Product Heterogeneity and Cost Allocations in Contingent Trade Protection

• Author: Brian D. Kelly
• Date: 01 September 2014
• Published date: 01 September 2014
• DOI: http://doi.org/10.1111/twec.12209

Product Heterogeneity and Cost

Allocations in Contingent Trade Protection

Brian D. Kelly

Albers School of Business and Economics, Seattle University, Seattle, WA, USA

1. INTRODUCTION

THE World Trade Organization agreements permit signatories to apply a limited set of

contingent trade restrictions to imports. ‘Contingent’ in that they are permitted only if

certain criteria are met, these restrictions are intended to remedy a trade problem rather than

provide simple protection. Narrowly def‌ined, these are the anti-dumping duty, countervailing

duty, and safeguard remedies. The f‌irst permits tariffs in the face of imports sold below ‘nor-

mal’ value; the second permits tariffs in response to subsidised imports; the third permits a

variety of responses to rapid, injurious increases in imports. Importantly for our purposes, the

WTO agreements describe each of these in terms of actions against a product from an export-

ing country: the Anti-dumping Agreement (ADA) permits tariffs with respect to ‘the product

exported from one country to another’ (World Trade Organization Anti-dumping Agreement,

2013, Article 2.1); the Agreement on Subsidies and Countervailing Measures (SCM Agree-

ment) allows countervailing duties to be imposed on ‘the product under consideration’ (World

Trade Organization Agreement on Subsidies and Countervailing Measures 2013, Article 15.1,

FN 6); the text of the Agreement on Safeguards consistently refers to its application to ‘a

product’ (World Trade Organization Agreement on Safeguards, 2013, Article 2.1). In no case

do these agreements acknowledge potential issues that may arise when the subject product is

in fact many different products, caught under a single caption.

Consistent with the language of the Agreements, the economic analysis of trade administra-

tion law and practice is often framed as if all trade proceedings involve single, homogeneous

goods. But proceedings routinely involve complex families of products, ref‌lecting the reality

of business practice and raising a host of issues. Anti-dumping calculations rely on the assig-

nation of costs and benef‌its to individual products within the ‘product’ subject to a proceed-

ing, require the aggregation of dumping margins across individual products, and involve

diff‌icult issues arising from comparisons between different products across markets. Subsidy

rates may vary depending on the relative content of subsidised inputs in the various products

manufactured by a f‌irm. The injury analyses of safeguards, as well as those for anti-dumping

and countervailing duty investigations, encompass differential impacts across products within

the general def‌inition of the domestic industry. Further, in all three types of proceedings the

scope def‌initions of subject products are often a matter of serious dispute.

Practice concerning the treatment of heterogeneous products has developed case by case,

both at the level of national administration and with respect to the WTO’s dispute resolution

process. To some extent, the issues involved have appeared so diverse, and the diff‌icul ty in

their articulation so great, that a case law approach has seemed sensible, allowing the f‌lexibil-

ity to evolve responses against a variety of facts. But with an absence of guidance from the

Agreements and the paucity of discernible themes in case law, national authorities have been

largely free from restrictions in developing policy concerning product heterogeneity. This has

©2014 John Wiley & Sons Ltd 1247

The World Economy (2014)

doi: 10.1111/twec.12209

The World Economy

led to a lack of predictability in trade administration, a result fundamentally at odds with the

purposes of the WTO.

1

Issues involving product heterogeneity in fact raise many common questions, and sys-

tematic economic analysis can provide a more eff‌icient, consistent resolution of these ques-

tions. This work focuses on heterogeneous products in anti-dumping proceedings, and in

particular on the most active area of current dispute, the allocation of costs to individual

products. There are two reasons for this. First, anti-dumping calculations raise the most

complex and fundamental issues concerning heterogeneous products. Resolution of some of

these issues will benef‌it other areas, such as injury analyses. Second, current cases involv-

ing cost allocations are active at the national administrative, national judicial and WTO dis-

pute settlement levels. These proceedings display a wide variety of differing national

responses to very similar situations, despite numerous earlier disputes involving much the

same issues. Current national practices make all too clear that there is no cumulative value

to these cases; the fact of multiple products within an overarching case ‘caption’ continues

to provide considerable scope for play by national authorities. A careful application of econ-

omic analysis to the cost allocation problem, informed by accounting practice in this area,

provides a systematic analytic basis to assess the issues currently bedeviling anti-dumping

administrative practice and judicial reviews, and by extension the issues facing of other

contingent trade remedies.

2. ANTI-DUMPING PRACTICE WITH HETEROGENEOUS PRODUCTS

Many previous works have explored the overall history and rationale of anti-dumping

practices and I provide only a brief synopsis here, before considering the case of proceed-

ings that include multiple products. Canada in 1904 introduced the f‌irst anti-dumping law

that took action based on a f‌irm’s relative pricing in its home and export market s, def‌ining

dumping as net export prices lower than net home prices. Numerous countries had adopted

such laws by the 1920s. Detailed in Viner’s (1923) review, the rationales were several,

including the fear of predatory pricing that would be beyond the reach of a country’s com-

petition authorities.

The off‌icial action in response to dumping was, by and large, an anti-dumping duty

imposed on imports, a tariff set equal to the amount by which the exporter’s home prices

exceeded its prices to the importing country. The measurement of this tariff was deliberate:

removing the ‘underpricing’ through a corrective tariff was viewed as restoring a level play-

ing f‌ield, leaving markets at the same point as if all participants behaved ‘fairly’. Despite

widespread condemnation by economists throughout the lifetime of these laws, they f‌lourished

and eventually came to be ref‌lected f‌irst in the articles of the General Agreement on Tariffs

and Trade (GATT) in 1947, and eventually in the ADA in 1994.

The ADA largely encoded the existing practices of its signatories. Anti-dumping actions are

prosecuted by the government of one country against imports from another country. Dumping

itself characterises the behaviour of individual f‌irms, not countries, so while a case will name

a country, it will be prosecuted against individual exporters from that country. The eventual

outcome of a proceeding, if dumping is found, is a tariff set equal to the excess of the ‘normal’

value of the offending exporters over their export prices to the country investigating the

1

See Jackson (1997), Chapter 4, for discussion of the motivations behind the WTO Agreements.

©2014 John Wiley & Sons Ltd

1248 B. D. KELLY