Academic journal article Law and Policy in International Business

Second-Best Countervailing Duty Policy: A Critique of the Entitlement Approach

Academic journal article Law and Policy in International Business

Second-Best Countervailing Duty Policy: A Critique of the Entitlement Approach

Article excerpt

A number of writers have inquired whether countervailing duty law serves any useful purpose. (1) One conjecture is that the imposition of countervailing duties by trading nations will increase worldwide economic welfare by discouraging market-distorting subsidy practices. If so, on the average, all nations will stand to gain. This conjecture is incorrect for at least two reasons. First, international consensus is wholly lacking as to the proper distinction between "inefficient" or market-distorting subsidy programs and other government activities, and it is thus unclear what practices the countervailing duty law should seek to deter. (2) Existing national laws (and U.S. law in particular) thus make no effort to distinguish efficient from inefficient subsidies, even by some set of controversial, unilaterally announced criteria. Second, even if a theoretically sound and administratively workable consensus regarding impermissible subsidy practices could be reached in the future, the haphazard and uncoordianted imposition of countervailing duties by some countries and not others will have little systematic deterrent effect. (3) Therefore, existing countervailing duty law cannot be understood as part of the enforcement mechanism for a mutually advantageous multilateral covenant, and it is questionable whether present law could serve that purpose satisfactorily even with considerable reform. (4) Likewise, existing law cannot be justified as a calculated optimum in a repeat-play game. (5)

An alternative conjecture is that countervailing duty law can promote the self-interest of nations acting non-cooperatively. Perhaps, for example, duties will deter or counteract subsidies that facilitate foreign monopolization of domestice markets, that shift economic rents from domestic to foreign firms through "strategic trade policy," (6) that disadvantage domestic exporters overseas, that cause undue domestic unemployment, or that have an unacceptable impact on the domestic wealth distribution. Alternatively, perhaps the existence of foreign subsidization is simply a self-regarding pretense for the "optimal tariff" -- the exercise of monopoly power by large importing nations (such as the United States). In another recent paper, the author considers these arguments and others, and rejects all of them, at least as a basis for the sweeping protection against subsidized imports provided by existing U.S. law. (7) Further, given the error costs and rent-seeking behavior inherent in any protective policy, the author's suggestion for "first-best" reform of U.S. countervailing duty law is quite simple: abolish it.

Yet, we do not live in a "first-best" world. Political forces ensure that countervailing duty law will survive for the time being, and administrative agencies must enforce it. Thus, options for "second-best" reform warrant serious consideration -- taking the existing statute as a constraint, how might the agencies best administer it to promote the national interest?

Professor Richard Diamond adresses this question, (8) drawing upon a proposal advanced by Goetz, Granet and Schwartz. (9) These writers develop an "entitlement model" of countervailing duty policy, positing that the objective of U.S. law is to insulate domestic firms from the effects of certain foreign government practices upon the U.S. market. (10) They draw upon that model to suggest a variety of reforms to existing agency practices.

Oddly, however, the proponents of the entitlement model omit any systematic normative defense. Goetz, Granet and Shwartz observe that existing law cannot be understood as promoting the efficiency of global resource allocation, "postulate an 'entitlement' rationale", and proceed to explore its implications. (11) Diamond makes much the same move, suggesting that one must choose between the entitlement rationale and a "global efficiency" or "distortion" model. After he rejects the latter, he embraces the entitlement model with little ado. …

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