Commentary: A U.S. Trade Ploy That Is Starting to Boomerang

By Paul Magnusson

You're the CEO of a widget company. The economy is sputtering, demand is down, and your warehouse is full of widgets approaching their expiration date. You rule out layoffs to slow production and instead slash prices to empty those shelves. Next Fourth of July, you'll be cheered at the company picnic.

But if you're a widget exporter and you cut prices to clear out your inventory, a different fate awaits you. By merely discounting prices on goods that you sell abroad, you may be "dumping." So future exports could face high-penalty tariffs collected by foreign governments. As many a U.S. company has discovered, it's that easy to run afoul of international anti-dumping rules.

Welcome to the curious and contradictory world of anti-dumping laws, cloaked in obscurity and illogic and administered by a cabal of highly specialized lawyers, consultants, accountants, and government customs agents. In the next few weeks, expect to hear more about this arcane issue. Why? On July 17, House and Senate jockeying began over a fast-track bill that would let President George W. Bush negotiate trade treaties with minimum involvement by Congress. But there's one major exception to the Senate version: He cannot negotiate any reforms of America's anti-dumping laws.

U.S. Trade Representative Robert B. Zoellick, who already acceded to demands from developing nations to put the contentious anti-dumping issue on the bargaining table, insists that no trade bill is preferable to one with that prohibition.

Instead of tying the President's hands, Congress ought to be encouraging reform. "Most economists think the anti-dumping laws are completely nuts, but I suspect that very few lawmakers even understand how they work," says Robert E. Litan, director of economic studies at the Brookings Institution. "And now, the developing world is picking up on our bad example."

Indeed, India and China have recently taken up the anti-dumping cudgel with a vengeance, and the U.S. has become a top target. Some of the U.S. companies now in the sights of trade protectionists abroad include Amana, International Paper, Dow Chemical, 3M, and Bristol-Myers Squibb. Developing countries filed only a handful of cases in the 1980s, but they brought 700 cases overall in the second half of the 1990s, according to figures compiled by the Cato Institute in Washington. Today, U.S. exporters face about 90 active investigations and 89 penalty tariffs, according to the U.S. Commerce Dept.

Long the target of U.S., Canadian, and European dumping laws, poorer nations are learning that dumping duties can be a convenient way of protecting favored domestic industries. China's new membership in the World Trade Organization has "appeared to amplify [its] new interest" in bringing anti-dumping cases against the U.S. on behalf of uncompetitive state-run enterprises, according to a 2002 report from the U.S. Trade Representative's office. Despite its late start, India is levying more dumping penalties (9) against U.S. products than is the entire 15-nation European Union (2). The danger: As more developing nations reduce tariffs to comply with WTO agreements, they'll switch to anti-dumping penalties to keep home industries cosseted.

U.S. anti-dumping statutes were written 80 years ago to protect against predatory pricing by foreign exporters. Theoretically, dumping occurs when a company sells goods overseas at prices below the cost of production or below the home-market price. But import-sensitive companies, particularly in the steel industry, which files nearly half of all U.S. dumping petitions, "captured" the process and dictated the rules on assessing dumping, according to Michael S. Knoll, a University of Pennsylvania law professor. "The system has been rigged so that it's easy to persuade the Commerce Dept. that there has been dumping," says Knoll.

Given the various plaintiff-friendly methods of calculating "fair" prices, it's easy to see why. An example: If a foreign manufacturer doesn't respond to a detailed Commerce Dept. questionnaire about its pricing policies, the department can just accept the allegations of the U.S. plaintiff. In calculating whether an exporter is charging a "fair" price, Commerce can determine the theoretical cost of production in the home country and add 10% overhead and 8% profit. Anything under that price points to dumping.

That's not to say that anti-dumping laws have no place. But they need to meet a more consumer-friendly test. For example, are exports being priced to damage a U.S. industry in order to seize monopoly control? Are other nations restricting their own markets to only domestic producers in order to generate high profits and subsidize exports? In those cases, dumping penalties are clearly warranted. As with antitrust laws, anti-dumping cases should rest on whether an exporter is undermining competition in order to hike prices later.

International talks to reform the process have precedents. The 1994 Uruguay Round required WTO members to review dumping penalties every five years and to drop duties that are no longer justified. That's sensible. Next, the WTO nations need to get back to the basics of defining unfair pricing. Exporters shouldn't be penalized just for following sound business practices.

Magnusson covers international trade from Washington.

    Before it's here, it's on the Bloomberg Terminal.