Oct 21 2008
Fair trade vs. free trade: the problem with “dumping”
Published by Jason Welker at 10:22 pm under
Technorati
Flickr
del.icio.us
Ice Rocket
WikipediaFT.com / World - Anti-dumping investigations soar
Free trade is good, right? This sentiment is one that economists typically agree with wholeheartedly. The mutual gains from free trade among nations that specialize in the goods for which they have the comparative advantage results in increased global output and consumption among trading nations. That, at least, is the basic premise of free trade.
But is there such a thing as unfair free trade? The World Trade Organization, whose mission is the removal of barriers to trade among all the world’s nations, thinks there is such a thing as unfair trade. Under certain circumstances, the WTO allows member nations to place protective tariffs on particular imports, and recently, more and more nations have taken action to protect their domestic markets from unfair trade practices of their trading partners:
The number of new anti-dumping investigations soared by nearly 40 per cent in the first six months of this year, the World Trade Organisation said on Monday, reflecting increased trade tensions as the credit crunch began to take its toll on the global economy.Between January and June 16 WTO members started 85 new investigations compared with 61 in the first six months of 2007. China was the target of nearly half the probes, a jump of 75 per cent over the same period last year.
Under WTO rules, countries can put duties on unfairly priced imports that are sold in export markets more cheaply than at home. But until this year dumping actions had seemed to be on a downward trend, with 164 investigations in the whole of last year compared with over 200 in 2006.
Anti-dumping actions, once mainly taken by rich countries against poor ones, have become a tool increasingly used by developing nations while industrialised countries have increasingly become targets…
The EU was the third-ranking target in the first half of the year, after China and Thailand. Canada, the US, New Zealand and Norway also had investigations opened against their exports.
The WTO said the main products affected were base metals (21 investigations), textiles (20) and chemicals (10).
The number of new measures taken as a result of anti-dumping probes also rose in the first six months of 2008, with 54 measures against 51 measures in the same period in 2007. India applied duties in 16 cases, with the EU some way behind in second place.
China was again the main target followed by Taiwan, the EU, South Korea, Russia and the US.
Discussion Questions:
- Why would a country want to keep cheap imports out of its domestic markets? Don’t cheap goods make consumers happy?
- Does dumping refer to the sale of a country’s goods below the importing country’s costs of production or the costs of production in the country where the good is made? Why does this distinction matter?
- When a nation protects its domestic market from dumping, is the principle of comparative advantage being undermined? Discuss.
About the author: Jason Welker is a teacher at Zurich International School in Switzerland, where he teaches Advanced Placement and International Baccalaureate Economics. Jason was an international school student in Malaysia before studying economics at Seattle University then earning his Masters in Education. He calls Seattle and Northern Idaho home. In addition to maintaining an economics wiki and this blog for economics student and educators, Jason also gives presentations on using Web 2.0 tools in education at workshops and conferences around the world. His economics wiki won the 2007 "Best Educational Wiki" award from the "EduBlog Awards". 
![Freakonomics [Revised and Expanded]: A Rogue Economist Explores the Hidden Side of Everything](http://ecx.images-amazon.com/images/I/51Z1scnqz1L._SL160_.jpg "Freakonomics [Revised and Expanded]: A Rogue Economist Explores the Hidden Side of Everything")
![The World Is Flat [Updated and Expanded]: A Brief History of the Twenty-first Century](http://ecx.images-amazon.com/images/I/410FGAGYGPL._SL160_.jpg "The World Is Flat [Updated and Expanded]: A Brief History of the Twenty-first Century by Thomas L. Friedman")
“Why would a country want to keep cheap imports out of its domestic markets? Don’t cheap goods make consumers happy? ”
As we discussed in class today, imports that are too cheap, or even food aid, are certainly desirable for consumers in the short run. Dumping usually happens when a country produces a surplus of a good one year, and literally “dumps” it on another nation to get rid of the excess. Consumers in the receiving nation benefit, and welfare in that society might even go up temporarily. That is, until the dump runs out.
As dumping is over-competitive in a way, because it sells under the price of production in the producing country, such goods are usually much below the domestic market price of the nations they are given to. Thus, domestic production of the goods in the receiving nations can be run out of business, as it cannot compete for the time period until the dumped good runs out.
So far so good, but because dumping is not a consisten thing, its long-run effects are to basically run some producers out of business, and then one year, when no surplus of the good is produced, and no dumping occurs, the country which previously received the aid is left with a) no aid and b) no possibilty for domestic production, as most of the businesses could not compete under the unfair conditions.
However, protectionism against dumping is not always justified, and I think it is highly probable that as globalization continues, more and more countries will try to pass of protectionist policies in this form infront of the WTO, where they are not applicable. I believe the recent increase in the amount of anti-dumping investigations that have occured in recent years suppors this.
Palmi,
That was an A+ repsonse! Great summary, answers, and articulation.
I particularly like your last paragraph where you point out that there could be a tendency for protectionist governments to proclaim a more WTO-acceptable “dumping” charge to restrict imports, when, it could be in fact, that the imports are produced at an actual very low cost. It’s a tough issue that is hard to prove. GM and Ford both “dump” their cars abroad as the cost to produce a Ford or Chevy is higher than the price they sell it for, evidenced by both firms losing billions of dollars!
Does dumping refer to the sale of a country’s goods below the importing country’s costs of production or the costs of production in the country where the good is made? Why does this distinction matter?
Dumping, as defined by Palmi, is the sale of a country’s goods below the cost of production in the COUNTRY OF PRODUCTION. This distinction is very important when a countries argues a case for dumping.
For example, recently in the news Russia have placed a quota on US poultry imports.
If America produces poultry below production costs in Russia, and Russia are the importing nation, then we can consider this not to be dumping. It is simply the principle of comparative advantage.
If however, they produce below their own production costs, then Russia have a case for dumping. There are two reasons that the US might be dumping on Russia. Either, they have a surplus of poultry and must find a way to get rid of it, or US producers are being subsidised. A subsidy, as a payment per unit of production by the government, does not represent the true production cost of a good.
Hi Nic,
Dumping occurs if the exporting country sells the product below its cost of production.
The idea is that any normal country would sell for a profit (price greater than costs) and “dumping” is inappropriate as it implies that the exporting country is getting rid of temporary surpluses.
Dumping is really hard to prove since countries receiving “dumped” products don’t have visibility to the cost of production on those imported products. Domestic industries hurt by trade are quick to always claim dumping which may or may not be true.
When a nation protects its domestic market from dumping, is the principle of comparative advantage being undermined? Discuss.
Nic and Palmi have both defined what dumping, though when can a country prove when another country is dumping goods into their country, or is it simply comparative advantage? Having discussed comparative advantage in class, everyone knows that if countries followed this theory, they would be better off. Dumping on the other hand is highly destructive for the country in which goods are being dumped in. For my commentary i actually had an article on anti-dumping duties placed on Asian footwear from China and Veitnam and how the EU members now want to remove this duty because they have realized that it only worsened their economic situation. As i said in the evaluation of my commentary, if the dumping of shoes were really occuring, then the EU took a beneficial action for the short and long run. However, in this case, it is much more likely that Asian shoe manufacteurs simply have comparative advantage over the European shoe manufacteur. For this reason, when a nation protects its domestic market from dumping the principle of comparative advantage if not being undermined, though if the country that put the protection against what they thought was “dumping” then yes, the principle is being undermined.
Does dumping refer to the sale of a country’s goods below the importing country’s costs of production or the costs of production in the country where the good is made? Why does this distinction matter?
Dumping is a good example in order to understand the importance of the clarity of the terms of trade. The distinction posed in the question matters. As Nic said, dumping refers to the sale of a country’s goods below the cost of production of the producing country. The selling of a country’s goods below the importing country’s costs of production is not dumping but free trade, by which countries should use their comparative advantage in the production of a certain goods, and sell those to other countries which have a higher opportunity cost in the production of the same good and vice versa. Low priced shoes imported from China or other developing countries where low cost of labour is a comparative advantage does hurt the national shoes industries and increases trade deficit, but is not dumping. Italy can retain his competitive advantage in the shoe industry because of his its high product positioning and quality standards: the strategy is not focused on cheap products, but leverages on design and quality. Customers are willing to pay higher prices because they know shoes are better.
Livia, you state that: “As i said in the evaluation of my commentary, if the dumping of shoes were really occuring, then the EU took a beneficial action for the short and long run.” I’ll agree with you that it is beneficial for the EU to place anti-dumping duties on Asian footwear from China and Vietnam in the long-run. However, I don’t see why it hurt the EU in the short-run. After all, in the short-run, consumers in Europe will be happy to purchase extremely cheap shoes. It is only in the long-run, once Chinese or Vietnamese producers do not have a surplus to dump in Europe, or European shoemakers have closed due to unfair competition, that the EU will be harmed by dumping. Also, what is the diffence between food aid and dumping? Will food aid not lead to greater famine in the future if it is not accompanied by a long-term development plan?
Eithan, as you answerd on Livias resonce i would like to add to your statement:”However, I don’t see why it hurt the EU in the short-run. After all, in the short-run, consumers in Europe will be happy to purchase extremely cheap shoes.”
Yes it is true that we the european consumers like cheap shoes, and evidently the shoes in aisa are extremly cheap. BUT europeans also like quality and would not just buy shoes because they are cheaper. Europe produces great shoes (Italy) that outrun the standards of the ones made in china. Protectionism as i understand is not only used to protect the domestic marked, but also the quality of the goods imported. To protect product standards, a country might decide to introduce safety, health or environmental standorads on good imported.
It hurt the EU in the short.run, because the quality of the good goes down, and europe wishes to protect that from happening.
Thanks Eithan, for starting another discussion, what is the difference between food aid and dumping? Will food aid not lead to greater famine in the future if it is not accompanied by a long-term development plan?
Some rich countries are able to dumb their surplus and call it “food aid”. The food aid will have a temporary relief on the nation receiving it, but in the long run it will destroy its market for food. Dumping food on to poor nations will hurt the local farmers, who cannot compete. Therefore they are driven out of their jobs and into poverty. Food will lead to greater famine in the future if it is not accompanied by a long-term development plan. Most less developed countries prefer trade over food aid. One particular example that was looked at in class was Kenya. Kenyans want more trade and less food aid. One hotel owner said, “It is better to teach a man how to fish, rather than catching one for him”. I think his point is valid, because it will benefit the Kenyan economy. When I mentioned trade over food aid, I am also aware of the fact that some less developed countries may not have anything to trade for food. So it might not work in all the cases.
I just realized I made a typo in the 3rd line. It should be dump instead of dumb.
Why would a country want to keep cheap imports out of its domestic markets? Don’t cheap goods make consumers happy?
A country would soley want to keep cheap goods out of its domestic economy to protect its own domestic firms from this direct competition. Sure the consumer welfare increases with cheap goods as more people are willing to pay the price for the given product. However these cheap imports may harm any domestic firm who might be producing goods in the same category.
With the domestic firms there may lie thousands and thousands of jobs that any gorvenrment would want to protect, as they keep people employed.
This is why for example the auto industry in the USA have been under the protectionist Umbrella for so long. The automakers faced great global competition from other car manufacturers. In order to preserve domestic jobs the government placed tarifs on imported vehicles so GM, Chrysler, and Ford would not have the incentive to outsource these jobs to countries where it would be cheaper in order to retain their competativeness on the global market.
However as we have seen this protectionist idea has not payed itself off, and now the US government face the same problem which they tried avoiding by protecting the domestic automakers in the first place (loss of domestic jobs). The tariffs on imported cars deminished the incentive for the US auto-industry to remain competative, and while all other global car industries have advanced, the american car industry chose to remain on hold in car technology advancements.
This is all due to this idea of governments not wanting any cheap imports on their domestic markets.
I don’t think that giving food aid is the same as dumping. It can be closely related to, but if the more developed country looks into the needs of the less developed country food aid should not cause any problems…
As we have seen in class there was an example of America dumping its excessive corn (for which it had gotten huge amount of subsidizes) into a poor country (I cant exactly remember which country…) it was dumping its corn because the less developed country had a domestic industry in corn. This meant that the domestic corn farmers were driven out of business. The consumer would buy the dumped corn from America rather than enjoy the domestically grown corn. This meant for the domestic farmer that he couldnt buy his corn seeds for the following year. This wouldn’t matter if America were to dump its corn again, however the following year America produced less corn and did dump any of its corn into another country. The less developed country now has no corn, and an industry that has been destroyed. This is were dumping measurements need to be taken place.
However, if America would have dumped its corn into a country with no corn producers, or very very little (not near enough to provide the whole country with corn) then wouldn’t this benefit the less developed country?