Numerical Example of Dumping
To understand why it is profitable for the Foreign firm to export the good at below-
average cost, we use the following hypothetical information pertaining to its costs and
demand.
Fixed costs = $100
Marginal costs = $10/unit
The firm’s total costs equal the sum of its fixed and variable costs:
Revenue – Total Costs = Profits
If the Foreign firm exports 10 units, at a price of $15, which is less than $20 average
costs, its profits become
Therefore, the Foreign firm receives an additional $50 in profit by selling the 10 units
abroad, even though the average costs of production ($20) for those quantities are higher
4 Policy Response to Dumping
We know that dumping is not an unusual practice. We have also just learned that
dumping can be profitable for firms even when the prices charged are less than their
Antidumping Duties
A Foreign monopolist is considered to be dumping when its export price is less than its
average costs of production or it is selling more cheaply abroad than it does in its local
A P P L I C A T I O N
U.S. and European Duties on Solar Panels from China
Beginning in 2009, the value of imports of solar panels from China to the United States
grew from $640 million to over $3 billion. During the same time period, American solar
32% be implemented against Suntech and 24% against the second company.
Strategic Trade Policy? There are two reasons for implementing antidumping duties.
The first case involves the Foreign firm acting like a discriminating monopolist as
described above. By raising the price of the dumped product with a tariff equal to the
difference between the exporter’s local price and the import price, the importing country
Comparison with Safeguard Tariff Contrary to the situation in which Japanese
producers of compact trucks treat the 25% tariff as fixed, a Foreign firm often has the
Calculation of Antidumping Duty Because the duty is equal to the difference between
the exporter’s local price and the dumped price, the Foreign firm can face a smaller tariff
The net effect on Home welfare due to the increase in the import price resulting from the
Foreign firm’s response to the antidumping duty is largely negative. More specifically,
Thus, the overall effect of the exporting firm’s response to the antidumping duty is a net
loss for the Home country, represented by area (b + c + d). If the Foreign firm raises its
Despite the negative net effect of the antidumping duty on the importing country, charges
of Foreign dumping have become increasingly popular. The reason is that the threat of an
antidumping duty often leads Foreign competitors to raise their prices, which reduces
competition for domestic firms in the same market.
APPLICATION
Antidumping/Countervailing Duties Versus Safeguard Tariffs
The “safeguard” provision in Article XIX of the GATT and Section 201 of the U.S. trade
law, discussed in Chapter 8, allows a domestic firm temporary relief from foreign
competition when it is determined that rising imports are the “most important cause of
In contrast to the infrequent use of safeguard or escape clauses, more than 1,228
antidumping cases were filed in the United States in the same period from 1980 to 2011.
The reason for their popularity is that the procedure necessary for tariff protection is
Aside from those cases in which duties were applied, 456 cases were rejected and the
remaining cases, 148, were withdrawn before the final ruling. By withdrawing the case,
The incentive to file dumping claims becomes evident when we note their potential
benefits to the domestic producer. Namely, there is a relatively high success rate of
obtaining tariff protection. Furthermore, a domestic firm is given permission to
The end result is a very costly trade policy. An estimate of the costs involved due to
5 Infant-Industry Protection
Aside from politics and the large-country case, a country may impose an import tariff to
allow its import-competing industry to become more competitive by lowering costs or
raising the quality of the products. The idea is that by temporarily nurturing the infant
industry through tariffs, it will have the time needed to learn and grow and thus become
able to compete in the future without needing protection.
A successful protection is one in which the infant industry is able to increase future
To analyze this case, we assume a Home monopoly. And we assume that this monopoly
will realize lower costs tomorrow if allowed to increase its output today—that by giving
the firm time to mature, it will learn how to produce more efficiently. The question is
should the government protect the industry today in order to allow it to survive long
enough to realize the gains from a more efficient production tomorrow?
Rather, the relevant case here is that it is assumed over time the entire average cost curve
will shift downward due to more efficient production techniques, with the infant firm
becoming competitive over time at world prices without the tariff.
There is a second case where import protection could be justified and this involves cases
of knowledge spillover, where a positive externality is created by increasing the output of
In both cases, market failure is assumed and tariffs or quotas may help to correct this
market imperfection. The market failure in the first case addresses a shortage of bank
However, we know that governments that attempt to address market failures often do so
inefficiently. If banks have knowledge that the infant may not be profitable in the future,
In both cases, it is highly likely that the tariffs or quotas could result in very costly
What we can conclude nonetheless is that although some form of market failure is a
necessary condition for infant-industry protection, it is not a sufficient condition.
Free–Trade Equilibrium
To more formally develop the case for infant-industry protection, we begin by assuming
that Home is a small-importing country facing fixed world prices. We know from
previous analysis that a Home monopolist will behave like a competitive firm under free
Equilibrium Today Today, the industry faces the world price of PW under free trade as
Tariff Equilibrium
However, if the government imposes a tariff in the amount of t to protect the infant
industry, then the domestic price increases from PW to PW + t, which equals the firm’s
Equilibrium Today At the higher price, the industry earns zero profit rather than a loss.
Equilibrium in the Future The resulting future efficiency is represented by the lower
average cost curve labeled AC
′
in panel (b). With the lower average costs, the industry no
Effect of the Tariff on Welfare To analyze the effect of the tariff on welfare, we need to
compare the deadweight loss today due to the tariff, denoted by the triangles (b + d) in
panel (a) of Figure 9-10 and the future gain in producer surplus represented by area e in
Both Conditions 1 and 2 must be satisfied in order for the tariff to be successful. The firm
must be able to produce without losses without a tariff at some point in the future. And
the present value of the future surplus must be positive.
APPLICATION
Examples of Infant-Industry Protection
We examine four examples of infant-industry protection in this Application:
1. Solar panel industry policies in the United States, Europe, and China
3. A ban on imports of computers in Brazil
Government Policies in the Solar Panel Industry Subsidies to consumers who install
solar power panels in their homes should not be viewed as a form of infant–industry
protection to the solar panel industry because subsidizing them is a way of addressing the
Subsidies in the United States On the other hand, subsidies that encourage solar panel
production via tax breaks, low-interest loans, or loan guarantees are an example of infant–
industry protection. President Barack Obama engaged in this type of protection by
Subsidies in China Another example of unsuccessful cases of infant-industry protection
occurred in China. The Chinese also pursued similar trade policies for solar panels via
export subsidies. Export subsidies act much like import tariffs and carry deadweight
Import Duties in Europe and the United States Import duties were applied by
SolarWorld, a German firm with subsidiaries in the United States. These duties were
applied in the EU and U.S. in the form of antidumping measures. The German firm
installation. So higher prices protected the producers and employees of the solar panel
industry but it raised the price of panels to installers of panels.
Ultimately, the protections led to the installers producing their own panels to avoid the
higher prices of SolarWorld. This is a unique case of technology transfer. Remember, for
an infant industry to be successful, one condition is that learning occurs that results in
lower costs. In this case, SolarCity, an installer of panels, purchased Silevo, a company
U.S. Tariff on Heavyweight Motorcycles
Partly due to a global price war between Honda and Kawasaki, two Japanese motorcycle
producers, inventories of imported heavyweight cycles increased substantially in the
United States during the early 1980s. As a result of lagging productivity and fierce
Calculation of Deadweight Loss Although Harley-Davidson requested that the import
tariff end earlier than scheduled, a comparison of the deadweight loss due to the tariff
against the potential gain in producer surplus is needed to more accurately study the
The deadweight loss in 1983 is the average import sales over 1982 and 1983 times 3.8%,
Future Gain in Producer Surplus Next we will calculate the future gain in producer
surplus to compare the value to the deadweight loss of $113 million. More specifically,
we will measure the future gains in producer surplus by examining Harley-Davidson’s
stock market value during the removal of the tariff protection. Harley-Davidson’s initial
Was Protection Successful? Our calculations imply that the tariff protection increased
welfare for the United States because the deadweight loss is less than the future gain in
producer surplus. However, there are doubts as to whether the heavyweight motorcycle
Computers in Brazil
Between 1977 and the early 1990s, the Brazilian military government protected its
domestic computer industry through a ban on imports of personal computers (PCs) and
computer parts. In addition, it prevented foreign firms from producing computers in
Prices in Brazil Computer prices, adjusting for improvements in speed, storage, and so
forth, are shown in Figure 9-11 for Brazil and the United States for 1982 to 1992. The