Dumping in Pricing

8 Key excerpts on "Dumping in Pricing"

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  Improving International Competition Order

  An Institutional Approach

  • C. Conrad(Author)
  • 2005(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  There can be dif- ferent reasons for exporting companies to decide on dumping as a viable practice, and these are now discussed. Selling below production costs 1 The company can try to increase its share of the foreign market (aggressive dumping), or see itself forced into sinking its price by a dumping pricing advance from a competitor (defensive dump- ing) 47 . In both cases, the exporting companies must finance their sales below average prices with profits from other markets or other products and will raise their prices as soon as the motivating competition disappears, which makes the dumping short-term and thus damaging to the importing country. Aggressive dumping is the classic case of Viner’s 48 predatory pricing. The first US anti-dumping act of 1916 addressed only this case. 49 The damag- ing effect comes from the exporter establishing himself as a monopolist by destroying the competition through dumping and 44 Improving International Competition Order subsequently raising his prices. Aggressive dumping occurs rather seldom. 50 In the second case, the exporting company fights for its market share in the importing country by defensive dumping because it expects that the future earnings will compensate for the losses. Apart from that, a retreat would change the previous for- eign investments into sunk costs. In both cases, we have short-term dumping in which the importing country suffers, which justifies anti-dumping measures. 2 As production is planned in advance and either fixed costs are unchangeable or capacities may be too costly to adjust, another motivation for price dumping is to compensate for a temporary reduction of demand on the domestic market by increasing exports (demand compensation dumping). In the presence of fluc- tuations in demand it would make no sense to adjust the capaci- ties. This is also a short-term dumping in which the importing country suffers, and thus justifies anti-dumping measures.

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  Aigbokhaevbo: Anti-Dumping Regulations and Practic

  • Violet Aigbokhaevbo(Author)
  • 2022(Publication Date)
  • Malthouse Press

    (Publisher)

  7 The existing literature on anti-dumping depends on which side of the divide the writer is on. It is common ground as amplified in GATT anti-dumping regulation that dumping is the act of selling in quantity at a very low price, especially to sell (surplus goods) abroad at much less than the market price at home. The World Trade Organization (WTO) in its dumping determination requires its members or national authorities to determine that imports are being sold at less than fair value (LTFV) and such imports are causing “material injury” to the domestic industry that is engaged in the production of similar imports or like products. 8 Once this is established, anti-dumping duties are mandatorily imposed on the erring products. The area of divergence is centred on the process or procedure for the determination of the existence of dumping, including the initiation and investigation standards and the attendant “level playing field” it supposedly sets out to create. 9 Another sore area is the issue of anti-dumping combating predatory pricing or monopolistic market practices. The lack of definition of “predatory 4 Thomas R. Howell, Dewey Ballantine, Dumping: Still a Problem in International Trade in “International Friction and Cooperation in High Technology Development and Trade Charles W. Wessner ed. (Washington D.C.: National Academy Press 1997), 325 5 Thomas J. Prusa, On The Spread And Impact of Anti-dumping Economic Research Working Paper 1999. 6 Gunnar Niels, What is Anti-dumping Policy Really About? Journal of Economic Survey, 14 Issue 4 (2000):460 7 Thomas J. Prusa, On The spread And Impact Of Anti-dumping, in supra note 214. The debate on the utility of anti-dumping laws is often acrimonious. The developing countries contend that it negates “fair trade” and globalization while the developed countries argue that “fair trade’“ should be distinguished from “free trade” and that undue advantage must not be taken of the global economy.

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  Beyond Competition

  Economics of Mergers and Monopoly Power

  • Thomas Karier(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  Table 8.1 can actually occur in the real economy is what makes these theories so useful. They provide plausible theoretical explanations of a wide variety of market activity, all of which can be observed somewhere or sometime in the world economy. But as a general explanation of business behavior they are inadequate. Each theory is based on its own particular assumptions and taken together they represent a patchwork of isolated ideas rather than a consistent, fully integrated theory of price competition. In none of the theories is price competition clearly defined, nor are its determinants fully delineated.

  It is at this point that the model of price competition presented in this chapter is particularly useful. It is defined as the relative deviation between the actual price and the one that maximizes current profits. It is most likely to occur when entry barriers are low, long-run substitutes are strong, excess capacity exists, and no retaliation by rivals or the government is expected. Firms with low monopoly power are more likely to use it because they have less fear of government intervention or rival retaliation. Finally, price competition is more likely for firms with particularly low discount rates or production costs and where markets widen, covering broader geographic regions.

  The model developed in this chapter is also useful for analyzing a variety of business practices as described in the following examples.

  Dumping

  A rather special case of price competition occurs when import prices are cut so severely that current profits are negative. In other words, the trader incurs short-run losses in the hopes of generating greater long-run gains. This practice is illustrated in Figure 8.5 where profits on path A are negative in the early period. When a domestic firm adopts this strategy it is predatory pricing, but for a foreign firm it is known as dumping. The goal is the same as price competition, to boost future economic power by sacrificing current profits. Milder forms of price competition may also qualify as dumping in U.S. law.19

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  The Law and Policy of the World Trade Organization

  Text, Cases, and Materials

  • Peter Van den Bossche, Werner Zdouc(Authors)
  • 2021(Publication Date)
  • Cambridge University Press

    (Publisher)

  In contrast, others consider ‘price discrimination’ (i.e. price differentiation) between the markets of the exporting and importing countries (as long as the sales price exceeds variable costs) as actually benefi- cial to national or global welfare. Another concern raised with regard to price discrimination is that large and economically powerful firms could use their market leverage to drive small firms out of business, thus reducing competition; in turn, these predatory firms can then raise their prices and reap monopoly 755 2 Basic Elements of WTO Law on Dumping 3 See J. Jackson, The World Trading System: Law and Policy of International Economic Relations, 2nd ed. (Massachusetts Institute of Technology Press, 1997), pp. 253–4. See also J. Viner, Dumping: A Problem in International Trade (Reprint of Economics Classics, Augustus M. Kelley, 1966), p. 120. 4 See Appellate Body Report, US – Washing Machines (2016), para. 5.52. 5 The United Kingdom (UK) and others argued that national anti-dumping laws were a hindrance to free trade and that the GATT should actually prohibit the imposition of anti-dumping duties. See B. Blonigen and T. Prusa, ‘Antidumping’ (July 2001), NBER Working Paper No. W8398, available at http://papers.ssrn.com/sol3/ papers.cfm?abstract_id=278031. profits. 3 Finally, it has also been argued that international dumping depends on the existence of import barriers of the exporting country that prevent the reim- portation of the dumped product into the home market. As noted by the Appellate Body in US – Washing Machines (2016): Although the Anti-Dumping Agreement does not contain a preamble expressly setting out its object and purpose, it is apparent from the text of this Agreement that it deals with inju- rious dumping by allowing Members to take anti-dumping measures to counteract injurious dumping and imposing disciplines on the use of such anti-dumping measures.

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  Antidumping Exposed

  The Devilish Details of Unfair Trade Law

  • Brink Lindsey, Daniel J. Ikenson(Authors)
  • 2003(Publication Date)
  • Cato Institute

    (Publisher)

  3. Dumping versus Price Discrimination

  In the previous chapter we looked generally at the U.S. antidumping law’s accuracy in targeting the effects of various market-distorting policies. Here we scrutinize in detail the specific nuts and bolts of the DOC’s methodologies for calculating dumping. Specifically, we evaluate those methodologies according to their ability to identify and measure international price discrimination.

  As we discussed in the previous chapter, antidumping supporters frequently contend that dumping can take the form of either international price discrimination or below-cost export sales. In practice, however, the U.S. antidumping law does not attempt to measure whether subject imports are sold below their cost of production. The closest that it ever comes is when U.S. prices are compared with constructed value—which equals cost of production plus some amount for profit. This artificial price is used as a surrogate for normal value when comparison-market prices are unavailable or have been deemed unusable; it is thus used as a “filler” and seldom serves as the exclusive basis of normal value. And even when all U.S. prices are compared with constructed value, what is measured is not whether the U.S. sales are below cost; what is measured, rather, is whether U.S. sales are below some designated benchmark of profitability.

  Conversely, the typical U.S. antidumping case does involve voluminous and highly intricate comparisons of foreign producers’ home-market and U.S. prices. According to antidumping supporters, such comparisons reveal dumping when a foreign producer charges lower prices in the United States than it charges at home. This kind of price discrimination supposedly demonstrates the existence of an unfair market distortion—in particular, a closed or “sanctuary” home market for the foreign producer. In a sanctuary market, trade barriers or other restrictions on competition allow the foreign producer to charge artificially high prices and earn artificially high profits with which it can crosssubsidize artificially low prices abroad. And because competition is restricted in the home market, the profit sanctuary cannot be arbitraged away by reimportation of dumped exports or retaliatory dumping by aggrieved foreign competitors.

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  Breaking New Ground in U.S. Trade Policy

  • James P Dorian(Author)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  Clearly, it is important that U.S. producers have the opportunity to obtain relief from foreign unfair practices that cause material injury to domestic firms and workers. At the same time, however, we must remember that such relief does not come free even if it entails no U.S. public budgetary expenditures. The cost is borne in the form of higher prices paid by domestic users of the product, whether they be final consumers or firms competing in a global market and relying on the product as an essential input. Protection for one industry can result in the lessening of competitiveness in another. It is imperative, therefore, that we continue to guard against a proliferation of unfair trade actions that have no basis in rational economic principles but, instead, are proxies for outright protection.

  Dumpig

  Dumping consists of selling a product for export below its fair value. “Less than fair value” is defined by GATT as aprice below that of the like product when sold in the home market of the exporting country. In the absence of a comparable domestic price, the price at which the product is sold to third markets may be used. If neither the home market nor the third-country price is available, the standard to be used is the cost of production in the country of origin plus reasonable additions for selling cost and profit.

  U.S. law is generally consistent with the GATT antidumping code but goes beyond it in specifying when and how the cost-of-production, or “constructed value,” standard should be applied. Under U.S. law, the cost of production is to be used not only when home and third-country prices are unavailable but also, even when they are available, whenever the Secretary of Commerce “has reasonable grounds to believe or suspect” that “such sales were made at less than the cost of producing the merchandise.” Under these circumstances, the Department of Commerce constructs the fair value, adding the cost of materials and fabrication plus 10 percent for overhead and general expenses plus 8 percent of total costs and expenses for profit. 7

  Increasingly, the cost of production, rather than price-to-price comparisons, is becoming the standard of choice in U.S. antidumping cases. Although official data have not been published, informal estimates suggest that 40 to 60 percent of the cases initiated since 1980 have involved comparisons between the price at which the foreign product enters the U.S. market and its cost of production in the exporting country. Moreover, the trend toward use of this constructed value has been strengthened by provisions of the Omnibus Trade and Competitiveness Act of 1988. In the section dealing with dumping by nonmarket economies, the act mandates that the Department of Commerce use constructed value as the preferred methodology in its investigations. Only if the available information for this purpose is inadequate may the department make its determination of fair value on the basis of the price of comparable products in market economies at a similar stage of economic development.

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  Free Trade under Fire

  Fifth Edition

  • Douglas A. Irwin(Author)
  • 2020(Publication Date)
  • Princeton University Press

    (Publisher)

  38

  Is Antidumping Defensible?

  The antidumping process involves many arbitrary judgments and is subject to abuse. Can any economic rationale be mustered in favor of the AD laws? The problem is that price discrimination, charging different prices in different markets, is a normal business practice and an accepted feature of domestic competition. Exporters often find that competition is more intense in the international market than in their home market, where they have a more secure position with domestic consumers. Therefore, exporters have to offer price discounts in foreign markets.

  On economic grounds, the fact that a firm charges different prices in different markets is neither unfair nor a problem unless it harms competition (such as through anticompetitive actions or predatory practices) or reflects a market-distorting policy. If geared toward preventing these actions, antidumping policy could have some merit as a means of preserving competition or correcting alleged market distortions. Unfortunately, the antidumping laws are not written to identify and respond to such situations. This leaves the impression that the laws exist only to protect domestic firms if they can jump through a few bureaucratic hoops.

  For example, the antidumping laws might be worthwhile if they prevented predatory pricing by foreign exporters. Predatory pricing would occur when an exporter prices its goods below cost in an effort to eliminate American producers and achieve a monopoly position. Firms engaging in predatory pricing must be prepared to incur substantial losses initially and then recoup those losses through the future exercise of a monopoly position. But this makes sense only if the firm can effectively knock out most of its competitors in the United States and in other countries. Were Bangladeshi shop towel producers trying to eliminate their foreign rivals and achieve a monopoly position? Were the flower growers from Colombia trying to do the same? Were China’s garlic producers aiming for world domination? Most foreign exporters simply want to receive as high a price as possible on their sales. Few companies entertain the delusion of driving all of their competitors out of business in the world market.

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  The Economics of International Trade and the Environment

  • Amitrajeet A Batabyal, Hamid Beladi(Authors)
  • 2001(Publication Date)
  • CRC Press

    (Publisher)

  There are two objections against applying this concept to international differences in environmental regulations. First, if one believes in factor price equalization, the implicit prices of environmental resources should be the same in all countries if there is trade. Differences in emission taxes across countries would not occur. To detect eco-dumping activities, one would have to employ the autarky prices. The second critique is more important. To a trade theorist, it does not make much sense to postulate that all countries should use the same level of environmental regulation. International differences in the endowments with environmental resources do exist, whether because of differences in physical characteristics of the countries or differences in the tastes of the people. Removing these differences by means of harmonization is equivalent to removing a part of the basis of gains from trade. See Hansson (1990) for instance. Thus, ecological dumping by employing lower environmental standards than the rest of the world can be a good thing.

  Nonetheless, I think that ecological dumping is a problem. With another definition of the subject, this becomes obvious at once. The definition is related to the modern view of dumping in commodity markets, which defines the subject of its analysis as pricing at less than marginal cost.1 See Davies and McGuinness (1982) and Ethier (1982). Correspondingly, ecological dumping can be defined as a policy which prices environmentally harmful activities at less than the marginal cost of environmental degradation, i.e., a policy which does not internalize all environmental externalities. Therefore, firms can dump their output into international markets at prices which do not meet the marginal social cost of production.2

  The problem with this definition is that there are many reasons for too low a level of environmental regulation, and it may be hard to distinguish between ecological dumping and other kinds of under-regulation. For instance, it is often argued that producers’ lobbies are more influential in the political decision-making process than the consumers of environmental quality. If this is true, the under-internalization of external effects would be possible even in closed economies, and this can hardly be called ecological dumping. A way out of this dilemma is to compare different sectors of the economy. One may argue that trade-related measures of environmental policy are targeted primarily at the producers of traded goods, who face competition in international markets, but not at the producers of non-traded goods that are not subject to international competition. One could, therefore, take the non-traded goods sector as a point of reference and define ecological dumping as a scenario in which environmental standards are tighter in the non-tradables than in the tradables sector. A prerequisite for this is that the government has the power to use sector-specific instruments of environmental policy. Anecdotal evidence tells us that this is indeed the case. There are even plant-specific differences in pollution abatement requirements, as is vividly attested to by the electricity generation sectors in various countries. In practical applications, however, it may be difficult to compare the tightness of environmental standards across different sectors. Matters are simple if both sectors discharge the same pollutant and cause the same environmental damage at the margin. This will be assumed in the theoretical parts of this chapter, and the emission tax rate is an appropriate measure of the tightness of environmental standards. In the more general case of different pollutants and different marginal damages, one should compare the degrees of internalization of social costs across different sectors of the economy.

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