Chapter 7: Trade Policies: Dumping and Export Subsidies
Chapter 7 Introduction
Learning Objectives
After reading this chapter, you should be able to
- Identify the economic effects of dumping and export subsidies.
- Identify the economic effects of anti-dumping and countervailing duties.
- Describe how dumping and export subsidies can lead to trade disputes.
- Discuss the dispute settlement process of the World Trade Organization.
- Discuss proposals for reform of the World Trade Organization rules relating to dumping.
Think About It!
Video: Free Trade vs. Protectionism
Before reading this chapter, watch this video outlining the basic concept of dumping and export subsidies.
Source: International Trade Administration. (2020, February 13). How dumping and unfair subsidies impact trade. [Video]. YouTube. https://www.youtube.com/watch?v=6qFkn_4duj0
Reflection Questions
Before delving into the discussion, we encourage you to reflect on the following questions:
- Why do you think that producers in any country would want to sell their products cheaply in foreign markets? In other words, what benefit do these producers get from sch sales?
- What effects do you think such low-priced sales will have on consumers in importing countries?
- Why do you think a national government would want to subsidize exports?
- What effects do you think export subsidies will have on producers and consumers in the exporting country and on consumers in the importing country?
Introduction
In this chapter, we describe the use of dumping and export subsidies in international trade and evaluate their effects on economic well-being, domestically and abroad. National governments and their domestic producers often adopt dumping and export subsidies are strategies to boost domestic exports. Dumping involves selling products in foreign markets at prices either below those for domestic sales or below the average total cost of production. Export subsidies are payments or other financial incentives given to producers to promote exports.
We will see that both dumping and export subsidies benefit importing-country consumers as well as the importing countries as a whole. These policies also benefit producers in exporting countries as they can expand the size of their market by making sales to foreign customers. Meanwhile, exporting-country consumers suffer economic losses as increasing exports raise domestic prices. While the exporting country can benefit economically from dumping, export subsidies lead to a net national loss.
Notwithstanding the economic gains that importing countries get from dumping and export subsidies, their governments are often concerned that domestic producers are injured by cheap imports. As a result, they attempt to “level the playing field” by imposing import duties designed to offset any advantages that foreign producers have in their domestic market. These duties, of course, remove the gains that importing-country consumers get from dumping and export subsidies but, as we will see, lead to an efficient global allocation of resources.
However, we recognize that the imposition by national governments of offsetting duties aimed at removing unfair advantages that foreign producers have in their domestic market can prompt retaliation by other countries and eventually lead to international trade disputes. Therefore, we will discuss the procedure for the resolution of trade disputes under the WTO and evaluate its effectiveness. Last, we examine several proposals for the reform of the dispute resolution mechanism of the WTO.
