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Nilanjan Banik

THE beneficial effect of free and fair trade is well known. It creates income for the community by reallocating jobs and capital from low productivity to high productivity sectors. This holds true both in the static and in the dynamic sense.

In the static sense, the benefit accrues to countries trading on the basis of comparative advantage (Ricardian theory), or on the basis of different factor endowments (Hecksher-Ohlin-Vanek model). For instance, if Japan has comparative advantage in producing cars and India in steel, then both countries gains through trade. India sells steel to Japan. Japan makes cars with it and exports them back to India.

The dynamic effects of trade on growth depend crucially on the extent of technology transfers or knowledge spill-overs across countries (endogenous growth models and recently, Helpman-Grossman models). In other words, trade plays an important role in a country's economic growth.

Unfortunately, numerous barriers have been created to restrict free and fair trade. Lately, subtle forms of protectionism are being put in place. Most of these protections come in the nature of non-tariff barriers (NTBs). The difference between tariff and non-tariff barriers is that the latter is non-quantifiable and discriminatory in application.

Prominent among NTBs are antidumping measures. These are "product" or "source" specific, imposed on dumped import causing harm to the domestic industry. The Antidumping Agreement was codified during the Tokyo Round of GATT negotiation (1973-79) to stop "predatory" pricing; in which case, there is no harm using antidumping measures. However, in most instances, these are used as tools to restrict market access, and not to stop predatory pricing strategy. Presently, it has earned the rare distinction of being the most widely used type of NTB (WTO Annual Report 2001).

Current trend suggests India is fast emerging as one of the largest users of antidumping duties. The first antidumping case in India was registered in 1992, and thereafter the process has increased leaps and bounds, from eight during 1992 to 67 cases in 1999. Between July 1, 1999 and July 30, 2000, India initiated 27 antidumping investigations, next only to the EU initiating 49 antidumping investigations and the US initiating 29 investigations (WTO Annual Report, 2001). The number of the anti-dumping investigations initiated during 2000-01 and 2001-02 were 28 and 30, respectively (Parliament Question, Rajya Sabha, April 2002).

So how rational are India's antidumping actions? Clearly, they seem to be in favour of the dominant players. By dominant players, one means the market share of these producers, individually accounting for at least 25 per cent of the total market. Of the 64 cases on which final antidumping duties have been imposed, in 40, the number of petitioner is one (Annual Administrative Report of the Directorate-General of Antidumping and Allied Duties, 2001).

That the petitioners are dominant players is proved by Article 5.4 of the Anti-dumping Agreement: "Domestic producers expressly supporting the application account for not less than 25 percent of total produce of like products by domestic industry and domestic producers expressly supporting the application account for more than 50 percent of total production of the like product by those expressly supporting and opposing the application".

Dominant players have good lobbying power and consequently they find it easier to get government support. This generally hold true for all countries. The recent steel tariff hike story in the US is a stark example. The decision was taken to appease the powerful, unionised steel mills in such key electoral States as West Virginia and Pennsylvania.

Besides lobbying, there are other factors that seem to have influenced India's antidumping decision. As in developed economies, here too, one finds some correlation between initiation of antidumping investigations and the performance of some macro parameters. The performance of the domestic economy (proxied with GNP) and industry (proxied with Index of Industrial Production), are negatively related with the initiation of antidumping investigations. This is true examining time series data of GNP and IIP between 1994 and 2001. Whenever the economy performs badly (reflected through a fall in GNP growth or IIP growth), the number of antidumping investigations increases. This is probably because lobbying for protection becomes more effective during recession.

Taking into account only producers is not justified, especially when many consumers are also exporters, who use these affected products as intermediate inputs. True, antidumping duties are countervailed, but the transaction cost involved in getting these duties back is always high.

The sector-specific imposition of antidumping duties reveals that chemicals and petrochemicals are the most affected sectors. Most of these products find their application in drugs, steel, plastic, rubbers, machinery, textiles and cement industries. These are also India's major export items. Higher transaction costs in getting antidumping duties countervailed raise export prices. As all the aforesaid items are elastic in price (buyers buying products from the least cost producers), Indian exporters suffer.

The general consumers also suffer. Examining the rate of price increase for items under antidumping duties vis-à-vis the rise in manufacturing price index, the increase has been more for the former. Between 1995-96 and 1999-2000, the average annual rates of price increases are 5.80 per cent for chemicals and petrochemicals, 3.98 per cent for steel, 9.4 per cent for basic chemicals and pharmaceuticals, and 7.94 per cent for consumer goods.

Except steel, in all other sectors, the rate of price increase was higher than the average annual growth rate of manufacturing price index, growing 4.11 per cent annually (Economic Survey 2000-01).

However, there can be other factors, besides antidumping duties that can contribute to a rise in price. For instance, for chemicals and petrochemicals, price increase is more due to rise in international price of crude oil between 1995 and 1997.

But given that the antidumping duties imposed are around 40 per cent, they nonetheless contribute to a rise in price index.

Increased use of antidumping actions can also undermine India's trading relation with other countries. The US and the EU have already started retaliating by imposing more antidumping duties on Indian exports.

Increased retaliation by our trading partners can cause significant amount of trade diversion. A study on the US antidumping cases precisely proves this point.

The study inferred a considerable amount of trade diversion from the affected countries to the non-affected economies, and that greater the diversion, larger the antidumping duty. This is a cause of concern for Indian exporters, especially at a time when the economy has started relying more on exports.

More caution should be exercised before imposing antidumping duties in India. Domestic industry, instead of asking for imposing antidumping duties, should ask the Government to formulate policies to help the ailing industries.

Their inefficiencies are due to infrastructure bottlenecks and higher input costs. Industry should seek a level-playing field in terms of availability and cost of capital, speedy clearance of projects, simplification of procedures and better infrastructure facilities.

Unfortunately, India like many other countries, is taking undue advantage of the antidumping clause. Since the WTO's endeavour is to do away with trade distortions, the best option lies in scrapping the domestic antidumping laws.

However, this is not plausible. The second best option is to set up an independent regulatory body, accountable to all principal parties — consumers, producers, exporters and importers.

(The author is a trade researcher with Utah State University, US. Feedback may be sent to nilbanik@cc.usu.edu)

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