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Chapter 10 OverviewChapters 7 through 9 focused on government policies toward imports, with little attention to government policies and business practices in the exporting countries. This chapter shifts to looking at various practices and policies that can increase exports, as well as the effects of these export-promoting activities on importing countries. The chapter has four major purposes: 1. Examine dumping—what it is, why it occurs, how it affects importing countries, and what government policies are used in importing countries. 2. Examine export subsidies, looking at the same set of issues. 3. Examine actual experience in six industries in which government policies may have helped new exporters. 4. Look at recent evidence on whether the Japanese government used industrial
targeting to promote Japan's export industries of the future. Dumping is selling exports at a price that is "too low." There are two standards sanctioned by WTO rules: selling exports at a price that is lower than the price in the home market (or in third country markets), or selling exports at a price that is lower than the full average cost of production (including a profit margin). The legal standard is one or the other, not both. There are at least four different reasons that a exporter would dump (based on one or the other of the two definitions). Predatory dumping is intended to drive out rivals. Cyclical dumping occurs during an industry downturn in demand, with sales below average cost. Seasonal dumping unloads excess inventories, especially on products that are perishable or going out of fashion. Persistent dumping is international price discrimination, with the exporting firm facing a less elastic demand curve in the home market, and having some way to limit or prevent reimport back into its home market. What should the importing country think of dumping? The first reaction should be to welcome it—why argue if someone is willing to sell you something at a low price? This seems to be the best reaction to both seasonal and persistent dumping. The importing country could have additional concerns about cyclical dumping. If used aggressively, it can export unemployment. Predatory dumping is potentially the most troubling to the importing country. If the exporter succeeds, it will raise prices in the future, and the importing country can be harmed. But predatory dumping probably rare. Actual importing-country government policies toward dumping generally do not make these economically sensible distinctions. The policy usually investigates alleged dumping by looking at whether the export price is too low, by either standard, and looking at whether there is injury to domestic industry. If both are found, then the importing country imposes antidumping duties equal to the difference between the low export price and the "normal price " or "fair market value." The policy does not look at the overall effect of alleged dumping on the national well-being of the importing country, because it does not examine the effects on domestic consumers, and it does not attempt to determine the reason for the dumping. It appears that the process is biased in favor of finding dumping and imposing antidumping duties. And even the threat of a dumping suit can induce foreign exporters to raise their prices. Antidumping policy has become a way for import-competing producers to gain new protection against imports. Governments in exporting countries sometimes use export subsidies to increase their exports. These export subsidies create inefficiency by distorting domestic production, and they discriminate against consumers in the exporting countries. WTO rules generally prohibit export subsidies and permit importing countries to impose countervailing duties in response. We examine the peculiar economics of all of this, using the case in which the export subsidy lowers the price of exports, and the market is otherwise competitive. Because of the lower import price, the importing country gains well-being in the shift from free trade with no subsidy to free trade with the foreign export subsidy (and no countervailing duty). If the importing country then imposes a countervailing duty, the importing country still gains, in comparison with free trade with no subsidy and duty, but it does not gain as much as it would if it did not impose the duty. The economics of an export subsidy are rather different if the market is not perfectly competitive—a major insight of strategic trade policy. The text shows the example of competition between Boeing and Airbus for the world market for a new type of airplane. With no government support, it is possible that neither firm will enter the new market, because both will lose if both enter. But if one government offers a suitable subsidy, its firm will enter. If the other government does not offer support, then the other firm will not enter, and the first firm will earn high profits, bringing a benefit to its country and possibly to the entire world. But, if the other government also offers a subsidy, both firms produce. The world's consumers gain, but each of the producing countries can end up with lower well-being because of its firm's loss net of the government subsidy (the subsidy is a transfer within the country). The chapter then turns to looking at how big a role government support has actually played in aiding the rise of new exporters in six industries. The analysis is simply looking at whether government assistance played an important role. It is not a full analysis of whether the government assistance increased net national well-being. In three of these sectors—steel, automobiles, and apparel—government played a small role. In television and semiconductors, Japanese government support played some role, but it probably was not large, and the Japanese industries recently have suffered some reversals. In aircraft, government support was large, and it has had the effect of establishing the U.S. industry (Boeing) as the leader and the European industry (Airbus) as the effective challenger. The chapter concludes with a look at recent evidence on Japanese government assistance to industry. The evidence shows that the Japanese government has not had a coherent industrial targeting policy that has favored high-growth industries that can succeed as exporters. Rather, relatively larger amounts of various types of government assistance have tended to go to slower growing industries in Japan. Objectives of the Chapter In contrast to limiting the number of imports into a country, governments may actively promote exports of goods from a country. While this sounds like a policy of encouraging free trade, in their practice it is implemented to gain some "unfair" advantage over another exporting country or over the import competing firms in a country. After studying Chapter Ten you should understand:
Key Terms Antidumping duty: Tariffs sanctioned under the International Anti Dumping Code (signed by most members of the WTO) to counteract or prevent dumping. Countervailing import duties: Retaliatory duties against a foreign government subsidizing exports into your national market. Dumping: A form of international price discrimination in which an exporting firm sells at a lower price in a foreign market than it charges in other markets (usually its domestic market) or sells its exports at a price that is below its costs. Export subsidy: Government policy to encourage export of goods and discourage sale of goods on the domestic market through low cost loans or tax relief for exporters, government financed international advertising, etc. Industrial targeting: Having government and industry agree in advance on which industrial products need encouragement and subsidy in anticipation of being able to export them in the future. Persistent dumping: Dumping that goes on indefinitely, as opposed to "cyclical dumping," which occurs only during periods of economic downturn, or predatory dumping. It is used by firms who can price discriminate between markets. Predatory dumping: This type of dumping occurs when the firm temporarily discriminates in favor of some foreign buyers with the intent of eliminating competitors and later raising its price after the competition is dead. Strategic trade policy: A government campaign to develop export advantage and cut imports in targeted sectors, to gain world market shares in global oligopoly industries. Warm up Questions True or False? Explain 1. T / F An export subsidy is more common than an export duty. 2. T / F Although it discourages most tariffs, the WTO allows an importing country to levy antidumping tariffs. 3. T / F Strategic trade policy and predatory dumping are weapons of economic warfare. 4. T / F Japan is the world's leading steel exporter. 5. T / F If a country levies a countervailing duty against a subsidized exporter, trade volumes and prices end up being about the same as those that would exist without the subsidy and duty. Multiple Choice 1. Which of the following is a correct statement?
2. In 1970, one major dumping case was brought against Sony of Japan. Sony was selling televisions made in Japan to U.S. consumers for $180 while charging Japanese consumers $333 for the same model. In response to the threat issued by the U.S. government, Sony shifted its supply for the U.S. market to a plant built in California, but did not change prices of televisions in either country. This case best describes:
3. If a foreign government is subsidizing exports into your national market, what should you do to maximize the net welfare effect on your nation (assuming no monopsony power)?
4. For profitable persistent dumping to take place the:
5. Governments have frequently used export promoting policies in:
Problems 1. Suppose that Leinster subsidizes exports of telephones to Saxony. How would that affect the level of welfare in Leinster and in Saxony? 2. Describe how each of the following policies could plausibly bring a net gain to the world as a whole:
3. Continuing with the export subsidy on Leinster's telephones:
4. Suppose that a European steel manufacturing firm is acting as a discriminating monopolist when selling at home and exporting to the United States.
5. Which of the following television exporting countries is guilty of dumping in the Saudi Arabian market?
Discussion Topics 1. Try to formulate arguments for export subsidies in terms of the national defense and the infant industry models. 2. What sectors (if any) do you think are likely to receive future export promotion from the U.S. government? Suggested answers to questions and problems (in the textbook)2. The objectives of the revision should be make antidumping policy contribute to U. S. national well-being. The policy should be targeted toward predatory dumping and aggressive cyclical dumping. It should take into account domestic consumer interests as well as domestic producer interests. It generally should not impose antidumping duties on persistent dumping that involves international price discrimination in favor of U.S. buyers. The specific provisions could include the following. First, the definition of dumping should be changed. Dumping should be defined as pricing an export below the average variable cost (or marginal cost) of production. This change will permit the definition of dumping to be focused on overly aggressive pricing that is often characteristic of predatory dumping or aggressive cyclical dumping. Second, the test for injury should include consideration of benefits to domestic consumers from low-priced imports, in addition to harm to domestic producers. The injury test should be a test of effect on net national well-being. A radical alternative is to abolish the antidumping law, and instead focus on prosecuting any predatory dumping using U.S. antitrust laws that prohibit monopolization. 4. A countervailing duty is a tariff imposed to offset the amount by which a foreign government subsidizes its exports to the country imposing the duty. 6. a. With free trade, price is
P0 and the quantity exported and imported is M0. The export subsidy "artificially" shifts the export supply curve
down to SX'. (The original SX curve still shows the resource cost of exports,
but the foreign exporters are willing to sell at the lower market prices shown
by SX' because the foreign government also pays them the export subsidy.) The
international market price falls to P1 and the quantity traded increases to
M1. b. The countervailing duty returns the market to P0 and M0. This is good for the world, because the marginal resource cost of the last unit exported (shown by the height of SX at M0) just equals the marginal benefit of that unit to the buyer (shown by the height of DM at M0). We return to the economic efficiency of the free-trade outcome. The export subsidy alone caused a global economic inefficiency equal to triangle ABC, the inefficiency of too much exporting. In comparison with just the export subsidy, the countervailing duty can increase the well-being of the importing country, in the same way that a tariff can increase the well-being of a large country. By imposing the countervailing duty, the importing country loses triangle ACF and gains rectangle P1FEPS. The importing country gains if the rectangle is larger than the triangle. 8. No, according to careful recent research. Instead the Japanese government tends to provide relatively greater assistance to the slower-growing industries in the economy. 10. One way is to say that most actual and potential export industries are highly competitive. In this case, export subsidies distort resource allocation within the economy, leading to overproduction of the exportable goods. The export subsidies bring a national net loss, with the case of Korean steel as an example. Another example is Europe's development of the Concorde, an airplane that almost no airlines bought, because it was uneconomic even with the subsidies. The counter to the infant industry argument is that in most cases the infant fails to grow up, so the country then faces the choice of whether or not to provide ongoing assistance to a high-cost, uncompetitive industry.
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