This blog seeks to decode what is meant by dumping, what is anti-dumping duty and why it is important for business managers to understand these terms.
In economics, dumping is when manufacturers export a product to another country at a price below the fair market price, which can hurt the local manufacturers in the importing country and make them uncompetitive. The purpose of dumping is to increase market share in the international market by reducing competition and thereby creating a monopoly where the exporter will be able to dictate both the price and quality of the product unilaterally. The World Trade Organization (WTO) introduced the Anti-dumping Agreement to promote free trade and reduce protectionism. As per this agreement, dumping is prohibited if it “causes or threatens to cause material injury to the domestic industry in the importing country.” Dumping is also prohibited when it causes “material retardation” to the establishment of an industry in the domestic market of the importing country.
If the importing country considers any of the above scenarios to reflect the reality that it is facing, it can impose “Anti-dumping Duty” (ADD) on the imported products. The imposition of this tax gives a competitive advantage to the local producers as well as to suppliers from other nations, which may be exporting commoditised items.
The anti-dumping measures have, however, been used to retaliate against products of countries that impose ADDs against the products of the host country.
Another critical term to understand in this context is “Market Economy Status (MES).” This is a status given to a country exporting the goods. The importing country accepts the prices of imported goods from the country that has MES. The prices of the items exported by the country with MES are considered as a benchmark.
Since 2017, China has been in dispute with the European Union (EU) at the WTO for getting MES. The EU’s opposition is mainly due to high government subsidies given to Chinese companies in various sectors in their home country. These subsidies decrease the cost of production to artificially low levels and thus eliminate competition from any other country. The Chinese steel industry, is an excellent example. It receives massive energy subsidies from the Chinese government*.
With China losing this dispute, the EU and other nations can now apply anti-dumping duties on Chinese products, especially in the steel industry. This is good news for Indian steel producers. To counter some of these aberrations unleashed by the Chinese government, the Indian government has also announced significant subsidies to domestic electronic manufacturers, especially those manufacturing mobile phones. This is the fastest-growing market in the country. However, despite these subsidies, China might continue to dominate the electronics manufacturing market. The manufacturers in China get continuous support from the Chinese government, including subsidies in electricity, water, and access to excellent infrastructure, including waste disposal management. Moreover, their labour rates are mandated by government fiat. Together, these factors converge to provide undue advantage to Chinese manufacturers. However, in the steel industry, the story might be different, since India has a mature steel manufacturing sector with the capacity and capability to effectively compete with China.
* Refer to: https://hbr.org/2008/06/subsidies-and-the-china-price
Written by Astha Sharma, ISB-Centre for Business Markets