Dumping and Antidumping duty

Dumping:
selling at the export market at less than normal value.

• Selling at a lower price in the export market, relative to

that charged in the domestic market
or,
• Selling below average cost in the export market

• Sporadic dumping
• Persistent dumping
• Perceived as a Predatory activity
Dumping is considered a predatory activity by WTO.

But dumping may occur without any predatory motive, just as an outcome of
profit maximization.
Persistent dumping as international price discrimination (1)
Dumping may occur when
• Domestic market of the exporter is a monopoly
• But export destination is a competitive market
Here the entire supply is made from one production unit

P Dumping margin = P2 - PF

3 MC
P2
P1 2 1 Foreign
PF demand

Dom. Domestic
MR demand

Q2 Qo Q1 Q

Dom Export
 Persistent dumping as international price discrimination (2)
Dumping may occur when
• Domestic market of the exporter has a
higher willingness to pay than the export destination.
• Monopoly in both domestic market and export destination of the exporter.
Here two markets are supplied from two different production units.
P P

Dumping margin = P1 – P2

P1 1
MC MC
2
Domestic
P2
E
demand Foreign
E’ demand
Dom. For.
Dom MR Export MR

Q1 Q Q2 Q
Domestic Export destination
Antidumping rules under WTO
• Provides Members the right to apply anti-dumping measures,
• How to identify dumping as per WTO rule?
Dumping - export of a product at an export price (PH) below its “normal
value”.
F H G
Exporting Export Third
country destination country
Price PF PH PG
Av. cost AC

• Dumping : PH < a normal value

• Normal value = some comparable price, PF
• In absence of PF, normal value = PG
(F exports the commodity to H and G)
• In absence of PF or PG, normal value = AC

Note: In some cases China’s domestic market price (PF) is not compared to,
because China is not given a ‘market economy’ status by the EU.
• Conditions for use of AD measures
• if such dumped imports cause injury to a domestic industry in the
territory of the importing Member.
• Establishment of a clear causal relationship between dumped imports
and injury to the domestic industry.
• Domestic Industry –
(1) the domestic producers as a whole of the like products (substitutes)
• Or
(2) those, whose collective output of the products constitutes a major
proportion of the total domestic production.
• provisional measures to be used before the case is settled,
use of price undertakings in anti-dumping cases.

• Terms of expiry of the ADD measure -five years after the date of
imposition
(unless a determination is made that, in the event of termination of the
measures, dumping and injury would be likely to continue or recur)

• Immediate termination of an anti-dumping investigation, if

(1) margin of dumping is < 2% of the export price of the product
or (2) volume of dumped imports is negligible (from an individual country <
3% of the imports of the product in question into the importing country).
• Objective of Antidumping duty (ADD):
to stop the unfair practice of predatory pricing

• Used primarily as a protectionist measure

• Most frequently used by USA, India, EU, China, Mexico, Argentina.
• India is a frequent user, and also one of the most targeted countries
Developed nations and AD duty:
Antidumping Act 1916 USA:
requires dumping firms to pay 3 times the damage + imprisonment + fine
Byrd Amendment USA 2000
AD collections to be paid to firms that brought the petition.
• Direct incentives to domestic industry to bring an AD complaint.
• Costly for developing nations to incur legislation costs in US and EU courts.
EU 2004 :
was allowed by WTO to take mirror legislations as in US

Developing nations’ challenges :

• Have to ensure special and differential treatment
• Enactment of AD laws similar to US and EU needed. More than
30 nations including India, Argentina. China, Indonesia have
enacted AD rules.
• India is one of the largest initiators of AD actions
Persistent dumping as international price discrimination (1)

3 MC
P2
P1 2 1 Foreign
PF demand

Dom. Domestic
MR demand

Q2 Qo Q1
Dom Export
Persistent dumping as international price discrimination (1)
Impact of antidumping duty
Reduction of dumping margin from P2-PF to P3-PF,
reduction in export.
See note below.
P
MC + ADD
Implications of the
ADD:
3 MC
P2 1. Dumping margin is
7
P3 only partially
2 4 1 Foreign
PF reduced, not
demand eliminated
6
5 2. Price in the export
destination does
E
Dom. Domestic not rise, only price
MR demand in the domestic
market falls.
Q2 Q3 Q4 Q1
3. Exports reduced
Dom Export
 Persistent dumping as international price discrimination (2)

P P

P1 1 MC
MC
2
Domestic
P2 Foreign
E
demand demand
E’
Dom. For.
Dom MR Export MR

Q1 Q2
 Persistent dumping as international price discrimination (2)
Impact of antidumping duty
Dumping margin and exports are reduced.
But reducing the dumping margin close to 0 is less likely.
P P

MC +ADD
P1 1 MC
MC 3
P3 2
Domestic
P2 Foreign
E E”
demand demand
E’
Dom. For.
Dom MR Exp MR

Q1 Q3 Q2
Implications of the ADD:
1. Dumping margin is only partially reduced, not completely gone
2. Price in the export destination rises. 3. Exports reduced
What would have been a true test of predatory motive?
 How predatory dumping should ideally be detected?

Cost based method

Proof of predatory intent: PH < MC or PH < AVC (Av. Variable cost)
This implies a negative operating profit. Hence should be a proof of predatory
intent. Information about MC or AVC may be difficult to obtain.
So alternative proof of predatory intent : PH < AC
But PH < AVC is a more conclusive proof of predatory motive.

Recoupment method
Period 1: predation and elimination of competition
Period 2: After competition has been eliminated

If estimated profit in pd-2 > estimated loss in pd-1

Below cost pricing can be proved.
 Even P < AVC (Av. Variable cost) not AC (average of total cost) signify
predatory intent
P > AC implies profit
Signifies no predatory
intent.

AC P = AC Break even point.

AVC < P < AC implies negative net profit but Proves no predatory intent.
positive operating profit.
Signifies no predatory intent. Firms could go on
producing as long as they have positive operating
profit. Firm is recovering the operating cost. The
fixed cost is not recovered. But they may wait for AVC
price to rise later to recover the fixed cost. P < AVC implies negative
operating profit. Neither the
fixed cost nor the variable
cost (operating cost) is
recovered.
Charging such low price
proves predatory intent.
Tests developed to establish predatory dumping

1. The US way - to show that

• PH < AC and
• High probability that predator recoups the lost profit

2. The EU way – to show that

Only PH < AC
As this price choice is a proof that the predator estimates that the probability
of recouping lost profit is high

3. The WTO way – to show that

PH < PF
Only in absence of PF, PH < PG or PH < AC
Dumping should be identified as unfair as long as it is done with a predatory
intent.

Consider the following cases that show that

• Dumping may occur without a predatory intent

• A predatory intent may be present without dumping being identified
Case 1

AVC = 80 PH = 90 (in importing country) PF = 110

PH > AVC
PH < PF

Dumping identified as per WTO rule, as PH < PF (price discrimination)

With no proof of a predatory intent.
PH > AVC
PF > AVC
Profit in both markets
May be a result of international price discrimination
Case 2

AVC = 100 PH = 95 (in importing country) PF = 90

PH < AVC
PF < AVC
PH > PF

No occurrence of dumping as per WTO definition, since PH is not < PF

Predatory intent in both domestic and international markets.
Thus
WTO’s PH < PF rule to prove dumping
• May identify and penalise dumping even when predatory motive is absent
• May not identify dumping, even if predatory motive is present.

The alternative P < AC rule

• May identify dumping although predatory intent may not be present.

P < AVC should be sufficient to prove a predatory intent. But this rule is not
adopted in WTO or in the AD regulations of its members
 ADD and Safeguard duties - as protection to domestic industry

ADD - if dumping occurs and it causes injury (if not inconsequential)

• provisional ADD duty can be imposed even before injury is proven
Safeguard duties – when import is surging causing serious injury to
domestic industry

ADD is much more frequently used than safeguard measures because

• provisional ADD can be levied or a price undertaking can be obtained from

the allegedly dumping firm before dumping is proven.
• Proof of a serious or substantial injury is difficult to establish.
 ADD and Safeguard duties - as protection to domestic industry

Issues
1. Surging imports may not cause serious injury to domestic industry
particularly with falling prices.
Even in such cases ADD or safeguard measures can be imposed.

2. Similarly, injury to domestic industry may be serious even without

dumping, or without increase in imports. May be due to other reasons, e.g.,
due to development of cheaper substitute products, general recessionary
trend etc.
In such cases, imports can be wrongly identified as the cause of injury and
ADD or safeguard may be wrongly misused.
Exercise
• ‘Coated paper rolls’ are produced in UK and exported to Brazil and Mexico.
The average total cost for a firm in UK exporting the product is 60, and
average variable cost is 35. Consider the following price combinations and
determine whether the product has been dumped according to WTO’s
definition of dumping. Also determine if a sufficient proof of predatory
intent exist in any market in each case. The proof of predatory intent may
not be according to the WTO’s AD regulation.

• Price combination A:
P(UK) = $85 P(Mexico) = $25 P (Brazil) = $55

• Price combination B:
P(UK) = $32 P(Mexico) = $76 P (Brazil) = $48
Reading

• “International Predation and Anti-Dumping” by Prabhash Ranjan

• Chapter 8 from text book – page 220-21