3. Anti-Dumping
There are two broad schools of thought relating to trade remedies such as anti-dumping. One is that such laws are aimed at intervening on behalf of efficient domestic manufacturers facing competition from imports that are artificially underpriced, usually as a result of "foreign subsidies or other subterfuges". [Nivola (1993), p.30.] The contrasting view is that anti-dumping laws are inherently protectionist in both their procedural and substantive effect.
Anti-dumping is subject to strong criticism, particularly when it is contrasted with the objective of market contestability and the operation of competition laws.
Anti-dumping laws are one of the most egregious exceptions in international trade law to this [national treatment] principle, in that they clearly subject foreign producers to much more burdensome pricing constraints than those to which domestic producers are subjected under domestic laws, including competition laws. ... While reforms of countervailing and safeguards regimes are not directly amenable to competition law solutions, the most widely invoked trade remedy - dumping - is. [Trebilcock (1996).]
[M]aking antidumping more sensitive to competition concerns is something that is in the interest of any administering country. The problem is one of political economy, in that the power of the lobbies supporting a narrow injury-to-industry focus outweighs that of those who bear the burden of this. [Hoekman and Mavroidis (1996).]
[Anti-dumping] is fundamentally flawed from an economic perspective and cannot be fixed by a tinkering with the methodological arcana of investigations. [Hoekman and Kostecki (1995).]
The traditional economic rationale for anti-dumping measures has been the threat of international predation. A pragmatic analysis of the situation led to a somewhat different assessment. With the great increase in transnational commerce, domestic economic policies, laws, and business practices have gained an important extra-territorial impact. In the absence of any international agreement as to which domestic policies and business practices constitute restrictions of trade, anti-dumping laws have evolved as strategic tools to counteract the effects of domestic structural differences and other non-tariff barriers between commercial partners. While anti-dumping actions may, indeed, protect statehood, in practice, anti-dumping laws effectively stop the entry of many otherwise reasonably priced imports from exporters incapable of predation. [Marceau (1994), p. 1.]
Nevertheless, the reasons for maintaining anti-dumping have been put forward, and it remains a fact that an increasing number of countries are introducing and using anti-dumping laws. This chapter provides an analysis of dumping and discusses some of the arguments which have been advanced in favour of anti-dumping. It then considers anti-dumping in a competition policy context.
Dumping
Dumping has been recognised as an economic issue for some time. An early and useful example of detailed analysis is provided by Viner [Viner (1926).] . He sought to understand the origins and impacts of dumping by considering the motive of the dumping firm, the duration of the dumping, and the ability of the domestic industry to adjust to the dumped goods. All of the forms of dumping described by Viner are generally forms of price discrimination. [Technically, all require that the market of origin and the destination market be isolated from one another sufficiently to prevent re-export and thus price equalisation. They also require that the market of origin has a lower price elasticity of demand than the destination market (which implies that the former is not perfectly competitive).] Assuming that the Government of the importing country cannot control the competitiveness in the originating market, or the degree of isolation of the two markets, all it can do in response to dumping is to apply border measures. These influence upwards the price at which the imports cross the border into the local market. The question is, should the Government do this?
Viner points out that "To the importing country cheapness of imports is an advantage". This is the standard economic conclusion that a nation’s welfare improves when the price of its imports falls relative to that of its exports. The gains to consumers offset the costs to producers of similar goods. This would suggest that the Government should not act against international supply shocks if they stem from cheap imports. However, Viner goes on to say that this advantage occurs "... unless the cheapness is so temporary that it results in greater injury to domestic industry than benefit to consumers". Viner sees this as likely, and thus as the prime justification for acting against dumping [Note that Viner also believed that, "It is not a matter of importance, however, whether dumping in general or any particular species of dumping should be classified with unfair competition or not. What is important with respect to dumping is its economic effect, which is not greatly dependent upon what happens to be its motive".]. Viner’s proposition implies that the interests of consumers should be taken into account in considering action against dumping, but they should be balanced with the interests of producers.
Why, if the cheapness of imports is only temporary, does it result in such injury to local producers? Substantial injury from temporary dumping suggests that the domestic industry may have problems arising from other sources (in which case acting against dumping may be unjustified). Viner insisted that there should be a "presumption, if not absolute proof that the foreign competition really is abnormal... [and that] an industry’s claims to special protection against abnormal foreign competition should be discounted to the extent that it already enjoys protection".
If dumping is causing injury because it is not temporary, it may well be that the cheapness of the imports stems from a genuine competitive advantage (in which case it is "normal trade"), or that it is part of a predatory strategy. In Viner's framework, only predatory pricing [Viner’s "market development pricing" might be indistinguishable, in the medium term, from predatory pricing under certain market conditions, in which case it would also be actionable domestically.] would give rise to Government intervention under competition policy if it was domestic in origin.
A more recent categorisation of dumping has been developed by Willig [Willig (1992). There is more discussion of Willig’s categorisation later in this Chapter.] , based on the intent of the exporter, its market power, and the structure of the importing market. Willig considers both predatory dumping and strategic dumping to be detrimental so as to justify a response. Strategic dumping is used to describe injurious exports through an overall strategy of the exporting nation combining pricing of exports and restraints which close the exporting country’s market. The success of such a strategy depends on this market being of a significant size relative to scale economies to provide a significant cost advantage over rivals.
It must be recognised, however, that the scope for strategic dumping is limited to certain countries or groups of countries, and to certain industries, and is unlikely to be of concern to New Zealand. Similarly, the actual incidence of predatory dumping in international trade is likely to be very small, just as successful prosecution of predatory pricing in domestic jurisdictions is not high. On this basis, therefore, there would appear to be few, if any, economic grounds for taking anti-dumping action, but there remain some doubts as to whether the theoretical position applies in all cases:
The basic theoretical criticism of anti-dumping holds that, unless dumping has its origins in an anti-competitive practice and/or market structure in the exporting market, it is welfare enhancing, or at worst, welfare neutral, and should be unremedied. ... The fundamental question that arises when the two modes of analysis [anti-dumping and competition] are compared, and when it is argued that one is intrinsically superior or inferior to the other, is that of resource allocation. In particular, can it be definitively demonstrated that price discrimination (other than in the narrow case of predation) always is preferable from a resource allocation point of view to the imposition of an anti-dumping duty?. Put another way, does imposing an anti-dumping duty (other than in the case of predation) always misallocate resources, thereby harming economic welfare? ... In particular, in a small, open economy where the domestic price is equivalent to the world price, if dumped imports reduce prices in the importing market below world price, it can be argued that the dumping may cause a misallocation of resources. Under these circumstances, the imposition of anti-dumping duties, if set at the correct level, would be welfare maximizing. [Morgan (1996).]
The assumption of the theoretical arguments against anti-dumping is that the imposition of duties will raise the price to consumers in the importing market by the amount of the anti-dumping duty. However, this may not always be the case, and while there is not a lot of research available on the actual impact of anti-dumping duties, one study [Cullen (1995).] indicates that prices did not increase as a result of the imposition of anti-dumping duties. One of the possible reasons for this is that the imposition of anti-dumping duty on only part of total imports does not render the entire market non-contestable, which would be required if the full amount of anti-dumping duty was to be reflected in price increases. [Morgan (1996).] Another issue, identified by Miranda [Miranda (1996).] is "whether one can conclude that the low prices that result from dumping invariably represent a market outcome. And this is assuming that every market outcome is socially desirable".
Arguments for Anti-Dumping
The conclusion by economists is that in the absence of predatory pricing, there is generally no justification for taking anti-dumping action. Clearly, given the widespread use of anti-dumping, this view is not shared by governments around the world. In any event, as suggested above, predation is rarely the reason for anti-dumping action being taken.
Notwithstanding the fact that it is difficult to identify domestic predation and even more difficult to try to capture international predation, the main point is that anti-dumping laws have nothing to do with predation. Tests used to identify foreign dumping do not follow economists’ argument that the main purpose of anti-dumping laws should be to deter international price discrimination and predation. Anti-dumping laws have taken from economics only the potential reference to threats of predation and, unfortunately, the use of the term "dumping" for business practices which often have nothing to do with economic dumping. [Marceau (1994), p. 26.]
This part of this chapter sets out and comments on the arguments frequently advanced in support of the anti-dumping regimes operated by the major trading countries. The applicability of a competition policy approach is discussed later in the chapter.
The question of "fairness" goes to the heart of much of the justification of anti-dumping. Arguments made in support of anti-dumping laws include the following:
- Dumping distorts comparative advantage;
- Dumping is only made possible by market isolation of the exporting country;
- Anti-dumping action ensures the maintenance of "fair" competition;
- Consumers are also producers, and it is in their long term interests to secure the viability of production in the importing country;
- The existence of anti-dumping laws against "unfairly traded" imports supports the maintenance of free trade regimes.
In addition, rationales relating to distributive justice and communitarian values have been identified as justifying anti-dumping action. [Trebilcock (1996), pp 76-77.]
Comparative Advantage
The argument regarding comparative advantage is that the dumping of goods creates an artificial rather than a true comparative advantage, since the lower export price does not result from cost-efficiency. The result is the distortion of the market signals to producers in the importing country, because the prices suggest that adequate returns will not be achieved for the dumped product. The consequence is that countries with a real comparative advantage will lose the capacity and capability to produce such products.
Left unchecked, the "false signals" which occur in cases of price discrimination or sales below cost can have a "snowball" effect on other producers’ decisions, creating a veritable avalanche of inefficiency in the market. If selling below cost is allowed to continue, other competitors (and potential competitors) will make business decisions based on this initial false market signal. They will fail to enter a product market, fail to expand capacity, fail to improve productivity, and fail to use all other resources efficiently, based on the other company’s ability to price below cost. There can be, and often are, multiple levels of economic inefficiency caused by these false signals. And although competitive pricing (and efficient resource allocation) may return at a later date, this only occurs after substantial loss in total economic growth, as companies in the competing industry and other affected downstream businesses disinvest and then reinvest more efficiently. [Stewart (1996).]
There are however a number of problems with this argument. First, it may be that the lower export price does result from cost-efficiency (dumping may result from price discrimination with both export and domestic prices well above cost of production). Secondly, if dumping is long term, it is true that adequate returns cannot be achieved, i.e. it is not a distorted suggestion. More generally, it should be noted that the theory of comparative advantage does not argue in terms of true or fair competition, but in terms of aggregate welfare. It suggests that dumping may result in reduced welfare, but that the burden will generally be borne by the exporting not the importing country.
Nevertheless, there remains the argument indicated above by Morgan, that where prices in an import market have been reduced below world prices, and where purchasers in that market are price takers, the prevailing price signals in the market will be distorted so as to stimulate overproduction of the exportable goods and underproduction of importable goods. Anti-dumping duties would restore relative pricing to prevailing world market conditions, restoring efficient resource allocation. One difficulty with this argument is that it is by no means clear that it is appropriate to talk of "world prices" outside a limited range of commodities.
Market Isolation
The argument is that dumping is caused by the isolation of the exporting country’s market through high protective barriers or lack of competition in the market of the exporting country. This permits high prices to be charged in that market, which cross-subsidise low prices in the market of the importing country.
While high protective walls or the existence of monopolies might explain why dumping can occur, neither Article VI of the GATT nor the AD Agreement specify market isolation as a basis for permitting the imposition of anti-dumping duties. If it was provided for, it could be expected that the situation in the exporting country would be a principal target of the investigating authorities, in that they would seek to determine the extent of protection or the extent of competition in the exporting country. It could also be observed that if this claim was seriously presented, then there would be no justification for anti-dumping measures to be taken against countries such as Hong Kong and Singapore, which operate free trade regimes.
While it has been argued that the existence of anti-dumping regimes can act as a continuing pressure on protectionist countries to address their own measures at the border, and the state of competition within their borders, there is no economic argument for responding to protective barriers in another country by erecting barriers to imports from that country.
However, to the extent that market isolation indicates the existence of a distorting element which could explain price discrimination, it could be taken as a useful indicator of a situation where dumping may need to be addressed. Put another way, the absence of market isolation could indicate a situation where there would be no justification for anti-dumping measures.
The Maintenance of Fair Competition
It is sometimes argued that anti-dumping protects free and fair competition. In this context, protecting free competition should lead to similar outcomes as competition law.
The concept of fair competition is related to the idea that competition is enhanced by dumping only if it is non-injurious and results in an extra supplier being added to the market. Thus, dumping is harmful if it undermines the productive capability of the domestic industry.
This view is illustrated by a European Community decision on magnesium oxide from China [Council Regulation (EEC) No 1473/93 of 14 June 1993, Official Journal of the European Communities No L 145/4 17 June 1993, pp 207-212.] :
In assessing the Community interest, two basic elements have to be taken into account. The first is that to prevent distortions of competition arising from unfair commercial practices and thus to re-establish open and fair competition on the Community market is the purpose of anti-dumping measures and is fundamentally in the general Community interest . . .
In addition, in general, while there might be a short term price advantage to end users if no duty is imposed, to refrain from establishing fair competition on the Community market would, in the longer term, lead to less competition and higher prices.
There are difficulties associated with the fairness rationale for anti-dumping actions. It is commonly used, yet it is often unclear what the author means by "fair" or whether the objective is to be fair to producers or consumers. The magnesium oxide case, for example, refers to fairness both in terms of processes and outcomes.
The first argument is that unfair commercial practices distort competition. In this context, "unfair commercial practices" could have more than one meaning. It could, for example, refer to the practices of an overseas firm that is able to dump because it is protected from competition in its domestic market. The rationale for anti-dumping action using this definition of unfair commercial practices is no different from the "market isolation" rationale discussed above.
Alternatively, "unfair commercial practices" might refer to the business conduct of overseas exporters in a more general sense. If, for example, it means anti-competitive practices, then some form of government intervention can be justified, but competition policy approaches would be more appropriate.
Secondly, it could be argued that unfair competition leads to less competition and higher prices. In other words, there will be more competition and lower prices if there are more suppliers in a market. This argument has merit if:
- The demise of the domestic industry would lead to the market being monopolised; or
- The local industry is internationally uncompetitive but, given a little time to adjust, could become competitive.
If, however, the domestic industry can survive only because it receives protection from imports then prices are likely to be less competitive. Consumers and the economy would be better off by allowing market forces to prevail, even if that led to a reduction in the number of suppliers. In any event, in most jurisdictions the imposition of anti-dumping duties is based on injury to competitors not injury to competition, and in the absence of an appropriately elaborated public interest clause, it is unlikely that this situation will change (it being noted that the EC does have a Community interest clause which presumably can take account of the need to maintain competition).
Consumers Are Also Producers
The claim is sometimes made that the focus of anti-dumping on primary line injury is appropriate because consumers are also producers, and in that role may require protection against other dumped imports. [See, for example, de Clercq, "Fair practice, not protectionism", Financial Times , 21 November 1988.] This argument has no more merit than the contrary contention that the producer interest should be ignored because producers are also consumers. In reality, producer interest is a poor proxy for consumer interest. Primary line producers frequently suffer injury from dumping whereas consumers should in most cases benefit from dumping.
The interests of consumers in maintaining domestic production can best be addressed through an analysis of the net national benefit, and must also take account of the economic objectives and policies pursued by the government. Issues relating to a net national benefit test are addressed later in this paper, but it could be noted that research in the US [USITC (1995)] has estimated that in 1991 the net economy-wide welfare gains arising from the removal of outstanding anti-dumping and countervailing duty orders was US$1.59 billion, equivalent to 0.03 percent of US GDP.
Distributive Justice and Communitarian Values
Under this argument, the distributive impacts of low-priced imports may outweigh the gains in consumer welfare, particularly through the impact on low-skilled, low-paid workers. In relation to communitarian values, low-priced imports may have a negative impact on the welfare of industry-dependent communities, particularly through their effects on social and related networks and infrastructure on which such communities depend.
However, as Trebilcock points out [Trebilcock (1996), pp 76-77.] , current anti-dumping regimes do not appear to focus significantly on these concerns, but in any event, to the extent that distributive justice and communitarian values are of concern, it is not clear that allegedly unfair trade practices, such as the price differentiation required for dumping, have anything to do with such impacts. Rather, the concern may be with the provision of appropriate adjustment assistance, with the international trade implications being addressed through safeguard action.
Political Considerations
The other argument for maintaining an anti-dumping policy is that of political expediency, Bhagwati’s prudential argument [Bhagwati (1988): "The institutional procedures for ensuring "fair trade" through operation of CVD and AD mechanisms under a free–trade regime have a rationale in the cosmopolitan theory of free trade. The optimal allocation of world activity requires that no country artificially distort its comparative advantage by substantial subsidies to specific commercial activities or by permitting firms to indulge in disruptive dumping designed to destroy cheaper producers and then stick it to consumers with higher prices by more expensive suppliers. I also believe that there is a prudential argument for maintaining such "fair trade" processes as a complement to a free trade regime: if governments willingly ignore such artificial aids to foreign suppliers, it will certainly produce a backlash and imperil the free–trade regime itself."] , which has some validity. However, it might be more appropriate to apply such an argument to temporary safeguard measures as a generic response to concerns about import competition, rather than to rely on a distinction between "fair" and "unfair" trade.
A Competition Approach to Anti-Dumping
The economic analysis of trade remedies suggests that in each instance, the key questions are situational and often come down to a balancing of interests to determine the net national benefit. Currently, New Zealand trade remedies recognise the former aspect, but neglect the latter. A wider framework which would take account of these different interests is that used for the regulation of domestic competition.
This discussion does not seek to address issues relating to an international approach to competition policy, or the question of the replacement of anti-dumping laws by competition law. The model provided by Australia and New Zealand, i.e. full free trade in goods and harmonisation of competition laws, or the EU, which goes even further in terms of economic integration, suggests that the removal of anti-dumping from the lexicon of international trade rules and its replacement by an internationally agreed approach to competition policy is not likely to be imminent.
This section discusses anti-dumping policy in the context of competition policy in New Zealand. It considers:
- The objectives of the two policies;
- A competition policy taxonomy for dumping; and
- The applicability of the elements of competition law analysis to dumping investigations.
It should be noted that use of a competition policy "net national benefit" approach essentially involves a consideration of whether low (or competitive) import prices are distorted (artificially low) or the result of sustainable, competition-enhancing profit maximising behaviour. Such consideration will differ, however, depending on whether the case at issue is one of dumping, subsidisation or safeguards.
The following discussion concentrates on dumping, since safeguards, by definition, deal with instances where prices are not artificially low in the sense outlined above. Competitive prices should reflect market forces and use of a "net national benefit" test and any associated remedy, provided it is WTO-consistent, would therefore seem appropriate. In dumping, prices, while being low in the sense of technically being "dumped", reflect market realities and are not "artificially low" in the sense of resulting from government intervention. Examples of artificially low prices resulting from government intervention include "market isolation" dumping [As discussed earlier, the existence of high protective walls is one explanation of how dumping can occur. This does not mean that use of anti-dumping measures against countries with free trade regimes invalidates the "market isolation" rationale for anti-dumping. Such use may reflect existence of other circumstances such as predatory pricing behaviour or it may reflect abuse of the anti-dumping remedy by the country imposing the measure.] , where dumping occurs from behind protective tariff barriers, and "mercantilist" dumping where governments promote exports with direct or indirect subsidies.
While subsidised goods may, in certain circumstances, have similar economic impacts to those of dumped products, their price stems from government action through the provision of some form of "bounty". In this connection, Viner observed, "To the importing country bounties are objectionable.....because the cheapness which results from them is not the consequence of any basic superiority in productive effectiveness, and may at any moment cease to prevail". [Viner (1926)] More recently, Bhagwati has noted that "optimal allocation of world activity requires that no country artificially distort its comparative advantage by substantial subsidies to specific commercial activities..." [Bhagwati (1988)] .
In both cases of "market isolation" and "mercantilist" dumping, trade which takes place at artificially low prices distorts resource allocation both globally and in individual importing and exporting countries. Such behaviour is potentially predatory in nature. It is also dependent on political decision and is consequently of uncertain duration. As is evident in New Zealand's domestic experience, this political uncertainty is likely to give rise to additional adjustment costs beyond those associated with normal market uncertainty. Similar issues arise with respect to subsidies other than direct export subsidies where resulting prices, while perhaps not meeting the price discrimination definition of dumping, are nevertheless artificially below those which would otherwise prevail in the market.
Safeguards, by definition, deal with instances where prices are more likely to reflect the operation of market forces and are not artificially low. Subsidies result in prices which are artificially low due to government intervention. Trade at artificially low prices distorts resource allocation, which, as explained in the preceding paragraphs, does not appear to be in the public interest. Internationally, New Zealand has maintained a strong position of opposition to subsidies. Certainly, in the case of export subsidies, which are prohibited by the SCM Agreement, New Zealand would not want to appear to be condoning their use. In addressing the impact of subsidies, therefore, a net national benefit test would not appear to be appropriate. Indeed, a strong stance taken against subsidies may reduce the likelihood of future subsidies being imposed. The following discussion, therefore, concentrates on dumping, where a priori the situation is not clear, and careful consideration must be given to any approach which attempts to analyse and address the effects of dumping.
Objectives
The GATT 1994 and the WTO AD Agreement provide that anti-dumping duties may be applied only if the dumping is causing material injury to domestic producers of like goods. Thus it can be stated that the trigger for invoking dumping law is the primary-line damage [Injury caused to producers of goods like those imported, as opposed to producers of other goods, or consumers.] to domestic producers. It should be noted that dumping deals with trade in goods only.
The actual economic impact of specific anti-dumping laws depends on two factors. First, as the WTO does not require anti-dumping duties to be imposed simply because there is injury to domestic producers, there is scope for WTO Members to take the effects of dumping on other segments of the economy into consideration before deciding on remedies. Some countries require the effect of dumping on consumers to be considered, to some greater or lesser degree. But New Zealand [Along with the great majority of other countries with dumping laws.] currently does not apply any test other than the "injury" test. The analysis under the Dumping and Countervailing Duties Act 1988 is limited to the primary-line injury.
Secondly, New Zealand law, like many others, does not precisely define "material injury". Accordingly, the extent to which anti-dumping law is protectionist in each jurisdiction is strongly influenced by the implementation practice.
New Zealand's economic policy is focused on increasing national welfare. This is achieved through the promotion of economic efficiency. The analysis in the previous chapter of the various trade remedies was based on this objective. However, the focus on primary-line injury may not be a good proxy for net national benefit since the adverse effects of dumping on primary-line producers can be outweighed by benefits to downstream producers and consumers.
New Zealand competition law has as its primary objective [Some countries have other objectives for their competition laws. Of these, the objective of consumer welfare maximization is the most common. There can be a conflict between the total efficiency and consumer welfare objectives if an anti-competitive merger or practice has outweighing productive efficiency gains, but in general, these two objectives are consistent.] the promotion of economic efficiency as this tends to lead to:
- Appropriate prices and, therefore, a level of output which is desired by society;
- Incentives on management to innovate or to otherwise produce output at the lowest possible cost; and
- Minimise the unproductive use of resources to secure or defend market power.
Included in this objective are both goods and services. Price and non-price effects are covered.
In addition, competition laws in some countries have secondary social or political objectives, such as promoting the interests of large manufacturers, small businesses, the unemployed, or the residents of a particular region. Such objectives often result in conflict with efficiency and consumer welfare.
In the past there were inconsistencies in the treatment of secondary objectives in New Zealand. However, in the last few years, decisions by the courts and the Commerce Commission have indicated that the economic effects of structures and conduct are the primary focus of the Commerce Act 1986. Secondary objectives, although not excluded from consideration, are unlikely to be sufficiently important to affect the outcome of most decisions. Thus, competition law in New Zealand is generally consistent with the objective of promoting the economically efficient use of resources.
In general, anti-dumping law is more narrowly focused than competition law. Anti-dumping law considers the price based effects of dumping of goods on one sector of the economy (primary-line producers), whereas competition law considers the effects of anti-competitive structures and conduct, including non-price effects, on all participants in the relevant markets (primary-line producers, intermediate producers, end users and consumers). The objectives of the two laws in New Zealand at present, are not always consistent.
Competition Policy Analysis
To consider the wider economic effects of dumping the authorities would have to consider the factors affecting supply and demand for the goods concerned. This would be akin to the analysis undertaken under competition law. As outlined above, Willig, a competition analyst, has considered dumping policy under such an approach and has modified and extended Viner’s classification of dumping and analysed each class in terms of competition policy.
Willig’s conclusions on the effects of dumping on importing countries are that dumping, essentially by definition, injures producers and benefits consumers; that long run, short run, intermittent and sporadic forms of price discrimination dumping can all be forms of profit-maximizing behaviour; that none of the forms of below-cost dumping are anti-competitive (predatory dumping is not included in this category); and that none of the forms of sporadic and long run dumping are anti-competitive. Willig concludes, however, that the forms of short run or intermittent dumping that are or can be anti-competitive are predatory dumping, limit price dumping, and isolated episodes of reciprocal dumping as punishments for apparent infringement of cartel discipline. Predatory dumping, with the danger that domestic and other alternative producers will irreversibly exit the market, leaving it in the monopolistic control of the predator, is decidedly harmful to the importing economy, bearing in mind that there are issues relating to practical problems in dealing with situations beyond the border.
Viner and Willig agree that sporadic and long term dumping are not harmful to the importing country. There is a significant difference between their views on short run dumping. Writing in the 1920's Viner considered short run dumping to be so common that substantial import volumes at dumped prices should create a presumption of material injury. However, the changes to the global economy render Viner's presumption no longer valid. The three forms of short run dumping (as listed above) identified by Willig as being harmful to importing countries are all relatively uncommon. Thus, in the bulk of cases, dumping is likely to be beneficial to the importing country.
Willig's analysis shows that an approach based on the framework of competition law provides a natural way to consider the broad economic effects of dumping as it incorporates the impact on all groups, not just on primary line producers. To consider the applicability of the methods of competition policy requires an outline of the relevant principles and practices of competition policy that would apply to dumping.
The Commerce Act, which is typical of modern competition laws, prohibits a range of types of anti-competitive behaviour. For this analysis two are important:
- The prohibition on dominant firm behaviour (sections 36 and 36a), of which price discrimination can at times be an example. Price discrimination cannot, of itself, create market power. It can only be anti-competitive when practised by a firm with sufficient market power to harm the competitive process without the need to collude with other firms - a dominant firm.
- The prohibition on agreements that substantially lessen competition [ This includes actions such as price fixing, output limitation and customer allocation agreements.] (section 27) has no equivalent under dumping law. However, public interest suggests considering extending the coverage to control agreements between two or more overseas firms that harm New Zealand's interests.
The main elements of analysis under section 36 [Section 36(1): No person who has a dominant position in a market shall use that position for the purpose of— (a) Restricting the entry of any person into that or any other market; or (b) Preventing or deterring any person from engaging in competitive conduct in that or any other market; or (c) Eliminating any person from that or any other market.] are the definition of the market, whether a firm has a dominant position in that market, whether the conduct is exclusionary, and the firm’s purpose.
Market definition and market power analysis are part of the same process. Market definition is an instrumental concept designed to clarify the sources and potential effects of a firm's market power. Whether different goods or services are in the same product market depends on the extent to which consumers regard them as substitutes. If they are close substitutes then the prices of each will provide a significant restraint on the other and it is appropriate to define them as being in the same market. The same principle applies to the other elements of market definition (geography, function and time).
Market definition is not part of the analytical process under anti-dumping law, which concentrates on the production of "like goods". Defining markets in accordance with economic realities (substitutability), can however, provide a framework for considering the wider effects of dumping
In all markets that are not perfectly competitive, each firm has some level of market power. The prohibition on the use of a dominant position is aimed at those firms that sell products that have no close substitutes and can profitably raise prices above competitive levels. Accordingly, "dominance" is a measure of market power which requires the courts to draw a line somewhere between trivial and serious economic effects.
The "material injury" test in dumping also draws a line between the trivial and the serious, but only in relation to the effect on the primary-line industry's performance (as measured by indicators such as sales, output, market share, profits and employment). Market definition/market power analysis provides an appropriate way of measuring the wider effects, including those on consumers and downstream producers.
Overall, the simpler tests involved in the dumping analysis are likely to be triggered in more situations than would result under the comprehensive balancing assessment required to invoke the provisions of competition law.
Section 36(1) focuses on the reasons why the non-dominant firm is unable to compete. The target of the prohibition is dominant firms which prevent or limit competitive conduct by rivals or potential rivals in the same or a contiguous market by using their high market power. Dominant firms which can weaken rivals or deter entry simply by being more efficient, are not caught by subsections (a)-(c).
Reasons for injury may be considered to some extent in a dumping investigation, but consideration of whether these are exclusionary is not part of the systematic analysis. From the national perspective, the reasons why a dominant firm's conduct causes injury to another firm will always be relevant. Thus a dumping policy which considered total welfare, would allow intervention only if the dominant firm's conduct was exclusionary.
The inclusion of purpose is useful because it can be difficult to judge whether the conduct identified in subsections (a)-(c) of section 36(1) is anti-competitive or normal competitive behaviour. The "purpose" test considers whether there is a causal link between the market power and the impugned conduct. But objective evidence of intent is rarely available. Consequently, the courts have looked at conduct and inferred purpose on the logical proposition that a firm intends the consequences of its actions. [See, for example, Union Shipping NZ Ltd v Port Nelson Ltd [1990] 2 NZLR 662; 3 NZBLC 101,618 at 101,648 where the High Court accepted an inference of purpose where "protestations of inner thoughts . . . [did] not reconcile with objective likelihoods".]
Under section 36, the dominant firm trades in a New Zealand market. The "purpose" test works satisfactorily because the evidence about a firm’s purpose is available in New Zealand and the necessary legal processes are available to gain the evidence. There would, however, be some practical difficulties in a dumping case as the alleged dumper can be an overseas firm not trading directly in New Zealand. Evidence gathering powers may turn out in practice to be inadequate to gain the necessary proof of purpose. [This problem was recognised in the context of the adoption of trans - Tasman abuse of dominance laws in 1990. Amendments were made to the competition and evidence statutes in both countries to ensure that normal evidence gathering powers would be available to New Zealand litigants for evidence located in Australia and vice versa.]
Nevertheless, information on the overseas firm’s purpose(s) may be ascertainable in individual cases. Under an anti-dumping law that included the interests of consumers, users and intermediate producers, it would be appropriate for the regulators to seek and consider evidence on the purpose to the extent that it is available.
Dumping Prices and Predatory Prices
Dumping pricing is selling goods with an export price less than their normal value in the country of origin. As the earlier analysis has shown, there are a variety of reasons why a firm may engage in such behaviour. Dumping analysis does not probe these. It focuses on establishing simple facts: evidence of (material) injury and of dumping pricing.
Generally, the normal value is taken as the price at which the goods are sold in arm’s-length transactions in the ordinary course of trade in the country of origin. If this price cannot be established, then normal values are based on prices of exports to third countries or constructed values, including manufacturing cost, selling and administration costs and profits.
International predatory dumping harms domestic producers because efficient producers are forced from the market. Consumers receive short term gains, but lose in the long term as the dumping predator recoups the earlier foregone profits through subsequent monopoly pricing.
The pricing rules under anti-dumping law are objective tests that are capable of reducing the area for case-by-case dispute. However, the problem with the anti-dumping pricing rules, from a total welfare perspective, is their arbitrary nature. The existence of international price discrimination in itself is of no economic significance to either the exporting or the importing country. What does matter for the importing country is whether the prices harm the economy taken as a whole.
Predatory pricing is the use of short-run price cutting in an effort to exclude rivals on a basis other than efficiency, in order to gain market power [OECD (1989), p.81.] . In other words, predatory pricing is price cutting that is inconsistent with short-run profit maximization, and which benefits the predator in the long run by forcing other firms to cease operations and by deterring competitive entry. [Nicolaides (1992) p.5.] The intention of the predator is to drive all other firms from the market so that it can subsequently extract monopoly profits. It does this by selling large quantities at below an accepted measure of cost. It is, therefore, a high cost/high risk strategy that is open only to firms with a considerably deeper pocket than the intended prey, and operating in markets with high barriers to entry.
Predatory pricing is undesirable because it does not produce an economically efficient outcome and thus has the drawbacks already identified. Establishing whether predatory pricing has occurred and tracing its consequences are complex tasks. Once such an investigation is carried through, though, the results are directly indicative of the economic consequences of the action.
Widening New Zealand dumping law to include consideration of the effects of dumping on persons other than the primary-line producers, could draw on the those tools that are available for analysing predatory pricing to the extent that it is practicable to do so (for instance, subject to the availability of information).
Non-Price Predation
Section 36 is not limited to pricing matters. It also covers non-price conduct. Non-price predation is generally accepted to be considerably more common than price predation on domestic markets, because it is a lower risk strategy and does not necessarily involve large foregone profits and uncertain outcomes. Similar effects are likely to prevail internationally. Therefore a total welfare approach to trade remedies would include non-price effects in the analysis.
Examples of non-price predation include disruption of distribution patterns and misuse of government processes [Bork (1978), pp 148-155.]. Distribution patterns can be disturbed and higher costs forced on to a rival, for example through exclusive dealing contracts or expulsion from co-operative business groups. The misuse of government processes includes legal processes, through courts or other government agencies, undertaken without regard to the merit of the claim being advanced, in order to harm a business rival. Certain types of anti-dumping investigations may fall into this category.
Agreements That Substantially Lessen Competition
The underlying reason for prohibitions on agreements that substantially lessen competition and use of a dominant position is the same. The concern under section 27 of the Commerce Act is that firms will, through their collective behaviour, be able to emulate the socially undesirable conduct of a dominant firm.
It is similarly possible that there may be concerted dumping by overseas firms. Thus, a comprehensive approach to trade remedies would include consideration of whether dumping firms are using collective market power in a manner that is harmful to New Zealand.
Remedies
Under anti-dumping law the object of the remedy is to remove the cause of the injury. The primary remedy is anti-dumping duties. The maximum amount of duty that can be applied under the Dumping and Countervailing Duties Act 1988 is the margin of the dumping, which is the difference between the export price and the normal value. However, the Minister is required to give consideration to the desirability of applying the amount of duty necessary to prevent injury if that amount is less than the margin of dumping.
The anti-dumping duty can be expressed as an ad valorem percentage of the value of a import value, or a specific duty, or as a threshold price based either on the normal value or the value needed to remove the injury.
As an alternative to duties, the Act also makes provision for exporters to give undertakings, for example by increasing prices, in order to remove the injurious effect of the dumping, and so allow the investigation to be terminated.
There are two broad objectives to remedies under competition law. One is to correct the anti-competitive conduct and the other is to deter further transgressions. [Moral culpability is not an issue, so retribution and rehabilitation are irrelevant.]
To correct anti-competitive behaviour, the Commerce Act provides for remedies including:
- The unenforceability of provisions of contracts and covenants that contravene sections 27-29 of the Commerce Act;
- Relief by injunction; and
- Other orders the High Court considers appropriate (including orders for restitution and compensation, in certain circumstances).
In order to deter future transgressions, the Commerce Act:
- Allows the Commerce Commission to apply for pecuniary penalties [In other jurisdictions, notably the United States, there is a strong view that effective deterrence against the most serious antitrust offences can be achieved only by personal criminal fines and jail sentences.] ; and
- Allows private parties to apply for damages (i.e. a compensation element).
An issue that arises is whether these types of penalties and remedies could be applied under anti-dumping laws. This would require a fundamental shift in the nature and scope of anti-dumping remedies from border measures which may or may not be targeted at individual exporters, to measures applied behind the border. Whether the change could be implemented in a practical sense would depend on the existence of a framework for international co-operation between governments and enforcement agencies.
The key international co-operation issue in other areas of law is that the internationalisation of markets means that relevant information and evidence is increasingly being found both inside and outside each regulator’s national borders. Co-operation is needed, but this requires more than just the desire to cooperage with foreign regulators. It also requires each regulator to have the legal authority to provide requested assistance.
Such frameworks exist for the international investigation and enforcement in some areas of law such as taxation and securities through a multiplicity of bilateral co-operation treaties and memoranda of understanding. Such a framework is starting to develop in the area of competition law for dealing with price fixing and other hard core cartels, but it is a long way from being complete.
Such frameworks require a shared acceptance that the conduct in question is unacceptable and that international co-operation will mean that every country is better off, even if this is not the situation in every individual case. This situation exists in relation to securities, taxation and some other areas of criminal law and is also increasingly accepted among countries with modern competition laws.
This commonality of view does not exist for anti-dumping. There is a division of views on the merits of anti-dumping law with some countries treating the reform of the international anti-dumping framework as a priority, and others being totally committed to retaining anti-dumping laws as a protective mechanism, even in the context of free trade agreements. The arbitrary nature of anti-dumping findings in some jurisdictions also militates against bilateral co-operation agreements.
To conclude, the foreseeable prospects for voluntary co-operation by way of treaties and memoranda of understanding in the context of anti-dumping laws are poor. This tends to suggest that a move to remedies which require international co-operation, such as those commonly found in competition laws, is impractical. Rather, border remedies are likely to continue to be the norm for anti-dumping.
Conclusions
The main conclusions that can be drawn from the analysis in this Chapter are:
- Competition law has a broader scope than anti-dumping law for three reasons. First, it considers the interests of all producers and consumers, not just primary-line producers. Secondly it covers non-price behaviour as well as pure pricing behaviour. Thirdly, it deals not just with goods but also with services.
- The analysis of dumping in terms of a competition framework shows that dumping is likely to be economically beneficial to the importing country in most cases.
- Competition law involves a complex analysis to determine undesirable instances of predatory pricing.
- The "normal value" and "material injury" tests of dumping law are much easier to meet than the tests of price predation under competition laws. It is likely that there are many instances of dumping, where anti-dumping duties have been imposed, which would not be caught as predatory under competition law.
- The trade remedies law questions are easier to answer but the competition law questions have a stronger underlying economic rationale.
- Anti-dumping remedies are simpler than those available under competition law, but many of the latter are likely to be unenforceable internationally and thus have no relevance to anti-dumping law.
- The analytical approach of competition law could be applied in dumping situations. It would allow consideration of wider impacts and thus a more complete indication of economic welfare.
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