by Dan Ikenson, policy analyst, Center for Trade Policy Studies, Cato Institute

Few trade policies engender more bitterness and interna¬tional ill will than the U.S. antidumping law. For many years, that law has been the weapon of choice among domes¬tic producers seeking to quell import competition. While defenders of the antidumping regime point to its use as a means for redress of unfair trade, scrutiny of the law in prac¬tice exposes the fallacy—even irony—of that justification.

In reality, administration of the antidumping law is entirely divorced from the supposed theoretical justifications articulated by its defenders. Furthermore, it is fraught with methodological distortions that routinely exaggerate and even fabricate dumping margins. The result is to cripple nor¬mal, healthy import competition and injure downstream U.S. industries and consumers.

Possibly the most egregious distortion is the practice known as “zeroing.” Its application is a significant cause of the systemic overestimation of dumping margins and subse¬quent application of inflated antidumping duties.

To appreciate the impact of zeroing, it is important to understand how the U.S. Department of Commerce calcu¬lates dumping margins.2 In a typical antidumping investiga¬tion, DOC calculates weighted-average net prices for each product sold in the United States. It then compares each of those U.S. prices to the product’s normal value, which can be calculated a number of different ways but is ideally the weighted-average net price of the most similar product sold in the home market.3 Zeroing is introduced after the com¬parison of the U.S. price and normal value.

When normal value is higher than the U.S. price, the dif¬ference is treated as the dumping amount for that sale or that comparison. When, however, the U.S. price is higher, the dumping amount is set to zero rather than its calculated neg¬ative value. All dumping amounts are then added and divid¬ed by the aggregate export sales amount to yield the compa¬ny’s overall dumping margin. Zeroing thus eliminates “nega¬tive dumping margins” from the dumping calculation. In so doing, it can create dumping margins out of thin air.

In Table 1 comparisons of the average prices of five products in both markets are presented. Each product is sold at identical net prices in both markets with the exception of Product 1 and Product 5. Product 1 is sold for $0.50 less in the home market than in the U.S. market, and Product 5 is sold for $0.50 more. The unit margin is equal to the amount of dumping calculated for each unique comparison. The arithmetic sum of the individual dumping margins (total mar¬gin) is zero because the price differences for products 1 and 5 cancel each other out. But surprise: This is not how dump¬ing is calculated by DOC.

Rather, the negative dumping margin on Product 1 is set equal to zero and is thus denied any impact on the overall margin. Thus, by engaging in zeroing in this example, the DOC would find a dumping margin of 10 percent (the sum of the total PUDD4 divided by the sum of the total value) despite the lack of any difference in overall price levels between the two markets.

Table 1 Zeroing

Product Net U.S. Net H.M.* Unit U.S. Total TotalTotalCode Price Price Margin Quantity Margin PUDD Value

1 $1.00$0.50 -$0.50 100 -$50 $0 $100 2 $1.00 $1.00 $0.00 100 $0 $0 $100 3 $1.00 $1.00$0.00 100 $0 $0 $100 4 $1.00 $1.00 $0.00 100 $0 $0 $100 5 $1.00 $1.50 $0.50 100$50 $50 $100

TotalMargin $0 Total PUDD $50 Total Value $500

PercentMargin 10%

Table 2 Percentage Changes to Calculated Dumping Margins in Actual DOC Determinations When Refraining from Zeroing

Consider the results of 18 actual U.S. dumping determi¬nations in Table 2. Using actual case data and the DOC’s dumping calculation computer programs, it was possible to calculate the actual effects of zeroing in these particular cases. In 17 of the 18 determinations, the dumping margin was inflated by zeroing. In 5 of the cases, the overall dump¬ing margin would have been negative. On average, the dumping margins in the 17 cases would have been 86.41 percent lower if zeroing had not been employed.

Certainly, the impact of zeroing varies from case to case. If every comparison generates a positive dumping margin, then the prohibition of zeroing will have no impact. But if there are many comparisons generating negative margins, or if there are only a few generating large negative margins, the prohibition of zeroing can have a very substantial impact on the amount of antidumping duties ultimately applied.

On April 13, 2004, a WTO dispute panel ruled against the U.S. practice of zeroing in a case brought by Canada involving softwood lumber. The panel found that “the United States has violated Article 2.4.2 of the AD Agreement by not taking into account all comparable export transactions when DOC calculated the overall margin of dumping as Article 2.4.2 requires that the existence of margins of dumping has to be established for softwood lumber on the basis of a compari¬son of the weighted-average-normal value with the weighted average of prices of all comparable export transactions, that is, for all transactions involving all types of products under investigation.”5 By setting equal to zero the dumping mar¬gins of those comparisons where the average export price exceeded the average normal value, the DOC failed to take into account all comparable export transactions.

The WTO’s ruling in the lumber case is not surprising since the practice of zeroing had already been found to vio¬late the WTO Antidumping Agreement in a previous case brought by India against the European Union involving bed linen. In that case, the WTO Appellate Body ruled in March 2001 that the EU’s practice was WTO-inconsistent for the same reason.6 The European Union has since changed its practice as a consequence of the Appellate Body’s ruling, but loopholes remain.

The U.S. zeroing methodology is also under WTO attack from another quarter.In February 2004 the European Union requested the formation of a WTO panel to hear its com¬plaint about 31 different U.S. antidumping cases in which zeroing had been used. The EU seems to be approaching this complaint particularly fastidiously, apparently—and rightly—concerned that the United States will exercise every contingency available to retard antidumping reform. Presumably, the inclusion of 31 different cases in the com¬plaint is designed to nip in the bud any attempts by the United States to respond to WTO indictments about zeroing on a case-by-case basis.

Importantly, the 31 cases include antidumping investiga¬tions as well as administrative reviews of existing antidump¬ing orders. The methodologies for calculating dumping are slightly different for each type of proceeding, presenting a potential loophole if the WTO were to rule on only one type or the other. It is important that the WTO issue an unam¬biguous decision that the practice of zeroing violates the Antidumping Agreement regardless of whether individual-to¬individual, individual-to-average, or average-to-average comparisons are used to calculate dumping.

While the United States is likely to appeal the panel’s decision in the Canadian lumber case, it is likely that the Appellate Body will come to the same conclusion that the panel did, just as the Appellate Body did in the case involv¬ing Indian bed linens. When it does—or if there is no appeal—the United States should seek to bring its antidump¬ing calculation methodology into conformity with the Antidumping Agreement in an expeditious manner.

The growing list of adverse WTO rulings with which the United States has failed to comply is serving to undermine the integrity of the dispute settlement system. Congressional resistance to repealing or revising the Continued Dumping and Subsidy Offset Act (or Byrd Amendment), which was ruled a violation of both the Antidumping Agreement and the Agreement on Subsidies and Countervailing Measures by a panel and the Appellate Body, is fostering doubts among U.S. trade partners about U.S. commitment to the WTO.8 Congress’s failure to act on the Foreign Sales Corporation/Extraterritorial Income (FSC/ETI) issue, which was determined to constitute illegal export subsidies by two panels and upheld twice by the Appellate Body, has led to the European Union’s imposing retaliatory tariffs on U.S. exporters. Failure to repeal the Antidumping Act of 1916— and the decision of a U.S. court to award damages under that statute even after it was deemed a violation of the Antidumping Agreement—threatens further damage to the integrity of the dispute settlement process.

Although the United States pushed hard in the Uruguay Round for the creation of a dispute settlement body that would render determinations that would be respected, ironi¬cally it is the United States that has been especially dismis¬sive of its findings. The unfortunate implications of this obstructionism are clear. As U.S. Trade Representative Robert Zoellick explained to a congressional subcommittee last month, “Our ability to demand that others follow the trade rules is strengthened when the United States addresses cases we lose."