Antidumping Investigations and the Pass-Through of Exchange Rates and Antidumping Duties

Field: Economics, Econometrics and Finance (Social Sciences)

1 1 As surveyed in Goldberg and Knetter (1997), pass-through studies are closely related to two other literatures: research on pricing-to-market, i.e., how an exporting firm price discriminates across destination countries given changes in exchange rates, and research into the law-of-one-price on international markets.2 See Knetter (1993), Feenstra, Gagnon, and Knetter (1996), Gron and Swenson (1996), and Yang (1996) for studies of industry effects on pass-through; and Baldwin (1988) and Froot and Klemperer (1989) for research on the effect of exchange rate expectations.(1989), which proposes and tests the hypothesis that ad valorem tariffs and exchange rate changes lead to symmetrically identical pass-through to prices.Interestingly, Feenstra(1989) examines the pass-through of tariffs and exchange rates individually, but not the potential impact of the trade policy on exchange rate pass-through.Harrison (1992)and Knetter (1994) examine this latter issue in the context of quantitative restrictions.Both Harrison and Knetter argue that pass-through of exchange rates (or pricing-to-market) depends on whether or not quantitative restrictions are binding.Knetter finds little evidence of pricing-tomarket for various Japanese and German exported products, including autos and certain steel products, while Harrison finds binding VERs substantially reduce exchange rate pass-through for U.S. imports of European steel, but not for Japanese steel.In this paper we explore for the first time the impact of antidumping (AD) investigations on passthrough of both exchange rates and the AD duties.Arguably the most heavily-used trade restriction in recent years, AD protection policies lead to AD duties when a foreign firm is found to sell a good in a domestic market at "less than fair value," i.e., dumping, and causing "material injury" to domestic firms.Like quantitative restrictions, we show that this form of protection (and the administration procedures that accompany them) theoretically affects firms' exchange rate pass-through decisions, even though most economists typically view AD duties as standard ad valorem tariffs.An important difference relative to standard tariffs is that AD duties are potentially recalculated each year by the U.S. Department of Commerce (USDOC) based on the firm's previous-year pricing decisions in what are known as administrative reviews.This review process implies that AD duties are endogenously determined over time by the firms' pricing decisions in both its export market and own home market.The endogeneity has important implications for both exchange rate pass-through and the pass-through of the AD duty.In our model, we first show that AD duties and the resulting administrative review process may substantially alter exchange rate pass-through elasticities.Second, we demonstrate that optimal behavior by the firm ' 1 e p F x F ( .) % p H x H (. ) & ö x F ( .)% x H (. ) ;w(1) The benchmark model -no AD dutyTo begin, we set up a simple model of a discriminating monopolist in two markets: its home (H) market and the foreign (F) market to which it exports. 7 We assume that the firm faces demand of x H (p H ,I H ) in its home market and x F (p F , I F , q F ) in the U.S. market.Both functions are assumed continuous and twice differentiable.I H and I F represent income (or equivalently, expenditure on all goods) by consumers in each market.Inclusion in the demand functions in this manner assumes that for both markets demand is weakly separable from other goods in the consumer's utility function.Demand in the U.S. market, x F (.), is an import demand function, where we assume the foreign firm faces a domestic substitute product, q F .Assuming the exporting firm and domestic producers in the foreign market play aBertrand game, we can treat q F as an exogenous parameter. 8 Demand is downward-sloping in the good's own price in both markets.All production occurs in the firm's home market with a twice differentiable and continuous cost function, ö(x H + x F , w), where w represents home factor prices.As in Feenstra (1989), we assume the firm sets its export price in the foreign currency, but maximizes profits in its own currency.Given these assumptions, the firm's problem in this benchmark model is the following: 99 Following Feenstra (1989), we assume that all other variables are non-random.This assumption, in conjunction with our assumption that the firm sets price in the foreign market currency, allows us to set up the profit maximization in the certainty-equivalent fashion in (1) where e denotes the expected exchange rate.10 These conditions are also sufficient to satisfy the second-order conditions.The comparative static result with respect to income requires the additional condition that the income elasticity of demand for the good in the foreign market is constant for all prices.These conditions also mean an increase in the income of the home country will increase the price charged in the foreign country.These comparative static results are available from the authors upon request.