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.

1) WTO