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How the Shrimp Tariff Backfired

Mises Daily: Wednesday, August 01, 2007 by and

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The great Frederic Bastiat (1801–1850) taught that wealth can be obtained in two ways: it can be produced or it can be plundered. Production is undertaken by entrepreneurs. Plunder is often undertaken with the express assistance of government, taking the form of tariffs, taxes, subsidies, and other interventionist measures justified as policy in the public interest.

But entrepreneurs are not easily thwarted by government intervention. Sometimes entrepreneurs respond so creatively that they render the interventionist measure almost meaningless. A classic example of an entrepreneurial response to state-sponsored plunder is the case of the US anti-dumping tariff on imported shrimp.

The anti-dumping tariff

On December 31, 2003 the Southern Shrimp Alliance (SSA) — a lobbying organization representing shrimp fishermen and processors in eight southern states — filed an anti-dumping petition with the Department of Commerce against shrimp importers from Brazil, China, Ecuador, India, Thailand, and Vietnam. US shrimpers complained that they were the victims of "dumping" — that they were being driven out of business by foreign shrimp producers who were selling their shrimp on the US market at prices below production cost. The SSA filed the anti-dumping petition seeking tariff protection for US shrimpers.[1]

After a year of investigation, the Department of Commerce determined that shrimp importers from the six countries were indeed guilty of dumping and that the dumping had caused "material injury" to US shrimpers. In January 2005, the department imposed tariffs on shrimp imports from the six countries named in the petition. The tariff structure is not simple: different shrimp producers within the same country may be subject to different ad valorem tariff rates, but these are the most common tariff rates in each country: Ecuador, 3.58 percent; Thailand, 5.95 percent; Brazil, 7.05 percent; India, 10.17 percent; Vietnam, 25.76 percent; and China, 112.81 percent.[2]

The tariff was expected to protect US shrimpers by reducing shrimp imports and, consequently, pushing domestic shrimp prices up. And just how has the tariff affected the domestic shrimp market? According to data published by the National Marine Fisheries Service (NMFS), total shrimp imports to the United States have increased by 14 percent since the tariff was imposed, while domestic shrimp prices have decreased by 9 percent. Also, US shrimp imports from the six countries targeted by the tariff have increased by almost 20 percent since the tariff was imposed. These were not the effects that the SSA, US shrimpers, and the Department of Commerce expected. What happened?

Entrepreneurial response: two switches

Policymakers often fail to understand how complex economic life is. People are not machines whose behavior can be easily anticipated or manipulated. People are clever, resourceful, and purposeful. They respond to changes in economic incentives. This is especially true of entrepreneurs who are ever alert to market opportunities, even when government intervention attempts to close off opportunities. Entrepreneurs search for cracks and gaps in interventionist measures, and often find many margins to exploit.

Entrepreneurs responded to the shrimp tariff in ways that policymakers at the Department of Commerce did not anticipate. US buyers of imported shrimp, for instance, responded even before the tariff was officially in place.

Antidumping claims to the Department of Commerce have an extremely high rate of success. Despite lengthy investigations, historically the department has almost always ruled in favor of the petitioner. Now, suppose you owned an American seafood manufacturing company, and your main supplier of frozen shrimp was a Chinese firm. You learn that an anti-dumping petition has been filed with the Department of Commerce, which will very likely respond by imposing tariffs on foreign shrimp producers in six countries, including your supplier. Your supplier is likely to increase its shrimp prices.

What can you do? You can buy shrimp from a supplier in a country that is not targeted by the tariff. There are plenty of them: US firms buy shrimp from suppliers in 44 countries other than the six targeted by the tariff. Would you wait until the Department of Commerce imposes the tariff before finding a new supplier? Establishing sound and reliable ties with suppliers requires time and planning. Waiting until the government imposes the tariff before finding a new supplier only adds to the cost. Why wait?

"Policymakers often fail to understand how complex economic life is. People are not machines whose behavior can be easily anticipated or manipulated."

Many American seafood manufacturers didn't wait. They began switching shrimp suppliers in 2004, while the Department of Commerce was investigating the anti-dumping petition, before even determining to impose the tariff.

NMFS data bear this out. In 2003, shrimp imports from Brazil, China, Ecuador, India, Thailand, and Vietnam totaled more than 822 million pounds, accounting for 74 percent of total shrimp imports. In 2004, the year the Department of Commerce investigated the anti-dumping petition, imports from the six countries targeted by the anti-dumping petition fell 13 percent to 712 million pounds, amounting to 62 percent of total shrimp imports.

Yet total US shrimp imports rose from 1,112 million pounds in 2003 to 1,141 million pounds in 2004, an increase of almost 3 percent. Shrimp imports from several non-targeted countries increased dramatically: imports from Malaysia increased by 880 percent, from Indonesia by 116 percent, and from Bangladesh by 113 percent. Overall, US shrimp imports from the countries not targeted by the anti-dumping petition rose from 290 million pounds in 2003 to 429 million pounds in 2004, an increase of 48 percent.

US shrimp buyers were not the only market participants to respond to the anti-dumping tariff in a creative, resourceful way. Shrimp producers in the six "dumping" countries also responded in creative and resourceful ways, ways that Department of Commerce policymakers also did not anticipate.

As mentioned earlier, the Department of Commerce imposed the anti-dumping tariff in January, 2005, and total shrimp imports from the six countries on which the tariff was imposed increased rather than decreased. In 2005, shrimp imports from the six increased to 744 million pounds, up 4.5 percent from the 2004 total of 712 million pounds. In 2006, imports from the six jumped 14.5 percent to 851 million pounds.

How did that happen? Why did shrimp imports from the six targeted countries increase after the tariff was imposed on them?

Shrimp, it turns out, is not a simple product. There are many species of shrimp, and they are processed and shipped in many different forms. The anti-dumping tariff does not cover all shrimp species, nor does it cover all forms of processed shrimp products. In particular, value-added shrimp products, such as breaded shrimp and prepared shrimp meals, are exempt from the tariff.

NMFS data show that, while shrimp producers in Brazil, India, and Vietnam found other markets for their shrimp (primarily Europe and Japan), Ecuador and especially China and Thailand shifted their production to value-added products that are exempt from the tariff. US imports of breaded shrimp increased 169 percent from 36.5 million pounds to more than 98 million pounds in 2005, and then rose another 11 percent in 2006. US imports of prepared shrimp meals increased moderately in 2005, then jumped 40 percent from 184 million pounds in 2005 to 257 million pounds in 2006. China and Thailand now account for 93 percent of US imports of breaded shrimp and 75 percent of US imports of prepared shrimp meals.

These creative and resourceful responses — US shrimp buyers switching to new suppliers of frozen shrimp and foreign producers subject to the tariff switching production to shrimp products exempt from the tariff — have rendered the anti-dumping tariff ineffective as a means of protecting US shrimpers (and harming US seafood manufacturers and US seafood consumers). The tariff remains, however, an effective means of plunder.

Plunder

When the SSA filed its anti-dumping petition in December 2003, a US law known as the Byrd amendment (named after Senator Robert Byrd and formally called the Continued Dumping and Subsidy Offset Act) was in place. Under the Byrd amendment, the federal government transferred all revenues collected from an anti-dumping tariff to the parties that filed the anti-dumping petition. In 2006 alone, despite the creative responses of domestic shrimp buyers and foreign shrimp producers, the SSA received $100 million under the Byrd amendment. The money was distributed among hundreds of domestic shrimpers.

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"The odd twists of this episode of protectionist plunder would not have surprised Bastiat."

The Byrd amendment was repealed in February of this year, but that hasn't stopped the plunder. With the help of some high-priced lawyers, the SSA filed a special appeal with the Department of Commerce that threatened foreign shrimp producers with more extensive tariffs. The move worked well: more than 100 foreign shrimp suppliers paid the SSA millions of dollars in return for its promise to drop the petition.[3]

The SSA has used the money to pay its high-priced lawyers, to pay lobbyists to rally government support for the industry, and to pay office expenses. Its clients — domestic shrimpers — receive nothing. Thus, the beneficiaries of the shrimp tariff are no longer domestic shrimpers, but lawyers and lobbyists.

A surprising case?

The odd twists of this episode of protectionist plunder would not have surprised Bastiat. He understood that many factions of society would find it irresistible to use government as an instrument of plunder. But he also understood how creative and resourceful buyers and sellers in markets can be, and how market forces, led by entrepreneurs, can sometimes overwhelm state-sponsored plunder.


Aleksandra Dunaeva is an economics student at Coastal Georgia Community College. Send her mail. Don Mathews teaches economics at Coastal Georgia Community College. Send him mail and see his archive. Comment on the blog.

Notes

[1] For background and an economic analysis of dumping, see "The Fallacies of Shrimp Protectionism."

[2] The specifics of tariffs can be complex, bordering on convoluted. The particulars of the anti-dumping tariff on shrimp can be examined online.

[3] "U.S. Shrimpers Haul Cash from Lower-Cost Rivals," The Wall Street Journal, April 2, 2007.