Dumping
Adding trade costs to our model of monopolistic competition also added another dimension
of realism: Because markets are no longer perfectly integrated through costless trade,
firms can choose to set different prices in different markets. The trade costs also affect how
a firm responds to competition in a market. Recall that a firm with a higher marginal cost
will choose to set a lower markup over marginal cost (this firm faces more intense competition
due to its lower market share). This means that an exporting firm will respond to the
trade cost by lowering its markup for the export market.
Consider the case of firm 1 in Figure 8-8. It faces a higher marginal cost in the
Foreign export market. Let and denote the prices that firm 1 sets on its domestic
(Home) market and export (Foreign) market, respectively. Firm 1 sets a lower markup
on the export market relative to its markup on the domestic market.
This in turn implies that , and that firm 1 sets an export price (net of trade
costs) that is lower than its domestic price.
That is considered dumping by firm 1, and is regarded by most countries as an “unfair”
trade practice. Any firm from Foreign can appeal to its local authorities (in the United
States, the Commerce Department and the International Trade Commission are the relevant
authorities) and seek punitive damages against firm 1. This usually takes the form of
an antidumping duty imposed on firm 1, and would usually be scaled to the price difference
between and P1 .17
P X - t 1
D
P1
X - t 6 P1
D
P1
P D - c1 1
X - (c1 + t)
P1
P X 1
D
c1 + t
ci
ci 7 c*
c* - t 6 ci … c*
ci ci … c* - t
c1 + t … c*
c2 + t 7 c*
c2 … c*
16See A. B. Bernard, J. B. Jensen, S. J. Redding, and P. K. Schott, “Firms in International Trade,” Journal of
Economic Perspectives 21 (Summer 2007), pp. 105–130; and Thierry Mayer and Gianmarco I. P. Ottaviano,
“The Happy Few: The Internationalisation of European Firms: New Facts Based on Firm-Level Evidence,”
Intereconomics 43 (May/June 2008), pp. 135–148.
17 is called firm 1’s ex factory price for the export market (the price at the “factory gate” before the trade
costs are incurred). If firm 1 incurred some transport or delivery cost in its domestic market, then those costs
would be deducted from its domestic price to obtain an ex factory price for the domestic market. Antidumping
duties are based on differences between a firm’s ex factory prices in the domestic and export markets.
P1
D
P1
X - t
CHAPTER 8 Firms in the Global Economy 179
Dumping is a controversial issue in trade policy; we discuss policy disputes surrounding
dumping in Chapter 10. For now, we just note that firm 1 is not behaving any differently
than the foreign firms it is competing against in the Foreign market. In that market,
firm 1 sets exactly the same markup over marginal cost as Foreign firm 2 with marginal
cost . Firm 2’s pricing behavior is perfectly legal, so why is firm 1’s export
pricing decision considered to represent an “unfair” trade practice? This is one major reason
why economists believe that the enforcement of dumping claims is misguided (see the
Case Study below for other reasons) and that there is no good economic justification for
dumping to be considered particularly harmful.
Our model of monopolistic competition highlighted how trade costs have a natural tendency
to induce firms to lower their markups in export markets, where they face more
intense competition due to their reduced market share. This makes it relatively easy for
domestic firms to file a dumping complaint against exporters in their markets. In practice,
those antidumping laws can then be used to erect barriers to trade by discriminating
against exporters in a market.
c2 = c1 + t
Case Study
Antidumping as Protectionism
In the United States and a number of other countries, dumping is regarded as an unfair
competitive practice. U.S. firms that claim to have been injured by foreign firms that
dump their products in the domestic market at low prices can
appeal, through a quasi-judicial procedure, to the Commerce
Department for relief. If their complaint is ruled valid, an
“antidumping duty” is imposed, equal to the calculated difference
between the actual and the “fair” price of imports. In practice,
the Commerce Department accepts the great majority of
complaints by U.S. firms about unfair foreign pricing. The determination
that this unfair pricing has actually caused injury,
however, is in the hands of a different agency, the International
Trade Commission, which rejects about half of its cases.
Economists have never been very happy with the idea of singling
out dumping as a prohibited practice. For one thing, setting different
prices for different customers is a perfectly legitimate business
strategy—like the discounts that airlines offer to students, senior citizens,
and travelers who are willing to stay over a weekend. Also, the
legal definition of dumping deviates substantially from the economic
definition. Since it is often difficult to prove that foreign firms charge
higher prices to domestic than to export customers, the United States
and other nations instead often try to calculate a supposedly fair
price based on estimates of foreign production costs. This “fair price” rule can interfere
with perfectly normal business practices: A firm may well be willing to sell a product for a
loss while it is lowering its costs through experience or breaking into a new market.
In spite of almost universally negative assessments from economists, however, formal
complaints about dumping have been filed with growing frequency since about 1970.
China has attracted a particularly large number of antidumping suits, for two reasons. One
is that China’s rapid export growth has raised many complaints. The other is the fact that
China is still nominally a communist country, and the United States officially considers it a
180 PART ONE International Trade Theory
“nonmarket economy.” A Business Week story described the difference that China’s status
makes: “That means the U.S. can simply ignore Chinese data on costs on the assumption
they are distorted by subsidized loans, rigged markets, and the controlled yuan. Instead, the
government uses data from other developing nations regarded as market economies. In the
TV and furniture cases, the U.S. used India—even though it is not a big exporter of these
goods. Since India’s production costs were higher, China was ruled guilty of dumping.”18
As the quote suggests, China has been subject to antidumping duties on TVs and furniture,
along with a number of other products including crepe paper, hand trucks, shrimp,
ironing tables, plastic shopping bags, steel fence posts, iron pipe fittings, and saccharin.
These duties are high: as high as 78 percent on color TVs and 330 percent on saccharin.
Adding trade costs to our model of monopolistic competition also added another dimension
of realism: Because markets are no longer perfectly integrated through costless trade,
firms can choose to set different prices in different markets. The trade costs also affect how
a firm responds to competition in a market. Recall that a firm with a higher marginal cost
will choose to set a lower markup over marginal cost (this firm faces more intense competition
due to its lower market share). This means that an exporting firm will respond to the
trade cost by lowering its markup for the export market.
Consider the case of firm 1 in Figure 8-8. It faces a higher marginal cost in the
Foreign export market. Let and denote the prices that firm 1 sets on its domestic
(Home) market and export (Foreign) market, respectively. Firm 1 sets a lower markup
on the export market relative to its markup on the domestic market.
This in turn implies that , and that firm 1 sets an export price (net of trade
costs) that is lower than its domestic price.
That is considered dumping by firm 1, and is regarded by most countries as an “unfair”
trade practice. Any firm from Foreign can appeal to its local authorities (in the United
States, the Commerce Department and the International Trade Commission are the relevant
authorities) and seek punitive damages against firm 1. This usually takes the form of
an antidumping duty imposed on firm 1, and would usually be scaled to the price difference
between and P1 .17
P X - t 1
D
P1
X - t 6 P1
D
P1
P D - c1 1
X - (c1 + t)
P1
P X 1
D
c1 + t
ci
ci 7 c*
c* - t 6 ci … c*
ci ci … c* - t
c1 + t … c*
c2 + t 7 c*
c2 … c*
16See A. B. Bernard, J. B. Jensen, S. J. Redding, and P. K. Schott, “Firms in International Trade,” Journal of
Economic Perspectives 21 (Summer 2007), pp. 105–130; and Thierry Mayer and Gianmarco I. P. Ottaviano,
“The Happy Few: The Internationalisation of European Firms: New Facts Based on Firm-Level Evidence,”
Intereconomics 43 (May/June 2008), pp. 135–148.
17 is called firm 1’s ex factory price for the export market (the price at the “factory gate” before the trade
costs are incurred). If firm 1 incurred some transport or delivery cost in its domestic market, then those costs
would be deducted from its domestic price to obtain an ex factory price for the domestic market. Antidumping
duties are based on differences between a firm’s ex factory prices in the domestic and export markets.
P1
D
P1
X - t
CHAPTER 8 Firms in the Global Economy 179
Dumping is a controversial issue in trade policy; we discuss policy disputes surrounding
dumping in Chapter 10. For now, we just note that firm 1 is not behaving any differently
than the foreign firms it is competing against in the Foreign market. In that market,
firm 1 sets exactly the same markup over marginal cost as Foreign firm 2 with marginal
cost . Firm 2’s pricing behavior is perfectly legal, so why is firm 1’s export
pricing decision considered to represent an “unfair” trade practice? This is one major reason
why economists believe that the enforcement of dumping claims is misguided (see the
Case Study below for other reasons) and that there is no good economic justification for
dumping to be considered particularly harmful.
Our model of monopolistic competition highlighted how trade costs have a natural tendency
to induce firms to lower their markups in export markets, where they face more
intense competition due to their reduced market share. This makes it relatively easy for
domestic firms to file a dumping complaint against exporters in their markets. In practice,
those antidumping laws can then be used to erect barriers to trade by discriminating
against exporters in a market.
c2 = c1 + t
Case Study
Antidumping as Protectionism
In the United States and a number of other countries, dumping is regarded as an unfair
competitive practice. U.S. firms that claim to have been injured by foreign firms that
dump their products in the domestic market at low prices can
appeal, through a quasi-judicial procedure, to the Commerce
Department for relief. If their complaint is ruled valid, an
“antidumping duty” is imposed, equal to the calculated difference
between the actual and the “fair” price of imports. In practice,
the Commerce Department accepts the great majority of
complaints by U.S. firms about unfair foreign pricing. The determination
that this unfair pricing has actually caused injury,
however, is in the hands of a different agency, the International
Trade Commission, which rejects about half of its cases.
Economists have never been very happy with the idea of singling
out dumping as a prohibited practice. For one thing, setting different
prices for different customers is a perfectly legitimate business
strategy—like the discounts that airlines offer to students, senior citizens,
and travelers who are willing to stay over a weekend. Also, the
legal definition of dumping deviates substantially from the economic
definition. Since it is often difficult to prove that foreign firms charge
higher prices to domestic than to export customers, the United States
and other nations instead often try to calculate a supposedly fair
price based on estimates of foreign production costs. This “fair price” rule can interfere
with perfectly normal business practices: A firm may well be willing to sell a product for a
loss while it is lowering its costs through experience or breaking into a new market.
In spite of almost universally negative assessments from economists, however, formal
complaints about dumping have been filed with growing frequency since about 1970.
China has attracted a particularly large number of antidumping suits, for two reasons. One
is that China’s rapid export growth has raised many complaints. The other is the fact that
China is still nominally a communist country, and the United States officially considers it a
180 PART ONE International Trade Theory
“nonmarket economy.” A Business Week story described the difference that China’s status
makes: “That means the U.S. can simply ignore Chinese data on costs on the assumption
they are distorted by subsidized loans, rigged markets, and the controlled yuan. Instead, the
government uses data from other developing nations regarded as market economies. In the
TV and furniture cases, the U.S. used India—even though it is not a big exporter of these
goods. Since India’s production costs were higher, China was ruled guilty of dumping.”18
As the quote suggests, China has been subject to antidumping duties on TVs and furniture,
along with a number of other products including crepe paper, hand trucks, shrimp,
ironing tables, plastic shopping bags, steel fence posts, iron pipe fittings, and saccharin.
These duties are high: as high as 78 percent on color TVs and 330 percent on saccharin.
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