Anti‐dumping Duty and Firm Heterogeneity: Evidence from Korea

• Date: 01 September 2017
• Published date: 01 September 2017
• DOI: http://doi.org/10.1111/twec.12463
• Author: Seungrae Lee,Joo Yeon Sun

Anti-dumping Duty and Firm

Heterogeneity: Evidence from Korea

Joo Yeon Sun

1

and Seungrae Lee

2

1

Global Leadership Division, Yonsei University, Seodaemun-gu, Seoul, Korea and

2

School of Economics

and Trade, Kyungpook National University, Buk-gu, Daegu, Korea

1. INTRODUCTION

ANTI-DUMPING (AD) duties are tariffs in addition to ordinary custom duties that are

imposed by an importing country to counteract certain ‘unfair’ pricing practices by foreign

private firms that cause genuine injury to the competing domestic industry (Sykes, 2008). In

other words, when foreign firms export products at a price lower than the price they charge in

their own home market, government agencies impose AD duties by calculating the dumping

margin to protect their domestic import-competing industries. While governments can also adopt

other measures such as countervailing duties and safeguard measures, due to its arbitrary rules

and unlikelihood of provoking trade retaliation, AD duties are known to be the most po pular

instruments among importing countries for deliberate restriction of international trade.

1

In this study, we analyse the impact of AD imposition on domestic import-competing firms by

using data on Korean AD cases between 2000 and 2010, an emerging economy where an increas-

ing number of AD investigations were initiated and temporary duties that typically last three or

five years after the starting date were imposed over the post-WTO period (1995–2012).

2

We first

identify a 10-digit HS products accused of dumping and their corresponding import-competing

firms by obtaining AD case reports from the Korea Trade Commission. Using the firm-level data,

This paper is a revised and updated version of KIEP Working Paper. This manuscript has benefited from

comments by the editor, Chris Milner, and two anonymous referees. The authors thank Dooyeon Cho, Ju

Hyun Pyun and Young Gui Kim for their helpful comments and suggestions on an earlier draft. All

remaining errors are the authors’ responsibility.

1

Countervailing duties are tariffs in addition to ordinary custom duties that are imposed to counteract

certain subsidies bestowed on exporters by their governments. Alternatively, safeguard measures are

defined as temporary trade restrictions, typically tariffs or quotas, which are imposed in response to

import surges that could lead to ‘serious injury’ to a competing industry in importing countries. While

there is no concrete answer as to why countries frequently use AD measures, many economists point out

its arbitrary rules and unlikelihood of provoking trade retaliation. In particular, since WTO AD rules are

not grounded on microeconomics, any investigative authority can impose WTO-consistent AD duties

under any possible scenario. For instance, while dumping should be determined by investigating price

behaviour of foreign firms, in many reported cases, dumping is determined based on foreign firms’ prof-

itability rather than price. Moreover, unlike the safeguard statute, WTO AD rules are known for not

requiring the AD duty-imposing country to offer compensating tariff reduction to the affected country.

2

According to the Korea Trade Commission reports and statistics, Korea has initiated 121 AD investi-

gations and eight safeguard investigations over the post-WTO period, while 25 AD and 25 safeguard

investigations were initiated during the pre-WTO period (1987–94). Examining the countries accused of

dumping, while developed countries such as the European Community, Japan and the United States,

accounted for 52 per cent of all AD investigations during the pre-WTO period, developing countries

accounted for 62.7 per cent of all AD investigations over the post-WTO period. Among these developing

countries, in particular, 73 per cent of AD investigations were initiated against Asian countries, of which

China accounted for the largest share (33 per cent).

©2016 John Wiley & Sons Ltd 2007

The World Economy (2017)

doi: 10.1111/twec.12463

The World Economy

we obtain the output and input measures for firms that are directly affected by AD measures and

estimate the firm-level total factor productivity (TFP) before and after the AD imposition. We

then specify a difference-in-difference (DID) framework to compare firm productivity changes in

a treatment group that receives the AD protection to a control group that does not.

Contrary to previous trade policy literature, our estimation results show that Korean AD

imposition significantly reduces the average productivity of protected firms during the period

that AD duties were imposed. The negative impact of AD imposition is robust when price

movements are controlled for and different types of control groups that did not receive tempo-

rary protection are considered. These include firms in AD termination cases that filed for tem-

porary protection but were not granted and firms in sectors similar to treated sectors but never

filed nor received AD protection.

To explain the channels where the average productivity loss comes from, we examine the

changes in external market condition and internal resource allocation during the AD protection

period. Using the Herfindahl-Hirschman Index to capture external market conditions, we first

find that the average productivity loss appears to be evident inside highly concentrated import-

competing sectors. However, using firm-specific variables that represent tangible and intangible

fixed assets, R&D investment and labour shedding, we find no evidence of the changes in inter-

nal resource allocation that induce productivity loss during the AD protection period. Consider-

ing that most of the Korean dumping complaints operate businesses abroad via foreign direct

investment (FDI), we examine firms’ FDI activities during the AD protection period. Using addi -

tional foreign affiliate-level data, we find that the average protected firms are more likel y to

increase FDI and productivity of its foreign affiliates during the AD protection period.

To analyse the mechanism behind the FDI increase by firms in AD industries, we conduct sev-

eral experiments. While we find no significant relationship between FDI activities and industry

concentration level or evidence of firm’s engagement in the intra-firm trade that affects FDI activ-

ity, we find that FDI activities are significantly related to domestic activities during the AD pro-

tection period. Estimating the effects of domestic production and investment on FDI, we find that

the increase in FDI and foreign affiliate productivity level is associated with a decrease in domes-

tic production and investment during the AD protection period. When including firms in the

expiry review cases where the protection is extended for additional years after the initial protec-

tion, we find that FDI and foreign affiliate productivity increases are more evident at the expense

of domestic production and investment during the period before the protection ends.

This study makes significant contributions to the trade policy literature. First, by using

micro-level data set of Korean firms, we evaluate the effects of AD imposition on perfor-

mance and behaviour of firms that receive a temporary protection. When examining the

effects of AD imposition on import-competing sectors, many prior trade studies have focused

on the benefits that firms receive from temporary protection by using AD cases in developed

countries, such as the EU and the United States.

3

Using aggregate annual data across the US

3

Several trade studies also analyse foreign exporting firms’ behavioural responses to AD duties; for

instance, Anderson (1992, 1993), Blonigen and Ohno (1998), Blonigen and Park (2004) examine firms’

dumping behaviour under different ex ante expectations that AD investigation will likely occur, while

Blonigen and Haynes (2002) study firms’ pricing behaviour under AD duties. Moreover, considering that

AD procedures reveal cost information of domestic and foreign firms through the injury inquiry and

dumping margin determination, Staiger and Wolak (1992b), Prusa (1992), Hartigan (1994), Veugelers

and Vandenbussche (1999) examine AD duty effects on collusive behaviour between domestic and for-

eign firms in a protected market.

©2016 John Wiley & Sons Ltd

2008 J. Y. SUN AND S. LEE