Anti-dumping Measure: Effect on Competition in Exporting Economy

Dumping is a classic example of international price discrimination where a producer firm sells its products at different prices in the domestic and export market. When the producer firm exports its goods at price less than at which it sells the same goods in domestic market, it is said to cause dumping of goods in the export market. The anti-competitive effects of dumping in the export market are more than obvious. The literature on industrial economics in general and international trade in particular in particular is replete with findings showing adverse effects of dumping in the export market. To put it shortly, the dumping of goods primarily leads to gradual eradication of firms operating in export market as the consumers increasingly tend to buy dumped goods. In the short run consumers, though, may benefit with goods at lower prices as the consumer surplus increases; the same does not hold true in the long run. In the long run, the firms in the export market gradually leave the industry due to losses and the exporter captures the entire demand in the export market. Eventually, the export would raise its prices at monopolist level when there are no competitors left in the market.

Thus, in order to curb these anti-competitive effects of dumping, economies across the globe take resort to anti-dumping measures though appropriate legislations. Much has been written about the effects of dumping in the export market. However, trade lawyers and economists have thrown little light on the effects of an anti-dumping measure on the domestic market of the exporter. In this brief note, I would argue that anti-dumping measure not only creates a level playing field for the domestic producers in the economy where goods are dumped but it also promotes efficiency in the economy which is the source of dumping

Let us assume that there is a firm “A” operating in an open economy “X” producing a product G (say, a beauty cream which brings about a unique glow in women’s skin). g is also produced by some firms in an economy “Y”. Firm A also exports the goods to its customers in economy Y. However, these exports are made at dumped prices i.e. the export price of G is less than the normal value of G. Normal value of G is the price at which it is sold in economy X. For the sake of simplicity, let us assume that the firm A in economy X does not face any import competition. The Government of X has banned imports of goods G in its country from other economies as all other economies exploit children while producing G. This has led to a situation where A has become a monopolist in economy X. Since, A does not face any competition; it prices G in its home market at P^M which is much above the competitive price P^C. Had the market for G in economy X been perfectly competitive, the price of the product would have been P^C. However, in the export market i.e. economy Y, Firm A faces competition from all other firms and hence the demand is perfectly elastic as shown in the Fig. by D^F. Therefore, ‘A’ prices its exports to Y at the competitive price P^C or else it would lose all its customers in economy Y. The producers of G in economy Y petition the government for imposition of anti-dumping duty on imports of G from economy X. The investigating agency in economy Y finds that indeed the goods are being sold at dumped prices as P^M is higher than P^C. The investigating agency, on facts and evidence, also determines that dumped imports of G have caused material injury to domestic producers of G in Y. Therefore, the government of economy Y imposes anti-dumping duty amounting to ‘t’ on imports of G from ‘A’. If firm A continues to price its products at P^C, the customers in economy Y would not buy its products as the same has now become costlier for customers by an amount ‘t’. The customers would move to either import from other countries or to the domestic producers in Y. Therefore, in order to sell its products to customers in economy Y, firm A would be left with only two options:

(i) It may further lower its price from P^C to P*, where P* <>C, to circumvent the effect of anti-dumping duty. However, this would lead to further intensive dumping of goods and the domestic manufacturers may petition the government to review the amount of duty or to change the format of anti-dumping duty to reference price form. In a reference price form, the government would calculate a non-injurious price and set it as the benchmark price for imports. Any imports less than the benchmark price would attract anti-dumping duty amounting to difference between the benchmark price and the lesser import price. In such a case, firm A would not be able to circumvent the duty by lowering its price.

(ii) The second option left to firm A is to lower its price in its domestic market and bring it to the competitive level P^C. Once the normal value is equal to export price, there would be no dumping and hence Firm A would be able to sell its products to its customers in economy Y. Thus, the imposition of anti-dumping duty would result in lowering of prices in economy X and subsequent increase in the consumer surplus. The consumers in economy X would now get more of goods G i.e G^C at a lower price P^C.

Therefore, the imposition of anti-dumping duty by government of economy Y may bring competitive pricing in the relevant market in economy X which otherwise was faced with monopolistic pricing.