By Joe Cobb
The Heritage Foundation Backgrounder Update #229 July 18, 1994
(published at 5 pages) (Updating Backgrounder No. 985, "A
Guide to the New GATT Agreement," May 25, 1994, and Backgrounder
No. 906, "A Guide to Antidumping Laws: America's Unfair Trade
Practice," July 21, 1992.)
To implement the new General Agreement on Tariffs and Trade (GATT)
agreement, which was signed on April 15 by the United States and
124 other governments in Marrakech, Morocco, Congress will need
to make a number of changes in current U.S. trade law. This will
be done in the form of a "fast track" bill. (The provision
for "fast track" consideration of the GATT Uruguay Round
implementing legislation is found in P.L. 10349, July 2,
1993. ) Such a bill essentially is negotiated between congressional
leaders and the White House, and it will be put to Congress for
an upordown vote without amendment.
Unfortunately it now seems likely that Congress will be asked
to include measures to "strengthen" the U.S. antidumping
law in the bill. (See Committee on Ways and Means, "Draft
Legislative Language for the Administration's Implementing Proposals
on the Uruguay Round Antidumping Agreement and Corresponding Provisions
in the Subsidies Agreement," July 12, 1994. For a summary
of current U.S. antidumping law, see Committee on Ways and Means,
Overview and Compilation of U.S. Trade Statutes (Washington, D.C.:
U.S. Government Printing Office, 1993), pp. 6271. See also,
"Administration AD/CVD Proposals," Inside U.S. Trade,
Special Report, June 21, 1994, pp. S2S22, and "Summary
of AD/CVD Proposals," Inside U.S. Trade, Special Report,
June 17, 1994, pp. S2S8. Lobbying to influence the antidumping
sections of the GATT implementing legislation is reported in Robert
Keatley, "More Protectionism May Be the Result As Congress
Studies Dumping Laws," The Wall Street Journal, July 1, 1994,
p. A10; "Dumping on Importers," The Journal of Commerce,
June 30, 1994, p. 10A; and Helene Cooper, "Corporate America
Finds Devil Is in the Details As Its Lobbyists Press Congress
to Change GATT," The Wall Street Journal, June 27, 1994,
p. A14.) But if enacted, the antidumping provisions actually would
result in increased trade barriers worldwide and undermine the
intent of the new GATT agreement. By including these provisions,
the White House and protectionists in Congress seem determined
to go against the sound observation of the President's Council
of Economic Advisers, which reported earlier this year that "Both
in the United States and elsewhere, antidumping laws go beyond
preventing anticompetitive practices which should
be their rationale and often have the effect of protecting
domestic industries from foreign competition." (Council of
Economic Advisers, Economic Report of the President, February
1994, p. 239. Emphasis in original.)
The U.S. antidumping law has become the primary legal tool invoked
by domestic industries supposedly to protect themselves from unfair
trade by imports, but in reality to shield themselves from competition.
Dumping is the practice of selling goods in one market at a price
below that charged in another market. The notion of a "fair
value" is usually associated with the higher price by industries
competing against the lower price, and the antidumping laws are
used to impose a tariff on the "unfair value" of the
lowerpriced goods. Seasonal department store clearance sales
and promotional price cutting are normal business practices in
domestic commerce, and may lead to prices that are lower than
"costs" figured in certain ways. But under the antidumping
laws, the same price and cost structure used by an exporter to
the United States could be considered a violation of U.S. law.
Around the world, this kind of protectionism has been growing
as tariffs and other nontariff barriers have come down.
Indeed, more dumping cases have been filed annually against U.S.
exporters around the world in recent years than against any other
country. (In the period 19881992, 166 cases were filed against
the United States, compared to 98 against Japan, 75 against Korea,
69 against Brazil, and 13 against Canada. A total of 1,196 were
filed worldwide. U.S. International Trade Commission, The Year
in Trade: Operation of the Trade Agreements Program, Reports 4044
(19881992).) The U.S. economy produces the world's largest
volume of exports, and therefore is the most vulnerable to the
abuse of antidumping laws. Instead of benefiting the U.S. economy,
"strengthening" the antidumping laws in this country
would not only raise costs for American consumers, but also likely
would trigger more antidumping cases against U.S. exporters worldwide,
through similar antidumping rules adopted by other governments
in future years.
The new GATT Antidumping Agreement (Office of U.S. Trade Representative,
Final Act Embodying the Results of the Uruguay Round of Multilateral
Trade Negotiations [cited hereafter as MTN/FA] (Washington, D.C.:
U.S. Government Printing Office, 1994), IIA1A8.) was
drafted in the spirit of fair and open trade, but individual governments
still will determine what they regard as the unfair pricing of
imports. The new agreement cannot eliminate the bias in favor
of domestic industries in every country, but the new rules are
intended to improve the transparency and fairness of national
antidumping laws. The GATT agreement requires governments to follow
certain rules in determining when dumping cases may legitimately
be filed by domestic producers, and specifies some procedures
that must be followed in calculating whether goods are being sold
"at less than fair value." A primary goal in the Antidumping
Agreement is for governments to make their antidumping laws compare
real market conditions in a producer's home country and its export
markets, and not to bias the process of finding whether dumping
has occurred by resorting to unrealistic accounting rules. Countries
also are supposed to reexamine antidumping orders at least every
five years and revoke those that are no longer valid. This provision
of the Uruguay Round agreement has been criticized by some as
"weakening" the U.S. trade laws.
When an antidumping case in the United States is decided against
an accused importer, the Commerce Department imposes a tariff
on the imported product, in effect raising its price to a "nondumping"
level. The amount of the tariff is calculated by using accounting
procedures spelled out in the antidumping law. Advocates of "strengthening"
the law in Congress and the Administration would amend the technical
accounting procedures in ways that would help domestic producers
more easily win antidumping cases. But if that happens, other
countries will toughen their antidumping rules as well. The result:
a general increase in tariffs by means of casebycase
litigation, as industries in the United States and around the
world file charges against each other alleging "less than
fair value" pricing. This would perversely close markets
to competition rather than opening them.
Comparing Foreign and Domestic Prices
One of the most serious problems under current U.S. antidumping
law is the Commerce Department's method of comparing an importer's
prices charged in the United States with prices in its home country.
An average homemarket price is computed by obtaining sales
data. The average price is then compared with individual sales
transactions (not the average) in the United States. Any U.S.
sales that are above the average homemarket value are disregarded.
(The comparison of "price" to "value" is not
a simple exercise because the calculations are not simple. Note
that "value" is based on the producer's costaccounting
data according to statutory rules, and it is thus the second major
area where arbitrary, unfair results can be mandated by law or
administratively imposed by a government favoring a domestic industry.
Cost accounting depends far more on judgmental factors than accounting
for financial reports because of different ways a producer's general
fixed costs might be allocated to individual products.) But if
any U.S. sales are found to be below the average homemarket
value, the Department concludes the imported product has been
dumped, and a "dumping margin" is calculated on the
basis of the price differences between the two countries.
The Uruguay Round Antidumping Agreement requires that this unfair
method be changed to use average transaction prices in both markets
(an "apples to apples" comparison). (MTN/FA, IIA1A8,
2.4.2, pp. 34.) The proposed legislation, however, specifically
creates a loophole to evade this requirement. Parties to an antidumping
case may request an annual review of a dumping order and the new
GATT requirement for comparing average prices would not apply
to an annual review. This deliberate omission would permit the
Commerce Department to conclude there has been a significant increase
in a product's dumping margin after such a case review, through
an "apples to oranges" comparison based on individual
belowaverage transaction prices only.
Dumping When the Importer and Exporter
are Related
Increasingly in international trade, companies produce components
of products in one country and bring them to a second country
for further work or modification before sale. Cost accountants
and economists employed by a company use various methods to allocate
indirect selling costs, including such things as advertising and
promotion costs, and to set the selling price depending on how
managers view market conditions.
The new GATT agreement does not require any change in current
U.S. law in this area. But the Administration has proposed to
change the current practice, which is complicated enough but in
general tries to determine the price at the factory gate. The
proposal is to determine the price to the first unrelated purchaser
in both the U.S. market and the exporter's home market. This change
would give the Commerce Department more power to disregard the
way international companies allocate their indirect costs. (Ways
and Means Draft Legislative Language, op. cit., pp. 96100.)
But there is also a strong lobbying effort by domestic producers
who compete in the U.S. market with foreign companies that built
factories here in the 1980s on behalf of a different method, which
would require the Commerce Department to treat indirect costs
in a specific way that would bias the comparisons in favor of
alleged dumping. (The socalled Exporter Sales Price (ESP)
methodology as described in the Administration's memorandum: "This
is perhaps the most technical and obtuse issue in implementing
the AD agreement. Unfortunately it is also one of the most important."
Inside U.S Trade, June 17, 1994, p. S3. )
The 1980s saw a significant increase in direct foreign investment
in the United States, which created millions of jobs, but both
foreignowned and domestic companies that import component
parts from foreign affiliates are vulnerable to the abuse of antidumping
laws. Competitors could accuse internationally diversified companies
of dumping and win cases that would require the government to
impose punitive tariffs. Even the threat of such litigation would
jeopardize future foreign investment in the United States and
the benefits of competition and lower prices, which would not
only affect U.S. consumers but also thousands of U.S. companies
that depend on international suppliers to produce their own goods
and services for export.
More careful economic study should be done before Congress changes
the rules in these cases. It is unclear how the Administration's
proposal would work, and any change in the U.S. antidumping law
in this area would be a minefield, with consequences that may
increase protectionism. The United States economy depends critically
on the free movement of investment, both to enable foreign companies
to establish factories here and for U.S. companies to diversify
abroad. The Administration's proposal would give the Commerce
Department sweeping powers to determine the way business must
allocate costs. The investment decisions of business worldwide
could be affected, after the fact, by arbitrary bureaucratic decisions
in antidumping cases. It might no longer be prudent for many companies
to invest in the United States.
Antidumping Duty as a Cost
Another proposed change that would also strongly bias the U.S.
antidumping laws against imports, in cases where the foreign exporter
and domestic importer are related, involves the accounting treatment
of money deposited with the U.S. Treasury. The proposal would
effectively double the tariffs in these relatedparty cases.
Under current U.S. law, dumping duties are calculated retrospectively,
but importers accused of dumping have to deposit their potential
dumping duties with the U.S. Treasury until a review determines
the actual amount, if any, of the tariff. Later, when a subsequent
review of the dumping charge is made, the deposit is used to pay
the duty or refunded.
Under the proposal, during the period the Treasury is holding
an importer's deposit, the Commerce Department would calculate
the imported product's price in the United States (which determines
if "dumping" has occurred) by subtracting the deposited
amount from any actual sales prices, treating it as a cost rather
than a financial asset. Thus the only way an importer could avoid
being found guilty of dumping and being stuck for
the duty twice would be to increase its U.S. price
by twice the amount of the duty to avoid any risks, which would
mean no price competition at all. The issue is further biased
against importers by the Administration's proposal specifically
not to follow the new GATT requirement to use average market prices
during the review period, as discussed above.
This measure was not contained in the Administration's published
draft proposal, but Congress is likely to insist it be in the
implementing legislation put before lawmakers because it resembles
a practice in the European Union and Canada, which do not use
a retrospective system to calculate dumping. Under the system
used by other countries, dumping duties are paid in advance and
not later modified by a review of the case.
Captive Production
The International Trade Commission (ITC) decided a case last year
involving flat steel products, including steel at different stages
of manufacturing. At each stage as a product is processed, it
can be sold to customers or used by the same firm for further
processing. The steel industry petitioners failed to obtain the
dumping protection they sought last year because, as the ITC analyzed
the facts of the case, the test of harm to the domestic industry
was deemed not to have been met. But if steel that was further
processed by the same firm had been artificially excluded from
the total amount of domestic production, the test might have been
met.
A proposed alteration to the Administration's draft legislation
by some in Congress is to mandate the methodology the ITC must
use in these cases, so that domestic production of intermediate
products consumed within the same company to make another product
cannot be counted. As a result, the ITC would be stripped of its
current discretion to exclude such production, or not, in its
analysis if it is appropriate given the facts of each case. The
Administration did not include this very parochial proposal sought
by lobbyists for the steel industry in its recommendations. It
is contrary to the traditional requirements of international law
in determining injury, and contrary to the Uruguay Round agreement.
(MTN/FA, IIA1A8, 4.1, p. 6 and 3.4, p. 5.) The ITC
is not an agency so biased against U.S. domestic producers that
its analysis of the facts of each industry's conditions of competition
needs to be dictated by Congress.
Compensation for Petitioners
Under current law, antidumping duties are general revenue to the
Treasury. Two proposals in Congress (H.R. 4206 sponsored by Representatives
Ralph Regula (ROH) and Norman Mineta (DCA), and H.R.
4716 sponsored by Representative Nancy Johnson (RCT).) would
provide for the payment of dumping duties into a special fund
that would then be used to compensate companies supporting an
antidumping petition for various alleged injuries. Aside from
providing a subsidy to domestic industry petitioners, which could
be illegal under the GATT rules, payments to any company that
supported a petition for dumping relief would amount to a private
right of action, and a lucrative source of new income for trade
lawyers. In addition, the proposal would provide a powerful incentive
to domestic industries to harass importers by bringing petitions,
increasing the probability that American consumers would ultimately
have to pay higher prices for a wide range of products as a result
of higher tariffs.
Conclusion
There is a confusion between the advocacy of antidumping measures to promote trade on equal terms and the actual use of these laws as a smokescreen for protectionism. A prominent critic of antidumping is J. Michael Finger, Lead Economist for Trade Policy at the World Bank. In his recent book, Antidumping, How it Works and Who Gets Hurt, Finger concludes:
Antidumping, as practiced today, is a witches brew of the worst
of policymaking: power politics, bad economics, and shameful
public administration. Antidumping law is an oxymoron. Expansion
of the power of the state to act against imports in the name of
antidumping has been built on the meanest of violations against
the principles of rule of law. Antidumping is a particularly insidious
threat in that it appears to bring systemic justification to the
trade restrictions it creates: it is as if the GATT system were
programmed to destroy itself. (Ann Arbor: University of Michigan
Press, 1993, p. 57. Emphasis in the original.)
Since a fast track bill is being put together by congressional
leaders and the White House, it may already be too late to have
a full and open debate about the way in which the United States
should comply with the new GATT Antidumping Agreement in the Uruguay
Round implementation legislation. But before they try to "improve"
on the GATT agreement by modifying the antidumping laws, lawmakers
should carefully investigate the costs and purported benefits
of the U.S. antidumping laws. Because amendments are not permitted,
the fast track legislative process tends to invite back room negotiations
between the Administration and advocates of particular trade law
changes that have no general economic benefits, because the White
House and congressional leaders want to assure wide support for
the bill when it is finally introduced in Congress. Some of the
proposals discussed above could have extremely serious economic
consequences on the U.S. economy, and the "back room"
nature of negotiations have given protectionists a rare opportunity
to insist on measures to gain their support.
Supporters of the Uruguay Round of GATT and its objectives of
more open world trade should insist that the fast track implementing
legislation be narrowly drafted to make only those changes in
U.S. law necessary to adopt its specific provisions. The antidumping
laws are, after all, U.S. domestic statutes that Congress could
debate and amend in the future in a more open manner, without
the constraint of the fast track process. That debate is needed.
Hopefully, the more the American people learn about how "antidumping"
laws are used to raise prices to some U.S. companies for the profit
of others, to violate the spirit of GATT rules, and to reduce
American competitiveness, the more likely will be the eventual
repeal of the largely protectionist antidumping rules.
Joe Cobb John M. Olin Senior Fellow in Political Economy