All Commentary
Monday, November 1, 1999

Fist of Steel

America Disguises U.S. Protectionism Behind the Veil of Anti-Dumping

Dale DeBoer is an assistant professor of economics at the University of Colorado, Colorado Springs.

Last year was bad for U.S. steel producers. Imports jumped to historic highs, and domestic prices fell. Corporate steel profits collapsed, and almost six percent of steelworkers lost their jobs. Crying foul, steel producers appealed for relief under U.S. international trade laws. The Clinton administration initiated an anti-dumping investigation against several countries, including Japan, Brazil, South Korea, and Russia. Early in 1999 Congress went further by pushing for quotas on steel imports. Together these efforts appear to be reducing the threat to U.S. steel interests: imports are falling. But at what cost to the U.S. economy as a whole?

The influx of steel imports into the United States is largely an outgrowth of the global economic turmoil of 1998. To understand this, consider the position of two fictional steel producers—Steel Amalgam in the United States and Mitsu Steel in Japan. In the early months of 1998 both plan their steel production, expecting a price of $100 per unit in the United States and 12,900 yen per unit in Japan. At the going exchange rate of 129 yen per dollar the price in both countries is comparable. Both producers begin making steel, incurring costs of $95 per unit here and 12,255 yen per unit in Japan ($95 per unit times 129 yen per dollar).

Unfortunately, demand for steel in Japan begins to decline because of its recession. Falling real output in Japan drives down the demand for steel. As the demand falls (following the logic of supply and demand) the price of steel in Japan begins to fall (by 5 to 7 percent at the wholesale level). At the same time the exchange rate between the Japanese yen and the U.S. dollar begins to change—increasing to 140 yen per dollar. All this makes it much more attractive to Mitsu Steel to sell its product here, where it can earn 14,000 yen per unit of steel ($100 per unit times 140 yen per dollar) rather than 11,977 to 12,255 yen per unit in Japan (reflecting the fall in prices there). So Mitsu Steel increases its sales to the United States, leading to the situation described above. Steel Amalgam sees the price here fall because of the increased supply from abroad—cutting profits. This forces Steel Amalgam to cut back on its current production, leading to layoffs.

Essentially this is what happened in 1998. Since the turmoil of 1998 involved many large steel-producing countries, the loss imposed on U.S. steel interests was large. Therefore, U.S. steel producers sought the protection offered by the trade laws.

Anti-Dumping Laws

Under U.S. law, dumping occurs (1) when a product is sold in the U.S. market at a lower price than in the producing country’s market or (2) when a product is sold in the U.S. market at a price lower than the cost of production. For relief to be granted, one of these conditions must hold and it must be shown that harm resulted from the dumping. From the example, it should be clear how both types of dumping occurred. The yen price of steel here is 14,000 versus 12,000 in Japan. Further, Mitsu Steel incurred costs of 12,255 yen in producing the steel. At the time of production, this was equivalent to 95 dollars. When it sold the steel the sales price in Japan had fallen to 87 dollars (12,255 yen divided by 140 yen per dollar), leaving the dollar sales price less than the dollar cost of production. This satisfies the definition of dumping. Additionally, “harm” was done to the United States. The expansion of imports pushed steel prices down, damaging the profit position of U.S. steel firms and the employment of U.S. steelworkers. So the behavior of the foreign producers is legally actionable under American law.

Notice that the harm to the U.S. firms and workers is the same harm caused by any import—the only distinction in this case is that the influx of imports was sudden, because of rapidly changing conditions in foreign markets. The Japanese export of automobiles to the United States reduces sales of U.S. automobiles, caps the price that can be charged by U.S. automakers, and lowers employment in the U.S. automobile industry.

Should we therefore conclude that all imports harm the United States? Of course not; this discussion leaves out one important element: the benefit to the purchaser of an import. The benefits to the purchaser include getting an item at a lower price, being exposed to greater variety, and because of lower prices, being able to purchase more items. In the case of steel, the beneficiaries are U.S. firms that use steel to make other products (cars, for example) and their consumers.

The benefits of imports most likely do not end with the consumers, however. Competition from abroad spurs a competitive response from U.S. producers, who must become more efficient if they wish to maintain their market position. If they fail to respond, they go out of business. This is the harsh reality of a market economy. It is also a key to its great productivity.

Advocates of anti-dumping laws have a ready rejoinder. Regular imports are acceptable and do offer the advantages enumerated. But products that are dumped are different because dumping is predatory! Predatory behavior is directed at eliminating competition. By doing so, a producer gains an opportunity to earn long-term monopoly profits. Reality does not lend support to this claim. As every first-year student of economics knows, monopoly power and profits arise only if a barrier to entry into the market exists. Since viable steel firms currently operate in the United States, no barrier exists. Even if these firms close, their factories and tools will still exist. The workers currently employed by these firms will still possess their skills. Even if domestic production ends, the firm could easily reopen once a foreign firm began exercising its monopoly power. The only force that would prevent a reopening of a domestic firm is perpetual dumping. If the predation never ended, some other country would be permanently using its domestic resources to give the United States steel cheaper than it can be domestically produced. Rather than complaining we should be offering them thanks for the gift!

Two More Tries

The defense of anti-dumping laws does not end with claims of predatory behavior. A common plea invokes special circumstances, for example, that the industry affected is either an infant or senescent industry. An infant industry is said to be one that has not developed to where it can withstand the full rigors of international competition. If exposed to the wind of foreign competition it will die like a sapling exposed to a hurricane. A senescent industry is one currently in decline and saddled with old capital and dated technology. Like its infant relative, it cannot stand up to the forces of competition. Dumping would presumably drive it out of business.

A claim that the affected industry is either infant or senescent is prone to a common weakness. If an industry is not capable of competing in the international arena, granting the industry protection does not guarantee its survival or growth. An industry or a firm is not a biological entity that will grow and strengthen if provided proper nutrients and shelter. Rather an industry needs an inducement to improve.

In the absence of competitive pressure firms face no need to improve and are as likely to stagnate in their current noncompetitive position as to evolve into more efficient producers. This logic is more binding on a senescent industry than it is on an infant industry. A senescent industry has fallen from a competitive position to a noncompetitive position. This indicates that the industry does not possess the requisite competitive instinct demanded by a market economy. Justifying protection for such an industry requires making a heroic assumption that given protection the firms in the industry will change their past inefficient behavior. If a firm has not responded to competitive pressure in the past, it seems unlikely that it will become competitive in the absence of competition. Therefore, this line of reasoning likely only codifies the protection of inherently poor producers.

Another special circumstance used to justify anti-dumping protection is that the affected industry is a “strategic” industry. A strategic industry produces a product critical to the long-term health of the economy or society. For instance, the production of weapons of national defense is often considered strategic production. In times of conflict the continued existence of the nation could be threatened if the United States relied on importation of weaponry. This would be a very strong argument but for three concerns. First, how is an item with strategic value to be identified? The Japanese have relied on this argument for protection of their domestic agricultural industry (“We don’t want to rely on imported grains during times of war!”). Through creative argument nearly anything can be turned into a product with strategic value (“We must protect television production because during times of war we will need the ability to produce screens for weapon-imaging systems!”). Before legitimating this argument, one must be careful to determine that the item in question has significant strategic importance.

Second, the strategic-interest argument only has force if domestic production is completely eliminated. This has not occurred with any industry for which a clearly defined strategic interest exists. Third, the industries where anti-dumping actions are most commonly taken (for example, textiles) clearly do not have significant strategic value.

It’s Not Just Us

Anti-dumping laws in the United States appear to be a backdoor effort to gain protection for industries that do not like the effects of global competition. It is natural that they do not like this competition; they must work harder to make a profit and maintain market share. But the gains to everyone else are great. The excuse of dumping to promote protectionism attempts to justify disreputable policies. This is true not just for the United States but for foreign countries as well, though the United States, with 294 anti-dumping orders in force, followed by the European Union with 135, is the greatest exploiter of this justification. By disguising U.S. protectionism behind the veil of anti-dumping, America deprives itself of the short-term gains of foreign products and long-term gains of greater efficiency.