The Economics of Dumping

What is dumping?
According to WTO, a product is considered to be dumped if it is introduced into the commerce of another country at less than its normal value, if the export price of the product exported from one country to another is less than the comparable price, in the ordinary course of trade, for the like product when destined for consumption in the exporting country.

An illustration
Measuring tapes are sold in China or exported from China to Indonesia (if calculated in Indian rupees) at Rs 100, and the price of the same when exported from China to India is Rs 70, then it can be said that China is dumping measuring tapes in India.

Dumping margin
The difference between export price and normal value is called ‘dumping margin’. Dumping margin is calculated as percentage of export price. Thus, in the above example, dumping margin is 100-70=30, which is about 42% of the export price.

What is anti-dumping (AD)?
The WTO agreement allows governments to act against dumping where there is genuine (“material”) injury to the competing domestic industry. In order to do that the government has to be able 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 do so.
Anti-dumping action means charging extra import duty on the particular product from the particular exporting country in order to bring its price closer to the “normal value” or to remove the injury to domestic industry in the importing country.

Adam Smith
Quoting Adam Smith, ‘by restraining, either by duties, or by absolute prohibitions, the importation of such goods from foreign countries as can be produced at home, the monopoly of the home market is more or less secured to the domestic industry employed in producing them.’ Thus Adam Smith was of the opinion, that, the importing countries should discourage those imports which will harm the domestic industries, by imposing duties on such items. Here he was referring to import duties but in the present economic scenario, import duties alone cannot discourage dumping. Thus the need arises for imposing anti-dumping duties.

Anti-dumping measures
1) Anti-dumping duty: This is imposed at the time of imports, in addition to other customs duties. The purpose of antidumping duty is to raise the price of the commodity when introduced in the market of the importing country.
2) Price undertaking: If the exporter himself undertakes to raise the price of the product then the importing country can consider it and accept it instead of imposing antidumping duty.

Calculating the extent of dumping
GATT (Article 6) provides three methods to calculate a product’s “normal value”. The main one is based on the price in the exporter’s domestic market. When this cannot be used, two alternatives are available — the price charged by the exporter in another country, or a calculation based on the combination of the exporter’s production costs, other expenses and normal profit margins. And the agreement also specifies how a fair comparison can be made between the export price and what would be a normal price.

Case study Ι
This case study supports the hypothesis that the dumping country need not be very developed so as to indulge in dumping. China is the world’s largest producer of apples. China has flooded the US market with apple juice concentrate along with textiles and garments. In the beginning of May 2000, an anti-dumping duty to the extent of 51.74% was imposed on Chinese apple concentrate. In United States, the price of Chinese apple concentrate is still low even after the imposition of anti-dumping duties due to their extremely low cost of production. China does not occupy a position among the world’s developed nations.

Case study ΙΙ
This case study brings out the injury that can be caused by dumping to the domestic firms. Anti-dumping investigations are taking place against import of Silk fabrics from China. It has caused injury to Indian silk domestic industry by causing significant decline in production, decline in capacity utilization, closure of several power looms, decline in sales, drop in employment, loss of market share in demand and decline in profitability.
Share of exports from China has increased in absolute terms as well as in relation to demand of product in India. This affects the small scale industries involved in the production of silk adversely.

The threat of dumping
In developing countries, especially those neighbouring the non-market economies, dumping can pose a serious threat. Dumping from China in India is an example of this. More than one-third cases decided by the Designated Authority in India involve China. These exporters are indulging in very aggressive pricing which is evident from the huge dumping margin. Moreover, in a majority of the cases, the exporters and producers of the exporting country have not cooperated in the investigation process.

References
1) WTO
2) CENTAD

0 thoughts on “The Economics of Dumping

  1. Thanks for visiting my blog:) Your’s is kinda…hmmm intense:)
    Well everyone in office was raving about Freakonomics sometime back, and there are a couple of copies doing the rounds!!
    Few years back there was a similar buzz about the tipping point.

  2. In a free trade environment (where no import/export duties changes the price), if china can dump products at a lower price into any other country than the input cost, it is only at the cost of ex-chequer. that means such products are kind of subsidized by china. long time back, and even to date india and rest of the world resort to import duties to protect local industries (one of the so called socialist principles) , it only breeds inefficiency rather than competing with china or other nation that is able to produce goods at a better price. (due to their increased productivity). did you lay hands on what paul krugman speaks about sweatshops?

  3. denying a customer to enjoy the privilege of low price by imposing import duty is illogical. your local companies have to learn it hard way that in businesses one has to work hard and constantly improve their productivity. otherwise, be ready to accept the fate of what happended to usa automobile industry in the hands of japanese counterparts.

  4. Harsha,
    The government has to take into account the demands of not only the consumers but the producers too. India which is predominantly an agriculture economy as in the primary sector still employs more then 60% of the population, it would not be wise to remove import duties and anti-dumping duties, which tend to cause harm to our local industries.
    It breeds inefficiency, when these duties are levied over a long period of time. During the periods where duties are imposed, the firms ought to increase their scale of production and become efficient either with an improvement in technology or an increase in economies of scale. There are predicaments to growth like patents, copyrights, etc which make it idfficult for the mediocre firms to compete.
    You are being totally capitalistic in your view. We need to strike a balance between both and ensure that the producers and consumers utility improves.

  5. Alex, informative post man….see the issue is *forget dumping*…i’m interested in economics…but i cant finish a single book on economics,they make it look so complicated (maybe it is) and thats kind of a repellant…i’ve tried out some ten books in the past two years…funniest one was das kapital (concise version)…i used to take one aspirin after every two paragraphs :)….you have a very simple way of explaining it and thats waht makes this place this good:)

  6. ~BVN
    Its depressing to hear that many books are complicated, in fact i feel its made complicated intentionally or it may be atht large number of jargons are used. Whichever is the reason, those who are interested in economics must not get repelled away.
    Have you tried reading Adam Smith’s Wealth of nations. It might take a long time to finish it, but you get the idea as to how the discipline evolved and how current textbooks are written.(From Adam Smith)
    I am hearing “Economics in a lesson” just now and when i looked it up, though it seems interesting, its better to try out Smith, because these short cuts to learn something, more often does not give us the whole picture.

  7. The trains are definitely crowded in Chennai during rush hour. But it’s probably a place where one can actually drive a car/bike and not worry so much about the traffic as in Bangalore (with most roads being one-ways and still clogged with traffic!) thanks to lanes and bylanes that offer an alternative to every major road there. Maybe someone “dumped” population in here :)

  8. Dumping is an interesting occurrence. Foreign firms purposefully dump, that is charge a price below their average cost, in order to drive a country’s inefficient firms out of business, so that the dumping firm can then charge monopoly prices.

    But, once the dumping firm drives competition away and starts charging monopoly prices doesn’t it create incentive for domestic firms to enter the market again and set prices equal to marginal cost, i.e., competitive prices, thusly, lowering prices?

  9. DismalScientist,
    In theory it works so, but in actual practice the firms who have been forced to exit find very difficult to enter the market again and by this time most of the market share will have been cornered by the monopoly.
    Truly, it is a hypothesis worth looking into, But no country would like to do that to their domestic firms.

  10. Informative writeup- In addition to taking action against those countries who dump, India would be better off also dumping off some of the old laws and attitudes if liberalization has to go full steam ahead.

  11. Hi Alex. After visiting your blog i’m wondering how you ever got to mine. I’m guessing you are an economics proffessor. Very good read indeed.

  12. Alex,

    While your second case study seems to have merit, I think there’s a huge risk of protectionist regimes entrenching themselves. Although I’m nervous about taking care of infant industries (and hopefully we’re just talking about middle income countries and not the wealthy ones), perhaps some form of insurance against aggressive dumping that leads to monopoly presence could be effective.

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  16. “Quoting Adam Smith, ‘by restraining, either by duties, or by absolute prohibitions, the importation of such goods from foreign countries as can be produced at home, the monopoly of the home market is more or less secured to the domestic industry employed in producing them.’ Thus Adam Smith was of the opinion, that, the importing countries should discourage those imports which will harm the domestic industries, by imposing duties on such items. Here he was referring to import duties but in the present economic scenario, import duties alone cannot discourage dumping. Thus the need arises for imposing anti-dumping duties.”

    This is baloney, sorry. Try reading the rest of the chapter which you quote. Adam Smith starts by explaining why people support duties but then goes on to explain why they are absolutely couterproductive to the society as a whole (even the importing society looked at alone) and should be avoided. To then go on and try and connect this to anti-dumping duties is just plain bizare.

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