II

Chins C. Cough un

Oletus C. Coughlin is a research officer at the FederalReserve Bank of St. Louis. Thomas .4. Pollmann providedresearch assistance. The author acknowledges the valuablesuggestions of Seth Kaplan.

U.S. Trade-Remedy Laws:Do They Facilitate or HinderFree Trade?

“Our fair trade laws are the bedrock on which free trade stands.”

N INCREASiNGLY contentious issue in in-ternational trade pertains to so-called “trade-remedy laws.” These laws are intended toremedy hardships for U.S. firms resulting fromthe actions and policies of foreign firms andgovernments. Allegedly, these laws produce a“fair” and “free” trading environment. Thepossibility exists, however, that the concept offair trade is simply a pretext used by interestgroups to pursue their own interests at the ex-pense of the national interest. This can result ina protectionist trading environment, whichlowers economic well-being in the United States,rather than a fair and free one.

This paper provides an inti’oduction to U.S.trade-remedy laws. As background to under-standing the justification and effects of theselaws, the concepts of fair trade, free trade andprotectionism are described. Next, an overviewof the primary laws is provided. This is follow-ed by evidence on the increasing use of trade-remedy laws. Finally, evidence on the adminis-

tration and effects of these laws is examined toassess competing claims that these laws facilitateor hinder free trade.

LAIR TRADE FREE TRADE ANDPROTECTIONISM

To understand the controversy involvingtrade-remedy laws, one must become familiarwith the basic concepts underlying the dispute.The most elusive concept is that of fair trade.On the surface, it is hard to argue against fairtrade; however, there are different interpreta-tions of this term and, thus, its application inconcrete situations varies across individuals.

Two interpretations of fair trade are relateddirectly to differing impressions of reciprocity,which is a concept of fairness used in interna-tional trade negotiations.’ Before negotiations toreduce trade barriers, two countries will gener-ally have different levels and types of trade bar~

I 3

IIIIII

— Malcolm BaldrigeIIIIIIIII ‘See Bhagwati and Irwin (1987) for a discussion of fair

trade and its relation to U.S. trade policy.

UHV!AnflUQT 1001

4

riers. “First-difference” reciprocity means that afair outcome is characterized by reductions intrade barriers such that the value received byeach country stemming from the other country’sreduction in trade barriers is equal. Consequent.ly, after the completion of negotiations, the twocountries may still retain different patterns oftrade barriers.

On the other hand, “full” reciprocity requiresthat two countries allow identical access to theirrespective markets, which implies identicaltrade restrictions. Full reciprocity means thatreciprocity of access must be met for individualsectors. This is known as a level playing field.

Negotiations under the auspices of the GeneralAgreement on Tariffs and Trade (GATT) usefirst-difference reciprocity as a procedural de-vice. Nonetheless, the implicit goal of GATT isto generate a free trade environment, which im-plies full reciprocity of market access. in suchan environment, certain actions, such as govern.ment attempts to directly influence the patternof trade, are viewed as inappropriate and, thus,can be counteracted.2

Even though actions taken to open foreignmarkets and counteract inappropriate behaviorby foreign firms and governments can be justi-fied in the name of fair and free trade, theseactions might not achieve their stated purpose.If they do not, then the result is higher levelsof barriers with adverse consequences.

Trade restrictions tend to reduce the competi-tion faced by domestic producers; this protec-tion is at the expense of domestic consumers.Empirical evidence shows clearly that the lossessuffered by consumers exceed the gains reapedby domestic producers and government.3 Notonly are there inefficiencies associated with ex-cessive domestic production and restricted con~sumption, but there are costs associated withboth the enforcement of protectionist legislationand attempts to influence trade policy. Empiri-cal research also shows that the adverse effectsof protectionist policies persist because such

policies generate relatively lower growth ratesthan free trade policies.

THE BASICS OF

TRADE-REMEDY LAWS

The United States employs various trade-remedy laws to provide relief from imports forU.S. industries. These laws are frequently char-acterized as “contingent protection” because theimport relief is provided only under certainconditions.~Table 1 lists the principal trade-remedy laws and summarizes their key features.

The Escape Clause

The escape clause, contained in Section 201 ofthe Trade Act of 1974, allows temporary importbarriers when rising imports can be shown toinjure a domestic industry seriously.~The legis-lation requires that the increase in imports con-stitutes “a substantial cause” of serious injury.While a substantial cause is not defined precise-ly, a working definition is that the cause is im-portant and no less important than any othercause of serious injury.

Two primary justifications exist for escapeclauses. The first justification relies on the im-portance of an “economic adjustment” goal.Rapidly increasing imports can harm selectedgroups, especially import-competing domesticfirms and their workers. Such firms must adjustto rising imports by enhancing productivity orby laying-off employees. Proponents of the es-cape clause argue that the costs of this adjust-ment can be reduced if the firm is providedtemporary relief from imports.

This argument, however, has some problems.Foremost is that there are numerous circum-stances in which firms are forced to make ad-justments. Changes in consumer demand, en~ergy price shocks and governmental changes inspending, taxation and regulation necessitate ad-justments. If rising imports justify governmentalintervention, then it can be argued that these

28hagwati (1988) characterizes GATT as a ‘‘contractarian”institution that regulates inappropriate actions. Politicalpressures make it difficult to maintain a free trade stanceunilaterally, so GATT attempts to prevent those actionsthat induce others to move away from free trade.

3See Coughlin et al. (1988) and Richardson (1989) for re-cent surveys.4Administered protection and procedural protectionism aretwo other terms for contingent protection.

5Prior to 1974, escape clause legislation required that therising imports be due to a prior reduction of a trade bar-rier. The elimination of this necessary relationship by theTrade Act of 1974 appears to make U.S. law inconsistentwith GATI. See Jackson (1990) for a comparison of thelegal nuances of U.S. law with Article XIX of GATT.

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Table 1Principal U.S. Trade Law Provisions’

CriteriaStatute Focus for action Response Responsibility

Section 201 Increasing Increasing imports Duties, quotas. tariff- President (ITCFair Trade imports are substanlial rate quotas. orderly recommendation)(escape clause) cause of injury marketing

arrangements.adjustmentassistance

Secton 301 Foreign practices Unjustifiable, Lnreason- All appropriate U.S tradeUnfa.r Trade v’olating a trade able, or discriminatory and feasible action representative subject

agreement or inlurious practices, burdensome to direction oyto U.S. trade to U S. commerce the president

Section 701 Manufaclurng. Material injury or Dut’os IT~-lnjurydeterminattonSuos.dized productton or export threat of material TA-Subsidylmpo”ls subsides inlu ry2 deterrnnat.on

Sect;on 731 Imports sold below Material injury or Dutes ITC-Injury determinationDumped Imports cost of production or threat of mater’al TA-Dumping

below foregn market iniury determ~nationprice

‘Origin o~current provisions Tariff Act of 1930 tSmoot-Hawey~.as amended, rrado Act of1974. as amended Trade Agreements Act ol 1979. as amended: T’ade ano Tar;fl Act o~1984:Omribus Trade and Competitiveness Act of 1988

‘Inc material rjury test is extended only to countrtes trial fulfill certain conditons.

SOURCE Cour.cl of Economic Advisers (1988. p 152~,mooified Dy aulhor

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fellow GAY” mernbn’v F b ~ flex hi ity allows tempo.arycepar~uresfrom :race r)nig’itiOlS w’.thout full-flcdciecrepudiations

IIIIIIIIIIIIIIIII

other causes of adjustment costs should be miti-gated as well. While there are cases other than

-- rising imports that do lead to governmental in-tervention, where should the line be drawn?

Another facet of the adjustment argumentfocuses on the fact that rising imports providebenefits to many consumers and impose costson relatively few firms and workers. An equityargument can therefore be made for shiftingsome of the burden of adjustment from thefew who are harmed to the many who benefitthrough the tax on consumers imposed by im-port restrictions.

The second primary justification for escapeclauses relates to this argument. A relativelysmall yet potentially well-organized group harmed

6Lande and VanGrasstek (1986) note that the escapeclause allows member countries to impose trade restric-tions to mitigate the perceived adverse effects of rising im-ports, while remaining cognizant of their obligations to

JFltV/AFlflttST 1001

after the filing of petitions. Significant declinesin sales, production, profits, wages or employ-ment are evidence of serious injury.

Negative ITC decisions require a majority ofthe commissioners to reject the petition and ter-minate the process. Affirmative ITC decisionsrequire either a tie or the majority of the com-missioners to accept the petition; they are for-warded to the president. A recommendation asto the appropriate trade restriction and/or ad-justment assistance to prevent or ameliorate theinjury is included. The president, however, isnot bound by the JTC’s injury finding or its sug-gested relief. Nevertheless, the Trade Act of1974 instructs the president to provide relief(which can take the various forms identified intable 1), unless such relief is deemed not to bein the national interest.

tin/air Trade .liegisiation

The escape clause allows a nation to restrainimports regardless of whether the imports havebeen assisted by “unfair” practices. Examinedbelow are the three most prominent pieces ofU.S. legislation that address the issue of offset-ting the effects of unfair actions: 1) Section 701,which deals with governments subsidizing ex-ports; 2) Section 731, which deals with dump-ing, that is, with foreign firms selling theirgoods at lower prices in the United States thanin their home markets; and 3) Section 301, whichdeals with violations of trade commitments anda wide range of other actions.

S~tkn Till: Couaterv-niling lint:’Leçislatinn

The legal purpose of countervailing duty legis-lation is to offset government-provided benefitsthat assist the exports of foreign firms. Thesebenefits include export subsidies, such as directgovernment payments, tax relief and subsidizedloans to a nation’s exporters and low-interestloans to foreign buyers. By inducing additionalforeign export activity as U.S. consumers substi-tute these goods for similar domestically pro-duced goods, these subsidies can injure import-competing U.S. industries. Assuming certainprovisions are met, U.S. trade law allows sub-sidized exports to be counteracted with tariffstermed countervailing duties.

Even if one acknowledges that export subsi-dies harm a domestic industry, it is possible toquestion the wisdom of countervailing duties.Many economists argue that if a foreign govern.ment subsidizes exports, the importing coun-try should accept the gift of cheaper goods.Resources no longer needed by the import-competing U.S. industries can be employed pro-ductively in other sectors of the economy.Countervailing duty legislation, however, fo-cuses on the harm to these import-competingindustries and ignores the benefits reaped byconsumers and other producers.

Bhagwati (1988), while acknowledging theeconomic validity of the preceding argument,argues that a free trade regime might dependon unfair trade legislation. Countries pursuing afree trade policy find it difficult to resist thedemands for protection when the decline of anindustry is due to the market-determined advan-tages of foreign producers. If the decline is dueto the use of export subsidies, demands for pro-tection are heightened because issues of fairnessare stressed. A free trade regime that does notcounteract artificial advantages might find itselfunable to defend and perpetuate its free tradestance.

The administration of countervailing dutylaws is the joint responsibility of the ITC andthe International Trade Administration (ITA) ofthe Department of Commerce. The ITA deter-mines the existence and magnitude of any sub-sidy, negotiates agreements to offset any sub-sidy, imposes duties, reviews the effectivenessof the remedy and determines when the rem-edy is terminated. Concurrently, the ITC appliesan injury test to determine whether subsidizedexports have caused or will threaten materialinjury to a domestic industry or have retardedthe establishment of a domestic industry.’

Material injury, as defined by the Tariff Actof 1930, is “harm which is not inconsequential,immaterial, or unimportant.” While this defini-tion is far from clear, the law does require thatthe ITC incorporate volume, price and impactconsiderations in its determination of harm. Inexamining the volume of imports, the ITC ischarged with determining whether an increasein that volume, either absolute or relative toeither U.S. consumption or production, is signif-

‘Lande and VanGrasstek (1986) point out that an injury testis used in countervailing duty cases only when the foreigncountry meets certain conditions. When an injury test isnot required, the ITA has complete control.

1

Figure 1Statutory Timetable for Countervailing Duty Investigations (in days)

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SOURCE

icant. With respect to the effect of imports onprtces, the ITC looks fot significant price under-cutting by the imports relattve to domesticallyproduced goods and attempts to assess the re-sulting price consequences. Finally, the impacton the domestic industry is assessed by examin-ing changes in production, employment, marketshare, profits and wages.

Countervailing duty cases begin when a peti-tion is filed with the ITA and the ITC by eitheran interested party or the ITA itself. (A completetimetable for countervailing duty investigationsis provided in figure 1.) If the ITA concludesthat an investigation is warranted, then the ITCmust reach a preliminary determination as towhether a “reasonable indication” of material in-

A preliminary affirmative ITA decision leadsto the announcement of a preliminary estimateof the export subsidy and an order that import-ers make a cash deposit or post a bond equal tothe estimate of the subsidy for each entry. Ifthe preliminary ITA decision is negative, no de-posit or bond is posted; however, the ITA inves-tigation continues until it reaches a final deci-sion. If the final ITA decision is negative, thenthe case is terminated; otherwise, the ITA mustdetermine the final subsidy margin.

An affirmative final determination by the IrAleads to an ITC hearing in which all interested

jury exists. A negative 11 C determination terminates the proceedings, while a positive deter-mination leads to additional investigation.

JULY/AUGUST 1.001

8

parties participate. If the ITC finds no materialinjury, then the case ends. On the other hand, afinding of material injury by the nC leads to anITA order of countervailing duties against theimported merchandise. Such an order continuesuntil revoked.

Set.lion 73.1: Anti-dumping .tegtslation

‘the legal purpose of anti-dumping legislationis to prevent two unfair practices: it) price dis-crimination in which foreign firms sell in theUnited States at prices lower than they chargein their home markets, and 2) export sales in theUnited States at prices below the average totalcost of production.~Both practices tend to lowerthe price of the good in the U.S. market causingU.S. consumers to purchase less of similar do-mestically produced goods. This decrease in de-mand harms the domestic industry by reducingprofitability, sales, employment and other mea-sures relative to a market without dumping.Although domestic consumers do benefit fromthe lower price, their interests are ignored bythis legislation.

Focusing on the first practice, if the ITAdetermines that the product in question is beingsold in the United States at a price less than itsforeign market value, the case is referred to theTTC. The ITC then investigates whether, as aresult of the dumping, a domestic industry is in-jured, likely to be injured or prevented from be-ing established.

The ITC’s assessment of material injury indumping cases is the same as in countervailingduty cases. The 1TA’s determination of thedumping margin, however, differs from thedetermination of the subsidy margin. The dump-ing margin is simply the difference between thehome market sales price and the export sales

price. While the concept of a dumping marginis simple, applying the concept to the real worldis complicated.°Details on calculating the dump-ing margin, which can affect the consequencesof this legislation, are highlighted later.

The administrative procedure for anti-dumpingcases is virtually identical to that of countervail-ing duty cases. The primary difference is thatwhile an injury test is automatic in anti-dumpingcases, it may not be required in certain counter-vailing duty cases. In addition, the timetable fordumping investigations (provided in figure 2) islonger.

Section 30.1 and the Anthoi’itv to Retaliate

Section 301 grants the United States TradeRepresentative (USTR) authority (subject to anydirections from the president) to take all “appro-priate and feasible action” to remove foreigntrade barriers that hinder U.S. exports and tofight foreign subsidies that hinder U.S. exportsto third-country markets.” This legislation isprimarily a Congressional response to dissatis-faction with GATT’s ineffectiveness in resolvingtrade disputes.” Formally, Section 301 allowsthe USTR to respond against any act, policy orpractice of a foreign country that is determinedto be~1) inconsistent with the provisions of, orotherwise denies benefits to the United Statesunder, any trade agreement; or 2) unjustifiable,unreasonable, or discriminatory and burdens orrestricts U.S. commerce.

Unreasonable is broadly defined in the Tradeand Tariff Act of 1984 so that offending foreignrestrictions are not limited to violations of tradeagreements. the term includes, and goes be-yond, any act, policy or practice that denies fairand equitable opportunities to begin arid oper-ate a business. Unjustifiable, as well as discrim-

8Boltuck (1991) identifies international price discrimination,promotional pricing, predatory pricing and hidden exportsubsidies as instances of price dumping. Note that forprice dumping to be profitable, barriers must exist thatprevent the imported good from being resold in the ex-porter’s market at the higher home market price. Interna-tional price discrimination is profitable when an exporterpossesses more market power at home than in the UnitedStates (that is, demand in the firm’s home market is lesselastic than in the United States) and charges a higherprice in its home market than in the United States. Promo-tional pricing arises when an exporter induces consumersin a foreign market to try a product by introducing it at alow price. Predatory pricing is a rarely used strategy inwhich an exporter attempts to eliminate competitors byreducing the export price below its rival’s costs and belowits own production costs. Once the competitors have ex-

ited the market, the exporter raises the price. Finally, hid-den export subsidies are classified as dumping eitherbecause there is no direct subsidization or the TA isunable to demonstrate the existence of a subsidy.

°SeeJackson (1990) for details on this complexity.‘°ThePresident (rather than the USTR) had this authority

prior to the Omnibus Trade and Competitiveness Act of1988,

“Although GATT is frequently involved in dispute-settlementproceedings, it has no authority to impose sanctions or en-force its decisions. A GATT ruling favorable to the UnitedStates simply justifies unilateral U.S. action when the otherparty does not abide by the decision. In addition, Section301 allows for the settlement of trade disputes with coun-tries not belonging to GATT or when the issue is notcovered by GATT.

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Figure 3A Representative Case for the Section 301 Process

Lesser of 12 months (18 months for tradeagreement cases) OR 30 days after pro-cedures end

Retaliation

45 days 30 days 30 days 30 days jr

It, ‘I ttPetition USTR / / Unfairness Presidentfiled takes decision gives

case by USTR ‘Specific+ 4 direction

Federal Public Notice Public Federal if any’register hearings for public hearings register to stopnotice hearings notice retaliation

SOURCE Grinots ~l989~

inatorv, includes any act, policy or practice that statutes. The US FR’s task is much more subjec-denies either national or most-favored-nation tive because it mu t also dcvi e and pursue atreatment. In the context of the United States negotiated settlement with a toreignand a specific foreign country, national treat- government.ment focuses on whether U.S. firms operatingin that country are treated as favorably as the If a negotiated settlement is not reached, thefirms of the foreign country are treated in the USTR may: 1) suspend, withdraw, or preventUnited States. Most-favored-nation treatment the application of, or refrain from proclaiming,refers to the best treatment accorded to firms benefits of trade agreement concessions to carryfrom any other country operating in a specific out a trade agreement with the foreign party in-foreign country. Even though all foreign fii-ms volved; and 2) impose duties or other import(including U.S firms) may be treated identically restrictions on the products of, and fees orin a specific country, Section 301 could still be restrictions on the services of, such foreign par-invoked if the treatment given were not as fav- ty. This retaliation can be applied to all coun-orable as the treatment given the foreign firms tries or to selected countries. Furthermore, thein the United States. retaliation can be applied to goods and services

other than those identified in the petition.Similar to other trade remedy proceedings,

U.S. firms may formally petition to initiate Sec- In addition to dissatisfaction with the GATTtion 301 proceedings or the USTR may initiate dispute-settlement process, Congress has beenthe case. A typical case in which the petition is unhappy with the operation of Section 301.filed with the USTR is illustrated in figure 3. Changes included in the Omnibus Trade andThe USTR’s role in Section 301 cases varies Competitiveness Act of 1988 generally reducefrom the roles of the ITA and ITC in other the president’s input into the process and en-trade-remedy cases. The USTR acts as both courage more frequent use of Section 301.12 Ajudge and advocate, while, relatively speaking, particular provision of the legislation known asthe ITA and ITC primarily judge on the basis of Super 301 reflected Congress’ desire to “getthe objective merits as defined by the relevant tough” with our foreign rivals and pry open

‘2See Grinols (1989).

FFnFpai PFSFRVF SANK OF ST I (IlLS

During the 1980s, import-competing firmsthroughout the world increasingly used anti-dumping actions rather than countervailing dutyand escape clause actions.” As shown in table2, this change has occurred in the United Statesas well; however, this change is not as pro-nounced in the United States as it is elsewhere.From 1983 onward, anti-dumping actions in theUnited States have exceeded 50 percent of thetotal number of trade-remedy petitions. In fact,the use of the escape clause mechanism has be-

come negligible. Since 1984, escape clause caseshave generally totaled less than 5 percent of thepetitions.

The total number of actions show a substan-tial decline since 1987. However, to argue thatthis decline indicates a sharp reduction in thedemand for protection would be erroneous. Be-tween 1982 and t986, the total number of ac-tions exceeded 100 cases in every year but one;however, approximately 200 cases involvingsteel products were initiated prior to the volun-tary steel agreement of October t98415 In addi-tion, the duties imposed under anti-dumping andcountervailing duty actions can persist for sometime.’°Similarly, other non-tariff barriers thatwere negotiated and imposed as a result of thepressure represented by anti-dumping and coun-tervailing duty actions also persist for sometime. Thus, many industries had their concernsresolved (at least temporarily) which resulted ina reduced number of new cases in the late1980s.

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Table 2U.S. Trade-Remedy Petitions: Number and Percentage of Total

Countervailing Total

Escape clause Anti-dumping duty Section 301 petitions1979 4 65% 16 258% 37 597% 5 81% 62

1980 2 54 24 64.9 11 29.7 0 0 371981 6 11.3 15 28.3 22 41.5 10 189 531982 1 0.5 63 29.2 145 671 7 3.2 2161983 5 6.2 47 580 22 272 7 8.6 811982 6 45 73 54.9 52 39.1 2 15 1331985 3 27 65 58.6 38 34.2 5 45 1111986 3 29 70 66.7 26 24.8 6 5.7 105

1987 2 77 14 538 5 19.2 5 19.2 261988 2 32 40 64.5 13 210 7 11.3 62

1989 0 0 23 56.1 9 220 9 22.0 411990 1 1.8 43 768 8 14.3 4 71 56

SOURCE Escape clause. anti-dumping ano countervailing duty data fo’ 1979-1988 are fromMesserlin (1990~.The remaking years of data are from the Office of the UnitedStales Traae Representative (1991) The data for Sect on 301. whrcn includes peti-

tions as well as cases instgated by the President of the United States and the USTR.is haseo on a listing from tile Off cc of the United States Trade Representative

IIIIIIIIIIIIIIIIII

their markets.” Super 301 required the USTRto name (by May 30 of each year) those nationswith the most restrictive barriers to U.S. ex-ports and to identify the specific practices thatmost hinder U.S. exports. The listed countriesfaced retaliatory measures if no agreement onremoving the trade barriei’s was reached within12 to 18 months.

THE FREQUENCY OF TRADE-

REMEDY PETITIONS

‘3See Bhagwati and Patrick (1990), especially Chapter 1, foran overview of the reasons for and the issues generatedby Super 301.

“See Messerlin (1990) for details.‘5See Ahearn et al. (1990).

“According to the Office of the United States TradeRepresentative (1991), 71 countervailing duty orders werein effect at year-end 1990. These 71 orders exceed thetotal number of countervailing duty petitions (61) between1986 and 1990.

S

12

The trend since 1987 of declining actions,however, is not exhibited by Section 301 peti-tions. On the other hand, there is no clear up-ward trend either. Recent legislative changes inthe Omnibus Trade and Competitiveness Act of1988 suggest that this mechanism will assumeincreasing importance in the future.

TR.ADE-REMEDY LAWS: THEIR

EFFECTS A.ND TRE ROLE OF

A.DMINISTRA’TlVE BIASES

To assess the consequences of trade-remedylegislation, information on the frequency of thesepetitions is supplemented with details of theiradministration and outcome. The evidence pre-sented below highlights biases in the administra-tion of these laws and the proliferation of tradebarriers resulting from these cases. As a result,it is highly unlikely that the legislation is facili-tating free and fair trade.

The Negligible Effects oJ EscapeClause Legislation

The small number of escape clause petitionsin recent years suggests that this trade-remedylegislation is having virtually no effect on thepattern of trade. The underlying criteria for asuccessful petition, plus the possibility of for-eign retaliation unless other U.S. trade barriersare reduced, have deterred the use of escapeclause petitions and induced industries to seekprotection using other trade-remedy avenues.”Despite the “requirement” that anti-dumping andcountervailing duty actions can be invoked onlyto counteract the specific unfair trade practicesof dumping and export subsidies, industrieshave increasingly resorted to these trade-remedy laws rather than use the escape clauseroute. This apparent anomaly is explained whenthe administrative details of these less-than-fairvalue procedures are scrutinized.

Effects of countervailing flute and

Anti-dumping Legislation andAdministrative Biases

Countervailing duty and anti-dumping actionsare associated with rising trade barriers. For ex-ample, of 774 countervailing duty and anti-dump-ing cases completed in the United States be-tween 1980 and 1988, 70 percent were resolvedto restrict trade in some way.’8 Whether theresulting duties, as well as the other negotiatedrestrictions on trade, should be viewed as pro-tectionist, however, requires additionalinformation.

Countervailing and anti-dumping duties can beviewed as responses to actions taken by foreigngovernments and firms. For example, if an in-vestigation determines that dumping is occurr-ing, then the U.S. response to impose a duty (adumping bond) equal to the dumping margin isautomatic. In this case, the effect of the duty isto offset the injury to the domestic industry. Ifeach instance of dumping is counteracted, thenthe net effect on trade would be zero in thesense that the level of trade would return tothe same level prior to dumping. Many, how-ever, do not feel that the actual workings of thelegislation are quite so benign.

~4dninistratim•~e .tiiases

Bias has been found to enter the administra-tion of less-than-fair value statutes through theirinterpretation by administrative agencies.’° Theadministering agencies have discretion that issufficiently broad to allow for bias. For exam-ple, Boltuck et al. (1991) conclude that the pro-cedures used by the ITA in measuring subsidyrates and dumping margins are biased towardfinding dumping and export subsidies.’°

A foreign firm is found to be dumping whenthe price of their good in the U.S. market is

‘7Article XIX of GATT allows trading partners affectedadversely by an escape clause action to retaliate bywithdrawing “substantially equivalent concessions” affect-ing the goods of the country invoking the escape clause.An alternative is to provide compensation to these GATTmembers by lowering trade barriers on their exports. SeeHamilton and Whattey (1990) and Lande and VanGrasstek(1986) for additional details.

“See Finger and Murray (1990).

“Recent research has suggested another way that the ad-ministration of this legislation could be biased. Moore (1990)found that ITC anti-dumping decisions were biased towardaffirmative decisions when the complaining industry was

located in the state of a senator on the Senate FinanceCommittee.

20See Kaplan (1991) for a demonstration of the protectionistbias in injury and causation determinations before the ITC.

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below: 1) the price of the good in its home mar-ket; 2) the price of the good in a third market ifno home market exists; or 3) its production cost.Such comparisons appear to be simple, but thedescription below suggests otherwise. Similar-ly, the measurement of subsidy rates appearsstraightforward with the focus on devising ac-counting rules to allocate government subsidiesacross the volume of exports. Closer inspection,however, indicates much complexity as well asthe potential for bias in these calculations.

The calculation of price dumping margins issubject to error at four different stages: 1) inidentifying the home (domestic) market; 2) inadjustments to make domestic and export prod-ucts comparable; 3) in adjustments to calculatethe e~ifactory price (that is, the price as itleaves the factory) of domestic and export prod-ucts; and 4) in comparing the e~vfactory pricesof domestic and export products. Errors at thefirst and last of these stages are illustrated.

The identification of the foreign firm’s homemarket tends to produce the highest possiblefair value of the foreign good and, thus, thelargest possible dumping margin. To illustrate,assume a firm occasionally charges a price be-low its production cost in its home market. Suchsales are made in the “normal course of busi-ness” for any firm in a competitive industrythat faces a demand for its product that variesrandomly.” Below-cost sales, that occur whendemand falls below its average level, are bal-anced by above-cost sales, that occur when de-mand is above its average level, allowing thefirm to earn a competitive rate of return. The

ITA, however, excludes all below-cost sales fromits calculation which raises the fair value of theproduct and creates an upward bias in thedumping margin.

The comparison between the e,x factory priceof individual sales in the foreign firm’s exportmarket (that is, the United States) to the averagee~factory price in its domestic market can pro-duce bias as well. For example, if prices weredeclining and exports increased relative to homesales during the period used to assess the exis-tence of dumping by the foreign firm, then apositive dumping margin would be found. Thelow-priced export sales at the end of the periodand the high-priced home market sales at thebeginning of the period would generate a posi-tive margin. Note that dumping would be foundin this case even if home and export prices wereidentical for every sale made on the same day.”

In theory, the preceding bias should also oper-ate in the other direction to generate negativemargins. In practice, however, this does not oc-cur because the ITC excludes the possibility ofnegative dumping, not only on average, but oneach individual price comparison. ‘Fhus, all ex-port sales below fair market value carry a posi-tive dumping margin, while all export salesabove fair market value carry a margin of zero.”Consequently, a positive dumping margin willbe found even when all sales are made at thesame price on the same day and the weights oneach sale are identical.” Thus, this procedurepunishes foreign firms for not price discriminat-ing because the only way to avoid dumpingduties is to charge substantially more in theUnited States than in other markets.

IIIIIIIIIIIIIIIII

‘1Fred Smith of the Competitive Enterprise Institute, asquoted by Bovard (1987), notes, “If the same antidumpinglaws applied to U.S. companies, every after-Christmas satein the country would be banned.”

22To illustrate this particular bias, assume the foreign firm’ssates occur at the same ex factory price in both the UnitedStates and its home market. Let the price be $10 in thefirst half of the investigation period and $5 in the secondhalf. The firm sells five units both in the United States andat home in the first half of the period and 15 units in theUnited States and 10 at home in the second half, Theaverage home price is $6.67 because one-third of thehome sates occurred at $10 and two-thirds at $5. Thisaverage price is compared to the individual sales prices inthe United States. Thus, each U.S. sale in the first half ofthe period would show a negative dumping margin (that is,dumping in the foreign firm’s home market rather than inthe United States) of $3.33 because the sales price of $10exceeds the average home price of $6.67; each sale in thesecond half of the period would show a positive dumpingmargin of $1.67 because the sales price of $5 is tess than

$6.67. One-fourth of the U.S. sales would have a negativedumping margin of $3.33, white three-fourths of the sateswould have a positive dumping margin of $1.67. If thiswere the only bias in the ITA’s calculations, a positivedumping margin of $42 would be calculated even thoughno actual dumping occurred. Additional biases, however,exacerbate the error further.

“In the numerical example in the preceding footnote, theone-fourth of the U.S. sales with the negative dumpingmargin of $3.33 would be treated as having a zero dump-ing margin. This increases the calculated dumping marginto S1.25 even though no actual dumping occurred.

‘4Boltuck et at. (1991) show that the bias in the marginequals approximately one standard deviation of the pricesfrom the mean, Thus, if a company charges an identicalprice in the United States and other markets and its pricesgenerally vary within 10 percent of the average pricecharged, the TA witt calculate a dumping margin of 10percent. In other words, if the firm’s average price is$6.00, the bias in the dumping margin is about $60.

14

Similar bias exists in the ITA’s calculation ofsubsidies in countervailing duty cases, especiallywhen the subsidy is not in the form of a directper unit export subsidy. Biased accountingmethods provide one route for finding inequity.For example, assume a foreign firm producesmore than one product and that one of the pro-ducts is allegedly subsidized. If the firm isfound to be subsidized, the ITA allocates the en-tire subsidy to the specific product that is thefocus of the investigation irrespective of thedegree, if any, to which the product issubsidized.”

Because of these sources of bias, virtuallyevery investigation that proceeds to a formaldetermination finds in favor of positive dumpingmargins and export subsidies.’~Thus, less-than-fair-value cases, similar to escape clause cases,hinge on injury tests. Since the criteria for theinjury test are less stringent for less-than-fair-value than they are for escape clause cases, theinfrequent usage of the escape clause is not sur-prising.”

Duties and [Jncertaintv

The reasons for the protectionist conse-quences of less-than-fair-value legislation are notlimited to biased administration. By law, anydumping margin or export subsidy greater than0.5 percent justifies an affirmative determina-tion. While a small duty is unlikely to have alarge effect on competitiveness, the existence ofany anti-dumping and countervailing dutiescfeates costs of uncertainty that may have largeeffects for the exporter. This possibility isrelated to the fact that the importer (not the ex-porter) assumes the risk of incurring higherduties than those originally paid.

The bond initially posted on imports whichare subject to these duties is only an estimate ofthe final duty. At the end of each year, the ITAallows interested parties the right to request areview of outstanding anti-dumping and counter-

vailing duty orders. Such a review will typicallyrequire three to four years before the final du-ty rate is set. If there is no request for a review,then the estimated deposit rate is equal to thefinal duty rate.

The uncertainty over deposit rates means thatby importing under anti-dumping and counter-vailing duty orders, importers are creating open-ended contingent liabilities for themselves. Find-ings of underpayment require additional pay-ments including interest to the government forthe imports. To assess the risk of underpay-ment, an importer must have substantial infor-mation. For example, importers of goods subjectto countervailing duties must be knowledgeableabout the various industrial programs in the ex-porting country and be able to assess the biasthat exists in the calculation of duties.’~

Iiarassment

Another line of argument suggesting the pro-tectionist consequences of less-than-fair-valuelegislation is known as the harassment thesis.Gregory (1979) noted a barrage of administra-tive complaints or court suits (35) filed by U.S.electronic appliance and component manufac-turers against Japanese competitors. He con-cluded that even when these actions are notdirectly successful, they impose lengthy andcostly delays on Japanese firms that indirectlyproduce a protectionist result.

This harassment is not confined to Japanesefirms nor are the consequences limited to in-creasing the cost of penetrating the U.S. mar-ket. Firms from virtually all developed countriesas well as many developing countries have beensubjected to less-than-fair-value petitions.” Whilethese petitions directly increase the cost of pen-etrating the U.S. market, the threat of a petitionalso increases the risk of exporting to the UnitedStates for actual and potential exporters. Theultimate result is that foreign firms will reducetheir efforts to export to the United States.

“See Bottuck et at. (1991) for additional examples.

‘6See Finger and Murray (1990).

“The fact that the president cannot set aside affirmativeless-than-fair-value decisions but can set aside affirmativeescape clause decisions, and that less-than-fair-valuecases can be targeted against firms from specific coun-tries white escape clause cases cannot, also explains therelative use of tess-than-fair-value cases.

revenue with the U.S. Treasury that it coutd have retained.Nonetheless, an exporter more concerned with short-termprofits from price discrimination than with a tong-term reta-tionship with the importer might stilt find it profitable toprice discriminate.

“Finger and Murray (1990) note that before a firm files atess-than-fair-value petition, it frequently makes inquirieswith law firms and holds informal discussions with the ITA,neither of which are kept secret. In effect, the period ofharassment can begin before an official complaint islodged.

problem is not so pronounced in the case of dump-ing. An exporter that continued to dump would be sharing

lyon-tan/f Barriers

As suggested by arguments discussing uncer-tainty as well as harassment, less-than-fair-valuelegislation can have protectionist consequencesapart from the actual duties resulting fromspecific cases. Another route to protectionism isthat this legislation can result in the more fre-quent use of non-tariff barriers. Finger (1981)pointed out that less-than-fair-value mechanismscan be used by a domestic industry to generatepublic support for protection. Until all the stan-dard means of seeking protection have been ex-hausted, it is unlikely that there will be strongpolitical support for protection. Mechanismssuch as less-than-fair-value cases must be util-ized prior to gaining access to more politicalforms of protection. Many non-tariff bar-ricesoriginated as less-than-fair-value cases. For ex-ample, Finger and Murray (1990) found thatnearly half of the less-than-fair-value cases inthe 1980s were superseded by some form ofnegotiated export restraint.

The Else p1 Less-Than-Fair-ValueLegislation in Other Gountnies

A final line of argument suggesting that less-than-fair-value cases lead to protectionism isthat these cases induce other less-than-fair-valuecases. As indicated by Messerlin (1990), thisavenue of protection was not used by develop-ing countries through 1985. ‘I’he increased fre-quency of these cases by developed countriescould have spurred their increased use by de-veloping countries in the late 1980s. In 1988more than 20 percent of anti-dumping actionsoriginated in developing countries. Some haveargued that use of this mechanism by develop-ing countries is even more capricious than useby developed countries because importers maybe subject to anti-dumping duties without eitherdue process or even formal notification.’” Thus,the use of less-than-fair-value legislation in theUnited States could backfire by generating addi-tional inequities for U.S. producers—in this case,exporters—and in subjecting international tradeto more barriers.”

Section 301 and Super 301:Controversial Consequences

Although Super 301 has generated much con-troversy since its passage, it has produced onlya small number of offenders and practices. In1989, for example, Brazil was cited for quantita-tive restrictions involving her balance of pay-ments; Japan was cited both for technical bar-riers to trade hindering forest products andgovernment procurement practices involvingsupercomputers and satellites; and India wascited for barriers limiting trade in foreign in-surance services and for trade-related invest-ment measures that imposed export performancerequirements on foreign investors. It is note-worthy that these priority practices were notnecessarily those with the greatest export poten-tial and that they were similar to those gener-ally handled under Section 301. Nonetheless,these Super 301 actions generated protests fromour major trading partners.”

Barfield (1990) criticizes the Super 301 processbecause it is ultimately controlled by the samepolitical judgments the United States criticizesother countries for using in their trade policydecisions. For example, the naming of India andBrazil was in retaliation for their role as leadersof a group of developing countries that opposedU.S. goals in the Uruguay Round.

The politicization charge can be levied againstthe Section 301 process in general. Powell (1990)argues that voluntary export restraints on steelin the 1 980s were highly politicized. In thecourse of the 1984 presidential campaign, Re-publican political leaders bowed to steel in-dustry pressure for protection. Finding no otheravenue available, the USTR threatened to fileSection 301 cases unless numerous countriesagreed to limit steel exports.

Other ways also exist to manipulate Section301 cases. For example, in November 1987, theUSTR invited public comment to identify po-tential Brazilian imports as targets for retalia-tory tariffs in a computer piracy case. Represen-tatives from various industries producing goods

15

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“This point is made by Powell (1990) based on an interviewwith Robert McNeitt, the executive vice chairman of theEmergency Committee for American Trade.

‘1A related point is that the filing of anti-dumping petitionsin the United States is not limited to domestically ownedfirms. As reported by Bradsher (1991), the Americanmanufacturing subsidiary of a Japanese company recentlyasked the ITC to impose duties on the imports of a com-

petitor that is 48 percent British-owned. This new type oftrade complaint wilt likely cause some supporters of thislegislation to reconsider their positions as it becomes clearthat foreign-owned firms can benefit at the expense ofU.S. consumers.

“See Bhagwati and Patrick (1990), especially Part 3, for thereactions to Section 301 by various U.S. trading partners.

16

unrelated to computers, such as leather shoesand dinner dishes, made appeals for retaliatorytariffs of 100 percent to the USTR.

Barfield (1990) also criticizes Super 301 be-cause it violates the fundamental premises ofGATT. GAIT relies on negotiated reciprocal re-ductions of trade barriers on a multilateral basisacross many industries. Actions in which coun-tries unilaterally define unfair practices andforce bilateral negotiations under a retaliationthreat are antithetical to GATI. Since GATT isthe foundation for an orderly world trading sys-tem, it is quite difficult to accept any argumentsuggesting that use of this legislation by theUnited States can facilitate free trade. It is morelikely that other countries will develop theirown versions of 301 legislation and that theywill be used to counteract the United States. Insuch an environment, trade barriers will pro-bably rise rather than decline.

A more fundamental criticism of Section 301(in general) and Super 301 (specifically) is thattrade retaliation and retaliatory threats are inef-fective in opening foreign markets. After study-ing a large number of cases, Powell (1990) con-cluded that this “crowbar” approach generallyfails and that markets are opened because ofdomestic conditions rather than external ones.From 1975 through March 1990, only 13 of 79Section 301 cases that were filed led to marketopenings.” In many cases, countries have re-sponded to retaliation by further closing theirmarkets.

Numerous reasons are offered to explainthe ineffectiveness and shortcomings of this ap-proach to open foreign markets. First, nation-alism in the target country is inspired by retali-ation; a coercive attempt by a foreign govern-ment tends to unite the target country againstthe threat. Second, the target country reorientsits economy toward alternative suppliers andmarkets. Firms and consumers in targeted coun-tries can replace their transactions with the

United States by selhng to and purchasing fromother countries. Third, the government’s role inthe target country generally expands. This in-tervention to manage the changes induced bythe retaliation involves trade-distorting policies,many of which are difficult to eliminate oncethey have been instituted. Fourth, the tougherthe sanctions, the larger the costs incurred bythe retaliating country in terms of higher con-sumer and input prices.”

The preceding assessment, however, is notshared by everyone. Ahearn et ah. (1990) note acongressional perception in recent years thatSection 301 and Super 301 are working. The1989 Super 301 complaints against Japan andBrazil were resolved in 1990. In addition, SouthKorea and Taiwan, both frequently mentionedas potential targets of Super 301, made advanceconcessions to avoid being named as prioritycountries.” Nonetheless, even in situationswhere this legislation is generating results, it isfar from clear that barriers to trade are actuallybeing reduced. For example, recent U.S-Japandiscussions (known as the Structural Im-pediments Initiative) were largely a Section 301negotiation. It can be questioned whether theU.S-Japan agreement to reduce structural im-pediments to trade, such as Japanese “conces-sions” to review tax policies that favor agricul-ture over new construction and American“concessions” to reduce its budget deficit, willpromote a freer trading environment or evenreduce the U.S. bilateral trade deficitwith Japan.”

CONCLUSION

The alleged purpose of nearly all trade-remedylaws is to ensure that international competitionis fair. Certain commercial practices, such asdumping and export subsidies, are viewed asunfair and, thus, should be counteracted. Theelimination of these unfair practices will pro-duce an economic environment in which the

“Powelt (1990) found that some openings for U.S. exportsto South Korea have led to new restrictions on importsfrom other countries, especially those from Japan. Thus,the South Korean market in not more open overall. Whitethe actions by South Korea have served the interests ofcertain U.S. exporters, the actions reflect the fact thatpolitical clout rather than economic efficiency is determin-ing the pattern of trade.

‘4Numerous examples are avaitabte to suggest the harm, In1988, President Reagan imposed 100 percent tariffs onBrazilian paper products, pharmaceuticals and consumerelectronics as a result of a Section 301 petition alleging in-adequate Brazilian protection of pharmaceutical patents. In

1982, President Reagan ordered higher steel tariffs andmore restrictive import quotas as a result of a petitioncharging European steel subsidies. White U.S. steel pro-ducers undoubtedly benefited, American manufacturersthat required competitively-priced steel as an input wereharmed.

“The 1989 Super 301 complaints involving two practices inIndia remain to be resolved. A review is to be conductedafter the conclusion of the Uruguay Round.

“See Butler (1991) for details on these negotiations as wellas for a general overview of U.S-Japan trade.

a

REFERENCES

Ahearn, Raymond, Allan Mendelowitz, and Atf red Reifman.Congress and US. Trade Policy in the Nineties, No. 663,(National Bureau of Economic Research, October 5, 1990).

Barfield, Claude E. “The Grand Inquisitor on Trade,”Washington Post (May 1, 1990).

Bhagwati, Jagdish N. Protectionism (MIT Press, 1988).

Bhagwati, Jagdish N., and Douglas A. Irwin. “The Returnof the Reciprocitarians—U.S. Trade Policy Today,” WorldEconomy (June 1987), pp. 109-30.

Bhagwati, Jagdish N., and Hugh T. Patrick, eds.Aggressive Unilateralism: America’s 301 Trade Policy and theWorld Trading System (University of Michigan Press, 1990).

Bottuck, Richard. “Assessing the Effects on the DomesticIndustry of Price Dumping,” in RK.M. Tharakan, ed., PolicyImplications of Antidumping Measures (North-Holland,1991), pp. 99-141.

Bottuck, Richard, Joseph F. Francois, and Seth Kaplan.“The Economic Implications of the Current Administrationof the U.S. Unfair Trade Laws,” in Down in the Dumps: Ad-ministration of the Unfair Trade Laws, Robert Litan, ed.,(Brookings, forthcoming).

Bovard, James. “U.S. Fair Trade Laws Are Anything But,”

Wall Street Journal, June 3, 1987.Bradsher, Keith. “New Kind of U.S. Trade Comptaint:

By Foreign Companies,” New York Times, April 19, 1991.

Butler, Atison. “Bilateral Trade Balances and EconomicTheory: The Case for a U.S—Japan Trade Deficit,” thisReview (March/April 1991), pp. 16-31.

Council of Economic Advisers. Economic Report of thePresident (GPO, 1988).

Coughtin, Cletus C., K. Alec Chrystal, and Geoffrey E.Wood. “Protectionist Trade Policies: A Survey of Theory,Evidence and Rationale,” this Review (January/February1988), pp. 12-29.

Finger, J. Michael. ‘The Industry-Country Incidence of ‘Lessthan Fair Value’ Cases in U.S. Import Trade,” QuarterlyReview of Economics and Business (Summer 1981), pp.260-79.

Finger, J. Michael and Tracy Murray. Policing UnfairImports: The LAS. Example, WPS 401, (The World Bank,March 1990).

Gregory, Gene. “The Profits of Harassment,” Far EasternEconomic Review (October 26, 1979), pp. 74-79.

Grinols, Earl L. “Procedural Protectionism: The AmericanTrade Bill and the New Interventionist Mode,” We/twin-schaftliches Arch/v (Heft 3, 1989), pp. 501-21,

Hamilton, Colleen, and John Whatley. “Safeguards,”Jeffrey J. Schott, ed., in Completing the Uruguay Round: AResults-Oriented Approach to the GATT Trade Negotiations(Institute for International Economics, September 1990), pp.79-92.

Jackson, John H. The World Trading System (MIT Press,1990).

Kaplan, Seth. “Injury and Causation in USITC AntidumpingDeterminations: Five Recent Approaches,” in P.K.M.Tharakan, ed., Policy Implications of Ant/dumping Measures(North-Holland, 1991), pp. 143-73.

1 17

mating the bias toward protection of domesticproducers.I

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success of firms and resource suppliers dependon their own performance in a competitivemarket rather than on their access to gov-ernment subsidies or the use of questionablepractices.

Reality, however, bears little resemblance tothe alleged purpose. Less-than-fair-value tradelaws, especially anti-dumping laws, are the mostfrequently used trade-remedy laws and providepotential relief from all imports, whether theyare traded fairly or unfairly. In fact, the opera-tions of these laws are biased toward findingsof dumping and export subsidies. Therefore,they have become standard devices to protectspecific domestic producer interests at the ex-pense of domestic consumer and other pro-ducer interests. In addition, U.S. less-than-fair-value trade laws explicitly instruct ad-ministrators to protect specific domestic pro-ducers, while ignoring the interests of domesticconsumers and other domestic producers.

The costs imposed by the increasing use ofless-than-fair-value trade laws are not restrictedto the consequences of the actual import duties.The threat of such cases leads to “voluntary”agreements to limit trade, agreements that harmpotential importers. Furthermore, the uncer-tainty associated with the actual duties collectedfunctions as a type of non-tariff barrier. Finally,there is evidence that the use of trade-remedylaws tends to encourage protectionism in othercountries.

Despite some instances where Section 301and Super 301 cases might have had positive ef-fects in liberalizing foreign markets, there issubstantial evidence suggesting that the crowbarapproach generally fails. Domestic conditionsrather than external pressures provide the pri-mary motivation for the liberalization of mar-kets. Nonetheless, there is a high probabilitythat this trade-remedy approach will he usedmore frequently in the future. If so, then othercountries are likely to develop and use theirown versions of 301 legislation to counteractthe United States’ actions. Similar to the world’sexperience with hess-than-fair-value laws, protec-tionism is a likely consequence.

Overall, the evidence is that trade-remedylaws hinder rather than facilitate free trade.U.S. fair trade laws can he more accuratelycharacterized as the bedrock for protectionismrather than the bedrock for free trade. As such,trade-remedy laws need to he remedied by ehim-

V~A~~ ~tY”

18

Lande, Stephen L., and Craig VanGrasstek. The Trade Office of the United States Trade Representative.and Tariff Act of 1984: Trade Policy in the Reagan 1991 made Policy Agenda and 1990 Annual Report (GPO,Administration (Lexington Books, 1986). 1991).

Powell, Jim. “Why Trade Retaliation Closes Markets andMesserlin, Patrick A. “Antidumping?’ in Jeffrey J. Schott, Impoverishes People?’ Policy Analysis (Cato Institute,

ed., Completing the Uruguay Round: A Results-Oriented Ap- November 30, 1990).proach to the QATT Trade Negotiations (institute for Interna-tional Economics. September 1990), ~ 108-29. Richardson, J. David. “Empiricat Research on Trade

Liberalization with Imperfect Competition?’ OECD EconomicMoore, Michael 0. “Rules or Politics?: An Empirical Analysis Studies (Spring 1989), pp. 7-50.

of ITC Antidumping Decisions?’ Working Paper (George U.S. International Trade Commission. AnnualWashington University, 1990). Report 1986 (GPO, 1987).

ccncoA~ Ocorrouc aAMv flC cry fln~cr