Non‐equivalent pass‐through of anti‐dumping duties, countervailing duties and import tariffs

• Author: Alexandre Skiba,Dmitri Nizovtsev
• Date: 01 January 2020
• DOI: http://doi.org/10.1111/twec.12849
• Published date: 01 January 2020

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wileyonlinelibrary.com/journal/twec World Econ. 2020;43:170–190.

© 2019 John Wiley & Sons Ltd

Received: 10 September 2018

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Revised: 13 March 2019

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Accepted: 25 June 2019

DOI: 10.1111/twec.12849

ORIGINAL ARTICLE

Non‐equivalent pass‐through of anti‐dumping

duties, countervailing duties and import tariffs

DmitriNizovtsev1

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AlexandreSkiba2

1School of Business,Washburn University, Topeka, KS, USA

2Department of Economics,University of Wyoming, Laramie, WY, USA

KEYWORDS

anti‐dumping duties, countervailing duties, pass‐through, tariffs, trade barriers

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INTRODUCTION

Most protectionist tools are controversial because they benefit select domestic industries at the ex-

pense of everyone else, leading to an overall welfare loss. They differ, however, in their mechanism,

effects and the political considerations involved. Those differences often determine their effect on the

extent of import competition in a country and, ultimately, the country's aggregate welfare. A better

understanding of those differences allows for better trade policy choices.

This paper contributes to the body of literature on the effects of trade barriers on exporters' pricing

behaviour. Import prices play an important role in understanding the effects of trade due to their strong

connection to trade volumes, profits and welfare. More specifically, we examine the short‐run pass‐

through of anti‐dumping (AD) duties, countervailing (CV) duties and tariffs into US import prices.

Using monthly product‐level data on US imports, we find strong empirical evidence that different

barriers affect import prices differently. Consistent with our theory, the pass‐through of AD duties is

higher than that of tariffs or CV duties.

Trade restrictions occupy a special place among trade frictions because, in contrast to exchange

rates1 or transportation costs,2 they are under the direct control of policymakers. Among the full set

of trade restrictions, we are interested in import duties because they directly affect import prices,

which then affect trade volume, domestic firms' profits and welfare. Accordingly, the strand of re-

search that focuses on the pass‐through of import duties is most directly related to the topic of our

paper.

1 A large body of literature on exchange rate pass‐through has concluded that the pass‐through of exchange rates is incomplete

and occurs with a substantial delay (Campa & Goldberg, 2005; Gopinath & Itskhoki, 2010; Menon, 1996; Salehizadeh &

Raafat, 2012). For an overview of earlier work on this topic, see Menon (1995) and Goldberg & Knetter (1997).

2 Hummels & Skiba (2004) and Martin (2012) examined the effect of transportation costs on prices, but addressed the issue of

pass‐through in a context different from ours.

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NIZOVTSEV aNd SKIBa

As numerous country and product‐specific studies of tariffs (Feenstra, 1989; Han, Liu, Ural

Marchand, & Zhang, 2016; Mallick & Marques, 2008; Pompelli & Pick, 1990; Rezitis & Brown,

1999) have found, akin to the effect of exchange rates, the pass‐through of tariffs is usually less than

perfect.3 Nizovtsev & Skiba (2016) obtained a similar result for a broad set of products subject to AD

duties. Prusa & Vermulst (2013) and Kelly (2014) argued for less‐than‐perfect pass‐through of export-

ing countries' subsidies.

Prior literature offered multiple explanations for the incomplete pass‐through of various trade

barriers. Several studies argued that the pass‐through may appear incomplete due to the entry and

exit of firms in response to cost shocks (Berman, Martin, & Mayer, 2012) or the introduction of

new products (Gagnon, Mandel, & Vigfusson, 2012; Nakamura & Steinsson, 2012). Other works

attributed incomplete pass‐through to the transitory nature of cost shocks (Choi, 2013), the presence

of local distribution costs or other non‐tradable cost components in the importing economy (Burstein,

Neves, & Rebelo, 2003; Corsetti & Dedola, 2005), price rigidity that may manifest in numerous forms

(Devereux & Yetman, 2010; Gopinath & Itskhoki, 2010), and the ‘optimal tariff’ argument or a large

importing country's ability to affect world prices and therefore force exporters to absorb part of the

shock.

Our theoretical model, however, belongs to the strand of pass‐through studies that build on the

‘pricing‐to‐market’ model (Krugman, 1986), which emphasises the imperfectly competitive nature

of the export market. Consistent with the theory of imperfectly competitive markets, changes in trade

cost components may not be fully reflected in final product prices but, instead, absorbed by profit

margins or markups, as shown in numerous prior works (Alessandria & Kaboski, 2011; Berner, Birg,

& Boddin, 2017; Campa & Goldberg, 2005; Goldberg & Knetter, 1997; Gullstrand, Olofsdotter,

& Thede, 2014; Han et al., 2016). Additionally, Nicita (2009) and Ural Marchand (2012) found

evidence of spatial tariff pass‐through heterogeneity that was consistent with the pricing‐to‐market

hypothesis.

Anti‐dumping duties are characterised by the unique institutional details of their implementation,

which differs from that of tariffs or any other duties, as pointed out in Blonigen & Haynes (2002),

among others. Based on this difference, we expect AD duties to affect the decisions of price‐setting

firms differently and therefore stand out among other trade barriers in terms of pass‐through.4

Specifically, the pass‐through of the AD duties may be more than complete if foreign firms adjust

border price upwards with the intent of having the AD duties reduced upon an administrative review.

Several prior studies estimate AD duties pass‐through empirically. Sandkamp (2018) found evidence

of more than complete pass‐through using a broad sample of EU imports. Existing industry‐specific

studies (Blonigen & Haynes, 2002; Cohen‐Meidan, 2013; Duc, 2010) reported a wide variety of pass‐

through estimates, whereas firm‐level data studies of Chinese exporters to the US and EU (Felbermayr

& Sandkamp, 2018; Lu, Tao, & Zhigang, 2013) failed to detect any price reaction to the AD duties.

In an attempt to provide a consistent comparison of the effects of tariffs and AD duties, this paper

focuses on systematic differences across trade barriers. Similar comparisons across trade policy tools

were previously made. For example, Feenstra & Lewis (1991) compared tariffs and quantitative

3 Additionally, Blonigen & Haynes (2002) showed that the presence of tariffs affects the exchange rate pass‐through. Knetter

(1994) derived a similar result for quantitative trade restrictions.

4 Prior work associated AD measures with increases in the importing country prices (Avsar, 2013; Ganguli, 2008; Prusa,

2001) and welfare losses that exceed those from other trade policy measures (Gallaway et al., 1999; Messerlin, 2001).

Additionally, it has been repeatedly noted that AD duties are being used more frequently, by more countries, and against

more products than ever before and that the importance of AD legislation and practices is not likely to diminish anytime soon

(Blonigen & Prusa, 2016; Bown, 2011; Irwin, 2005; Prusa, 2005; Zanardi, 2006).