e\u) ,.::::.. ,- Situati*n First-best world Distortions [xternal cosis Externai benefits Monopoiy polver lvlonrpsotiv power (a case not deveiop?iC in thrs texibook) Distorting tax Distorting subsidy P:> Slvlc P rryith tax > -9Avf C Pwith subsidy < 5M{ Distortions and J'heil Ft}'ects lneentives at the Margin P:MB-MC:SMB:SMC SMC>Pi:MB:MC:S{dB} SfrlB -. P l: IVB : MC: SMC Chapter 10 Argtu;tLnls Jiir ,-rt.:./ .rgcrirt.rt Pnriecf iott Effeets Exactly the right amount is supplieC anC demancled. Too rluch is suppriecl becau:e suDljlters make and seli extra uniis far which the socral costs exceeci the plrce (whiclr equals MCand MB ar-td 5M8i. Exarnple. production that pollut*.s air or lvater. Not enoi:gh ts demanded because demanders receive only private benefits equai to the price, rrot the full social benefiis. [xample: trarnrng or education ihat brings extra gains in attitudes or leam skills. I'jot enough is demanded because the monopoly :ets the price too high. Not *nough is sunpled because the moriopiony sets its br:ying price loo low. Example. a single firm that dorninates a labor market anrj uses its power to sei a lou; wage. l'.lot encugh is demandeej becaitse the tar: makes the price io huyers exceed the revenLje per unit receivecl by sftpliers. Too rnuch is demandeo becarlse the subsidy makes the price to iruyers iower than ihe rev€nue per unit received by suppliers. SMB )- /' \llli<et pricr' llB Plilatc nrar.einal benefit olal auir,it-v (to those v,ho demanrl iti ,1'1{' Privale rlrrginal ccst of an activity ito those *'ho sripply iti .tl.1lJ Socill rmrginrl herrelit r:f an activit-v (to er,er-vbody iriiecied.) .tJli Solri uraryinai eosl of m;rctivity 1to er,'elybodl aft'ected) In a first-best norld lree tracle is ecorrornicaily efficient. Frce tracle aliows the "'irtvis- ible hand" of nrarket competition ter reach globaily Private pt'oducers. reacting to the sig- rral of the niarket pdce, exparlcl produetion in each country to levels that are as good as possible ibr the rvorld as rl'hole. Irrit,ate cLtilsunlers, also reacting to price signals. expatrd theirpurchases of products to levels tliat make {he r.vhole r,vorlcl as rvellolf as possiirle. . Our lvorld is not ideal. Distcrlions exist, attd thel' clo not autoruaticali-y cancel each other out. The distortions rcsult lrom ongoing gaps betiveen tire privaie and social lnternational Economics - Vol. 1 par t IWO lr,r.li l,trlicr 216 [,' i' !i I i;, !r' 'a: i:': a!: T:, d:. $ t li: Fr i:.1,' f_; w! ii :1" ii: l,: i. il 5e*efitS Or Costs Of an aCtivity. We live in a:,.;.=;1d'lr-:\1 Itiri d, one tl-lat includes distortions. As long as these gaps exist bets'een r,vhat private inclividuals Llse t{} l}lake therr ilecisions and the fuil ef-f'ect*q of these ilecisions on society. pt'ivute u{:fiott'\ u)ill not !etic! k; lke b<:.st :ta'\,\il1!e ouiL:otile'\ fb| societr'' 'flrere ale trvo niajor sources ol clistortiolrs in ail econolllv. Iiil'st. ;r ...

1. eu)
,.::::.. ,-
Situati*n
First-best world
Distortions
[xternal cosis
Externai benefits
Monopoiy polver
lvlonrpsotiv power
(a case not deveiop?iC
in thrs texibook)
Distorting tax
Distorting subsidy
P:> Slvlc
P rryith tax > -9Avf C
Pwith subsidy < 5M{
Distortions and J'heil Ft}'ects
lneentives at the Margin

2. P:MB-MC:SMB:SMC
SMC>Pi:MB:MC:S{dB}
SfrlB -. P l: IVB : MC: SMC
Chapter 10 Argtu;tLnls Jiir ,-rt.:./ .rgcrirt.rt Pnriecf iott
Effeets
Exactly the right amount is supplieC
anC demancled.
Too rluch is suppriecl becau:e suDljlters
make and seli extra uniis far which the
socral costs exceeci the plrce (whiclr equals
MCand MB ar-td 5M8i. Exarnple. production
that pollut*.s air or lvater.
Not enoi:gh ts demanded because
demanders receive only private benefits
equai to the price, rrot the full social
benefiis. [xample: trarnrng or education
ihat brings extra gains in attitudes or
leam skills.
I'jot enough is demanded because the
monopoly :ets the price too high.
Not *nough is sunpled because the
moriopiony sets its br:ying price loo low.
Example. a single firm that dorninates
a labor market anrj uses its power
to sei a lou; wage.

3. l'.lot encugh is demandeej becaitse the tar:
makes the price io huyers exceed the
revenLje per unit receivecl by sftpliers.
Too rnuch is demandeo becarlse the subsidy
makes the price to iruyers iower than ihe
rev€nue per unit received by suppliers.
SMB
)-
/' llli<et pricr'
llB Plilatc nrar.einal benefit olal auir,it-v (to those v,ho demanrl
iti
,1'1{' Privale rlrrginal ccst of an activity ito those *'ho sripply
iti
.tl.1lJ Socill rmrginrl herrelit r:f an activit-v (to er,er-vbody
iriiecied.)
.tJli Solri uraryinai eosl of m;rctivity 1to er,'elybodl aft'ected)
In a first-best norld lree tracle is ecorrornicaily efficient. Frce
tracle aliows the "'irtvis-
ible hand" of nrarket competition ter reach globaily Private
pt'oducers. reacting to the sig-
rral of the niarket pdce, exparlcl produetion in each country to
levels that are as good as
possible ibr the rvorld as rl'hole. Irrit,ate cLtilsunlers, also
reacting to price signals. expatrd
theirpurchases of products to levels tliat make {he r.vhole
r,vorlcl as rvellolf as possiirle.
.
Our lvorld is not ideal. Distcrlions exist, attd thel' clo not

4. autoruaticali-y cancel each
other out. The distortions rcsult lrom ongoing gaps betiveen tire
privaie and social
lnternational Economics - Vol. 1
par t IWO lr,r.li l,trlicr
216
[,'
i'
!i
I
i;,
!r'
'a:
i:':
a!:
T:,
d:.
$
t
li:
Fr
i:.1,'

5. f_;
w!
ii
:1"
ii:
l,:
i.
il
5e*efitS Or Costs Of an aCtivity. We live in a:,.;.=;1d'lr-:1 Itiri
d, one tl-lat includes
distortions. As long as these gaps exist bets'een r,vhat private
inclividuals Llse t{} l}lake
therr ilecisions and the fuil ef-f'ect*q of these ilecisions on
society. pt'ivute u{:fiott' u)ill
not !etic! k; lke b<:.st :ta',il1!e ouiL:otile' fb| societr''
'flrere ale trvo niajor sources ol clistortiolrs in ail econolllv.
Iiil'st. ;ridi*gt.fttilttt"t:;
are ways i1 whicir piivate rnaikets fhil to achieye full eccnomic
efficiency. Second
goyerlfltent polit'ie.s {'uil distort ail ()lltervti.€
(L:ottat}ticdll.t' e.llicient privLlte tnat'kef'
i;igur* 10.1 provides infblnation on six specific t)ipes
olclistortions. with fhe first
tbilr being types of pr:ir,ate trarket ihilures. arld the last ftvo
being government policies
thal catt create distot'titltis.

6. The first two types of distortiorls in the figur"e Are *3fll:l!:i: .
i'
'- LrI 'i'';i r ''
{tif*{i{ {net el1i:ct.s or1 iti€rfies ofher f}ratt fhcse agreeing fo
buy'or sell in a nrarker-
place). The filst example of an externality is the classii case of
pollution' Consider
,h..ur* ol riverl:ollut'ion, all example ue *'ill explore at leilglh
in Chapter 13' if the
sellers of paper ploilucts {ire not fbrcecl to i1o So. they do not
1'L)ck01} thc dallage
dolle
by tlie papei niiiis' r'iver poihrtion as part of the cost of tlieir
produetion' So
the pol1u-
tigl costs afe not incorporateclinto thc p1"ice of paper'
Similarly. buyeri; of-petroleunt-
luels do not reckon thaithe social cost olair pollution fiam using
those ftlels is
part of
the lirel ilrice that they have to pay. If sorae costs of
proelllcillg or
collsllmillg a pfoduct
are ignoied by the private decision-makers. then too much of the
product
is produced
01'consumed.

7. Our seccld example ol'an"externalit,f Supposes that jobs in a
certaitt impolt-
competlltg sector generate greater I'etul'tl$ for society than are
trlel"ceived
by the people
who decicie rvhether o. noito take the jobs.'fhese exterrlal
benefrts can happen.
lbr
instance. if working in the sector brings gains in knowledge,
skills' anil attitlldes
that
benefit firms or people other than the workers and en'rplo3'ers
in the sector'
In this
example the sociil niaryinal benefits (.t&18) cf u'orking in tire
sector irre higlier
than
the rvage rale (or the piice, P) that rvorkers rcceive . Ii soipe
bettet-its o1'the activity
are ign*orerl brv prirrate decision-makels" then too little of the
activitv llccilrs
(in the
example, loo ferv people are hired into jobs in the sectot')'
in this chapter le foclls on rlistortiolls caused by ertet'nalities'
ln fact' 'e
focus on varitlus kincls of external benefits that are the "extra
good'' that can

8. ae cornpany lccal proclrrctiorl of a prodr-lct or enlploytttent in
producing the
prod-
1ct. We oniy briefl-v tnetrtion here the otlier four types oi
rlistortiolts shor'tt itt
Figure l0.l .'rl,lonopoly
power can create a clistot'tioti because a polverfll seller
restricts olltput
to raise price ind increase profits. In the box on clotnestic
noncrpollr in ClTapler
9' we
sarv that fiee tracle could eliminate thjs clistortion by forcing
tlie domestic
lllonopolv
to cotnpete tr,lth forc'ign firtns. h{onopsolly power can create ii
disiortioil
because a
por'r,erful buyer sets a price that is too 1ow'
In the absence of airy other rlistortiolt. a tax creates a
distot'tion by artificiall'v
lais-
ing the price to br,yers. our analirsis of a tafifT in Chapter I is
an exarnptr* of a tax
diitortiiin and ths inetlicienc,r'caused by tliis distortion.
In ihe abse*ce oi'any otliei'distorti.J. a governmeni sLrbsidy
creates a distortion

9. bV
artiticially lorvering th! plice to Lruyers. Essentiall,t", a
subsidy' is like a negative
tax'
we rvill examine sLibsitlies later in this chapter ancl in chapter
1
'l'
lnternational Economics - Vol. 1
::itr.;.::,... : . t :;:...:. .::
r'. . :. r''r ,i;'i:: ; :
r. : . , r: ':
.t -
.i,_: I -;.i:1 ,: -
;,'#,:t'.::l ;i:::
Dc you iike io eat things that are sureet I if ycu do,
end il you live in the United stfrtes, the Europe;n
Union, or Japan, then you are a viriiin of your
criunrry's protectionist g:clici*s toward !ugar. The
clomrstic pri<.e r.rf youl" 5i_,gar is about cJoubje the
'woric price. For ihe tJnjted States, cn ave!.age
dLlring 20$0-;0i0, the rjoriestic price of ra,x, sugar
rt,as $C.?1 per pouncJ, w.hile the world price wa:
$tl.1l per pourril. For ihe Ljniterj statec, sugar pro_
tecticn costs consumers about $3.5 billion p€r ysa1.
i t.

10. 1
e' u
I I
e. i
1?,? v-?1.i,t9:e-5t y,?,t'rJs,s,,t*El.bu'
€ver sent a ietler to your iegislaiive reilresenta-
tive asking him oi' her to oppr:se sugar oioiection,
a policy that is cleariy *gairis.i your intereets? Have
you rontributed monev cr tirne to a group that
iolibie-c the governrrient to e nd :ugar proteclicn?
l)'-) ysu kncvr anyone who h;.is eryel rjone sr.:?
Presumebiy not. Why nat? lVhile $3.5 L:iliicn per
year :cunds llke a ict nf money,, it is cnly about
$11 per person per year. As r.riscu:sed in the text,
lhe average qain for anv eile person to oppose
1i:i: protection is smali. lt's nst worth Voijr effort.
Ihe situation is a little different for sugar
producers. Fcr tire United States, tire increase iir
d*meltii_ proclucer surpli-;s is abou! $l.S bitiion
per y"ear. These gains aie ceineentrateci in a srrall
nurrber cf f irms. ii is worth it for thefii to actively
seek poiicies tiiat resirairi sugar i;nports. 'lv,ro
rompanie;, A.nrericari Cryslai in North Dakoti:
and Mir:iir:slte, and l-lo-5un in FloriiJa, have i:een
F)*rtirlriarly active, contr"itruting rnillions of dol-
i*rs ir.} recent yesrs to Democratit and Repubiican
c*ngressional candidates and politicai paities.
i:or f:lo Sun, o*;ned b-v tr,rio brcthers, Alfonso and
Jose f anjLri, oile estifiate i5 that pr.rtertifit.tist
sr-rr;ar policies add $55 nrillion per year ir: theii'
profits. A fe*.r ntiliion bucks io defend this profit
stream is rJefinitely a good invesiment.

11. .a.ficth€r group active in loi:bying is ilre
Arnei'iean Sr"rgar Alliance. representing rnajr:i" U.5.
sligar grcwers. ln additicn, ihe high dornertic
r:i'ice for sugar expanris demarrd fcr cr:rn sweel-
encrs, a ciose substitr.ite fcr sugar. Corn farnrers
in the Anrerican Midwest like the suqar prot€e-
iicn, ano they have a rnajor influenre on the
positions taken b;r their states' representatives
and 5enators.
Tire Coalition for Suqar Reforrn, yvitich inclLlrJes
food manufaciurers that usg suqSi coilsume!-
groups, taxpdyer advo{:ates, and environrrtsritai
grcups, is ;:ctive iri opposing suger proiectiori.
It nas 5ome good argumenls on its sicie. fr,s Jeff
Nedelnran. a spckesperscirr for the coalitjon,
s.lid. "This is a corporate rnrelfare program for
the v€iy rich,"- Il_re coaiitian poiiltt o,..tt thai
jobs cre being lost as sugar-uslnq firrns {like
candy makers) shift procluction lo otiter countrisr
ttYlr'd?6iilq;i piices are cheaper. Furtherrrrore, i:y
polluting and disrL:ptin{ water flov,rs, the pro-
tected sugar production in Flcrida is ai:o a major
cause of serious environinent;;i rieclinq: in ihe
Lverglades. These are Scod poi{tts, but ihey ;rre
nc nratch for the nloney arrd or-gaiii;ation cf the
rjt opunent,, oi prol.:ciion
Foreign sugar producers, iliany cf them poor
fai'mers in develcping aountrie:, are ai:o lrurt
by proteetianist pclicies in imoorting countries.
Researchers estirtat€ that the rnrorld rugar f.rice
.would rise hy,-17 Derrent if the t".iniied States

12. rernov€d its sr:gar ooiicie:. Br"rt it is not easy for
foreign interesls ts harre an effect sn the U.5.
poiiiical pro{ess. Fcreigners don't vote. and polit-
ical cppcnents can charcle thai legislaiors whr:
openiy side with foreigners aqainst i-J.5. ',arorkers
and cornpanies ;re "anti-Arneric.lri. "
Scr the sirgar protectian pclitie: r,onj:inue" For
lhe Unite{j statrs, tlte net coti to the iountry is
clo5e to $2 biilion per year lt is n*t thet s$gar
is so large or inportant a part of tire eccnomy
that we have to proteet it. ln the UniteC States,
about 38,G00 people work grorrvirig suqar, and
about 16,000 peopie r,vork in :uq*r reiininq, iir
totai aboLit C.01i perc€nt of f_he U.5. l;rbor force.
lf we shifted in free trade, enrg:k:ymeni would
probably decline by 3,0110 ialthougir ilre deci!ne
could be as high as 15,000). The small nunrber of
people r,',ho lose theit- jobs cauld be reemployeci
';vith little irsuble in other sectors rif the eran-
omy. lnstead, vre see the ,r-rure FOiitii;r! e{onofiiy
of proteclion. r.vith the ilrilduaer intere$t! in thi-c
t,ase much better organi:ecl and effectlr:e than
the consumers are.
*A: quoted in "Sugar Rules Defy lree -Tr::de i cgic,"
llev,; Yark Tintes, Mav 6, 20Ai.
i lq
d."" i
Chapter 1 1 Ptrsltiirg lirlrurls ': | '
crrrreut coillpetitors in the importing counfiy, it may exllect
that, once it raises prices.

13. nes, flnns, inelriding r)ew expofiers i'roln otlter countt'ies, rvill
elltcr ls cotnllctilors.
The prc.datory exporter u,ould not be airlc to raise priccs or to
keep thtrn high for very
lang. Recent resiarch suggests thai no more tlian 5 percent ol
a1i cases of aileged
du:lping in the Unitecl States. the European Union, Canada.
fulexico. and lnilia show
even a nroderate possibility fbr predation (and it is possible that
none ol these cases
inrol'ues predation;.
Ciyclical durnpin-e is the inost cornptricatecl kind of durnping
lbr" the inrporiing
country. Most cyclical durlping is probabi,v the nonnai rvorking
of n'ell-functioning.
crtmpetitirre global prociuct markets. Wlien clemand declines,
the market price lalls il;
ihe sliort run, A firni lvill continue to produce, sell. and even
expofi sone anouut ct
the procluct, as long as tire levenue earned at least covers
variable cost. This is exactl-v
what rve want to happen rvhen tl:ere is a decline in demand.
Productioit deciines
s,;nrervhat irt rnany counlries as the iiorld price lalls. Ther"e is
an etTicient global "shar*
ir:g" ol the clecline in clentand. Once the recession ends,
demanel price. and global
production will rect'ner. {if insteacl loo nuch prodltction
capacitl,'contitrues to exist.
then evenrualll, there will neecl to be an elTicienl global
sharing olcapacity l'ecluctlotl

14. before price can recover.)
I'he importing country nra.v.- not be completely conr.inceel that
cyclical dLrn-rpitig
is fnir3rrsi because it is usually glolrally eflicient. Whert
dentatld dcciint's b,v" sarr''.
10.-percent. whiqh countries abssrb horv nuch of global
redrtctittti in output'.) ls it
tair tbat the ilnport-country/ firrns have to re{iuce their output
end suller losse-c'.)
In particular iithe clecline in ciemancl is a result of a nationai
recessiotr in the
exporting coulltr-v. rvhy is it lair that the exporting countrY
can "expott sonre of its
une mpicyment"'.)
,,s usual. it is not easy to answer the question of lvhat is 1air.
.l'he
intet'tlational
sharing of recessiolrs is one of the etfects that comes r.vith the
genexal benelits ol
iniernatiolaitrade. W'e carr also recall the key lesson lioni
{ihapter l0-*-use the speci-
ticity rule . The real problem here is tire ccxrcern about
producer losses. For instance.
if the ke.v cotcern is abor,rt unentplol,eil workers, the country
should provide suilable
unempIoyrnent insurance or adjttstment assistance.
:.
Our discr-rssion suggests ti-rar dumping is ofteri goocl for the
country irnporting the
dunped expolts but thal two types of riunrping couid he bad lbr

15. the iir,porting corffry'
Predatory duniiring can be bad il it is successfitl. but success is
probabl-v rare. Cyclicai
clurlping can sometitnes Luitairly haum thr' importing countrY.
but nruch of tlie tirtle
it is probably the normal rvorking of the cornpetitive rnarket.
The inplication is that
tlie irnporting-country's government policy torvard dumping (its
antidunping policy)
sfioulcl exanrile each case and consider benefits and costs
trelirre imposing antidulrlp-
ing rluties or other resfi ictions on dunrped imports. ln fact,
actllai gor;ernrnetrt poiicies
are not at all like this.
'fhe W1-O 1riles perrlit countries to retaliate against cfun-r;littg
i1'the dumping
rnjLtres dornestic irlpori-cor-npetlng producers. If the
gtlvernrtent in the inrporting
lnternational Economics - Vol. 1
lndia
Furopean Unicn
United States
Argentina
f hiria
Brazil
Turkey
Pakistan
South Africa

16. rustralia
Scr-rth Korea
WorlC
-lop
1 1 lnitiatols olAntidumping Cases
Nurnber of Cases
lnitiated
1986-1990 20S5*2009
0 196
182 103
184 84
a78
069
663
tl ))
046
737
156 34
131
tfo 992 662
Number of
New Antidumping
lVleasures
2S05-2009

17. 'r 19
69
66
44
ua1
39
)0
17
i4
'13
2l
Antidumping
Measures
in Effect
June 2010
l.Va
1AO
) 4,"i
87
119
/l
121
"lo
,?a
74

18. 37
1,379
Average
Antidumping
Suty lmposed*
11 alI / /A
4a
89
85
54
5:
11
J)
45
59
79
i.JA
Notes: NA: lrot arailable.
*For lnciin. lverage 1992-2il02. source Canguli (2008): for the
European Union. the United Stares. and Chinr. ai'erage 2002
)004-
sorirce Bor,;u {20i01): fot'lther countries^ average 199--i-1999.
source ('ongressional BLrdget Ciiice {1001I.
( )r!rili /irl ir fi. ": rti:tlurnPinE: Slrl islirs rrt .nlidtlnip irlg.''

19. coltntrv ilncis both dumping and iryurrl then the governrrent is
perrlitted to inrpose an
,::'-'t,1".:j.: ..:: ; :;t11.s,'|-flfl extfa tadffequal to the disclepancy
{the dirmping margin}
betr,r'een the actual expot1 plice and tlte normal Yalue.
Antielumpirrg cases throi-rghout the rmrlcl actuall,v were inf-
r*'{lllent r.tnlil tlte late
1t)70s. and as oi'lg80 only about -34 countries had antidutlping
iaws. T'hert more
con:rtlies acloptecl antidunrping 1arvs. especially since 1990.
arrci by 2010 lnorc than
i00 couutries lrad thenr.
Lip to rhe lale I 980s. the lbur '"traditional users" of
antiduntping ithe United States.
tfue European Union. Canarla. and Austr:alia). accounteci for
ovrr 90 percent of the
cases. but then the use spread. Figr"u'e I 1.2 shows the
countries tliat are the niajor users
af autidunrping actions during 2005-2009. From l qB6 - 1990
t<i 2005-20t)9. the nurrtber
of cases worldrvide increased b5,'-35 irercent, attd the share of
thc fi:ur tradition:rl tlsers
{inc|,rding Canacla. rvith on1-v 18 cases during 2005-2009)
dropped to 24 percent of'
total cases, Inclia haci no antidumping cases untii 1992. but by
20A5'Z00c) it rvas ihe top
initiator in the r.,,'oric1. China enacteci its antidunrping
policies oniy in 1997 ar.rd quickly
rose to be a r"najor injtiator. Argentina and Pakistan alsc went

20. fi'om zero to top 10.
Wbrlcirvide" the prodilcts most often involvecl in dumping
cases are chemicals. sttlel
aril othcr metals. plastics and rubber prochlcts^ macirinery,
texfiles. iind apparel.
'i'he
countries rvhose exporters are nlost fiecluently charged rvith
clurnping arl: Cliina, South
Korea. Tais'an. rlre iinited States.l-hailand and lndonesia. For
{lhilra. in 2009. alrotrt 2
percert of its exports were subject to antidumping nreasures in
the iinporting countries.
P,
Sii
&:1.
-L-i:
Et'
*:4:
::r:
i,'
ilr,
tnlernauonal tconomics, 1 5th Edition 249
Chapter 11 I)rrsirirrg Eri,.rn'ts

21. Let'"s look more closely at U.S. antiduntping polic-v. A case
usually begins with a
complaint flonr U.S. producers.'Ihe U.S. Department
olCommerce exarnines whether
dumirinre has actually occurred and the U.S. International
Ti'ade Conmission exam-
ines u,hether U.S. ftms have been injured. In adclition,
negotiations may occur witir
foreign exporters. If they agree to raise prices or to limit their
exports, then the case
can tle tenninated or suspended. (This type of outcorrre has
been cc)inlnon in cases
involving steel and cheriiicals.;
Iil about 94 percent of it determinations, the Department of
Commerce flnds solne
antollnt of durnping-the iarv and the procedures are biased to
inake sholving duinp-
ing easy. In cases in which the comparison is betueer the export
price and the home
market price. therc are arcane rules about cost tests and
ignoring export prices that
are above the home markel price. Tl're upshot is that only low-
priced exports tend to
be compared to only high-priced home rlarket sales. In cases in
which export prices
instead are cofirparcd to average cost, obtaining and
interpreting data on the costs
incurred by lbreign exporters are often difficult, so the
Comnrerce Department has
ieeway in detennining ivhat normal value is. Lindsel' nnd
lkenson {20A2}. using actual
data for l8 antidumping cases. examined them for specific
biases in the methods used
by the l)eparfilent of flommerce. They concluded tiral in 10 of

22. the 18 cases there actu-
ally ra,as no dumqing, and jn 4 of the orher B cases the actual
dutxpilg rvas less than
half tiie amount fbun<l by the Departmenr.
The injury standard is not strict" Lrut injury is usuaily the key
to the outcilnre of a
case. In about nvo-thircls of the cases. the International T}ade
Commission finds mate-
rial injury to U.S. import-competing industries.
Il botlt dumping ar:d injury are fbnnd. cllstolTls ofllcials are
instructe6 1o jeyy an
antidunrping dLrly. More than half of the cases brought in the
United kates resLrlt in
arttiduntping duties or an eKporter agreement to restrain its
export prices or volunres.
(By compariug the trvo colurnns in Figure 11.2 for nelv cases
initiated and ner.v anli-
dumping measures for 2005-2009. r,ve can see thai more than
half of the cases in most
of the other countries shown and in the rvorld overall result in
antidurrrping duties or
expOfier agreements.)
Recent research shows sonre clear patterns of efrects fion al1
tliis, Shortly after the
complaint is illed tire prices of tire exporters charged r.r'ith
dumping increase, prob-
ably' to tt'v lo reduce fhe final duniping rnargin. Export
quanfities decrease. because
of the higherprice and because of the uncertainty about the
outcorne of the case. If
antidurnping drities are imposed. the export quantities decrease
f'urther. by an average
of

23. T0percent,andoftentozero{aswenotedforthecaseshorvninFignre
lt.i).The
exporter also has an lncentive to raise its export price. The
anticlumping duties are
reduced u'eliminated il'a subsequent review by the Department
of Conrmerce tlncls
less or no dr"unping.
A rccent study sf 15* overail effects of imposing antidumping
dLrties concluded that
the United States suflbrs a loss of well-being of nearly $4
billion per year. Abor-rt half
of that arnount is deadrveigirt loss (like areas h t d in Figirre
8,5 or Figure 9.3). The
other halfis the transf-er to foreign exporters thai raise tlreil
plices {1ike area rr irr Figure
9.3). T"he net loss ic the United States could L"re lolver than
this. because tlre stui'ly
does not attenpt to quantiff tlie value of avoiding anl.harmlul
ellecfs fi'om preciator'.v
dumping (probably minimal) anci cryciical dr"unping {hard to
measl}re).
International Economics - Vol, j
l:,:
l'r.
Part Two Trriiie i'rli-r
to U.5. steel firms in six of these cases, and
the Department of Commerce found dumping
margins of up to 195 percent. ln the large case

24. involving cold-rolled steel, imports declined by
20 percent i* the months after the case was filed,
even though the U.S. firms eventually ,,lost,, the
{ase n hen nc iq;vry vtas founa-.
As prices remained relatively iow around the
world, the U.S. steel firms continued to find new
dumping. They brought five major cases in 2000
and six major cases in 2001. ln seven of these
cases, the international Trade Commission found
injury, and the U.S. qovernment imposed hefty
antidurnping duties, up to 369 percent.
{n early 2002 presirJent Bush imposed new
general tariffs of up to 30 percent on imports
of steel, and the number of new dumping cases
decreased. Under pressure from U.S. steeJ users
and an adverse WTO ruling, he removed these
tariffs in fate 2003. But th€n global steel prires
rose by more than 50 percent during 2004, jriven *;
by rapidly rising dernand in China and other
developinq countries. With strong world prices
continuing into ;009, there were f*uv new anti-
dumping suits in the United Stater.
Then, as the global crisis struck, the steei
industry went into recession in late 200g, extend-
ing into 2009. tn addition, the share of the U.S.
steel market served by imports inereased jn Jate
2008. The slor,vdown in giobal sieel demand
and increased import penetration restarted the
great machine that rolls out complaints about
foreign dumping of steel into the U.S. market.
The U.S. industry {iled seven new dumping cases
in 2009. ln six of these cases. fhina was the only

25. alleged dumper, and in the other one both China
a*d Taiwan were charged. ln two cases, the LJ.S.
lnternational Trade Commission failed to find
inju4r and the cases were dismissed. For the
other five cares, the U.S. governrnent imposed
antidumping duties. For the largest case, involv_
ing pipes and similar products used bv the oit
industry, the duties hit almost $3 billion of annuat
imports. Steel-remainr the U.S. antidumping king,
and the oil industry and many other users ,:J steel
in rhe United States pay the (higher) price.
Uilder culrent antidumping policies in the uniteii States and a
growing nurrber of
other countries. rve get the follotving results:
i. T'he procedrire is biased towarci finding dunrping.
2. T'he injury test considers only harn to impolt-compedng
producers. There is no
conside'ration of whether predation or sorne other sorrrcJ of
lnr- i6 the countrv
is in'oir.ed. There is rittre orno consideration of the benefits
t;.;,;;u;;,;;;l;;
lou;-priced inrports.
3' overall' the process is biaseri towarcl imposing anridurrping
dLrries, even tlrouglriliis r"rstrally lorn'ers the well-being of
the impJrting .uunrrji Anticigrlping duties
aiso generally lower world r.velf'are.
See tlie box 'Antidun.rping in Action" fbr specific examples that
illrsrrate these
conclusions.
If an exporting countrv's government believr's that an importing

26. country,s goveri-
ment violated the wro's rules in clecieiirig ta impos* an
antidlunping duryl it cair
ccmplain to the wro. B3,early 2011^ rhere had been 86 such
conipiaiits, including
42 abaut fhe lar.vs and procedures of the U.S. governfitent. as
of e'arl1,2{)ll. panefi
irad been convelled and reachecl decisions in ibout hall cf
thesr- g6 casrs. Lisualh.
,') ! .,
Chapter 11 Prrsiirg 6rplrr^t I "';
the panels fbund errofs by the itnporting countries. inclr"rding
rrsing inappropriate
procecliires. determiiliilg diiinpiirg margins (or subsid.v rates)
il1 a mallnel' iuconsis^
tent rvith WTO rLlles, uJO O.t*in]*ing iirlury using iticornplete
rnftrrri:ation or brased
analysis. lu some of the cases tlte irnporting coulltlv
impletnetrted changes {iike
,*r,oiiog the ilities) to bring their praitices in line rvith WfO
ruies, brtt itt otlters
rhey irai;e not (yet). Whiie tlie WTO rlispute settlerneni
procedure catt provide sottte
guall againstiuisuse o1'aiiticlulrping duties, lhe process is too
slorv to niinirnize {he
efl'ects of such it'tisuse.

27. Antidumping polic,r' starts oLrt sounrling like it is abottt uniair
exports' But a cioser
exanrination inrlicatesjhat sornetling else is going on.
Antidutntrtitrg politt: htrs l:'e(onrc
u ntuf or $,u1,.fix' inryart-t'ompeting prctlttcer,t in u grrtx'ing
numher of't'rtrtnffies to gttirt
1*t'pt.{)lection ugrsin,rt itrptsrts,-it,itlt theT.tsztul deutlx'eigllt
{'{}sts lo tltr tt'ttrkl und
ir.t th-e intpot.ting tr1,intt'r,. As sho*,n in Figure I1,2. the
avel'age antidumping duties
rinposeei against foreign exportLrrs are generallli very high.
mLrch hi-Uher thiur mrrst
regLrlar tarilfs, so tlre cleadtveight losses can be large.'fhere is
also tire cost of argiiitig
thi eases and gathering the daia to prove or disprove dunrping
and injury' In acldition'
inrport-comp.iing firtns use the threat of a durnping complaint
to prod exporters to
raise their prices an<i restrain their conrpetition-the
hurusstnertt elftt--even if nct
conipiaint is actualiy filed.
ti, ai'it-i iii ii *:{'iiii*
Althirugh there are exceptigns. the current practice of retaliatiot
agaittst dumpirrg
is usually bad for the r.r.orld and f'ol the irnportirtg conntry.r
Yet this practice is fLlllv
consistent r,r,ith current VT'O rules. Reform of the Wl"O ilrles

28. is an importatrt itetl ott
the ageucla for the cul-relt Doha Round of rnultilateral trade
negotiaticnts. Three pos-
sibiiities f'or refbrrn are iliscrissed rn the lollorving
paragraplrs.
Fitst. utttitlyurpting ut'tirsn.s r:utltl ht iiniletl t* .ri/tttttion.t in
v'hit'h pretfut{or.1' &urtp-
ing i.r pluu.vble. T'hii reftrrm rvould focus on the l"Ype of
durnping that is nrost likely
ro be bad for the rvorlci anci lor the irnporting couniry. lt
rvould also align anticlumpitrg
poltc3, u,ith antirrust policy (as it is callecl in the United
States; it is called competitiorl
polic5,, anlimonopoly policy" or sitlilar llames iu other
counfties)' Pro-conlpetition
policies usuailv to.t lri any predatory aciion to gain monopoly
power.
'I'his reform
ivould try, ro limit the scope of antiduntping polic,v. Hclvever.
the proceclnres in a
.Here is an exairple ip r,vhich re:aliaiir:n against persistent
cllmping cculd bring gairrs io the wi:oie
rvorlcj. lf tlre "corrr.riciecj" clLrr-nper aaat.., ij1 price
discrimiiiatiorl, conti{lues lo serve i:Oth trrarkets with a
sirrglo 1tr'ice ihai 15 not toc hiqit, arrd ts rcr'.;arllec1 by i-
;eitirrg ihe duty rerrorve-cl,
the 'uvoricj could erld up

29. bgiier off from tlre temporary puiritive use of tlre dL;ty. The
r,vorld ls betier cf{ in thc senrt'that ouiput i:
reCirected io the hor-.e-ccrur',iry buyers i,vho valued tire good
more hic;hly a1 the rnarqin. One exarnple of
thi: kind of gain is the oulcome of a li,5. durnping case aqainst
Kolean consutner elecltonrcs prcduceis,
r,r,hich leci tJa lcrvering ot the high prices Korearr consurrers
had been paying for these prociucis.
'lhis
is only one of a nlimber of pr:ssible ouicome!, and lhe otltetrs
are ust:ally bad for tlte trrctlrl. lot-
instanrc, iire durripe|s rlay rrto,,e their exltort-rnarket prclclr-
rciiotr to the ir'ilportinq ccuniry;lt some axtra
exl)e;se oi rn,crld tesoLrrce's. Cr llrey rnrqht .rl,iandon the
conlrovelslal fcireiqn rr;rrket lts not .d)rth the
bother if it is spciled by an.:ntir.1,.:r-npirrg riuty.'lhe issLie of
dur"npirrr.; is compiex. The ioxl qtr:es ihe
welfar-e results ihat seem n-rost iikeiy
-)
-J
Strti
Chapter 1 1 I'ir.shirlg E-tlxrri.r ''"r l
i i li .;i;,i:::"l1i

30. Cor,errtnrents promote or subsidize exports more often than
they reslrict oi' tax
exports.r Sorne government efforts to promote exports are not
cotttrcversial according
to intertational precepls {althoLrgh there are questions abcut
}rorv efiective they are),
C6vernlnent agencies like Expolt.Gov of the tJ.S. Department
of'Clommerce provide
foreign-nrarket researclr. inforn:ation on export proceciiires
anil fbreign governlllent
regulations, anrl help rvith contaeting buvers. Covernnent
agettcies sponsor export
promoiion e/ents like trade lairs and organized trips.
Covelnnlents establish export
processing zones that pernrit imports of nrateriais and
coinponents tvith easier custolns
procedures and low or-no taritl's.
Covermrents alsr: provide vadous lbrms o1'firrancial assistance
that beneflt their
expo*ers. ,11 r:11*.g-i;t9'1 sr.li:*i'-?r is contloversial because
it vtolates internalional nornls
about tarr trade. Our analysrs of'export subsidies will conclude
tlut export subsidies are
rrsr-raiiy bacl fiorn a rvorld point of vic:w'. However, the
ititernatiottal division of gains and
losses turns out fo be very dill-erent fitrl rvhat vou rvotild
expect just bv iistening to rr,'ho
firvors export subsidies and who complains about them. Export
subsidies are bad 1lir the
countries that use them. but are good fcr the count'ies that
cornplain atrortt tlteml

31. Governnrents sribsiclize exports in nranv ways. sotrle of theil
delitreratel3.' subtle to
escapg."detection. fhqy use taxpayer"s'money to gii,e iou-
interest loans to exporters 01'
their fbleign custolners. An exarnple is the Ll.S. Export-hlport
Bank, or Eximbank.
Founded in the 1930s. it has compromised its name by giving
easy' credit to U.S. exllort-
ers and their fbreign customers but not to U.S. intporters or
their tbreign sr:ppliers.
Covenlnrents also charge lolv prices on inputs (such as rarv
tnaterials or dotnestic trans-
port services) that go into procluction that r.vill be exportecl.
Ittcorne tax rules are also
trvisteci to give tax relief based on the value of goods or
services each firln ffiporls.
Expol'f suirsiclies are small on arerage. but they loom large in
certaitr proclucts
and fbt' r:efain companies. For instiriice. most Exirnbat'rk ioans
have been channeled
tou'ard a l'erv large U.S. firrns anri their customers. Boeing, in
particulat', has beetl
helped to exfi^a fbreign aircralt orriers by cheap Exir:bank
crcdii. lVore hroadl)'. the
biggt-'st export sutrsidies appiy to agdcultural products.
What are tlie efl"ects on tbe conntrv rvhose goiernnteltt off-ers
the export subsidy'/
Let's exarnlne the efJ-ects f(t a tttntperftive intlu.ttrr.i using
ollr standard supply-and-
demand ij"anervork. We rvill reach the fbllowilg conclusiotts:
l. Al export sLrbsidy expands exports and production clthe

32. subsidized product. I n fact,
the expr:rt subsidy can sr.vitch the proeluct lrorn being
importeci to being exported.
?. An export sLrbsidy iouers tlre price paid by ioleign buyers.
relative to the price that
iocal cotrsurlters pay lilr the produr:t. ln addition. for the
expoft subsidy to tvork as
jntended {the govemment subsidizes onlv exporls. not domestic
pirrchases). soitrethit:g
must prcr;ent local buyers from in:porting the product at tlie
lower fbreign price.
3. The export subsidlr reduces the net national lvell-Lreing of
the expoltittg countrv.
Lett exanrine tl:rec- cases to see the validity ot'tlrese
conclusions.
;lr ihe Urited Siaies tlrtr is not sr:rprisinr; because the Ii.-.
Constitution prohri--rits the'laxinq of expoits.
lnternational Economics - Vol. l
Part lwo l'r,i i., l',rliir
Exportable Froduct, Small Exporting Country
Figtire I1.3 shorvs a stnall coitntry. in this case a country
vr.hose exports of steei pipes
do not all'ect the world price of Sl00 per pipe (sranda;d lenglh).
Wirh tiee tracie ihe
finns in fhe country's conliletitive stee'l-pipeinriusrrv procluc"e
160 million pipcs pi:r.
year anrl export g0 millton (: lfi() - 70t. The government r:rithis

33. c6untrv then 4ecirJes
to otlbr to its flnlls an export subsidy ol'520 per pipe. The
revenue per pipe exprlrterl
then is $120, equal to the Sl0[i price paid bir foreign bu.vers
plLrs rhe$20 subsici_v. Ila
pipe firnr carl get 512{) f-ot each pipe exported. it witl noi sell
ro anv doniestic 6iryer ar
a price lo$'er than S 120" Of course. this is only pclssible
il'clonrestii buvr.rs cannot.just
buy importcd pipes fl'ont the rvorlci narket ar S100, Sonrerhing
nrr,rt t**p ihc crport
tnarket sepitrate lroni the domesiic nrarhet. ('l'his should souicl
larniliar-' it soLinds
likr: persistent dttttiping. In t'act. receiving an export subsicly
is auother rcasop wliy an
exporting firn wcruld exgage in dumping.)
Wltat are the other etlbcts of the export subsjclv in tlris casr'.,
Ilreienue per.unit
rises to $120 (for both export ancl iocal sales). the quantity
prorlur:ed iricreases
Irxport SuLrsidy.
Snrall lour.rtr3.,
Er:portable
Product
Price
i -. ..::
120
100
'i 60 190 Quantity

34. With fiee trade irt the n'cllti price olg100. this sllall
coonlry exporrs 90 nrillion steel pipes. If-the countr-i,
instead ot]-ers an expor'1 sirbsidy oi'520 per.unit exportecl,
revenue per Lrnit exported rises to Str20" and the expr.rr'trnu
finrs nrust receive this aLtiount as the se.lling price ti.oru
donrestic buvers as weli. Domestic production rises f.n:tr
l(r0 to 190 rnillion. dornestic consuntpiion flrils fi.orrr 70
to 50 nrillian, and the couilrlry exports 140 million llipe-s.
Domesiic producels
-uain surplus eqLral tc area r l-./ j g"
dorlesiic c{-)nsulllel"s lose sut'plus eqLuri to area e .r-.1, and
tlie cosi tc.r the gor.errrment of paS,ilg the erport subsir!1, is
area.l .r g .n *. Tite ner ioss in nationtl well-being becailse
olilre export siibsidy is area./plus area /r.
2ntl
AJ'
,4
i
Chapter 11 l'lr.;hiiiq E11,,rr.
ta 190 nrllioii. tf the donrestic price incleases to $120. local
elLrantiiy demzrnde6
ciecreases to 50 rnillion. euantity exported increases to i40
million {: t"qo * 5i}).
Who are the rvittners and losers in the exporting cointry]
Producers gain surplirs
equalloareas{' + f + g.Consuuerslosesuiplusequal to arcae
+./.Th;c*sttothe'
govermlent of pavirig the export subsidv is areas./'* g + h,

35. equal tri the export sub-
sidy of s20 per pipe times the 14i) rnillion pipes expoited n ith
the subsicilr
I'he export subsidy has increased exports and pioduction o1'this
proclirct, bur is it
.qood for the exportittg coLuttry'/ Llsing orir one-dollar. one-
vote r:retric. the answer
is no. Altel we catrcel out the rnatching gains and losses. tJie
net loss in national
rveil-being is areas.l and h. Area.l is the cr:**i;;:lc}tiq]r:
#f!err:"i of the export sub-
sidy. the iost consitltrer strplus lbr those consrlmers squeezecl
out of the niarket
rvhen the domestic price rises above tire wolld price. Area /r is
the ?:;r'r:{.:i;r..-iiilr-r
l'i''i'*q-i of tlie expot'l sLrbsicly, th* loss due to encouraging
clonestic productign that
has a resource cost gl'eater than the world price {the wori<i
stanclarci fbr efficient
ploeluctioli). Although tliese two triangles are on the opposite
sides of the graph.
because this is an exportable proclirct rather ihan an irnprirtabie
producf, tne-v- ir.e itre
sane kintls of eflects sitorvn for the irnport tarilf in Figure 8.4.
The ioss of natiilnal
well-being l-orthis small exporfing country is also a loss forthe
norl<1.
Exporlable Prodqct, Large Exporting Country
We'r'e just seen that a sniall exporting country han s itself by
oltbring an expor{ sutr-
sldv to its conrpetitive exporting industry. Perliaps the resulr
isdillereniif the exporring
countly is large enouqit to affeet the rvorld price. lriot so--in
fact, it nrav be 1t'orse.

36. Figure I 1.4 shcrvs this case. With fiee tarle the rvcrlcl price is
S 100 per pipe, ihen
tite exporting-coulltrY governt'nent oltbrs the exilort subsiel,v
o1'$20 per pipe , e,rportrug
f-inns rvant to export ltore to f;et r-r-lore o1'the su'hsirJy. To
get lbreigri .oirri,**i, to truy
rtrore 0f the e.xportecl proiittct. the exporting firms lnust lou'er
tli"* export price. And.
just as in the srlall-countrv case" domestic buyers in ihe
exporting counhy must end
up paying S20 more than the export price {assuming ihat rhey
canriot inrport fr-opr the
rest of ihe rvorid at the ne.v world price).
4/e can see the resulting equiiibrium more easily in panel 13 of
Lrigure ii.4. I.he
export sultsidy creates a wedge of S20 between the price lhat
fbreigri*inrporrers pay
and the revenue per unii that exporters receive. Tliis $20 wed-re
"fiis,' (verticatly.j ar
tlie quantigr traded of 110 million pipes. fhe new $,orld pricJis
sBg, the price paid
b}' the importers. The revenue per ulit fo the experr-ting firrns.
and the nerv piice iri tire
exporting courtr,v, is S 108.
Panei A of'Figure 1 l.'l shows rvhat is liapprring in the
exporting coglfry. At $ l0B
p*r pipe. pkrrluelion in the exporting corintry increases iiom l
60 nrillion to I 72 ntil-
lion, and domestic ct-rltsLttnption citcreases ll-orn 70 to 62
rnillion. euantitv exportecl
increases fionr 90 rniilion to I 10 iniliion.
As irr the smail-coutrtry ci1se, the export sr-rbsidy lias

37. increaseci dornestic produclion
and expotls ol pipes. What are ihe eil-ects on v,ell-being in the
exporting country,.)
Prortlrcer snrplus increases bv area. e * / * g. cionsurner
surplus taits uy irea i: * .1.
The exporl subsiciy costs tire governnlent $20 times tlie i10
ntjlliol griits exporteri.
l'his iJovernrnent cosr ol$2.2 billion is area /'-J-. g + h + i +,.i -
L k * lj- trt itrpanelA
{orareal * g * lt I n * r * I * zr inpanel B).
2s8 lnternationalEconomics - Vol. I
Part Two Tr,ulc lrdicl
i,': li :'"'l Export Subsidy. Lar:ge Country, Exportable Product
With tree trade at the u'orld price of $ 100, this large cou11tl'y
exports 90 millir:n steel pipes. If instead the- couritry.
offers arr export subsidy ofS20. its extra exports drive the
world price down to $88. The reveniie per unit received by
the exporling firnrs is $108, and domestic buyers pay a price of
S108. The net loss of well-Lleing folthe e.rporting
country is area./'+ h a- i + i + l, + i+ rn. The export subsidyboth
distorts donrestic ploduction and cortsuniptiorr
and rvorsens the exportin-t crruntry'.s international terql-c of
trade. The irlefficiency cleated lbr the
n'orld is a'rea/''i h i u.
The net loss to tire exporting countrv js the sliaded area in
panel A or B. 'I'his n
loss has three parts:
. The consumption effect {area /').

38. " T'he production effect iarea /r).
, The ioss due to the declirle jn the exporting country's
international terms of trac
(areai *.j + lt * ! * m : area ft + r + t + tt).
1'he export subsidy gives a good bargain to fbreign buyers.
However, their gain is
loss to the exporting country fron selling at a lorver world
price.
We can also use panel B to see the effect on rvorld well-being.
Area n * r * t
increased surplus for the impofiing counh'y. The net loss to the
world is the triangul;
area./'-t h * u. 'Ihis is the loss from too much tradrng of steel
pipes,
Switching an lmportable Product ints an Exportable Product
"lf you throw enough money at something, it will happen." This
adage applies t
expor-t slrbsidies. They can turrl an irnportable product into
one that is exported. Let
see i10w
A. The Domestic Market for Pipes
Price
r,i ...,, r .,.-, .:
108
100
88
108

39. 100
88
172 Quantity
:1 i ' :,', ';. -: i ; , '.., .',; ;