Sarut Wittayarungruangsri's Entry For The 2004 Moffatt Prize in Economics
While other trade barriers such as tariffs and quotas have been considerably reduced under the role of GATT/WTO, antidumping activities are threatening to become the most important trade restricting device. Thinking about antidumping as a modern trade instrument, one might find it hard to imagine that the origin of antidumping practices dates back to a century ago when Canada adopted the first antidumping law in 1904.Prior to the 1980s, there were only a few countries who were relatively active in pursuing antidumping actions. They are nowadays regarded as 5 traditional users, and these include Canada, the United States, the European Union, Australia, and New Zealand. Today the situation changes a lot. More than 75 countries (treating the EU as one) have adopted antidumping law and the number of antidumping investigations has risen sharply during the last two decades.
The increasing use of antidumping policy has gained a lot of attention from policy makers as well as academics. The 1990s witnessed a fast growing body of literature concerning several aspects of antidumping. This leads economists to a consensus that antidumping actions do a lot more harm than good. An eminent trade theorist, Arvind Panagariya, even suggests that antidumping should be outlawed.
Despite the opposition from scholars, antidumping has survived criticism and gained even more popularity over time. This phenomenon poses a number of interesting questions. To what extent is dumping unfair? Why is antidumping unfavourable? Why have we witnessed more and more antidumping actions worldwide? And what can we expect to see in the future? This essay is aimed to address these questions.
To begin with, it is crucial to understand clearly what dumping is all about. To general public, dumping sounds like an evil action where a foreign firm cuts price below cost in the domestic market in order to eliminate domestic producers and gain monopoly power afterwards. Hence dumping is harmful for society because it hurts not only the domestic producers but also consumers. The reason is that the dumping firm can raise the price to the monopoly level once the market has been monopolised. Such business practice is clearly undesirable and this is the perception taken by a huge number of free trade opponents. In fact, this perception is completely wrong. It has nothing to do with dumping under the law.
According to the WTO rules, a firm is said to dump if it sells its product in another country at a price less than the normal value. The normal value is defined as the price it charges in its local country, or in a third country, or the constructed price (the constructed price is calculated by the authority concerned when the first two are unavailable). Therefore, it does not matter whether a foreign firm sells at a higher or lower price than the domestic ones; as long as the price charged in the domestic country is below that in its own country, the firm can be found allegedly dumping.
Nevertheless, one may still believe that dumping is unfair because products of the same quality should be priced equally wherever they are sold. But, thinking about it more carefully, it is rather strange if the prices are identical everywhere. There are so many factors that make price differ across markets; tariff, market size, demand structure, and so on. Moreover, dumping can be viewed as a sign of price discrimination. This common business practice is acceptable domestically and there is no reason why it cannot be done internationally. If it is good to sell concert tickets to school students at a cheaper price than those for adults, why is it bad to sell medicines in Uganda at a price less than in the United States?
The only unacceptable type of dumping is predatory dumping which is rather similar to the wrong perception mentioned above except that price differential between two countries needs to be taken into account as well. By all means, this kind of dumping is really harmful. Fortunate enough, it is very unlikely (if ever possible) that predatory dumping could occur at all. In theory, if we allow new entrants to compete in the market, the dumping firm will never be able to raise the price up, and it will never be able to sell below cost forever either. In reality, there is no evidence of such kind of dumping.
Be Sure to Continue to Page 2 of "Antidumping: A Villain in International Trade ".
