Balboa, Banguis, Suplico

ABE 154

The Anti-Dumping Argument

Foreign firms’ dumping into the home country constitutes a threat to domestic producers. Thus
we need to impose an antidumping duty to prevent this unfair practice.

I. Objective
to stop an unfair trading practice (dumping)

II. Consistency: It depends on the type of dumping

World Trade Organizations’ definition: Dumping is, in general, a situation of

international price discrimination, where the price of a product when sold in the importing
country is less than the price of that product in the market of the exporting country. Thus, in
the simplest of cases, one identifies dumping simply by comparing prices in two markets. It has
three types:

1. Sporadic or Intermittent Dumping

- It is adopted under exceptional or unforeseen circumstances when the domestic
production of the commodity is more than the target or there are unsold stocks of
the commodity even after sales. In such a situation, the producer sells the unsold
stocks at a low price in the foreign market without reducing the domestic price.

This is possible only if the foreign demand for his commodity is elastic and the
producer is a monopolist in the domestic market. His aim may be to identify his
commodity in a new market or to establish himself in a foreign market to drive out a
competitor from a foreign market. In this type of dumping, the producer sells his
commodity in a foreign country at a price which covers his variable costs and some
current fixed costs m order to reduce his loss.

2. Persistent Dumping:
 - When a monopolist continuously sells a portion of his commodity at a high price in
the domestic market and the remaining output at a low price in the foreign market,
it is called persistent dumping. This is possible only if the domestic demand for that
commodity is less elastic and the foreign demand is highly elastic. When costs fall
continuously along with increasing production, the producer does not lower the
price of the product more in the domestic market because the home demand is less
elastic.

However, he keeps a low price in the foreign market because the demand is highly
elastic there. Thus, he earns more profit by selling more quantity of the commodity
in the foreign market. As a result, the domestic consumers also benefit from it
because the price they are required to pay is less than in the absence of dumping.
3. Predatory Dumping:
- The predatory dumping is one in which a monopolist firm sells its commodity at a
very low price or at a loss in the foreign market in order to drive out some
competitors. But when the competition ends, it raises the price of the commodity m
the foreign market. Thus, the firm covers loss and if the demand in the foreign
market is less elastic, its profit may be more.

Dumping is legal under World Trade Organization rules unless the foreign country can
reliably show the negative effects of the exporting firm on the domestic producers. In order to
counter dumping, most nations use tariffs and quotas to protect their domestic industry from
the negative effects of predatory pricing.

In an increasingly global economy, consumers in a nation that has been the target of
dumping activity may have few qualms about consuming products that have been dumped, as
long as they are of comparable quality to local merchandise but are priced much lower. Over
time, dumping may have a negative impact on the local economy by driving domestic producers
out of business, which would result in job losses and a higher rate of unemployment.
 Another key assumption is that World Trade Organization Members can only impose
anti-dumping measures, if, after investigation in accordance with the Agreement on
Implementation of Article VI of the GATT 1994 (The Anti-Dumping Agreement), a determination
is made (a) that dumping is occurring, (b) that the domestic industry producing the like product
in the importing country is suffering material injury, and (c) that there is a causal link between
the two.

III. Winners or Losers

 Winners for anti-dumping duties on:

1. Sporadic dumping - import-competing home firms
2. Persistent dumping - import-competing home firms, foreign consumers
3. Predatory dumping - import-competing home firms, home and foreign consumers

Mainly, the import-competing home firms win in the process of ant-dumping. When
that company or firm believes that it is being injured by import dumping, it files a petition with
the federal government requesting that protection—in the form of duties—be applied to the
imported good in question. Ronald Wirtz (2001) stated that once the petition is filed, an
investigation is launched by two federal offices. The Department of Commerce determines
whether goods were sold below cost or at less-than-normal market value, and the International
Trade Commission (ITC) calculates whether the imported goods wreaked "material injury" on
domestic industries. Both have to find in the affirmative for duties to be imposed. When it is
proved that the said company is “injured” with the dumped import goods, the company will
receive protection from the government with an appropriate anti-dumping duty.

 Losers for anti-dumping duties on:

1. Sporadic dumping - foreign (dumping) firm, home consumers
2. Persistent dumping - foreign (dumping) firm, domestic consumers
3. Predatory dumping - foreign (dumping) firm

The foreign firms, which dump goods to another countries, lose due to the protection
given to the importing company or firm. In free trade, those foreign firms will limit the
 amount or quantity of the export goods, having less exports thus it will be their (profit) loss.
Probably, they are also entitled to pay depending on the countervailing duties protecting
the import-competing firms. Foreign firms that produce goods or commodities more than
how much is actually demanded will be of disadvantage. If the industry is producing under
the law of diminishing returns, the price will fall because costs will decrease. This will more
likely to lower their profit. Moreover, there is a possibility of unemployment growth in the
foreign country due to the declined efficiency of production.

IV. Net Impact

1. Sporadic dumping - Net welfare effect is not evident, though does not seem to
justify protection if it is a short-term phenomenon
2. Persistent dumping – Negative net welfare effect (compared to a tariff regime)
3. Predatory dumping – Positive net welfare effect (compared to a tariff regime)

V. Alternative Policy

If we want to promote domestic industry, imposing subsidy and/or import quota is a

more efficient instrument.

Subsidy

A subsidy is a benefit given by the government to groups or individuals usually in the

form of a cash payment or tax reduction. The subsidy is usually given to remove some type of
burden and is often considered to be in the interest of the public.

The exporting-foreign country is subsidized by its government thus it will export the
good up to the point where the domestic price exceeds the foreign price by the amount of the
subsidy. This means that the foreign industry will not export their goods at a lower price,
preventing dumping of the goods to another country.

Import Quota
 Import quota is another measure to stop dumping under which a commodity of a

specific volume or value is allowed to be imported into the country. For this purpose, it includes

the imposition of a duty along with fixing quota, and providing a limited amount of foreign

exchange to the importers.

VI. Conclusion

Anti-dumping duties depend on the three types of dumping: sporadic, persistent, and predatory
dumping. Also, the key assumptions to determine that such argument is occurring are the
existence of dumping, the domestic industry is suffering from imported material injury, and the
casual link between the two.

The effect of Anti-Dumping duty is desirable if used to prevent predatory dumping (positive net
effect) and undesirable if used to prevent persistent dumping (negative net effect). Generally,
the import-competing home firms win while the foreign firms lose in this argument. Further,
the objective could be achieved more efficiently through imposing subsidy to the exporting
country and requiring import quota.

References:

https://www.minneapolisfed.org/publications/the-region/antidumping-the-freetrade-antacid

http://www.yourarticlelibrary.com/economics/dumping-meaning-types-price-determination-
and-effects-of-dumping/28863/