Contingent Protection – Anti-dumping
The first Anti-dumping law passed by a sovereign government was over a century ago (in 1904) by Canada. This was followed by similar legislation in most of the major trading nations in the industrialised world prior to and after World War I (New Zealand (1905), Australia (1906), USA(1916)). After the World War II, Anti-dumping provisions were incorporated into the General Agreement on Tariﬀs and Trade (GATT) (Deardorﬀ and Stern, 2005). Since the turn of the century, developing countries – that have historically played only a minor role in the contingent protection landscape, have been involved in an overwhelming way as either petitioners or targets of these contingent protection cases (Feinberg, 2011).
Dumping10 is said to have taken place when an exporter sells a product in a market at a price less than the price prevailing in its own domestic market (sometimes even lower than cost of production) (Viner, 1923). A proof of ‘injury’ (or threat of an injury) to a competing domestic industry, within the provisions of the Agreement on Implementation of Article VI of the GATT 1994, makes the importing country eligible to impose anti-dumping measures against the exporters. Here, injury could mean material injury to a domestic industry, threat of material injury to a domestic industry, or material retardation of the establishment of such an industry and shall be interpreted in accordance with the provisions of this Article (WTO Antidumping Agreement, 1995). The dumping margin determines the quantum of duty that an importer levies on the ‘unfair’ imports. The dumping margin is the diﬀerence between the export price and the domestic selling price in the exporting country. Should the 9We use this year as a starting point because the WTO was formed on January 1, 1995.
10 In his seminal work on dumping, Viner (1923) classifies dumping according to motive : (1) the bargain-sale type, to dispose of a casual surplus; (2) the advertising type, to obtain or retain a market in which prices will presently revert to higher levels; (3) the predatory type, to kill or forestall competition; (4) the bounty-fed type in which exports at lower than the home price are made profitable through export bounties granted by governments of mercantilistic tendency; and (5) the cost-reducing type, to secure or retain a reduced unit cost by the expansion of output. He also suggests that after the 1890s, the fifth type of dumping has become most important of all suggesting that dumping is simply a method for obtaining economies which would be impossible without it. determination of the comparable domestic price be impossible, export prices to third countries or a ‘constructed value’ is used for price comparison. Constructed value is calculated as the cost of production in the country of origin plus reasonable amounts of handling costs and profits.
Stiglitz (1997) argues that from a static perspective, dumping by foreign firms seems to make consumers better oﬀ. However, from the policymakers’ point of view, dumping could become a problem in wake of predatory pricing and new trade theory eﬀects.
Predatory pricing is a tactic employed by firms to drive down market prices to such low levels that other firms are forced to exit the market because they just cannot compete. Predatory pricing, while unprofitable initially, can lead to profits in the second stage by acting as an entry barrier for other firms. However, several conditions may exist in which firms sell less than the cost of production. For example, firms may have sales below average total cost but above average variable cost in the short run. Also, learning curves can prompt firms to forward price at long-run marginal cost rather than short-run marginal cost (Stiglitz, 1997).
In recent years, it is seen that foreign firms are targeted with anti-dumping cases despite charging higher prices abroad or prices higher than domestic competitors. Thus, predatory pricing does not feature as a pre-requisite for filing anti-dumping petition against firms. Therefore, Blonigen and Prusa (2001) conclude that ‘Anti-dumping has nothing to do with predatory pricing’- a conclusion arrived at by Stiglitz (1997) much earlier.
With respect to the new trade theory eﬀects, Brander and Spencer (1985) suggest that there may be cases in which subsidy on imports could raise national welfare but reduce welfare in the importing country due to import surges. In this case, countervailing duties11 are useful in preventing foreign firms from gaining the first mover advantage in the domestic market.
Contingent Protection – Countervailing Duties
Barcelo III (1977) exposes the trade principle behind countervailing duties observing that the inadequacies of free economies may require government intervention from time to time. While the intervention can be in the form of subsidy to domestic production and export subsidies, it is the former that is more eﬀective from eﬃciency point of view. Bown (2010b) analyses this view further suggesting that there was a potential shift towards governments relying on the countervailing duty (anti-subsidy) policy triggered mainly due to two events: (1) China’s WTO accession in the face of its continued export expansion; and (2) the global policy response to the financial crisis of 2008–09 which led to a number of government-financed industry bailouts. These government support measures in the form of subsidies could be addressed through countervailing duties by trade partners. He also notes that while in the 1990-2009 period the US was the major user of countervailing duty provisions, several other WTO member economies (India, China, Turkey) have implemented new countervailing duty legislation and enhanced their use of this statue (See Figure 4). China’s purported ‘currency manipulation’ has often led to the rise in concerns of acting as an export subsidy which may lead to a surge in countervailing duty cases by other countries (Staiger and Sykes, 2010) and therefore, amongst the other countervailing duties-imposing economies in the G20, there is strong evidence of the simultaneous use of countervailing duties alongside anti-dumping.
The overall growth in countervailing duties could be troubling since it indicates either of the following two practices: 1) subsidies are growing or, 2) countervailing duties are being employed against a wider range of subsidies suggesting an increasingly protectionist deportment (Marvel and Ray, 1995). Since Marvel and Ray’s commentary in 1995, countervailing duty cases have been on a rise, although not commensurate to the number of anti-dumping cases worldwide. Also, it is worth noting that the US is a major user of countervailing duties in the world with its countervailing duty implementations since 2014 exceeding the countervailing duty initiations by all other countries combined (Figure 4).
Safeguards12 are contingent protection measures used by trading nations to (temporarily) protect a specific domestic industry from import surges that cause (or threaten to cause) material injury to the domestic industry. The GATT formalised the ‘insurance’ needed to make free trade politically acceptable in Article XIX which allows safeguards to be levied if import surges threaten domestic industry (Stiglitz, 1997). A few select sectors have seen intensive use of safeguards (Figure 5). These are the base metals, chemicals and ceramics categories. Since China’s accession to the WTO in 2001, there have been China specific safeguards imposed by countries. These account for 17% of the total safeguard cases filed between 2002 and 2012 (author’s calculation from Bown (2016)).
12While safeguards are not the focus of this dissertation (because of their non-bilateral nature), this short section is devoted to touch upon significant ideas concerning this mechanism of contingent protection.
Countries have been more restrained in their use of safeguards, probably because of the relative ease of using anti-dumping and countervailing duty petitions (Bown, 2010a). Also, safeguards may be less popular because using them might signal the admittance that a country’s domestic industry is not competitive (Niels, 2000).
Consequences of contingent protection
Empirical studies seem to support the theoretical argument that flexibilities are needed in trade agreements. These flexibilities help in addressing possible diﬃculties that may not be envisaged at the time of signing the agreement. Contingent protection measures are a step in that direction and research suggests that they are more likely to be used when countries are undergoing diﬃcult economic circumstances. However, researchers have not disbared the possibility of these measures being used as protectionist tools invoking numerous consequences (WTO, 2009). With the rapid proliferation of contingent protection policies, the eﬀects or consequences that arise from them have been scrutinised in several studies.
Vandenbussche and Viegelahn (2011) categorise the use of several indicators that capture direct eﬀects of contingent protection policy (in this case anti-dumping). These are product coverage, country coverage and product-country coverage, all coded as count measures. Studies with a core partial equilibrium nature have focused on the product level directly aﬀected by contingent protection actions. For example, Krupp (1994) examine the use of anti-dumping in the US chemical industry to find a positive link between import penetration and price-cost margin with petitioning activity. In a recent paper Chandra (2019) investigates the eﬀect of US anti-dumping duties on the exports of Indian multi-product firms and find that firms aﬀected by US anti-dumping duties increased the number of products exported to other destinations by about 0.7 products, on average.
Vandenbussche and Zanardi (2010) also expand to a general equilibrium approach by looking at the aggregate eﬀects of contingent protection where a mixture of eﬀects is likely to be at play. They identify indirect eﬀects on trade flows like trade destruction, trade creation (via import source diversion), trade deflection and trade depression13 due to contingent protection.
13 If country A takes a contingent protection measure against B, there are four possibilities of trade flows between A, B and third country C :
1) trade flows (relative to free trade) from B to A can reduce (trade destruction),
2) trade flows (relative to free trade) from B to C will increase (trade deflection),
3) trade flows (relative to free trade) from C to B can reduce (trade depression) and,
4) trade flows (relative to free trade) from C to A increase (trade creation via import source diversion) (Bown and Crowley, 2007; Vandenbussche and Zanardi, 2010)
Research has also delivered the following potential channels through which contingent pro-tection can administer consequences on trade. These are : downstream eﬀects (negative impact on downstream products like cars due to protection in intermediate sectors like steel (Krupp and Skeath, 2002)), deterrent eﬀect (making trade partners more cautious when shipping their goods to countries that signal to be frequent and tough users of contingent protection (Blonigen, 2006)), collusive device (formation of international cartels and tacit collusion (Prusa, 1992; Zanardi, 2004)), FDI eﬀects (exporters may decide to evade contingent protection by setting up a production plant within the protected market (Blonigen, 2002; Cole and Elliott, 2005), retaliation eﬀects (political and strategic considerations related to the use of contingent protection laws (Blonigen and Bown, 2003; Feinberg and Reynolds, 2006, 2018; Skeath and Prusa, 2001)).
Thus, the eﬀects or consequences of trade protection could have short as well as long term reach for a country’s macro-economy and often the global economy (Vandenbussche and Zanardi, 2010). This becomes particularly important for countries that seek to access developed markets where restrictiveness of non-tariﬀ measures is higher. Therefore, three broad conclusions can be drawn from the literature on the consequences of contingent protection. First, use of contingent protection is a highly political process and creates vested interests not only among protected industries and their political representatives, but also among the oﬃcials and lawyers directly involved in the policy (Niels, 2000). Second, ‘chilling eﬀects’ of protectionist policies are measurable even before a duty is imposed (Vandenbussche and Zanardi, 2010). And third, evidence is mixed on the eﬀect of trade flows between countries that impose protectionist polices, the target of these protectionist measures and third countries14.
At this juncture, it is important to enunciate that this dissertation does not study the conse-quences of contingent protection. This dissertation explores the determinants of contingent protection and attributes their genesis to factors other than only trade. Nevertheless, we believe, a fundamental discussion on the consequences of contingent protection was worthwhile to inform the debate on the motivations of the same. This is in line with the observations of Gawande et al. (2015) who point out that quantitative evaluations of the consequence of protection on trade flows cannot be decoupled with the understanding of the determinants of trade policy in the first place. In that vein, this dissertation is an attempt to uncover the atypical factors that play a role in nations’ activity of contingent protection.
14A priori, the eﬀect of contingent protection proliferation on trade flows remains unclear. Imports are likely to be reduced in an equilibrium scenario of all countries use contingent protection. Alternatively, the proliferation of contingent protection laws may result in a politically optimal equilibrium where the capacity to access these laws induces a cooperative equilibrium (Bagwell et al., 2016).
Outline of the dissertation
The literature on contingent protection measures, specially anti-dumping duties, is fairly mature with significant contributions over the past three decades related to key questions from when and why dumping occurs to its overall welfare eﬀects. However, there is scant attention to several new issues which although developed by trade theory have not found coverage in the contingent protection literature (Blonigen and Prusa, 2016). For example, which group of countries use contingent protection as a strategic tool to retaliate and in which sectors? Why do some countries take a more belligerent stand and does this have to do with the leadership or representation of the country? Do countries use development assistance as a ‘carrot and stick’ approach to induce desired behaviour in the recipient countries who become competi-tive trading partners? This dissertation is an attempt to address these under-scrutinised issues.
This dissertation is a collection of three empirical studies in international trade focusing on the use of contingent protection measures by trading nations. However, it can be advocated that it comes under the realms of development economics since trade protection has percolated into the developing countries, not only as targets but also as petitioners. It is an attempt to examine the trends in use of protection, consequently evoking discussion on welfare-enhancing alternatives that would be a useful direction for research. Each paper consists of a detailed literature review, and therefore here, we only briefly describe the motivations, theoretical backdrop, empirical methodology and key findings of each chapter.
What determines trade protection?
The first chapter titled Protection begets protection? is aimed to uncover the role of strategic motives like retaliation when using Anti-dumping duties. It is to be noted, in this chapter, we focus only on anti-dumping policy as it is the most conspicuous of all trade policies in terms of retaliatory behaviour 15. It seems that anti-dumping has found a favour for countries wanting subtle protection due to its unique combination of political and economic manipulability, incentives, and intrigue (Blonigen and Prusa, 2001). Blonigen and Bown (2003) develop theoretical models to exhibit the potential channels of retaliation involved in Anti-dumping cases. They suggest that eﬀective retaliation requires a combination of having 15To avoid noise in this particular analysis about the strategic motive of retaliation, we exclude countervailing duties since the bulk of countervailing duty cases (roughly 66%) are attributed to the USA. Also, safeguards as contingent protection tool, have to be excluded since these are not bilateral but levied product wise. access to and experience with the GATT/WTO dispute settlement mechanism and having suﬃcient trade from the home country to engage in a strong enough retaliatory response. To this eﬀect, more recent studies like Feinberg and Reynolds (2006, 2018); Niels and Francois (2006) find strong evidence that a significant share of anti-dumping filings worldwide can be interpreted as retaliation.
Table of contents :
1 Protection begets protection?
1.2 Literature and evidence on anti-dumping
1.3 Empirical Analysis
1.5 Sectoral Analysis
2 Are only men fighting trade wars?
2.2 Gender and trade policy
2.3 Empirical framework
3 Medicine with side effects
3.2 Foreign Aid and Aid for Trade – Related literature
3.3 Empirical Framework and Analysis
3.5 Disaggregating Aid for Trade
3.6 Robustness Checks