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Anti-dumping: Let Us Not Shoot Ourselves in the Foot.

Arvind Panagariya

            An ominous development on the trade-policy front in recent years has been the rise of anti-dumping actions.  Till 1992, we had never imposed anti-dumping duties. But by early 1998, when the World Trade Organization (WTO) carried out our second Trade Policy Review, we had initiated as many as 45 anti-dumping cases, covering 18 products.  In 11 cases, definitive duties had been imposed.  In only two cases, petitions got thrown out due to a ruling of no injury to the local industry. This trend has remained unchanged in the last year, with several new products being subject to anti-dumping actions.

            Under The criteria laid down in the General Agreement on Tariffs and Trade (GATT), it is relatively easy to prosecute foreign firms for dumping. The anti-dumping authority has to only show that the foreign firm has sold the product at prices below what it charged in its own domestic market and that such sales have resulted in injury to the local industry.  The standard of proof for establishing injury is low.

            Trade economists regard anti-dumping to be the most pernicious instrument of protection.  Its use is economically justified only if dumping is predatory, meaning that the offending firms sell the product below cost with the objective of driving other firms out of the market and then raising the price to the monopoly level. 

            In modern times, with so many potential sources of supply around the world, the probability that a small number of firms can establish the monopoly price is extremely low, if not zero. The U.S. firms selling steel in India must compete against the firms from not merely India but Europe, Japan, Korea and China as well.  To successfully establish the monopoly price, they must stamp out competition from all these sources.

            Leaving aside this unlikely case, if foreign firms wish to sell a product to us below cost, we should gladly take it.  From the national welfare standpoint, we should want to pay less for foreign goods, not more.  And it should not matter whether the low price is the result of sales below cost or the discovery of a cheaper method of production.  Nor should it matter that the price is lower than what the firms charge in their own domestic market.

            While consumers and the country as a whole benefit from cheaper supply of foreign goods, inefficient domestic firms that produce similar goods lose. If these firms are politically powerful, they successfully lobby the government to take anti-dumping actions against the more efficient foreign suppliers.  And given the weak GATT rules, prosecution is relatively easy.

            Prior to the reforms initiated in 1991, protection to domestic firms was provided on demand through strict licensing and tariffs that sometimes exceeded 300 percent.  The economic reforms of 1990s did away with licensing, except in the case of consumer goods, and slashed tariffs considerably.  The highest tariff rate came down to 40% (with some reversal in the form of special additional duty) and the import-weighted average tariff rate to 25 percent.  It is this liberalization and concomitant benefit to consumers that anti-dumping measures now threaten to reverse.

            Even in rare circumstances when a compelling case for temporary protection can be made, two factors make anti-dumping the least desirable instrument.  First, under the GATT rules, foreign firms can avoid anti-dumping duties if they sell goods in our market at prices at least as high as those they charge in their own markets.  This gives the firms an incentive to charge us higher prices than otherwise.

            Second, anti-dumping is a highly targeted and discriminatory instrument.  To provide protection to domestic firms, it targets the most efficient foreign suppliers.  After all, it is these firms that are likely to be most competitive.

            A less costly means of providing temporary protection is the use of conventional safeguards permitted under GATT Article XIX.  These measures do not discriminate among foreign suppliers and are, thus, consistent with the most favored nation principle.

            Anti-dumping measures were invented by and accommodated into GATT Article VI at the initiative of developed countries.  Until as late as 1990, just four developed countries accounted for 80 percent of all anti-dumping actions: Australia, Canada, European Communities and U.S.A.  Today, having substantially done away with tariffs and quotas, developing countries have become significant players in this game, however.  They already account for as many as two thirds of the new anti-dumping actions taken annually worldwide.

            The destructive nature of anti-dumping becomes especially apparent when we consider the use of anti-dumping measures against our own exporting firms in foreign markets.  Recall that a key benefit that developing countries have negotiated under the Uruguay Round Agreement is the elimination of the Multi-fibre Agreement (MFA) by 2005.  This means that starting in 2005, developing countries will no longer face quotas on their exports of textiles and clothing in developed country markets.  A key fear of developing countries today is that as MFA quotas are removed, developed countries will replace them by anti-dumping measures.  This will nullify the major benefit developing countries negotiated under the Uruguay Round.

            An argument is sometimes made that anti-dumping actions by developing countries against developed country firms may be the only way to convince developed countries of the ills of this practice and, hence, to persuade them to outlaw it from GATT.  While there is some truth in this argument, we must remember that to-date the majority of anti-dumping actions by developing countries have been taken against other developing countries. Moreover, in pursuing this strategic approach, developing countries that indulge in anti-dumping do hurt themselves.  Therefore, on balance, our interest will be best served by exercising restraint and using conventional safeguards when necessary.

            The ideal long-term solution to the evil of anti-dumping lies in seeking tighter rules on anti-dumping in the next round of trade negotiations.  At present, the United States has said that it will not negotiate these rules.  But this may simply be a negotiating tactic.  Past experience shows that when the price is right, the United States does not walk away from negotiations.

           

Economic Times, June 30, 1999