James C. Hartigan

Dumping and signaling

Abstract A model of predatory dumping based upon incomplete and asymmetric information is developed. The foreign firm may induce exit by the home firm through acting like a low cost competitor, irrespective of its actual costs. The home firm must infer the foreign firms cost through its export price. By tying the export price to the price that the foreign firm charges in the foreign market, a home county antidumping law raises the cost of signaling low production costs to the home producer. The law has signal enhancing or inhibiting effects, which may adversely affect the home firm with ambiguous welfare consequences.

Perverse Consequences of the GATT: Export Subsidies and Switching Costs

GATT permits its members to retaliate against unfair trade practices committed by its signatories. However, GATT imposes requirements on this retaliation. These include establishing injury to the pertinent industry in the offended country, requiring that the unfair practice be currently in existence, and mandating that duties not exceed the dumping or subsidy margin. Because the injury requirement gives the foreign government a period lead in introducing the export subsidy, the home government is unable to completely restore the competitive balance when switching costs are present because of these restrictions. Thus, GATT may induce the behavior that it seeks to deter. Copyright 1996 by The London School of Economics and Political Science.

An Antidumping Law Can Be procompetitive

Home and foreign duopolists collude in the absence of an antidumping (AD) law because competition law makes renegotiation of collusion more costly than imposition of punishment for defection. Introduction of an AD law with a weak injury standard can undermine collusion by providing a low-cost mechanism for renegotiation. This induces dumping by the foreign firm and defection by the home firm. An AD law can be procompetitive, in contrast to recent literature suggesting that an AD law can facilitate collusion. The law is asymmetric, providing a greater incentive for home-firm than foreign-firm deviation.

Is the GATT/WTO Biased Against Agricultural Products in Unfair International Trade Investigations?

The unfair-trade codes of the GATT/WTO are better suited to addressing complaints from manufacturing than agriculture. This is because the seasonality and uncertainty of agricultural output, together with substantial use of contracting with factors of production, makes sales at a loss a rational business practice during certain times of the year. This cost dumping induces the use of constructed values in the calculation of dumping margins by the US, which typically generates high duties. The model provides for cyclical dumping arising as a supply phenomenon. This contrasts with cyclical dumping in manufacturing that is induced by demand fluctuations.

Making Sense of Safeguards

The ASG was negotiated in response to the use of extralegal measures and inappropriate use of legal measures to restrict imports. More effective disciplines regarding implementation of Article XIX was recognized as an important unilateralism deterrent in policy implementation. These disciplines are subjective and objective. Disciplines that are quantifiable are more effective. Utilizing both balances rules and discretion. A home and foreign producer are used to assess SG in the context of adverse shocks. This framework entails a novel feature appropriate to SG. Firms are permitted to select optimal levels of downward flexibility in output in response to a possible shock. The extent of adjustment is directly related to the cost incurred. Firms choose flexibility in stage one and output in stage two. Without SG, firms will not insulate themselves completely from the conditional expectation of an adverse shock. Introducing the ASG increases the relative adjustment burden for the foreign firm.

Did the Agreement on Safeguards Nullify their Use

Abstract The Agreement on Safeguards (ASG) clarified the obligation to apply measures in accordance with the most favored nation (MFN) principle. Because foreign supply shocks can be non-uniform, MFN can induce nullification and impairment (N&I) complaints at the World Trade Organization from (third party) foreign suppliers not benefitting from the shock. These suppliers’ exports are reduced by both the beneficial shock to other exporters and the safeguard (SG) action by the home country. Although the ASG made use of SG more attractive by delaying requests for retaliation for three years in the absence of compensation for N&I, this may have been negated by the MFN requirement. Thus, it becomes a plausible explanation for the proliferation of antidumping actions. For recent U.S. anti-dumping cases against multiple exporting countries, dumping margins differing by over an order of magnitude were common. This suggests that alternative use of SG with an MFN requirement would elicit third party N&I.

Disfavored Nations: Anti‐Dumping at the WTO

The proliferation of Anti-Dumping actions may be explained by the Most Favored Nation rule of safeguards, the advantages of unilateral retaliatory measures as an alternative to formal dispute resolution, and the exercising of discipline in a risk-sharing agreement. Use of unilateralism is attractive to developing members that are constrained by legal capacity. The expression of the Anti-Dumping Agreement appears to be a hybrid of rules and standards. However, a lack of interpretive guidance from the WTO and the opportunities for discretion in the implementation of rules render them standards in a shroud of rules. This is due to the presence of large proxy spaces, or the domestic investigative authority being substantially the arbiter of satisfaction with the agreement.

Compliance Institutions in Treaties

Due to the costs of negotiating treaties, signatories may defer the resolution of uncertainty to the future rather than include all possible states of nature in a treaty. This particularly will be the case when addressing uncertainty will increase the negotiating costs. In such a context, the existence and form of compliance institutions is of particular importance. We develop a formal model to consider the relationship among treaty negotiation, compliance institutions, and uncertainty over future states of nature. In our model, states of nature determine the costs of compliance with a treaty. We explain that when resolving uncertainty is deferred to the future and compliance costs are unobservable, an escape clause facilitates viability of a treaty. When escape is considered to be de jure compliance, and signatories are incompletely informed about one anothers compliance costs, an incentive for opportunistic breach arises. In such a context, we demonstrate that a dispute resolution mechanism that discloses compliance costs of a signatory invoking escape can deter spurious use of the clause. We incorporate uncertainty through the specification of a discrete time, continuous-state stochastic compliance function. Because many policies for which treaties are negotiated exhibit persistence in their costs of compliance, we contrast compliance cost processes with and without persistence. We explain how persistence in compliance costs that exhibit uncertainty may undermine the effectiveness of an escape clause, even with a dispute resolution mechanism. Persistence also increases the cost of negotiation by increasing the expected costs of compliance, which may result in fewer commitments, rendering the treaty less viable. We examine two options to mitigate these effects: dynamic adjustment of commitments through an institutional compliance structure specified in the treaty, and renegotiation. When an escape clause fails to preserve compliance under persistence, dynamic adjustment may be more likely, as renegotiation requires a stronger commitment to the agreement. When dynamic adjustment entails periodic scheduled reconvening of signatories, however, compliance may be undermined and disputes may be more frequent.

Endogenous Obfuscation in Injury Investigations

Eligibility for public benefits may require an injury investigation. The thoroughness of the investigation is a policy decision of the government. An investigative authority chooses the optimal effort to infer from a noisy signal (business plan) the quality of management and market conditions when a firm petitions for benefits. Under plausible conditions, firms will underperform to raise the probability of an affirmative verdict, and the authority will expend low investigative effort. Good and bad managers will obtain relief under adverse market conditions. This is preferred by good managers, as they do not have to separate by sending a costly signal.

In or Out? Standards, Discretion, Compliance and the WTO

Self enforcement in international agreements in the presence of uncertainty in the form of shocks and imperfect information regarding the extent of compliance by other members is enhanced by use of standards in performance of commitments. Standards are less precise than rules. They must be sufficiently demanding that under compliance is distinguishable from non-compliance. Discretion permits under compliance as an alternative to renegotiation of commitments, safeguards, and the filing of disputes. Under compliance, particularly when restrained, is a lower cost and less confrontational resolution to addressing adverse shocks. Signatories are restrained in under complying so that the effect their actions are imperfectly distinguishable from the effects of shocks. Compliance and evidentiary standards for formal disputes define the accomplishments of the agreement. Evidentiary standards serve as an important discipline to under compliance even in the absence of formal disputes.