The dubious case for anti-dumping duties .

It was recently reported that the US had raised its anti-dumping duty on shrimp exports from India by 300 per cent, thereby putting seafood exporters in troubled waters.

It's true that in recent times both developed and developing countries have imposed anti-dumping duties on a wide range of products. India, at one time, had earned the dubious distinction of imposing the highest number of anti-dumping duties. So, developed countries such as the US are not to be blamed alone.

‘Dumping' refers to instances where a producer sells for less in a foreign market compared to the price back home (called “fair” or “normal” value). In economic theory, such price discrimination makes sense if a producer wants to maximise profits when faced with different degrees of competition (measured by what economists call ‘the price elasticity of demand') in different markets.

For the same reason, some surgeons charge less for a poor patient and some airlines or movie theatres offer lower rates for a senior citizen. No law regards such practices as wrong or objectionable.

Typically, firms find it more difficult to compete abroad than at home where it often enjoys some inbuilt advantages such as familiarity with local conditions and better access to distribution channels, supply chains and bureaucracy. So, ‘dumping' in the foreign market is usually in the interest of the exporting firm. Naturally, the domestic firms in that country will be hurt and will lobby for an anti-dumping duty to offset the “dumping margin” (the difference between the foreign and domestic prices charged by the exporting firm).

‘Dumping' impact

Curiously, international trade rules under WTO find “dumping” objectionable and allow anti-dumping duties under certain conditions such as proving that the domestic industry has been “sufficiently hurt” by the “dumping.” This provision is used to oblige the domestic producer lobby by imposing anti-dumping duty to discourage cheaper imports. Most economists, however, find nothing objectionable in “dumping”. In fact, nothing can be better than if foreigners want to give us goods cheap or even free. The only objection could come when the foreign producer sells cheap to drive out competitors from the market, create a monopoly and then raise the price. Though this is possible theoretically, it is highly unlikely in today's globalised economies. It is virtually impossible to kill competition through low pricing. A Chinese maker of ball bearings, for instance, has to compete not only with local producers in India but also producers from Germany, South Korea, Vietnam, the EU and Mexico. So, the other foreign competitors will bring down the price if the “dumping” firm tries to raise it. Consequently, in today's world, the case for anti-dumping duties is very weak indeed.

The questionable logic behind such duty becomes clear in the following scenario: Suppose India imports equal amounts of ball bearings from two firms — one Chinese and the other Mexican — at the same price. Now, if the ball bearings are priced slightly higher in the Chinese market than in the Mexican market, then India can allege “dumping” by China and impose an anti-dumping duty while it cannot act against the Mexican imports. Under these circumstances, is there any justification for discouraging imports from China but not from Mexico? The position of Indian producers vis-à-vis the overall imports would remain the same.

Why, then, are anti-dumping duties proliferating in recent years? It is mainly because this is a protectionist device still allowed by WTO rules despite caps in the form of ‘bound' duty rates on most products. True, anti-dumping duty provides only temporary protection — for 3-5 years at the most — against cheaper imports. But it can be renewed under a new petition filed by the affected domestic producers.

Small exporters suffer

What is even more troublesome is the fact that small producers (such as shrimp exporters) from a developing country can challenge an anti-dumping duty imposed by the US only in that country's courts. This can prove too expensive.

So, all considered, most economists would call for dumping the anti-dumping duties in the interest of fair play and a trade regime free of backdoor protectionism.

But will economists find support in policymakers who are often guided by lobbyists?

Source : Business Line