Trade Remedy Measures

Line Up Antidumping – what is it & why is it used? Impact of Antidumping – Costs and Benefits Trade Impacts Canada’s Experience Empirical Evidence Case Study – Vitamin C Reconciling with theory

FORM OF REMEDY MEASURES The WTO framework allows “protection” in specific cases using trade remedy measures Anti-Dumping Countervailing Safeguards 9/19/2018 Nisha Malhotra

ANTIDUMPING To remedy the effect of imports ‘dumped’ in a country by imposing a tariff equivalent to the ‘dumping’ margin

The WTO framework allows Antidumping measures Reason: Antidumping was set up to prevent predatory pricing. Predatory pricing is considered anti-competitive. If a firm practises predatory pricing, it charges a much lower price for its products or services than its competitors in order to force them out of the market. After having driven away the competition they would raise prices. Praditry 9/19/2018 Nisha Malhotra

Dumping is defined as When an exporter sells a product to an importing country at a price below cost. OR When an exporter sells a product to an importing country at a price lower than the price at which the same product is sold- in its own domestic market a third county market ‘Dumping’ = Price discrimination between national markets 9/19/2018 Nisha Malhotra

Conditions for Antidumping Injury to the domestic industry Relation between dumping and injury to the domestic injury 9/19/2018 Nisha Malhotra

Some Facts Historical Origins-First AD case Canada (1904) : to protect against steel dumped in Canada by US firms United States (1916): to protect against post WW1 dumping from Europe India-national law on anti-dumping in place since 1985. However, first case initiated in 1992 9/19/2018 Nisha Malhotra

IMPACT OF AD Small Country -Welfare Analysis Impacts on Trade Large Country

Cost and Benefit of an AD Duty in a Small Importing Country Price, P Quantity, Q S consumer loss (B+E+F+G) producer gain (B) government revenue gain (F) WELFARE LOSS: E+G A B C F E D G D Price with AD duty D2 S2 Price without AD duty S1 D1 Imports after duty Imports before duty

Costs and Benefits of AD A tariff raises the price of a good in the importing country. As a result of these price changes: Consumers lose in the importing country Producers gain in the importing country Government imposing the tariff gains revenue

Trade Effects of an AD Duty in a Small Importing Country Price, P Quantity, Q S Trade Before Duty: D1-S1 Trade After Duty: D2-S2 Trade Restriction: (D1-D2)+(S2-S1) D Price with AD duty D2 S2 Price without AD duty S1 D1 Imports after duty Imports before duty

Costs and Benefits of an AD duty for the large Importing Country Price, P Quantity, Q S D = consumer loss (a + b + c + d) = producer gain (a) = government revenue gain (c + e) Welfare change=e-(b+d) PT a D2 S2 b c d PW S1 D1 e P*T QT

Costs and Benefits of an AD Efficiency Loss: The areas of the two triangles b and d measure the loss to the nation as a whole. arises because a tariff distorts incentives to consume and produce. Producers and consumers act as if imports were more expensive than they actually are. Triangle b is the production distortion loss and triangle d is the consumption distortion loss. Terms of Trade Gain: area of the rectangle e measures an offsetting gain The terms of trade gain arises because a tariff lowers foreign export prices (or Home import prices). If the terms of trade gain is greater than the efficiency loss, the tariff increases welfare for the importing country.

Trade Effects of an AD duty for the large Importing Country Price, P Quantity, Q S Trade Before Duty: D1-S1 Trade After Duty: D2-S2 Trade Restriction: (D1-D2)+(S2-S1) D PT D2 S2 PW S1 D1 P*T QT

CANADA’S EXPERIENCE

Canada-Antidumping law If an industry in Canada believes that it is being injured by unfair competition through dumping- it may request the imposition of antidumping Canada Customs and Revenue Agency (CCRA) Canada's anti-dumping and countervailing law is contained in the Special Import Measures Act (SIMA). The Canada Customs and Revenue Agency (CCRA) and the Canadian International Trade Tribunal (Tribunal) are jointly responsible for administering SIMA 9/19/2018 Nisha Malhotra

Some Examples

Empirical Evidence Trade Impacts of AD

Empirical Evidence Several empirical studies analyze the trade impacts of ANTIDUMPING : US, EU, Mexico and more recently for a few other developing countries. However, the results are not consistent across these studies for various countries.

Empirical Evidence Prusa(2001): Vandenbussche et al.(2001): (50%) import restriction evidence of trade diversion. Vandenbussche et al.(2001): comparable imports restrictions of 67%. No Trade Diversion Malhotra & Rus (2008): Import restricted 54% No diversion

CASE STUDY : Case of Trade Diversion India: Antidumping case against imports of Vitamin C

Import Patterns: Vitamin C

Reconciling with theory

Trade Diversion in a Small Importing Country Trade Before Duty: D1-S1 Expected trade After Duty: D2-S2 Trade Restriction: (D1-S1)- (D2-S2) (D1-D3)+(S3-S1) Price, P Quantity, Q S D P(china/Japan) + AD Trade Diversion: (D3-S3) – instead of coming from china/Japan – now comes from Russia/EU D2 S2 P(Russia/EU) S3 D3 P(china/Japan) S1 D1 Imports –would ‘ve been Imports after duty

Cost and Benefit of an AD Duty in a Small Importing Country Price, P Quantity, Q S consumer loss (B+E+F+G) producer gain (B) revenue gain (F) WELFARE LOSS:F+ E+G D P(china/Japan) + AD P(Russia/EU) D2 S2 B F E G P(china/Japan) S1 D1 These higher domestic prices also attract new foreign countries or import sources that did not find it profitable to export to India previously. Imports after duty Imports before duty

Antidumping Used to restrict trade However, trade might be diverted to other countries Bigger welfare loss to the importing country

The End China Daily (2009-05-18)

CASE: Aramid Fibre World Market, two producers Petitioner=Sole producer ADD imposed on imports from Netherlands Bertrand Competition (price competition) Division of the international market between the two producers “ Strong demand has caused both producers to allocate aramid fiber among various customers” “ Both (the firms) negotitate with customers individually to price their products…” Usitc publication No. 3394, feb 2001 There are only two producers of Aramid fibre in the world market. The domestic petitioner is the sole producer of the good in the US The petition was approved and a duty was imposed on the imports from Netherlands However, in a two firm game one either expects Cournot competition between the firms or Bertrand competition. In this market, the price cutting behavior was nothing but bertrand competition where both the firms compete in prices. Restriction of imports in this case led to a division of the world maket between the two producers. The quotes from the ITC reports, sums up the conclusion very well. (E.I. Dupont & Akzo/Teijin Twaron.