March, 2001: Publius

By Greg Rushford
Published in the Rushford Report

Once in awhile, when economics meets the antidumping laws, economics wins.
It is no secret (except from the U.S. Congress and the American public) that antidumping laws are not respected in respectable economics circles. Economists cringe because these laws penalize international price discrimination, while domestic price discrimination is regarded as precisely the rigorous competition upon which market economies thrive. Translated into English, the previous sentence means that price wars between domestic competitors are praised because lower prices benefit consumers and contribute to a healthy economy — but foreigners who enter U.S. markets to do the same thing are condemned as “unfair” traders.

Now comes Aramid Fiber from the Netherlands, where economics trumps law. On February 8, the International Trade Commission ruled that there was no likelihood that “dumping” from a Dutch competitor named Teijin Twaron BV would injure E.I. DuPont de Nemours & Co. While the commissioners’ legal reasoning will not be released until later this month, forget the legal intricacies. This case can be understood by anyone who has ever taken Economics 101. But the same set of facts looks very different from the boardroom.

Aramid Fiber is one of DuPont’s many wonderful gifts to the world. It cost DuPont researchers some $700 million to develop it.

You might not be aware of it, but aramid fiber is in your life. Known by its brand name, Kevlar, it was originally developed for tires as a substitute for steel-belt radials; it’s now also in the brake pads of your car, and in the belts that are under the hood. Bulletproof vests for the military and police are made of Kevlar. It’s in your commercial airliner. Kevlar also protects fragile fiber-optics cables.

The only other company in the world that makes Kevlar — which it markets as Twaron — is a Dutch manufacturer that was bought by a Japanese concern last year and is now known as Teijin Twaron. While the precise financial numbers and respective worldwide market shares held by the duopolists were not put on the public record in the U.S. antidumping proceedings, it is safe to say that DuPont and Twaron are fighting over hundreds of millions of dollars. The competitors like each other much as the Rev. Jesse Jackson likes Rev. Jerry Falwell.

In 1994, DuPont struck a blow against Twaron by persuading U.S. antidumping officials to slap a 67 percent tariff on the Dutch company. The case struck economic observers as somewhat odd — DuPont’s patent on Kevlar had run out and it was only natural to expect that Twaron would gain increased market share by undercutting DuPont’s pricing. But again, that’s the antidumping laws for you.

Last year — pursuant to the so-called sunset review process that examines old antidumping orders — DuPont asked U.S. antidumping officials to continue the tariffs. Without them, DuPont argued to the Commerce Department, Twaron would continue to dump. DuPont also asked the ITC to determine that if the alleged dumping was continued, DuPont would likely suffer injury.

Here’s where the economics comes in.

John Greenwald, a partner in D.C.’s Wilmer, Cutler & Pickering, represented DuPont. Greenwald’s submissions to the ITC said there had been a “price war” between DuPont and Twaron in Europe that had driven European prices “to levels well below prices in the United States.” The antidumping order in the United States had “worked,“ preventing such a price war, Greenwald said. “If the antidumping order is revoked, imports will increase and U.S. market prices will fall,” the Wilmer, Cutler lawyer told the ITC.

At a January 9 ITC hearing, a DuPont executive explained the bottom line to commissioners. “In summary, when I see the likelihood of increased imports and reduced prices, coupled with increased costs, I see significantly reduced profits for us,” testified William Harvey, who is the director of DuPont’s advanced fiber systems business. “Without an acceptable level of profitability, Dupont’s position in the aramid fiber market is threatened, and our potential for investment and continued growth in the market is limited, so, yes, we are vulnerable if the order if revoked.”

Wait a minute. Profitability, competition, a global shortage — what’s the problem? This sounds like a perfect description of normal economic competition. In fact, that’s how Richard Boltuck, a Washington economic consultant who was retained by Twaron, responds when asked what the case was all about. “This case was about healthy competition.”

You don’t have to be a PhD like Boltuck to understand his point. If prices are higher in Europe than in the United States, how can the Dutch be said to be “dumping” in U.S. markets? If you have demand that exceeds supply in the United States, aren’t imports obviously beneficial to the economy? If both DuPont and Twaron admit to being profitable, where’s the harm? As to the possibility of a price war in U.S. markets, well, consumers may be grateful to DuPont for inventing Kevlar, but not to the extent of wanting to pay more for the stuff than necessary.

DuPont is making tons of money from Kevlar, and expects growth. And Barbara Murphy, a partner in D.C.’s Adduci, Mastriani & Schaumberg who represents Twaron, told the ITC that her client had recently announced price hikes of 40 percent to some of its European customers. Twaron, she declared in one submission, “is operating at full capacity and experiencing such severe shortages that it has placed customers around the world — in al end uses — on allocation.”
“These are not the circumstances that warrant maintenance of an antidumping order,” Murphy argued.

Each of the five ITC commissioners who voted on the case last month bought into Murphy’s reasoning. Even the Commerce Department, which (as usual) found that Twaron would likely continue “dumping” if the order were removed, took the unusual step of recommending a mere three percent tariff instead of the original margin of 67 percent that had been assigned seven years ago.

While economic purists can be gratified with the ruling, Wilmer, Cutler’s Greenwald basically explains that his clients have an entirely different view. “If your question is, ‘is this good for consumers now’ sure,” he says. “But if the question is, ‘should a company like DuPont bother to readily commit itself to a billion dollar effort to develop a product like aramid fiber, given what the Dutch have been able to do in this particular case,’ the answer is, No.”

DuPont had only begun to recover its $700 million in sunk R&D costs when Twaron began piggybacking on the Kevlar market, Greenwald said. “DuPont lost substantial market share,“ but thanks to the antidumping order his client was “in a situation where the order was working,“ he declared. Now, he said, both companies were increasing their capacity in order to meet demand. “I will guarantee you that within two to three years we will be in an excess capacity situation and we will be right back to where we were in 1994.”

Whatever happens from now on in the competition between DuPont and Twaron, you can be sure of one thing in all future antidumping cases: Economists will keep on shooting holes through the antidumping laws’ slippery reasoning. But in the boardrooms, no matter: When the competitors start taking money out of their pockets, executives will reach for their bulletproof vests, and call in their hired guns.

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