Anti-Dumping with Heterogeneous Firms: New Protectionism for the New-New Trade Theory

1. Anti-Dumping with Heterogeneous Firms: New Protectionism for the New-New Trade Theory Christian Gormsen Schmidt, Aarhus School of Business, GlobID Research Group

2. Presentation plan: • Research question • Background: Anti-dumping literature • The model • The anti-dumping equilibrium • Results • Conclusion Research Question • Accelerating use of anti-dumping legislation, worldwide. • Theoretical advancement with the introduction of heterogeneous firms. • How does anti-dumping affect • Firm selection (exiters, domestic-only, exporters) • Entry patterns • New motivations for anti-dumping legislation? • Method: Two-country model, (Home, Foreign) one country (Foreign) has anti-dumping legislation ‘Tough’ use of legislation Anti-Dumping with Heterogeneous Firms: New Protectionism for the New-New Trade Theory Christian Gormsen Schmidt, Aarhus School of Business

3. Presentation plan: • Research question • Background: Anti-dumping literature • The model • The anti-dumping equilibrium • Results • Conclusion My findings (all theoretical) Firms and industry: • Domestic Distortion in ‘the other country’, Home • Firm selection affected • Dramatically fewer exporters in Home • Firm Entry in H decreasesFirm Entry in “anti-dumping regime” (F) increases • Policy • Anti-dumping similar (but not identical) to unilateral trade restriction. • Enforcing anti-dumping attracts variety-producing firms • and gives large increase in net exports of varieties • Long run Welfare gains • Beggar thy neighbor, but less than unilateral trade restriction

4. Presentation plan: • Research question • Background: Anti-dumping literature • The model • The anti-dumping equilibrium • Results • Conclusion The anti-dumping literature: • Policy-related empirical studies Adoption and interpretation of anti-dumping legislation.Prusa (2005), Vandenbussche and Zanardi (2008), Blonigen (2006a) • Partial equilibrium models, firm level • Firm’s strategic use/response (pricing, collusion)Prusa (1994), Reitzes (1993), Prusa (1992), Vandenbussche and Veugelers (1999) • Empirical studies of firm’s filing and price responses Blonigen and Haynes (2002), Staiger and Wollak (1994) • Economy-wide effects, estimations • CGE modeling, the USBlonigen Gallaway and Flynn (1999) • Gravity equations with anti-dumping var.s as regressorsVandenbussche and Zanardi (2006)

5. Presentation plan: • Research question • Background: anti-dumping literature • The model • The anti-dumping equilibrium, results • Conclusion Firm heterogeneity • Heterogeneous firms in monopolistic competition models, Melitz (2003) • My baseline: Melitz and Ottaviano (2008) • Two-country version, Home (H) and Foreign (F)(superscript l and h) • Quadratic preferences, linear demands • Ll consumers (l = H, F) • Fixed costs of entry, fE, no fixed cost of producing nor of exporting • Marginal cost lottery, draw from G(c) (pareto) • Trade cost: country-specific iceberg cost t l > 1 • Non-strategic firms

6. p p Export markethMarginal export cost:t hc, t h > 1 Domestic marketl Firm draws marginal cost c c > cDl, exit cDl cD h c > cXldomestic only c < cDl, produce cXl = cDh/t h c < cXlexport D-1 D-1 q q Survival selection in Melitz and Ottaviano (2008) Export selection in Melitz and Ottaviano (2008) Firm selection, cost cutoffs

7. Presentation plan: • Research question • Background: anti-dumping literature • The model • The anti-dumping equilibrium, results • Conclusion The open economy equilibrium • Domestic and export prices: • Domestic cutoff summarizes ‘competitiveness’ of industry • Zero expected profits of entry, determines domestic cutoffs • Domestic cutoff then determines • Average prices (proportional) • Number of varieties for consumers, Nl • Number of entrants, from: • Welfare: Higher with lower cutoff

8. Presentation plan: • Research question • Background: anti-dumping literature • The model • The anti-dumping equilibrium, results • Conclusion The role of trade barriers • Bilateral trade liberalization:Bilaterally decreasing t’s increases welfare • Unilateral trade restriction:Unilaterally increasing t l increases welfare in l, reduces welfare in h • Induces more entry in l

9. Presentation plan: • Research question • Background: anti-dumping literature • The model • The anti-dumping equilibrium, results • Conclusion The anti-dumping equilibrium • The model has reciprocal dumping: • Anti-dumping authorities deduct trade costs: • Sufficient to conclude that dumping occurs • The analyzed anti-dumping equilibrium: • Asymmetric, only Foreign has anti-dumping legislation • All Home exporters decide not to dump • In equilibrium, no anti-dumping petition filed • Interpretations: • Policy evalution: This is the goal of anti-dumping legislation • Outcome in industry with ‘history of intense anti-dumping’ • Asymmetric in order to highlight effects on trading partner

10. Presentation plan: • Research question • Background: anti-dumping literature • The model • The anti-dumping equilibrium, results • Conclusion Constrained prices, Domestic distortion • Home exporter constrained: • Prices: • “Optimal domestic distortion”, weight b H [0,1] • My results are consequences of new pricing rule • GE effects (when cutoffs determined by free entry condition) • ‘pre-GE’ effects • Prices lowered on domestic market, domestic quantity increased

11. Presentation plan: • Research question • Background: anti-dumping literature • The model • The anti-dumping equilibrium, results • Conclusion Export or stop exporting? • Reduced profits for Home exporter • Deadweight loss decreased in Home, increased in Foreign • Costly to export: • Export only profitable if: • New, lower, export cutoff • Altered zero expected profit condition, • Entry in Home less attractive, • leads to GE consequences

12. Presentation plan: • Research question • Background: anti-dumping literature • The model • The anti-dumping equilibrium, results • Conclusion GE Effects in Home (simulation) (p1) • Firm selection: • Domestic competition reduced, cDHincreases. • Export propensity in Home dramatically lower • Due to reduced Entry • Harder to export  Entry less attractive • Less varieties • … and shift towards imported varieties • Prices: • Average price: Net decrease • Exported goods cheaper, but less competition • Price variance increases (cheaper exportes)

13. Presentation plan: • Research question • Background: anti-dumping literature • The model • The anti-dumping equilibrium, results • Conclusion GE Effects in Home (simulation) (p2) • Welfare loss • Less varieties, higher average price • Softened: Substitution towards varieties from Home exporters • Under strong asymmetries: if t H >>t F and LH >> LF Softening may dominate.

14. Presentation plan: • Research question • Background: anti-dumping literature • The model • The anti-dumping equilibrium, results • Conclusion GE Effects in Foreign (simulation) (p1) • Firm selection: • Domestic competition increases, cDF decreases • Easier to become exporter, cXF falls with cDH • Due to increased entry: • Entry in Foreign relatively more attractive • More varieties for consumers • Shift towards domestic varieties • Prices • More expensive imports, but more competition • Net effect: Decrease in average price • Net effect: Decrease in price variance

15. Presentation plan: • Research question • Background: anti-dumping literature • The model • The anti-dumping equilibrium, results • Conclusion GE Effects in Foreign (simulation) (p2) • Welfare gain • More varieties, lower average prices • Drawback: Consumers cannot buy cheap imported goods (fall in price variance) • Again, if t H >>t F and LH >> LF , the negative effect may dominate.

16. Presentation plan: • Research question • Background: anti-dumping literature • The model • The anti-dumping equilibrium, results • Conclusion Anti-Dumping vs. Unilateral Trade Restriction • Anti-dumping equilibrium: Effects similar to unilateral trade restriction (increase in t F) • A comparison can be made in simulations • Anti-dumping corresponds to a large trade restriction • Anti-dumping has stronger effect on: • Export propensity in Home • Entry in Home, entry in Foreign • Total entry falls more • Variety trade flows distorted more • Welfare reduced by less in Home

17. Presentation plan: • Research question • Background: anti-dumping literature • The model • The anti-dumping equilibrium, results • Conclusion Conclusion • Firms in Home • Severely reduced export oppurturnity, less entry • Non-exporting incumbents gain (profits up with cDH) • “New non-exporters” lose export profits • AD exporters lose profits on both markets • Firms in Foreign • More attractive market, more entry • Gains on export market; new exporters • Domestic profit per firm reduced • Policy insights • Attracts variety-producing firms, jobs • Large increase in net exports of varieties • Harsh anti-dumping conduct can lead to welfare gains • Beggar thy neighbor, but less than unilateral trade restriction