Economics and the International Trade Commission.

• Author: Devault, James M.

1. Introduction

   U.S. trade policy over the last two decades has become increasingly reliant on the U.S. unfair trade laws. These laws have been used primarily to punish foreign firms whose exports to the U.S. are dumped or subsidized. Since the passage of the Trade Agreements Act of 1979, some 950 cases have been completed under the U.S. antidumping and antisubsidy laws, resulting in the imposition of more than 300 punitive duties. The U.S. antidumping and antisubsidy laws have also been the spawning ground for many other trade restrictions, including the steel VRAs negotiated during the 1980s and the U.S. semiconductor agreement with Japan.

   Because the U.S. antidumping and antisubsidy laws are now one of the most important means used to restrict imports, the administration of these laws has come under considerable scrutiny. Many observers are concerned that these laws are being administered in a way which favors U.S. industries. In this paper, I attempt to address some of these concerns by determining the extent to which the administration of the U.S. unfair trade laws is based on the economic criteria specified in the unfair trade legislation. In particular, this study examines the importance of economic criteria in the antidumping and antisubsidy decisions of the International Trade Commission (ITC). The ITC is one of the most important agencies responsible for administering the U.S. unfair trade laws and its role extends beyond these laws into other areas, including the escape clause. The administrative role of the ITC in unfair trade cases is to determine whether unfairly traded imports are a cause of material injury to a domestic industry.

   Many other authors have examined the basis for ITC decisions. The results of Baldwin |3~ and Goldstein and Lenway |8~ provide support for the hypothesis that the ITC uses at least some of the legislated economic criteria appropriately. Both studies examine the escape clause decisions of the ITC and find that industries with declining profitability are more likely to receive favorable ITC decisions. Goldstein and Lenway |8~ also find that the ITC is immune to congressional pressures for protection. Both studies, however, focus solely on escape clause decisions, which represent only a small fraction of ITC decisions and do not involve allegations of unfair trade. Escape clause actions are also different from other ITC decisions in that the president must ultimately decide whether relief is warranted.

   Hansen |9~, Prusa |16~, and Finger, Hall and Nelson, |7~ examine ITC decisions involving unfair imports and find that economic criteria play a minor role in these decisions. This is not very surprising, however, since all three studies are based on aggregated economic data not actually employed in ITC decisions. These studies also provide support for the argument that ITC decisions are political. Hansen's results indicate that ITC decisions are influenced by pressure from influential members of Congress. Both Hansen |9~ and Finger, Hall and Nelson |7~ also find that ITC decisions are positively related to the size of the domestic industry, so that larger industries are more likely to obtain relief through the unfair trade laws.

   The studies which are based on the economic data available to the ITC find that some economic criteria are important in ITC unfair trade decisions. Herander and Schwartz |11~ show that the probability of an affirmative ITC antidumping decision increases as the dumping margin rises and as employment falls. The results of Baldwin and Steagall |4~ indicate that declining domestic shipments are a robust predictor of affirmative ITC antidumping and antisubsidy decisions. Moore |14~, in what is probably the most thorough analysis of ITC decisions, finds that higher profit rates and increasing production and profitability decrease the probability of an affirmative ITC decision.

   All of these authors also find that non-economic factors influence ITC decisions. The most striking results here are obtained by Moore |14~, who finds that ITC decisions are influenced by congressional pressure. Herander and Schwartz |11~ find that ITC decisions are inversely related to the number of firms in the petitioning industry, suggesting that greater industry concentration makes it easier to present a more effective case. Both Moore |14~ and Baldwin and Steagall |4~ find that increases in overall imports or overall import penetration increase the likelihood of affirmative ITC decisions.

   What is to be made of all these results? The results indicate that economic criteria play at least a limited role in ITC decisions. Thus it appears that industries with low and declining profitability and declining shipments or employment are more likely to obtain relief. Two aspects of the results for the economic criteria are troubling, however. First, the studies identify different economic criteria as important. Second, the studies find little connection between the injury which is suffered and the imports supposedly responsible for this injury.(1) Indeed, the results show that increases in overall imports or overall import penetration are far better predictors of affirmative ITC decisions than increases in unfair imports or unfair import penetration. If valid, these findings reduce the U.S. unfair trade laws to a substitute for the escape clause, a practice which is clearly at odds with the GATT.

   Previous studies also indicate that non-economic criteria have a significant impact on ITC unfair trade decisions. The results of both Moore |14~ and Hansen |9~ support the conclusion that certain members of Congress can influence ITC decisions. The findings of Hansen |9~ and Finger et al. |7~ that industry size influences ITC decisions are also disturbing because they suggest that unfair trade cases are not treated equally, a conclusion which finds additional support in the results of Herander and Schwartz |11~.

   In summary, the available evidence indicates that both economic and non-economic criteria play a role in ITC decisions, implying that the ITC does not administer the unfair trade laws in a purely objective or apolitical fashion as it was designed to do. This study attempts to clarify the role of both economic and non-economic criteria in ITC decisions by carefully modeling the methods used by the ITC to evaluate economic criteria. Previous studies have ignored these methods, and as a result, they have not fully identified the role of economic and non-economic criteria in the decisions of the ITC.

   The remainder of the paper is comprised of six sections. The second section provides an overview of the ITC and its role in implementing the U.S. antidumping and antisubsidy laws. The third section describes the methodology used by the ITC in its antidumping and antisubsidy decisions. The fourth and fifth sections describe the data used in the study and the econometric model. The final two sections contain the results and conclusions of the paper.

2. The ITC and the U.S. Antidumping and Antisubsidy Laws

   The ITC is an independent, quasi-judicial government agency which has several other functions in addition to its role as administrator of the U.S. unfair trade laws. Some of these functions include monitoring import levels, analyzing trade policy issues and providing recommendations to the president on certain trade policy questions. The ITC consists of 6 commissioners and a support staff of economists, lawyers and other personnel. The commissioners are appointed by the president and approved by Congress. Under normal circumstances, each commissioner serves one nine-year term which cannot be renewed. The commissioners are responsible for the antidumping and antisubsidy decisions of the ITC as well as for ITC decisions involving a number of other trade matters. Each ITC decision is based on a simple vote with the majority opinion prevailing.(2)

   The role of the ITC in U.S. antidumping and antisubsidy investigations is to determine whether dumped or subsidized imports materially injure or threaten to materially injure a U.S. industry.(3) Each antidumping or antisubsidy case involves a preliminary ruling by the ITC on whether there is a reasonable indication that dumped or subsidized imports have caused or threaten to cause material injury. If the ITC's preliminary ruling is negative, the case is dismissed; if the ruling is affirmative, the case continues. During the sample period considered here, approximately 15% of the ITC's preliminary decisions were negative.

   If the ITC makes an affirmative preliminary decision, the case is then passed over to the International Trade Administration (ITA), an agency of the Department of Commerce. The role of the ITA is to determine whether dumping or subsidization has occurred, and if so, to what extent. If the ITA finds that dumping or subsidization has taken place, then the ITC must render a final decision on the case. If this decision is affirmative, antidumping or countervailing duties will be levied. If the ITC's final decision is negative, the case is dismissed.

   The economic criteria upon which ITC decisions are supposed to be based vary depending on the nature of the injury facing the domestic industry. Different criteria exist for the case in which the domestic industry is experiencing material injury and for the case in which the domestic industry is threatened with material injury. In cases involving actual material injury, the commission is directed by law to consider changes in the following variables: output, sales, market share, profits, productivity, capacity utilization, investment, return on investment, prices, cash flow, inventories, employment, wages, growth, and the industry's ability to raise capital. Also to be considered are changes in the volume and value of the unfair imports, the market penetration of the unfair imports, and the price of these imports. In addition, the law also allows each commissioner to examine any other...