Working Paper 98.

2 May 1998
The Dumont Institute for Public Policy Research
236 Johnson Avenue, Dumont, NJ 07628 USA [email protected]
Telephone: (201) 501-8574

Antidumping and the People's Republic of China: Five

Case Studies

Robert W. McGee
Seton Hall University

Yeomin Yoon
Seton Hall University

JEL Classification: F13, K2, L5, O53

Abstract

The People's Republic of China has been the number one target of
antidumping actions filed by the U.S. Commerce Department on behalf
of various domestic industries. One reason for this special status is
because the PRC is one of the world's lowest cost producers. Because
of the cost structure of its industries and economy, as well as the fact
that it tends to manufacture products at the low end of the quality scale,
it is able to sell a wide range of products for lower prices than most
competitors. Furthermore, because it is classified as a nonmarket
economy, special rules must be used to determine the cost of
production.

It is unlikely that the frequency of antidumping actions will decline in

the near future. Indeed, because the antidumping laws are becoming
more widespread as a result of their adoption by every country that
became a member of the World Trade Organization, it is likely that the
number of antidumping actions filed against the PRC will increase in
the years to come.

This paper begins with an overview and history of the antidumping

laws and proceeds to examine five antidumping actions initiated by the
U.S. Commerce Department against the People's Republic of China.
The paper concludes with a brief commentary and recommendations.

Introduction
Antidumping laws, which punish foreign producers for selling their

products on domestic markets at low prices (McGee 1993), have been in existence
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for decades. Since the finalization of the Uruguay Round of GATT they have taken

on increased importance, and the GATT agreement included an antidumping

provision that all signatories must adhere to. Before the recent GATT agreement

was concluded, only about 40 countries had antidumping provisions in their

domestic laws. After the Uruguay Round, more than 120 countries agreed to adopt

and enforce the GATT antidumping laws. In the past few years, the People’s

Republic of China has been the most frequent target of antidumping actions initiated

in the United States.

This paper will examine some recent case studies involving antidumping

actions initiated in the USA against the PRC and attempt to determine what the

frequent exercise of the antidumping laws might mean for the future.

In the past, there have been many problems with both the theory and

enforcement of antidumping laws, especially in the United States. To complicate

matters, the antidumping provisions adopted by GATT are somewhat different than

the provisions in U.S. law, and it has not yet been determined which set of laws

will prevail in antidumping actions initiated in the United States. Some

commentators have suggested that adopting the GATT antidumping provisions

would amount to a partial abrogation of U.S. sovereignty. Others deny that this

would be the case.

Regardless of which set of antidumping provisions is utilized, there are

many common features between the GATT rules and the U.S. rules. Many of the

weaknesses in the U.S. rules have survived the Uruguay Round.

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One of the major criticisms leveled against the U.S. antidumping rules is the

subjectivity with which they are applied. In a case involving some Brazilian

companies, more than ten different methods were used to determine the cost of

production (Bovard 1991: 129). The use of some methods resulted in finding that

dumping had occurred, since the selling price in the domestic market was less than

the cost of production. Yet if other methods were used, no dumping was found

because the cost of production was less than the selling price. Potential targets of

antidumping actions never know in advance which cost of production methods will

be used to determine whether dumping has occurred, thus injecting major

uncertainty into the marketplace (Kaplan et al 1988). It is impossible to predict in

advance whether a pricing strategy will result in the triggering of an antidumping

action, or whether the antidumping action, once started, will be successful.

Another major criticism of the U.S. rules is the arbitrariness, and the

potential abuse that goes with it (McGee 1994: 92-111). The government can

demand practically anything and the target of the investigation must comply or face

dire consequences. If the target company(ies) produce 99 percent of what is

demanded in the format requested, the Commerce Department can reject the entire

submission and instead use what it labels the "best information available" (BIA)

which, in practice is often information provided by the domestic producers that

initiated the antidumping action. This BIA is often not the best information

available, in spite of the name. It is often biased against the target of the

investigation and is often based on estimates that violate generally accepted

accounting principles or common sense.

In many previous antidumping cases, the Commerce Department has

demanded vast quantities of information with a short turnaround time. In a case

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involving Matsushita, it demanded that 3,000 pages of financial information be

translated into English. The demand was made on a Friday afternoon; the deadline

was the following Monday morning (Bovard 1991: 136). Rather than comply with

this impossible request, Matsushita withdrew the product from the domestic

market, which pleased the domestic companies that initiated the action.

In another case, the Commerce Department sent a 66-page questionnaire (in

English) to six former Soviet republics and demanded information about their

uranium production (Bovard 1992). Aside from the fact that they did not have the

information, it would have been illegal to supply it if they did have it. Yet they

were punished for failure to comply.

Another problem with the computations used to determine whether dumping

has occurred is the method by which prices are determined in an environment with

rapidly changing exchange rates (Palmeter 1988). Sometimes, the methods used to

compare the foreign currency to the dollar will result in a finding of dumping where

no dumping would otherwise be found. This methodology may prove to be a

major problem in many Latin American countries, where inflation has been

institutionalized, but could be a problem in China as well, which has a much lower

rate of inflation.

Many antidumping actions in the past have compared products that are not

strictly comparable, with the result that an antidumping action might find a party

guilty where a guilty finding is not warranted. For example, Product A in China

might be compared to Product B in the United States even though Product A might

be different qualitatively from Product B. The fact that the products are

qualitatively different does not mean that there will automatically be some

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discounting applied to account for the qualitative difference. Where differences are

taken into account, the Commerce Department sometimes uses strange comparisons

that have no basis in economics.

Where the alleged dumping has been done by companies in a nonmarket

economy, the normal methodology is to choose a surrogate country's prices,

perhaps with adjustment, as a substitute for the alleged offender's costs, in an effort

to determine whether the foreign producer has sold products on the domestic market

for less than cost. This faulty methodology invites abuse, and is compounded by

the fact that the petitioners are often the ones that choose which country is to be

used as a surrogate, and which data from the surrogate country are to be examined.

This procedure is especially relevant to cases involving the People's Republic of

China, since the Commerce Department has on many occasions classified the PRC

as a nonmarket economy.

The whole concept of selling consistently for less than fair value, or for less

than the cost of production, is a curious one. First of all, fair value is determined

by the interaction of buyers and sellers. Something is worth whatever someone is

willing to pay for it. So asserting that a product can be consistently sold for less

than fair value, when buyers and sellers are free to negotiate, is ridiculous on its

face. Yet the view that something can be sold for less than fair value is not only the

basis for the underlying antidumping theory, but is also punishable, even though

both parties to the transaction benefit as a result of the sale. Otherwise, there would

be no sale, since parties to a sale do not go into it with the idea of making

themselves worse off. Consumers benefit, of course, and antidumping laws were

put on the books (supposedly) to increase competition, which benefits consumers.

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Selling a product for less than the cost of production is almost never done,

and when it is done, it is for a good reason. Any company that sells for less than

the cost of production as a general policy will soon go out of business.

Furthermore, if something is sold for less than the cost of production, consumers

benefit, and since the antidumping laws were passed to benefit consumers, no one

should complain, and certainly companies that sell their products to domestic

consumers for low prices should not be punished. Yet that is exactly what happens

under the present antidumping laws.

The problem with antidumping laws is that they are used by domestic

producers to prevent foreign competition. They use the force of government to

either prevent foreign competitors from entering the domestic market, or if they do

enter, they must either charge high prices or pay a high tariff to the government as a

cost of doing business.

One reason why the antidumping laws were passed was to prevent

predatory pricing. Yet the antitrust literature of the past few decades has concluded

that predatory pricing either doesn't exist, or if it could exist, would benefit

consumers (R. McGee 1994:138-9; Koller 1971; J. McGee 1958; Fisher 1987;

Armentano 1972, 1990). It doesn't take a rocket scientist to figure it out. If a

company drops its price so low as to drive out all competitors, it will gain market

share and lose money on every sale. If it is able to force out all competitors, they

will stay out only as long as prices remain so low that they would not be able to

make a profit by re-entering the market. The only way a predator can prevent

competitors from re-entering the market is by keeping its prices abnormally low.

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It would probably go out of business if it kept its prices low. But let's say

that it was somehow able to stay in business. Consumers would benefit by the

lower prices. So it is possible to conclude, a priori, that predatory pricing cannot

exist in a free market, or if it did exist, it would benefit consumers. Thus, the a

priori approach meshes completely with the empirical antitrust literature on this

point.

Cases
Preserved Mushrooms

This investigation was launched in January 1998 as the result of a request

by the Coalition for Fair Preserved Mushroom Trade, which is comprised of L.K.

Bowman, Inc., Nottingham, PA; Modern Mushroom Farms, Inc., Avondale, PA;

Monterrey Mushrooms, Inc., Watsonville, CA; Mount Laurel Canning Corp.,

Temple, PA; Mushroom Canning Co., Kennett Square, PA; Sunny Dell Foods,

Inc., Oxford, PA; and United Canning Corp., North Lima, OH. (USITC 1998: A-

3, 6). Thirty-six potential PRC exporters and mushroom producers were targeted

by the petitioners (A-8). Because China is classified as a nonmarket economy,

surrogate country costs were used to estimate the costs of production. In this case,

Indian consumption data for materials, labor and energy were used. The petitioners

alleged that the mushrooms were being sold for less than the cost of production.

Based on information supplied by the Coalition, the preliminary investigation

concluded that there was reason to believe that the Chinese mushroom imports

were, or were likely to be, sold at less than fair value (A-8).

Carbon Steel Plate

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Carbon steel plate investigations are quite popular with the USITC. Since

1980, at least 80 investigations have been launched against companies in numerous

countries that export this product to the United States (USITC 1997a: D-3-6). In

November, 1996 the Commerce Department launched the present investigation of

Chinese carbon steel plate as a result of petitions filed by Geneva Steel Company

and Gulf States Steel, Inc., which alleged that imports from the People's Republic

of China, Russia, Ukraine and South Africa are being, or are likely to be, sold in

the United States at less than fair value, and that such imports are materially

injuring, or threatening material injury to a U.S. industry (USITC 1996a: A-6). At

first, it was questionable whether there was sufficient support for the petition, since

Section 732(c)(4)(A) of the Tariff Act of 1930 requires that the petition be

supported by companies comprising at least 25 percent of the total production of the

domestic like product and more than 50 percent of the production of the domestic

like product produced by that portion of the industry expressing support for, or

opposition to, the petition. That question was laid to rest when the petition was

amended to include support from Bethlehem Steel Corporation, the U.S. Steel

Group and the United Steelworkers of America.

Since China is classified as a nonmarket economy, normal value for

Chinese production is based on factors of production that exist in some surrogate

country. The petitioners selected Indonesia as the primary surrogate country, since

Indonesia is at a comparable level of economic development and since it is a

significant producer of comparable merchandise. The petitioners were not able to

obtain port unloading charges for Indonesia, so they used the lowest charge

applicable to Brazil, based on a news article. Overhead, SG&A and profit

percentages were estimated using India as the surrogate country. Based on these

data, the Commerce Department estimated the dumping margins to range from

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10.01% to 45.84% (USITC 1996a: A-7). Under the terms of the final agreement,

Chinese plate exports are limited to 150,000 metric tons between November 1,

1997 and October 31, 1998. Weighted average dumping margins at the final stage

ranged from 17.33 percent to 128.59 percent (USITC 1997a: I-2).

Collated Roofing Nails

The Commerce Department launched this investigation as a result of the

petition filed in November, 1996 by the Paslode Division of Illinois Tool Works,

Inc, which alleged that Chinese collated roofing nails are, or are likely to be, sold in

the United States at less than fair value, and that a U.S. industry is likely to be

materially injured, or threatened with material injury as a result.

Since China is classified as a nonmarket country, a surrogate country must

be chosen for cost comparisons. India was chosen because its per capita gross

national product is relatively close to that of China, and because India produces

comparable merchandise. Using this information, preliminary antidumping

margins ranged from 106.08% to 118.41% (USITC 1997e: A-5 & 6). Final

dumping margins ranged from 0 percent to 40.28 percent (USITC 1997b: A-17).

Persulfates

The Commerce Department launched an antidumping investigation of the

Chinese persulfate industry as the result of a petition filed in July, 1996 by FMC

Corporation of Chicago. Based on an examination of the evidence, it found that

there was a reasonable indication that an industry in the United States was

threatened with material injury by reason of imports from China (USITC 1996b: v).

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Since China is classified as a nonmarket economy, a surrogate country was

chosen in order to determine equivalent costs. The petitioner chose India to value

factors of production, in this case, since India is the only persulfate producer

among surrogate countries that the Commerce Department typically uses for the

PRC. Based on comparisons of export prices with the normal values the petitioner

constructed from factors of production, dumping margins were determined to range

from 15.87% to 182.37% (USITC 1996b: A-6). The final determination found that

Chinese persulfates were being, or were likely to be, sold in the United States for

less than fair value (USITC 1997c: A-5). Dumping margins in the final

determination ranged from 40.97% to 134% (USITC 1997c: A-18).

Brake Drums and Rotors

This investigation was launched as the result of a petition filed by the

Coalition for the Preservation of American Brake Drum and Rotor Aftermarket,

which consisted of manufacturers from Illinois, California, Pennsylvania and

Missouri (USITC 1996c: B-3). The Coalition alleged that Chinese brake drums and

rotors were, or were likely to be, sold in the United States at less than fair value.

(USITC 1996c: B-4). Since China is classified as a nonmarket economy, India

was used as a surrogate country to estimate some Chinese costs (USITC 1997d: A-

11). Based on information furnished by the petitioner, the Commerce Department

found, at the preliminary level, that the Chinese were guilty, and calculated

dumping margins ranging from 46.76 percent to 105.56 percent for brake drums

and from 52.08 percent to 62.55 percent for brake rotors (USITC 1996c: B-5). At

the final stage, termination agreements were entered into. Dumping margins for

brake drums ranged from 0 percent to a China-wide rate of 86.02 percent. For

brake rotors, the final margins ranged between zero and 43.32 percent (USITC

1997d: A-17).

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Concluding Comments
The antidumping laws are based on a number of faulty premises. For one

thing, actual dumping rarely occurs, because if it did, the company that does the

dumping would probably go out of business. There are instances where a company

sells its products, either in foreign or domestic markets, at less than the cost of

production. Where this practice does occur, it is usually for good business reasons

-- the alternative to selling below cost may be to not sell at all. This is certainly the

case for wilting flowers or aging tomatoes. Very seldom do companies sell at less

than cost to drive out the competition with the intent of later capturing market share.

The numerous studies that have been done on predatory pricing have either found

that predatory pricing does not exist, or if it does exist, it benefits consumers.

Another faulty premise is that dumping is bad for the economy. If a foreign

producer does sell below cost, or for a lower price than in its home market (these

are the two criteria for dumping), the practice benefits consumers -- the general

public. Domestic producers are harmed, but domestic producers constitute a small

minority, although a concentrated one. In practice, the antidumping laws have been

used as protectionist clubs by these special interest groups -- domestic producers --

to batter the competition at the expense of the general public.

Another flaw, a philosophical one, is the concept that one producer should

be punished for harming another producer. There is a vast difference between

being harmed and having your rights violated. For example, if a supermarket

opens up across the street from a small, mom and pop grocery store, mom and pop

will likely be harmed, but they will not have their rights violated. They have no

right to sell products to consumers who do not want to buy from them. But the

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antidumping laws go a step further down this illogical road. They would punish

foreign producers for doing business domestically if there is a mere threat of harm

to a domestic industry. Thus, they are punished for something that they merely

might do in the future. If such a theory were applied to criminal law in the United

States, it would lead to the incarceration of anyone who fits a criminal profile

whether they were actually guilty of breaking the law or not. Yet the antidumping

laws regularly use such a yardstick to determine whether a foreign producer should

be punished.

A number of other flaws too numerous to mention here infect the

antidumping laws. But these flaws have been pointed out elsewhere (McGee 1993;

1994). The main point is that antidumping laws have become much more important

since the conclusion of the Uruguay Round and the founding of the World Trade

Organization. Now, more than 120 countries have these laws at their disposal.

The potential for abuse is great and growing. It is reasonable to expect that, as

domestic producers in these countries become aware that they can use these laws to

prevent foreign producers from offering their goods in domestic markets at low

prices, they will make use of these laws, which benefit domestic producers at the

expense of the general public. The antidumping laws will become the biggest

weapon of protectionists as tariffs and quotas fade away. Reform is not the

answer, since these laws are based on incorrect premises. The only solution is

outright repeal, the sooner the better.

Unfortunately, it is unlikely that the antidumping laws will be repealed by

the WTO and its 120+ signatories in the near future. As a result, antidumping laws

will have an increasingly important effect on world trade, especially in the case of

China, since the PRC is the number one target of antidumping actions.

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Antidumping laws can become one of the major challenges to trade with China in

the twenty-first century.

The Uruguay Round diminished the effectiveness of tariffs and quotas as

protectionist tools, but antidumping laws have become more important.

Antidumping laws are likely to become the protectionist tool of choice, and will

likely be used to keep Chinese goods out of foreign markets. Thus, a major

challenge to trade with China will be how to find ways to conduct business with

China without running afoul of the antidumping laws, or how to circumvent the

antidumping laws when they are used to block trade. These laws will likely result

in high antidumping duties in many cases. These duties will have exactly the same

effect that tariffs had in the past -- they will increase prices to consumers and make

Chinese goods less competitive in international markets. In some cases, Chinese

goods will not be able to cross borders at all, and thus will have the same effect on

international trade as did quotas in the past.

The best solution to this impending problem is outright repeal, as was stated
previously. However, until repeal can be accomplished, ways must be found to
minimize the adverse effects that the implementation of antidumping laws will have
on international trade.

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Bovard, James (1992, June 8). U.S. Protectionists Claim a Russian Victim. Wall
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Bovard, James (1991). The Fair Trade Fraud. New York: St. Martin's Press.

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Brown, Terry (1997). Chinese Crawfish: Let Them Dump. Loyola Student
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