What Is “Dumping”?

Supposedly, dumping is the practice of a foreign company “selling below cost”—but in almost all cases, the dumping company is not losing money.

© 2018, Farok J. Contractor, Rutgers Business School

(Also see my April 13, 2018 post,TEN QUICK FACTS ABOUT US TRADE: Deficits, Dumping, and Discords, in which I introduced the topic of dumping in Fact 9.)

All over the world each year, thousands of local companies are filing cases and complaints with their governments alleging they are being hurt by foreign firms “dumping” their products or services in their countries at an “unfairly” low cost. The US alone has acted against imports from more than 60 nations.[1] Diverse product types—steel, aluminum, crawfish, honey, magnets, pencils, TVs, apple juice, canvas, shelving, nails, crepe paper, and pasta, to name but a few—are among many thousands of items arriving on foreign shores each year. With trade disputes ramping up around the world, dumping is becoming a larger issue between governments.

Dumping is reviled as a practice in which unscrupulous importers are said to be (a) selling “below cost,” (b) thereby unfairly hurting competing local producers. But on the face of it, (a) can be true only infrequently. Otherwise, why would thousands of such dumping firms be willing to lose money, often for years on end? However, (b) is true because dumping forces local producers to also reduce their prices, hurting their profits and occasionally driving them to lay off workers or even close their businesses.

But is dumping really selling below cost?

No, in most cases it is not. The selling price of the imported item may be low, but it almost always is above the variable cost of production and distribution. This is true in manufactured goods, and especially true in the knowledge economy.

An Example of Dumping: Sunk, Fixed, and Variable Costs 

Consider a firm that has developed a new software package after incurring $3.25 million in R&D costs. These costs are already incurred, or “sunk,” although the company may wish to amortize them on a 10-year basis, at $325,000 per year.

The company’s fixed costs—the indispensable annual costs that cover factory, equipment, rentals, insurance, key personnel salaries, etc., regardless of the volume of production or sales—are $14 million per year.

On the other hand, variable costs—for labor, materials, etc.—are incurred only if a unit of software is produced and sold. For our example company, this is a mere $2 per unit, because, not counting R&D and fixed costs, the incremental cost to produce and sell one more software unit on a thumb drive, CD, or download is only $2. The maximum production capacity is 5 million software units per year.

Initial sales of 3 million units by the company were in the domestic market at a $10 price, which earned a profit margin of $9.675 million, as shown in Table 1 below. The average cost (or cost on average per unit of production) worked out to be $6.775 per unit. But with the installed capacity of the factory being 5 million units, 2 million units of excess capacity remained, which could be used to develop foreign markets.

The company then indeed began to export to foreign markets, but found that sales were price sensitive and they could not sustain anywhere near a $10 unit price. In fact, in order to sell internationally, the company had to price very low, at $3.50 each, as seen below. At that price, they could sell 1 million units abroad.

Table 1. Typical Example of “Dumping” Where the Company Really Does Not Lose Money

Click to enlarge

Competing producers of comparable software in those countries immediately began to complain and then launched anti-dumping cases against our example company. They alleged that the nasty foreign firm was dumping product at $3.50, whereas the same software was priced in its domestic market at $10 per unit. They added, “We suspect that the $3.50 price is well below the dumping company‘s cost.”

Typically, such cost information is a proprietary secret that companies refuse to disclose. But based on the above example, we can answer some questions, from the point of view of the focal firm:

  • Is the firm losing money by selling at $3.50?

Answer: No, despite a very low price—in fact, they are making an incremental profit in the foreign market of $1,500,000.

  • Do the foreign market sales in any way reduce the domestic market earnings or profits?

Answer: No, the R&D amortization and fixed costs are already covered by domestic sales revenue and do not change—as long as the domestic and foreign markets are separate and segmented so that a low price in one nation does not affect price levels in other nations. (This is also a reasonable assumption in many cases.)

  • What is the lowest, or “floor,” price? If the firm chose to, what is the lowest or minimum price it could sell at in a very poor or price-sensitive nation and still earn an incremental profit?

Answer: $2.01, or one cent above the variable cost floor. (Below the $2 level the firm would indeed lose money on every item it sells. But this scenario is very rare.)

Multinational Companies Practice Price Discrimination 

Most international marketers will price the same software, or camera, or washing machine, or whatever item, according to what each nation’s customers can bear. They do this because the income levels, culture, and purchasing power of customers varies dramatically across nations. Hence, the multinational company is forced to price the same item at very different price points, depending on the country in question. And there can be enormous price variations—in our above example, ranging from $2.01 to $10 or even higher if consumers in a particular nation are willing to pay more. Global price discrimination is ubiquitous and is a common practice that maximizes the multinational company’s overall global revenue and profits.

Alleged Dumping by Chinese Steel and Aluminum Producers

Chinese steel and aluminum imports, allegedly dumped according to the Trump administration, are a similar example.[2] Excess capacity was installed in China (in huge factories, far more than the domestic Chinese market demand required). This was aided by cheap loans and land given by the Chinese central and provincial authorities, driven by a “build it and they will come” mentality.[3] As long as the domestic Chinese market’s fixed costs are covered, and profits are made, the Chinese steel and aluminum producers can then sell in the US market at very low prices, which are likely still above their variable cost floor per ton. The Chinese companies are probably not really losing money.

Unsurprisingly, this has hurt steel and aluminum producers in the US, and all over the world, who do not play the same multicountry price-discrimination game,[4] resulting in layoffs and closures in the US and Europe. Pain and hurt indeed. But with the pain, there is also gain. Let us not forget that this dumping has also resulted in a multibillion-dollar benefit to the US and European economies with cheaper steel and aluminum in cars, appliances, machinery, and any product that uses steel.

Anti-Dumping Measures 

Most complaints made by local producers against dumping imports, numbering in the tens of thousands, are simply ignored by their governments. This is often the case because under WTO (World Trade Organization) rules, before any anti-dumping duties are levied, material injury to the industry from imports being allowed into the importing country must be demonstrated. This is difficult to prove—and may not be true. Nevertheless, many thousands of complaints end up with governments levying extra anti-dumping customs duties (or tariffs) on the imports. If the exporting country objects, the case may be arbitrated in WTO tribunals.

But how is the additional anti-dumping tariff actually calculated by the concerned local government?

To put it bluntly, most scholars would admit that no rational economic or accounting method exists. Many governments base their calculation on two hypothetical questions: (1) Is the same item being sold in the exporting country, or other countries, at a higher price? (2) What would the imported/dumped product cost if the same item were made by another similar third-country producer, or made locally?

For example, in April 2018, the US Court of International Trade (an agency of the US Department of Commerce) came up with a calculation of $3.87 per kilogram anti-dumping tariff on Vietnamese fish fillet imports. This seems like a very precise scientific calculation and is based on a lot of underlying data.[5] But in fact, such calculations are most often based on a very shaky framework of assumptions. For example, if similar fish were processed in a country other than Vietnam, is that a fair comparison? Would the freshness, taste, species of fish, labor, capital, or transport costs, etc., be the same? No, certainly not exactly. Hence, the calculation is far from exact. Moreover, Vietnam would argue that it is not subsidies, but rather efficient low-cost labor, refrigeration facilities, a long coastline, and other similar assets that give the country a comparative advantage in this business. Therefore, it would say that anti-dumping duties are simply negating its natural advantage as a low-cost producer and making fish more expensive to US consumers.

In a classic case, mocked by the business press several decades ago, the US launched an investigation against Polish golf carts allegedly being dumped in the US market.[6] The problem was that no golf carts were then being sold in Poland. Indeed, at that time Poland did not even have any golf courses. The Polish factory’s production was 100 percent exported. So no comparison could be made between the US market price and the Polish market price for a golf cart. Moreover, the only other import of golf carts into the US was from Canada—whose economics and cost structure were hardly comparable to those of Poland.

This kind of dilemma still applies in thousands of instances. A large number of Chinese factories produce goods or components 100 percent for export outside China, so that there is no China market price available for comparison. Moreover, the Chinese export is custom-designed and custom-ordered by the US importer, so that there is no exactly comparable product. Or it could be a unique item, or a subassembly or subcomponent, for which there is no similar production anywhere else. How then to make a comparative-cost calculation?

The Gains and Pains of International Trade 

International trade creates “pain” when imports displace local production, jobs are cut, and some local producers are forced out of business. But international trade also creates “gains,” which for the most part considerably outweigh the pain. Across thousands of products and services, amounting to hundreds of billions of dollars, consumers benefit if they pay lower prices for imports. In an earlier post[7] I calculated that if Chinese consumer goods imports were hypothetically replaced by US domestic production, each of the 124 million households in the US would have to pay $2,380 more annually—amounting to an additional cost of $295 billion for all consumers. (And this was only for consumer items imported from China, not counting intermediate or industrial goods.) Allowing Chinese consumer goods into the US, therefore, saves American households $296 billion each year, which more than offsets the pain or loss to American industry.

Tariff protection against imports by the same token, hurts consumers. Take just one item—fish consumed by Americans. Fish sellers and restaurants in the US would argue that American consumers are being unfairly and unnecessarily bearing the extra $3.87 per kilo cost just for Vietnamese fish fillets,[8] with this protection also raising the price of other fish caught in the US and elsewhere. Altogether, for all 327 million consumers in the US, the additional expense for fish likely amounts to hundreds of millions of dollars.

Many argue that protection against imports is necessary if production in China and other nations takes away jobs from the US. This would be a reasonable consideration were it not for the fact that the US is already a full-employment economy, with companies actually finding it difficult to fill positions. The US Bureau of Labor Statistics reported that the number of job openings reached a series high of 7.1 million on the last business day of August 2018. Other reports indicate that American firms find it chronically difficult to fill as many as 900,000 positions. Statistics aside, there is no doubt that thousands of Americans have been disadvantaged by import competition—because even when they are employed, US workers’ wages are dampened by the specter of competition from imports.

Conclusions

The economy-wide benefits of cheap imports, be it steel from China or fish from Vietnam—resulting in cheaper cars, appliances, and food for consumers—likely exceed the pain, suffering, and costs borne by shareholders and workers in the closed steel factories by a large margin, measured in billions of dollars. These advantages also compensate for the lower wages of fishermen in Massachusetts, Louisiana, and across the entire US economy.

Politically, the voices of those feeling the “pain” of international trade are often louder than the voices of the entire population that enjoys the “gains” from international trade. This is because the economy-wide benefits of international trade are widely diffused across, for example, all 327 million US consumers, who do not notice the benefit when each fish is eaten or when each car or appliance is purchased. By contrast, the pain and wage losses are more concentrated over only some thousands of affected workers in a minority of industries.

Levying tariffs and anti-dumping duties eventually raises costs for the entire population and is inefficient. What is a better solution? An enlightened and benevolent society could ameliorate the concentrated pain and suffering in a few industries through tax benefits, adjustment grants, retraining, and similar assistance given to individuals and companies adversely affected by imports. At the same time, the entire population would then enjoy, across the entire range of consumption, the benefits of lower-cost imports.

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References

[1] See government list.

[2] China dismay as Trump signs off steel, aluminum tariffs. DW.com, September 3, 2018.

[3] This is a saying popular in US culture from the 1989 movie Field of Dreams. Also see AFI’s 100Years…100 Movie Quotes compiled by the American Film Institute.

[4] China being a relatively closed market that foreign firms cannot enter, US and European companies simply cannot play the same game in China in order to neutralize the Chinese rivals’ multicountry price-discrimination advantage.

[5] Fuller, J.C. (2018). Vietnamese fish producers challenge antidumping duty rates. International Trade Law Compass (April 15).

[6] Rowe, J.L. Jr. (1978). Polish golf carts present trade problem for U.S. The Washington Post (August 5).

Andelman, D.A. (1979). Those Polish golf carts are no toke. The New York Times (January 28).

[7] Contractor, F.J. (2017). What’s at stake in China-US relations? An estimate of jobs and money involved in the bilateral economic tie. GlobalBusiness.blog (March 10).

[8] In addition, fish caught off Massachusetts, or Louisiana, could also then be sold at a higher price, so that all seafood ends up costing more—to the tune of hundreds of millions of dollars per year.

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