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Situati*n First-best world

Distortions

[xternal cosis

Externai benefits

Monopoiy polver

lvlonrpsotiv power (a case not deveiop?iC in thrs texibook)

Distorting tax

Distorting subsidy

P:> Slvlc

P rryith tax > -9Avf C

Pwith subsidy < 5M{

Distortions and J'heil Ft}'ects

lneentives at the Margin

P:MB-MC:SMB:SMC

SMC>Pi:MB:MC:S{dB}

SfrlB -. P l: IVB : MC: SMC

Chapter 10 Argtu;tLnls Jiir ,-rt.:./ .rgcrirt.rt Pnriecf iott

Effeets

Exactly the right amount is supplieC anC demancled.

Too rluch is suppriecl becau:e suDljlters make and seli extra uniis far which the socral costs exceeci the plrce (whiclr equals MCand MB ar-td 5M8i. Exarnple. production that pollut*.s air or lvater.

Not enoi:gh ts demanded because demanders receive only private benefits equai to the price, rrot the full social benefiis. [xample: trarnrng or education ihat brings extra gains in attitudes or leam skills.

I'jot enough is demanded because the monopoly :ets the price too high.

Not *nough is sunpled because the moriopiony sets its br:ying price loo low. Example. a single firm that dorninates a labor market anrj uses its power to sei a lou; wage.

l'.lot encugh is demandeej becaitse the tar: makes the price io huyers exceed the revenLje per unit receivecl by sftpliers.

Too rnuch is demandeo becarlse the subsidy makes the price to iruyers iower than ihe rev€nue per unit received by suppliers.

SMB )-

/' \llli<et pricr' llB Plilatc nrar.einal benefit olal auir,it-v (to those v,ho demanrl iti ,1'1{' Privale rlrrginal ccst of an activity ito those *'ho sripply iti

.tl.1lJ Socill rmrginrl herrelit r:f an activit-v (to er,er-vbody iriiecied.)

.tJli Solri uraryinai eosl of m;rctivity 1to er,'elybodl aft'ected)

In a first-best norld lree tracle is ecorrornicaily efficient. Frce tracle aliows the "'irtvis- ible hand" of nrarket competition ter reach globaily Private pt'oducers. reacting to the sig- rral of the niarket pdce, exparlcl produetion in each country to levels that are as good as possible ibr the rvorld as rl'hole. Irrit,ate cLtilsunlers, also reacting to price signals. expatrd theirpurchases of products to levels tliat make {he r.vhole r,vorlcl as rvellolf as possiirle.

.

Our lvorld is not ideal. Distcrlions exist, attd thel' clo not autoruaticali-y cancel each other out. The distortions rcsult lrom ongoing gaps betiveen tire privaie and social

lnternational Economics - Vol. 1

par t IWO lr,r.li l,trlicr

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5e*efitS Or Costs Of an aCtivity. We live in a:,.;.=;1d'lr-:\1 Itiri d, one tl-lat includes distortions. As long as these gaps exist bets'een r,vhat private inclividuals Llse t{} l}lake

therr ilecisions and the fuil ef-f'ect*q of these ilecisions on society. pt'ivute u{:fiott'\ u)ill

not !etic! k; lke b<:.st :ta'\,\il1!e ouiL:otile'\ fb| societr'' 'flrere ale trvo niajor sources ol clistortiolrs in ail econolllv. Iiil'st. ;ridi*gt.fttilttt"t:;

are ways i1 whicir piivate rnaikets fhil to achieye full eccnomic efficiency. Second goyerlfltent polit'ie.s {'uil distort ail ()lltervti.\€ (L:ottat}ticdll.t' e.llicient privLlte tnat'kef'

i;igur* 10.1 provides infblnation on six specific t)ipes olclistortions. with fhe first

tbilr being types of pr:ir,ate trarket ihilures. arld the last ftvo being government policies

thal catt create distot'titltis. The first two types of distortiorls in the figur"e Are *3fll:l!:i: . i'

'- LrI 'i'';i r '' {tif*{i{ {net el1i:ct.s or1 iti€rfies ofher f}ratt fhcse agreeing fo buy'or sell in a nrarker- place). The filst example of an externality is the classii case of pollution' Consider

,h..ur* ol riverl:ollut'ion, all example ue *'ill explore at leilglh in Chapter 13' if the

sellers of paper ploilucts {ire not fbrcecl to i1o So. they do not 1'L)ck01} thc dallage dolle

by tlie papei niiiis' r'iver poihrtion as part of the cost of tlieir produetion' So the pol1u-

tigl costs afe not incorporateclinto thc p1"ice of paper' Similarly. buyeri; of-petroleunt- luels do not reckon thaithe social cost olair pollution fiam using those ftlels is

part of

the lirel ilrice that they have to pay. If sorae costs of proelllcillg or collsllmillg a pfoduct

are ignoied by the private decision-makers. then too much of the product is produced

01'consumed. Our seccld example ol'an"externalit,f Supposes that jobs in a certaitt impolt-

competlltg sector generate greater I'etul'tl$ for society than are trlel"ceived by the people

who decicie rvhether o. noito take the jobs.'fhese exterrlal benefrts can happen. lbr

instance. if working in the sector brings gains in knowledge, skills' anil attitlldes that

benefit firms or people other than the workers and en'rplo3'ers in the sector' In this

example the sociil niaryinal benefits (.t&18) cf u'orking in tire sector irre higlier than

the rvage rale (or the piice, P) that rvorkers rcceive . Ii soipe bettet-its o1'the activity

are ign*orerl brv prirrate decision-makels" then too little of the activitv llccilrs (in the

example, loo ferv people are hired into jobs in the sectot')'

in this chapter l\e foclls on rlistortiolls caused by ertet'nalities' ln fact' \\'e focus on varitlus kincls of external benefits that are the "extra good'' that can

ae cornpany lccal proclrrctiorl of a prodr-lct or enlploytttent in producing the prod-

1ct. We oniy briefl-v tnetrtion here the otlier four types oi rlistortiolts sho\r'tt itt

Figure l0.l .'rl,lonopoly power can create a clistot'tioti because a polverfll seller restricts olltput

to raise price ind increase profits. In the box on clotnestic noncrpollr in ClTapler 9' we

sarv that fiee tracle could eliminate thjs clistortion by forcing tlie domestic lllonopolv

to cotnpete tr,lth forc'ign firtns. h{onopsolly power can create ii disiortioil because a

por'r,erful buyer sets a price that is too 1ow'

In the absence of airy other rlistortiolt. a tax creates a distot'tion by artificiall'v lais-

ing the price to br,yers. our analirsis of a tafifT in Chapter I is an exarnptr* of a tax diitortiiin and ths inetlicienc,r'caused by tliis distortion.

In ihe abse*ce oi'any otliei'distorti.J. a governmeni sLrbsidy creates a distortion bV

artiticially lorvering th! plice to Lruyers. Essentiall,t", a subsidy' is like a negative tax'

we rvill examine sLibsitlies later in this chapter ancl in chapter 1 'l'

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Dc you iike io eat things that are sureet I if ycu do, end il you live in the United stfrtes, the Europe;n Union, or Japan, then you are a viriiin of your criunrry's protectionist g:clici*s toward !ugar. The clomrstic pri<.e r.rf youl" 5i_,gar is about cJoubje the 'woric price. For ihe tJnjted States, cn ave!.age dLlring 20$0-;0i0, the rjoriestic price of ra\,x, sugar rt,as $C.?1 per pouncJ, w.hile the world price wa: $tl.1l per pourril. For ihe Ljniterj statec, sugar pro_ tecticn costs consumers about $3.5 billion p€r ysa1.

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€ver sent a ietler to your iegislaiive reilresenta- tive asking him oi' her to oppr:se sugar oioiection, a policy that is cleariy *gairis.i your intereets? Have you rontributed monev cr tirne to a group that iolibie-c the governrrient to e nd :ugar proteclicn? l)'-) ysu kncvr anyone who h;.is eryel rjone sr.:? Presumebiy not. Why nat? lVhile $3.5 L:iliicn per year :cunds llke a ict nf money,, it is cnly about $11 per person per year. As r.riscu:sed in the text, lhe average qain for anv eile person to oppose 1i:i: protection is smali. lt's nst worth Voijr effort.

Ihe situation is a little different for sugar producers. Fcr tire United States, tire increase iir d*meltii_ proclucer surpli-;s is abou! $l.S bitiion per y"ear. These gains aie ceineentrateci in a srrall nurrber cf f irms. ii is worth it for thefii to actively seek poiicies tiiat resirairi sugar i;nports. 'lv,ro rompanie;, A.nrericari Cryslai in North Dakoti: and Mir:iir:slte, and l-lo-5un in FloriiJa, have i:een F)*rtirlriarly active, contr"itruting rnillions of dol- i*rs ir.} recent yesrs to Democratit and Repubiican c*ngressional candidates and politicai paities. i:or f:lo Sun, o*;ned b-v tr,rio brcthers, Alfonso and Jose f anjLri, oile estifiate i5 that pr.rtertifit.tist sr-rr;ar policies add $55 nrillion per year ir: theii' profits. A fe*.r ntiliion bucks io defend this profit stream is rJefinitely a good invesiment.

.a.ficth€r group active in loi:bying is ilre Arnei'iean Sr"rgar Alliance. representing rnajr:i" U.5. sligar grcwers. ln additicn, ihe high dornertic r:i'ice for sugar expanris demarrd fcr cr:rn sweel- encrs, a ciose substitr.ite fcr sugar. Corn farnrers in the Anrerican Midwest like the suqar prot€e- iicn, ano they have a rnajor influenre on the positions taken b;r their states' representatives and 5enators.

Tire Coalition for Suqar Reforrn, yvitich inclLlrJes food manufaciurers that usg suqSi coilsume!- groups, taxpdyer advo{:ates, and environrrtsritai grcups, is ;:ctive iri opposing suger proiectiori. It nas 5ome good argumenls on its sicie. fr,s Jeff Nedelnran. a spckesperscirr for the coalitjon, s.lid. "This is a corporate rnrelfare program for the v€iy rich,"- Il_re coaiitian poiiltt o,..tt thai jobs cre being lost as sugar-uslnq firrns {like candy makers) shift procluction lo otiter countrisr

ttYlr'd?6iilq;i piices are cheaper. Furtherrrrore, i:y polluting and disrL:ptin{ water flov,rs, the pro- tected sugar production in Flcrida is ai:o a major cause of serious environinent;;i rieclinq: in ihe Lverglades. These are Scod poi{tts, but ihey ;rre nc nratch for the nloney arrd or-gaiii;ation cf the rjt opunent,, oi prol.:ciion

Foreign sugar producers, iliany cf them poor fai'mers in develcping aountrie:, are ai:o lrurt by proteetianist pclicies in imoorting countries. Researchers estirtat€ that the rnrorld rugar f.rice

.would rise hy,-17 Derrent if the t".iniied States rernov€d its sr:gar ooiicie:. Br"rt it is not easy for foreign interesls ts harre an effect sn the U.5. poiiiical pro{ess. Fcreigners don't vote. and polit- ical cppcnents can charcle thai legislaiors whr: openiy side with foreigners aqainst i-J.5. ',arorkers and cornpanies ;re "anti-Arneric.lri. "

Scr the sirgar protectian pclitie: r,onj:inue" For lhe Unite{j statrs, tlte net coti to the iountry is clo5e to $2 biilion per year lt is n*t thet s$gar is so large or inportant a part of tire eccnomy that we have to proteet it. ln the UniteC States, about 38,G00 people work grorrvirig suqar, and about 16,000 peopie r,vork in :uq*r reiininq, iir totai aboLit C.01i perc€nt of f_he U.5. l;rbor force. lf we shifted in free trade, enrg:k:ymeni would probably decline by 3,0110 ialthougir ilre deci!ne could be as high as 15,000). The small nunrber of people r,',ho lose theit- jobs cauld be reemployeci ';vith little irsuble in other sectors rif the eran- omy. lnstead, v\re see the ,r-rure FOiitii;r! e{onofiiy of proteclion. r.vith the ilrilduaer intere$t! in thi-c t,ase much better organi:ecl and effectlr:e than the consumers are. *A: quoted in "Sugar Rules Defy lree -Tr::de i cgic," llev,; Yark Tintes, Mav 6, 20Ai.

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Chapter 1 1 Ptrsltiirg lirlrurls ': | '

crrrreut coillpetitors in the importing counfiy, it may exllect that, once it raises prices.

nes, flnns, inelriding r)ew expofiers i'roln otlter countt'ies, rvill elltcr ls cotnllctilors. The prc.datory exporter u,ould not be airlc to raise priccs or to keep thtrn high for very

lang. Recent resiarch suggests thai no more tlian 5 percent ol a1i cases of aileged du:lping in the Unitecl States. the European Union, Canada. fulexico. and lnilia show even a nroderate possibility fbr predation (and it is possible that none ol these cases inrol'ues predation;.

Ciyclical durnpin-e is the inost cornptricatecl kind of durnping lbr" the inrporiing country. Most cyclical durlping is probabi,v the nonnai rvorking of n'ell-functioning. crtmpetitirre global prociuct markets. Wlien clemand declines, the market price lalls il;

ihe sliort run, A firni lvill continue to produce, sell. and even expofi sone anouut ct the procluct, as long as tire levenue earned at least covers variable cost. This is exactl-v

what rve want to happen rvhen tl:ere is a decline in demand. Productioit deciines s,;nrervhat irt rnany counlries as the iiorld price lalls. Ther"e is an etTicient global "shar* ir:g" ol the clecline in clentand. Once the recession ends, demanel price. and global production will rect'ner. {if insteacl loo nuch prodltction capacitl,'contitrues to exist. then evenrualll, there will neecl to be an elTicienl global sharing olcapacity l'ecluctlotl before price can recover.)

I'he importing country nra.v.- not be completely conr.inceel that cyclical dLrn-rpitig is fnir3rrsi because it is usually glolrally eflicient. Whert dentatld dcciint's b,v" sarr''. 10.-percent. whiqh countries abssrb horv nuch of global redrtctittti in output'.) ls it tair tbat the ilnport-country/ firrns have to re{iuce their output end suller losse-c'.) In particular iithe clecline in ciemancl is a result of a nationai recessiotr in the exporting coulltr-v. rvhy is it lair that the exporting countrY can "expott sonre of its une mpicyment"'.)

,,\s usual. it is not easy to answer the question of lvhat is 1air. .l'he

intet'tlational

sharing of recessiolrs is one of the etfects that comes r.vith the genexal benelits ol iniernatiolaitrade. W'e carr also recall the key lesson lioni {ihapter l0-*-use the speci- ticity rule . The real problem here is tire ccxrcern about producer losses. For instance. if the ke.v cotcern is abor,rt unentplol,eil workers, the country should provide suilable unempIoyrnent insurance or adjttstment assistance.

:.

Our discr-rssion suggests ti-rar dumping is ofteri goocl for the country irnporting the dunped expolts but thal two types of riunrping couid he bad lbr the iir,porting corffry' Predatory duniiring can be bad il it is successfitl. but success is probabl-v rare. Cyclicai clurlping can sometitnes Luitairly haum thr' importing countrY. but nruch of tlie tirtle it is probably the normal rvorking of the cornpetitive rnarket. The inplication is that tlie irnporting-country's government policy torvard dumping (its antidunping policy)

sfioulcl exanrile each case and consider benefits and costs trelirre imposing antidulrlp- ing rluties or other resfi ictions on dunrped imports. ln fact, actllai gor;ernrnetrt poiicies

are not at all like this. 'fhe W1-O 1riles perrlit countries to retaliate against cfun-r;littg i1'the dumping

rnjLtres dornestic irlpori-cor-npetlng producers. If the gtlvernrtent in the inrporting

lnternational Economics - Vol. 1

lndia Furopean Unicn United States Argentina f hiria Brazil Turkey

Pakistan South Africa r\ustralia Scr-rth Korea

WorlC

-lop 1 1 lnitiatols olAntidumping Cases

Nurnber of Cases lnitiated

1986-1990 20S5*2009 0 196

182 103 184 84

a78 069 663

tl )) 046 737

156 34 131

tfo 992 662

Number of New Antidumping

lVleasures

2S05-2009 'r 19

69 66 44 ua1

39 )0 17

i4 '13

2l

Antidumping Measures in Effect

June 2010

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) 4,"i

87 119

/l 121 "lo

,?a 74 37

1,379

Average Antidumping

Suty lmposed*

11 alI / /A

4a

89 85 54 5: 11

J)

45 59 79

i.JA

Notes: NA: lrot arailable. *For lnciin. lverage 1992-2il02. source Canguli (2008): for the European Union. the United Stares. and Chinr. ai'erage 2002 )004-

sorirce Bor,;u {20i01): fot'lther countries^ average 199--i-1999. source ('ongressional BLrdget Ciiice {1001I.

( )r!rili /irl ir fi. ":\ rti:tlurnPinE: Slrl islirs rrt .\nlidtlnip irlg.''

coltntrv ilncis both dumping and iryurrl then the governrrent is perrlitted to inrpose an ,::'-'t,1".:j.: ..:: ; :;t11.s,'|-flfl extfa tadffequal to the disclepancy {the dirmping margin} betr,r'een the actual expot1 plice and tlte normal Yalue.

Antielumpirrg cases throi-rghout the rmrlcl actuall,v were inf-r*'{lllent r.tnlil tlte late 1t)70s. and as oi'lg80 only about -34 countries had antidutlping iaws. T'hert more con:rtlies acloptecl antidunrping 1arvs. especially since 1990. arrci by 2010 lnorc than i00 couutries lrad thenr.

Lip to rhe lale I 980s. the lbur '"traditional users" of antiduntping ithe United States.

tfue European Union. Canarla. and Austr:alia). accounteci for ovrr 90 percent of the cases. but then the use spread. Figr"u'e I 1.2 shows the countries tliat are the niajor users

af autidunrping actions during 2005-2009. From l qB6 - 1990 t<i 2005-20t)9. the nurrtber

of cases worldrvide increased b5,'-35 irercent, attd the share of thc fi:ur tradition:rl tlsers

{inc|,rding Canacla. rvith on1-v 18 cases during 2005-2009) dropped to 24 percent of' total cases, Inclia haci no antidumping cases untii 1992. but by 20A5'Z00c) it rvas ihe top initiator in the r.,,'oric1. China enacteci its antidunrping policies oniy in 1997 ar.rd quickly rose to be a r"najor injtiator. Argentina and Pakistan alsc went fi'om zero to top 10.

Wbrlcirvide" the prodilcts most often involvecl in dumping cases are chemicals. sttlel

aril othcr metals. plastics and rubber prochlcts^ macirinery, texfiles. iind apparel. 'i'he

countries rvhose exporters are nlost fiecluently charged rvith clurnping arl: Cliina, South

Korea. Tais'an. rlre iinited States.l-hailand and lndonesia. For {lhilra. in 2009. alrotrt 2 percert of its exports were subject to antidumping nreasures in the iinporting countries.

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Chapter 11 I)rrsirirrg Eri,.rn'ts

Let'"s look more closely at U.S. antiduntping polic-v. A case usually begins with a complaint flonr U.S. producers.'Ihe U.S. Department olCommerce exarnines whether dumirinre has actually occurred and the U.S. International Ti'ade Conmission exam- ines u,hether U.S. ftms have been injured. In adclition, negotiations may occur witir foreign exporters. If they agree to raise prices or to limit their exports, then the case can tle tenninated or suspended. (This type of outcorrre has been cc)inlnon in cases involving steel and cheriiicals.;

Iil about 94 percent of it determinations, the Department of Commerce flnds solne antollnt of durnping-the iarv and the procedures are biased to inake sholving duinp- ing easy. In cases in which the comparison is betueer the export price and the home market price. therc are arcane rules about cost tests and ignoring export prices that are above the home markel price. Tl're upshot is that only low-priced exports tend to be compared to only high-priced home rlarket sales. In cases in which export prices instead are cofirparcd to average cost, obtaining and interpreting data on the costs incurred by lbreign exporters are often difficult, so the Comnrerce Department has ieeway in detennining ivhat normal value is. Lindsel' nnd lkenson {20A2}. using actual data for l8 antidumping cases. examined them for specific biases in the methods used by the l)eparfilent of flommerce. They concluded tiral in 10 of the 18 cases there actu- ally ra,as no dumqing, and jn 4 of the orher B cases the actual dutxpilg rvas less than half tiie amount fbun<l by the Departmenr.

The injury standard is not strict" Lrut injury is usuaily the key to the outcilnre of a case. In about nvo-thircls of the cases. the International T}ade Commission finds mate- rial injury to U.S. import-competing industries.

Il botlt dumping ar:d injury are fbnnd. cllstolTls ofllcials are instructe6 1o jeyy an antidunrping dLrly. More than half of the cases brought in the United kates resLrlt in arttiduntping duties or an eKporter agreement to restrain its export prices or volunres. (By compariug the trvo colurnns in Figure 11.2 for nelv cases initiated and ner.v anli- dumping measures for 2005-2009. r,ve can see thai more than half of the cases in most of the other countries shown and in the rvorld overall result in antidurrrping duties or expOfier agreements.)

Recent research shows sonre clear patterns of efrects fion al1 tliis, Shortly after the complaint is illed tire prices of tire exporters charged r.r'ith dumping increase, prob- ably' to tt'v lo reduce fhe final duniping rnargin. Export quanfities decrease. because of the higherprice and because of the uncertainty about the outcorne of the case. If antidurnping drities are imposed. the export quantities decrease f'urther. by an average of T0percent,andoftentozero{aswenotedforthecaseshorvninFignre lt.i).The exporter also has an lncentive to raise its export price. The anticlumping duties are reduced u'eliminated il'a subsequent review by the Department of Conrmerce tlncls less or no dr"unping.

A rccent study sf 15* overail effects of imposing antidumping dLrties concluded that the United States suflbrs a loss of well-being of nearly $4 billion per year. Abor-rt half of that arnount is deadrveigirt loss (like areas h t d in Figirre 8,5 or Figure 9.3). The other halfis the transf-er to foreign exporters thai raise tlreil plices {1ike area rr irr Figure 9.3). T"he net loss ic the United States could L"re lolver than this. because tlre stui'ly does not attenpt to quantiff tlie value of avoiding anl.harmlul ellecfs fi'om preciator'.v dumping (probably minimal) anci cryciical dr"unping {hard to measl}re).

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Part Two Trriiie i'rli-r

to U.5. steel firms in six of these cases, and the Department of Commerce found dumping margins of up to 195 percent. ln the large case involving cold-rolled steel, imports declined by 20 percent i* the months after the case was filed, even though the U.S. firms eventually ,,lost,, the {ase n hen nc iq;vry vtas founa-.

As prices remained relatively iow around the world, the U.S. steel firms continued to find new dumping. They brought five major cases in 2000 and six major cases in 2001. ln seven of these cases, the international Trade Commission found injury, and the U.S. qovernment imposed hefty antidurnping duties, up to 369 percent.

{n early 2002 presirJent Bush imposed new general tariffs of up to 30 percent on imports of steel, and the number of new dumping cases decreased. Under pressure from U.S. steeJ users and an adverse WTO ruling, he removed these tariffs in fate 2003. But th€n global steel prires rose by more than 50 percent during 2004, jriven *; by rapidly rising dernand in China and other developinq countries. With strong world prices

continuing into ;009, there were f*uv new anti- dumping suits in the United Stater.

Then, as the global crisis struck, the steei industry went into recession in late 200g, extend- ing into 2009. tn addition, the share of the U.S. steel market served by imports inereased jn Jate 2008. The slor,vdown in giobal sieel demand and increased import penetration restarted the great machine that rolls out complaints about foreign dumping of steel into the U.S. market. The U.S. industry {iled seven new dumping cases in 2009. ln six of these cases. fhina was the only alleged dumper, and in the other one both China a*d Taiwan were charged. ln two cases, the LJ.S. lnternational Trade Commission failed to find inju4r and the cases were dismissed. For the other five cares, the U.S. governrnent imposed antidumping duties. For the largest case, involv_ ing pipes and similar products used bv the oit industry, the duties hit almost $3 billion of annuat imports. Steel-remainr the U.S. antidumping king, and the oil industry and many other users ,:J steel in rhe United States pay the (higher) price.

Uilder culrent antidumping policies in the uniteii States and a growing nurrber of other countries. rve get the follotving results:

i. T'he procedrire is biased towarci finding dunrping. 2. T'he injury test considers only harn to impolt-compedng producers. There is no

conside'ration of whether predation or sorne other sorrrcJ of lnr- i6 the countrv is in'oir.ed. There is rittre orno consideration of the benefits t;.;,;;u;;,;;;l;; lou;-priced inrports.

3' overall' the process is biaseri towarcl imposing anridurrping dLrries, even tlrouglriliis r"rstrally lorn'ers the well-being of the impJrting .uunrrji Anticigrlping duties aiso generally lower world r.velf'are.

See tlie box 'Antidun.rping in Action" fbr specific examples that illrsrrate these conclusions.

If an exporting countrv's government believr's that an importing country,s goveri- ment violated the wro's rules in clecieiirig ta impos* an antidlunping duryl it cair ccmplain to the wro. B3,early 2011^ rhere had been 86 such conipiaiits, including 42 abaut fhe lar.vs and procedures of the U.S. governfitent. as of e'arl1,2{)ll. panefi irad been convelled and reachecl decisions in ibout hall cf thesr- g6 casrs. Lisualh.

,') ! .,

Chapter 11 Prrsiirg 6rplrr^t I "';

the panels fbund errofs by the itnporting countries. inclr"rding rrsing inappropriate

procecliires. determiiliilg diiinpiirg margins (or subsid.v rates) il1 a mallnel' iuconsis^

tent rvith WTO rLlles, uJO O.t*in]*ing iirlury using iticornplete rnftrrri:ation or brased

analysis. lu some of the cases tlte irnporting coulltlv impletnetrted changes {iike ,*r,oiiog the ilities) to bring their praitices in line rvith WfO ruies, brtt itt otlters rhey irai;e not (yet). Whiie tlie WTO rlispute settlerneni procedure catt provide sottte

guall againstiuisuse o1'aiiticlulrping duties, lhe process is too slorv to niinirnize {he

efl'ects of such it'tisuse. Antidumping polic,r' starts oLrt sounrling like it is abottt uniair exports' But a cioser

exanrination inrlicatesjhat sornetling else is going on. Antidutntrtitrg politt: htrs l:'e(onrc

u ntuf or $,u1,.fix' inryart-t'ompeting prctlttcer,t in u grrtx'ing numher of't'rtrtnffies to gttirt

1*t'pt.{)lection ugrsin,rt itrptsrts,-it,itlt theT.tsztul deutlx'eigllt {'{}sts lo tltr tt'ttrkl und ir.t th-e intpot.ting tr1,intt'r,. As sho*,n in Figure I1,2. the avel'age antidumping duties rinposeei against foreign exportLrrs are generallli very high. mLrch hi-Uher thiur mrrst

regLrlar tarilfs, so tlre cleadtveight losses can be large.'fhere is also tire cost of argiiitig

thi eases and gathering the daia to prove or disprove dunrping and injury' In acldition' inrport-comp.iing firtns use the threat of a durnping complaint to prod exporters to

raise their prices an<i restrain their conrpetition-the hurusstnertt elf\tt--even if nct conipiaint is actualiy filed.

ti, ai'it-i iii ii *:{'iiii*

Althirugh there are exceptigns. the current practice of retaliatiot agaittst dumpirrg is usually bad for the r.r.orld and f'ol the irnportirtg conntry.r Yet this practice is fLlllv

consistent r,r,ith current \VT'O rules. Reform of the Wl"O ilrles is an importatrt itetl ott the ageucla for the cul-relt Doha Round of rnultilateral trade negotiaticnts. Three pos-

sibiiities f'or refbrrn are iliscrissed rn the lollorving paragraplrs.

Fitst. utttitlyurpting ut'tirsn.s r:utltl ht iiniletl t* .ri/tttttion.t in v'hit'h pretfut{or.1' &urtp- ing i.r pluu.vble. T'hii reftrrm rvould focus on the l"Ype of durnping that is nrost likely

ro be bad for the rvorlci anci lor the irnporting couniry. lt rvould also align anticlumpitrg poltc3, u,ith antirrust policy (as it is callecl in the United States; it is called competitiorl

polic5,, anlimonopoly policy" or sitlilar llames iu other counfties)' Pro-conlpetition policies usuailv to.t lri any predatory aciion to gain monopoly power.

'I'his reform

ivould try, ro limit the scope of antiduntping polic,v. Hclvever. the proceclnres in a

.Here is an exairple ip r,vhich re:aliaiir:n against persistent cllmping cculd bring gairrs io the wi:oie

rvorlcj. lf tlre "corrr.riciecj" clLrr-nper aaat.., ij1 price discrimiiiatiorl, conti{lues lo serve i:Oth trrarkets with a

sirrglo 1tr'ice ihai 15 not toc hiqit, arrd ts rcr'.;arllec1 by i-;eitirrg ihe duty rerrorve-cl, the 'uvoricj could erld up

bgiier off from tlre temporary puiritive use of tlre dL;ty. The r,vorld ls betier cf{ in thc senrt'that ouiput i:

reCirected io the hor-.e-ccrur',iry buyers i,vho valued tire good more hic;hly a1 the rnarqin. One exarnple of thi: kind of gain is the oulcome of a li,5. durnping case aqainst Kolean consutner elecltonrcs prcduceis,

r,r,hich leci tJa lcrvering ot the high prices Korearr consurrers had been paying for these prociucis. 'lhis

is only one of a nlimber of pr:ssible ouicome!, and lhe otltetrs are ust:ally bad for tlte trrctlrl. lot-

instanrc, iire durripe|s rlay rrto\,,e their exltort-rnarket prclclr-rciiotr to the ir'ilportinq ccuniry;lt some axtra

exl)e;se oi rn,crld tesoLrrce's. Cr llrey rnrqht .rl,iandon the conlrovelslal fcireiqn rr;rrket lts not \.d)rth the

bother if it is spciled by an.:ntir.1,.:r-npirrg riuty.'lhe issLie of dur"npirrr.; is compiex. The ioxl qtr:es ihe

welfar-e results ihat seem n-rost iikeiy

-) -J

Strti Chapter 1 1 I'ir.shirlg E-tlxrri.r ''"r l

i i li .;i;,i:::"l1i

Cor,errtnrents promote or subsidize exports more often than they reslrict oi' tax exports.r Sorne government efforts to promote exports are not cotttrcversial according

to intertational precepls {althoLrgh there are questions abcut }rorv efiective they are), C6vernlnent agencies like Expolt.Gov of the tJ.S. Department of'Clommerce provide foreign-nrarket researclr. inforn:ation on export proceciiires anil fbreign governlllent regulations, anrl help rvith contaeting buvers. Covernnent agettcies sponsor export promoiion e\/ents like trade lairs and organized trips. Covelnnlents establish export processing zones that pernrit imports of nrateriais and coinponents tvith easier custolns procedures and low or-no taritl's.

Covermrents alsr: provide vadous lbrms o1'firrancial assistance that beneflt their

expo*ers. ,\11 r:11*.g-i;t9'1 sr.li:*i'-?r is contloversial because it vtolates internalional nornls about tarr trade. Our analysrs of'export subsidies will conclude tlut export subsidies are rrsr-raiiy bacl fiorn a rvorld point of vic:w'. However, the ititernatiottal division of gains and losses turns out fo be very dill-erent fitrl rvhat vou rvotild expect just bv iistening to rr,'ho firvors export subsidies and who complains about them. Export subsidies are bad 1lir the

countries that use them. but are good fcr the count'ies that cornplain atrortt tlteml Governnrents sribsiclize exports in nranv ways. sotrle of theil delitreratel3.' subtle to

escapg."detection. fhqy use taxpayer"s'money to gii,e iou-interest loans to exporters 01' their fbleign custolners. An exarnple is the Ll.S. Export-hlport Bank, or Eximbank. Founded in the 1930s. it has compromised its name by giving easy' credit to U.S. exllort- ers and their fbreign customers but not to U.S. intporters or their tbreign sr:ppliers. Covenlnrents also charge lolv prices on inputs (such as rarv tnaterials or dotnestic trans-

port services) that go into procluction that r.vill be exportecl. Ittcorne tax rules are also trvisteci to give tax relief based on the value of goods or services each firln ffiporls.

Expol'f suirsiclies are small on a\rerage. but they loom large in certaitr proclucts and fbt' r:efain companies. For instiriice. most Exirnbat'rk ioans have been channeled tou'ard a l'erv large U.S. firrns anri their customers. Boeing, in particulat', has beetl helped to exfi^a fbreign aircralt orriers by cheap Exir:bank crcdii. lVore hroadl)'. the biggt-'st export sutrsidies appiy to agdcultural products.

What are tlie efl"ects on tbe conntrv rvhose go\iernnteltt off-ers the export subsidy'/ Let's exarnlne the efJ-ects f(t a tttntperftive intlu.ttrr.i using ollr standard supply-and- demand ij"anervork. We rvill reach the fbllowilg conclusiotts:

l. Al export sLrbsidy expands exports and production clthe subsidized product. I n fact, the expr:rt subsidy can sr.vitch the proeluct lrorn being importeci to being exported.

?. An export sLrbsidy iouers tlre price paid by ioleign buyers. relative to the price that iocal cotrsurlters pay lilr the produr:t. ln addition. for the expoft subsidy to tvork as jntended {the govemment subsidizes onlv exporls. not domestic pirrchases). soitrethit:g must prcr;ent local buyers from in:porting the product at tlie lower fbreign price.

3. The export subsidlr reduces the net national lvell-Lreing of the expoltittg countrv.

Lett exanrine tl:rec- cases to see the validity ot'tlrese conclusions.

;lr ihe Urited Siaies tlrtr is not sr:rprisinr; because the Ii.-\. Constitution prohri--rits the'laxinq of expoits.

lnternational Economics - Vol. l

Part lwo l'r,i i., l',rliir

Exportable Froduct, Small Exporting Country Figtire I1.3 shorvs a stnall coitntry. in this case a country vr.hose exports of steei pipes do not all'ect the world price of Sl00 per pipe (sranda;d lenglh). Wirh tiee tracie ihe finns in fhe country's conliletitive stee'l-pipeinriusrrv procluc"e 160 million pipcs pi:r. year anrl export g0 millton (: lfi() - 70t. The government r:rithis c6untrv then 4ecirJes to otlbr to its flnlls an export subsidy ol'520 per pipe. The revenue per pipe exprlrterl then is $120, equal to the Sl0[i price paid bir foreign bu.vers plLrs rhe$20 subsici_v. Ila pipe firnr carl get 512{) f-ot each pipe exported. it witl noi sell ro anv doniestic 6iryer ar a price lo$'er than S 120" Of course. this is only pclssible il'clonrestii buvr.rs cannot.just buy importcd pipes fl'ont the rvorlci narket ar S100, Sonrerhing nrr,rt t**p ihc crport tnarket sepitrate lroni the domesiic nrarhet. ('l'his should souicl larniliar-' it soLinds likr: persistent dttttiping. In t'act. receiving an export subsicly is auother rcasop wliy an exporting firn wcruld exgage in dumping.)

Wltat are the other etlbcts of the export subsjclv in tlris casr'., Ilre\ienue per.unit rises to $120 (for both export ancl iocal sales). the quantity prorlur:ed iricreases

Irxport SuLrsidy. Snrall lour.rtr3., Er:portable Product

Price i -. ..::

120

100

'i 60 190 Quantity

With fiee trade irt the n'cllti price olg100. this sllall coonlry exporrs 90 nrillion steel pipes. If-the countr-i, instead ot]-ers an expor'1 sirbsidy oi'520 per.unit exportecl, revenue per Lrnit exported rises to Str20" and the expr.rr'trnu finrs nrust receive this aLtiount as the se.lling price ti.oru donrestic buvers as weli. Domestic production rises f.n:tr l(r0 to 190 rnillion. dornestic consuntpiion flrils fi.orrr 70 to 50 nrillian, and the couilrlry exports 140 million llipe-s. Domesiic producels

-uain surplus eqLral tc area r l-./ j g" dorlesiic c{-)nsulllel"s lose sut'plus eqLuri to area e .r-.1, and tlie cosi tc.r the gor.errrment of paS,ilg the erport subsir!1, is area.l .r g .n *. Tite ner ioss in nationtl well-being becailse olilre export siibsidy is area./plus area /r.

2ntl AJ'

,4 i

Chapter 11 l'lr.;hiiiq E11,,rr.

ta 190 nrllioii. tf the donrestic price incleases to $120. local elLrantiiy demzrnde6 ciecreases to 50 rnillion. euantity exported increases to i40 million {: t"qo * 5i}).

Who are the rvittners and losers in the exporting cointry] Producers gain surplirs equalloareas{' + f + g.Consuuerslosesuiplusequal to arcae +./.Th;c*sttothe' govermlent of pavirig the export subsidv is areas./'* g + h, equal tri the export sub- sidy of s20 per pipe times the 14i) rnillion pipes expoited n ith the subsicilr

I'he export subsidy has increased exports and pioduction o1'this proclirct, bur is it .qood for the exportittg coLuttry'/ Llsing orir one-dollar. one-vote r:retric. the answer is no. Altel we catrcel out the rnatching gains and losses. tJie net loss in national rveil-being is areas.l and h. Area.l is the cr:**i;;:lc}tiq]r: #f!err:"i of the export sub- sidy. the iost consitltrer strplus lbr those consrlmers squeezecl out of the niarket rvhen the domestic price rises above tire wolld price. Area /r is the ?:;r'r:{.:i;r..-iiilr-r l'i''i'*q-i of tlie expot'l sLrbsicly, th* loss due to encouraging clonestic productign that has a resource cost gl'eater than the world price {the wori<i stanclarci fbr efficient ploeluctioli). Although tliese two triangles are on the opposite sides of the graph. because this is an exportable proclirct rather ihan an irnprirtabie producf, tne-v- ir.e itre sane kintls of eflects sitorvn for the irnport tarilf in Figure 8.4. The ioss of natiilnal well-being l-orthis small exporfing country is also a loss forthe norl<1.

Exporlable Prodqct, Large Exporting Country We'r'e just seen that a sniall exporting country han s itself by oltbring an expor{ sutr- sldv to its conrpetitive exporting industry. Perliaps the resulr isdillereniif the exporring countly is large enouqit to affeet the rvorld price. lriot so--in fact, it nrav be 1t'orse.

Figure I 1.4 shcrvs this case. With fiee tarle the rvcrlcl price is S 100 per pipe, \\ihen tite exporting-coulltrY governt'nent oltbrs the exilort subsiel,v o1'$20 per pipe , e,rportrug f-inns rvant to export ltore to f;et r-r-lore o1'the su'hsirJy. To get lbreigri .oirri,**i, to truy rtrore 0f the e.xportecl proiittct. the exporting firms lnust lou'er tli"* export price. And. just as in the srlall-countrv case" domestic buyers in ihe exporting counhy must end up paying S20 more than the export price {assuming ihat rhey canriot inrport fr-opr the rest of ihe rvorid at the ne\.v world price).

\4/e can see the resulting equiiibrium more easily in panel 13 of Lrigure ii.4. I.he export sultsidy creates a wedge of S20 between the price lhat fbreigri*inrporrers pay and the revenue per unii that exporters receive. Tliis $20 wed-re "fiis,' (verticatly.j ar tlie quantigr traded of 110 million pipes. fhe new $,orld pricJis sBg, the price paid b}' the importers. The revenue per ulit fo the experr-ting firrns. and the nerv piice iri tire exporting courtr,v, is S 108.

Panei A of'Figure 1 l.'l shows rvhat is liapprring in the exporting coglfry. At $ l0B p*r pipe. pkrrluelion in the exporting corintry increases iiom l 60 nrillion to I 72 ntil- lion, and domestic ct-rltsLttnption citcreases ll-orn 70 to 62 rnillion. euantitv exportecl increases fionr 90 rniilion to I 10 iniliion.

As irr the smail-coutrtry ci1se, the export sr-rbsidy lias increaseci dornestic produclion and expotls ol pipes. What are ihe eil-ects on v,ell-being in the exporting country,.) Prortlrcer snrplus increases bv area. e * / * g. cionsurner surplus taits uy irea i: * .1. The exporl subsiciy costs tire governnlent $20 times tlie i10 ntjlliol griits exporteri. l'his iJovernrnent cosr ol$2.2 billion is area /'-J-. g + h + i +,.i -L k * lj- trt itrpanelA {orareal * g * lt I n * r * I * zr inpanel B).

2s8 lnternationalEconomics - Vol. I

Part Two Tr,ulc lrdicl

i,': li :'"'l Export Subsidy. Lar:ge Country, Exportable Product

With tree trade at the u'orld price of $ 100, this large cou11tl'y exports 90 millir:n steel pipes. If instead the- couritry. offers arr export subsidy ofS20. its extra exports drive the world price down to $88. The reveniie per unit received by the exporling firnrs is $108, and domestic buyers pay a price of S108. The net loss of well-Lleing folthe e.rporting country is area./'+ h a- i + i + l, + i+ rn. The export subsidyboth distorts donrestic ploduction and cortsuniptiorr and rvorsens the exportin-t crruntry'.s international terql-c of trade. The irlefficiency cleated lbr the n'orld is a'rea/''i h i u.

The net loss to tire exporting countrv js the sliaded area in panel A or B. 'I'his n loss has three parts:

. The consumption effect {area /'). " T'he production effect iarea /r). , The ioss due to the declirle jn the exporting country's international terms of trac

(areai *.j + lt * ! * m : area ft + r + t + tt). 1'he export subsidy gives a good bargain to fbreign buyers. However, their gain is loss to the exporting country fron selling at a lorver world price.

We can also use panel B to see the effect on rvorld well-being. Area n * r * t increased surplus for the impofiing counh'y. The net loss to the world is the triangul; area./'-t h * u. 'Ihis is the loss from too much tradrng of steel pipes,

Switching an lmportable Product ints an Exportable Product "lf you throw enough money at something, it will happen." This adage applies t expor-t slrbsidies. They can turrl an irnportable product into one that is exported. Let see i10w

A. The Domestic Market for Pipes

Price r,i ...,, r .,.-, .:

108

100

88

108

100

88

172 Quantity :1 i ' :,', ';. -: i ; , '.., .',; ;