Let’s Inject Antitrust Principles into Antidumping Law

Alden Abbott —  17 July 2015

In a Heritage Foundation paper released today, I argue that U.S. antidumping law should be reformed to incorporate principles drawn from the antitrust analysis of predatory pricing.  A brief summary of my paper follows.  Such a change would transform antidumping law from a special interest cronyist tool that harms U.S. consumers into a sensible procompetitive provision.

Imports and Dumping

Imported goods and services provide great benefits to the American economy and to American consumers.  Imports contribute to U.S. job creation on a large scale, provide key components incorporated by U.S. manufacturers into their products, and substantially raise the purchasing power of American consumers.

Despite the benefits of imports, well-organized domestic industries have long sought to protect themselves from import competition by convincing governments to impose import restrictions that raise the costs of imported goods and thus reduce the demand for imports.  One of the best known types of import restrictions (one that is allowed under international trade agreements and employed by many other countries as well) is an “antidumping duty,” a special tariff assessed on imported goods that allegedly are set at “unfairly lower” rates than the prices for the same products sold in their domestic market.

Product-specific U.S. antidumping investigations are undertaken by the U.S. Department of Commerce (DOC) and the U.S. International Trade Commission (USITC, an independent federal agency), in response to a petition from a U.S. producer, a group of U.S. producers, or a U.S. labor union.  The DOC determines if dumping has occurred and calculates the “dumping margin” (the difference between a “fair” and an “unfair” price) for the setting of antidumping tariffs.  The USITC decides whether a domestic industry has been “materially injured” by dumping.  If the USITC finds material injury, the DOC publishes an antidumping order, which requires importers of the investigated merchandise to post a cash deposit equal to the estimated dumping duty margins.

Economists define dumping as international “price discrimination”— the charging of lower prices (net of selling expenses and transportation) in a foreign market than in a domestic market for the same product.  Despite its bad-sounding label, price discrimination, whether foreign or domestic, is typically a perfectly legitimate profitable business practice that benefits many consumers.  Price discrimination allows a producer to sell to additional numbers of price-sensitive consumers in the low-priced market, to their benefit:  Those consumers would have bought nothing at all if faced with a uniformly applied higher price.

Dumping harms domestic consumers and the overall economy only when the foreign seller successfully drives domestic producers out of business by charging an overly low “predatory” (below its cost) import price, monopolizes the domestic market, and then raises import prices to monopoly levels, thereby recouping any earlier losses.  In such a situation, domestic consumers pay higher prices over time due to the domestic monopoly, and domestic producers that exited the market due to predation suffer welfare losses as well.

The Problem with Current U.S. Antidumping Law

Although antidumping law originally was aimed at counteracting such predation, antidumping provisions long ago were reformulated to raise the likelihood that dumping would be found in matters under investigation.  In particular, 1974 legislation eliminated consideration of sales made below full production cost in the home market and promoted the use of “constructed value” calculations for home-market sales that included approximations for the cost of production, selling, general and administrative expenses, and an amount for profit.  This methodology, compared to the traditional approach of comparing actual net foreign product prices with net U.S. prices, tended to favor domestic producers by yielding higher margins of dumping.

The favoring of domestic industries continued with the Trade Tariff Act of 1984, which compelled the USITC to use a “cumulation” analysis that could subject multiple countries to anti-dumping penalties if one county’s product was found to cause material injury to the establishment of a domestic industry.  More specifically, under cumulation, if multiple countries are being investigated for dumping the same particular product and if exports from any one of those countries, or all in combination, are found to cause material injury, then all exports are made subject to an antidumping order.  Thus, imports from individual countries that individually could not be shown to cause material injury face a price increase — an anti–American consumer outcome that lacks any legitimate rationale.

These and other developments have further encouraged American industries to invoke antidumping as a protectionist mechanism.  Thus, it is not surprising that in recent decades, there has been a significant increase in the number of U.S. antidumping cases filed and the number of affirmative injury findings.  Also noteworthy is the proliferation of foreign antidumping laws since 1980, which harms American exporters. Overall, the economic impact of antidumping law on the American economy has grown substantially.  In short, antidumping is a cronyist special interest law that harms American consumers.

Moreover, even taking into account domestic industrial interests, prohibiting dumping likely would not have a positive effect on domestic industry as a whole.  Antidumping restrictions on imported raw materials and industrial products used by U.S. firms make it difficult for these firms to compete internationally.  In fact, the USITC is statutorily barred from considering their impact on consuming industries.  These consuming industries are often a larger part of the U.S. economy than the industries benefitting from antidumping regulation, and producers of upstream products have become reliant on restricting customer access to foreign goods rather than better responding to their customers’ needs.

Furthermore, antidumping harms the U.S. economy by reducing American firms’ incentive to produce more efficiently.  Non-predatory dumping spurs domestic firms to produce more efficiently (at lower costs) so that they can reduce prices and compete with imports in order to remain in the market.  Finally, the existence of antidumping law may encourage implicit collusion among domestic firms and foreign firms to soften price competition.  The truth is that when domestic industries complain that non-predatory dumping is “unfair,” they are really objecting to competition on the merits — competition that raises overall long-term American economic welfare.

A New Antitrust-Based Predatory Pricing Test for Dumping

In sum, aggressive price competition by foreign producers benefits American consumers, enhances economic efficiency, and promotes competitive vigor — net benefits to the American economy.  Only below-cost “predatory dumping” by a foreign monopolist that allows it to drive out American producers and then charge monopoly prices to American consumers should be a source of U.S. policy concern and legal prohibition.

A test that would prohibit only harmful predatory dumping can be drawn directly from a standard developed by U.S. courts and scholars for determining illegal price predation under American antitrust law.  Applying that test in antidumping cases, antidumping tariffs would be imposed only when two conditions were satisfied.

First, the government would have to determine that the imports under scrutiny were priced at a below-cost level that caused the foreign producer to incur losses on the production and sale of those imports.  This would be a price below “average avoidable cost,” which would include all the costs that a firm could have avoided incurring by not producing the allegedly dumped products.

Second, if it met the first test, the government would have to show that the firm allegedly doing the dumping would be likely to “recoup” — that is, charge high monopoly prices for future imports that more than make up for its current losses on below cost imports.

This proposed new antidumping methodology would be administrable.  Indeed, because it focuses narrowly and solely on certain readily ascertainable costs and data on domestic industry viability, it should be easier (and thus less costly) to apply than the broad and uncertain methodologies under current law.

Of perhaps greater significance, it could serve as a sign that the U.S. government favors competition on the merits and rejects special-interest cronyism — a message that could prove valuable in international negotiations aimed at having other nations’ antidumping regimes adopt a similar approach.  To the extent that other jurisdictions adopted reforms that emulated the new American approach, U.S. exporters would benefit from reduced barriers to trade, a further boon to the U.S. economy.

Conclusion

U.S. antidumping law should be reformed so that it is subject to a predatory pricing test drawn from American antitrust law.  Application of such a standard would strengthen the American economy and benefit U.S. consumers while precluding any truly predatory dumping designed to destroy domestic industries and monopolize American industrial sectors.

Alden Abbott

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I am a Senior Legal Fellow at the Heritage Foundation. I write on antitrust, domestic and international regulatory policy, and law and economics. I am an Adjunct Faculty Member at George Mason Law School.