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Monday, 9 July 2007

SILK dumping- the theory and practice. Is the contingent protection substantiated?

The recent imposition of anti dumping duties on Chinese silk imports to India has stirred up the global silk scenario. The issue whether there is dumping of specific grade raw silks by China is debated with in and out side the countries concerned. This article takes a glimpse at the economic theory behind dumping and anti dumping strategies, as the bulk of the current debates is found to be deficient in the theory behind the phenomenon. The discussion is published in two parts.

Dumping is usually understood to mean that a product is exported at a price lower than the price at which the identical or a similar product is sold by the same producers on the exporting country’s domestic market. Dumping can be either a result of monopoly or an instrument to create or strengthen monopoly.
The conditions mandatory for dumping to take place are
1. Presence of an imperfect market where price discrimination between markets is possible. (Because in imperfect markets firms are price setters not price takers) 2. Segmented markets where there is no arbitrage easily possible between markets.
Only if these two conditions are satisfied is it possible for the exporting firm to engage in dumping. For any firm, price discrimination in favor of exports is more common because the share of exports is usually lesser than the domestic demand.
The classic view at dumping identifies the following types
· Private long term dumping and price discrimination
· Subsidized and public dumping
· Dumping in the interest of the exporting country
· Short term dumping
Private long term dumping and price discrimination
Private long-term dumping and price discrimination can result from the profit maximizing policies of a discriminating monopolist. The behavior of the monopolist will be based on the elasticity of demand existing in the domestic and foreign markets. Suppose the domestic demand is less elastic compared to the foreign demand he will restrict the supply of goods in the domestic market (to raise the prices) and dump the product in the foreign market to take advantage of the price elasticity of demand existing there. This concept can be graphically represented.


In the figure 1; Dh D’h and Df D’f represent the domestic and foreign demand curves respectively. Mh M’h and Mf M’f represent marginal domestic and marginal foreign revenue curves. The horizontal summing of the two marginal revenue curves gives the aggregate marginal revenue curve Ma M’a. The domestic producers marginal cost curve is C C’. The discriminating monopolist will produce at the point where his aggregate marginal revenue is equal to his marginal cost. Total output will be OR, sales at home- O Wh, and sales abroad- O Wf. The producer has equated his marginal revenue in both markets to his marginal cost, hence satisfying the condition for his private optimum. The price at home is O Ph and price of export is O Pf. In the diagram it is assumed that at the relevant points the elasticity of demand at home is lower than that abroad, so that the domestic price is higher, and thus there is dumping. The essence of private dumping is price discrimination.
Subsidized and public dumping
This is a case of competitive market, not monopoly. The case of an export subsidy is represented in figure 2. The domestic supply curve, which is equal to marginal costs is represented by Sh S’h. Domestic demand curve is Dh D’h. Here price is equal to marginal cost of production. The foreign demand is assumed to be perfectly elastic as represented by the foreign demand curve Df D’f. An export subsidy of Df S is installed which raises the domestic price to OS. Consumption falls and production rises. For the higher domestic price to be possible there have to be either transport costs or a domestic tariff. Domestic consumers pay the price OS and foreign consumers pay a lower O Df. Thus there is dumping.

The case of public dumping is more or less the same. Here we are concerned with export marketing arrangements in which there are private competitive producers and a marketing board intervenes to protect exports, rather than maximizing the profit of producers. The board will charge a higher price to the domestic consumer and the profit margin will be used to provide export subsidy.
Dumping in the interest of the exporting country
As distinct from the private interest of the monopolist, dumping can also be in the national interest of the exporting country. National policy in the form of tariffs can make private long term dumping possible. If the foreign demand curve is perfectly elastic then a price equal to the marginal cost can be put for both the domestic and foreign markets. If the foreign demand curve is downward sloping the national optimum demands that in the export market marginal cost to be made equal to marginal revenue and in the domestic market marginal cost to be made equal to average revenue. Thus export price exceeds the domestic price (reverse dumping). In this situation by imposing an optimum export tax the country forces the exporters to bring down the export prices which in effect can lead to dumping.
Short term dumping
Short term dumping is of two types namely sporadic and predatory. Sporadic dumping is the fall in foreign supply prices due to variations in production abroad due to various technical reasons etc. Though a fall in prices is always beneficial to the consumers, it increases the risk of domestic producers.
Predatory dumping is not just a manifestation of monopoly but a technique to maintain it. A foreign dominant supplier may temporarily reduce his supply price so as to force out a domestic producer trying to enter or extent his share of the market, the foreign supplier being able to sustain a price war longer than the domestic supplier. Predatory dumping is effective only if the foreign exporter is able to sustain a monopoly. It is not sufficient for him that he is able to force out a domestic supplier. If he has to compete with other foreign suppliers he may not subsequently be able to raise his price.
Anti Dumping - Meaning and concept
Anti dumping is a measure to rectify the situation arising out of the dumping of goods and its trade distortive effect. Thus the purpose of anti dumping duty is to re establish fair trade. Many countries have anti dumping regulation of some kind. One outcome of the Kennedy round of GATT negotiations was an agreement establishing an international anti dumping code which now governs the anti dumping policies of signatory countries. Dumping refers to private dumping and is considered to occur “if the export price of the product exported from one country to other is less than the comparable price for the like product when destined for consumption on the exporting country. Action could be taken if there is material injury to the domestic producers and sufficient evidence of the injury. Countervailing duties can be imposed to offset subsidies.
The important concern is with short term dumping, which creates uncertainty and may be an instrument of monopoly. The concern is often with producer rather than the consumer interests. If the import price falls there will be domestic income re distribution effect, which should be prevented. Another concern is that of fairness. Dumping seems unfair when it is believed that the export price is below the foreign suppliers average cost of production.
Anti dumping duty and customs duty.
Customs duties fall in the realm of trade and fiscal policies of the Government while anti dumping and anti subsidy measures are there as trade remedial measures. The object of anti dumping and allied duties is to offset the injurious effects of international price discrimination while customs duties have implication for the government revenue and for overall development of the economy. Anti dumping duties are not necessarily in the nature of a tax measure in as much as the authority is empowered to suspend these duties in case of an exporter offering a price undertaking. Thus such measures are not always in the form of duties/ tax. Anti dumping and anti subsidy duties are levied against exporter/ country in as much as they are country specific and exporter specific as against the customs duties which are general and universally applicable to all imports irrespective of the country of origin and the exporter.
Anti dumping (AD) and countervailing (CV) procedures- implications for developing countries
Contrary to their design as temporary means to offset unfair competition, these trade defense measures are in practice used as a long term strategy for various economic difficulties. Used (abused) as a substitute for positive adjustment measures ad and CV actions are also utilized to deal with structural problems. Applied as an instrument for tackling the negative consequences of trade liberalization they became a common tool to protect domestic producers from foreign competition. Faced with the need to protect sensitive domestic industries from increased imports or price slumps, countries often decide to use AD/ CV measures instead of (the more costly) safeguard measures provided for in the GATT 1994.
The WTO era saw a notable rise in AD and CV proceedings. Anti dumping investigations more than doubled and countervailing investigations increased six fold. Countries that appreciated their exchange rate regimes also seem to have used anti dumping to limit current account deficits caused by external shocks.
The almost exclusive restriction of AD initiations to the Big four (Australia, Canada, European Union and United States) was replaced by a broadened field of applicants. Argentina, Brazil, India, Mexico and South Africa became active users, responsible for a significant number of new investigations. Together they account for about one quarter of the AD investigations initiated since 1995. The United States and the European Union initiated two thirds of all CV investigations. Altogether developed countries were behind more than 80% of the overall number for CV investigations initiated in the WTO period.
Anti dumping and countervailing actions has a variety of negative implications.
· They can create substantial distortions with damaging effects on trade and competition.
· The imposition (or even the mere threat) of a duty may lead exporting firms to change production and seek alternative sources of supply.
· The exclusive focus on certain domestic producer neglects costs imposed on consumers due to price increases.
· The existence of these trade defense measures encourages rent seeking behavior by import competing firms.

To be continued.........

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