Japan and the World Economy 2 (1990) 181-187 181

Elsevier Science Publishers B.V. (North-Holland)

‘DUMPING’, ‘UNFAIR’ COMPETITION

AND MULTINATIONAL CORPORATIONS

Edith PENROSE *
30-A station Road waterbeach, Cambridge, CBS 9Hr UK

Received August 1989, final version received February 1990

The term ‘Dumping’ refers to a situation in which prices are charged in export markets that are
lower than those charged in the exporters’ domestic markets. I does not necessarily, or even
usually, mean that sales are made ‘below cost’ in order to drive out competition. Already the
negotiation of restrictive arrangements outside GAlT through which the stronger governments
work to protect their own interests are severely weakening the effectiveness of the institution. The
spreading and spurious use of ‘anti-dumping’ protective duties constitute yet another serious
erosion of the free multilateral trading system envisaged by GAlT

Keyworak: ‘Dumping’, multinational corporations, international trade.

In making arrangements to free international trade so far as possible from the

heavy burdens imposed by the pre-war network of protective tariffs and
quotas, the General Agreement on Tariffs and Trade (GATT) included provi-
sions relating to ‘unfair’ trade practices, among which was ‘dumping’. These
were extended and elaborated later and anti-dumping codes were formulated.
As trade barriers were reduced through international negotiations and older
industries in older industrial countries began to be displaced by the rise of new
high-technology industries in newer industrialized countries, many govem-
ments began to search for ways of protecting the one against rapid change and
the other against lower-cost competitors.
In general terms, dumping in international trade is simply the charging of
different prices in different markets which are not justified by differences in
costs. It usually refers to a situation in which prices are charged in export
markets that are lower than those charged in the exporter’s domestic markets.
It does not necessarily, or even usually, mean that sales are made ‘below cost’ in
order to drive out competition.
Apart from the latter, it is by no means clear why it is inherently ‘unfair’ to
sell more cheaply in one market than in another. Price discrimination of this

* The author is Emeritus Professor of Economics, University of London and INSEAD,

Fontainebleau.

0922-1425/90/$3.50 Q 1990 - Elsevier Science Publishers B.V. (North-Holland)

 182 E. Penrose / Comperirion and muhanonal corporarions

kind is as much, if not more, a symptom of existing market imperfections as it

is a cuusc of market ‘distortion’. Nevertheless, the term ‘dumping’ in itself
provides a self-contained argument in the form of a slogan which excludes,
and, as used, is intended to exclude, any further rational consideration of the
nature of international competition.
A large proportion of manufactured products entering into international
trade comes from multinational companies that are vertically, horizontally,
geographically and functionally integrated across international frontiers, pro-
duce many different products with different but interrelated processes and
inputs, and are heavily engaged in fundamental technological research. The
processes of production and distribution of such companies are often char-
acterized by economies of scale and economies of scope (size and diversifica-
tion) as well as by rapid technological change. The principles of international
trade which include simple price discrimination between national markets
among ‘unfair’ or monopolistic trade practices, have never integrated or taken
account in a coherent manner of any of these characteristics of modem
international production and distribution.
A number of economists have noted the importance of trade within large
multinational companies where economies of scale and joint costs of produc-
tion are often especially significant. Because of economies of scale multina-
tional companies will often find it advantageous to concentrate much of the
production of some components constituting intermediate inputs in one or
only a few plants. This implies specialization of the production of such
components in a few countries and, like all intrafirm trade, it implies transfer
pricing. Economies of scope, as well as scale, may make it cheaper to
distribute many of a firm’s products through a few large marketing sub-
sidiaries in each country. In the ‘construction’ and comparison of import and
export prices according to, for example, EEC procedures, such conditions lead
to the calculation of very large dumping margins. ’
Although a significant proportion of industrial exports does take place
within multinational companies, a much larger proportion is exported by them
to the world at large. The activities of large diversified companies involve the
production of many different products, often drawing on the same research
base, similar technology, or common managerial resources. Much trade of this
kind is determined by considerations very different from those set forth in the
principle of comparative advantage applied to countries. The trade-offs and
constraints and the criteria for the optimization of the use of resources are
very different when looked at from the point of view of an integrated firm,
than they are from that of an ‘independent’ subsidiary, or from that of a

’ There has recently been a considerable revival of literature dealing with the definitions,
assumptions behind, and statistical calculation of, dumping margins relating particularly to the
practices of the EEC and the US. See the references.
 E. Penrose / Competition and multinarlonal corporatrons 183

country. Given the inherent and unavoidable imperfections of the actual

markets in which companies compete, as well as the avoidable ones and the
defensible political considerations of governments, it is difficult sensibly to
insist on welfare maximiz ation grounds that companies be penalized because
they did not behave us if markets were perfect.
Multinational companies are often referred to as ‘global’ corporations. This
term does not carry the implication that each produces everywhere on the
globe, but rather that their range of vision encircles the globe; to use the
jargon, they ‘scan’ the globe in space and well into future time. Such firms are
‘networks’ of subsidiary companies, of differing size, complexity and impor-
tance, often operating in accordance with an overall ‘strategic plan’ and
competing in individual markets with each other but over a diversified range
of products and groups of products, exploiting every opportunity to attack
each others’ markets, often using for the purpose their investments in their
‘core’ technologies, and treating individual products as part of an ‘extended
family’ in which one ‘member’ can at times be used to help others in
distribution and marketing. The cash flow gained in one market or activity is
an important short-term means of bolstering the cash flow in another in
continual struggles over market share. The size of market share is seen as a
major criterion of cost advantage over competitors; the ability to create and
effectively to use new technology is crucial in the race to remain ahead, to
achieve the minimum, though temporary, ‘dominance’ deemed necessary for
competitive survival.
‘Future orientation’, a long range of vision, with strategic moves planned
long in advance, and pricing so designed as to ensure so far as possible a
future market of a size that will justify the pricing strategy, is one of the major
“keys to success”. Competition is intense among such “networks” and it
seems to be a major driving force of modem technological progress in all its
forms.
Thus, to the traditional availability and prices of the factors of production
(factor proportions), which characterize trading countries, and the economies
of scale in the production of intermediate and final products, which char-
acterize many aspects of industry, and the more modem concept of economies
of scope, which characterize companies, must be added competitive anticipa-
tions of technological innovations in processes and products by the competing
companies as well as a variety of other characteristics of strategic global
competition among them. The addition of such considerations not only affects
the analysis of the causes of, and the appraisal of the benefits and costs
associated with, international trade (including transfers of technology), but
also the desirability and effectiveness of measures designed to regulate it.
Management guides and manuals, the leading theorists and teachers of the
art of business management in today’s business schools, ranging from Stanford
to Harvard, from the Geneva IMI to the Fontainebleau INSEAD, from
 184 E. Penrose / Comperirion and mulharlonal corporariots

London to Bradford, all seem to be insisting that the successful managers of

multinational companies must engage in pricing according to the elasticity of
demand and competitive conditions in real, not theoretical. markets, in ‘expe-
rience curve pricing’, cross subsidization within ‘families’ of products (espe-
cially if characterized by joint costs) and in conscious international manage-
ment of their costs and after-tax revenues. All of these will almost necessarily
result in ‘dumping’ as defined in the anti-dumping codes. Clearly the contem-
porary ‘rules of the game’ with respect to ‘big business’ competition as taught
in higher degree studies in business management courses in. our schools and
universities conflict seriously with the traditional rules as laid down in GAIT
and as interpreted and implemented by governments.
Moreover, one need only to look ‘out there’ at what is going on in the real
world to realize that the ‘business school rules’ are the ones prevailing in
international business. These bear very little, if any, resemblance to the
economist’s ‘textbook’ principle relating to the optimum conduct of intema-
tional trade. Indeed, given their economic and administrative structure, the
diversification of their industrial organization, the nature of modem techno-
logical change and the structure of costs, large multinational companies simply
could not regulate their affairs us if they were engaged in the type of
competition that denied the legitimacy of charging different prices in different
markets. In other words, ‘dumping* is endemic in the system, an inherent part
of the competition among large, diversified, research-based, integrated compa-
nies.
In these circumstances, one might have thought that to discover and
quantify price discrimination not based on cost differences, that is, ‘dumping’,
would have been impossible since it involves the conceptual and statistical
severing of symbiotic relationships within complex organisations in order to
compare prices and costs directly attributable to particular products as if each
were produced and sold by independent entities and priced as if all markets
were characterized by an almost textbook form of perfect competition.
An ‘objective’ performance of this task is indeed impossible. It unavoidably
requires many discretionary judgments, conceptual fictions and arbitrary
statistical manipulations. In the attempts to apply the anti-dumping codes in
circumstances to which the traditional theory of dumping is totally inap-
propriate, the scope for unreasonable and unfair procedures is very great. It is
not surprising that governments take full advantage of this in order to justify
the imposition of protective duties under the disguise of anti-dumping mea-
sures in pursuance of their industrial policies.
Multinational companies are well aware that governments have enormous
power to frustrate or advance the company objectives. In consequence, they
attempt to be ‘responsive’ in varying degrees to the demands of government,
making the requisite ‘trade-offs’. But this in itself easily creates another
channel for the abuse of power and for governmental intervention in intema-
 E. Penrose / Competition and multinational corporations 185

tional trade to further national policies while the ‘costs of citizenship’ may be
high for companies. As Professor Yves Doz of INSEAD has remarked, To a
great extent national sectoral strategies in global industries can be seen as
mirror images of multinational business strategies.. . The logic is clear.. . to
beat the integrated MNCs at their own game. 2
When the interests of companies in ‘global’ industries conflict with the
national objectives of governments there develops a rivalry among companies
and among governments and between companies and governments. Some
governments may offer selective support to nationally-based subsidiaries of
multinational companies as part of their own industrial policies. One result is
that a multinational company may be caught in the cross-fire between more
than one government or, alternatively, may be in a position to take advantage
of government policies to improve its own competitive position. 3
To give a not unrealistic illustration of the latter. Consider the strategy of
an American multinational, the European subsidiary of which has successfully
built up production of a high-technology product using imports of compo-
nents (and technology) from a Japanese sister subsidiary but now no longer
needs the imports. It nevertheless still finds that Japanese exports of competi-
tive products reduce its profitability. What better strategy than to join with
other companies in promoting a dumping charge against the Japanese ex-
porters of the finished product and of component parts? If successful (and
success is not difficult given the nature of the methods of investigation in use),
not only is the company protected from Japanese competition in the European
market but its less-advanced European competitors still relying on component
imports are rendered less competitive. ‘Input dumping’ can be ‘proved’ under
EEC-type regulations as easily as for final products, and anti-dumping duties,
together with ‘screw-driver’ provisions, can be, and are, used by governments
primarily as means of inducing foreign subsidiaries to shift as much of their
component manufacture as possible from what might be otherwise cheaper
areas. 4

2 Doz (1986, p. 128). Chapter 5 of this book gives an illuminating discussion of this kind of
competition in the computer and micro-electronics industries between European countries and
Japan, both of which adopted ‘a policy of partial protection.’
’ Doz also provides interesting examples of ‘national responsiveness’ in various contexts. Often
an important objective of an MN0 policy is to obtain one or more governments as allies in its
competitive rivalry.
4 WiUy de Clerq, European Commissioner for External Relations, writing in the Financial Times
(London) stated with reference to the so-called ‘screw-driver’ provisions (which require a
minimum of local content) imposed on the subsidiaries of foreign companies that had jumped
the wall erected by anti-dumping duties, that ‘The Community’s main concern.. . was to guard
against the flagrant circumvention of anti-dumping duties while ensuring that the provisions did
not deter genuine inward inu-wment. This aim seems to have been achieved. Direct investment of
Japan into Europe increased about 90% in the year following the introduction of the provisions.
Furthermore.. . it was found that the assemblers have been able to switch the source of their
components with comparative ease and once this happened the Community readily accepted
undertakings from the assemblers and removed the duty on the assembled product.’ (Emphasis
added.)
186 E. Penrose / Competinon and mcrlrinafional corporations

Japanese multinationals, especially in high-technology industries, have often

been primary targets of anti-dumping changes. One justification frequently
given is that the Japanese markets are protected by non-tariff barriers of
various kinds and that this is ‘unfair’. Certainly a protected domestic market is
likely to lead to higher domestic prices than otherwise would have been the
case. The issue of the openness or otherwise of Japanese markets generally is
one that should be, and indeed is, a subject for inter-governmental negotia-
tions. It does not seem appropriate to bring dumping charges and impose
penalties against individual exporting companies in the attempt to bring
pressure on their government, expecially if the problem stems from traditional,
structural or other considerations beyond the control of the companies and
sometimes of Government, at least in the short term. Moreover, even a more
open Japanese market might reduce the size, as calculated by the EEC, of
dumping margins but would probably have no effect whatsoever for most
products on the anti-dumping duties imposed since these are supposed to be
set at levels intended only to ensure the profitability of locally based compa-
nies.
Already the negotiation of restrictive arrangements outside GATT through
which the stronger governments work to protect their own interests are
severely weakening the effectiveness of the institution. The spreading and
spurious use of ‘anti-dumping’ protective duties constitute yet another serious
erosion of the freer multilateral trading system envisaged by GATT. But so
long as GATT rules, or practices adopted under the rules, unreasonably
attack, or are totally inconsistent with, the normal and generally reasonable
and often inherently unavoidable practices which characterize the existing
competitive rivalry among international large companies, those rules will
continue to be misused and the fabric of GATT itself is likely to be increas-
ingly threatened. ’

’ Camp and Diebold (1986) present an excellent discussion of this problem in a number of
different contexts.

References

Baghwati, Jagdish, N., 1988. Protectionism (MIT Press, Cambridge, MA).

Camps. Miriam and William Diebold, Jr., 1983, The new multinationalism: Can it be saved?
(Council on Foreign Relations, New York, 1983). (Reissued in 1986 with a new introduction.)
De Clerq, Willy, 1988, Fair practice, not protectionism, Financial Times, 21 November (Letter
commenting on this appeared in the same paper on 25 November 1988 by Brian Hindley).
Davey, William, J., 1989, Antidumping laws: A time for restriction. in: Barry E. Hawk, ed.,
Annual Proceedings of the Fordham Corporate Law Institute (Fordham University, New
York).
DOG Yves, 1986, Strategic management in multinational companies (Pergamon Press, Oxford).
Hindley, Brian, 1988, Dumping and the Far East trade of the European Community, The World
Economy 11, no. 4. Dec.
 E. Penrose / Competition and multinational corpora~iont 187

Financial Ties, 9 January 1989, The design of Fortress Europe.

Norall, Christopher, 1986, New trends in anti-dumping practice in Brussel. The World Economy
9, no. 1. March.
Norall. Christopher, 1989. New amendments to the EC’s basic anti-dumping regulation. Common
Market Law Review 26.
Palmeter, N. David, 1988, The capture of the antidumping law, Review essay on J.N. Baghwati.
Yale Journal of International Law 14, no. 1.