In public policy the most valuable contributions can sometimes slip by with little comment. And so it was, sadly, with the Productivity Commission’s take-no-prisoners report on Australia’s antiquated anti-dumping regime, released earlier this week.
Australia’s anti-dumping system levies tariffs on overseas goods deemed to be sold too cheaply in Australia. The Productivity Commission was unable to find credible evidence that the noble argument advanced in its support – that it protects Australian jobs from unfair competition – has much validity. Protected firms and workers benefit, but the system imposes bigger costs on other Australian firms, workers, and consumers.
Anti-dumping measures directly increase the price of hundreds of consumer products including toilet paper, tinned tomatoes and coated steel used for building fences, roofs and backyard sheds. Most consumers have no idea they are paying inflated prices for these products. The Australian business customers who pay more are also given little or no weight in anti-dumping decisions.
The term “dumping” conjures up visions of nefarious activity on the part of an overseas supplier. But under the rules a producer is classed as dumping if it sells goods in Australia as little as 2% cheaper than its prices at home.
There are many reasons why an exporter might choose to sell its products at different prices in different markets. A supplier new to the Australian market might discount its product to develop customer relationships. In some markets price cuts lead to much bigger increases in sales volumes than in others. And a drop in the dollar can shift a supplier’s prices from “legitimate” to “dumping” without any change in its Australian prices.
For dumping duties to be imposed, dumping must have caused, or threatened to cause, “material injury” to a domestic firm. Australian producers have not found it difficult to satisfy this threshold. That is because the indicators used by the Anti-Dumping Commission to assess injury – lower prices, loss of profits and reduced market share – are also the outcomes of legitimate competition.
The most common justifications for anti-dumping rules are that they reduce the risks of predatory pricing from overseas suppliers and temporarily assist local firms that are seeking to become globally competitive. But as the Productivity Commission points out, predatory pricing – where an overseas producer sells at below cost for a period to drive out a local competitor before jacking up prices – is largely unrealistic because such firms usually have many remaining competitors, including other importers.
And the system does little to help local firms become globally competitive. It does not require recipients of anti-dumping protections – which last at least five years and in some cases over a decade – to implement strategies to become more competitive. On the contrary, the long-term protections provided by the system can dull incentives to innovate and compete.
A further reason sometimes given for keeping the anti-dumping system is that World Trade Organisation rules allow it and other countries do it. But just because you can do something doesn’t mean you should. Most of the economic costs of the trade barriers we impose are borne not by foreigners but by Australians.
Why, then, does this protection racket survive? Some local firms that gain a significant advantage from the system are its vocal supporters. The average dumping duty in Australia is 17%, well above the general tariff rate of 5%. Such duties (and even the threat that they may be applied) give local firms breathing space on price competition, artificially inflating their profits.
For the steel industry, by far the most prolific users of the anti-dumping regime, strategic use of the regime is now part of the business model. Steel company Arrium advised its shareholders in 2014 that 65% of its sales base was subject to anti-dumping applications and that it was looking for opportunities to apply for more.
The Commission’s recommendations – to rework or dump the anti-dumping system – are a challenge for the Turnbull government. Ministers are eager to trumpet the government’s free trade credentials following trade deals with Korea, Japan and China, as well as the Trans-Pacific Partnership. But their free trade rhetoric is increasingly difficult to reconcile with ongoing support for a protectionist regime that hurts Australia.
The Commission’s report may not have splashed in the media. But if it convinces the government to dismantle this outdated and economically harmful regime it will have made a valuable landing.