Dumping And Anti Dumping

INTRODUCTION The concept of “dumping” in international trade has a long history. Dumping, less than one name or another has been part of the rhetoric of political economy for a long time. In economics, "dumping" is a kind of predatory pricing, especially in the context of international trade. It occurs when manufacturers export a product to another country at a price either below the price charged in its home market, or in quantities that cannot be explained through normal market competition. The definition of dumping according to GATT is: The sale of products for export at a price less than the normal value where normal value means roughly the price for which those same products are sold on the home or exporting market. The concept of dumping seems fair because it is recognized that producers may sell their goods in different markets at different prices and that prices of a goods are influenced by several market forces and may vary at different times. It may be a perfectly legitimized business activity like discounts offered by airlines to students or senior citizens etc. There may not seem anything intrinsically unethical or illegal about dumping. A standard technical definition of dumping is the act of charging a lower price for a good in a foreign market than one charge for the same good in a domestic market. This is often referred to as selling at less than "fair value". Under the World Trade Organization (WTO) Agreement, dumping is condemned (but is not prohibited) if it causes or threatens to cause material injury to a domestic industry in the importing country. The term has a negative connotation, as advocates of competitive markets see "dumping" as a form of protectionism. Furthermore, advocates for workers and laborers believe that safeguarding businesses against predatory practices, such as dumping, help alleviate some of the harsher consequences of such practices between economies at different stages of development. The Bolkestein directive, for example, was accused in Europe of being a form of "social dumping," as it favored competition between workers, as exemplified by the Polish

Plumber stereotype. While there are very few examples of a national scale dumping that succeeded in producing a national-level monopoly, there are several examples of dumping that produced a monopoly in regional markets for certain industries.1 OBJECTIVES OF DUMPING 1. To enter into a foreign market dumping may be resorted to make an entry in a foreign market with subsidies being provided by the government 2. To dispose of occasional surplus at a lower price in foreign markets 3. To develop a market in foreign countries by selling at a lower price in the initial stages just as new markets van be developed in the country itself by selling at lower prices. 4. A monopolist also resorts to dumping for the expansion of his industry. When he expands it, he receives both internal and external economies which lead to the application of the law of increasing returns. Consequently, the cost of production of his commodity is reduced and by selling more quantity of his commodity at a lower price in the foreign market, he earns larger profit. 5. The monopolist practices dumping in order to develop new trade relations abroad. For this, he sells his commodity at a low price n the new market, thereby establishing new market relations with those countries. As a result, the monopolist increases his production, lowers his costs and earns more profit. EFFECTS OF DUMPING A. On the importing country

1.

Domestic industry might be affected adversely by a decline in sales and profits.

2.

If dumping is continued for a longer period, survival of the domestic industry may be threatened.

3.

Dumping may create balance of payments problems for the country subjected dumping.

1

Ron Chenow points to the example of regional oil monopolies in Titan: The Life of John D. Rockefeller, Sr. where Rockefeller receives a message from Colonel Thompson outlining an approved strategy where oil in one market, Cincinnati, would be sold at or below cost to drive competition's profits down and force them to exit the market.

B. On the Exporting Country

1. It must be presumed that a producer who dumps benefits from doing so, although in the case of promotional and predatory dumping, there is an element of risk in that the ultimate benefits, on which the loss‐making export sales are premised, may not materialize. 2. Provided its home market is shielded against arbitrage or retaliation, and consequent price drop (which would neutralize the discrimination), dumping can have clear advantages for the individual exporter. 3. A profitable home market provides a platform which may be used to operate in export markets at prices much lower than could have been possible without market segregation. 4. The low export prices generate further sales which in turn lower the cost of production, an advantage which benefits both export and home sales. 5. Dumping can still have beneficial effects on the dumper even in situations where home market sales are made at a loss. 6. As long as the dumper covers fixed costs, export sales can be priced as low as variable cost, a strategy which permits production and employment to be maintained in a recession or enables the dumper to obtain considerable advantages when going for economies of scale. ADVANTAGES OF DUMPING The main advantage of dumping is being able to sell at unfairly competitive lower price. Generally a country will have to give the exporting businesses a huge subsidy to enable them to sell the export below cost. The country is willing to take a loss on the product to increase its comparable advantage in that industry. It may do this because it wants to create jobs for its residents. It often uses dumping as an attack on the other country's industry, in the hopes of putting that country's producers out of business, and dominating that industry. DISADVANTAGES OF DUMPING The main disadvantage of dumping is that it's very expensive to maintain. It can take years for dumping to work. Meanwhile, the cost of subsidies can add to the export country's sovereign debt. The second disadvantage is retaliation by the trade partner. This can lead to trade

restrictions and tariffs. The third is censure by international trade organizations, such as the World Trade Organization (WTO) or the European Union (EU). ILLUSTRATION OF DUMPING A farmer in Chiapas, Mexico may be able to grow corn for, say, $3 a bushel, a U.S. company can export it to Mexico and sell it for $2.20 a bushel (25% below the cost to produce it), allowing the corn to sell on Mexican markets cheaper than domestic corn. Corn is Mexico’s de facto national crop, yet in post-NAFTA Mexico over 25% of the country’s corn market is now imported from America: an eighteen fold increase since the implementation of NAFTA. Under NAFTA, a yearly cap was placed on the amount of allowable amount of corn that the U.S. could export to Mexico. The amount was supposed to increase yearly until by the year 2008 when all limitations are removed. This was intended to facilitate the price of corn in Mexico, which had been above world average, to fall slowly until it was more in line with the price of corn in America and Europe. Unfortunately for the Mexican farmer, this did not occur. Instead of a gradual decrease in the price of corn over fifteen years, the market price collapsed at an astonishing rate until, by 1997, it was equivalent to the world market average—having decreased over 70 percent. In a little over two years, the bottom fell out from beneath the feet of Mexican corn farmers. This results in the Mexican farmer, whose field is likely less than five acres in size, not being able to sell his crop for a profit. In turn, this will lead to forced sale of his farm. These former farmers often attempt to cross into the US in hopes of finding a way to earn money. Ironically, they often end up working for the very farm corporations that put them out of business. Thus from the above example of Dumping we can see how it can affect a country’s economy and their residents and the Domestic Market.

EUROPEAN COMMUNITIES BED LINEN CASE In September 1996 the European Communities (EC) initiated an anti-dumping case against imports from India of cotton-type bed linen. However, the European Union was split about the case. The reason for support for the action was clear protecting the EU’s fabric weaving sector from low-priced import competition. Equally obvious was the reason for opposing the antidumping action: jobless companies that consumed the imports which incurred or faced redundancies as a result of the protective remedy. Because there were so many Indian exporters and producers of the subject merchandise, cottontype bed linen, the EC elected to analyze dumping from a sample of Indian companies. In determining the home (Indian) market price for bed linen sold by investigated respondents, the EC took the constructed value as a substitute for Normal Value. The reason for using constructed value as a proxy for normal value was a lack of sales made in the ordinary course in the Indian market (the market was not viable). The EC identified five types of cotton bed linen exported to it and also sold in representative quantities in India. However, not all five types were sold in India in the ordinary course of trade. Thus, the EC could not base normal value on prices from these sales, and had to use the constructed value. The EC established export price from prices actually paid or payable for cotton-type bed linen in the EC market and compared constructed value with export price, computed for each Indian respondent with the dumping margin being the difference between the weighted average constructed prices. In this computation EC applied a zeroing methodology 2 . It deemed any negative dumping margin as zero. The EC calculated dumping margins for different models (for example- pillowcases and sheets) finding negative dumping margins on a number of them. It then zeroed these to obtain a dumping margin for bed linen. The panel ruled that the calculation did not take into account of all transactions, as WTO rules require it to. The WTO appellant body said that a comparison between export price and normal 2

Possibly the most egregious distortion of dumping, is the practice known as "zeroing." Zeroing is a concept whereby non-dumped sales are not permitted to offset dumped sales, essentially by setting the value of a negative dumping margin to zero.

value does not fully take into account the prices of all comparable export transactions such as the practice of zeroing is not a fair comparison between export price and normal value (the price in the exporters home market). The Appellate Body of the World Trade Organization has faulted the methods adopted by the European Union in anti-dumping investigations and calculations of dumping and found them to be violative of the WTO’s Anti-Dumping (AD) agreement, and ruled in favor of India, in the EC’s actions against imports of cotton-type bed linen from India. In its ruling, the Appellate Body found fault with the EU Commission, AD investigations and measures such as: 1. The practice of zeroing; i.e. investigating the existence of margins of dumping - taking account of the averaging of positive dumping margins in investigated products, but ignoring the cases where there are negative margins and giving a zero value to them instead; 2. Calculating the administrative, selling and general (SG&A) costs and profits by using a method where data applicable to one other exporter or producer is used to apply to all others, and 3. Calculating the amount of profits by excluding sales by other exporters or producers not made in the ordinary course of trade; and 4. Using all types of bed-linen products - bed sheets, duvet covers and pillow cases, packaged for sale either separately or in sets, and made of cotton-type fibers, pure or mixed with man-made fibers or flax, and bleached, dyed or printed - as a single product competing with like products of the domestic industry, for certain purposes of investigation, but using the various components of the imported product for calculating export price and normal value and averaging them, to establish dumping.

As a final observation about the bed linen cases, the appellate body exposed the hypocrisy of the EC’s argument that bed linens were a single product, but different dumping margins had to be calculated and zeroing had to be used, for different product types.

OTHER CASE STUDIES 1. USA BEEF IMPORTS TO MEXICO While Mexico exports more live cattle to the U.S. than it imports, the U.S. exports beef products back into Mexico in large numbers accounting for over 18% of the U.S. beef market which amounted to over $450 million worth of beef products. The Mexican government, in response to complaints from its farmers, instituted anti-dumping tariffs on US beef products. The measures still exist and American beef packers are still seeking a decision by international trade courts. Some countries institute de facto anti-dumping measures involving packing standards, health standards, or manufacture standards that would prove extremely costly, if not impossible, for some countries to maintain. These measures have the same result of monetary anti-dumping measures: they usually result in the decrease of importation of those products into the domestic market. The countries being affected cannot fight such measures as these standards are matters of internal domestic affairs, and the WTO has ruled that countries have to right to enact such laws as ways to ensure the health of citizens. 2. SALMON: USA & EU/CHILE Chilean sales of salmon3 to the USA are huge–US $2 billion in 2002, and a major contributor to Chile’s economy. Chile is now the second largest salmon and trout farmer in the world, after Norway. The USA is Chile’s most important market, and so trade relations with the USA are critical. The first anti-dumping challenge occurred in mid 1997, when US salmon producers claimed that Chilean government subsidies were allowing producers there to sell below true production cost. This was rejected by the ITC after the Chilean government was able to prove no such distorting subsidies existed. However, fighting this allegation was very expensive though

3

Salmon is the common name for several species of fish in the family Salmonidae

estimated at $22 million, which was paid by Chilean farmers. Chilean companies had to harmonize their accounting systems to accord with US government standards for greater transparency. In February 2003 the Fisheries Commission of the European Parliament terminated the investigation finding no grounds to proceed. Latterly, this issue has been reopened, though, this time the emphasis is on a “safeguard” approach, the arguments being that material damage to the Scottish and Irish salmon farmers has occurred, and that this warrants action against third country imports.

CONCLUSION The use of anti-dumping measures as a trade protection tool has increased phenomenally during the last decade. One significant aspect of this new trend is the increasing involvement of developing countries. India is one such country which has emerged as a frequent user of antidumping measures. Those in favor of anti-dumping duties argue that it is a tool of protection in the hands of the domestic producers against the cheaper foreign imports. Critics of anti-dumping duties though find it difficult to prove the fact that the imposition of anti-dumping duties results in economic benefits to the domestic industry. Consumers are aggrieved as well, as they feel deprived of the lower costs and availability of variety of goods. The role of the government in tackling the problem of anti-dumping should be to protect the smaller industries rather than concentrating on the major industries. This is because; it is these small scale industries which suffer the most as a result of imposition of anti-dumping duties. However, safeguarding competition in domestic industry is not the only purpose that antidumping laws serve and in the present situation, they are acting as barriers for free trade and domestic producers are concerned about avoiding competition. In case of allegations and anti-dumping duties slapped on economically weaker nations, it could result in a stunt of economic growth for these developing countries, as they are unable to develop secure and stable long term industries. Even the threat of imposition of anti-dumping duties has a serious adverse effect on the functioning of small and medium size firms, resulting in a fall in production, heavy unemployment and declines in incomes and increases in poverty levels. Anti-dumping duties were imposed by developed countries to protect their industries against the low priced imports. Right from the beginning there was a clear division between the fundamental aims of those countries whose exports were most commonly exposed to anti-dumping action (developing countries) and those which took such action (mostly developed countries). Developing countries wanted anti-dumping rules to be tight and explicit as possible, allowing minimum transparency. Developed countries wanted to retain and even expand their discretion to meet what they saw as being used by companies to get around the present rules of anti-dumping

code and thereby cause injury to domestic industry, their proposals tended to be the most radical and controversial. The negotiating stance of developing countries like India should be for tightening the agreement. This is because India is a victim if the costs and benefits to different industry segments are assessed at an aggregate level. Even though abolishment of these anti-dumping laws will lead to increased competition, lower prices for consumers, more efficient production, and higher national income, it is unrealistic to hope that the WTO will remove this trade device in the near future. But before things become worse, an immediate reform is necessary and the WTO antidumping rules need to be amended to allow a more transparent process of investigation and to determine correctly whether the material injury caused is because of dumping or higher competition. The WTO rules need to be formulated so as to target only predatory dumping and not persistent or sporadic dumping. All countries need to have the uniform standards for determination of the dumping margins so as to maintain fairness. While aiming at consumer welfare, it is necessary to justify the use of anti-dumping laws as tools against unfair trade, to reconsider its definition and analyze as to what is essentially fair and what is not and keeping in mind the gross abuse of anti-dumping laws answer the very fundamental question of whether these laws are necessary at all.

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1. Lеxis Nеxis 2. Mаnupаtrа 3. Lеgаl Еаglе Sitеs Rеfеrrеd –

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