Oct 21 2008
Fair trade vs. free trade: the problem with “dumping”
Published by Jason Welker at 10:22 pm under
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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". Related posts:
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“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?
Hello!
Very Interesting post! Thank you for such interesting resource!
PS: Sorry for my bad english, I’v just started to learn this language
See you!
Your, Raiul Baztepo
dumping is not bad even the price of a certain product is lower than the other identical product. it has capital so there nothing wrong with it.
1. A country wouldn’t want lost of cheap imports flooding the economy because this surplus of cheap imports would mean less business for the domestic manufacturers of similar goods, and the workers in those firms would lose their jobs. If those workers are out of a job, they can’t spend money and help the economy.
2. Dumping refers to selling a product below the price it was made in the country of origin. It is important to make this distinction because selling a good below the importing country’s costs of production is jsut free trade.
3. The principle of comparative advantage is technically being undermined, but it is for a good cause. Everyone wants to buy a good product for a low price, but the long term effects of this habit lead to unemployment in the domestic economy. A country has to pick its poison when dealing with dumping.
Robin,
Everything you said about food aid and dumping was very interesting. I think there can be some sort of middle ground between food aid and dumping in a third world economy that could get a country the food it needs, while not pushing local farmers out of business. This food aid could be coupled with trading of better technology for farming, for instance. The local farmers could find an importer for the crops while learning how to better manufacture food for future markets.
1. Why would a country want to keep cheap imports out of its domestic markets? Don’t cheap goods make consumers happy?
Firstly, cheap imports are usually of inferior quality, and the cheapest goods that a country sends to another might not only be of bad quality, but might be the ‘dumping’ that a country does not want or does not need anymore. Therefore, cheap imports might benefit and at the same time affect a country’s economy.
2. 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 refers to the sale of a country’s goods below the importing country’s costs of production. Because when dumping we are not studying the costs relating to were the good is made, but the average costs required to export a certain product out of that country.
3. When a nation protects its domestic market from dumping, is the principle of comparative advantage being undermined? Discuss.
It is being sort of undermined, because the population will not get the chance to buy cheap products. But it is good to take these measures because on the other hand, the population would buy cheap products and the economy would decrease greatly as the taxes will decrease.
1. Why would a country want to keep cheap imports out of its domestic markets? Don’t cheap goods make consumers happy?
A country would want to keep cheap imports out of its domestic markets because with an excess of foreign goods being sold for less than the production costs in domestic production there would be negative repercussions in the domestic market. Cheaper goods would please consumers, but they could also result in increased unemployment levels and inflation.
2. 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 refers to the sale of a country’s goods below the importing country’s cost of production in the producing country. The distinction outlined in the question is important because it relates to the comparative advantages of individual countries.
3. When a nation protects its domestic market from dumping, is the principle of comparative advantage being undermined? Discuss.
In protecting its domestic market from dumping, a nation is can be seen to be undermining the principle of comparative advantage. Because dumping is very hard (if not impossible) to prove, many countries may be seen to be utilizing their comparative advantage rather than simply dumping their excess goods in another country at a very inexpensive level.
To Myrthe,
I enjoyed your example; it made sense and illustrated the dangers of dumping well. In response to your question (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?), I understand that this would not necessarily be the case. If, in your example, the US had dumped its excess corn in a country with very little corn to begin with, due to the American production of corn in the subsequent year being significantly less, it could hurt the domestic market there. Also, in a country with no/very few corn producers to begin with, it would seem that the dumping of American corn there would result in problems in the market for the substitute good in that country.
1.Even though cheap imports make consumers happy, they don’t make the domestic producers very happy. If a country is importing goods that are sold for much cheaper than the prices the domestic firms are selling their goods for, than it will cause problems with unemployment. The local businesses, with the increased prices, will suffer because eventually they will go out of business since the demand for their goods are decreasing.
2.Dumping refers to the sale of a country’s goods with a price that is lower than the price that the exporting country sells the goods in their own country. The distinction is important because otherwise, if it was the sale of a country’s goods below the importing country’s cost of production it would mean that its simply free trade and not “dumping”.
3.Basically, yes. When a nation protects its domestic market form dumping, they are not allowing all the potential choice for their citizens to have the comparative advantage of buying goods at the lowest price possible. However, even though the principle of comparative advantage is being undermined, there is also a positive aspect to this protection. The nation is protecting their economy from other problems such as unemployment.
(1)As studied, countries would want cheap imports out of their domestic markets to protect the domestic producers. If domestic producers cannot produce at the same price as the world price, then their demand decreases, due to the theory of opportunity cost: People have to spend smaller portions of their income on the product, so they can spend more on other products for example. Some countries, especially developing ones also use protectionism as a raise in their governmental revenue, because it is difficult to raise actual taxes. This gives them the opportunity to spend more in the development of their nation. Cheap products make the consumers happy, but not the domestic suppliers, and since consumers are also suppliers they are interlinked. If domestic production would decrease, so would consumption, because people can spend less on other products.
(2)Dumping is the sale of a country’s good below the costs of production in the country where the good is made. This distinction is of high significance. If the price is below domestic production costs, then that means that in the short run the company will be making profit, because their product is cheaper than how much it cost to produce it. Example: Country A sells produces butter at 1.5$ but sells it at 1$ in country B. If the price would be under the (potential) costs of production of the export country, then that would not necessarily mean that the company would make a loss. This is, when the export country’s costs of production for the same product are higher. Example. Country A produces butter at price 1.5$, Country B produces butter at 2$, country A exports butter to the price of 1.7$ to country B.
(3) I think that the principle of comparative advantage is definitely undermined, because it does not have any significance anymore, once protectionism is applied. Then, the price of the imported products is the same or even higher than of the domestic products, therefore the comparative advantage is of no use any longer. The country only looses in this situation, because they can sell less products, which are at cheaper prices than the domestic products. So, in comparison to the domestic producers, they may even make less profit, although they originally had the comparative advantage.
To Celine:
Very good answers I thought. You also mentioned the consequences on (un)employment in the nations, which I didn’t really focus on in my answer, but I think you’re right that it’s important to be considered, because if
a) there is no protectionism, then the importing country’s firms will potentially not be able to compete on the market and so they have to close down, leaving many people unemployed; thus unemployment rises.
b)there is protectionism, then the exporting country’s firms will potentially not be able to compete against the domestic firms and so they possibly have to close down parts of their firm because there isn’t enough demand. Therefore their unemployment will rise.
Thanks for that!
1. A country would want to keep cheap imports out of the country to protect their domestic firms that are more expensive. This would be good for the companies but not for the consumers. The country will see a greater benefit by protecting the domestic companies than the consumers.
2. Dumping refers to the sale of a countrys goods where the price is below the price of the imported goods. the destinctions matters because the meaning would be different.
3.I think that in that case there is not the principle of comparative advantages anymore because only the domestic firms get an advantage as the other ones will only sell less and probably make no profit.
to kerstin,
I liked what you said in response to celine because in any case you show that there willl be a looser by protectionism. As most countries want the best for their own industries they will introduce protectionism measures, if everybody does that trade will die out because nobody will want something from other countries.
Response to Calvin:
Your example of the American car industry and what happened to it after America imposed tariffs on importing cars is a good example of why people are opposed to protectionist actions. The American car industry is actually suffering in its potential to grow because they feel secure that their industries wont go out of business. This is what makes this such a debatable subject because in some ways now I agree that in industries that are giving up efforts and advancements, the tariffs should end, and in the case of America, it should end so that they are forced to join into the competitive market.
1. If a product is produced domestically then the cheaper product will reduce the demand on the domestically made product. This will result in less business for the domestic organisation which snowballs into lower wages, fewer jobs, and a downturn in the domestic economy. Therefore initially lower prices may make the consumer happy, but if that consumer looses their job due to the increased competition with an unmatchable price, then lower prices do not matter.
2. Dumping refers to the sale of goods at a lower cost than they were made, where they were made. This distinction is important as if it were valid to compare it to the production cost of where they were being sold; there could be a variety of reasons as to why the sale price was lower. For instance, increased efficiency could result in one countries industry producing the same product for drastically cheaper. Furthermore, a lower wages and resource price also has the same effect. This distinction is important also as it draws the line between one country intentionally sabotaging local business by using their surplus, and one countries industry just being able to export at a lower price.
3. Yes the principle of comparative advantage is being undermined by the protection against dumping, due to the fact that dumping is so hard to prove. Although the principle of comparative advantage is being undermined it is protecting against the threat of the negative results of dumping.
To kerstin:
Well thought out answers, in particular number 1. I did not make the connection with the decrease in the demand for other products in the long term in the domestic market due to the decrease in production of the ‘dumped’ product.
1. Why would a country want to keep cheap imports out of its domestic markets? Don’t cheap goods make consumers happy?
Any countries want to keep cheap imports out of its domestic markets because it usually brings disadvantages to different people and the companies. For instance, markets can cause a central bank to lose control of domestic monetary policy when it is also managing the exchange rate.
There are the non-consumers who would have entered the market if the lower price had been in effect. Also injured are domestic firms that now sell fewer goods because Americans have to spend more to purchase the tariffed products. A tariff levied against “cheap labor” products would economically hold back foreign workers and keep domestic consumers from purchasing less expensive products.
2. 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?
Some products may just no longer be in great demand in one’s home market. In addition, a producer may want to continue a certain production level during an economic downturn at home. In such a case, it may be better to sell products abroad at a lower price than to shut down production for the duration of the economic downswing. Also, foreign monopolists, unable to attain more domestic sales, may be able to increase their profits by expanding sales in foreign markets. As long as production costs are met by foreign sales, the decrease in per unit production costs will increase earnings in the domestic market. This can occur when a company is experiencing increasing returns to scale in production. The foreign market enhances the home market giving rise to economics of scale.
3. When a nation protects its domestic market from dumping, is the principle of comparative advantage being undermined? Discuss.
When a nation protects its domestic market from dumping, the principle of comparative advantage is being sometimes under-minded, though it depends, because sometimes protectionism not always is under-minded. I am saying the protectionism against dumping is not always not under-minded because due to a very likely of globalization that will continue, more and more countries will try to pass of protectionist policies in this form in front of the WTO(world trade organization), where they are not valid. This however, on the other hand, I think the dumping is under-minded because any kind of market manufactures have comparative benefit over the other country manufactures. Due to this reason, when there is a protectionism in a nation, it’s domestic market from dumping the principle of comparative benefit if not being under-minded, though if the country that put the protection against what they thought was dumping, well, I think it is under-minded.
Jack.ecslb.f09,
Jack, I read through your answers, I liked the fact that you even defined the meaning of some terms you might need to use. Now, I have some doubts about your 3rd answer. I clearly understood where you said that the principle of comparative advantage is being under-minded by the protection against dumping. I did not understand why you think it is being under-minded because you did not state it clearly, according to what I see… Maybe you could have write it in more detail. You said that “due to the fact that dumping is so hard to prove”, can you at least state one reason why? For my answer, I proved both ways that either they are under-minded or not. So, maybe it is good to consider both things.
JiYoon
1. Of course in the short-run cheap products make the consumers happy but the problem is that if this cheap imports continue to a lot of time they will start to destroy the producers of the nation that receive that cheap exports, so in the long run this cheap products could create unemployment (and the unemployment always produces unhappiness in the people)
2. Dumping refers to act of selling your products in other places anther your price of production (the case of selling anther the price of production of the people of the other place is only free trade)
3. No because if you let the dumping enter in our country it will destroy your industry without reporting real benefit to any one (the companies that create that dumping would not cover the price of produce that)
raphael.echl.f09
The thing you say is true when the cheaper product came from the free trade but when it comes from dumping it only benefit to the consumers at the beginning but them it destroy the national industry and the next year when there is not dumping the consumers couldn’t obtain that product (or obtain it very expensive) because it countries don’t produce it
Why would a country want to keep cheap imports out of its domestic markets?
Don’t cheap goods make consumers happy?
Cheap imports are good on a short period of time, however it could end up in
unemployment because it would make no good to national producers.
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?
It refers to the sale of products at a lower cost than for which they were made where they were made. This is because some product could have a smaller demand in the one´s home market.
When a nation protects its domestic market from dumping, is the principle of comparative advantage being undermined? Discuss.
No, if the nation does not prevent the domestic market from dumping it will affect the internal industry of the country without obtaining any revenue.
To raphael.echl.f09
I think that cheapp import would just help the companies for a short period after that, it is most likely to provoke unemployment.
Why would a country want to keep cheap imports out of its domestic markets? Don’t cheap goods make consumers happy?
The country does not want cheap imports in its markets, because then that country’s products will not sell and the domestic industry will suffer. Cheap goods may make the consumers happy for a little while, but that happiness will not last long because the effects of the importing will last a lot longer then the low prices. Such effects could be a loss of jobs, for example.
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 the sale of a country’s goods below the cost of production in the producing country. This matters because if it were that a country was selling products to a country where that product was more expensive to make it would simply be free trade, which is nothing like dumping.
When a nation protects its domestic market from dumping, is the principle of comparative advantage being undermined? Discuss.
To some extent, yes, protectionism does undermine the principle of comparative advantage. Although the country is looking out for its own economy by stopping dumping, it is at the same time hurting the comparative advantage market. If a country’s domestic market is protected, it is protected from everything, even things that might not be harmful to it.
Pedro,
You said that protecting a nation’s domestic market was not undermining the principle of comparative advantage because,”if you let the dumping enter in our country it will destroy your industry without reporting real benefit to anyone.” But what about when it does benefit the country? Not all importing is harmful to the industry.
~Madison
1. Why would a country want to keep cheap imports out of its domestic markets? Don’t cheap goods make consumers happy?
It is because as rational consumers, they will buy the cheaper goods. This means that the quantity demanded for domestic goods will decrease. This will lead to a decrease in local labour employed and creates unemployment.
2. 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?
Yes, this is very unfair as the government subsidises and protects their exporting goods. This will create an unfair trade with the country.
3. When a nation protects its domestic market from dumping, is the principle of comparative advantage being undermined? Discuss.
I think to country does not really have a comparative advantage when its goods are subsidised. Their goods are competitive, only because they have a rich government. This disobeys the concept of a self-dependant economy and therefore it does not have a comparative advantage over the other countries.
To Victor,
Yes, I also agree that the country should set barriers to trade with subsidised goods!
A country wants to keep cheap imports out of its domestic markets. While consumers are happy that there are cheap prices, the domestic economy is suffering on a whole because the consumers are only happy with the imported goods and are not supporting the domestic market. For this reason, governments put in place reactionary protectionist measures to exclude cheap imports so as to keep out the competition.
Dumping is defined as the act of a manufacturer in one country exporting a product to another country at a price which is below the price it domestically charges and therefore below the cost of production. The distinction concerning whether or not the price is below the domestic or the importing country is important because domestically, prices of products are unique to the market specific to every country in the world. There are anti-dumping measures taken because when firms contribute to dumping, they are hurting their own domestic economy by offering prices lower than costs of production and they are contributing to comparative advantage in foreign countries.
The law of comparative advantage refers to the ability of a firm to produce a particular good at a lower opportunity cost than another firm. It is the ability to produce a product most efficiently given all the other products that could be produced. Comparative advantage explains how trade can create value for both parties and is the main concept of the pure theory of international trade. The practice of dumping definitely undermines comparative advantage because with dumping in place, both parties are not advantageous.
Pedro,
If the domestic industry and economy is destroyed due to dumping, isn’t that exactly undermining comparative advantage? In comparative advantage, both parties are supposed to gain.. but in the situation you proposed, there is not any advantage in the destroyed economy
1) Why would a country want to keep cheap imports out of its domestic markets? Don’t cheap goods make consumers happy?
Dumping in the form of cheap imports can work for a short period of time, although there are some costs as workers in the relevant industries are deemed unnecessary and laid off. However, once the dumping ends, the affected country will be left without a means of producing or easily gaining that good, ruining their economy and forcing them into trade deficits.
2) 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 refers to the sale of the country’s goods below their own costs of production. This matters because the country would not be selling goods for less than the production costs unless they are desperate to unload those goods or have a hidden motive.
3) When a nation protects its domestic market from dumping, is the principle of comparative advantage being undermined? Discuss.
No, because dumping only takes place when the exporter is selling below-cost in their own country; if it was below the costs of the importing country, then the principle of comparative advantage applies. However, under those circumstances, the exporting would also not be considered to be dumping.
Derek.ecslb.f09,
That’s a good point. People will demand fewer domestic goods, which will put domestic companies out of business and lead to the losses of lots of jobs.
1) Why would a country want to keep cheap imports out of its domestic markets? Don’t cheap goods make consumers happy?
A country would want to keep cheap imports out of its domestic markets so that it would not need to contend with foreign competitors. Cheap imports may make consumers happy but domestic suppliers lose large profits. Thus the economy could suffer due to trade imbalance. Sometimes what the public wants isn’t always in the sellers’ best interests. The government does not want anything hurting the gross revenue of domestic markets.
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2) 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” refers to the sale of a country’s goods below the costs of production in the country where the good is made. This distinction is significant because this determines which country is more negatively affected. Because the cost of production is less, the exporting country is making a profit while the importing country is losing revenue. Dumping is condemned if it causes or threatens to cause material injury to a domestic industry in the importing country. It has the potential to severely damage a country as its domestic markets won’t be able to compete causing internal economic issues.
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3) When a nation protects its domestic market from dumping, is the principle of comparative advantage being undermined? Discuss.
There is a fine line between comparative advantage and dumping. Dumping is a predatory practice as it seeks to cause domestic markets of importing countries to suffer. On the other hand, comparative advantage is just a matter of strength; some economies are just stronger than others. Some just happen to have the upper hand in the trade balance. These are just the economic facts of life. Dumpling has the power to cripple the domestic markets of a nation; this is simply taking advantage of the situation. In economics, the law of comparative advantage refers to the ability of a party (an individual, a firm, or a country) to produce a particular good or service at a lower opportunity cost than another party. In a nutshell, dumping is unfair trade and comparative advantage isn’t.
Michael that’s a great and brief explanation for why countries would not desire cheap imports. I like how you listed the effects during and after dumping. As you stated, they can be very detrimental.
Theresa you are correct. Dumping hurts the weaker party. Comparative advantage is most certainly undermined by dumping because as you said, with the principle of comparative dumping no one loses. It’s a win-win situation and even though one party may gain more than the other, its completely fair game.
1. The main reason a country wants to protect against dumping is that it means that their domestic businesses will either lose the consumers or have to drop their prices to a point where they are no longer gaining a profit. This means that the country would then become dependent on imports which would allow the countries providing the exports to raise prices dramatically as there would be no more competition for their goods.
2. I believe that dumping refers to the sale of a country’s goods below the importing country’s cost of production. The distinction does matter because different countries could have different costs of production. For example, the costs of production in Mexico are much higher than the costs of production in China. If a country operates below their own costs of production, they will face a deficit while the other country’s economy may only suffer marginally depending on the strength of their businesses. If they operate below the importing country’s costs of production, they will be able to quickly eliminate the country’s domestic producers and once they are gone, they will be able to raise the prices dramatically.
3.When a nation protects its domestic market from dumping, is the principle of comparative advantage being undermined? Discuss.
Yes, the principle of comparative advantage is being undermined, but in some cases, comparative advantage is immoral and undermines the entire purpose of free trade as it really creates great disparity between the rich and the poor nations. It could either lead to a world where every nation depends on another nation entirely for a good or to many wars based on resources and such. This could lead to a return to the imperial era which also goes against the concept of economic growth and development.
1. A country would want to keep cheap imports out of its domestic markets to preserve domestic jobs and firms. If a country has too many cheap imports, the firms and workers in those industries cannot compete with the low priced imports, and therefore those firms shut down and the workers lose their jobs. An industry can disappear in a country if it is filled with cheap imports. They may keep consumers happy for a while, but when other consumers/workers in the country lose their jobs, they won’t be so happy anymore.
2. Dumping refers to the sale of a country’s goods below the costs of production. This distinction matters because a country would not want to “dump” a good at prices that are less than the production costs, however it occurs when a country is desperate to get rid of those goods, or they could possibly have a hidden agenda regarding the selling of such goods.
3. When a nation protects its domestic market from dumping, the principle of comparative advantage is being undermined in most cases. This means that a firm is producing a good at a lower cost than another firm, and because it does so, one of the firms loses out on this particular good.
Response to john.ecsla.f09,
I agree that a country would not want to have a lot of cheap imports flooding into the economy, as it is bad for domestic firms and workers. Cheap imports are dangerous, as they can cause the downfall of an industry. I agree that the principle of comparative advantage technically is being undermined, however leaving a nation to pick its own poison is dangerous. The country must truly consider all possible implications of such practices, which doesn’t always seem to be the case.
reply to Theresa.ecslb.f09
Theresa, wouldn’t countries only participate in dumping if it could be to their advantage? This would then mean that they would sell their products at a point which would give them a comparative advantage over the domestic markets. This advantage would allow them to eliminate competition and increase their profit over the mid to long-term.
1. A country would want to keep cheap imports out of its domestic markets because even though it does make consumers happy, it takes business away from local businesses. Local businesses who can’t afford to make their goods as cheap as the foreign ones would suffer, leading to a loss of jobs as well.
2. Dumping refers to the sale of a country’s goods below the importing country’s costs of production. The distinction is important because this can fluctuate due to each country’s different economies and policies.
3. Yes by protecting its domestic market from dumping, the principle of comparative advantage is being undermined. However, sometimes this has to be done in order to protect a country’s domestic businesses from economic trouble.
@Diana
That’s a great point you made on the first question. It’s very often that the consumers want something that isn’t necessarily food for the whole country.
When a country gets cheap imports it makes that item easier for consumers to buy them. This is a positive, but it means that the countries domestic production companies will not make as much money and could eventually put them out of business.
Dumping refers to the sale of a country’s good below the cost of production in the country where the good is made. It’s important to make this distinction so it doesn’t give free trade a bad image. Selling goods under the cost of the country importing cost of production is just a good allocation of resources.
I believe that the principle is not being undermined. The country that is dumping voids the comparative advantage so it is fair game to protect from.
@alan
i see dumping as the sale of a good below the price of production in the country that made it. it called dumping since the country is just dumping there goods on another country