The positive and negative effects of the use of anti-dumping policy in developing countries

08/09/2016 12:00 - 1355 total view

Introduction

Despite worldwide decline in the use of tariffs since World War II, the use of Anti-dumping (AD) policy, has risen in absolute and relative importance in recent times (Webb, 1992; Cuyvers and Weifeng, 2008). Defined as a nontariff barrier used by countries to impose penalties on unusually low-priced imports and to safeguard domestic industries from unfair competition, it is by far, one of the most topical protectionist tools that has attracted considerable concerns in international trade discourses. Historically a favourite industrial policy weapon among advanced economies such as the United States, Canada, New Zealand, Australia and the European Union, the use of anti-dumping legislations by most developing economies such as India, Brazil, Mexico, and Argentina among others, is rather a recent phenomenon (Niels, 2000; Finger, Francis and Wangchuk, 2001; Prusa and Skeath, 2002; Baruah, 2007).

Recent estimates by the World Trade Organisation indicate that developing countries – including India, China, South Africa, Argentina, Brazil and Mexico – are now the heaviest users of anti-dumping policies (Mankiw, Gregory and Swagel, 2005). As opposed to 463 anti-dumping cases by developed countries since the Uruguay Round, Finger, Francis and Wangchuk (2001) establish that, developing countries initiated a total of 559 cases. This is confirmed in Prusa (2005) who contends emerging countries use anti-dumping policy 15 to 20 times more often than traditional users such as the European Union and United States.

As with most advanced economies, the use of anti-dumping policies by developing countries comes with both positives and negatives. In the discussions that follow, the paper explores the positive and negative effects of the use of AD legislations in developing countries. It concludes that, despite claims that AD policy helps to achieve anti-competitive outcomes, the welfare consequences of such a policy are enormous, especially from the perspectives of domestic consumers and user enterprises. A thorough examination of the extent of the existence of predation and material injury is thus necessary if AD policy is to remain a key instrument in international trade policy.

Positive Effects of Anti-dumping Policies

Arguing from the “infant industry” standpoint, the use of anti-dumping policies in developing countries helps to shield domestic firms and consumers against “predatory pricing” and monopolistic prices by countering the price advantage exploited by foreign firms on their low-priced exports. Even though in the short-term, dumping yields benefits to domestic consumers through improved access to quality and cheaper products, the long-term economic consequences is considerably expensive. It has the potentials of leading to the failure of domestic firms and eventually exposes consumers to monopolistic prices in the long-run after domestic firms have been out-competed.

By virtue of their technological superiority and cost advantages, most foreign firms are better positioned to sell their exports below the “normal value” in importing countries. In the final analysis, domestic firms suffer the vicissitudes of foreign competition. Towards promoting fair trade, anti-dumping legislations work to discourage foreign firms from selling their exports below the prices of similar products in the domestic markets. By causing foreign firms to alter their pricing decisions to the level that equals the domestic prices, a market where dumping margin is zero and common prices exist for like-products is guaranteed (Reitzes, 1993; Tivig and Walz, 2000).
Similarly, through anti-dumping policies, domestic firms engaged in the production of import-competing goods are able to take over the lost market share of foreign firms (Niels, 2003). In the case of India, which accounted for 16 percent of all global anti-dumping cases for the period 1995-2011, anti-dumping enforcements, according to Bagchi, Bhattacharyya and Narayanan (2013), have worked to safeguard the country’s manufacturing firms including the Rubber and Plastic industry, Chemical and Allied industries as well as Base Metals and Textiles industries from the risk of dumping from Japanese and Brazilian firms. Also, of the 24 AD cases reported in Mexico for the period 1994-1998, Mendieta (2004) contends that, fragile domestic industries engaged in the production of chemicals, steel, food, rubber and paper have been the greatest beneficiaries of AD protection.

Aside the protectionist role, AD policy as an instrument of commercial policy also promotes the welfare of developing economies by shifting profits from dumping to dumped economies. Referred to as “Rent-shifting Effect” by Krugman-Brander (1983), anti-dumping measures transfer profits from foreign economies engaged in dumping to dumped markets through import revenues. In effect, their strategic roles of raising revenues yield medium to long-term positive impacts on the economies of developing countries.
Despite the protectionist significance of anti-dumping policy in offsetting the unfair price advantages of foreign exporters, its downsides have also been well-documented in literature including (Niels, 2000; Prusa and Skeath, 2001; Prusa and Skeath 2002; Ganguli, 2008; Aggarwal, 2010). Though not exhaustive enough, the paper, in the next section, identifies some of the negative effects associated with developing countries’ use of anti-dumping policies.

Negative Effects of Anti-dumping policies

Popular among the negative effects of anti-dumping policies in developing countries is their welfare-diminishing impact especially on domestic user enterprises and consumers. The imposition of AD policies threatens societal welfare by inhibiting the inflow of cheaper and quality products from dumping economies. In the absence of regulations to restrict dumping from exporting firms, the sales of dumped products below normal values in domestic economies yield improvements in social welfare. However, with the imposition of an AD policy, poor consumers in developing countries are denied the opportunity of improved access to affordable varieties of merchandises. In India where only 30 percent of the population could afford modern drugs according to Malhotra and Malhotra (2008), it could be conveniently discerned that, while AD policy’s role of protecting domestic pharmaceutical industries is legitimate, the interests of domestic consumers are violated by way of increased prices of dumped pharmaceutical products.

In the same way, since the principal objective of anti-dumping policy according to Niels (2003) is to dampen the competitive impact of dumped foreign products in domestic economies, such a policy, argue Prusa and Skeath (2001), provide incentives for retaliation. They find the

likelihood that, once firms in a country have been filed an antidumping petition against by those in another country, there always would be an incentive for vengeance. The concern however is that, if countries keep striking back on every affirmative AD policy, the number of anti-dumping activities would grow further at a relatively higher speed. Consequently, the essence of free trade is undermined and domestic firms’ competitiveness and productivity gains weakened. In Prusa and Skeath (2002), it is contended that recent increases in the initiation of anti-dumping cases by some developing countries such as China, India and Brazil are mostly against countries that previously imposed anti-dumping legislations against them.

Also worthy of note is the fact that, the long-term economic costs of the imposition of anti-dumping policies on developing countries could be substantial. By way of insights from the historical users of anti-dumping policies, a potential hurdle emerging users could expect is the difficulty of having to remove an AD measure once it has been imposed and domestic firms are benefiting from the protection it provides. Liebman (2004), Moore (2006) and Bown (2006) argue that, despite WTO’s mandatory 5-year “sunset review” for every imposed measure, evidence from the US suggests this requirement has little impact on the removal of already imposed measure. Given that, there is little or no historical instances for countries that have been rigorous users of AD measures to abruptly curtail that use (Zanardi, 2004), the welfare implications of such a policy on an economy could be expensive.

In the same way, developing countries’ use of anti-dumping policy has potential trade contraction and destruction effects. In Niels (2003), these effects are particularly strong for cases against industries engaged in the production of textile, rubber and processed foods. In the case of China and India where 120 antidumping measures have been imposed on the former between 1995 and 2011, Vandenbussche and Viegelahn (2012) reveal that prices of the Chinese products affected have gone up, volumes of merchandises dropped and overall market share lost in the Indian market. Studies also reporting the trade destruction effects of AD enforcements are Prusa (2001) and Konings et al (2001). In the former, a confirmative AD legislation leads to nearly 50 percent reduction in import values and an overall average reduction of 37 percent in imports is recorded in the case of the latter. In essence, anti-dumping policies through their differential impacts, breaches the principle of fairness as domestic firms stand to gain substantially to the detriment of their foreign counterparts.

Conclusion

While the use of anti-dumping policy remains strongly justified on the basis of its potential of preventing predation and providing strategic shelter from foreign competition, it is apparent from the discussions above that, their negative effects on developing countries are enormous. In the circumstance where consumer welfare outweighs the welfare of domestic producers, the imposition of anti-dumping policy on foreign exporters may not represent a socially optimal decision. Developing countries’ ability to reconcile the conflicting interests of both domestic consumers who would be harmed by affirmative AD legislations with those of domestic producers is necessary if AD policies are to remain important policy instruments in international trade agreements.

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Source: Ishak Mohammed (2014) Adam Smith School of Business, University of Glasgow, UK
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