Economics for Managers Instructor: Philip Leatherwood
KIMEP, Fall 2000 Student: Nuriya Khabibullina
Group A
Antidumping as Protectionism (USA and Kazakhstan)
In the United States and number of other countries dumping is regarded as an unfair competitive practice. Firms that claim to have been injured by foreign firms who dump their products in the domestic market can appeal to the Commerce Department for relief. If their complaint is ruled valid - and from 1980 to 1995 56 per cent of foreign companies accused of dumping were deemed guilty -an "antidumping duty" is imposed, equal to the calculated difference between the actual and "fair" price of imports.
For one thing, price discrimination between markets may be 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 foreign firms charge higher prices to domestic than export customers, the United States and other nations instead often try to calculate a supposed fair price based on estimates of foreign production costs.
Formal complaints about dumping have been filed with growing frequency since about 1970.
Why may dumping have increased? Because of the uneven pace at which counties have opened up their markets. Since 1970 trade liberation and deregulation have opened up international competition in a number of previously sheltered industries.
A few years ago the United States faced the problem of dumping prices in steel industry with Kazakhstan, as the foreign producer. As Kazakhstan has many reserves of steel, as well as other mineral resources, it is a profitable business for Kazakhstan to trade on a worldwide scale.
As a matter of fact the price for steel products imported from Kazakhstan was much lower than domestic price in the United States. Consequently, the US steel industry had big losses and the domestic producers were not satisfied with a decreasing volume of profits. Because dumping is a legitimate concern, it is prohibited under American trade law. Where dumping occurs and is shown to injure American firms, the Federal government imposes tariffs called "antidumping duties" on the dumped goods. The US Government came to the conclusion to impose antidumping duties on the Kazakhstani steel imports threatening to undermine trade negotiations already in process.
The protection against dumping argument for tariffs contends that tariffs are needed to protect American firms (in this case or any firm in general) from foreign producers that "dump" their excess goods onto the American market at less than cost.
Two reasons have been suggested as to why Kazakhstani producers might wish to sell in America at below cost. First, these producers/firms may use dumping to drive out American competitors, obtain monopoly power, and then raise prices. Secondly, dumping may be a complex form of price discrimination - charging different prices to different customers.
Actually, the fact is that Kazakhstan can produce certain goods at substantially less cost than American competitors. Hence, what on the surface may seem to be dumping often is simply the principle of comparative advantage at work
The cheap foreign labor (in this case it is Kazakhstani) holds that domestic firms and workers must be shielded from the ruinous competition of countries where wages are low. If protection is not provided, cheap imports will flood domestic markets and the prices of these (domestic) goods - along with the wages of the workers - will be pulled down and their living standards reduced. So, the logic of this argument would suggest that it is not mutually beneficial for rich and poor persons to trade with each other.
Even in case Kazakhstani producers raise the price of their steel to the level of world price (Pw), the Kazakhstani producers will get more profit as this level of Pw will be still lower than the price US steel producers charge for their steel. In case the US steel producers reduce the price of their steel products the domestic consumers will benefit from buying cheaper steel products, but still the US (i.e. the producers) will have less profits than Kazakhstan does.
Pusa > Pw > Pkz
Questions to the case:
True or False questions:
___ Domestic and foreign countries have opportunities to trade between each other because of the difference in their production costs.
___ Antidumping tariffs are artificial protective tariffs of the government.
___Antidumping tariffs limit both the imports and the exports of the nation levying these nations.
___ The price at which the country exports a given good is usually lower than its domestic price.
___ The only reason the Government levies antidumping tariffs is that it wants to get profit.
___ There is no difference between antidumping tariffs and protective tariffs.
___ Mutually advantageous specialization and trade are impossible between two nations so long as the domestic cost ratios for any two products differ.
___ Trade barriers take the form of protective tariffs, quotas, non-tariff barriers, and different kinds of export restrictions.
___ After a domestic country introduced such tariffs the foreign importers find their sales diminish.
___ Foreign producers have expenses and get less profit when their selling price is much lower than on the domestic market.
Questions: