Protectionism Remains a Danger to Economic Recovery

Tough times almost always raise the pressure for trade protection, and the current global economic troubles are no exception.  President Obama has generally resisted this impulse, asking Congress to approve new free-trade agreements with Colombia, Panama, and South Korea.  Still, Congress has yet to act. And here and around the world, new duties or other restrictions have been applied on a range of imports. More broadly, protectionist demands from India, Brazil and other large developing nations have stalled the completion of the Doha multilateral trade round.   Even so, a renewed commitment by Congress and the Administration to expand trade may be the best way currently available to help support a faltering U.S. recovery. 

Such a push will have to confront the strong temptation in times like these to turn to measures which would reduce trade, most notably anti-dumping and countervailing duties against imports from developing countries.  The futility of this approach has been demonstrated time after time, perhaps most recently in the decision by the International Trade Commission (ITC) to slap anti-dumping and anti-subsidy duties on imports of coated paper products from China and Indonesia.  I won’t argue about whether or not that decision was consistent with U.S. law.  My focus is entirely on whether or not it will help or harm American consumers, paper companies and their employees.  So I conducted a case study to find out:  The conclusion is, those duties harm American consumers without providing any assistance to American paper companies and their workers.

This issue is especially timely since September 21 of this year is the one-year anniversary of the Department of Commerce decision to impose the new antidumping and countervailing duties on coated paper imports from China and Indonesia.  The ITC reaffirmed the duties last October with the final vote in November 2010.

The case began in September 2009, when three large U.S. paper companies and the United Steel Workers, which represents 6,000 of their employees, filed for relief from the ITC under the anti-dumping and countervailing duty laws.  They won their case: The ITC imposed duties of between about 8 percent and 135 percent on coated-paper imports from China and duties of 18 percent to 20 percent on imports of those products from Indonesia.  These duties, of course, raise the prices for those imports here, wiping out most or all of the difference between the prices that Americans businesses and consumers paid for those imports and the prices they paid for coated-paper products made here.  And without that price competition, the result is higher prices not only for the imports, but also for U.S. and European paper products.  

This makes no economic sense:  At a time when overall demand by American consumers and businesses is flagging, forcing them to pay more for these products only leaves less for them to spend on everything else.  

Nor are there benefits for our own paper producers and workers to offset these higher costs.  The reason lies in the fact that our producers compete with Indonesian and Chinese paper makers not only here, but around the world.  So, as the new duties contract their share of the U.S. market, the Indonesian and Chinese paper producers have more product to sell in third-country markets.  We found that this increase in the available supply of these products will drive down the prices of Chinese and Indonesian coated paper in those countries between 7 percent and nearly 19 percent.  The predictable effect is that their market share in those countries will increase at the expense of American producers.   That’s how global markets work.  

In addition, our new duties may trigger retaliation by China and Indonesia, targeting U.S. exports of the same products to their own markets.  That’s precisely what happened in other cases of U.S. antidumping and anti-subsidy duties.  Since China is the third largest market for U.S. coated paper products, such retaliation could further harm our own producers.

The irony is that coated paper is an example of an unusually well-functioning market.  From 2007 to 2009, when this particular case was filed, coated-paper imports to the United States had actually contracted by more than 30 percent.  Imports from China and Indonesia had increased, but imports from European countries had declined even more, so the domestic market share of American producers had increased from 61 percent to 66 percent.  In addition, the prices paid for these products by American consumers and businesses had fallen by between 2 percent and 6 percent.   This was not a market than needed to be “fixed” by new duties.

Further, the U.S. market for these products was segmented quite efficiently.  An ITC survey had found that business customers for these products judged American, Chinese and Indonesian products comparable in terms of quality, product consistency, packaging, discounts, and credit terms.  Business customers also found Chinese and Indonesian products superior for their lower prices. The survey also reported that American customers preferred the American-made products for the range and availability of product, reliability of supply, delivery terms and delivery time, and technical support.   Various advantages and disadvantages, then, produced a market in which buyers choose based on what is most important to them.  

The emergence of China and Indonesia as major paper producers also has followed a very powerful and natural dynamic in the global paper industry; namely, that paper production follows paper consumption.  In nearly all cases, a country’s capacity to produce paper products has expanded or contracted with its share of worldwide consumption of the products.  For example, as the U.S. share of worldwide consumption of paper products fell from 41 percent in 1970 to 19.4 percent in 2009, our share of worldwide production of the same products fell from 40 percent to 20.5 percent.   Similarly, China and Indonesia’s combined share of worldwide consumption of paper products went from just over 2 percent in 1970 to 25.3 percent in 2009.  Over the same years, their combined share of worldwide production of those products rose from just under 2 percent to 25.6 percent.

It is also only natural that companies like to see their competitors hobbled.  Laws and regulations in the United States, as in most other countries, still contain hundreds of instances in which a special burden is imposed on certain companies or a special benefit is conferred on other companies, all to the detriment of their rivals.  Consumers almost never win from such special grants.  And as this case study shows, when the special burdens involve protectionism targeted to an industry’s foreign rivals, the American firms and workers that called for the protection also lose in the end.