A model of dumping and protectionism in the United States

A Model of Dumping and Protectionism

in the United States

By

Dominick Salvatore

C o n t e n t s : I. Introduction. - II. The New Protectionism and Dumping. - III. The Theory of Dumping: A Reformulation and Extension. - IV. A More Formal Extension and Reformulation of the Theory of Dumping. - V. A Simultaneous Equations Model of Antidumping Protectionism. - VI. Empirical Estimation and Evaluation of the Model. - VII. Comparison with Results from Other Studies. - VIII. Summary and Conclusions.

I. Introduction

D uring the past decade, there has been a rash of antidumping cases in the United States, the European Economic Community (EEC), and

other industrial countries. While antidumping codes and actions have been traditionally justified as a defense for domestic producers against unfair trade practices by foreign exporters, it has now become an important expres- sion of the wave of"new protectionism" that has emerged since the mid-1970s.

Industrial nations in general, and the United States in particular, have used nontariff trade barriers (NTBs) to protect their large and mature industries from the structural adjustments required by international trade in a climate of slow domestic growth and high unemployment. As tariff barriers have been reduced as a result of the several successful rounds of multilateral trade negotiations (MTNs) that have been conducted during the postwar period, NTBs have increased sharply during the past decade and a half, to the point where today they represent the most serious threat to the postwar international trading system and world welfare. It seems that industrial nations have increasingly relied on NTBs as the preferred method of protection as a substitute for tariff protection, in order to preserve at least the appearance of continued support and movement toward trade liberalization in the form of negotiated tariff reductions [see Salvatore, 1987a].

While modern antidumping codes have been on the books for many decades, the greatly increased reliance on these codes during the past decade,

Remark." I would like to thank Jagdish Bhagwati, William Branson, Lawrence Klein, and Goran Ohlin for helpful comments on an earlier version of this paper, which was presented at the United Nations, the Harvard Institute for International Development, and the New York Aca- demy of Sciences. The usual disclaimer applies.

764 Weltwirtschaftliches Archiv

and the way that these codes have been interpreted and enforced leave no doubt that they have become part of the new protectionist wave. In this paper, we first examine the relationship between antidumping action and the new protectionism, and then we reformulate and extend the theory of dumping. Subsequently, we construct, estimate, and validate a simultaneous equations model to examine the causes and effects of antidumping action in the United States. Finally, we compare the results obtained in this paper with those of the few empirical studies that have been conducted on dumping in order to highlight some of the salient conclusions that arise from the present study.

II. The New Protectionism and Dumping

Two major expressions of the new protectionism in the form of NTBs are escape clause actions and "less-than-fair-value" (LFV) complaints and cases. Escape clauses seek to protect or provide assistance to a domestic industry that faces disruption and large loss of employment resulting from international trade that is fair (i.e., that does not involve dumping or other unfair trade practices). GATI" rules allow escape clauses in order to provide time for a domestic industry to adjust to increased international competition. Though protection and/or relief for the domestic industry is supposed to be temporary, escape clauses are basically protectionistic in nature. Escape clause protection for U.S. producers is now provided unter Section 201 of the Trade Act of 1974, but it has been in continuous existence since 1950 and its objective has remained basically unchanged [see Salvatore, 1987b, pp. 127-131].

In contrast, Section VII of the Tariff Act of 1930 prohibits subsidized exports (the object of Section 701) and dumping (the object of Section 731). Subsidized exports are often referred to as "countervailing duty cases", while dumping refers to imports sold in the United States at prices below the foreign market price of the product or below costs of production. Actions under Section VII of the Tariff Act of 1930 are referred to as LFV cases because the trade practices that they are intended to control involve, in legal terms, the sale of products in the United States at less than "fair value" [see U.S. International Trade Commission, 1988]. While LFV cases allegedly seek only to defend domestic producers against unfair trade practices by foreign exporters and governments, they have increasingly been applied and enforced for protectionist purposes and can, therefore, be regarded as part of the new protectionism.

A countervailing or antidumping petition can be filed by a firm, a trade association, a labor union, or the Department of Commerce itself by present- ing some evidence that subsidized or dumped imports have materially injured, threaten to materially injure, or threaten to materially retard the establishment of a domestic industry. The petition is filed simultaneously with the Department of Commerce and the United States International Trade Commission

Salvatore: Dumping and Protectionism 765

(USITC). The Department of Commerce then conducts an extensive investigation to determine if imports have, in fact, been subsidized or dumped in the United States and to calculate the amount of the subsidy or dumping margin (i.e., the difference between the price at which the product is sold in the United States and the fair value of the product, defined as the price or cost of the product in the exporting country).

At the same time that the Department of Commerce is conducting its investigation, the USITC investigates whether the domestic industry has been injured by subsidized or dumped imports. After 45 days of the filing date (and while the Department of Commerce is continuing its investigation), the USITC must file a preliminary report on the case. Only if the result of this USITC preliminary investigation is positive (i.e., that the domestic industry has been injured), the investigation continues. If the domestic industry is not found to have been injured, the case is dosed even if imports have been subsidized or dumped. Finally, after 120 days from the date that the original petition was filed, the USITC must submit its final ruling on the case. If in its final report the USITC rules that the domestic industry has in fact been injured by subsidized or dumped imports, a countervailing or antidumping duty equal to the amount of the subsidy or dumping margin is then automatically imposed on foreign exporters [ USITC, 1988; Palmeter, 1987].

To be pointed out is that the ability to file a trade complaint is, in and of itself(and independently of actual retaliatory or countervailing action to which it may lead), likely to discourage trade and can reasonably be regarded as protectionistic because of the cost imposed on the foreign exporter to respond to the complaint (the so-called "harrassment thesis"). While the domestic industry also incurs the costs of filing a petition, these costs are usually spread over many more units of the product since imports are generally less than one half of domestic consumption for most importable commodities. Domestic firms are likely to have a further advantage over foreign firms because of their greater experience in filing and pursuing such petitions [Finger, 1981]. On balance, therefore, the very act of filing a trade complaint is likely to have a protectionistic effect.

In 1980, the administration of escape clause and LFV cases was shifted from the Treasury Department to the Department of Commerce partly because of the feeling that the former was overly sensitive to the interests of consumers and importers as opposed to the interests of domestic producers. This encouraged the filing of trade complaints in the United States, particularly LFV petitions. Between 1979 and 1986, there have been a total of 774 investigations completed by the USITC under escape clause and LFV statutes. While escape clause cases have been much larger, on the average, than LFV cases (about $ 600 million as compared with $ 40 million), the latter have been much more numerous than the former (691 as compared with 83).


IlL The Theory of Dumping: A Reformulation and Extension

Traditional dumping theory is based on monopolistic price discrimination between national markets [Viner, 1923; Corden, 1974]. Since an international firm is likely to have greater market power in the domestic market (because of the protection afforded by transportation costs and tariffs) than abroad (where it faces greater competition from foreign firms), the firm will maximize total profits by selling at a higher price at home than abroad.

The Trade Act of 1974 extended this definition of dumping to include sales of the product abroad at prices below the average cost of production. This type of dumping need not imply predatory behavior if foreign sales allow the firm to take advantage of economies of scale in the production of the product. Profits on domestic sales may then be sufficiently large not only to compensate for the below-cost sales abroad but to also make the firm's total profits larger than in the absence of foreign sales [Wares, 1977]. More recently, the possibility of below-marginal cost dumping has been recognized. This type of dumping has been based on demand uncertainty and input rigidity [Ethier, 1982] or on demand uncertainty alone at home and/or abroad [Davies, McGuinness, 1982; Blair, Cheng, 1984; Bernhardt, 1984; Hillman, Katz, 1986]. That is, because of demand uncertainty and high adjustment costs, a firm may end up with more output on hand than it wishes to sell at home. The firm may then sell the surplus output abroad even at less than marginal cost. Reciprocal dumping in the traditional price-discrimination sense has also been shown to be possible as the direct consequence of oligopolistic rivalry [Brander, Krugman, 1983].

Another useful way to extend dumping theory, which has heretofore not been fully explored and which is proposed in this paper, is to explicitly model the increased risk of antidumping action that foreign exporters face as they export greater quantities of the product and increase their share of the importing country's market. In view of the fact that favorable antidumping action has been based on dumping margins as low as 1.5 percent [Palmeter, 1987] and that there are many nonpredatory reasons for a firm to temporarily sell a product at below cost both at home and abroad (for example, to unload unwanted inventory, meet the competition, avoid increasing prices during cyclical downturns in industries with high fixed costs, and so on), it does not seem unreasonable to view dumping actions as being more frequently protectionistic in nature than being used primarily for protecting domestic firms against truly predatory behavior on the part of foreign firms. The perception that dumping is now being used primarily for protectionist purposes is dearly acknowledged [Economic Report of the President, 1988, p. 159].

Furthermore, the method that is used by the Department of Commerce to calculate the "fair value" of the foreign product in antidumping cases almost invariably ensures that the product can be shown to be dumped. Specifically,


the Department of Commerce arrives at the "fair value" for the imported product by adding to the foreign average total cost of production the cost of transporting, packaging, and advertising the product for the export market, as well as a profit margin of 8 percent, and any production subsidy that the foreign firm might receive. This means that in order to avoid being accused of dumping a foreign firm should not only price the export product above the average cost of production but would often be required to sell the product abroad at a higher price than at home (i.e., to reverse dump).

Antidumping action is also clearly preferable to escape clause action for protectionistic purposes because the former only requires dumped imports to be a reason (even if a minor one) that a domestic industry is injured, as contrasted with escape clause action which requires showing that imports are a substantial cause of injury. Furthermore, antidumping action can be applied in a discriminatory fashion and does not permit retaliation on the part of the firm that is the object of antidumping action. This is to be constrasted to escape clause protection which must be applied in a nondiscriminatory manner and allows retaliation by exporters who are adversely affected by the escape clause action. This is not to say that antidumping action has been used as a substitute for escape clause action, since both have increased over time, but only that antidumping action has been the preferred choice of protection whenever possible.

In view of the fact that (0 antidumping action is being used more and more for protectionistic purposes, (iO dumping can rather easily be "proven" in many cases in the absence of predation, and (iit) a domestic industry is more likely to be injured in the face (even if not primarily because) of rising imports, it would not seem unreasonable to conclude that rising imports increase the probability of an antidumping petition being filed against the foreign exporter and that this will impose an additional cost to the exporter to respond to the petition. We can, therefore, regard the probability of a dumping petition being filed and the cost of responding to it as an added variable cost of exporting that a firm must explicitly take into account in order to maximize total profits from domestic and foreign sales.

In the next section of this paper we extend dumping theory in a more formal way along the above direction. In doing so, it will also be recognized that in order for a firm to dump (i.e., sell a product at a lower price abroad than at home or sell the product abroad at below cost) the firm must have some degree of market power at home based on transportation costs, tariffs, product differentiation, and so on. Complete monopoly power at home is not required. On the other hand, the firm is likely to face near perfect competition abroad if the product is standardized, and monopolistic competition if the product is differentiated. For example, while there are many exporters of automobiles to the United States, the product is somewhat differentiated (as indicated by the


premium prices that American consumers have been willing to pay for some Japanese automobiles). Thus, neither complete monopoly at home nor perfect competition abroad is required or assumed.

In conclusion, the proposed extension of dumping theory is applicable under different forms of market structure at home and abroad (it only requires some market power at home in order to dump); it integrates the traditional price-discrimination and the below-cost bases for dumping; it recognizes that dumping action has become part of the new protectionism and that this can be incorporated into a more general theory of dumping by the inclusion of an additional variable cost of exporting. Thus, while previous extensions of dumping theory were based on the consideration of uncertainty on the demand side, the present extension is based on explicitly considering uncertainty on the supply or cost side of exporting.

IV. A More Formal Extension and Reformulation of the Theory of Dumping

Traditional dumping theory in the form of price-discrimination between national markets can be presented as follows. Let the inverse linear demand functions for the product at home (h) and abroad (f) be given by (1) und (2), respectively, where P refers to price, Q to quantity, and a, b, c, and d > 0.

Ph = a - bQh (1) Pf = c - dQf. (2)

Let "e" refer to variable costs per unit, which for simplicity are assumed to be constant, so that the total variable cost (V) function is given by

V = eQ, (3)

where Q = Qh + Qf. The total profit function (II) that the firm seeks to maximize from its domestic and foreign sales is given by (4), where F refers to total f'Lxed costs

Max II = aQh - bQh 2 + c Q f - dQf 2 - eQ - F (4)

0I I /0Qh = a - 2bQh - e = 0

0I I /0Qf = c - 2 d Q f - e = 0,

so that

MRh ----- MRf = M C . (5)

If we now let the exporter take into consideration the additional per-unit variable cost "g" that arises from exporting increasing quantities (because of the greater probability of having to respond to an antidumping petition), we have


so that

Max II = aQh - bQh 2 + c Q f - dQf 2 - eQ - g Q f - F

0H/OQh = a - 2bQh - e = 0

OH/OQf = c - 2 d Q f - e - g = 0,

(6)

MRh = MC and MRf = MC + g. (7)

Thus, depending on whether g = 0 or g > 0, Qf and Qf* are, respectively,

Qf = (c - e) / 2d (8)

Qf* = (c - e - g) / 2d. (9)

With g > 0, the firm will export less and charges a higher price for exports than with g = 0. Since with constant marginal cost, sales and price in the home or domestic market do not change, the dumping margin on exports is lower.

If, on the other hand, the exporter's marginal cost is rising rather than being constant, the reduced sales in the foreign market will require a smaller overall total output by the firm, which results in a lower marginal cost on the last unit of the total output produced. This will lead to an increase in the profit-maximizing sales of the firm and to a lower price in the home market than with g = 0. It will also neutralize part of the fall in the volume and rise in the price of exports that arise with g > 0. This can be seen in Figure 1.

In Figure 1, Dh und Df are, respectively, the demand curves for the price-discriminating firm in the home and foreign markets, and MRh and MRf are the corresponding marginal revenue curves when the firm is an imperfect competitor in both markets. MR is the lateral summation of MRh and MRf. The profit-maximizing level of output of the firm is OJ and is given at the intersection of MC and MR at point A in the right panel. The firm would sell OG units at price GP" in the home market and O H at price H P " in the foreign market. Since the average cost is JB for the total output of the firm, the firm earns a profit of P" B" per unit and (OG) (P" B ' ) in total in the home market and incurs a loss of B" P" per unit and (OH) (B" P " ) in total in the foreign market. Production for the foreign market, however, allows the firm to take advantage of economies of scale in production and to earn sufficiently higher profits in the home market not only to cover the total losses incurred in the foreign market but also to earn a total profit larger than without price-discrimination. Dum- ping, in this case, involves not only selling in the foreign market at a price lower than in the home market but also at a price lower than the firm's average cost of production.

770

$1

W e l t w i r t s c h a f t l i c h e s A r c h i v

Figure 1 - Dumping with Market Power at Home and Abroad

$ $

~R Home Foreign ~,,~~ Total . . . . . . . . . . .

. . . . . . . . . . . : iJ

N "I IH RI IJ " Qh 0 ~ Qf 0 ~ Q

When the firm considers the increasing cost of exporting greater quantities that result from the greater probability of facing antidumping action (i.e., with g > 0), the marginal cost of foreign sales would be higher. The firm would then cut exports and total production, and face a lower overall marginal cost (a movement down along the MC curve in Figure 1). This leads to an increase in the equilibrium sales in the home market and a lower domestic price. It also neutralizes part of the reduction in exports and rise in their price that result with g > 0. Figure 1 shows one possible final equilibrium, where the firm produces the overall output of OR, of which ON is sold in the home market at price NP* and OM is exported at price MP**, in such a way that JR = HM - NG. At output OR, AC = RF, which equals the price of MP** in the foreign market and is smaller than the home market price of NP* by P*F'. The firm now sells exports at cost of production and eams a smaller profit on home sales and overall. The degree of price-discrimination is smaller than with g = 0 and the below-cost aspect of dumping has been eliminated. While the price of exports need not be exactly equal to the firm's average cost of producing the total output (as in Figure 1), the dumping margin from price-discrimination and from the below-cost pricing of exports will be lower with g > 0 than with g = 0 .

The price of exports will equal the average total cost of the firm only if r/f (the price elasticity of demand for exports) at the particular level of exports of the firm equals r/c (the elasticity of the firm's average total cost curve) in the presence of economies of scale. This can be easily seen as follows:

MRf = Pf(1 + 1/r/f) (10)


MC = AC (1 + l/r/c) (11)

Pf(1 + 1/r/f) = AC (1 -t- l/r/c)

Pf /AC = ('Of r/c + r/f) / (r/f r/c + r/c). (12)

Thus, Pf = AC if r/f = r/c and Pf ~ AC if lr/f I ~- [ r/r I �9

Figure 2 shows the case where the firm is an imperfect competitor in the home market but a perfect competitor in the export market. This is possible with a homogeneous product. In the figure, Dh and MRh are the firm's demand and marginal revenue curves in the home market, while Df = MRf is the horizontal and coincidental demand and marginal revenue curves faced by the firm in the foreign market. With g = 0, the firm produces a total output of OJ (given by point A at which MRf = MC). It sells O G in the home market (given by point A" at which MRh = MC) at price G P ' , and G J in the foreign market at price JA = MRf. Thus, dumping involves international price-discrimination and selling abroad at P < AC. With g > 0, on the other hand, the firm produces a total output of OR (given by C " at which MC" = MC + g = MRf). The firm continues to sell OG at price GP" in the home market, but sells only GR in the foreign market at price RC'" = JA = MRf. Thus, with g > 0 exports decline, but the excess of Ph over Pf(i.e., P 'A" or the degree of price-discrimination) remains unchanged.

Figure 2 - Dumping with Market Power in the Home Market Only

$

0

~ --MC'=MC+g

I "'-E / J;J'P

i\ . s ! i \MRh oi I, v I ,,~ ~

Df;MRf

Q


Thus, we can conclude that if the firm faces economies of scale (i.e., if its AC curve is negatively sloped) at the best level of total output of the firm, as in Figure 2, the firm will incur a loss on exports which it more than makes up by the profits it earns on home sales (since with production for exports the firm can take advantage of economies of scale). This is true with g = 0 and with g>0. With g>0, Ph exceeds Pf by the same amount as with g = 0 (i.e., by P 'A ' ) , but AC exceeds Pf by a greater amount (FC" as opposed to BA). Thus, with g > 0, exports are lower but the cost-dumping margin is even greater than with g = 0. In either case, however, exports are not dumped at a price less than MC. If, on the other hand, the firm faces diseconomies of scale (i.e., if the AC curve is positively sloped) at the best level of total output of the firm (not shown in the figure), then the firm earns a profit on both home sales and exports. In that case, the only dumping that can be charged is that based on traditional price-discrimination.

V. A Simultaneous Equations Model of Antidumping Protectionism

We now construct a three-equation simultaneous equations model to analyze the causes and effects of antidumping protectionism in the United States. The endogenous variables of the model are import penetration, the number ofantidumping petitions filed, and the ratio of success ofantidumping petitions. The formal model is summarized in Table IA and examined below.

In (13), it is postulated that a~ and a2<0, while a3, a4, and a~>0. That is, import penetration into the United States (MP) in a given year is postulated to be inversely related to the number of antidumping petitions filed in the same year (ND) and the ratio of successful petitions (SR), but directly related to the real exchange rate of the dollar (ER) lagged one year, the ratio of exports to GNP (RX), and the level of import penetration in the previous year. The number of antidumping petitions filed is a measure of protectionist pressure (the harrassment thesis), while the ratio of successful petitions can be taken as a measure of the degree of actual protectionism. Thus, (13) postulates that import penetration will be smaller, the greater is the level of protectionist pressure and actual protectionism. The real trade-weighted exchange rate of the dollar is lagged one year because it is well established that it usually takes from 12 to 18 months for the trade balance (and, therefore, for the level of import penetration) to be significantly affected by exchange rate changes (the J-curve effect). Equation (13) also postulates that import penetration in a given year is directly related to the degree of openness in the U.S. economy. Since this has increased over the postwar period, a4 is postulated to be positive. Finally, (13) postulates that import penetration in a given year is directly related to import penetration in the previous year. The introduction of the lagged dependent as an explanatory variable results from taking all the right-hand variables


( R H V ) in (13) as expec ted values, wi th expec t a t ions genera l ly f o r m e d on the

basis o f a d is t r ibuted lag o f cur ren t and past va lues o f the R H V .

Tab le 1 - The Model and Its TSLS Estimation, 1954-1986

A. Model

MPt = a0 + atNDt + a2SRt + a3ERt-t + a4RXt + asMPt-i

NDt = b0 + btRGt + b2ME + b3SRt + b4NE, + bsD

SRt = co + cIMPt + c2TBt + c3LY, + c4ND, + csD

B. Estimation Results

MP, = - .0961- .00010NDt - ,01273SRt+ .00078ERr-) + .92967RXt + .56555MPt-~ (.00012) (.00535) (.00044) (.41901) (.17926)

R 2 = .97 S.E.E. = .0050 Durbin h = 1.26

NDt = 40.7003+ 2.1737RGt- 269.32MP, - 18.795SR,+ 1.0695NEt + 32.536D (.9577) (263.76) (14 .069) ( .5377) (10.884)

R2=.64 S.E.E. = 10.508 D.W. = 1.68 Rho=.4708 (.1726)

SRt = 2.3780 - 3.0270MPt - .58761TBt - .00067LY,- .00736NDt + .36766D (3.7540) ( .16080) ( .00015) (.00231) (.12006)

R2=.73 S.E,E,=.1300 D.W.=I.99 Rho=,2743 (.1382)

Legend"

MP = Import penetration measured by the ratio of the value of imports to GNP

ND = Number of antidumping petitions filed

SR = Success ratio in number of antidumping petitions filed

ER = Exchange rate of the dollar (real trade-weighted); (a rise in ER refers to dollar appreciation)

RX = Ratio of the value of exports to GNP

RG = Relative growth measured by growth of real GDP in U.S. divided by the weighted average of growth of real GDP in other industrial countries

NE = Number of escape-clause petitions filed

D = Dummy variable assuming value of 1 for years 1980--1986 for the Trade Agree- ments Act of 1979 (which took effect in 1980)

TB = Real merchandise trade balance (exports minus imports)

LY = Level of real GNP

Numbers in parentheses are standard errors.

(13)

(14)

(15)

(16)

(17)

(18)


In (14), it is theorized that b~, b2, b3, b4, and b5 > 0. Specifically, it is postulated that the numer of antidumping petitions filed in a given year (ND) is directly related to growth in the United States relative to growth in other industrial countries (RG), the level of import penetration (MP), the ratio of positive antidumping rulings (SR), the number of escape clause petitions filed (NE), and the change in the antidumping laws instituted by the Trade Agree- ments Act of 1979 (D). Faster growth in the United States relative to other industrial countries provides both the opportunity and the incentive for other industrial countries to dump in the United States. Similarly, the higher the level of import penetration and the ratio of successful petitions, the greater the number of antidumping petitions filed is postulated to be. That is, success encourages more antidumping petitions being filed because the greater is then the perceived return and incentive from such a rent-seeking activity. Further- more, the number of antidumping petitions filed is postulated to be directly related to the number of escape-clause petitions filed to test for their complementary relationship. Finally, the number of antidumping petitions filed is postulated to be greater during the 1980s as a result of the Trade Agreements Act of 1979, which relaxed the standards for filing antidumping petitions and for receiving favorable rulings, and from the transfer of the administration of trade codes from the Treasury Department to the Department of Commerce.

In (15), it is postulated that c~ and c~>0, while c2 and c3<0. That is, the ratio of successful antidumping petitions (actual protectionism) in the United States in a given year is expected to be directly related to the level of import penetration in the same year, and to be more likely during the 1980s (when the Trade Agreements Act of 1979 was in effect). On the other hand, the ratio of successful petitions is likely to be smaller in years when the U.S. trade balance (defined as real merchandise exports minus imports) is more favorable and when the level of real national income is high. The number of antidumping petitions flied is included as an additional explanatory variable to determine if their rising number was associated with a constant, rising, or declining ratio of success. Thus, the sign of c4 is ambiguous. This equation is included in the model to examine the political economy of protectionism. That is, to test if the interpretation and enforcement of the antidumping laws in the United States are affected by the international position of the nation, as measured by the level of import penetration and trade balance, after taking explicitly into consideration the changes in the trade laws themselves, the level of real national income, and the number of antidumping petitions filed.

Summarizing briefly the inherent logic of and the simultaneity links in the model as a whole, it can be seen that import penetration is affected by (in (13)) and affects the number of antidumping petitions filed (in (14)) and the ratio of their success (in (15)). This establishes one of the simultaneity links in the model. The number of antidumping petitions filed is affected by (in (14)) and


affects the level of import penetration (in (13)) and the ratio of success of antidumping petitions (in (15)). This establishes another simultaneity link in the model. Finally, the ratio of successful antidumping petitions is affected by (in (15)) and affects the level of import penetration (in (13)) and the number of antidumping petitions filed (in (14)). The latter establishes the third simultaneity link in the model.

VI. Empirical Estimation and Evaluation of the Model

The simultaneous equations model presented above was estimated by Two-Stage Least Squares (TSLS) using annual data for the years from 1954 to 1986. During this period there have been 1,037 antidumping petitions and investigations, of which 476 were affirmative and led either to the suspension of dumping by foreign exporters or to the application of an antidumping duty on them. The results from the empirical estimation of the model are reported in Table lB. The values in parentheses refer to the standard errors of the esti- mates, R 2 to the coefficient of multiple correlation (from the corresponding OLS estimation of the regression), S.E.E. to the standard error of the regression, D.W. to the Durbin-Watson statistics, and Rho to the coefficient of serial correlation of the errors.

From the table we see that the model fits the data well. All of the fifteen estimated slope coefficients have the correct sign, except for b2, b3, and cl (none of which, however, are statistically significant). Nine of the 12 coefficients with the correct sign are statistically significant at better than the 5 percent level, and another two (b4 and c3) are nearly so. The coefficient of multiple determination is 97 percent for (16), 64 percent for (17), and 73 percent for (18). Since the Durbin h statistic is statistically insignificant, no serial correlation correction was necessary for the presence of the lagged dependent among the explanatory variables in the TSLS estimation of (16) [Johnston, 1984, pp. 360--362]. The Cochrane-Orcutt method was used, however, in the TSLS estimation of (17) and (18) to correct for the presence of serial correlation. The value of Rho is 0.4708 in (17) and 0.2743 in (18), and both are statistically significant at better than the 1 percent level.

As postulated in the model, the level of import penetration in the United States is inversely related to the number of dumping petitions filed and the ratio of successes, but directly related to the overvaluation of the dollar, the degree of openness in the U.S. economy, and import penetration in the previous year (equation (16)). The lack of significance of the coefficient of ND is not due to multicollinearity with RS, since removing the latter did not increase the statistical significance of the former. The lagged exchange rate variable has the correct sign and is statistically significant at better than the 10 percent level. Substituting the contemporaneous value of this variable results in a negative


sign (confirming the postulated inverse J-curve effect). The positive and statistically significant coefficient for the ratio of exports to GNP confirms the generally-held notion that the United States has become more interdependent over time, despite the rise in protectionism. Import penetration in the United States in a given year is also positively and strongly related to import penetration in the previous year.

As predicted, in (17) the number of antidumping petitions filed in a given year is directly related to growth in the United States relative to growth in other industrial countries in the same year, the number of escape-clause petitions filed, and the dummy variable for the years of operation of the Trade Agree- ments Act of 1979. The first and third of these variables are statistically significant at better than the 1 percent level. The second is statistically significant at nearly the 5 percent level, and this confirms the postulated complementary relationship between the number of escape clause and antidumping petitions filed. On the other hand, the number of antidumping petitions filed does not seem to depend on the level of import penetration or their rate of success. This is very likely due to the strong collinearity (over 0.9) among RG, MP, and RS.

As predicted in the model, (18) shows that the ratio of successful petitions is inversely related to the trade balance and the level of economic activity in the United States but directly related to the dummy variable for the years of the operation of the Trade Agreements Act of 1979. On the other hand, the greater the number of antidumping petitions filed, the smaller is the rate of success. That is, as more firms and industries have exploited the potential rents to be earned from filing antidumping petitions, the Department of Commerce and the USITC seem to have made it somewhat more difficult to obtain a favorable ruling, after the positive effect of the Trade Agreements Act of 1979 was explicitly taken into consideration. All of the above variables are statistically significant at better than the 1 percent level. On the other hand, the import penetration variable is statistically insignificant (and has the wrong sign).

More important than the statistical significance of individual parameters and equations, and a rigorous test of the validity of the entire model is provided by the dynamic simulation of the model over the sample period. Using the exogenous time series and the starting values of the endogenous variables, the model generates historical simulated values for the endogenous variables of the model. Table 2 shows that these simulated values differ by less than 2 percent from the average historical values of the three endogenous variables of the model. Thus, the model seems to perform better than most larger macro models [Fair, 1984].


Table 2 - Historical and Simulated Average Annual Values, 1955-1986

Historical

Model

Percentage difference

MP ND SR

0.0531 31.871 0.4768

0.0533 32.390 0.4729

0.56 1.62 0.82

Table 3 - Theil's Inequality Coefficients and Their Decomposition

Endogenous Variable T B V C

Import penetration

Number of petitions

Ratio of successes

0.0419 0.0010 0.0306 0.9684

0.1691 0.0019 0.0861 0.9120

0.1347 0.0006 0.0030 0.9964

Even though the model is highly aggregative and was formulated to analyze the long-run causes and effects of protectionism arising from antidumping action, as well as other broad policy questions, it also captures relatively well short-run fluctuations in the level of import penetration, the number of antidumping petitions filed, and the ratio of successes. Table 3 presents Theil's inequality coefficients (T) and their decomposition into the bias (B), variance (V), and covariance (C) proportions. The T-values indicate that the model captures over 95 percent of the actual short-run change in the level of import penetration, over 83 percent of the actual short-run change in the number of petitions filed, and nearly 87 percent of the short-run change in the ratio of successful petitions. The decomposition of T into its components is also near optimal, with over 90 percent of the error due to imperfect covaria- tion (over which nothing can be done) for all three equations. Thus, the performance of the model is better than for most larger econometric models.

VII. Comparison with Results from Other Studies

We now briefly compare our results with those of the handful of other empirical studies that examined the causes and effects of antidumping cases and protectionism in the United States. One study is by Herander and Schwartz [1984]. While the authors develop a different model, for a different purpose, and test it with cross-section data over the 1976-1981 period, their results are broadly consistent with the results presented in this paper. Herander and Schwartz found that foreign firms that dump in the U.S. market lower

778 Weltwirtschaftliches Archly

their dumping margin to reduce the probability of antidumping action against them. Thus, the mere threat of antidumping action seems sufficient to alter the pattern and the volume of trade. This confirms the harrassment thesis and actual protectionism shown differently by (16) in the present study. The authors also found a statistically significant direct relationship between import penetration and the number of antidumping petitions filed, as opposed to the statistically insignificant result in (17) of the present study. The differences in results are very likely due to the fact that Herander and Schwartz used industry data while the present study uses macro data, and a much different time period than the present study. Finally, the authors found that import penetration is not a statistically significant determinant of the ratio of successful antidumping petitions filed (as we did in (18)), but that the level of industry profits and employment are inversely related to the ratio of successful antidumping petitions filed.

Estimating a still different model with cross-section data over the period 1975-1979, Finger [1981] found a strong negative relationship between the number of LFV petitions filed (which include both countervailing duty and antidumping cases) and import penetration in the United States, again confirming the harrassment thesis. Finger also finds for all LFV cases, as we did in (18) for antidumping cases, that import penetration does not seem to affect the rate of success. He speculates that this may be due to the fact that LFV pricing by foreign firms and the resulting LFV penalties on them may be just offsetting each other. Finally, the results presented in this paper are broadly consistent with those obtained by the author [1987b] from the estimation of a model similar to the one presented in this paper, and inspired by the work of Takacs [1981], for escape-clause petitions and action in the United States over the 1948-1985 period. In that study, the harrassment thesis was found to be more important than actual protectionism, while the reverse was found in this study for antidumping cases. To be noted, however, is that the filing requirements and the probability of obtaining a favorable ruling were changed by the Trade Expansion Act of 1962 and the Trade Act of 1974 for escape-clause cases, but by the Trade Agreements Act of 1979 for antidumping cases.

VIII. Summary and Conclusions

Several important conclusions on the causes and effects of antidumping protectionism in the United States emerge from this study. The most important are:

(t) Antidumping action has become an important component of the new protectionism in the form of nontariff trade barriers (NTBs), and these have been used to compensate for negotiated tariff reductions.


(it) Traditional dumping theory is based on monopolistic price discrimination between national markets. This definition of dumping was subsequently expanded to include sales of the product abroad at prices below the average cost of production. This type of dumping need not imply predatory behavior if foreign sales allow the firm to take advantage of economies of scale in the production of the good. Still more recently, the possibility of below-marginal cost dumping has been recognized, based on demand uncertainty and input rigidity.

(iiO Another useful way to extend dumping theory is proposed in this paper. This is based on modeling the increased risk of antidumping action that foreign exporters face as they export greater quantities of the product and increase their share of the importing country's market. It is proposed that the probability of a dumping petition being filed and the cost of responding to it be included as an additional variable cost for the firm to explicitly take into consideration in maximizing total profits from domestic and foreign sales. This will affect dumping somewhat differently in perfectly and imperfectly competi- tive export markets.

(iv) As postulated on theoretical grounds, the estimated simultaneous equations model confirmed that import penetration is inversely affected by the ratio of successful antidumping petitions filed, and positively affected by the overvaluation of the dollar and the degree of openness in the U.S. economy. The number of antidumping petitions filed is directly related to growth in the United States relative to other industrial countries, is complementary to the number of escape-clause petitions filed, and directly related to the dummy variable reflecting the change in the antidumping procedures instituted by the Trade Agreements Act of 1979. Finally, the ratio of successful antidumping petitions was found to be inversely related to the trade balance, the level of real national income, and the number of antidumping petitions filed, but directly related to the dummy variable reflecting the change in the trade laws. These results are consistent with theoretical postulates and with those of the few other empirical studies on the causes and effects of the new protectionism in the United States.

(v) While antidumping codes are supposed to be remedial rather than punitive in nature, they prohibit many practices by foreign traders that are tolerated in domestic trade. Antidumping action generally benefits domestic producers of importable commodities at the expense of consumers. Since it has seldom been possible to prove predatory intent in dumping cases, the presump- tion is that most dumping has not been of a predatory nature. If that is true, it would seem to lead to the conclusion that antidumping codes should be abolished or left to address truly predatory behavior. Other dumping practices should be addressed with domestic competition policies (as is the case in intra-EEC trade).


References

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Z u s a m m e n fa s s u n g: Dumping und Protektionismus in den Vereinigten Staaten - ein Modell. - Der Autor untersucht die Beziehung zwischen AntidumpingrnaBnah- men und dem neuen Protektionismus, reformuliert und erweitert die Theorie des Dumping und sch~itzt ein Modell mit simultanen Gleichungen, um die Ursachen und Wirkungen von Antidumpingmal~nahmen in den Vereinigten Staaten zu iiberpriifen. Der empirische Test des Modells zeigt, dab die Durchdringung des amerikanischen Marktes mit Importwaren negativ korreliert ist mit dem Prozentsatz der erfolgreichen Antr~ige auf AntidumpingmaBnahmen, aber positiv mit der LIberbewertung des Dollar und dem Grad an Offenheit der US-Wirtschaft. Die Zahl der registrierten Antidum- pingantr~ge steht in direktem Verhiiltnis zum wirtschaftlichen Wachstum der Vereinig- ten Staaten im Vergleich zu anderen Industriel~indern, und der Prozentsatz der erfolgreichen Antidumpingantriige ist negativ korreliert mit der Handelsbilanz, der H6he des Volkseinkommens und der Anzahl der registrierten Antidumpingantr~ige.

R 6 s u m 6: Un module du dumping et du protectionisme aux Etats-Unis. - Cette 6tude examine les relations entre l'action anti-dumping et le nouveau protectionisme, revise et 6tend la th6orie du dumping et estime un module d'6quations simultan6es pour examiner les causes et les effets de raction anti-dumping aux Etats-Unis. Le test empirique du module d6montre que la p6n6tration de rimportation d6pend (i) de sens inverse du rapport des requites anti-dumping d6pos6es, mais couronn6es de succ~s et (ii) de sens positif de la sur6valuation du dollar et du degr6 que r6conomie am6ricaine est ouverte. Le nombre des requites anti-dumping d6pos6es d6pend directement du croissance 6conomique des Etats-Unis en relation aux autres pays industriels. Le rapport des requ&es anti-dumping d6pend de sens inverse de la balance commerciale, du niveau du produit domestique et du nombre des requites anti-dumping d6pos6es.

R e s u m e n : Un modelo de dumping y proteccionismo para los EE UU. - Este trabajo examina la relaci6n entre una medida antidumping y el nuevo proteccionismo, reformula y extiende la teoria del antidumping y estima un modelo de ecuaciones simul~neas para estudiar las causas y efectos de medidas antidumping en los EE UU. El test empirico del modelo muestra (1) que la penetraci6n con importaciones estfi inversamente relacionada con el porcentaje de peticiones antidumping exitosas registradas y afectadas positivamente por la sobrevaluaci6n del d61ar y el grado de apertura de la economia de los EE UU, (2) que el nfmero de peticiones antidumping registradas est~ relacionado directamente con el credimiento de los EE UU relativo al de otros pa]ses industriales, y (3) que el porcentaje de peticiones antidumping exitosas estfi inversamente relacionado con el balance comercial, el nivel de ingreso nacional real y el ntlmero de peticiones antidumping registradas.

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A model of dumping and protectionism in the United States