Coalition or Collusion: Is Anti-Dumping a Worthwhile Policy?

By: Julia Manso

In the past month alone, hundreds, if not thousands, of anti-dumping duties have been imposed around the world, on everything from bone-in chicken in South Africa to ultra-niche grain-oriented flat-rolled products of silicon-electrical steel in the European Union. But what is anti-dumping, and are policies combatting it really worthwhile? I turned to economic literature to find out.

According to International Trade: Theory and Evidence by James Markusen, James Melvin, Keith Maskus, and William Kaempfer, there are two legal definitions of dumping; the “first is the practice by a firm of selling a product in an export market at a price below that at which it sells the product in its home market” (355). The second defines dumping as the “practice of selling a product in an export market at a price below the average cost of producing it”—or as B.A. Blonigen and T.J. Prusa more broadly define it in the Handbook of Commercial Policy, when a firm “exports [a] good at a price below costs” (108).

There are three key types of dumping: sporadic dumping occurs when the demand for a firm’s product falls at home, so rather than lay off workers or cut prices, the firm exports its goods to a foreign market, charging a low price to ensure sales. Depending on fluctuations of demand, sporadic dumping appears to be rather rare: exports usually require established customer relations, as well as a marketing and distribution system, and firms often do not cultivate these relationships purely to have a market for their goods in the event of a decline in domestic demand. Predatory dumping, another type of dumping, occurs when a firm sells its goods in an export market at a price low enough to drive domestic competing firms out of business or deter entry by other firms. In pricing so low, the predatory firm may accept losses in the short run with the intention of capturing the market after the other firms are forced to exit. Yet, in practice, little evidence of predatory dumping exists: new firms and/or the firms forced to close would reenter the market as the prices of the good rose (unless the predatory firm keeps prices low enough to discourage entry). Additionally, predatory dumping would likely be detected and fined by regulation.

The third type of dumping, equilibrium dumping, seems to be most common and is explored in the reciprocal dumping model, by James Brander and Paul Krugman. The central idea is that there are two firms who select the quantity of output produced. They are located in separate countries with positive transportation costs between countries but no transportation costs within countries. Additionally, both firms have identical production costs while the countries have identical demand conditions. Under these conditions, the equilibrium price in both markets is identical: according to the price definition of dumping, both of the firms are indeed dumping into each other’s countries as they absorb the transportation cost needed to ship to the export market. Likewise, a firm may charge a lower price abroad and a higher price at home if the demand for the good is more sensitive to price changes in foreign markets than at home. This difference in price sensitivity can occur if domestic consumers are biased towards a home-produced good, as is rather common in real markets; consumers in the U.S., for instance, may pick the “Made in U.S.A.” product over an identical substitute manufactured elsewhere. Thus, facing different demand levels and segmented markets, profit-maximizing pricing—dubbed “equilibrium dumping”—is fairly likely to occur. Under this type of equilibrium dumping, it may be appropriate to impose a tariff to shift the foreign firm’s profits gained in the importing country to the domestic treasury. Thus, antidumping tariffs, in very specific situations of this kind, can make sense.

With these three types of dumping in mind, we can now investigate whether the laws tackling them are actually needed. Anti-dumping law, particularly in the U.S., is skewed towards findings of foreign dumping. In the U.S., if dumping is found to have occurred, an anti-dumping tariff is imposed to equal the dumping margin, which is the difference between the import price and the fair market value (average cost) of the product. These types of policies not only negatively impact consumers, who could have previously enjoyed lower prices for imported goods, but also have a clear bias towards affirmative findings of dumping because they have inflated standards for determining a firm’s fair market value costs. Often, an industry association or firm will lodge a dumping complaint against a foreign firm, causing the U.S. Department of Commerce to instigate an investigation. Yet, there are several problems with this process, including that the fair value of the production cost is often determined by some other country’s prices and costs, rather than the country that is actually being accused of dumping.

Additionally, there is heavy institutional bias; in recent years, Congress has lowered standards for showing the existence of injury to the point that a finding of injury is now the expected outcome. Foreign firms often revise their pricing practices under the mere expectation of an affirmative dumping judgement in one of these investigations, often raising their prices or ceasing to sell in the U.S. market altogether. These agreements can thus be a way for domestic firms to willfully limit foreign competition, and they are only becoming increasingly common. As Blonigen and Prusa highlight, more and more countries have established anti-dumping laws, and using the count metric, the largest users of anti-dumping policies have between 3 and 7 percent of their tariff lines subject to anti-dumping scrutiny. While anti-dumping is one of the largest trade protection measures used by many developed countries today, consumers and producers of intermediate goods are hardest hit by the policies.

Thus, while the exact impact of anti-dumping practices depends on context, they often have more negative impacts than not, especially in countries like the United States where the standard for a foreign firm dumping is rather low. While anti-dumping may sound like a worthwhile venture, gaining political support by protecting domestic industry, the actual details are much fuzzier, leaving consumers to once again take up the price burden.