The Anti-dumping and Subsidies Rules of the WTO Don't Always Ensure Fair and Beneficial Trade

[This is a response memo in my Political Economy of Trade class at the Harvard Kennedy School of Government] 

When seeking redress against dumping and unfair competition due to subsidization of imports, an importing country is permitted under WTO Law to protect itself provided it can prove material injury. The protection may take the form of ‘safeguards measures’, ‘antidumping duties’ or ‘countervailing duties’. ‘Antidumping duties’ are tariffs in addition to ordinary customs duties that are imposed to counteract certain ‘unfair’ pricing practices by private firms that cause or threaten to cause ‘material injury’ to a competing industry in an importing nation. ‘Countervailing duties’ are tariffs that are imposed to counteract certain subsidies bestowed on exporters by their governments, when they cause or threaten to cause material injury to a competing industry. In this memo, I discuss antidumping duties and countervailing duties since they relate explicitly to dumping and subsidies. I discuss the extent to which these trade remedies ensure that trade is fair and beneficial at the end of each section.

Agreement on Subsidies and Countervailing Measures (SCM) 

According to Alan Sykes (2003) subsidies may lead recipients to reduce prices and expand output, which attracts customers away from unsubsidized firms. It follows that subsidies can be used to protect domestic firms from foreign competition. Protective subsidies are economically undesirable because they may upset the expectations associated with particular market access commitments in the WTO. When domestic firms expand output at the expense of imports because of a subsidy, productive resources are diverted into domestic production and away from foreign production. Subsidies for export promotion are contingent on the volume of exports and may include a fixed payment for every unit of a good or service that is exported, or below-market export financing or insurance, tax benefits for exportation, and many other measures. Export subsidies can diminish market access opportunities for competing exporters, which in turn can upset their expectations pursuant to negotiated trade agreements. They lead to exports no longer being produced at the lowest possible cost (ibid). In this light, therefore, WTO rules to curb their use may be deemed beneficial to international trade and to the violating country as they also prevent use of distortionary taxes collected in order to finance the subsidy.

Article I of the SCM agreement states that a “subsidy” exists when a “financial contribution is made by a government,” in the form of a direct transfer of funds, government revenue that is otherwise due is foregone or not collected or when a government provides goods or services other than general infrastructure, or purchases goods. Only subsidies that are “specific” to an industry e.g. low taxes on particular firms are prohibited. Currently, subsidies may either be actionable or prohibited. Export subsidies for instance are expressly forbidden under the WTO. Actionable subsidies are of the type that can cause serious prejudice including a loss of exports by the complaining member to the home market of the subsidizing member, and a loss of exports by the complaining member to exporters from the subsidizing member in a third country market. Therefore, an action may be brought when a subsidy displaces exports from the complaining member to a third country market, and when a subsidy displaces exports from the complaining member to the market of the subsidizing country.

Critics of countervailing duties observe that subsidized imports are generally beneficial to an importing nation – regardless of the reason why imports are cheap, an improvement in the terms of trade will yield an aggregate gain in national economic welfare, other things being equal. As such, the welfare effect of countervailing duties will often be adverse, much like the welfare effect of any other tariff. Implicitly, this view recommends openness to subsidized imports (ibid). Proponents of countervailing duties urge that countervailing duties may serve as a deterrent to wasteful subsidy practices, which as discussed earlier can divert resources.

Antidumping Agreement (ADA) 

With regard to antidumping, Article 2 of the ADA states that a product is to be considered as being dumped, i.e. introduced into the commerce of another country at less than its normal value , if the export price of the product exported from one country to another is less than the comparable price, in the ordinary course of trade, for the like product when destined for consumption in the exporting country. Antidumping duties are by far the most frequently used measure in the trade remedy arsenal. The remedy for dumping, however, lies entirely with the importing country, in the form of antidumping duties. This means their use can at times be unwarranted and therefore unfair. For example, in 2004, Bangladesh successfully brought India before the WTO dispute settlement body regarding the unfair imposition by India of anti-dumping measures on Bangladeshi lead acid battery imports.

Alan Sykes in Guzman and Sykes (2007) states that on the normative side of the debate on the efficacy of antidumping measures, the weight of modern commentary has been highly critical of antidumping policy. He writes, “The only plausibly useful function of the antidumping laws from an efficiency standpoint is the avoidance of predatory pricing and monopolization by foreign firms”. Many commentators note that this objective can be accomplished through the antitrust laws without the need for a separate antidumping law. The authors, however, list three instances when antidumping policies may yield economic benefits:

First, antidumping duties will to some degree discourage international price discrimination, and it is possible that global welfare will increase because antidumping policy reduces the degree of output constriction by firms with market power.
Second, from a national welfare perspective, antidumping duties may benefit large nations that are not already charging their ‘optimal tariff’. The logic here is that “large nations have a degree of monopsony power, and can exploit it through tariffs that extract rents from foreign exporters by inducing them to lower their prices”. Antidumping duties might by chance yield a welfare gain to a large importing nation for this reason, although again the opposite outcome is certainly possible.
Third, in industries fitting the strategic trade paradigm – an industry that exhibits increasing returns to scale that can eventually earn monopoly rents at the expense of foreign consumers, or that generates positive externalities that do not cross national borders – it is well known that protection can enhance national economic welfare.

Outside of economics, one can find political rationale for antidumping policy at the national level. Consider Standing Up for Steel, a case about how the American political system handles trade issues. According to Lawrence, Devereaux and Watkins (2006) the actions of the Bush administration in initiating Section 201 exemplifies a form of “rational breach:” whereby powerful players in the trading system, in this case the United States, can take actions to placate powerful domestic  political constituencies—knowing full well that their actions will eventually be found to be noncompliant with WTO rules—at relatively little cost. Offering an industry short-term protection from foreign competition can serve as a safety valve that releases domestic political pressure.

References: 

I. Alan O. Sykes (2003). The Economics of WTO Rules on Subsidies and Countervailing Measures. Chicago John M. Olin Law & Economics Working Paper No. 186 (2nd Series).

II. Andrew T. Guzman, Alan O. Sykes (2007). Research Handbook in International Economic Law.

III. Charan Devereaux, Robert Z. Lawrence, Michael D. Watkins (2006). Case studies in US trade negotiation Resolving disputes Volume 2.

WTO Resources: 

o Antidumping Agreement: http://www.wto.org/english/docs_e/legal_e/19-adp.pdf
o Agreement on Subsidies and Countervailing Measures: http://www.wto.org/english/docs_e/legal_e/24-scm.pdf
o India — Anti-Dumping Measure on Batteries from Bangladesh: http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds306_e.htm

Lecture Slides: 

o Lecture 12 slides, ITF-110, Professor Robert Lawrence, fall 2013.
o Lecture 14 slides, ITF-110, Professor Robert Lawrence, fall 2013.