Dumping (pricing policy)
Encyclopedia
In economics, "dumping" is any kind of predatory pricing
Predatory pricing
In business and economics, predatory pricing is the practice of selling a product or service at a very low price, intending to drive competitors out of the market, or create barriers to entry for potential new competitors. If competitors or potential competitors cannot sustain equal or lower prices...

, especially in the context of international trade
International trade
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...

. It occurs when manufacturers export a product to another country at a price either below the price charged in its home market, or in quantities that cannot be explained through normal market competition.

Dumping can force established domestic producers out of a market and lead to monopolistic positions by the exporting nation. For example, a glut of Chinese garlic exports in the mid 2000's forced many North American producers to switch crops and leave the market. When the price of Chinese garlic soared in 2009, the shuttered North American businesses were unable to quickly re-enter the local market due to barriers to entry
Barriers to entry
In theories of competition in economics, barriers to entry are obstacles that make it difficult to enter a given market. The term can refer to hindrances a firm faces in trying to enter a market or industry - such as government regulation, or a large, established firm taking advantage of economies...

.

Overview

A standard technical definition of dumping is the act of charging a lower price for a good in a foreign market than one charges for the same good in a domestic market. This is often referred to as selling at less than "fair value
Fair value
Fair value, also called fair price , is a concept used in accounting and economics, defined as a rational and unbiased estimate of the potential market price of a good, service, or asset, taking into account such objective factors as:* acquisition/production/distribution costs, replacement costs,...

". Under the World Trade Organization
World Trade Organization
The World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...

 (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.

The term has a negative connotation as advocates of free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...

s 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
Protectionism
Protectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow "fair competition" between imports and goods and services produced domestically.This...

). The Bolkestein directive
Directive on services in the internal market
The Directive on services in the internal market is an EU law aiming at establishing a single market for services within the European Union . Drafted under the leadership of the former European Commissioner for the Internal Market Frits Bolkestein, it has been popularly referred to by his name...

, 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
Polish Plumber
Polish Plumber was a phrase first used by Philippe Val in Charlie Hebdo and popularised by Philippe de Villiers as a symbol of cheap labour coming in from Central Europe as a result of the Directive on services in the internal market during the EU Constitution referendum in France in 2005.The...

 stereotype. While there are very few examples of a national scale dumping that succeeded in producing a national-level monopoly, there are several examples of dumping that produced a monopoly in regional markets for certain industries. Ron Chenow points to the example of regional oil monopolies in Titan : The Life of John D. Rockefeller
John D. Rockefeller
John Davison Rockefeller was an American oil industrialist, investor, and philanthropist. He was the founder of the Standard Oil Company, which dominated the oil industry and was the first great U.S. business trust. Rockefeller revolutionized the petroleum industry and defined the structure of...

, 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
Chicago
Chicago is the largest city in the US state of Illinois. With nearly 2.7 million residents, it is the most populous city in the Midwestern United States and the third most populous in the US, after New York City and Los Angeles...

, prices would be increased by a quarter.

Legal issues

If a company exports a product at a price lower than the price it normally charges in its own home market, it is said to be "dumping" the product. Opinions differ as to whether or not such practice constitutes unfair competition
Unfair competition
Unfair competition in a sense means that the competitors compete on unequal terms, because favourable or disadvantageous conditions are applied to some competitors but not to others; or that the actions of some competitors actively harm the position of others with respect to their ability to...

, but many governments take action against dumping to protect domestic industry. 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
General Agreement on Tariffs and Trade
The General Agreement on Tariffs and Trade was negotiated during the UN Conference on Trade and Employment and was the outcome of the failure of negotiating governments to create the International Trade Organization . GATT was signed in 1947 and lasted until 1993, when it was replaced by the World...

 (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.

Calculating the extent of dumping on a product is not enough. Anti-dumping measures can only be applied if the dumping is hurting the industry in the importing country. Therefore, a detailed investigation has to be conducted according to specified rules first. The investigation must evaluate all relevant economic factors that have a bearing on the state of the industry in question. If the investigation shows dumping is taking place and domestic industry is being hurt, the exporting company can undertake to raise its price to an agreed level in order to avoid anti-dumping import duty.

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.

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
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...

, domestic firms can file an antidumping petition under the regulations determined by the United States Department of Commerce
United States Department of Commerce
The United States Department of Commerce is the Cabinet department of the United States government concerned with promoting economic growth. It was originally created as the United States Department of Commerce and Labor on February 14, 1903...

, 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
Countervailing duties
Countervailing duties , also known as anti-subsidy duties, are trade import duties imposed under WTO Rules to neutralize the negative effects of subsidies. They are imposed after an investigation finds that a foreign country subsidizes its exports, injuring domestic producers in the importing country...

". 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.

Actions in the European Union

European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...

 anti-dumping is under the purview of the European Council
European Council
The European Council is an institution of the European Union. It comprises the heads of state or government of the EU member states, along with the President of the European Commission and the President of the European Council, currently Herman Van Rompuy...

. 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
Directorate-General for Trade (European Commission)
The Directorate-General for Trade is a Directorate-General of the European Commission. DG Trade works on securing prosperity, solidarity and security in Europe and around the globe...

 (DG Trade), based in Brussels
Brussels
Brussels , officially the Brussels Region or Brussels-Capital Region , is the capital of Belgium and the de facto capital of the European Union...

. 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.

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
Tariff
A tariff may be either tax on imports or exports , or a list or schedule of prices for such things as rail service, bus routes, and electrical usage ....

 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.

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
China
Chinese civilization may refer to:* China for more general discussion of the country.* Chinese culture* Greater China, the transnational community of ethnic Chinese.* History of China* Sinosphere, the area historically affected by Chinese culture...

 is a prime example. In such cases, the DG Trade is prevented from using domestic prices as the fair measure of the domestic price. A particular exporting 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 widget
Widget (economics)
The word widget is a placeholder name for an object or, more specifically, a mechanical or other manufactured device. It is an abstract unit of production. The Oxford English Dictionary defines it as "An indefinite name for a gadget or mechanical contrivance, esp. a small manufactured item" and...

s, 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 USA is a popular analogue market. In this case, the price of widgets in the USA 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 is one of the countries that has the cheapest labourforce. Criticisms have argued that it is quite unreasonable to compare China's goods price to the USA's as analogue. China is now developing to a more free and open market, unlike its planned-economy in the early 60s, 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.

European Union and Common Agricultural Policy

The Common Agricultural Policy
Common Agricultural Policy
The Common Agricultural Policy is a system of European Union agricultural subsidies and programmes. It represents 48% of the EU's budget, €49.8 billion in 2006 ....

 of the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...

 has often been accused of dumping though significant reforms were made as part of the Agreement on Agriculture
Agreement on Agriculture
The Agreement on Agriculture is an international treaty of the World Trade Organization. It was negotiated during the Uruguay Round of the General Agreement on Tariffs and Trade, and entered into force with the establishment of the WTO on January 1, 1995....

 at the Uruguay round
Uruguay Round
The Uruguay Round was the 8th round of Multilateral trade negotiations conducted within the framework of the General Agreement on Tariffs and Trade , spanning from 1986-1994 and embracing 123 countries as “contracting parties”. The Round transformed the GATT into the World Trade Organization...

 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
European Agricultural Guidance and Guarantee Fund
This article is not up to date. The European Agricultural Guidance and Guarantee Fund was replaced by the European Agricultural Guarantee Fund and the European Agricultural Fund for Rural Development on 1 January 2007...

 (EAGGF) - 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 produce 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

  • Import tariff
  • Safeguard
    Safeguard
    In the technical language of the World Trade Organization system, a safeguard is used to restrain international trade in order to protect a certain home industry from foreign competition. A member may take a “safeguard” action In the technical language of the World Trade Organization (WTO)...

  • Countervailing duties
    Countervailing duties
    Countervailing duties , also known as anti-subsidy duties, are trade import duties imposed under WTO Rules to neutralize the negative effects of subsidies. They are imposed after an investigation finds that a foreign country subsidizes its exports, injuring domestic producers in the importing country...

  • World Trade Organization
    World Trade Organization
    The World Trade Organization is an organization that intends to supervise and liberalize international trade. The organization officially commenced on January 1, 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade , which commenced in 1948...


External links

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