Chapter 11
Pushing Exports
Overview
Chapters 8 through 10 focused on government policies toward imports, with little attention to
government policies and business practices in the exporting countries. This chapter shifts to
looking at various practices and policies that can increase exports, as well as the effects of these
export-promoting activities on importing countries. The chapter has two major purposes:
1. Examine dumping—what it is, why it occurs, how it affects importing countries, and what
government policies are used in importing countries.
2. Examine export subsidies, looking at these same issues and a few others.
Dumping is selling exports at a price that is “too low.” There are two standards sanctioned by
WTO rules: selling exports at a price that is lower than the price in the home market (or in a third
country market), or selling exports at a price that is lower than the full average cost of production
(including a profit margin). The legal standard is one or the other, not both.
There are at least four different reasons that an exporter would dump (based on one or the other
of the two definitions). Predatory dumping is intended to drive out rivals. Cyclical dumping
occurs during an industry downturn in demand, with sales at prices that cover average variable
cost but are below average total cost. Seasonal dumping unloads excess inventories, especially
on products that are perishable or going out of fashion. Persistent dumping is international price
discrimination, with the exporting firm facing less elastic demand in the home market, and
having some way to limit or prevent reimport back into its home market.
What should the importing country think of dumping? The first reaction should be to welcome it
—why argue if someone is willing to sell you something at a low price? This seems to be the
best reaction to both seasonal and persistent dumping. Predatory dumping is potentially the most
troubling to the importing country. If the exporter succeeds, it will raise prices in the future, and
the importing country can be harmed. But predatory dumping probably is rare. The importing
country could also have concerns about cyclical dumping. If used aggressively, cyclical dumping
can export unemployment.
Actual importing-country government policies toward dumping generally do not make these
economically sensible distinctions. The policy usually investigates alleged dumping by looking
at whether the export price is too low, by either standard, and looking at whether there is injury
to domestic industry. If both are found, then the importing country imposes antidumping duties
equal to the difference between the low export price and the “normal price” or “fair market
value.” The policy does not look at the overall effect of alleged dumping on the national
well-being of the importing country, because it does not examine the effects on domestic
consumers, and it does not attempt to determine the reason for the dumping. It appears that the
process is biased in favor of finding dumping and imposing antidumping duties. And even the
threat of a dumping suit can induce foreign exporters to raise their prices. Antidumping policy
has become a way for import-competing producers to gain new protection against imports. The
box on “Antidumping in Action” illustrates these concerns with three examples. The chapter also
examines three proposals for reform: limit antidumping actions to cases in which predatory
dumping is plausible, expand the injury standards to include domestic consumers, and replace
antidumping policy with safeguard policy.
Governments in exporting countries sometimes use export subsidies to increase their exports. In
fact, a large enough export subsidy can turn an import-competing product into an export product.
If markets are competitive, these export subsidies create inefficiency by distorting production
and consumption. For a large exporting country an export subsidy causes a decline in its
international terms of trade. For both a small and a large country, an export subsidy results in net
national loss as well as a loss for the whole world. As a case study, the box “Agriculture is
Amazing” discusses subsidies to food production and export.
WTO rules generally prohibit export subsidies and permit importing countries to impose
countervailing duties in response. We examine the peculiar economics of all of this, using the
case in which the export subsidy lowers the price of exports, and the market is otherwise
competitive. Because of the lower import price, the importing country gains well-being in the
shift from free trade with no subsidy to free trade with the foreign export subsidy (and no
countervailing duty). If the importing country then imposes a countervailing duty, the importing
country still gains, in comparison with free trade with no subsidy and duty, but it does not gain as
much as it would if it did not impose the duty. The countervailing duty does improve world
efficiency, by reversing the international distortionary effects of the export subsidy.
The economics of an export subsidy are rather different if the market is not perfectly competitive
—a major insight of strategic trade policy. The text shows the example of competition between
Boeing and Airbus for the world market for a new type of airplane. With no government support,
it is possible that neither firm will enter the new market, because both will lose if both enter. But
if one government offers a suitable subsidy, its firm will enter. If the other government does not
offer support, then the other firm will not enter, and the first firm will earn high profits, bringing
a benefit to its country and possibly to the entire world. But, if the other government also offers a
subsidy, both firms produce. The world’s consumers gain, but each of the producing countries
can end up with lower well-being because of its firm’s loss net of the government subsidy (the
subsidy is a transfer within the country). (The box “Dogfight at the WTO,” the third in the series
on Global Governance, discusses the cases that the United States and the European Union filed
against each other about subsidies that each has given to its aircraft firm.)
Tips
There is much here to interest the student who gravitates toward policy debate or business
relevance. There are often current cases of alleged dumping (e.g., steel in the United States) that
can be incorporated into class discussion.
The material, especially that on dumping, can lead to lively class discussion. For instance, the
instructor can present the legal definitions of dumping, and then ask students why an exporting
firm would engage in dumping. The follow-up question can be to ask what the importing country
should think of dumping.
In a class discussion of reforms or alternatives to antidumping policy, an instructor may want to
include use of standard antitrust policy (also called competition policy or antimonopoly policy)
to deter predatory dumping, as a replacement for antidumping policy.
In the discussion of effects of an export subsidy, it is possible to present an integrated discussion
of the exporting and importing countries. By adding a third graph to Figure 11.4, the instructor
can examine the effects in the importing country. (This set of three graphs is the same basic form
used in Figures 2.3 and 2.4.) An export subsidy effectively shifts the supply-of exports curve
down by the amount of the subsidy, and a countervailing duty effectively shifts the
demand-for-imports curve down by the amount of the duty.