Dimensions: 9'' x 6'' 92 pages AEI Press  (Washington) Publication Date: December 2003 Paperback ISBN: 084477168-6 Price: $ 15.00 Add to Cart   Examination Copies

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January 2004
High-Tech Protectionism: The Irrationality of Antidumping Laws
By Claude E. Barfield

This study presents a powerful indictment of antidumping laws and actions pursued by the United States and other members of the world trading community in attempts to protect domestic industries. The author charges that antidumping measures are "fundamentally at odds with the free trade policies that have dramatically increased global welfare over the past half century."

AEI resident scholar Claude E. Barfield is the author of several books, including Free Trade, Sovereignty, Democracy: The Future of the World Trade Organization (AEI Press, 2001).

Antidumping actions have proliferated over the past decade, and U.S. firms are being increasingly targeted by foreign governments and competitors. Countries such as India, South Africa, Mexico, and Argentina have joined the United States, the European Union, and Canada as the most frequent users of antidumping actions, and at the end of 2002, the United States stood third behind China and South Korea as the most popular target of antidumping investigations, with 115 investigations initiated by eighteen different countries. The United States and the European Union currently have over 250 and 200 antidumping measures in place, respectively.

It should come as no surprise then that reform of the World Trade Organization antidumping rules has emerged as a hotly debated topic in the Doha Round of multilateral trade negotiations. Leading developing countries in the WTO--China, Brazil, Argentina, South Korea, and Egypt--have vowed to hold all other negotiating issues hostage to fundamental changes in the antidumping regime. This means that without serious reform, U.S. goals in services, industrial tariffs, and agriculture will be unattainable. And yet, despite this reality, Congress has strongly warned the U.S. Trade Representative not to agree to major change and compromise.

This study demonstrates, through four case studies, the unintended, negative consequences for the U.S. economy of attempts to protect high-technology sectors through antidumping actions. The book concludes with a chapter of specific recommendations for fundamental reforms, starting with abolition of the current system and, if that should prove politically impossible, changes to make antidumping laws more rational economically.

Antidumping and High-Tech Global Competition

While the application of antidumping laws is problematic in any sector, it particularly irrational in high-technology sectors for three primary reasons. First, given the inherently dynamic nature of high-technology industries, specific products which have duties imposed upon them are often obsolete by the time an antidumping case is resolved. In semiconductors, for instance, there is a empirically valid rule of thumb that the capacity of semiconductor chips doubles every eighteen months. Under such conditions, the petitioner in the domestic market rarely gets meaningful relief--as the case study herein on semiconductors shows. Second, identifying so-called "strategic industries" (that is, industries that are key to high-tech competitive leadership) is always a fool's errand. An item labeled "strategic" in one year may become a mere commodity a few years later. Third, the high degree of multi-sourcing from different countries--a hallmark of competition in high-sectors--will inevitably result in a situation where antidumping duties on one component impair the competitiveness of the final product in world markets.

To illustrate the above points in more detail and to provide a backdrop for reform of the current protectionist system, this study traces the history and negative consequences of antidumping industrial policy for four sectors: dynamic-random-access-memory semiconductor chips (DRAMs); flat-panel television screens; supercomputers; and steel. What follows are brief histories of three of those industries: DRAMs, FPDs, and steel.

Semiconductors. U.S. firms pioneered in the creation of the semiconductor technology and until the end of the 1970s controlled over 60 percent of world markets. Through a combination of licensing and targeted government support, however, by the mid-1980s Japan had pulled even with the United States overall and led in the production of the most basic chips, DRAMs. A substantial boom in DRAM sales in the early 1980s was followed by a bust in 1985, when the market for these chips contracted by 60 percent.

A number of U.S. DRAM manufacturers came under extreme competitive pressures, though three-quarters of the decline in their revenues stemmed from the domestic recession and not from Japanese competition. Nonetheless, the U.S. government came under great pressure to intervene and protect the industry. Antidumping cases were filed, and in an unprecedented step (at the time) the U.S. Commerce Department self-initiated an antidumping action. Under these antidumping protectionist threats, Japan capitulated and signed the so-called Semiconductor Trade Agreement in 1986. By mid-1987, Japan had agreed to set a high floor price on DRAMs and to force Japanese semiconductor firms to curtail production and export to the United States. In effect, the United States and Japan colluded to establish a DRAM cartel.

Both negative and unintended consequences ensued. In 1988 and 1989, DRAM prices soared, and Japanese semiconductor companies enjoyed "super-normal" profits, given the high floor price and their production efficiency. A Brookings Institution study calculated that the semiconductor agreement resulted in the transfer of $4-5 billion to Japanese manufacturers from U.S. consumers and companies dependent on semiconductor chips for their final products. Aware that the agreement had made them less competitive in world markets, U.S. computer manufacturers promptly established their own organization to counter such protectionist actions in the future. The agreement did not save the American DRAM manufacturers, all of which left this market within a decade.

Finally, in terms of historical lessons, it is clear that the Pentagon and the U.S. Commerce Department wholly misunderstood the technological trajectory of the semiconductor industry. A 1987 Defense Department report had warned that DRAMs were the key to U.S. technology leadership and that loss of this industry would cripple the ability of U.S. firms to compete in all other high-tech electronic sectors. What the Pentagon failed to understand--a lesson already absorbed by the private sector--was that DRAMs were becoming a high-volume, low-profit, commodity and that the future of U.S. electronic firms was in more advanced microprocessors and specialty chips, along with chip design rather than actual production. It was a costly lesson for the government and for the U.S. economy.

Flat-Panel Television Displays (FPDs). FPDs are a class of advanced display technologies that have emerged to replace traditional cathode-ray tubes because of advantages in weight, smaller power needs, high resolution, and high information content potential. They are now widely utilized in advanced television sets and in computer displays. Though once again, the United States pioneered in the technology, by the l970s Japanese companies took over the market, first through licensing from U.S. firms and then through their own technology contributions based upon their dominance of low-end consumer electronic products such as wristwatches and pocket calculators. By the early 1990s, more than a dozen Japanese firms were competing in the area of advanced displays; and Japanese companies controlled 90 percent of the world FPD market. With the exception of IBM, which had a joint venture with Toshiba, there were no large American companies interested in these technologies. There were, however, a number of very small companies producing for niche markets.

The Defense Advanced Research Projects Agency (DARPA) and the Commerce Department became convinced that--as with DRAMs--FPDs represented a strategic industry the United States could not afford to pass by. Thus, DARPA took the leadership to establish a new industry by subsidizing a number of small firms, organizing meetings to exchange information, and finally, encouraging the companies to file antidumping suits. In 1990, a newly created trade association, the Advanced Display Manufacturing Association (ADMA) filed an antidumping petition against major Japanese companies. The U.S. International Trade Commission in July 1991 authorized dumping duties of over 60 percent.

In making this judgment, the USITC had to accept several novel arguments. U.S. and Japanese computer companies argued strongly that a U.S. FPD industry did not even exist, stating that "most U.S. FPD firms simply are not mass producers" of computer screens. ADMA's argument, which the USITC implicitly accepted, actually did not challenge this assertion by the computer companies. Rather, it urged the government to put in place the antidumping duties in order to allow the creation of a new industry that could compete with Japan.

While the imposition of the 60 percent duties did little to help the fledgling FPD industry (which never did get off the ground), it immediately caused a substantial increase in the price of U.S.-made computers and made them less competitive with Japanese computer manufacturers. Beyond this, it impelled U.S. and foreign computer companies manufacturing in the United States to move plants and jobs offshore. As a Washington Post reporter wrote at the time, "The administration's new tariffs won't hurt the Japanese. . . . The only losers will be American workers who might have had jobs building laptop computers--until the Commerce Department stepped in."

The Clinton administration in the mid-1990s launched one final effort to create a U.S. FPD industry under the always-suspect cloak of national security. In 1994 the administration announced plans for a National Flat Panel Display Initiative that would spend $600 million to build four advanced FPD plants. Several years later, the plan foundered under a wave of criticism. Two things had become clear: one, the administration had greatly underestimated the cost of the program (even though objective observers estimated that it would take at least $3 billion to meet the goal of 15 percent of the world market); two, it had vastly overestimated defense FPD needs over the next several decades (again, more objective experts argued that small, niche plants could more than satisfy DOD requirements).

The formal DOD planning documents went far beyond traditional defense missions and tackled the more difficult tasks of creating and managing private markets. High on the list of actions deemed necessary was the monitoring of world FPD prices and swift intervention with trade sanctions and antidumping actions against firms engaging in alleged predatory dumping. Thus, inevitably, along with subsidy, would have come dumping actions to protect the huge public investment.

Steel. The chapter on steel traces the long, forty-year history of the protection and subsidy of the U.S. steel industry and chronicles the failure of the numerous government interventions to stem the decline of this industry. Indeed, government protection and subsidy only acted to retard needed technological advances and the adjustment of the domestic U.S. steel industry to changing worldwide competitive conditions. The most important points made concerning this depressing history are the following:

For more than three decades, the steel industry has been the most prolific user of U.S. antidumping laws. From 1970 through 2002, of the 258 antidumping suits instituted, 123 dealt with steel products. In turn, this protective umbrella eased pressures on the integrated steel industry to introduce technological upgrading, such as continuous casting, which eliminated many production steps, both Japan and Europe introduced and widely used this technology a decade ahead of U.S. steel companies.

Trade protection also impeded the advance of the more efficient and technologically advanced minimills from the late 1970s through the 1990s. Still, these mills, which utilized electric arc furnaces to transform steel scrap into finished steel products, represented the real competition for the increasingly obsolete integrated steel dinosaurs. Today, minimills produce half of all domestic steel products, and they have moved steadily up the technological ladder to compete with ever more sophisticated steel products. Though the integrated mills lag behind the minimills, in both cases it is increased productivity and not primarily foreign competition that is responsible for declining employment in the steel sector.  

The most important public policy lessons from the dreary history of government intervention to protect the U.S. steel industry are:

• Neither public subsidy nor almost continuous protection can roll back technological change and shifting comparative advantage. While a recent study estimated that it received subsidies of more than $16 billion over the past thirty years, the U.S. steel industry has shrunk dramatically, with employment down by two-thirds and capitalization only one-tenth of its former valuation.
• Second, the costs of steel protection to the U.S. economy and U.S. consumers have far outweighed the benefits to the steel industry. One study has calculated that if antidumping duties and safeguards actions cut steel imports by 15 percent, it would save 6,000 steel production jobs. But the cost to downstream companies and consumers would be $2.7 billion, or $450,000 per job saved. In addition, some 18,000 jobs in steel-using industries would be lost. This is hardly a good bargain for the U.S. economy or U.S. workers.
• Third, national security arguments in favor of steel protection are spurious. Even the U.S. Commerce Department, the very font of misguided antidumping protection for U.S. companies, has admitted that national defense requirements for finished steel are "very low" and "can readily be satisfied" by current domestic production.

Proposed Reforms of the Antidumping Regime

Given the power of domestic producers in alliance with sympathetic government officials, fundamental changes to current protectionist antidumping regimes will be difficult. For that reason, many advocates of reform in recent years have retreated to incremental and highly technical changes to begin to redress the bias against importers and consumers. This study endorses a number of these proposals but argues that for two reasons, fundamental, systemic reforms should be placed at the top of the agenda: first, because it is imperative to drive home the basic truth to politicians and the public that current antidumping rules are intellectually without foundation, even on their own terms, and second, given the sophistication and cunning of proponents (and their lawyers) over time, technical changes are likely to be twisted and revised back in a protectionist direction. The study advances a series of fundamental alternative options:

• Repeal antidumping laws and substitute antitrust actions.
• If repeal proves impossible, amend existing laws to force petitioners for antidumping actions to prove that foreign companies are operating out of a "sanctuary market" that allows them to price their product at less than fair market value.
• Amend existing rules to provide that the petitioner and the government antidumping authority be mandated to identify purported competition-distorting policies and private practices that create the alleged sanctuary market and establish a causal connection with injurious dumping by the foreign exporter.
• A National Interest Test should be established for determining remedies in antidumping cases. The antidumping rules should allow for an assessment of the costs and benefits of individual antidumping actions across the entire economy--and not be limited as now to evaluating the impact on the domestic producer.
• In certain circumstances, the president should be given the authority to intervene, invoke a national interest test, and craft a solution that is based upon economy-wide considerations and other U.S. national goals.
• Lastly, national trade remedy actions should be shifted away from antidumping toward the greater use of safeguards actions, As presently administered, safeguards actions have the positive benefits of avoiding spurious claims that importers have used "unfair" trade tactics; and of providing greater flexibility in that the president can take into account total national economic welfare in crafting a workout solution for the industry.