged in favor of protectionist outcomes, but are insulated from popular scrutiny by arcane and highly technical procedures. Indeed, most defenders of the law have no idea how it works in practice, but are simply attracted to its appealing rhetoric of "fair trade" and "level playing fields." If it sounds good, it must be good.
Dumping is said to occur when an exporter's prices in the United States are lower than those it charges for similar merchandise in its home market. Procedures for determining these price differences are not straightforward. They are subject to curious conditions and indefensible calculations, which are strictly the domain of the Import Administration.
In virtually every case, all of the exporter's U.S. sales are compared to only a higher-priced subset of its home-market sales (sales in its own country). Home-market sales priced below the average cost of production are simply disregarded. If an exporter sells five widgets in both the U.S. and the home-markets at prices of $1, $2, $3, $4, and $5, the average price in both markets is $3. No dumping, right? Wrong! If it costs $2.50 to produce these widgets, the home-market sales at $1 and $2 are dropped, causing the average home-market price to rise to $4 and generating a dumping margin of $1, or 33 percent. A tax of 33 percent would be slapped on future U.S. sales from that exporter. This procedure alone accounts for a significant portion of most dumping margins "calculated" by IA across industries, across countries, and over time. Yet, not a single antidumping defender could reasonably justify this so-called "cost test."
When exporters sell multiple products in the U.S., the IA calculates dumping amounts for each unique product and then averages the positive results to generate an overall rate. Any negative results — where the U.S. price exceeds the home market price — are simply ignored! So, if an exporter sells a rubber widget and a plastic widget at $2 each in the U.S., and at $3 and $1, respectively, in the home market, a dumping margin of $1 exists on the rubber widget and a margin of $-1 exists on the plastic widget. Therefore, the average dumping margin is zero, right? Wrong! The negative dumping margin on the plastic widget is simply disregarded — actually set to 0 — and the total dumping margin is calculated as $1 (the total amount of positive dumping) divided by $4 (the total value of all U.S. sales), or 25 percent. The procedure, known as "zeroing," also accounts for a significant portion of dumping margins across industries, across countries, and over time.
These two stealth procedures come from a much larger bag of tricks that the Import Administration routinely perpetrates on foreign exporters. Dozens of countries around the world employ similar scams with their own antidumping laws — frequently at the expense of U.S. exports. Unless these abuses are reined in, the bold U.S. proposal for a duty-free world is doomed to ring hollow.