Level Playing Field?

Edward J. Dodson

[The following essay by Walter Olson appeared in Barron's, 27 July, 1987. My response appears at the end, which was printed in a subsequent issue.]

Today's protectionists cannot make much of an intellectual case, but they do have one metaphor (or at least catch-phrase) with an apparent ring of fairness: the "level playing field." Haven't lax U.S. trade laws made this country a target for dumped and government-subsidized goods from around the world? How is an American company supposed to compete with that? Maybe the only way to flatten things out is with a legislative steamroller like the current one in Congress-powered by hot air though that vehicle may be.

Many economists don't share this urge to iron out irregularities of turf. Foreign taxpayers, they observe, are the ones who should object to subsidizing U.S. imports, and anyway such subsidies are a losing game and eventually tend to vanish from the scene. (As for "dumpers," who help us without harming their own citizens, we should welcome them with ticker-tape parades.) But suppose such skeptics are wrong; suppose it's unfair for foreigners, at least, to sell products here below cost. Just what have the allegedly lax U.S laws been letting our trading partners get away with?

Under current law, factoring out shipping costs, a foreign producer is "dumping" when it charges Americans less than Customers back home. In other words, it is illegal to target discounts at U.S. buyers. The size of the "dumping margin" doesn't matter: tiny price variations are no more legal than big ones.

It is hard to imagine so ludicrously broad a rule. To illustrate, a foreign firm can be hit with sanctions merely for matching the price it finds in the U.S. market, though that price amply covers its production costs and its conduct is in no way predatory from an antitrust point of view. As long as its domestic price is higher, it transgresses.

Of course, a price gap needn't mean that an item is too cheap in Topeka; just as likely, it's too dear in Taipei. But U.S. dumping laws are evenhanded: the foreigner loses either way. If the home price is too high, the law assumes that some sort of protective barrier must be giving the local firms a monopoly position, which is unfair to U.S. producers though "it is hard to see," as Debevoise & Plimpton attorney Michael Knoll points out, "what entitlement competing domestic producers have to this artificially maintained price."

Even if there's no real or lasting price gap between markets, a foreign producer is far from safe; random price and exchange-rate fluctuations will open up temporary "dumping margins. Moreover, a fog of uncertainty surrounds dumping calculations: Are shiping-cost estimates accurate? Is the export article truly comparable to the one sold at home? Some of the uncertainties work both ways and could thus let off real dumpers as well as trap innocent firms. But one major bias. in the Commerce Department's methods works only against imports. Instead of comparing the average sale price there with the average sale price here, Commerce compares the average price there over a span of time with the individual price of each sale here, and finds dumping if any of the U.S. prices are lower.

This rule means trouble for firms whose prices vary according to time, place or customer: they get no credit for selling above the foreign price, but full blame for selling below it. Take seasonal goods. U.S. firms may routinely cut prices in January or July, but a f3 reign firm risks dumping charges if it does the same thing. Commerce finally relented and took seasonality into account in a cut-flower case where the problem was obvious', but still balks in others where variation over time is less predictable.

Status goods are another case in point. Suppose a French firm marketing a fashion item sells some at full price to affluent customers and the rest at cut rates to budget buyers. Its U.S. competitors may follow the same marketing strategy, but can hit it with a dumping complaint anyway because it charged its budget customers less than its average French customer.

Narrow dumping margins can cost as much to defend as big ones, and lead just as surely to automatic sanctions; hence firms that want to stay out of trouble may try to build in a safety factor by charging all their U.S. customers more than they ever charge the folks at home. Does this sort of least-favored-nation policy get them off the hook? No way. The law tells Commerce to disregard home-market prices when they fall below average production cost, to the dismay of economists who say it's quite normal for companies to price below average cost when business is slow (the sign of hanky-panky is pricing below marginal cost).

Murky and arbitrary as it may seem, dumping law is clarity itself compared with subsidy law, the other big part of U.S. unfair-trade policy. The idea here is to charge "countervailing" tariffs that cancel out the help foreign governments give their producers.

But not many subsidies translate dollar-for-dollar or pound-for-pound into export stimulus. Some grants mostly aid domestic sales. Others are spent com- plying with the terms of a program, as when a firm gets reimbursed for the added cost of putting its factory in Northern Ireland or the Mezzogiorno. Still others are pocketed by owners as a windfall with little boost to export sup- ply. Yet current law tries to countervail each subsidy down to the last pfennig as if it were an outright export bounty.

In one memorable case, American producers sought relief from a British subsidy that helped retrain steelworkers for other jobs so that mills could be closed-a form of aid that tended to reduce industry capacity and thus actually benefit U.S. competitors. That particular claim was too absurd even for Commerce, which nevertheless persists in the lesser absurdity of fully offsetting subsidies whose export stimulus is very weak. Thus, it found one benefit for Canadian lumber producers counter-vailable even though some economists viewed its effect on exports as nil.

Amusing complications always ensue when a complaint is filed against a communist country, since the degree of subsidy in such cases is anyone's guess -- even the makers don't really know the cost of production. Here Commerce must fall back on a bizarre calculus using a surrogate capitalist economy at the same "level of development." The choice of stand-in has lately been rather insulting to our allies, as when the British economy was used as a surrogate for those of Rumania and the Soviet Union. (Canada and Spain were the surrogates in a famous probe of Polish golf carts, a product that had no home market, since nobody plays golf in Poland.)

When Commerce has done its worst, the International Trade Commission decides whether the illicit imports have hurt American producers. Commissioners are supposed to weigh a multitude of factors-the domestic industry's profits and revenues, employment and capacity utilization, and much more -- but are firmly bound by none.

You'd think finding damage in these cases would be well-nigh automatic: what business isn't harmed by its competitors' sales, dumped or not? The only clue as to why the ITC would ever say no is that the damage has to be non-trivial, or, as the lawyers put it, "material." One ITC commissioner saw in this a de Minimis cutoff for action -- imports aren't materially damaging until they take at least a tiny market share-but Congress rejected that idea, preferring to hold the door open for relief in every kind of case.

Other methods of determining dam- age, however, are scarcely reliable. Consider the toting up of "lost sales." A domestic industry can trigger an ITC investigation in part by claiming that its members have lost sales to imports. Amazingly, the reported amount of such lost business can run several times higher than the actual volume of in'- ports, simply because a dozen U.S. firms may have lost out on the same contract. Commission staffers later check the reports by calling American firms on the telephone ("Hi, we're trying to decide whether to kick the Japanese out of your market. Have you lost any sales to them?") and then call customers in hopes of confirming the findings.

Unless all indicators of the domestic industry's health point the same way, ITC members are left with a lot of leeway in their decisions. But Congress is not shy about putting its thumb on the scales to help domestic producer,'. For instance, it wants the ITC to ask not the logical question of whether the forbidden act, the dumping or subsidy, damaged U.S. producers, but the illogical one of whether the imports themselves did any damage. The effect is to penalize many imports whose margins of dumping or subsidy are trivially small.

Legislators also have made the ITC lump together as many complaints as possible in looking for damage, so that individual slights, immaterial in themselves, can as a whole trigger retaliation. The commission calculates the effort of not only the dumped imports but also the innocent imports from the same producer. It then adds in other allegedly dumped or subsidized Imports from around the world, and even imports from innocent producers that have the bad luck to come from the same countries as guilty ones.

But enough. Even by the vague and debatable standards of "fair trade," the U.S. playing field is already dizzily tilted against legal imports. And far from rectifying matters, the pending trade bill would add new peaks and valleys compared with which the current field would look as level as the Utah salt flats. If Congress persists, the U.S. won't have to choose between fair trade and free trade. It will have abolished both.

To the Editor:

Walter Olson, in his July 27 "Level Playing Field?" editorial commentary, provided a very strong and clear argument against protectionist measures. His bottom line is that, historically, they do not achieve their objectives and are ruinous to economic growth. Some additional observations:

American politicians have responded to the cries of constituents who have lost, or are threatened with losing, employment, in large measure as a result of a shift in demand toward goods produced outside their representative districts. We are familiar with most of the reasons cited - a decline in workers' skill levels, heavy taxation of production, high wages and inflexible union/government regulations, locational disadvantages and the high cost of operating sites. Two courses of political action present themselves as necessary and, on the surface, desirable: to establish a meaningful degree of localized competitive advantage for producers and to call for prohibitive restrictions against external producers. The problem is that the rest of the world is not simply standing by waiting to be victimized by a change in the rules.

The fundamental problem is the conflict between savings and consumption. High aggregate savings is desirable only to the point necessary to finance capital expenditures. Go beyond this and we have too much capital chasing too little consumption (i.e., a decline in real rates of return). In the same way, global producers are involved in a dangerous aggregate game. For individual producers in the short run, sound business judgment may dictate "going offshore" to gain substantial cost advantages. A large-scale movement of capital investment to such low-cost environments is eventually offset by the corresponding reduction in consumption power of those workers left behind. The net reduction in aggregate demand tends to reduce prices and may leave many producers only marginally better off or worse off once the market reaches its new equilibrium point.

In addition, most of the government actions included in the bag of fiscal and monetary policies no longer work very well. Other governments and market players move to counteract one another and do so rather effectively. When the dust settles, the inefficiencies created by all this nonproductive activity harm economic growth for all and do very little good for individual nations.

If the major trading nations of the world could eliminate trade barriers, local governments could concentrate on developing infrastructures to improve their competitive advantages. On a more level playing field, the game might turn into a win-win situation, with greater efficiencies, greater productivity and expanding consumption power.