Trade Dumping and Its Consequences
Dumping is when a country's businesses lower the sales price of their exports to gain unfair market share. They drop the product's price below what it would sell for at home. They may even push the price below the actual cost to produce. They raise the price once they've destroyed the other nation's competition.
In November 2017, the Trump administration imposed an 18% tariff on Canada's $5.9 billion of softwood lumber exports. It said some provinces allowed loggers to cut down trees on government-owned land at reduced rates. The U.S. Commerce Department said the dumping injured the American lumber industry. The action sent lumber prices to a 23-year high.
Trump first announced the tariff in April 2017. The threat was enough to reduce imports of Canadian softwood lumber. The tariff was retroactive for 90 days. Many companies hesitated to purchase lumber that could face a 20% surcharge.
Canadian loggers say there is no unfair subsidy. They pay the government for the logs and plant trees to replace the ones taken. In April 2019, the World Trade Organization ruled that the United States violated international trade rules in the way it calculated the tariff.
The main advantage of dumping is selling at an unfairly competitive lower price. A country subsidizes the exporting businesses to enable them to sell below cost. The nation's leaders want to increase market share in that industry. It may want to create jobs for its residents. It often uses dumping as an attack on the other country's industry. It hopes to put that country's producers out of business and become the industry leader.
There is also a temporary advantage to consumers in the country being dumped upon. As long as the subsidy continues, they pay lower prices for that commodity. For example, low-cost Canadian lumber has kept U.S. new home prices low. A 20% tariff would raise prices and possibly hurt new home buyers.
The problem with dumping is that it's expensive to maintain. It can take years of exporting cheap goods to put the competitors out of business. Meanwhile, the cost of subsidies can add to the export country's sovereign debt.
The second disadvantage is retaliation by the trade partner. Countries may impose trade restrictions and tariffs to counteract dumping. That could lead to a trade war.
The third is censure by international trade organizations. These include the WTO and the European Union.
A country prevents dumping through trade agreements. If both partners stick to the agreement, they can compete fairly and avoid it.
Violations of dumping rules can be difficult to prove and expensive to enforce. For example, the North American Free Trade Agreement provides a mechanism to review violations of the trade agreement. A NAFTA panel concluded that Canada was dumping lumber. In 2004, it said the United States did not prove the dumping had harmed the American lumber industry.
Trade agreements don't prevent dumping with countries outside of the treaties. That's when countries take more extreme measures. Anti-dumping duties or tariffs remove the main advantage of dumping. A country can add an extra duty, or tax, on imports of goods that it considers to be involved in dumping.
If that country is a member of the WTO or EU, it must prove that dumping existed before slapping on the duties. These organizations want to make sure that countries don't use anti-dumping tariffs as a way to sneak in trade protectionism.
The Role of the WTO in Anti-dumping
Most countries are members of the WTO. Member countries adhere to the principles laid out during negotiations of the General Agreement on Tariffs and Trade. That was a multilateral trade agreement that preceded the WTO. Countries agree that they won't dump and that they won't enforce tariffs on any one industry or country. To install an anti-dumping duty, WTO members must prove that dumping has occurred.
The WTO is specific in its definition of dumping. First, a country must prove that dumping harmed its local industry.
It must also show that the price of the dumped import is much lower than the exporter's domestic price. The WTO asks for three calculations of this price:
- The price in the exporter’s domestic market.
- The price charged by the exporter in another country.
- A calculation based on the exporter’s production costs, other expenses, and reasonable profit margins.
The disputing country must also be able to demonstrate what the normal price should be. When all these have been put in place, then the disputing country can institute anti-dumping tariffs without violating the GATT multilateral trade agreement.
For example, the Canadian lumber dispute has been ongoing since 1982. In 2004, the WTO ruled that the United States failed to prove Canadian lumber imports harmed the U.S. lumber industry.
The EU and Anti-Dumping
The EU enforces anti-dumping measures through its economic arm, the European Commission. If a member country complains about dumping by a non-member country to the EU, then the EC conducts a 15-month investigation. Like the WTO, the EC must find that material harm has occurred to the industry.
Unlike the WTO, the EC doesn't explicitly define dumping by using a formula to determine that the price is lower than in the exporter's market. The EC must find two other conditions before it imposes duties. First, it must find that dumping is the cause of material harm. Second, it must find that the sanctions don't violate the best interests of the EU as a whole.
If found guilty, the exporter can offer to remedy the situation by agreeing to sell at a minimum price. If the EC doesn't accept the offer, it can impose anti-dumping duties. These can be in the form of an ad valorem tax, a product-specific duty, or a minimum price.