Class 25 April 24 Last class: 5. Trade policies of exporting nations Today: 5. Trade policies of exporting nations Special topic: trade and income distribution Quiz 7 (Chapter 5) Next class: Special topic: trade and income distribution Reading: Important date:

5. Trade policies of exporting countries 5.1. Major export policies 5.2. Reasons for export policies 5.3. Export subsidy 5.4. Export tax 5.5. Price discrimination 5.6. Related topics 5.7. Dumping and antidumping

5.7. Dumping and antidumping in international trade What is dumping? Why and how? What is reciprocal dumping? What is wrong with dumping? Antidumping practice in the U.S. Antidumping under WTO Challenges for China What can China do?

What is dumping? Definition: a firm charges a lower price for its exported product than it charges for the same product in the domestic market In practice: a firm charges a price for its exported product that is lower than the product’s actual or estimated average production cost. Price discrimination: charge different prices for the same product. Two necessary conditions for dumping: (1) The industry is imperfectly competitive (2) The domestic and international markets must be segmented

Why does a firm “dump” to a foreign market? Foreign market is more competitive with low prices (lower than its production cost) but the company needs foreign exchange to import some materials or equipment Low price to enter the foreign market and hope to increase the price later Successful examples: Hyundai and Kia Failed examples: The loss in the foreign market due to low price is recovered from domestic market with higher price

Why does a firm “dump” to a foreign market? One hypothetical example: One firm sells 1,000 electric fans at the domestic market at $20 per unit and exports 100 units at $15 per unit. Suppose the firm will have to reduce the price by $0.01 in order to sell one more fan at home OR abroad, where will the firm cut the price and sell one more fan? Home market: x 1001 – 20 x = 9.99 Abroad: x 101 – 15 x 100 = If the average production cost is $16: Profit from the domestic market = (20 – 16) * 1000 = 4000 Profit from the foreign market = (14.99 – 16) = –

What is reciprocal dumping? The situation in which dumping by both nations leads to two-way trade of the same product ( there would be no trade without dumping because the price in both nations is the same or almost the same ) What is wrong with dumping?

Antidumping in the U.S.? How does it work? Recent cases: Antidumping under WTO? WTO regulations How to estimate the average production costs? -- Market economies -- Non-market economies (e.g., China) -- Examples China’s TV export to the U.S.

Special topic: Income distribution and trade Review:Trade and trade policy affect income distribution Average income vs. income inequality Gini coefficient: an indicator of income inequality How to interpret a Gini coefficient? How to calculate a Gini coefficient? A case study: China’s increasing income inequality and policy implications

How to calculate Gini coefficient?

Gini coefficients around the world

Most developed European nations tend to have Gini coefficients between 0.24 and 0.36, the United States Gini coefficient is above 0.4, indicating that the United States has greater inequality. Using the Gini can help quantify differences in welfare and compensation policies and philosophies. However it should be borne in mind that the Gini coefficient can be misleading when used to make political comparisons between large and small countrieswelfarecompensation