Question

Explain Dumping and how would an economy can be affected by dumping? Give your answer via graph by using change in § Consumer surplus § Producer surplus § Net welfare effect judgments 2. Explain the policies a country should implement in order to protect its industry from dumping.

Answer 1

Dumping is a term used in the context of international trade. It is the export by a country or company of a product at a price that is lower in the foreign importing market than the price charged in the exporter's domestic market. Because dumping typically involves substantial export volumes of a product, it often has the effect of endangering the financial viability of manufacturers or producers of the product in the importing nation.

Effects of dumping on an economy can be best described by the following diagram:

The effect on dumping on domestic shoes market

in an open economy, which allows free trade, foreign supplies, such as Chinese and Vietnamese companies, in this case, are supplying their shoes to EU market at price lower than their domestic market or price lower than their production cost. This action of those firms will set world price of shoes, indicated by P_World, lower that domestic price, indicated by P_E. The world price is established by numerous sellers and buyers worldwide, in this case, particularly those of China and Vietnam. This large number of sellers allows domestic market to import as much as it wants to. Therefore, it is perfectly elastic supply, illustrated by a horizontal line. (Quantity supplied is not affected by price.)At the lower world price, only few domestic suppliers are willing and able to supply, so domestic production stops at Q₁. However, quantity demanded exceeds quantity supplied at low price level, creating shortage in domestic market. However, that shortage can be overcome by supply provided by Chinese and Vietnamese producers, who are willing and able to supply at lower prices. They will supply to meet domestic demand, quantity from Q₁ to Q₂.This is definitely beneficial to domestic consumers as they can afford shoes at lower price, but this is loss to domestic suppliers because they cannot sell as much as they used to in a close economy. On the other side, Chinese and Vietnamese shoes producers benefit from this situation as they can kill off competition within EU through the practice of ‘dumping.’ Now If we calculate the Consumer surplus, Producer Surplus and Net welfare effect:

Consumer surplus = A

Producer surplus = B+C

Net welfare effect = - (D+E)

2. Anti-dumping actions:

• If a company exports a product at a price that is lower than the price it normally charges in its own home market, or sells at a price that does not meet its full cost of production, it is said to be "dumping" the product. It is a sub part of the various forms of price discrimination and is classified as third-degree price discrimination. Opinions differ as to whether or not such practice constitutes unfair competition, but many governments take action against dumping to protect domestic industry. The WTO agreement does not pass judgment. Its focus is on how governments can or cannot react to dumping—it disciplines anti-dumping actions, and it is often called the "anti-dumping agreement". (This focus only on the reaction to dumping contrasts with the approach of the subsidies and countervailing measures agreement.)The legal definitions are more precise, but broadly speaking, the WTO agreement allows governments to act against dumping where there is genuine ("material") injury to the competing domestic industry. To do so, the government has to show that dumping is taking place, calculate the extent of dumping (how much lower the export price is compared to the exporter’s home market price), and show that the dumping is causing injury or threatening to cause injury.

• Under the Anti-dumping Agreement, imposition of an anti-dumping duty requires that the investigating authority have evidence not only to substantiate dumping, but also to prove that the dumping has resulted in injury to a competing domestic industry in the importing country. Moreover, dumping may result in benefits to consumers in the form of lower-priced goods and is thus not an entirely deleterious practice. Under the terms of the GATT, a country can take actions against dumping only when there is a factual finding of injury to an industry in an importing country.
  The Tokyo Round Anti-dumping Code did not clearly set forth the conditions necessary to establish injury. Unfortunately, the prior provisions have lent themselves to different interpretations by different countries.
  The Anti-dumping Agreement contains more detailed rules on determinations of injury. It is difficult, however, to develop a general quantitative standard to measure the extent of injury that has occurred.
  We must therefore be aware of the potential problems in discretion. Specifically, we must ensure that sufficient evidence is considered when determining injuries, that there is sufficient proof of causality between dumping and injury, and that there is no potential for injury from other factors unrelated to dumping imports to be counted in with dumping injury.

• According to footnote 2 of the Anti-Dumping Agreement, domestic sales of the like product are sufficient to base normal value on if they account for 5 percent or more of the sales of the product under consideration to the importing country market. This is often called the five-percent or home-market-viability test. This test is applied globally by comparing the quantity sold of a like product on the domestic market with the quantity sold to the importing market.Normal value cannot be based on the price in the exporter’s domestic market when there are no domestic sales. For example, if the products are only sold on the foreign market, the normal value will have to be determined on another basis. Additionally, some products may be sold on both markets but the quantity sold on the domestic market may be small compared to quantity sold on foreign market. This situation happens often in countries with small domestic markets like Hong Kong and Singapore, though similar circumstances may also happen in larger markets. This is because of differences in factors like consumer taste and maintenance.Calculating the extent of dumping on a product is not enough. Anti-dumping measures can only be applied if the act of dumping is hurting the industry in the importing country. Therefore, a detailed investigation must first be conducted according to specified rules. The investigation must evaluate all relevant economic factors that have a bearing on the state of the industry in question; if it is revealed that dumping is taking place and hurting domestic industry, the exporting company can raise its price to an agreed level in order to avoid anti-dumping import duties.

• One of the most valuable and important improvements, requiring Anti-dumping duties to be automatically terminated no later than five years from their imposition except in cases where investigating authorities have conducted reviews on their own initiative or upon a duty- substantiated request made by the domestic industry, and determined that dumping and injury would continue or resume. The United States has rarely terminated Anti-dumping duties once it imposed them. This change is, therefore, very important, and we need to keep a watch on the US administration of Anti-dumping measures.