Introduction to
Economics
Lesson 10 / 07
DUMPING
Virtually all
economists are agreed on the desirability of engaging in trade and the
benefit to be achieved by all concerned in its practice.
This is the result of the fact that trade is not, as it is often
mistakenly thought to be, an exchange of items of equal value.
Rather, absent violence or fraud, each party to a trade or
exchange acquires something that he or she values more than what he or
she is giving up. If this
were not the case the trade or exchange would not take place.
In the parlance of
games, trade is thus not a zero-sum activity, in which the gain of one
participant is matched or paid for by the loss of the other.
Rather trade is properly described as a positive-sum game; it is
a win-win situation for the parties concerned.
Protectionism
Protectionism is
the application of force to restrain the occurrence of trade, which
would otherwise take place. Since
being forced to abstain from trade is, on its face, detrimental to the
parties restrained, proponents of protectionism have been required to
produce arguments and explanations to justify such measures.
As the fallacies in the more traditional reasons advanced for
protection have been exposed, would be protectionists have been forced
to seek newer and more sophisticated arguments. For modern
protectionists, the concept of dumping has proven particularly
attractive.
In economic terms,
dumping can refer to any form of predatory pricing, including the
practice of a domestic firm selling its product in the domestic market
at a low price, even below cost, with the aim thereby of achieving
market share, and of ultimately driving its competitors out of business.
This having been achieved, the dumper is then theoretically in a
monopoly position, and able to exploit the consumer by charging supra
competitive prices, in the process recouping the losses previously
incurred in the process of dumping
In popular terms,
however the word dumping has been used to refer to the concept of a
foreigner exporting a product into a country’s domestic market and
selling it there at a price below the normal price of such product, as
charged in the foreign producer’s own domestic market.
In theory such could occur with the intent of driving local
producers out of business and thereafter the foreign producer being able
to exploit that country’s consumers by charging supra competitive
prices. The reality is
however almost impossible. To that extent, the concept of dumping is political rather
than economic.
As a general
proposition lower prices benefit consumers.
Lower prices in particular benefit poorer consumers.
However because individual producers have generally a greater
interest and incentive to achieve producer protection than individual
consumers have in achieving consumer protection, what tends to occur in
practice is the effective capture of consumer protection
instrumentalities and authorities by producers, who then use the power
of such instrumentality or authority against rather than in favour of
the consumer, Trying to prevent this tendency is akin to trying to make
water run uphill; it is contrary to the natural order.
Under the World
Trade Organization Agreement, dumping, defined as the act of charging a
lower price by the producer in a foreign market than for the same
product in the producer’s domestic market, is condemned but not
outlawed. What can take
place however is the initiation, if domestic producers in the importing
country are injured by such practice, of anti-dumping duties on such
imported produce. Similarly
if the country of export has subsidised its producers in exporting the
product the importing country can impose a countervailing duty to offset
the effect of the subsidy. In
Australia, such a program is conducted by the Australian Customs
Service. In affect it is seen as an aspect of border protection.
As a concept,
Dumping, needless to say, is subject to considerable criticism by free
trade and consumer organisations, particularly for its methodology in
attempting to establish what is the alleged normal or fair price for the
product being allegedly dumped.
A Case Study
The Australian
prawn industry provides an interesting case study of the interaction of
various competing interests. Australian
prawns [or shrimp as they are sometimes referred to] are reputed by many
to be the best tasting in the world, particularly those from the waters
of northern Australia. For
the Australian consumer, however, they have in the recent past been
somewhat of a delicacy, retailing in urban supermarkets at around $30+
per kilo.
In the last year or two, purchasers of prawns have seen the
price plummet. Cooked and
peeled prawns are now available for purchase at less than $10 a kilo. They are in affect, now cheaper than beef or lamb. Australians
are eating an increasingly greater volume of prawns. This
is not however a result of increased Australian productivity but because
of a flood of cheap imports of frozen, farm-produced prawns from China,
Vietnam and Thailand.
Australia’s
northern waters, from Kimberley in the west to Weipa on Cape York
Peninsula in the east, an area of roughly 1 million square kilometres,
supports an industry worth annually in recent years about $100 million.
It is however an industry in significant decline.
In 1983 there were 298 trawlers operating in the Northern Prawn
Fleet. Last year the number
was down to about 80. Rising
costs, particularly for diesel and crew wages and reduced catches have
been partly to blame. Largely
however the problem is one of cheap imports.
Australian prawn
fishermen are not the only ones to suffer.
In the USA, a similar situation prevails.
Shrimp consumption has never been higher and prices are low and
falling. Shrimp trawling in
the Gulf of Mexico, however, the traditional shrimp fishing area, has
significantly declined. In
the movie, Forrest Gump made his fortune from shrimp trawling, but today
it is likely that he would be filing for bankruptcy.
Fishermen in both countries have reacted in similar fashion,
turning to the government for assistance and for protection against
cheap foreign imports, allegedly being dumped in the home market by
their foreign producers.
As claimed, the
foreign producers of farmed prawns have conspired together to flood
Australia with frozen prawns sold below cost with the intention of
driving Australian prawn fishermen out of business.
When that object has been achieved, it is claimed the foreign
suppliers will be able to control the Australian market and will exploit
Australian consumers by charging excessively high prices for their
product. On the evidence,
however, the reality is significantly different.
Modern prawn
farming largely began in the early 1970s and has grown steadily ever
since. In 1985 it accounted
for 10% of the world production. In
2001 this had grown to 40%. Farming
is a less expensive, more efficient and more reliable way of producing
prawns for food than trawling. Prawn
farming now occurs in more than 50 countries and the idea that any group
of foreign producers, having driven the Australian fishermen out of
business, could thereafter hold Australian consumers to ransom is
laughable. Whilst a niche
luxury market for trawler-caught, wild prawns is likely to continue, the
bulk of prawns produced in the future are almost inevitably going to be
farmed.
David Sharp
10 July 2007