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Time to Dump "Dumping"?

The Economics of Wage Labor... Privatizing Keynes...
by Michael Munger
Guest Blogger
Dumping, or the practice of a producer in one market selling below cost in another market to drive out competition, has a dubious logical pedigree. But its political history is second to none: a perfect shut-up argument. The idea seems to be that you should always accuse competitors of "dumping." It does sound so much better than "foreigners are producing a better product at a lower cost and I want men with guns to stop them at the border."

Take second-hand apparel. Here is a reuse-recycle market that actually works! There is such a huge stock of already-produced, slightly used clothing, that a number of nations in Africa and south Asia have claimed such clothes are being "dumped." The idea that this is dumping has also popped up in New Guinea.

The argument that (new) textile and apparel manufacturers make is that their jobs must be protected for the good of the nation. But study after study has shown that the cost to consumers is an integer multiple (3 times, 4 times, maybe 10 times) the benefit to the textile worker. Still, there may be some point to this, since the reason that the second hand clothes are so cheap is the "goodwill" of industrialized nations. Huge shipments of second-hand clothing from charitable organizations have swamped the markets of third world nations, driving native clothing makers out of business. (You might want to draw the line at undies, though. Ick.)

Talk about unintended consequences: the guy wearing the "Munger Family Reunion, 1996" t-shirt in Mombassa got the shirt for free, but now he’s lost his job at the small textile company. Without meaning to, industrialized nations are subsidizing exports of second-hand clothing, which is imported into third world nations at prices that are very close to zero.

Of course, you can’t win for losing. When some governments tried to respond by putting a tax on second-hand clothing, they drove still other local businesses bankrupt.

For another example, take steel….please. President Bush imposed tariffs (briefly) on imported steel because of alleged dumping. This is an old argument. The problem is that steel is a very high fixed cost industry, and in a slump, in the short run, it makes perfect sense to sell at low prices, so you can cover your variable costs and part of your fixed costs.

Let me ask you this: What producer is guilty of the most egregious dumping in the U.S. steel market over the past decade? The answer is …. U.S. Steel Corporation! Yes, they have incurred huge losses over several of the past ten years. I’m pretty sure that means that they have been selling steel at prices below "cost," and that is dumping.

Sure, that’s nonsense, but dumping is a nonsense concept. Dump it.

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CATEGORIES: International Trade

TRACKBACKS (6 to date)
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The author at Ashish's Niti in a related article titled How to profit from dumping writes:
    Dumping by foriegn manufacturers make imports cheaper. This saves consumers as well as domestic manufacturers money. Domestic manufacturers do not have to spend resources on manufacturing what is available through cheap imports. This together should ... [Tracked on August 10, 2004 7:53 PM]
The author at The Club for Growth Blog in a related article titled Thursday's Daily News writes:
    Relevant News and Commentary Random Thoughts - Tom Sowell, What Does Marginality Mean? - R. Murphy, Two Choices for Tax Reform - D. Mitchell, Heritage “Fewer Jobs! More Crime!” - D. Boudreaux, Cafe Hayek Train C... [Tracked on August 12, 2004 8:56 AM]
COMMENTS (13 to date)
Walker writes:

I disagree. Dumping, as you define it "the practice of a producer in one market selling below cost in another market to drive out competition" is too common a business tactic to drop from the lexicon.

A little while back the local Blockbuster I went to decided to drop its rental fees in half. When I asked a staffer that I knew what was going on, he said that they were trying drive another video store in the area out of business. For about 6 months they kept the fees at that level and so they must have been taking losses during that time. I am not sure what you would call this but "dumping" works for me.

For those interested in a broad perspective:

The term "dumping" and excellent analyses of dumping in practice and theory are discussed in various Econlib books. Great thinkers and writers on the subject include Taussig, Pigou, Hobson, Viner, and Bhagwati. This Econlib Search displays relevant paragraphs, with links to the books.

Mike Munger's nice observation is that though the traditional definition of dumping may be between countries, what after all, is the definition of a country? If the same practice occurs within the arbitrary boundaries of a country, isn't the economic analysis the same?

I think that what Munger suggests is ridding from our vocabulary the politically-charged version of the term "dumping," which for over 100 years has increasingly been used by politicians to rally anti-foreign political sentiments.

Lawrance George Lux writes:

Dumping does occur, no one can deny this fact. Is Government action against 'dumping' been effective? Almost never. Does Dumping incite some bankruptcies in native industries--yes! Do I agree with Munger--yes!

Dumping is a form of economic competition, which while vicious, reduces Business Profits by recycling them to the Consumer. Producers must possess real advantage in geographic location for production, or lose economic advantage to the nations in which they dump Product. Nations who purchase dumped Product enjoy economic profits, which can act as a spur to economic advancement. Dumper Nations actually lose economic viability in the industry, though they enjoy higher immediate Profits (only at the cost of a below-normal profits postion). lgl

Michael Munger writes:

Domestic "dumping" is predatory pricing, an RPA offese.

Hard to define. Really requires intent, although the actual Robinson-Patman Act standard is murky.

Large literature in economics on problems of predatory pricing vs. actual competition.

The good Lux is certainly right, IMHO. It is NOT true that dumpling/predatory pricing never occurs. Rather, attempts to control it are as likley to do harm as good, and competition makes it all shake out anyway.

Walker writes:

Let me try to give a very simple scenerio under which predatory pricing benefits the predator nation at the expense of the prey (note: terms used without any ethical connotations).

For example, if the predator gains a monopoly in the industry in question, whatever consumer benefit that the prey accrues during the dumping period can be lost over time when the monopolist uses its power to increase the price. If the product is vital enough and the cost of entry is great enough the price could be set arbitrarily high. Furthermore, the threat of further dumping can be used make the cost of entry that much greater.

Under such a scenario it would seem that both the firm and consumer of the prey nation lose. The only way that the prey can win is if the temporary consumer benefit is invested effectively enough to make gains greater than the costs associated with the loss of the industry and the eventual inflation in the good's price (not to mention the transition costs like worker displacement, etc.).

While this may be an extreme scenario, its existence makes it tough for me to come to the conclusion that a laissez-faire attitude toward dumping is appropriate in all cases.

Bhagvati's argument (as gathered from the link Lauren provided) seems to be that anti-dumping measures may be appropriate in theory, but in practice governments tend to go too far and use protectionist measures inappropriately, such as to satisfy special interests. A couple of the comments above hint at similar thinking. This would mean that the argument over government intervention in the face of dumping is reduced to an argument over the degree to which governments are competent (or free enough of corruption)enough to make the right moves.

Lawrance George Lux writes:

Your argument about monopoly pricing will not hold water, in the face of advanced technology and Capital. The closest which can be formed is an oligarchy, which supplies the greatest majority of the World's needs at a Price level forbidding Entrants from achieving normal Profits. Monopoly pricing simply leads to invasion of the production sector by a Capitalized and Technical economy, in pursuit of normal or economic profits. lgl

Walker writes:

Monopoly pricing simply leads to invasion of the production sector by a Capitalized and Technical economy, in pursuit of normal or economic profits.

The higher the barriers to entry the easier it is for a monopoly firm (or colluding cartel) to maintain high markups. Depending on the industry, the amount of capital involved and/or level of technological sophistication needed may be prohibitive to all but a few players. There is also the issue of time -- it could take years or even decades to build up a viable competitor. During this time, the monopolist or cartel may get the added benefit (deliberately or not) of being able to set the standard for its product -- as suppliers and customers get locked in to this standard the barrier gets still higher. Finally, with assured profits, the monopoly or cartel can afford to make long-term investments that allow it to build an edge in product quality or production technology. The firm or cartel may even decide to repeat the game with a related product to entrench itself still further vertically or horizontally.

In a nutshell, a relevent analysis should not ignore the power that a monpoly can wield by assuming it away, however convenient it might be to do so.

joecobb writes:

But, Walker, the question remains: Did your local Blockbuster store actually succeed in driving the other store out of business? And did Blockbuster, perhaps, raise its prices afterwards or otherwise reduce your consumer surplus?
I seriously doubt they did either of those bad things.

joecobb writes:

It is important to understand that an industry exists in Washington, DC, known as "the petitioners' bar," consisting of about ten big law firms that file anti-dumping petitions with the U.S. Dept. of Commerce, International Trade Admistration. The steel industry for years was their biggest client, but the list is growing.
The petitions allege dumping. The process is hardly "fair" in a judicial sense. The respondents must file detailed economic and production information in a very short period of time, in English, on computerized media. Give them a break! Most do not respond at all.
The International Trade Admin. then slaps on a tariff, specifically on the imports from the named companies (respondents), and under the [Robert, of WV] Byrd amendment of 2000, the petitioning companies get the money!
Talk about an incentive! The lawyers in Washington, DC, make out like bandits.
Of course, there is an opportunity for the respondents to appeal to the U.S. International Trade Commission. Most of them don't bother to do that; they simply stop shipping products to the U.S. market. The consumers are not represented at any time in this system.
If a case does get to the International Trade Commission, the question then is whether the "dumping," which has already been "proven" by the Commerce Dept. (rarely, perhaps never, turning down any petition) has or has not "harmed" the domestic industry.
Sometimes the ITC affirms no harm, but this is rare. It all depends on how you define "the industry," just like in anti-trust law.
It is a very, very rigged game, and not one Congressman or Senator in a hundred understands any part of the problem. And there are the ten big law firms to lobby Congress continually to keep the rigged system of protectionism, known as "anti-dumping," firmly in place, to keep on collecting lawyers' fees.
I know. I worked in Congress and tried to fight the good fight, until I gave up and retired in 1997.

randy writes:

Dumping used clothing is analogous to the Bastiat fable about the pernicious sun: it steals jobs from candlemakers!!

Walker writes:

the question remains: Did your local Blockbuster store actually succeed in driving the other store out of business?

To tell the truth I am not sure who they were targeting exactly so I can't say. The location of the branch was ideal -- in a university area within walking distance of the greek houses and other university residences. There were a number of smaller independent and specialty video stores around that I never went to -- I can't account for how they were affected.

And did Blockbuster, perhaps, raise its prices afterwards or otherwise reduce your consumer surplus?

Yes, the Blockbuster did hike the price up for new movies a dollar more than the rate before the dumping, but this might have been coincident with a general increase and not just a measure taken at this particular branch (To be precise, as I remember it, before dumping it was about $3 for new movies $2 for old, during dumping it was $2 for new and $1 for old, and after dumping it was $4 for new and a little more than $2 for old). From an eyeball survey, it didn't seem to affect their business.

DSpears writes:

"A little while back the local Blockbuster I went to decided to drop its rental fees in half. When I asked a staffer that I knew what was going on, he said that they were trying drive another video store in the area out of business."

So when you told them that you were on to their little scheme, you foiled it by insisting that you pay the full price for the video, right?

Avinash Desai writes:

dumping is quite a prevalant practice. especially when the exporting country is not a free market economy. when there is no or little competition in the exporting country's domestic market, price is greater than average cost. this monopolistic situation the domestic market allows the firms to reduce the prices in the international market substantially, or in other words, to dump.

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