Dumping (pricing policy)

This article is about the economics term. For industrial relations and social justice issue, see Social dumping. For the tax avoidance term, see SUTA dumping.

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 below its cost of production. The purpose of this act is sometimes to increase market share in a foreign market or to drive out competition.

Overview

A standard technical definition of dumping is the act of charging a lower price for the like goods in a foreign market than one charges for the same good in a domestic market for consumption in the home market of the exporter. This is often referred to as selling at less than "normal value" on the same level of trade in the ordinary course of trade. 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.[1]

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 (see protectionism). 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 few examples of a national scale dumping that succeeded in producing a national-level monopoly, there are several examples of local 'dumping' that produced a monopoly in regional markets for certain industries. Ron Chernow 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. In another area where other independent businesses were already driven out, namely in Chicago, prices would be increased by a quarter.[2]

Anti-dumping actions

Legal issues

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.[3] 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.

Definitions and extent

While permitted by the WTO, General Agreement on Tariffs and Trade (GATT) (Article VI) allows countries the option of taking action against dumping. The Anti-Dumping Agreement clarifies and expands Article VI, and the two operate together. They allow countries to act in a way that would normally break the GATT principles of binding a tariff and not discriminating between trading partners—typically 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.

There are many different ways of calculating whether a particular product is being dumped heavily or only lightly. The agreement narrows down the range of possible options. It 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.

Five percent rule

According to footnote 2 Anti-Dumping Agreement, domestic sales of the like product are sufficient to base normal value on if they account for 5 per cent or more of the sales of the product under consideration to the importing country market. This is often called the five-per-cent or home-market-viability test. This test is applied globally by comparing quantity sold of like product on the domestic market with quantity sold to 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.

Procedures in investigation and litigation

Detailed procedures are set out on how anti-dumping cases are to be initiated, how the investigations are to be conducted, and the conditions for ensuring that all interested parties are given an opportunity to present evidence. Anti-dumping measures must expire five years after the date of imposition, unless a review shows that ending the measure would lead to injury.

Generally speaking, an anti-dumping investigation usually develops along the following steps: domestic producer(s) make(s) a request to the relevant authority to initiate an anti-dumping investigation. Then investigation to the foreign producer is conducted to determine if the allegation is valid. It uses questionnaires completed by the interested parties to compare the foreign producer's (or producers') export price to the normal value (the price in the exporter’s domestic market, 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). If the foreign producer's export price is lower than the normal price and the investigating body proves a causal link between the alleged dumping and the injury suffered by the domestic industry, it comes to a conclusion that the foreign producer is dumping its products. According to Article VI of GATT, dumping investigations shall, except in special circumstances, be concluded within one year, and in no case more than 18 months after initiation. Anti-dumping measures must expire five years after the date of imposition, unless a review shows that ending the measure would lead to injury.

Anti-dumping investigations are to end immediately in cases where the authorities determine that the margin of dumping is, de minimis, or insignificantly small (defined as less than 2% of the export price of the product). Other conditions are also set. For example, the investigations also have to end if the volume of dumped imports is negligible (i.e., if the volume from one country is less than 3% of total imports of that product—although investigations can proceed if several countries, each supplying less than 3% of the imports, together account for 7% or more of total imports).

The agreement says member countries must inform the Committee on Anti-Dumping Practices about all preliminary and final anti-dumping actions, promptly and in detail. They must also report on all investigations twice a year. When differences arise, members are encouraged to consult each other. They can also use the WTO’s dispute settlement procedure.

Actions in the United States

In the United States, domestic firms can file an antidumping petition under the regulations determined by the U.S. Department of Commerce, which determines "less than fair value" and the International Trade Commission, which determines "injury". These proceedings operate on a timetable governed by U.S. law. The Department of Commerce has regularly found that products have been sold at less than fair value in U.S. markets. If the domestic industry is able to establish that it is being injured by the dumping, then antidumping duties are imposed on goods imported from the dumpers' country at a percentage rate calculated to counteract the dumping margin.

Related to antidumping duties are "countervailing duties". The difference is that countervailing duties seek to offset injurious subsidization while antidumping duties offset injurious dumping.

Some commentators have noted that domestic protectionism, and lack of knowledge regarding foreign cost of production, lead to the unpredictable institutional process surrounding investigation. Members of the WTO can file complaints against anti-dumping measures.

Because of the 1997 Asian financial crisis, October 27, 1997 mini-crash, and 1998 Russian financial crisis, the United States steel producers was severely harmed by a record surge of more than 40 million tons of cheap steel imports, resulting in the loss of more than 10,000 steel production jobs in 1998, and was the imminent cause of three bankruptcies by medium-sized steel companies (Acme Steel, Laclede Steel, and Geneva Steel), reduced volume, lower prices, and affecting the willingness of private banks and investment institutions to make loans to the U.S. steel producers. As a result, Congress passed the Emergency Steel Loan Guarantee and Emergency Oil and Gas Guaranteed Loan Act of 1999, also known as the Emergency Steel Loan Guarantee Act of 1999.[4]

Actions in the European Union

European Union anti-dumping is under the purview of the European Council. It is governed by European Council regulation 384/96. However, implementation of anti-dumping actions (trade defence actions) is taken after voting by various committees with member state representation.

The bureaucratic entity responsible for advising member states on anti-dumping actions is the Directorate General Trade (DG Trade) in Brussels. Community industry can apply to have an anti-dumping investigation begin. DG Trade first investigates the standing of the complainants. If they are found to represent at least 25% of community industry, the investigation will probably begin. The process is guided by quite specific guidance in the regulations. The DG Trade will make a recommendation to a committee known as the Anti-Dumping Advisory Committee, on which each member state has one vote. Member states abstaining will be treated as if they voted in favour of industrial protection, a voting system which has come under considerable criticism.[5]

As is implied by the criterion for beginning an investigation, EU anti-dumping actions are primarily considered part of a "trade defence" portfolio. Consumer interests and non-industry related interests ("community interests") are not emphasized during an investigation. An investigation typically looks for damage caused by dumping to community producers, and the level of tariff set is based on the damage done to community producers by dumping.

If consensus is not found, the decision goes to the European Council.

If imposed, duties last for five years theoretically. In practice they last at least a year longer, because expiry reviews are usually initiated at the end of the five years, and during the review process the status quo is maintained.

An example of an Anti-dumping duty action taken by the European Union is that of the Anti-dumping duty imposed upon bicycle imports from China into the EU, which has recently be continued at a rate of 48.5%.[6] The tax has also been extended to imports from Indonesia, Malaysia, Sri Lanka and Tunisia.[7] However, some companies are excluded or have a reduced rate.

Chinese economic situation

The dumping investigation essentially compares domestic prices of the accused dumping nation with prices of the imported product on the European market. However, several rules are applied to the data before the dumping margin is calculated. Most contentious is the concept of "analogue market". Some exporting nations are not granted "market economy status" by the EU: China is a prime example because its market status is considered "state-sponsored capitalism". In such cases, the DG Trade is prevented from using domestic prices as the fair measure of the domestic price. A particular export industry may also lose market status if the DG Trade concludes that this industry receives government assistance. Other tests applied include the application of international accounting standards and bankruptcy laws.

The consequences of not being granted market economy status have a big impact on the investigation. For example, if China is accused of dumping widgets, the basic approach is to consider the price of widgets in China against the price of Chinese widgets in Europe. But China does not have market economy status, so Chinese domestic prices can not be used as the reference. Instead, the DG Trade must decide upon an analogue market: a market which does have market economy status, and which is similar enough to China. Brazil and Mexico have been used, but the United States is a popular analogue market. In this case, the price of widgets in the United States is regarded as the substitute for the price of widgets in China. This process of choosing an analogue market is subject to the influence of the complainant, which has led to some criticism that it is an inherent bias in the process.

However, China has one of the world's cheapest labour costs. Criticisms have argued that it is quite unreasonable to compare China's goods price to the United States as analogue. China is now developing to a more free and open market, unlike its planned-economy in the early 1960s, the market in China is more willing to embrace the global competition. It is thus required to improve its market regulations and conquer the free trade barriers to improve the situation and produce a properly judged pricing level to assess the "dumping" behaviour.

Agricultural support

European Union and Common Agricultural Policy

The Common Agricultural Policy of the European Union has often been accused of dumping though significant reforms were made as part of the Agreement on Agriculture at the Uruguay round of GATT negotiations in 1992 and in subsequent incremental reforms, notably the Luxembourg Agreement in 2003. Initially the CAP sought to increase European agricultural production and provide support to European farmers through a process of market intervention whereby a special fund—the European Agricultural Guidance and Guarantee Fund—would buy up surplus agricultural produce if the price fell below a certain centrally determined level (the intervention level). Through this measure European farmers were given a "guaranteed" price for their produce when sold in the European community. In addition to this internal measure a system of export reimbursements ensured that European products sold outside of the European community would sell at or below world prices at no detriment to the European producer. This policy was heavily criticised as distorting world trade and since 1992 the policy has moved away from market intervention and towards direct payments to farmers regardless of production (a process of "decoupling"). Furthermore, the payments are generally dependent on the farmer fulfilling certain environmental or animal welfare requirements so as to encourage responsible, sustainable farming in what is termed "multifunctional" agricultural subsidies—that is, the social, environmental and other benefits from subsidies that do not include a simple increase in production.

See also

References

  1. ↑ Van den Bossche, Peter (2005). The Law and Policy of the World Trade Organization. Cambridge, UK: Cambridge University Press. p. 42. ISBN 978-0-511-12392-4. Dumping, i.e. bringing a product onto the market of another country at a price less than the normal value of that product is condemned but not prohibited in WTO law.
  2. ↑ Chernow, Ron. Titan: the life of John D. Rockefeller, Sr. Retrieved 2009-09-24.
  3. ↑ Bryan T. Johnson, A Guide to Antidumping Laws: America's Unfair Trade Practice (Heritage Backgrounder #906)
  4. ↑ Emergency Steel Loan Guarantee and Emergency Oil and Gas Guaranteed Loan Act of 1999, 113 Stat. 252, § 101
  5. ↑ Eggert, J. "Observations of the EU Anti-Dumping Regulation FTA Position for the Expert Meeting". Retrieved 2007-07-23.
  6. ↑ VAN SCHAIK, JAN WILLEM. "Anti-Dumping Duty for China Imports to Continue". Retrieved 2015-04-08.
  7. ↑ Stearns, Jonathan. "EU China-Bike Duty Hits Indonesia, Malaysia, Sri Lanka, Tunisia". Retrieved 2015-04-08.

External links

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