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Tariffs and anti-dumping duties are two important tools used to protect industries from foreign competition and to generate revenue. While the two tools have been studied extensively in separate contexts, little is known about their comparative effects. This paper compares their effects on prices, profits, government revenue, industry protection, and welfare in a two-country framework where a dominant firm in one country exports to the other inhabited by an oligopoly. Conditions under which one tool dominates the other for a given criterion are provided.

Tariffs and anti-dumping duties are two important tools that can protect industries from foreign competition and generate revenue to countries initiating them. The two tools have been studied extensively in separate contexts.1 However, except for a limited effort, a detailed comparison of them has not been carried out, unlike, for instance, in the case of tariffs and quotas.2 This paper compares tariffs and anti-dumping duties with respect to their effects on domestic and import prices, industry protection, exporting firm's profits, and domestic and foreign welfare using a dominant firm-oligopoly model. The goal is to explore conditions under which one tool is superior to the other in terms of a well-defined objective, such as improving domestic industry protection or welfare. If the superiority of one tool can be established for a given objective, measures can be adopted to promote the use of that tool to achieve that objective.3 A basic comparison of the two tools is relevant in view of the recent trends. Reliance on tariffs has receded globally in recent years. Instead, use of anti-dumping duties has been on the rise. Over the period 1980–2003 the number of countries with an anti-dumping law went from 36 to 97.4 The increasing reliance on anti-dumping duties is pronounced especially in certain developing countries such as Turkey, where the number of anti-dumping cases filed has almost tripled over the last decade. While there may be several other reasons, such as political considerations, for these trends, whether the trends reflect an economic rationale associated with the underlying superiority of one tool over the other in certain dimensions is a key open question. The lack of a comparative analysis of the two tools is in part due to the fact that tariffs and anti-dumping duties differ in the ways they are usually treated in theoretical work. A tariff is typically designed to maximize either domestic revenue or domestic welfare. An anti-dumping duty, on the other hand, is usually set to make up for the difference between a foreign firm's price at home and the price of its exports, provided that the latter is lower.5 In other words, an anti-dumping duty serves the purpose of industry protection, and also produces revenue as a by-product, but it is not designed to maximize protection, revenue, or welfare. Consequently, unlike a tariff, an anti-dumping duty is not typically posed as a solution to an optimization problem. This discrepancy in theoretical treatments renders the comparison of the two tools challenging. In practice, too, there are several differences between the implementation of the two tools. Tariffs are usually imposed uniformly on all foreign firms exporting a given good to a domestic market. Anti-dumping duties, on the other hand, target a specific foreign firm or a group of firms which are claimed to be dumping, that is, selling at prices deemed “unfair”. The goal is to restore fair pricing, where the yardstick of fairness is usually the price prevailing in the foreign market. The tools differ also in terms of the institutional and political process they need to go through to be initiated. Furthermore, there are cases where anti-dumping duties are introduced in an industry already protected by tariffs. These differences and complications in practice notwithstanding, how each tool fares with respect to the other when used alone to intervene in a free trade environment demands a basic theoretical investigation. Such an investigation also supports empirical work on the performance of the two tools. This paper offers a basic framework to compare the two tools in detail. In carrying out a comparison, it is important to note that tariffs and anti-dumping duties are not necessarily designed or viewed as strict substitutes in trade policy. Yet, it stands relatively unexplored whether one tool, when used alone, can achieve most of the objectives of the other and still do better also in other dimensions that are deemed to be important by policymakers. For this reason, it is useful to envision a world in which only a single tool is in effect. The first approach of this paper is therefore an “as is” comparison of the two tools, in which each tool is defined in its usual theoretical form, but mutually exclusively of each other: a revenue- or a welfare-maximizing tariff versus an anti-dumping duty that is designed to restore fair pricing. However, more flexible comparisons are also considered. Because a tariff can take on several values other than just the ones that maximize revenue or welfare, in theory it can also be used to match certain aspects of an anti-dumping duty.6 For instance, a tariff can theoretically be set to achieve the main objective of an anti-dumping duty, which is the restoration of fair pricing. A tariff can also be set to provide the same protection to the domestic industry or the same revenue to the government as the anti-dumping duty does. Thus, some alternative choices of tariffs are also investigated and compared with the revenue- and welfare-maximizing tariffs in terms of their effects compared to an anti-dumping duty. Finally, the effects of the joint use of the two tools are also studied and are compared with the effects of the use of either tool alone. For the purposes of comparing the two tools, a static model of trade between two countries is developed. Using the model, a free trade regime, a tariff regime, and an anti-dumping duty regime are defined and analyzed. The three regimes are then compared in terms of equilibrium levels of prices, domestic industry protection, domestic welfare, government revenues, and foreign firm's profits. In the model, there are two substitutable goods, one produced domestically, and the other in a foreign market. The foreign good is exported to the domestic market, in addition to being consumed in the foreign market. The elasticities of demand and the efficiencies of production technologies differ across the foreign and domestic markets. The structures of domestic and foreign markets in the model are based on key observations from a large subset of U.S. anti-dumping cases. A majority of the cases filed in the U.S. between 1979 and 2003 involve dumping allegations against a single, and often large, foreign firm, which is frequently the dominant producer in its home country. It is not surprising that foreign monopolies or dominant firms are more frequently the subject of an anti-dumping scrutiny. All else equal, the foreign price tends to be higher the less intense the competition in the foreign market. The gap between the foreign price and the export price therefore also tends to be higher. To incorporate this observation in a basic form, the foreign industry in the model consists of a single firm.7 This choice approximates a foreign market structure where a dominant firm with a large market share has some degree of market power and can set price in its home market. The findings are robust if the foreign firm faces competitors at home. On the domestic country's side, the filing of an anti-dumping petition or lobbying for a tariff generally requires some degree of coordination among domestic firms. Such coordination is more easily attained in markets with a relatively small number of firms. To reflect this observation, the domestic industry is represented by an oligopoly with an exogenously fixed number of firms, which can range from two (i.e. duopoly) to an arbitrarily large integer, which approximates the case of a perfectly competitive industry. In the equilibrium of the model the dumping margin is determined by both the domestic and the foreign demand elasticity, whereas the tariff rate depends only on the former. This key difference permits a tractable comparison of the two tools. The main findings can be summarized as follows. In general, neither tool out-performs the other for a given objective, except for certain special cases, such as constant-elastic demand. However, under plausible restrictions on parameters, definitive statements can be made. In particular, a sufficiently low foreign demand elasticity favors the use of anti-dumping duties, which provide higher revenue, domestic welfare, and protection than the revenue-maximizing tariff. When the foreign demand elasticity is sufficiently low, the government prefers the anti-dumping duty both from a revenue and protection standpoint, but at the same time the foreign firm may find a duty unfavorable compared to a tariff. The incentives of the foreign firm and the government thus conflict in this case. When the foreign demand elasticity is sufficiently high, on the other hand, a revenue-maximizing tariff is favored by both the government and the foreign firm over the anti-dumping duty. In addition, when competition is introduced to the foreign market, it can be shown that the higher the competition foreign firm faces at home, the less attractive is the use of an anti-dumping duty compared to the revenue-maximizing tariff for both protection and revenue. The predictions of the model on the direction of change in foreign and domestic prices when a tariff or an anti-dumping duty is imposed are also broadly consistent with existing empirical evidence. For example, dumping by the foreign firm continues even in the presence of anti-dumping duty, and the introduction of an anti-dumping duty makes the foreign firm lower its home price and raise its export price. The rest of the paper is organized as follows. In the next section, empirical evidence and some examples from U.S. anti-dumping cases are provided to motivate the modeling approach. Section 3 lays out the model. Section 4 analyzes the model under three regimes: free trade, anti-dumping duty, and tariff. Section 5 compares the three regimes. Section 6 considers some extensions. Section 7 concludes. Proofs of results that are not obvious are referred to the Appendix.

With anti-dumping duties becoming more frequently used than tariffs in trade policy worldwide, this paper sought to answer the question of which trade policy tool, a tariff or an anti-dumping duty, is more effective when used alone in achieving a given objective in intervention to an otherwise free trade environment. To provide an answer, a basic comparison of tariffs and anti-dumping duties has been carried out in a framework that embeds some common elements of many dumping cases in the U.S. The model features an environment where a firm dominant in its home market exports unilaterally to a market inhabited by an oligopoly. The key property that was used in obtaining the main results without much complication is that a tariff depends only on the elasticity of the import demand in the domestic country, whereas an anti-dumping duty depends, in addition, on the elasticity of the foreign demand. The main message of the analysis is that while one tool does not dominate the other uniformly under all criteria, under certain conditions definitive statements can be made, depending on the magnitude of the foreign demand elasticity. In particular, when the foreign demand elasticity is sufficiently low, an anti-dumping duty dominates a revenue-maximizing tariff in terms of domestic revenue, protection, and welfare. An important question for future research is how the two tools fare under uncertainty about the imposition of a tool. The comparison of the two tools in a dynamic environment, where the anticipation of an anti-dumping duty versus a tariff might have different effects, is another promising research avenue.