Byrd Amendment Sanctions Last Friday,

Byrd Amendment Sanctions

Last Friday, the World Trade Organization (WTO) gave the go-ahead to the EU countries, and six other countries, to impose punitive tariffs on exports from the U.S. USA Today has the story, "WTO approves sanctions over U.S. anti-dumping law"

What's at stake is one element of U.S. anti-dumping law. In 2000, Senator Byrd of West Virginia got a statute through Congress requiring that revenues from "anti-dumping" tariffs be turned over to the businesses that petitioned for the tariffs.

"Dumping" occurs when a foreign company sells a product in the U.S. for less than it does in its home country. Assuming that the price in the foreign country, and the price in the US, were both calculated fairly, so that it actually was true that a foreign company was selling for less in the U.S. than at home, there may be perfectly legitimate business reasons for this, having nothing to do with unfair competition. But U.S. law and regulation mandate the use of procedures that are likely to show that there was a price difference, even when there really wasn't.

A U.S. company that wants to use anti-dumping rules files a petition with the Department of Commerce, and Commerce launches an investigation into the foreign pricing behavior. Commerce seeks to calculate a "dumping margin" (the difference between the foreign and U.S. prices). As described below, Commerce uses procedures that stack the deck against foreign companies.

If Commerce says dumping occurred, and the International Trade Commission (ITC) says that it injured U.S businesses, tariffs equal to the dumping margin can be imposed on the exporters. The Byrd amendment turns these tariffs over to the businesses that filed the initial petitions.

The WTO determined in 2002 that this provision violated trade agreements the U.S. has agreed to. The argument is that, in effect, the provision imposes a double penalty on exporters to the U.S. accused of dumping: their goods are subject to tariffs, and their U.S. competitors receive a subsidy equal to the tariff revenues. The decision was upheld on appeal in 2003. On Friday, the WTO authorized selected foreign nations to impose punitive tariffs on U.S. exports while the Byrd Amendment remains. The President has said he will work with Congress to bring the U.S. into compliance.

As mentioned above, the "anti-dumping" procedures are not written to give foreign companies a fair shake. Brink Lindsey and Dan Ikenson cite an example of procedural bias (and not just one) in their CATO Institute report, ""Antidumping 101. The Devilish Details of "Unfair Trade" Law":

"One of the most egregious methodological distortions in contemporary antidumping practice is the so-called cost test. The purpose of the cost test is to eliminate from consideration sales made in the home market [the "home market", that is the foreign company's home market - Ben] at prices lower than the full cost of production. When below-cost sales are eliminated in this way, the result is that all U.S. sales are compared with only the highest-priced (that is, above-cost)home-market sales.

What possible purpose could be served by excluding below-cost home-market sales from normal value? ["normal value" is the technical term for the price against which the U.S. price is to be compared - Ben] Remember that the main theory behind the antidumping law is that the foreign producer is enjoying an artificial advantage because of a sanctuary market at home. According to the theory, trade barriers or other restrictions on competition cause prices (and profits) in the home market to be artificially high, thus allowing the foreign producer to cross-subsidize unfairly cheap export sales. Consequently, price differences between the export market and the home market are supposedly probative of unfair trade because they might indicate the existence of a closed sanctuary market in the foreign producer’s home market. Whether those price differences exist, though, cannot be fairly determined if all the lowest home-market prices are excluded from the comparison.

Indeed, the existence of below-cost sales in the home market is actually affirmative evidence of the absence of a sanctuary market. A sanctuary market, after all, is supposed to be an island of artificially high prices and profits. If home-market sales at a loss are found in significant quantities, isn’t that a fairly compelling indication that there is no sanctuary market? But because of the cost test, it is precisely under these conditions that dumping margins are boosted significantly higher than they otherwise would be.

The cost test is thus fundamentally misconceived...

The effect of the cost test on the dumping calculation can be dramatic. For example, in Table 5, there are five sales of widget product Code 1 in the U.S. market at different prices ranging from $1.00 to $5.00. Likewise, in the home market there are five sales at the identical prices. Assuming the same volume is sold in each of the 10 transactions, the weighted-average price for Product 1 is $3.00 in both markets. The dumping margin for this comparison is zero. There is no price discrimination whatsoever. However, this is not how the calculation works.

The cost test imposes restrictions on the eligibility of home-market sales that factor into the average price. Sales made at prices below the full cost of production are eliminated from consideration. In Table 5, the two home-market sales at prices below $2.50 are excluded, causing the average home-market price of Product 1 to rise to $4.00 [in the hypothetical example in the table, all of the goods are produced for the same price, $2.50/unit, no matter what price they are sold for. Two goods sold in the foreign market, and two sold in the U.S. are sold for less than $2.50. Only the ones in the foreign market are deleted from the comparison. - Ben]. This generates a dumping margin of 33 percent despite the fact that there are no price differences between markets."

Lindsey and Ikenson were writing at the end of 2002; I assume this example is still relevant. The rules are not fair to foreign companies. They are not fair to U.S. consumers either. These are denied competition for their business, and are faced with higher prices.

Sebastian Mallaby describes the topsy-turvy moral world of U.S anti-dumping practice as it was implemented in the recent shrimp anti-dumping case: "Jumbo Shrimp Follies".

Lindsey and Ikenson apparently develop their argument at greater length in book form, in Antidumping Exposed: The Devilish Details of Unfair Trade Law".