Transcript Chapter 11

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 thirdcountry markets), or at less than full
production cost.
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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.
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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.
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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
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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
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Persistent Dumping
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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
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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
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Top 9 Initiators of Antidumping Cases
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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 importcompeting 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 wellbeing of the importing country and world welfare
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Three Proposals for Reform
1. 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.
2. Expand the injury standards to require that full
weight be given to consumers and users of the
product. Shift to injury to net national wellbeing.
3. Replace antidumping policy with safeguard
policy, another kind of increased temporary
import protection allowed by WTO rules.
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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
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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
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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
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Export Subsidy, Small Country,
Exportable Product
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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)
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Export Subsidy, Large Country,
Exportable Product
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An Export Subsidy Turns an
Importable Product Into an Export
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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.
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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.
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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.
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A Foreign Export Subsidy and a
Countervailing Duty
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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?
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A Two-Firm Rivalry Game with No
Government Subsidies
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A Two-Firm Rivalry Game with Government
Subsidies: Airbus versus Boeing
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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.)
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