Chapter 11 Pushing Exports

Dumping According to the World Trade Organization (WTO): Dumping occurs when goods are exported at a price less than their normal value, generally meaning they are exported for less than they are sold in the domestic market (or third-country markets), or at less than full production cost. © 2016 McGraw-Hill Education. All Rights Reserved.

Dumping Two legal definitions of normal value: Price-based dumping occurs when a firm sells a product in a foreign market at a price below that for which the firm sells the same product in the domestic market. International price discrimination favoring buyers of exports. Cost-based dumping occurs when a firm sells the same good in a foreign market at a price below its average total cost. © 2016 McGraw-Hill Education. All Rights Reserved.

Reasons for Dumping Predatory dumping: A firm temporarily charges a low price in the foreign export market, with the purpose of driving its foreign competitors out of business. Cyclical dumping: Occurs during a period of economic recession. Because of low demand, a firm tends to lower its price to limit the decline in quantity sold. During a recession with falling demand, the market price may fall below the average total cost but above the average variable cost (covering part of the fixed cost of production). The firm will continue to produce as long as price exceeds average variable cost. © 2016 McGraw-Hill Education. All Rights Reserved.

Reasons for Dumping Seasonal dumping: A firm exports excess inventories of a product. A price above the marginal cost of making the sale is sensible. (Similar—An introductory low price that an exporting firm uses to establish its product in a new foreign market.) Persistent dumping: A firm with market power uses international price discrimination between domestic and foreign markets © 2016 McGraw-Hill Education. All Rights Reserved.

Persistent Dumping As a general rule, a profit-maximizing firm with monopoly power will charge a lower price to foreign buyers if : It has less monopoly power (faces more competition or more elastic demand) in the foreign market than it has in its home market Buyers in the home country cannot avoid the high home prices by buying the good abroad and importing it cheaply © 2016 McGraw-Hill Education. All Rights Reserved.

Persistent Dumping © 2016 McGraw-Hill Education. All Rights Reserved.

Reacting to Dumping: What Should a Dumpee Think? The optimal response to dumping will depend on the type of dumping (predatory, cyclical, seasonal, or persistent) Dumping is usually good for the country importing the dumped exports. But two types of dumping could be harmful for the importing country: Predatory dumping can be bad when it is successful, but it is probably rare Cyclical dumping can be harmful (“importing unemployment”), but much of the time it is just part of the industry cycle in competitive markets © 2016 McGraw-Hill Education. All Rights Reserved.

Actual Antidumping Policies: What is Unfair? WTO rules permit countries to retaliate against dumping if dumping injures domestic import-competing producers. If the government in the importing country finds both dumping and injury, the government is permitted to impose an antidumping duty—an extra tariff equal to the discrepancy (the dumping margin) between the actual export price and normal value © 2016 McGraw-Hill Education. All Rights Reserved.

Top 9 Initiators of Antidumping Cases © 2016 McGraw-Hill Education. All Rights Reserved.

Actual Antidumping Policies: What is Unfair? Under current antidumping policies, we get the following results: The procedure is biased toward finding dumping The injury test considers only harm to import-competing producers. There is no consideration of whether predation or some other source of harm is involved, or of the benefits to consumers of the low-priced imports The process is biased toward imposing antidumping duties, generally lowering the well-being of the importing country and world welfare © 2016 McGraw-Hill Education. All Rights Reserved.

Three Proposals for Reform Limit antidumping actions to situations in which predatory dumping is plausible. Focus on the type of dumping that is most likely to be bad for the world and for the importing country. Expand the injury standards to require that full weight be given to consumers and users of the product. Shift to injury to net national well-being. Replace antidumping policy with safeguard policy, another kind of increased temporary import protection allowed by WTO rules. © 2016 McGraw-Hill Education. All Rights Reserved.

Safeguard Policy Safeguard policy is better because: There is no need to show that foreign exporters have done anything unfair The interests of consumers can be considered in the process that leads to the decision of whether or not to impose a safeguard policy The focus is on providing time for adjustment by the import-competing firms and their workers There is pressure to adjust because the import protection is temporary © 2016 McGraw-Hill Education. All Rights Reserved.

Export Subsidies Governments promote or subsidize exports more often than they restrict or tax exports An export subsidy is controversial because it violates international norms about fair trade © 2016 McGraw-Hill Education. All Rights Reserved.

Export Subsidy: Competitive Market An export subsidy Expands exports and production of the subsidized product Lowers the price paid by foreign buyers, relative to the price that local consumers pay for the product Reduces the net national well-being of the exporting country © 2016 McGraw-Hill Education. All Rights Reserved.

Export Subsidy, Small Country, Exportable Product © 2016 McGraw-Hill Education. All Rights Reserved.

Export Subsidy, Small Country, Exportable Product Consumption effect: the lost consumer surplus for those consumers squeezed out of the market when the domestic price rises above the world price Production effect: the loss due to encouraging domestic production that has a resource cost greater than the world price (the world standard for efficient production) © 2016 McGraw-Hill Education. All Rights Reserved.

Export Subsidy, Large Country, Exportable Product © 2016 McGraw-Hill Education. All Rights Reserved.

An Export Subsidy Turns an Importable Product Into an Export © 2016 McGraw-Hill Education. All Rights Reserved.

WTO Rules on Subsidies The WTO rules divide subsidies into two types: Subsidies linked directly to exporting are prohibited, except export subsidies used by the lowest-income developing countries Subsidies that are not linked directly to exporting but still have an impact on exports are actionable. © 2016 McGraw-Hill Education. All Rights Reserved.

WTO Rules on Subsidies If an importing country believes that a foreign country is using a prohibited subsidy or an actionable subsidy, the importing country can follow one of two procedures: File a complaint with the WTO Use a national procedure similar to that used for dumping If the importing country can show the existence of a prohibited or actionable subsidy and harm to its industry, it is permitted to impose a countervailing duty on the imports. © 2016 McGraw-Hill Education. All Rights Reserved.

Should the Importing Country Impose Countervailing Duties? If the exporting country is large enough to influence the world price of the exports, then the export subsidy lowers the price that the importing country pays for these exports. The importing country benefits from improved terms of trade. A countervailing duty can reverse these effects, but the importing country is worse off. Export subsidies are bad for the world as a whole, so imposing the countervailing duty is good for the world as a whole. © 2016 McGraw-Hill Education. All Rights Reserved.

A Foreign Export Subsidy and a Countervailing Duty © 2016 McGraw-Hill Education. All Rights Reserved.

Strategic Export Subsidies Could Be Good Under competitive supply and demand conditions, an export subsidy harms the exporting country. But for some industries, the competitive condition assumption does not apply. What if an industry is dominated by two large firms with high degree of market power? © 2016 McGraw-Hill Education. All Rights Reserved.

A Two-Firm Rivalry Game with No Government Subsidies © 2016 McGraw-Hill Education. All Rights Reserved.

A Two-Firm Rivalry Game with Government Subsidies: Airbus versus Boeing © 2016 McGraw-Hill Education. All Rights Reserved.

Strategic Export Subsidies Could Be Good For a global oligopoly, a strategic export subsidy could benefit the exporting country by shifting more of the high-price, high-profit foreign sales to its firm. However, The other country could counter with an export subsidy for its firm, in which case both exporting countries could end up worse off. The case for giving the subsidy is fragile, depending on too many conditions to be a reliable policy prescription. (For example, purported high foreign profits may actually turn out to be small.) © 2016 McGraw-Hill Education. All Rights Reserved.