Import Tariffs vs. Antidumping Duties: A Comparative Analysis with Policy Implications

Abstract

This paper analyzes and compares differences in policy implications between import tariffs and antidumping (AD) duties in the presence of dumping under free trade. We present a vertical differentiation model of international trade in like products under duopolistic competition, allowing for the endogenous quality decisions by two competing firms located separately in a developed country (DC) and a less-developed country (LDC). Product markets in the trading countries exhibit different degrees of competition due to an inter-country income differential. We show that the LDC firm sells a lower-quality product and practices dumping in the DC market by charging a price lower than the product's price in its LDC local market (i.e., less than fair value). Relative to an AD policy, the DC government's import tariff policy makes its domestic firm better off. As for DC consumers, they are better off under free trade than a tariff or an AD policy when international market competition is high. However, if the market competition is low, the import tariff policy generates the highest surplus for DC consumers. Moreover, the DC government's response to LDC dumping results in higher domestic welfare than alternative policies such as AD duties or free trade. From the perspective of global welfare, our results indicate that a tariff policy is preferred over an AD policy when dumping occurs under free trade.