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The Congressional Budget Office (CBO) is studying U.S. antidumping and countervailing-duty laws and policy at the request of the Ranking Minority Member of the Subcommittee on Trade of the Committee on Ways and Means. This memorandum summarizes the main features of CBO's ongoing analysis of the topic. It was prepared by Bruce Arnold of CBO's Natural Resources and Commerce Division under the supervision of Elliot Schwartz and Jan Paul Acton.

The analysis concludes that U.S. laws treat the pricing of imports in the U.S. market differently from how they treat the pricing of domestically produced goods. The antidumping law imposes duties on imports sold in the U.S. market at prices below what is charged in the foreign exporter's home market or at prices below cost. Whether the prices are predatory is not considered. The antitrust laws impose no similar restrictions on the pricing of domestically produced goods, prohibiting mainly predatory pricing. Similarly, the countervailing-duty laws impose duties on imports that are subsidized by, or at the direction of, the foreign exporter's home government. Within the United States, however, states are allowed to subsidize production of goods shipped to other states, and other states are not allowed to offset such subsidies. Over time, the antidumping and countervailing-duty laws have become a general source of protection for U.S. firms from foreign competition.  
 

INTRODUCTION

HOW THE LAWS CURRENTLY FUNCTION

A LOOK AT THE NEW GATT ANTIDUMPING AND SUBSIDIES CODES

OPTIONS FOR LEGISLATION TO IMPLEMENT THE NEW ANTIDUMPING AND SUBSIDIES CODES
 
 

INTRODUCTION

The antidumping and countervailing-duty laws provide protection to domestic firms from import competition. U.S. antidumping law is a tangled and confusing subject because U.S. law and procedures have changed substantially over time. U.S. antidumping law was once a reasonably close approximation of a prohibition on predatory pricing of imports; it served as a complement to antitrust law, which prohibited predatory pricing by domestic firms. Over the years, antidumping law and antitrust law have evolved in different directions, so that now the United States treats similar pricing practices differently depending on whether the product being sold is domestically produced or imported.

Predatory pricing, as the term is currently used, refers to the practice of intentionally selling a product at a loss in order to drive competitors out of business, thereby establishing increased market power that allows one to raise prices above competitive market levels and increase profits. It is one of a number of unfair competitive practices that the Sherman Antitrust Act has been interpreted to prohibit. Early court decisions, however, ruled that acts committed in other countries were beyond the jurisdiction of the Sherman Act. Among other things, this interpretation effectively ruled out most Sherman Act prosecutions of predatory pricing of imports.

The Antidumping Act of 1916 specifically applied to the practice of pricing imports substantially below their normal market value with the intent of destroying, injuring, or preventing the establishment of an industry in the United States. Over time, antidumping policy and antitrust policy have diverged strikingly. Antidumping law and policy have evolved along a path of ever-increasing protection for U.S. firms from imports and decreasing concern for consumers and the economy as a whole. Antitrust law relating to predatory pricing, at least in recent decades, has taken a path of increasing concern for consumers and the economy as a whole and decreasing concern for firms suffering intense competition.

Antidumping law no longer acts primarily against predatory pricing. It acts against international price discrimination (sales at a lower price in the United States than in the home country of the exporter) and sales below cost, regardless of whether the sales are predatory or not Yet, the relevant provisions of the antitrust laws prohibit only predatory pricing; they do not prohibit selling below cost or price discrimination analogous to that prohibited by the antidumping laws except in cases where it is predatory.

This difference is important. Predatory pricing is detrimental to economic welfare because it leads to monopolies, which cause economic inefficiency and raise concerns about social equity. It seldom occurs, however, because it is rarely a profitable strategy and is usually not possible. By contrast, nonpredatory price discrimination and sales below cost generally provide net benefits to the country receiving the lower price, and both are relatively common. Moreover, seldom do cases of price discrimination or selling below cost have anything to do with predatory pricing.

Countervailing-duty laws provide for added duties on imports that have been subsidized by the government of the exporting country. They date from before the turn of the century. But unlike the antidumping laws, these laws have not changed in character over time, though they have become more inclusive. The first such U.S. law covered only imports of sugar, A later law covered all dutiable imports, and a later revision expanded coverage to include both dutiable and nondutiable imports.

Over the years since World War II, U.S. tariffs have steadily declined in accord with agreements reached in successive rounds of negotiations to liberalize the General Agreement on Tariffs and Trade (GATT). This decline has resulted in increasing competition for domestic firms from imports. For industries suffering from such increased competition, U.S. trade law provides two forms of assistance: trade adjustment assistance and protection under the Section 201 escape clause.¹ Trade adjustment assistance consists of training, employment services, job search and relocation allowances, and other forms of aid to displaced workers in industries adversely affected by increased import competition. The Section 201 escape clause provides temporary protection from imports to provide breathing room for domestic industries to adjust to increased competition. It contains several restrictions designed to ensure that the protection it provides is used only for such temporary adjustment purpose--not for permanent protection--and only when the adjustment costs are large and the cost of the protection to the economy and the national interest is not large.

In the case of industries unable to become competitive with imports (such as unskilled-labor-intensive industries), temporary breathing room for adjustment may be better than no protection at all, but it is not what the industries really want. Anything short of long-term protection would force painful contractions on them that trade adjustment assistance will not completely ameliorate. Further, those industries want protection from imports that cause any injury, not just those that cause substantial injury, and they would rather such protection be automatic, without regard to any harm it might cause to the rest of the economy or to the national interest generally. Consequently, they have found the escape clause to be inadequate.

As the antidumping and countervailing-duty (AD/CVD) laws became more inclusive and protection under them became easier to obtain, industries more and more frequently were able to obtain better protection, and to obtain it more easily, under these laws than under the escape clause. Gradually, many groups came to view the laws as an alternative to the escape clause for uncompetitive industries and for those industries unable to meet the stringent criteria that the escape clause sets for the protection it provides.

As more people accepted this view, the laws and the procedures for administering them--especially the antidumping law and procedures--began to evolve in the direction of serving this more general protective purpose more effectively. From the point of view that the purpose of AD/CVD laws is to prevent, punish, and offset predatory pricing, subsidies, and other unfair practices relating to U.S. imports, many of the legal provisions and procedures that have evolved--especially those used for calculating dumping margins--are biased against foreign exporters (and against U.S. consumers of foreign goods). From the point of view that the AD/CVD laws should offer more general protection for domestic industries from troublesome import competition, these same provisions and procedures appear more reasonable, even if a bit ad hoc, and they have been quite effective.

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1. Trade adjustment assistance is provided for in Chapters 2, 3, and 5 of Title II of the Trade Act of 1974, as amended. The Section 201 escape clause consists of Sections 201 through 204 of the Trade Act of 1974, as amended.