Contingency Measures:

Trade Effects

Lecture 6
 Scale Economies and Specialization
• Switzerland produce watch at price P1 as its price falls with time.
• Thailand can produce the commodity more cheaply (P2) but it is difficult for it to
reach the efficient scale due to presence of the Swiss players, as initial cost is C0.
• Can there be a role of dumping?

Price, Cost
(per watch) • Thailand is the
newcomer
• Switzerland is
the incumbent.
C 0
1
P1 ACSWISS
2
P2 ACTHAI

Q1 Quantity of watches
produced and demanded
 How Dumping takes place?

Cost, C and • Consider a single monopolistic domestic firm

Price, P • The foreign demand curve is a straight line
due to competition
3
PDOM
MC The Firm produce
the Monopoly
2 1 output, exploit the
PFOR position in domestic
DFOR = MRFOR industry (MC =
MRDOM = PFOR) and
DDOM
export the rest.

MRDOM
O QDOM QMONOPOLY Quantities produced
and demanded, Q

Domestic sales Exports

• Production = OQM
• Domestic Consumption = OQD
Total output • Exports = QDQM
 Dumping
• Dumping can occur only if two conditions are met:

• Imperfectly competitive industry

• Segmented markets

• Example:

Exporter Domestic Price Export Price to Export Price to

in China India US
China $ 10 $ 9.5 $9

• Given these conditions, a monopolistic firm may find that it is

profitable to engage in dumping.

• Dumping per se is not WTO-incompatible, but it’s margin should

not cross 2 percent ad valorem

Other Dumping Scenarios ..

 Why Dumping takes place?
• Predatory intent – displacing foreign competition in its home market
by entry with a lower price – short run losses compensated by long run
monopoly profit
• Global competition and the urge to sell at a marginally lower price in
foreign market to fulfill tender requirement – continue to charge
monopolistic price in the home market due to limited competition
• Subsidy from home government to cover initial losses, driven mainly by
– ‘national pride’, ‘sunrise argument’, ‘employment creation’ etc .
• How is dumping margin determined?
Country Domestic Price in Export Price to Absolute Level of
home country India Dumping
China $ 115 $ 95 $ 20
Russia $ 300 $ 75 $ 225
Thailand $ 20 $8 $ 12

A. Dumping Margin = 20 / 95 X 100 = 21.05%.

B. Dumping Margin = 225 / 75 X 100 = 300.00%.
C. Dumping Margin = 12 / 8 X 100 = 150.00%.
 Effect of Subsidy on Trade Equilibrium
D
• AB is the best reaction function of the
Output for the Domestic Firm

A’ domestic firm (country A) to the

foreign firm (no subsidy).
• CD is the best reaction function of the
A G foreign firm (country B) to the
domestic firm.
• E is the equilibrium.

B’
B

C Output of the Foreign Firm

• When the domestic country provides subsidy, the response function
shifts to A’B’ and the output of domestic players increases.
• On the other hand, output of foreign firms decreases.
• G is the new equilibrium.
• What happens, if foreign country decides to subsidize in Period 2??
How the Contingency Measures Work?

AD, SCM, SFG

 How do the Contingency Measures Work?
Provisions Anti-Dumping
Proof Dumping and injury to domestic
industry and causal link between
them
Incidence 1. Dumping margin more than 2
percent
2. Volume of dumped import more
than 3 percent from a country
3. Volume of dumped import more
than 7 percent from all
partners
Precondition for Supported by more than 50
initiation percent of domestic industry
Initiation under Supported by more than 25
special circumstances percent of domestic industry
Provisional Measure Not sooner than 60 days
Duration of 4 months, extended to 6 months
Provisional Measure upon request
Price Undertaking Voluntary, but suggestion may be
provided
Duty Determination Within 12 months, under no
circumstances beyond 18 months
Duty amount Lesser Duty Rule
Duration For the necessary period, not
more than 5 years
Subsidies and Countervailing
Measures
Subsidy and injury to domestic
industry and causal link
between them
Total ad valorem subsidization
of the product exceeds 5
percent
Supported by more than 50
percent of domestic industry
Supported by more than 25
percent of domestic industry
Not sooner than 60 days
4 months, extended to 6
months upon request
Voluntary, but suggestion may
be provided
Within 12 months, under no
circumstances beyond 18
months
Lesser Duty Rule
For the necessary period, not
more than 5 years
Compiled from respective WTO Agreements
Safeguard Provisions
Increased import and injury to
domestic industry and causal
link between them
Significant overall impairment
to domestic industry
Major section
Major section
Quick determination
200 days
Voluntary, but suggestion may
be provided
Quick determination
Lesser Duty Rule
For the necessary period, not
more than 8 years since the
date of investigations
Dumping
 The Dumping Universe: Policy Questions

Dumping Margin Material Injury Causal Link

Representative Industry?

Essential Facts
Facts Available Like Product
Investigation with Foreign Firms- primary or secondary data?

Non-Market Economy Status Opportunity for Defence

Lesser Duty Rule – How much to charge? Consultation with Domestic Players?

Price Undertaking - Polite request to stop Dumping?

AD Duty - Ad Valorem or Specific Duty?

 Stages of Dumping: Policy Choices

Garments

Fabric

Fabric Dumping by Chinese firms

Cotton

• What is India’s export interest?

• In whose favour?
• How should the government react?
• Industry?
• Price Undertaking?
• Lesser Duty Rule?
 100

0
200
300
500
600
700
800

400
China
Russian Federation
Ukraine
Brazil
India
Indonesia
South Korea
Malaysia
Initiations

Mexico
By Exporter

Singapore
South Africa
Taipei, Chinese
Measures

Thailand
Turkey
European Union
Japan
United States
100

0
200
300
500
600
700

400

Argentina
Australia
Brazil
Canada
China
Egypt
Anti-Dumping Investigations Scenario

European Union
India
Indonesia
By Importer

Korea, Republic of
Mexico
South Africa
Measures

Source: Constructed from WTO Data

Initiations

Turkey
United States
 Which Sectors are most affected by Dumping?
1200

1000
Initiations Measures

800

600

400

200

0
Chemical and Plastic and Paper and Textile and Cement, Glass Base Metals Machinery and
Allied Rubber Wood Garments etc. Equipment
industries

EU and US Policies
Constructed from WTO AD database
 Global Evidence: US-Viet Nam Catfish Debate
• Catfish can be imported cheaply from Viet Nam in the US and the local
catfish industry complained against it.
• First, it was complained that the Viet Nam variety contains traces of
certain harmful chemicals.
• Next it was claimed that the Viet Nam variety is much different from the
US variety. After several round of discussions, the Viet Nam exporters
started to call their variety basa or tra (meaning catfish in their language).
• What’s in a Name? The joy of the US players were short-lived, as the US
consumers started purchasing more of the Viet Nam variety, thinking the
nomenclature to represent a more exotic premium product.
• Finally, the US producers tried to access their last resort, anti-dumping.
However, it was already argued that the Viet Nam product is NOT
CATFISH!!
• Anti-Dumping Duty of 66 percent, increase in September 2010.
• Farm Bill 2008: change the U.S. definition of catfish to include Vietnamese
tra and basa catfish and transfer the management of catfish imports from
the U.S. Food and Drug Administration to the Department of Agriculture

Brambilla et al (2009)
14
 India as Importer (1)
• Case I - Anti-dumping investigation concerning imports of 1-Phenyl-3-
Methyl-5-Pyrazolone from China PR
• Import of the subject goods from China PR constitutes almost 98% of
total imports to India
• Domestic industry showed that Sinochem Tianjin and Anhui Bayi
Chemicals Group co. Ltd. are under state control – so NME clause
applicable.
• No response was received from any exporter on the normal value of
the subject goods from China PR.
• Constructed normal value was therefore considered.
• The dumping margin was found to be 37.46 %.
• While the domestic demand of the product has increased by 66%
compared to the base year, the sales of the domestic industry has
declined by 23%.
• While market share of dumped imports increased from 6.68% in the
base year to 56.69% , the same for domestic industry declined from
93% in the base year to 43%.
• Final duty US $ 1.218 / KG

Source: DGAD Documents

 India as Importer (2)
• Case II - Anti-dumping investigation concerning imports of Ball Bearings (up to 50 mm bore
dia) from China PR, Poland, Russia and Romania
• Korea was kept out of investigation, as there is no evidence of dumping from Korea
• The exporters claimed that there is no distortion of production costs and financial situation
as the Respondents are entirely private companies
• The authority found that sufficient evidence and information for considering normal value
had not been furnished.
• Indian team went to Beijing to check the accounts of the firms.
• Chinese Government re-affirmed that there is no subsidy to the cost of labour, water and
electricity.
• Finally India was convinced that market economy conditions are prevailing and agreed to use
the ex-factory export price for several firms.
• However for remaining non-complying firms, best available information was applied.
• India agreed to use the data provided by Russia and Romania.
• For Poland, complete information was not furnished, hence domestic sales price was
considered as normal value.
• Dumping Margin: China (3.13%), China (280.01%), Poland (253.17%), Russia (368.21%) and
Romania (181.46%).
• Share of dumped import increased from 16.94% in 1998-99 to 68.59% during POI.
• Interestingly: production, capacity utilization, sales, profitability, productivity has gone up,
hence no material injury has occurred.
• Hence no duty was imposed.

Source: DGAD Documents

 India as Exporter: Canned Preserved Mushrooms
• Import Administration (USA) refused to make an adjustment to the costs
reported by exporter, who was claiming that “extraordinary events”
reduced the company’s crop yield during the period of investigation.

IA views IA Actions

Heavy rainfall not unusual for India and
management had taken preemptive steps to
mitigate the effects of flooding by building
drainage ditches.
Various disease prevention measures in place
at companies facilities implied that crop
disease was not unusual or unexpected.
Cost test - every sale was made at a price
below the unit cost of production.
Building Case - Since the company had no sales
above cost (i.e., no profits) during the period
of investigation, profit rate experienced by
the company in the previous year was applied
for establishing gain for the exporter.

• Thus, the company incurred a financial loss during the period of

investigation because of a stunted crop yield; IA declined to adjust for
the unusual output by ruling that the cause was not extraordinary; and
then while determining the duty IA pretended that the company actually
realized a profit on its operations.

• The Taiwan Case – Flash Drives

• DGAD Resources - Case No. : 14/14/2015-DGAD (Radial tyres
import from China)
Subsidy and Countervailing Duties
 10

0
20
30
40
50
60
70
China

India

South Korea

Indonesia

United States

European Union

Thailand
By Exporter

Argentina

Canada

Brazil
Measures
Initiations

Taipei, Chinese

South Africa

Malaysia

0
20
40
60
80
100
120
140

United States

European Union

Canada

Australia

South Africa

Brazil

Peru

Chile
By Importer

China
Subsidies and Countervailing Investigation Scenario

Measures
Initiations

New Zealand

Mexico
Source: Constructed from WTO Data

Argentina
 0
100
120
140

20
40
60
80

Base metals and articles

Plastics and rubber

Chemical products

Prepared foodstuff; beverages etc.

Machinery and electrical equipment

Textiles and articles

Live animals and products

Articles of paper

Vegetable products

Mineral products
Measures
Subsidies and Countervailing Measures: By Sector

Initiations

Animal and vegetable fats, oils etc.

Articles of wood
Source: Constructed from WTO Data

Vehicles, aircraft and vessels

 Unit Price of Import of Bars and rods of alloy steel
other than stainless, not further worked than hot-
rolled, hot-drawn (722830) by South Korea (2016)

9000
US $ per Ton
8000

7000

6000

5000

4000

3000

2000

1000

Italy
Viet Nam

Taiwan
India

USA

Germany
Austria
Japan

Ukraine

Ukraine
China

Sweden
Source: Trade Map Data
In 2016, China’s share in Korea’s import is
84.6 percent. India stands at 0.1 percent.
 Subsidies: China’s Price Competitiveness??
• China’s subsidy programs are often the result of internal administrative
measures and are not publicized. Sometimes they take the form of income
tax reductions or exemptions, debt forgiveness and reduction of freight
charges.
• Subsidization is particularly high in steel, petrochemical, high technology,
forestry and paper products, textiles, hardwood plywood, machinery and
copper, and other nonferrous metals industries.
• After much pressure from WTO, China submitted the first subsidies
notification to the Subsidies Committee in 2006. Though the notification
reported over 70 subsidy programs, it failed to notify the subsidies
provided by China’s PSU banks or by provincial and local government
authorities.
• Moreover, no commitment to withdraw several prohibited subsidies were
made.
• China agreed to eliminate all of the prohibited subsidies at issue by
January 1, 2008 after a WTO case against US.
• Actual reform is however still questioned.
 Example: Chinese ‘Help’ to Textile Sector
Subsidy Provider Financial implications
Programmes
Brand Building (Shishi City of Range from RMB 100,000-500,000
Incentives Fujian Province)
Brand Central Government For corporate development projects - grant up
Development to RMB 200,000 or 50 percent of the actual
Fund expenses required; public services projects, if
covered under the public services project plan
jointly determined by the provincial foreign
trade bureau and finance bureau, can be fully
subsidized.
Export Incentive Guangdong Province $1250 subsidy for enterprises with more
Program than $1 million in exports.
Export Incentive Zhejiang Province Provide all companies exporting more than USD
Program $3 million with a subsidy of 0.01 RMB per each
USD $ exceeding this threshold.
Go Global Central Government The initial scale of the fund is RMB 1.35 billion
with RMB 560 million dedicated to projects
related to technology innovation and
restructuring and RMB 800 million for the "go
global" operation.

 This is accompanied by electricity and other input subsidies.

 Strategic Support: Country Cases
Country Policies
United • R & D subsidies in US
States • Foreign Sales Corporations export-contingent subsidy tax
scheme
Canada • Technology Partnership Canada (TPC) since 1996
• Loan funding for so-called “pre-competitive” R & D activities for
companies incorporated in Canada.
• C$2.7 billion in TPC funding commitments have been made for
over 600 projects.
• Had to restructure TPC in 1999 after a WTO Dispute Panel
requested by Brazil determined that it provided illegal subsidy.
• Only in 2006, Canada closed the program to new TPC applicants
except for the aerospace and defence sectors.
• The new entity is Industrial Technological Office (ITO)
South • State-owned Korea Development Bank (KDB) support to certain
Korea Korean industries.
• Lending and equity investments - overcapacity in certain Korean
industries and edge to compete in world market.
• Korea’s support for its semiconductor industry has been
objected by many countries, and it attracted countervailing
duties by the United States for a considerable period
 Case: Incentives provided for R & D in India
Type of institution Incentives
Industries with in-house • Write-off of revenue and capital expenditure incurred on R&D
R&D centres • No import duty charged on the import of certain specialty equipment
for R&D, as specified by the Government, in pharmaceutical &
biotechnology sector and agro-chemical sector
• No import duty on import of capital goods for R&D, for certain sectors
as specified in the Export Promotion Capital Goods (EPCG) Scheme in
the Foreign Trade Policy. For other sectors, there is concessional
import duty.
Industry / private A weighted tax deduction of 200% given under Section 35(2AA) of the
sponsored research Income Tax Act.
programmes
Companies engaged in A weighted tax deduction of 200% under Section 35(2AB) of the Income
manufacture having an in- Tax act for both capital and revenue expenditure incurred on scientific
house R & D centre research and development. Expenditure on land and buildings are not
eligible for super deduction
Investments on plants and Accelerated depreciation allowance given at 40 percent of written down
machinery used for value
manufacture based on
indigenous technology
Technical, educational and No excise duty on excisable goods produced during the course of carrying
research institute out experiments or research
Any wholly owned Indian Excise duty exemption on goods manufactured based on indigenous
company technologies and patented in any two countries outside India, USA, Japan
and any one country of the European Union
Source: Deloitte (2011)
Key Sectors identified by the National Manufacturing Competitiveness Council: Textile and
Clothing, Pharmaceuticals, Leather products, Food Processing Industries
 Trade Game – Boeing-Airbus
Airbus
1 1970: Airbus formed as European consortium
of French and German companies
2 1970s: Spain companies joined the
consortium
3 1979: British Aerospace joined Airbus
Industries
4 1980s / 90s: Each of the four partners
operated as national companies and market
share of Airbus increased in line with its
reputation
5 2001: Airbus became a single fully integrated
company
6 2004: Airbus had overtaken its main rival
Boeing
7 2005: World’s largest and most advanced
passenger aircraft, the A380, appeared
8 Present: Position of Airbus further
strengthened
Boeing
1 1916: Construction of the first plane
2 1917: The Boeing Airplane Company arose
3 During World War I, the Navy needed
training airplanes and Boeing emerged as
leading designer of military aircraft
4 1927: Boeing created an airline, named
Boeing Air Transport (BAT)
5 1958:The US became a leader in
commercial jet manufacture
6 2001: Boeing’s focus on 787 Dreamliner
7 2003: Boeing loses ground to Airbus as
market leader
8 Present: attempts for recovery
Neumann et al (undated)
 Trade Game – Boeing-Airbus
• DS 316 – US complaint against EC in 2004.
• Measures: the provision of financing for design and development to Airbus
companies (“launch aid”); the provision of grants and government-provided
goods and services to develop, expand, and upgrade Airbus manufacturing
sites for the development and production of the Airbus A380; the
provision of loans on preferential terms; the assumption and forgiveness of
debt resulting from launch and other large civil aircraft production and
development financing; the provision of equity infusions and grants; the
provision of research and development loans and grants in support of large
civil aircraft development, directly for the benefit of Airbus, and any
other measures involving a financial contribution to the Airbus companies.
• The subsidies in question include those relating to the entire family of
Airbus products (A300 through the A380)
• The panel found that EC measures lead to displacement of exports of US
LCA from the markets of Australia, Brazil, China, Chinese Taipei, EC,
Korea, Mexico, and Singapore and asked EC to remove them.
• Appellate Body report was released in May 2011.

The verdict: The EC subsidies have caused serious prejudice to

the interests of the US and must be removed.
 Trade Game ..
• DS 317 – EC complained against prohibited and actionable subsidies
provided to US producers of large civil aircraft (LCA) and in
particular the Boeing company, as well as legislation, regulations,
statutory instruments and amendments thereto providing such
subsidies, grants, and any other assistance to the US producers in
2004 – parties request to set aside the original timetable for the
dispute until an unspecified date in the future in 2006.

• DS 347 – US complained that the launch aid provided by the EC

and the member States to Airbus for the development of large
civil aircraft and the loans appear to be subsidies that are
inconsistent with ASCM in 2006– withdrawal in 2006.

• DS 353 – EC complaint against US subsidies for LCA in 2005 – the

panel was supposed to submit report in 2008, but delivered in
March 2011.
The verdict: Some of the measures maintained by the States of
Washington, Kansas, Illinois and municipalities therein, the NASA
aeronautics R&D measures, some of the DOD aeronautics R&D
measures, and the FSC/ETI and successor act subsidies, constituted
specific subsidies.
 Comac C919

Breaking
the
Monopoly?

Comac, in partnership with Russia’s United Aircraft Corp

 Comac: Made in China?

Comac’s planes are as yet not certified by the U.S.

Federal Aviation Administration (FAA) or the European
Aviation Safety Agency (EASA), which severely limits
Source: https://www.aerotime.aero
where they can fly.
 Why the Dispute?
• India’s National initiative, the Jawaharlal Nehru National Solar
Mission, was launched in 2010.

• Phase I Batch I states that projects must use crystalline modules

made in India, while Phase I Batch II states that projects must
use domestically-made crystalline photovoltaic cells and modules;
subsidies are also available for using local equipment.

• Phase II Policy Document (December 2012) – “Provision of

requirement of domestic content for setting up solar power
projects was kept in the guidelines for Phase-I with a view to
develop indigenous capacities and generate employment. It was
noted that the production capacities for solar PV cells and modules
have expanded in the country.”

• US argued this "appears to discriminate" against U.S. photovoltaic

cell and module manufacturers.

On what basis?
 Key Considerations for Domestic Content
Requirement during NSM Phase-II
• Development of 4-5 GW of manufacturing capacity is one of the objectives
of JNNSM
• Current manufacturing capacity (SPV): ~1500 MW
• Cheaper loans available with imported components
• DCR conditions under schemes entailing direct funding support by Central
Government could facilitate development of domestic manufacturing
capacity base.
• Options to operationalise domestic content requirement during Phase-II
1. For all PV projects, cells and modules produced in India shall be used
2. Price preference for domestic manufactured cells/ modules
3. Percentage of domestic content in cost terms (say 50%) for both PV and
thermal technologies
4. Percentage of cells manufactured in India
5. Some batches with 100% domestic content requirement
6. For thermal technologies material equivalent to 50% of supply costs
(excluding land, taxes, erection, financing, soft costs, etc.) should be
manufactured in India during Phase II

India lost, but protested against US policy as well

All is well in Solar
Cell Sector?
 Other Side: Domestic Challenges
• In April 2017, bid to supply 250 MW
power at the auction won by
SolaireDirect, a subsidiary of the
French energy giant Engie, quoting a
record low tariff of Rs. 3.15 per
kWh in Andhra.

• In May 2017, solar auctions

conducted by Solar Corporation of
India at the Bhadla Solar Park in
Rajasthan saw the winning tariffs
fall further, first to Rs. 2.63 and
then to Rs. 2.44 per kwH.

• So, Andhra Government considers

power tariff too high and power
purchase agreement (PPA) delayed
over friction.
•
Safeguard Measures
 Safeguard Agreement: Concern Areas
• Political Factors
– China against US actions
– El Salvador, Honduras, Guatemala and Costa Rica complained against
Dominican Republic actions
• Regional Dimension
– EU noted that despite the lack of any sudden and sharp increase in
imports of Table wine and lack of serious injury, SG measures was
introduced – but imports from MERCOSUR countries had been
excluded from the Brazilian authority’s investigation (WTO, 2012).
– Argentine SG actions against footwear import from third countries
came under scanner as there was no intra-regional SG mechanism
against MERCOSUR countries (Baracat and Nogues, 2005).
• Legal Issues
– Importance of the process of liberalisation and of structural
adjustment (Wolfe, 2009)
– ‘significant cause of material injury’ is open to interpretation - SG
measures constantly run the risk of being abused
 Safeguard: Concern Areas ..
• Economic Dimension
– Rise in developing countries for low-tech products with tariff reform
– SG actions both explicitly and implicitly lead to departure from MFN
principles (Bown and McCulloch, 2004).
– Economic impact of SG is a function of the form in which it is applied and
might discourage non-RTA partner exports.
– While calculating serious injury, US authorities often applied a higher
standard for SG vis-a-vis the same under AD and CVD cases (Baldwin and
Steagall, 1994).
– Optimality of SG as a trade policy tool has also been questioned, as the
benefits of the SG actions are much lower than the associated costs (Read,
2005).
• Problems for newcomers
– SG measures result in quantitative restrictions in terms of tariff rate
quotas, where licences are often based on historical market shares in
recent years.
– This practice for obvious reasons goes against the interest of countries
who newly enters the product market facing SG actions (Bown, 2010).

Bown (2013) – US 2002 Steel Safeguard

 Safeguard Trends
40

Initiations Final Measure

35

30

25

20

15

10

0
1995

1996

1997

1998

1999

2003
2000

2001

2002

2004

2005

2006

2007

2008

2009

2016
2010

2012

2013

2014

2015
2011
Constructed from WTO Safeguard database
 0
5
20
25
30
35
40
45

10
15
Chemical

Base Metals

Stone,
Cement Etc.

Live Animals

Prepared
Foodstuff

Vegetable
Initiations

Textile
Products
Measures

Machinery
Safeguard Trends – Sectors ..

Products

Rubber and
Plastic
Constructed from WTO Safeguard database
 SG Negotiations: Concerns
• Devising a Special Safeguard Mechanism (SSM) both in terms of price and
volume triggers, which would be acceptable to both developed and
developing Member countries.

• December 2008 proposals yet to be accepted by both set of countries

• In October 2012, the Friends of Safeguards Procedures (FSP) (WTO

grouping made of Australia, Canada, the European Union, Japan, Korea, New
Zealand, Norway, Chinese Taipei, Singapore and the United States)
expressed concern about “procedural, transparency, and due process
issues” related to safeguard investigations.

• The FSP especially cited the following “examples of where there appears to
be an emerging and serious disregard of multilateral rules”: imposition of
provisional safeguard measures without clear evidence; lack of rationale
and consistency in the data examined during the investigation; “suspension”
of previously imposed safeguard measures; untimely notifications to the
Committee; and unwarranted safeguard investigations.

Most important: what is the coverage of ‘unforeseen

development’ provision?