The Latest WTO Case

The WTO has just ruled in favor of the EU and against the US in a WTO dipute. The case involves the “Byrd Amendment,” otherwise known as the Continued Dumping and Subsidy Offset Act of 2000. This law directed the US government to distribute any tariff revenues received from anti-dumping duties to the most affected US firms. So for example, in the case of anti-dumping tariffs in steel, the tariff revenues are collected by the US government and then passed on to US steel firms.

The Byrd amendment was a triumph of good politics over bad economics, for several reasons. It gives an additional incentive for US firms to file or support anti-dumping cases, increasing the wasteful expenditure of resources attacking and defending firms’ pricing behavior. It helps to keep inefficient firms that should be driven out of business from being replaced by more efficient producers. Also, many WTO cases are typically settled without any tariffs being levied (for example because an offending country simply agrees to change its behavior), but the Byrd amendment discourages this and encourages a no-compromise resort to tariffs. See this CBO report for more details about the economic effects of the Byrd amendment.

The WTO ruled that this scheme was illegal back in January of 2003, because such redistribution of tariff revenues to domestic firms essentially amounts to an additional subsidy to domestic firms over and above WTO-sanctioned tariffs on foreign firms. The US was given 11 months to repeal the Byrd amendment, but the Congress took no action to eliminate what is actually a fairly popular provision in US trade laws. Today’s action by the WTO therefore legally permits the EU to retaliate by levying tariffs on US exports to the EU totalling 72% of the amount of money distributed to US firms by the Byrd amendment. Several other complainant countries joined the EU in this suit, and were also given permission to start levying tariffs on US goods.

What does this mean? Possibly nothing; the EU (and the other countries) may just use this “permission to tariff” as an added bit of leverage in their ongoing negotiations with the US. However, if they do start levying this tariff, then this means that the more tariffs that the US raises on EU goods, the more that the EU will levy on US goods. Sounds like the Byrd amendment is on its way to encouraging a good old fashioned trade war.