Antidumping and subsidy policies in the European Union

The thesis analyzes EU authorities' choice among the available set of policy options in terms of the nature of the cost advantage of foreign competitors, and the implications of that cost advantage for potential FDI activity by foreign firms. It consists of three main parts. The first presents the institutional framework of antidumping (AD) and subsidy policies in the European Union (EU). The basic regulations are derived from the principles of the General Agreement on Tariffs and Trade and its successor, the World Trade Organization. However, there are certain specifics that make the EU legislation unique, mainly due to the institutional organization of the EU and the autonomous decision-making power of its supervisory bodies, especially the European Commission, Council, and Parliament. Despite the Union's commitment to free and undistorted internal competition, its primary interest is to protect the interests of domestic firms and consumers. Therefore it is sometimes deemed necessary to intervene in the market, especially when EU officials believe that foreign entry is supported by unfair trade practices.; The second part of the thesis provides a theoretical analysis of EU policy choice in a duopoly composed of a domestic EU firm and a foreign firm that can enter the EU market as an exporter or, through foreign direct investment, as a local producer. Under free trade, the foreign firm benefits from a production cost advantage that allows it to undercut the price determined by the domestic firm in the EU market and thus creates an incentive for the EU to apply certain protectionist instruments: an AD duty, a price undertaking, or a production subsidy for the domestic firm. The EU government's optimizing policy choice takes into account the effects of an imposed policy on the location decision of the foreign firm.; The final part of the thesis is an empirical examination of EU government officials' choice of a policy instrument, given the cost structure of the foreign firms supplying the EU market. The analysis tests the implications of the theoretical model using 4-digit Combined Nomenclature (CN) data and information on EU AD and production subsidy investigations from 1985 to 1995. The results support the theoretical finding that the EU is indifferent between imposition of a definitive AD duty and a production subsidy when foreign firms enjoy a location-specific and thus non-transferable cost advantage, and subsidizes domestic production if a foreign firm with a transferable cost advantage can avoid AD duties by undertaking FDI. If production subsidies are not a feasible policy choice, the EU will impose a definitive AD duty on imported goods produced by a firm with a location-specific cost advantage but will negotiate a price undertaking if the foreign firm would switch to FDI production when an AD duty is imposed.