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Dumping and Export Subsidies
Lecture 9

 

Dumping

 

Dumping – exporters charge a lower price for products dumped on the international market as compared to prices charged within a country

  1. A country claims dumping to impose trade protection

    • A country imports products that have a lower price. The exporting country has a comparative advantage

    • The lower price is the basis for nfair trade practice

  2. Measure

    1. A firm sells a product for a lower price to foreigners than it sells to its domestic customers

    2. A firm sells a product for a price to foreigners below its average total costs

  3. Forms of Dumping

    1. Cyclical dumping - a foreign firm disposes excess inventories on the international market

      • A recession

      • Gov. usually does not impose protection

    2. Seasonal dumping - a foreign firm sells excess inventories

      • Firms sells clothes at the end of a season for low price

      • Gov. usually does not impose protection

    3. Predatory dumping - foreign firm lowers prices to drive firms out of a market

      • Then firm raises price once competition is gone

      • Gov. usually imposes protection

    4. Persistent dumping - foreign firm persistently dumps products on a market using price discrimination

      • Gov. usually imposes protection

  4. Price Discrimination, or Third Degree Price Discrimination

    • Conditions

      1. Company has some monopoly power; it can influence price

      2. Consumers can be separated into groups who have different demand functions

      3. Consumer buying for low price cannot sell to consumers who buy for high price

    • Easy to apply to an international market

      • All firms maximize profits when MR = MC

        • If MR > MC

          • Example: MR = $10 and MC = $5

          • If a firm produces one more unit, it collects $10 in revenue that cost $5 to make

        • If MR < MC

          • Example: MR = $10 and MC =$20

          • If a firm produces one more unit, it collects $10 in revenue that cost $20 to make

          • Thus, a firm reduces production

      • Purely competitive markets mean MR = P, thus, P = MR = MC

      • A firm with market power has P > MR = MC

    • Exporting firm

      • Use price discrimination to divide market into domestic and international market

      • Total production = QD + QI

      • Domestic consumers pay P*D while international consumers pay P*I

Exporting Firm uses Price Discrimination to Dump Products on International Market

Exporter dumps products on the market by using price Discrimination

  1. Benefit – Importing country pays a low price

  2. Problem – Companies in importing country may bankrupt

    1. WTO permits countries to impose an antidumping tariff, if it harms a domestic industry

      • U.S., Europe, Australia, and Canada impose tariffs on predatory dumping

      • Easy to show in the U.S.

      • Show dumping by having a price difference

      • Then firms calculate the “injury” to the industry

      • Examples

        • U.S. Steel Industry – protection from foreign producers

        • Cray computers – prevented NEC to import cheaper super computers into the U.S.

        • Tyson chicken – South Africa imposed protection against Tyson chicken

    2. WTO permits safeguard policies

      • Domestic industry is harmed from foreign competition

      • Competition came too fast

      • A country is allowed to impose temporary barriers to give domestic industry time to adjust

      • Example – Harley Davidson gained protection against Honda and Suzuki

 

Export Subsidies

Export Subsidies – gov. gives domestic industry subsidies and incentives to boost exports

  1. Types

    1. Gov. grants low interest rate loans

      • U.S. Export-Import Bank (Exim Bank)

    2. Tax breaks and tax abatements

    3. Gov. sponsors promotional events, trade fairs, and organized trips

  2. WTO

    1. WTO is against direct export subsidies, except agricultural subsidies and developing countries that is developing an industry

    2. Tariffication – economists convert import quotas and other non-tariff trade barriers into tariffs

      • WTO wants to include ag. barriers

      • WTO wants countries to reduce tariffs after non-tariff trade barriers are converted to equivalent tariffs

    3. A country could impose a countervailing duty

      • A tariff to nullify the effects of an export's country subsidy

      • Exporting country pays a tax to the importing country, nullifying the deadweight losses

  3. Economics of subsidy

    • Expands domestic industry, boosting employment

    • Could cause a country to switch from an importer to exporter

      • Strategic trade practice - gov. subsidizes an industry, creating a thriving export industry

    • Domestic consumers pay higher price, while foreign consumers pay the lower subsided price

      • Creates a price wedge

      • Gov. has to levy a tax on another market to pay for subsidy

      • Similar to dumping; domestic price is higher than international price

  1. Small country case

    1. Country is too small to influence the world price

A Small Country Imposes an Export Subsidy

A Small Country Imposes an Export Subsidy

    1. Welfare for small country with free trade

      • Consumers' surplus = a + b + c

      • Producer welfare = f + g + h + i

      • Total = a + b + c + f + g + h + i

    2. Welfare for small country with a subsidy

      • Consumers' surplus = a

      • Producers' surplus = b + c + d + f + g + h + i

      • Total = a + b + c + d + f + g + h + i

      • Gov. pays c + d + e

      • For gov. to pay a subsidy, it has to impose a tax on another market

      • All money goes to domestic producers

      • Deadweight loss = c + e

  1. Large country case

    1. Country can influence the world price

    2. Some of the subsidy goes to the foreign consumers

A Large Country Imposes an Export Subsidy

A Large Country Imposes an Export Subsidy

    1. Welfare for large country with free trade

      • Consumers' surplus = a + b + c

      • Producer welfare = f + g + h + i + j + k + m

      • Total = a + b + c + f + g + h + i + j + k + m

    2. Welfare for large country with a subsidy

      • Consumers' surplus = a

      • Producers' surplus = b + c + d + f + g + h + i + j + k + m

      • Total = a + b + c + d + f + g + h + i + j + k + m

      • Gov. pays c + d + e + u + t + v

      • Deadweight loss = c + e + t + v

    3. Welfare for a country impacted by an export subsidy

A Large Country is Impacted by an Export Subsidy

A Large Country is Impacted by an Export Subsidy

    1. Welfare for large country with free trade

      • Consumers' surplus = n + q + r

      • Producer welfare = s + w

      • Total = n + q + r + s + w

    2. Welfare for large country with a subsidy

      • Consumers' surplus = n + q + r + s + t + u + v

      • Producers' surplus = w

      • Total = n + q + r + s + t + u + v + w

    3. Deadweight loss = c + e + t + v

    4. Note – although the government pays the subsidy to the producer, the large country causes the world price to fall. That is why the foreign consumers benefit. The government is indirectly subsidizing the foreign consumers.

 

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