Chapter 7 Summary

LO 7.1 Economic Effects of Dumping and Export Subsidies

• Two strategies that governments and their domestic producers use to raise foreign sales are dumping and export subsidies, which are unfair trade practices.
• Dumping is selling in foreign markets at prices below fair market value, which is either the price in the producer’s domestic market (or in a third-country market) or average total cost of production.
• Different types of dumping are predatory dumping, sporadic dumping, and persistent dumping. In predatory dumping, the foreign firm initially charges a low price but later raises the price after domestic rivals have left the market. Sporadic dumping entails the firm disposing of excess inventories abroad at low prices. Persistent dumping occurs when the firm uses international price discrimination.
• A small importing country benefits from dumping because the gain in consumer surplus is more than sufficient to compensate for the loss suffered by domestic producers.
• An export subsidy is a payment or other financial incentive to producers per unit of exports to encourage them to increase sales abroad.
• While an export subsidy raises the product’s price and benefits producers as they expand production and exports, domestic consumers and the nation are worse off due to lower consumption and the cost of the subsidy. This result is true whether the country providing the subsidy is small or large.

LO 7.2 Economic Effects of Anti-Dumping and Countervailing Duties

• The rules of the WTO permit countries to retaliate with anti-dumping duties if dumping is found to materially injure import-competing domestic producers.
• An anti-dumping duty benefits domestic producers in the importing country but hurts consumers, the nation, and the world.
• WTO rules also allow an importing country to counteract unfair subsidies that hurt its domestic producers with countervailing duties.
• Countervailing duties benefit domestic producers in importing countries but hurt consumers and the nation compared with the situation with the export subsidy. However, countervailing duties are good for the world as they eliminate excessive trade and inefficient overproduction.

LO 7.3 How Dumping and Export Subsidies Can Lead to Trade Disputes

• Domestic producers, when faced with dumping and export subsidies, are usually successful in getting their national governments to impose anti-dumping and countervailing duties.
• Anti-dumping and countervailing duties, although legitimate under the rules of the WTO, can lead to retaliation by the exporting countries and can trigger trade wars.
• Recognizing the potential for trade wars, a procedure for resolving international trade disputes is included in the rules of the WTO.

LO 7.4 The Dispute Settlement Process of the World Trade Organization

• The WTO procedure for resolving trade disputes between countries involves four steps – consultation, adjudication, implementation of the ruling, and appeal.
• If a country that is judged to be in violation fails to change its policy in keeping with the decision or to provide appropriate compensation, the WTO may allow the country bringing the complaint to retaliate.
• Retaliation, usually in the form of high tariffs on a range of the offending country’s products, is rare.

LO 7.5 Proposals for Reforming WTO Rules Relating to Dumping

• Proposals for reform of WTO rules related to dumping include the following:
  • First, anti-dumping actions should be restricted to situations where predatory dumping might be taking place.
  • Second, in the determination of material injury, the measure of economic well-being should be broadened to include not just the benefits or losses of producers but also those of consumers and other interest groups.
  • Third, a safeguard policy might be more actively used in place of anti-dumping duties to provide temporary protection from imports that materially injure domestic producers, allowing them some time for adjustment.

Check Your Understanding