The Effects of Antidumping (AD) upon Foreign Direct Investment (FDI) : an Overlapping of International Trade and FDI Perspective

Dang, Jun SCID, Stanford University

Xi’an International Studies University 5, July, 2011

Contents

• Antidumping and FDI current trends• Literature review• Overlapping of international trade and FDI• The dynamic game of AD and FDI• Policy implications

Backgrounds : Antidumping

• Antidumping law: over 90 countries • Cases: 3752 by exporting countries from 1995 till 30,

June, 2010. (www.wto.org )• Developing countries became new major users• India, Mexico, Argentina, Brazil, South Africa, Turkey

and China.• Developed countries still rank high in the list (e.g. Antidumping measures taken by the USA accounts for 1337 till 2000, of

which 981 were taken after 1980s. But from 2000 till 2009, there are 341 antidumping measures taken, although it is less than India and EU in numbers. And there are 420 since 1995 till 30, June,2010)(Liu Zhenhuan, U.S. trade policy studies, Law press, Beijing, 2010.2. P: 66. )

World Current FDI

• FDI since 1990s has been prevailing, developed countries are the main recipient country; developing countries are the new receivers.

• Intra-industry trade accounts for 2/3 of the world trade.• Multinational Enterprises are big players in the world

economy: Anderson and Cavanagh(2000) multinational corporations are very big. (51/100 )

• Seventy percent of world trade is controlled by 500 of the largest industrial corporations, and in 2002, the top 200 had combined sales equivalent to 28% of world GDP (http://www.thomhartmann.com/users/ajagbe-adewole/blog/2010/11/multinational-corporations).

AD effects • Basic theoretical protection goals of AD

- local production increase after AD: fair trade

- increase prices of the product - maintain the domestic employment

• Empirical Studies -T. Prusa(1996) : the US AD did restricted import from named

countries, but there is a significant trade diversion effect from named to non-named countries.

-C.M. Krupp, S. Skeath(2002) : the imposition of antidumping duties in an upstream industry positively affects the quantity and value of domestic upstream production and negatively affects the quantity of downstream production.

• Arastou Khatibi (2009) shows that although antidumping protection predominantly benefits the EU domestic market rather than non-named countries, it is not strong enough to offset the decrease in imports from named countries.

• H. Vandenbussche, M. Zanardi(2010) New evidence on antidumping’s “chilling” impact: heavy new users of antidumping, experienced a substantial reduction of their aggregate annual import volumes due to the use of antidumping. However, aggregate imports are affected only for those users that have established themselves as frequent users of antidumping…

• Andrew J. Kaelin(2004): unintended effects, antidumping tariffs could increase China’s competitiveness.

• Chu Tianshu(2004) mentioned that AD could be an incentive to Make an FDI in China.

• Maya Cohen-Meidan(2010) found duties imposed on Japanese producers shipping cement to the West-Coast's coastal markets led to imperfect substitution to other imports, allowing domestic prices and production to increase, but other areas insignificant.

• Of FDI studies, Isabel Faeth(2009) generalized 9 models: the early studies of determinants FDI; neoclassical trade theory; ownership advantages; aggregate variables; OLI model; knowledge capital model; horizontal and vertical model; diversified FDI and risk diversification models; and the policy model.

• Among them, the early studies mainly agreed that the market factors, trade barriers, cost factors, and investment climate are decisive,. The consensus is that marketing factors, including market size, market growth, and maintaining market share are important.

• KH Zhang, Markusen(1999) states that the vertical MNEs depend on transport costs, market size and factor abundance in the host country.

• Markusen and Markus(2002) analyzed the horizontal, vertical FDI and the knowledge-capital model.

• But these are all about why do they invest abroad, the reactions of FDI to policy factors are seldom touched.

The Effects of AD upon FDI

• Feng Zongxian, Zhu(2006) found out there is a negative effect similar to previous findings, $550 million in chemical sector for each AD case.

• More related studies addressed this topic by case studies, and some empirical, Zhu Wei, Dong Youde(2005) ; Li Jun （ 2005);Chen Yang, Wang Yanming （ 2007).

• One noteworthy study by Bao Xiaohua(2004) stated that the antidumping had a tendency to

cause more FDI into China.

The Complexity of AD effects

• Traditional static theory vs. dynamic world economy• Product level policy vs. Industry level implications • Macro statistics vs. micro decision making• Optimal functions of countries vary: W=CS+PS+TR • One New feature of World economy: The Overlapping of

International Trade and FDI(OITF)

The Overlapping of International Trade and FDI: International Statistics

• Growth in the volume of world merchandise exports and production

• Geographical distribution of world trade flow

• FDI inflow and stock 2000-2009

• Trade in parts and finished goods trade share in selected area (1992vs 2004)

• World Distribution of the Antidumping by Sectors

MNEs’ Possible Reactions under OITF :

Micro Analysis • Hypothesis:---In order to make an argument, here we address the

vertical FDI;---assume that the rational reaction is transmitting from

upper-stream to down stream when facing an AD;--- and the transfer pricing in the network of the MNE would

help to circumvent the barrier of investment;--- the host market is crucial to the MNE; --- the MNE is performing according to maximizing its

global profit both long term and short term( including dynamic or strategic interests).

Possible Outcomes

a. If there is a MNE subsidiary existed in the host country, the MNE will make use of Transfer pricing to offset the AD effects (collusion effect), the key factor is the market share.

• b. If there isn’t a subordinating firm of the MNE, when there is a potential demand, then the reaction would be an FDI into the country. If we make a partial analysis of the AD effect, the supposed protection to domestic producers would be dissolved. So the result would be quite relieving if the government is to promote the FDI in the target product.

• c. The MNE may divert its investment to a third country, the short term effect is the goal of AD achieved, but in the long run, the third country will definitely fill-up the market if the domestic producer dose not increase production significantly. Finally, the AD is easy to be offset.

The OITF framework: vertical integration

A, parent firm, X1

B, sub-branch 1, X2 C, sub-branch 2, X3

ADDump, X1 Export

X1and X2

AD to X2

FDI in C, X1 X2

X3 sell back to home A

Simplified AD to FDI in a vertical framework

The Antidumping and FDI Interaction without Countervailing Statutory

Antidumping MNEs’ export decrease

Exit from the market

Diversion of production

Adjusted Export

MNE Invest in a third country

FDI inflow not increased

Continue to export to the market, AD dissolved

The Antidumping and FDI Interaction with Countervailing Statutory

Antidumping MNEs’ export decrease

Exit from the market

Diversion of production

Adjusted Export

MNE Invest in a third country

FDI inflow increased

Countervailing offset the diversion effect of the MNE

countervailing

The Dynamic Interactions of Antidumping and FDI

B, ADMNE in A export FDI in B

Dumping

Subsidiary 1

Encourage new FDI

Diversion of FDI to C

C Produce and export to B(Sub 2)

The market share of the Sub in B got protected

AD induced FDI

Trade and FDI diversion, need a countervailing, or antidumping to Sub 2 in C

Collusion dissolved

Export

AD

to C

AD

AD seduced FDI

B

FDI maximization

AD maximizationn

AD-FDI

Policy Implications

• This frame work compensated the dynamic and bias upon the effects of the MNEs reaction to a countries trade policy effects, enabled a dynamic policy environment for the multi-lateral trading system

• For the host country, there should be a balanced international trade policy, try to practice balanced international economic goal: both domestic and alien investment

• For the host country, keep a moderate development of the market share of the foreign direct investment in the country could be beneficial, namely, to keep the MNEs’ market share in a threshold level.

• For international trade disputes settlement, this study could provide a way to extend the macro factor analysis with the dynamics of the micro enterprises

• Host country should consider the transfer-pricing issue, to ascertain the effect of an AD, this is the link between the macro policy factor and the Micro MNEs reactions.

Future Research • The OITF model need to be improved to integrate

the macro analysis on the basis of the Micro (MNE, which is already making macro effect in the international economics ) mechanism.

• Attach importance to the transfer pricing rules, try to figure out how it affects the performance of the Multinational enterprises (the black box).

• Form a dynamic mechanism to deal with the possible reactions of the MNEs, possibly, I wish there could be some hints for the reunion of micro and macro economics.

Thank you!!

Comments are welcome!!