Author: Justin R. Pierce (Board of Governors of the Federal Reserve System)
Publisher: Federal Reserve Board Finance and Economics Discussion Series Paper No. 2011-40
Date Published: September 2011
Antidumping duties, designed to protect domestic industries from unfair foreign competition, play a critical role in international trade. Such tariffs are placed on notably low-priced imports. In the United States, these imports are considered to be offered at less than fair value — or “dumped” — when the price is lower than what is charged for comparable goods in the home market, or below an adjusted value tied to average total cost.
The duties are popular in the U.S. — in recent years, companies or unions from 16 of 19 manufacturing sectors have filed petitions seeking such protection. The Department of Commerce determines whether dumping has occurred and then the International Trade Commission decides whether the U.S. industry has been harmed. If so, a tariff equal to the percentage difference between the price in the U.S. and the price in the home market is slapped on the imported goods. The slap can really hurt. Some years ago, a 259 percent duty was placed on aluminum sulfate from Venezuela, for example, leading to a 98 percent plunge in U.S. imports from that country.
But despite the widespread appeal of antidumping penalties among U.S. companies and unions, their effect on the sale of U.S. domestic products has remained murky. Although some studies have found a correlation between antidumping protection and increases in revenue, this paper argues that those findings are misleading. Temporary gains in revenue are merely a result of short-term price hikes put in place by the protected U.S. manufacturers, the author says, while the number of units produced domestically dips. What’s more, antidumping duties could have a downside in that they enable firms to continue operating plants that are under-producing, in turn wasting resources.
“Increases in prices and markups artificially inflate the effect of antidumping duties on revenue productivity, while physical productivity actually falls,” the author writes. “Moreover, antidumping duties allow low-productivity plants to continue producing protected products, slowing the reallocation of resources from less productive to more productive uses.”
This study, which the author calls “the first micro-level evidence on the effects of antidumping duties in the United States with a dataset that includes the full population of U.S. manufacturing plants,” compares the behavior of plants that receive protection against a control group of plants in similar industries that do not. Crucially, the perceived effect of antidumping penalties on plant-level production depends on whether output is measured in revenue or in physical units, because price hikes and markups would likely be taking place at the same time as any shifts in physical productivity.
To identify the source of the revenue boom for protected firms — whether it is a jump in the quantity of goods produced or a factor of short-term markups — the author analyzed data from the U.S. Census Bureau’s Census of Manufactures for the years 1987, 1992, and 1997. This 10-year period was chosen because it was a stable era for the Census’s Standard Industrial Classification codes, with only minor changes to product-class codes. Several recent studies, including a 2010 analysis of the product-switching behavior of U.S. manufacturers, have relied on this data set, noting that the underlying dynamics of the antidumping environment have remained largely consistent.
Irrespective of size, all U.S. manufacturers are required to respond to the Census. The information contains plant-level data on the value of shipments, the number of employees and their roles, raw material usage, and the book value of capital assets, which can be used to measure productivity. The Census also provides plant-level and product-level output data in terms of revenue and physical units for each product — a significant feature because it allowed the researcher to calculate physical productivity as well as the average unit prices and price-cost markups.
The use of data at the plant level is an “important innovation,” the author argues, with many advantages over more aggregated data — including firm-level information — because many companies that petition for antidumping protection are large manufacturers that produce a wide array of items. By examining individual plants, which tend to produce a narrower range of products, the author could more accurately match up products named in antidumping investigations and the specific facilities that make them.
Similarly, the author could drill down to determine which plants did and did not receive protection; the Census data reports the full list of products manufactured at each plant, their value, and often their quantity, as well as which goods were shipped where. “The availability of this plant-product-level data represents an additional level of disaggregation beyond the ‘major industry’ codes generally used to identify plants and firms in micro-level datasets,” the author writes.
In his regression analysis, the author found that antidumping protection leads to an average increase in revenue productivity of 3 to 7 percent, depending on the industry. However, the effect of antidumping tariffs on physical productivity is vastly different.
The number of products made actually declines by a greater amount as the effective rate of antidumping duties protecting the plant rises. These rates vary across importing countries, in line with the importance and share of the market commanded by the product in question. For every 1-percentage-point increase in the effective antidumping duty rate, physical productivity declines by 3 percent, according to the author. Furthermore, the author found that increases in the duty rates are connected to both price hikes and markups. On average, he writes, a 1-percentage-point hike in the antidumping rate leads to an average increase in the markup cost of 0.3 percentage points.
Finally, the author explored whether antidumping protection revealed a hidden danger for firms: namely, that the artificial price hikes allowed for the prolonged operation of low-output plants that would otherwise have ceased production. The author examined, first, whether tariff protection made plants less likely to stop producing a guarded product, and second, whether plants that halted manufacturing had lower productivity levels than those that continued to operate.
The data set allowed the author to define “production-stopping” by a plant’s choice to either close its doors or merely drop a product. This enabled the study to account for plants that produce many goods and drop a protected product but remain open.
The author found that antidumping protection makes plants between 10 and 15 percent less likely to halt production of a particular product; plants that do stop production are 15 percent less productive in terms of revenue and 10 percent less productive in terms of physical units shipped.
“Combining the results from these two steps, I find that antidumping protection allows more plants to continue production of protected products than would be the case without protection, which leaves low productivity plants active in the industry,” the author writes. “This continued operation by low productivity plants, therefore, contributes to the relative decline in physical productivity found.”
The findings provide new insights about how firms in a developed economy respond to major tariff shocks, the author concludes. More generally, the results indicate that antidumping protections can be a double-edged sword. Because tariffs are more likely to lead to higher prices than higher productivity, companies must make sure to allocate resources to plants that remain efficient and that are not compensating for lower productivity with temporary price hikes.
The apparent increases in revenue for U.S. firms protected by antidumping duties are driven primarily by price hikes and markups. Physical productivity at plants actually decreases, and antidumping protection brings with it the danger of allowing underperforming plants to continue operations.