Archives For international trade

On March 14, the U.S. Chamber of Commerce released a report “by an independent group of experts it commissioned to consider U.S. responses to the inappropriate use of antitrust enforcement actions worldwide to achieve industrial policy outcomes.”  (See here and here.)  I served as rapporteur for the report, which represents the views of the experts (leading academics, practitioners, and former senior officials who specialize in antitrust and international trade), not the position of the Chamber.  In particular, the report calls for the formation of a new White House-led working group.  The working group would oversee development of a strategy for dealing with the misuse of competition policy by other nations that impede international trade and competition and harm U.S. companies.  The denial of fundamental due process rights and the inappropriate extraterritorial application of competition remedies by foreign governments also would be within the purview of the working group.

The Chamber will hold a program on April 10 with members of the experts group to discuss the report and its conclusions.  The letter transmitting the report to the President and congressional leadership states as follows:

Today, nearly every nation in the world has some form of antitrust or competition law regulating business activities occurring within or substantially affecting its territory. The United States has long championed the promotion of global competition as the best way to ensure that businesses have a strong incentive to operate efficiently and innovate, and this approach has helped to fuel a strong and vibrant U.S. economy. But competition laws are not always applied in a transparent, accurate and impartial manner, and they can have significant adverse impacts far outside a country’s own borders. Certain of our major trading partners appear to have used their laws to actually harm competition by U.S. companies, protecting their own markets from foreign competition, promoting national champions, forcing technology transfers and, in some cases, denying U.S. companies fundamental due process.

Up to now, the United States has had some, but limited, success in addressing this problem. For that reason, in August of 2016, the U.S. Chamber of Commerce convened an independent, bi-partisan group of experts in trade and competition law and economics to take a fresh look and develop recommendations for a potentially more effective and better-integrated international trade and competition law strategy.

As explained by the U.S. Chamber in announcing the formation of this group,

The United States has been, and should continue to be, a global leader in the development and implementation of sound competition law and policy. . . . When competition law is applied in a discriminatory manner or relies upon non-competition factors to engineer outcomes in support of national champions or industrial policy objectives, the impact of such instances arguably goes beyond the role of U.S. antitrust agencies. The Chamber believes it is critical for the United States to develop a coordinated trade and competition law approach to international economic policy.

The International Competition Policy Expert Group (“ICPEG”) was encouraged to develop “practical and actionable steps forward that will serve to advance sound trade and competition policy.”

The Report accompanying this letter is the result of ICPEG’s work. Although the U.S. Chamber suggested the project and recruited participants, it made no effort to steer the content of ICPEG’s recommendations.

The Report is addressed specifically to the interaction of competition law and international trade law and proposes greater coordination and cooperation between them in the formulation and implementation of U.S. international trade policy. It focuses on the use of international trade and other appropriate tools to address problems in the application of foreign competition policies through 12 concrete recommendations.

Recommendations 1 through 6 urge the Trump Administration to prioritize the coordination of international competition policy through a new, cabinet-level White House working group (the “Working Group”) to be chaired by an Assistant to the President. Among other things, the Working Group would:

  • set a government-wide, high-level strategy for articulating and promoting policies to address the misuse of competition law by other nations that impede international trade and competition and harm U.S. companies;
  • undertake a 90-day review of existing and potential new trade policy tools available to address the challenge, culminating in a recommended “action list” for the President and Congress; and
  • address not only broader substantive concerns regarding the abuse of competition policy for protectionist and discriminatory purposes, but also the denial of fundamental process rights and the extraterritorial imposition of remedies that are not necessary to protect a country’s legitimate competition law objectives.

Recommendations 7 through 12 focus on steps that should be taken with international organizations and bilateral initiatives. For example, the United States should consider:

  • the feasibility and value of expanding the World Trade Organization’s regular assessment of each member government by the Trade Policy Review Body to include national competition policies and encourage the Organisation for Economic Cooperation and Development (OECD) to undertake specific peer reviews of national procedural or substantive policies, including of non-OECD countries;
  • encouraging the OECD and/or other multilateral bodies to adopt a code enumerating transparent, accurate, and impartial procedures; and
  • promoting the application of agreements under which nations would cooperate with and take into account legitimate interests of other nations affected by a competition investigation.

The competition and trade law issues addressed in the Report are complex and the consequences of taking any particular action vis-a-vis another country must be carefully considered in light of a number of factors beyond the scope of this Report. ICPEG does not take a view on the actions of any particular country nor propose specific steps with respect to any actual dispute or matter. In addition, reasonable minds can differ on ICPEG’s assessment and recommendations. But we hope that this Report will prompt appropriate prioritization of the issues it addresses and serve as the basis for the further development of a successful policy and action plan and improved coordination and cooperation between U.S. competition and trade agencies.

Neil TurkewitzTruth on the Market is delighted to welcome our newest blogger, Neil Turkewitz. Neil is the newly minted Senior Policy Counsel at the International Center for Law & Economics (so we welcome him to ICLE, as well!).

Prior to joining ICLE, Neil spent 30 years at the Recording Industry Association of America (RIAA), most recently as Executive Vice President, International.

Neil has spent most of his career working to expand economic opportunities for the music industry through modernization of copyright legislation and effective enforcement in global markets. He has worked closely with creative communities around the globe, with the US and foreign governments, and with international organizations (including WIPO and the WTO), to promote legal and enforcement reforms to respond to evolving technology, and to promote a balanced approach to digital trade and Internet governance premised upon the importance of regulatory coherence, elimination of inefficient barriers to global communications, and respect for Internet freedom and the rule of law.

Among other things, Neil was instrumental in the negotiation of the WTO TRIPS Agreement, worked closely with the US and foreign governments in the negotiation of free trade agreements, helped to develop the OECD’s Communique on Principles for Internet Policy Making, coordinated a global effort culminating in the production of the WIPO Internet Treaties, served as a formal advisor to the Secretary of Commerce and the USTR as Vice-Chairman of the Industry Trade Advisory Committee on Intellectual Property Rights, and served as a member of the Board of the Chamber of Commerce’s Global Intellectual Property Center.

You can read some of his thoughts on Internet governance, IP, and international trade here and here.

Welcome Neil!

Public policies that rely on free-market forces and avoid government interventions that distort terms of international trade benefit producers, consumers, and national economies alike.  The  full benefits of international trade will not be realized, however, if sales and purchase decisions are distorted by anticompetitive behavior or other illegitimate commercial conduct (such as theft, fraud, or deceit) that undermines market forces.  Thus, the importation of goods produced through the theft of U.S. property, including intangible “intellectual property” (including, for example, patents, copyrights, and trademarks), distorts the market and merits being curbed.

The provision of U.S. trade law that is targeted most specifically at anticompetitive and other harmful business conduct affecting American imports is Section 337 of the Tariff Act of 1930, which is administered by the U.S. International Trade Commission (USITC).  Section 337 condemns as illegal imports that violate U.S. intellectual property (IP) rights related to a U.S. industry or involve “unfair methods of competition and unfair acts” that harm a U.S. industry.  The standard remedy for a Section 337 violation is the issuance of an order excluding the offending imports from the U.S. market.  As I explain in a Heritage Foundation “Backgrounder” published on June 2, 2016, congressional consideration of reforms that address policy constraints on its application, potential limitations on its reach, and the breadth of the conduct it covers could help Section 337 to become an even more valuable tool with which to protect U.S. IP rights and combat truly unfair competition in a manner that is consistent with general free trade principles.

More specifically, while Section 337 should be judiciously modified to make it an even more effective weapon against foreign theft of U.S. IP rights, it should at the same time be amended so that it cannot be applied in a protectionist manner to curb vigorous and legitimate competition from abroad.  The U.S. antitrust laws are well designed to deal with legitimate cases of anticompetitive foreign business activity not involving IP.  Moreover, the USITC’s brief (and unsuccessful) experimentation during the 1970s with non-IP-related investigations revealed that Section 337, if not appropriately cabined, had a welfare-inimical protectionist potential.  That potential will remain unless and until Section 337 is amended to make it an “IP theft only” statute.

My June 2 Backgrounder concludes as follows:

Section 337 of the Tariff Act of 1930 provides valuable relief to American IP holders whose property rights are undermined by infringing imports. In many cases, Section 337 may be the only truly effective means by which industries that depend on U.S. IP can protect their interests and compete on an undistorted playing field with imported products. Nevertheless, a few carefully tailored amendments to the statute could render it even more effective. Specifically, Congress should seriously consider language that would:

  • Clarify that Section 337 covers all imports, both intangible (such as electronic data compilations) and tangible;
  • Specify that it applies to import schemes aimed at infringing IP rights, even if there is no direct infringement at the precise time of importation;
  • Limit the President’s unreviewable discretion to overturn Section 337 exclusion orders, except on grounds of public health or safety; and
  • Eliminate Section 337’s application to non-IP-related import practices.

Adoption of reforms along these lines could make Section 337 an even more effective tool with which to protect U.S. IP rights in international trade and ensure that Section 337 is applied in a procompetitive, pro-consumer fashion. Such reforms would enhance the role of Section 337 as a law that supports American innovation and economic growth in a manner that is consistent with free trade principles.

In a 2015 Heritage Foundation Backgrounder, I argued for a reform of the United States antidumping (AD) law, which allows for the imposition of additional tariffs on “unfairly” low-priced imports.  Although the original justification for American AD law was to prevent anticompetitive predation by foreign producers, I explained that the law as currently designed and applied instead diminishes competition in American industries affected by AD tariffs and reduces economic welfare.  I argued that modification of U.S. AD law to incorporate an antitrust predatory pricing 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.

A recent economic study supported by the World Bank and released by the European University Institute confirms that the global proliferation of AD laws in recent decades raises serious competitive concerns.  The study concludes:

Over a century, antidumping has gradually evolved from an obscure and rarely used policy tool to one that now constitutes an important form of protection not subject to the same WTO [World Trade Organization] controls as members’ bound tariff rates. Rather, antidumping is one of several instruments that allow members to exceed their bound tariffs, albeit subject to very detailed WTO procedural disciplines. Moreover, while the application of antidumping was until the WTO era mainly the province of a few traditional users, emerging markets have become some of the most active users of antidumping and related policies as well as important targets of their application. And though these policies are known collectively as temporary trade barriers, WTO rules governing the duration of antidumping measures are much weaker than for safeguards.

As antidumping use has evolved and proliferated (about 50 countries now have antidumping statutes although some are not active users), both its economic justification and the concerns raised by its possible abuse have also evolved. While the original justification of antidumping was to protect importing countries from predation by foreign suppliers, by the 1980s antidumping had come to be regarded as just another tool in the protectionist arsenal. Even more worrying, evidence began to mount that antidumping was being used in ways that actually enforced collusion and cartel arrangements rather than attacking anticompetitive behavior.

Today’s world economy and international trading system are much different even from those of the early 1990s, when this concern reached its peak. Some changes, in particular the significant growth in the number of countries and firms actively engaged in international trade, tend to limit the possibility of predation by exporters. Moreover, antidumping has developed a political-economic justification as a tool that can help countries manage the internal stresses associated with openness. But other changes, especially the important role of multinational firms and intra-firm trade and the increased use by many countries of policies to limit exports, suggest that concerns about anticompetitive behavior by exporters cannot be entirely dismissed. Vigilance to ensure that antidumping is not abused by complainants to achieve and exploit market power thus remains appropriate today.

In sum, the study reveals that anticompetitive misuse of AD law has become a serious international problem, but, because the potential still remains for occasional predatory use of dumping (China is discussed in that regard), what is called for is appropriate monitoring of the actual application of AD laws.

Building on the study’s conclusion, the best way of monitoring AD laws to ensure that they were employed in a procompetitive fashion would be the redesign of those statutes to adopt a procompetitive antitrust predatory-pricing standard, as recommended in my 2015 Backgrounder.  Such an approach would tend to minimize error costs by providing a straightforward methodology to readily identify actual cases of foreign predation, and to quickly reject unjustified AD complaints.

This in turn suggests that a new Administration interested in truly welfare-enhancing international trade reform could press for redesign of the WTO Antidumping Agreement to require that WTO-conforming AD laws satisfy antitrust-based predation principles.  Initially, a more modest effort might be to work with like-minded nations for the consideration of plurilateral agreements whereby the signatories would agree to conform their AD laws to antitrust predation standards.  Simultaneously, of course, the new Administration would have to make the case to Congress that such an antitrust-based reform of American AD law made good economic sense.

American AD reform along these lines would represent a rejection of crony capitalism and endorsement of a consumer welfare-based approach to international trade law – an approach that would strengthen the economy and ultimately benefit American consumers and producers alike.  It would also reinforce the role of the United States as the leader of the effort to liberalize international trade and thereby promote global economic growth.  (Moreover, to the extent foreign nations adopted the proposed AD reform, American exporters would directly benefit by being afforded new opportunities to compete in foreign markets.)

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.

During the recent debate over whether to grant the Obama Administration “trade promotion authority” (TPA or fast track) to enter into major international trade agreements (such as the Trans-Pacific Partnership, or TPP), little attention has been directed to the problem of remaining anticompetitive governmental regulatory obstacles to liberalized trade and free markets.  Those remaining obstacles, which merit far more public attention, are highlighted in an article coauthored by Shanker Singham and me on competition policy and international trade distortions.

As our article explains, international trade agreements simply do not reach a variety of anticompetitive welfare-reducing government measures that create de facto trade barriers by favoring domestic interests over foreign competitors.  Moreover, many of these restraints are not in place to discriminate against foreign entities, but rather exist to promote certain favored firms. We dub these restrictions “anticompetitive market distortions” or “ACMDs,” in that they involve government actions that empower certain private interests to obtain or retain artificial competitive advantages over their rivals, be they foreign or domestic.  ACMDs are often a manifestation of cronyism, by which politically-connected enterprises successfully pressure government to shield them from effective competition, to the detriment of overall economic growth and welfare.  As we emphasize in our article, existing international trade rules have been able to reach ACMDs, which include: (1) governmental restraints that distort markets and lessen competition; and (2) anticompetitive private arrangements that are backed by government actions, have substantial effects on trade outside the jurisdiction that imposes the restrictions, and are not readily susceptible to domestic competition law challenge.  Among the most pernicious ACMDs are those that artificially alter the cost-base as between competing firms. Such cost changes will have large and immediate effects on market shares, and therefore on international trade flows.

Likewise, with the growing internationalization of commerce, ACMDs not only diminish domestic consumer welfare – they increasingly may have a harmful effect on foreign enterprises that seek to do business in the country imposing the restraint.  The home nations of the affected foreign enterprises, moreover, may as a practical matter find it not feasible to apply their competition laws extraterritorially to curb the restraint, given issues of jurisdictional reach and comity (particularly if the restraint flies under the colors of domestic law).  Because ACMDs also have not been constrained by international trade liberalization initiatives, they pose a serious challenge to global welfare enhancement by curtailing potential trade and investment opportunities.

Interest group politics and associated rent-seeking by well-organized private actors are endemic to modern economic life, guaranteeing that ACMDs will not easily be dismantled.  What is to be done, then, to curb ACMDs?

As a first step, Shanker Singham and I have proposed the development of a metric to estimate the net welfare costs of ACMDs.  Such a metric could help strengthen the hand of international organizations (including the International Competition Network, the World Bank, and the OECD) – and of reform-minded public officials – in building the case for dismantling these restraints, or (as a last resort) replacing them with less costly means for benefiting favored constituencies.  (Singham, two other coauthors, and I have developed a draft paper that delineates a specific metric, which we hope will be suitable for public release in the near future.)

Furthermore, free market-oriented think tanks can also be helpful by highlighting the harm special interest governmental restraints impose on the economy and on economic freedom.  In that regard, the Heritage Foundation’s excellent work in opposing cronyism deserves special mention.

Working to eliminate ACMDs and thereby promoting economic liberty is an arduous long-term task – one that will only succeed in increments, one battle at a time (the current principled effort to eliminate the Ex-Im Bank, strongly supported by the Heritage Foundation, is one such example).  Nevertheless, it is very much worth the candle.

Today, the International Center for Law & Economics released a white paper, co-authored by Executive Director Geoffrey Manne and Senior Fellow Julian Morris, entitled Dangerous Exception: The detrimental effects of including “fair use” copyright exceptions in free trade agreements.

Dangerous Exception explores the relationship between copyright, creativity and economic development in a networked global marketplace. In particular, it examines the evidence for and against mandating a U.S.-style fair use exception to copyright via free trade agreements like the Trans-Pacific Partnership (TPP), and through “fast-track” trade promotion authority (TPA).

In the context of these ongoing trade negotiations, some organizations have been advocating for the inclusion of dramatically expanded copyright exceptions in place of more limited language requiring that such exceptions conform to the “three-step test” implemented by the 1994 TRIPs Agreement.

The paper argues that if broad fair use exceptions are infused into trade agreements they could increase piracy and discourage artistic creation and innovation — especially in nations without a strong legal tradition implementing such provisions.

The expansion of digital networks across borders, combined with historically weak copyright enforcement in many nations, poses a major challenge to a broadened fair use exception. The modern digital economy calls for appropriate, but limited, copyright exceptions — not their expansion.

The white paper is available here. For some of our previous work on related issues, see: