Against Anti-Dumping Duties: Don’t Fear Cheap Chinese Steel

Alexander Mengden // 24 March 2017

Following the European Commission’s steel price investigations, the European Union has adopted new anti–dumping (AD) duties on Chinese steel products in January 2017. With this step, the European Union has reached an unprecedented number of 17 different trade defence measures against steel imports from China and Taiwan. Chinese exports will be taxed with anti-dumping duties ranging from 30.7% to 64.9%. Taiwanese exports will face anti-dumping duties from 5.1% to 12.1%.

 

The European Commission justifies this restrictive measure as part of their commitment to open trade. The idea is to complement genuine free trade with anti-dumping efforts.

 

As standard economic theory suggests, the Chinese government induces economic inefficiencies through export subsidisation – however, it is important to note that these are primarily a burden on the Chinese taxpayer, not on the European economy. While cheaper imports advantage consumers and net-importing businesses over domestic producers competing with the foreign suppliers, they are usually a net-gain to the importing economy. Why should we be worried about cheap Chinese steel imports then?

 

The standard economic justification for anti-dumping duties is predatory pricing. In this case, temporarily cheaper imports are a net-harm to an economy because they harm both domestic producers and consumers in the long term.

 

If this were the case, it would mean that the Chinese government heavily subsidises steel export, flooding the world market with below-cost priced steel products; this is aimed at driving foreign competitors out of the market and gaining market dominance. Once this situation is established, they can utilize their market power to raise prices substantially above costs to recoup their previous losses and gain surplus revenues on top of that.

 

If this strategy turns out successful, this hurts the European steel industry as well as net-importers of steel in the long term. A government actor can defend their interests against these unfair practices by imposing AD duties on the imports equivalent to the subsidies they receive, so both measures cancel each other out.

 

An important condition for the success of such predatory pricing strategies is that there must be substantial barriers to (re-)entry in the target industry. Otherwise, once the predator raises the price above costs to recoup its losses, competitors can (re-)enter the market by undercutting the incumbent’s price and driving it down to a competitive level again.

 

In the context of Chinese steel imports, a scenario like this might initially seem implausible because rebuilding the European steel industry after its expected decline could require massive costs of reentry into the market. Fortunately, there are alternative options by which market mechanisms can successfully counteract and render harmless the Chinese government’s predatory pricing strategies.

 

A promising option to do so can be stockpiling: If investors believe that Chinese steel products are massively subsidised, and, in accordance with the theory of price predation anticipate massive price hikes in the future, then they should buy as much steel at below-cost prices in the present as they can and sell it later when the Chinese government decides to jack up the price. Following this strategy, they would drive up the price of the under-priced steel products now, and undercut them in the future, leading them back to their competitive level again.

 

While the effect of these market mechanisms is similar to the one caused by AD duties, they generally provide a superior defence against price dumping. Unlike political agencies, markets incorporate and aggregate the dispersed information of millions of people. Moreover, in order not to lose money, the economic incentives for investors to make accurate predictions are high. As economists like Figlewski (1979), Plott and Chen (2002), or Berg, Nelson and Nietz (2003) show empirically, there is strong evidence that these features of markets lead to their high predictive performance. Instead of imposing AD duties, why should we not rely on market forces to stockpile steel and harness these features to proceed against export subsidies?  

 

In the case of less durable steel products, markets may underproduce protection against predatory pricing efforts by the Chinese government and lead to suboptimal outcomes. These are especially goods that are used for more specific purposes or in fields in which technology changes rapidly. The problem with this kind of products is that they cannot easily be stockpiled, although there remains the opportunity of recycling the materials after their use, which the European Commission itself promotes in their Circular Economy plans.

 

Even in these cases, there are good reasons to remain sceptical of AD duties. While markets may underprovide counter-strategies against price predation, restrictive government regulations are likely to overprovide them and turn AD duties into a protectionist instrument to inhibit international competition rather than safeguarding it.

 

Firstly, government agencies lack proper incentives and information to correctly estimate the size of the subsidies to predating firms’ goods, and to anticipate the timing and magnitude of future price hikes – problems that are crucial to setting the AD duties accordingly.

 

AD duties are also vulnerable to rent-seeking behaviour by domestic steel producers that induces a protectionist bias and can lead to anti-competitively high AD duties. As Mankiw and Swagel (2005) highlight, such cases of regulatory capture are common in the United States. The fact that revenues from tariffs are one of the ways EU policy makers can increase the EU budget might inline them to be more receptive to such approaches as well.

 

Moreover, the European Commission’s publication on AD measures against Chinese steel imports indeed shows that the concerns of European steel producers are widely discussed while the interests of European consumers and steel-importers are rarely mentioned at all. Given that the latter would be a primary subject to economic harm only in the case of successful predatory pricing, there seems to be an imbalance in the interests considered.

 

In summary, there are multiple reasons to be sceptical of the latest anti-dumping tariffs imposed on steel products from China and Taiwan. In many cases, allowing markets to estimate the dangers of predatory pricing attempts and react to them via stockpiling subsidised Chinese steel is a superior mechanism of limiting the damage of unfair trading practices to the European economies. Although in principle, anti-dumping duties can be helpful when steel products are less durable and hard to stockpile, they are not easy to implement and likely to be captured by rent-seeking behaviour of domestic steel producers and to turn into instruments that hinder competition, thereby endangering the interests of European consumers and steel importers.

EPICENTER publications and contributions from our member think tanks are designed to promote the discussion of economic issues and the role of markets in solving economic and social problems. As with all EPICENTER publications, the views expressed here are those of the author and not EPICENTER or its member think tanks (which have no corporate view).