August 13, 1998

NOTE TO EDITORS

Free versus Fair Trade: The Dumping Issue, the latest edition of the New York Fed's Current Issues in Economics and Finance, is available for your review.

Authors Thomas Klitgaard and Karen Schiele examine the debate over antidumping tariffs --tariffs imposed on imports judged by a government to be unfairly priced ("dumped")--and conclude that their use is ill conceived in many ways. More countries have resorted to antidumping tariffs in recent years as international trade agreements have phased out other kinds of trade barriers. The article raises questions about the merits of this form of trade protection and discusses other remedies that are available to those hurt by unfair import competition.

According to Klitgaard and Schiele, defenders of antidumping tariffs claim that the tariffs prevent foreign producers from engaging in predatory pricing--a radical underpricing of export goods that is designed to drive domestic competitors out of business. Critics argue that these tariffs, like all trade barriers, hurt the economy by directly raising the prices that consumers and manufacturers must pay for goods.

The authors focus their analysis on the rationale for antidumping regulations and the review process used by governments to evaluate allegations of dumping. They find:

  • The belief that foreign firms, if undeterred, will engage in predatory pricing has little economic basis. Firms in fact have few incentives to undertake such schemes.
  • The criteria used to determine whether prices are too low are questionable on economic grounds. Under antidumping regulations, pricing behavior that is consistent with normal business practices can be interpreted as evidence of wrongdoing.
  • The standard used to establish that domestic industries have been injured by imports is weak. A standard of "material" injury--defined as harm that is "not inconsequential, immaterial, or unimportant"--is considerably lower than the standard of serious injury used in antitrust cases involving domestic firms.
  • Industries hurt by import competition have alternative remedies. U.S. firms can appeal to the antitrust authorities to resolve disputes over unfair pricing in international trade. Another option is the safeguard action, which places tariffs or quotas on imports for a limited period while domestic firms make adjustments to cope with competition. Klitgaard and Schiele argue that both forms of protection are less harmful to the economy than antidumping tariffs.