WTO Rules and Countervailing Duties

1. WTO Rules and Countervailing Duties • The WTO has a set of rules on subsidies. • Subsidies directly linked to exporting are prohibited • ex: firm gets a tax break on quantity of exports • except if used by low income developing countries • Subsides not directly linked to exporting, but still have an impact on exports are "actionable“ • ex: gov. subsidizes electricity to local firms, who then export some of their production • If a subsidy is believed to be prohibited or actionable, a country can • file a complaint with the WTO and use the dispute settlement process or use a national procedure for assessment • If the importing country can prove a prohibited or actionable subsidy and harm to its industry it can impose a "countervailing duty“ • countervailing duty: a tariff used to offset the price or cost advantage created by the subsidy to foreign exports.

2. Dumping • Dumping: selling exports at a price too low - less than "normal value" or fair market value • 2 definitions of “normal value” • normal value: the price charged to comparable domestic buyers in the home market (or to comparable buyers in other markets) • dumping is thus international price discrimination favoring buyers of exports • normal value: takes a cost-base approach. Dumping is selling exports at price that is less than the full average cost of the product.

3. Dumping: Why does it occur? • Predatory dumping • firms temporarily charge a low price in the foreign market to drive competitors out of business • Once competition is gone, monopoly power will be used to raise price • Cyclical dumping: • occurs during periods of recession • In a LR equilibrium, perfectly competitive firms earn oπ at P=ATC. • But in a global recession, demand for commodities , thus  equilibrium prices in the short run. • Thus in the SR, prices will fall below ATC. Firms produce and sell in the SR as long as they cover variable costs (but make -π in the SR). If these sales are exports - we have dumping

4. Dumping: Why does it occur? • Season dumping: • intended to sell off excessive inventories of a product. • Firms undergo some FC of production. • IF there is a big harvest of a perishable product, prices on the market  → selling exports a low prices below average cost is dumping. • Persistent dumping • Firms with market power uses price discrimination between markets to  π • A firm will Max π by charging a lower price to foreign buyers if: • it has less monopoly power (more competition) in the foreign market than in home market • and if buyers in home market cannot avoid the high home price by buying the good abroad and importing it cheaply • If these conditions hold: firm can make home country buyers pay more and thus earn a higher total profit.

5. Antidumping: How should the “dumpee” react? • Answer depends • Firms competing against dumped exports: complain loudly to gov. • Consumers of dumped exports: welcome the low prices • especially true under persistent dumping (and seasonal dumping) because they get gains from trade at the low export price • not necessarily true under predatory dumping • Consumers gain in the short run from dumping, but not in the long run with eventual monopoly pricing • What about cyclical dumping? • Complicated because it is the sign of a well functioning competitive global market

6. Antidumping Policies • Basic idea: If an importing country believes they are faced with dumped exports into their market and it believes it may be harmful to their domestic industry. • They may be interested in levying a antidumping duty (a tax) to retaliate against dumping. • antidumping duty: an extra tariff equal to the discrepancy between the export price and normal value • Before doing so, should weigh costs and benefits…

7. Antidumping Policies: costs vs benefits • Investigators of alleged dumping look at: • whether the export price is too low & whether there is injury to domestic industry. • If both are found the importing country can impose antidumping duties • However: investigators don’t look at: • overall effect of alleged dumping on the national well-being of the importing country (benefit to domestic consumers) • The reason for (type of) the dumping • Result: • Some think the process is biased in favor of finding dumping and imposing antidumping duties. • The threat of a dumping suit can induce foreign exporters to raise their prices. • Point: Antidumping policy has become a way for import-competing producers to gain new protection against imports.

9. Antidumping Policies: Proposals for reform • antidumping actions could be limited to situations in which predatory dumping is plausible • this will limit the scope of antidumping policy and focus on the type of dumping that is considered "bad" for consumers and producers. • the injury standard could be expanded to require that the weight be given to consumers and users of the product • this shifts the focus of discussion on net welfare • the antidumping policy could be replaced by the more active use of safeguard policy • safeguard policy: the use of temporary import protection when a sudden increase in imports causes injury to domestic producers