One of the primary arguments for protectionist measures is the need to prevent foreign firms from “dumping” goods into the domestic market. In this context, dumping is the selling of goods at prices below market value. Domestic producers dislike dumping because it makes it exceedingly difficult for them to compete with foreign producers whose low prices could potentially price them out of the market. However, in reality dumping is hardly a problem at all. The incidences of dumping are overstated, and even when dumping does occur, it is largely benign. Like most scaremongering over trade, dumping is simply a way for domestic producers to frighten people into voting for counterproductive and inefficient protectionist measures that decrease societal welfare and retard economic growth.
Before explaining why dumping is a relatively harmless practice, it is first important to understand the many ways in which the Department of Commerce biases economic analysis to exaggerate the cases of dumping. But to understand this, one must first understand exactly what dumping is. Price-based dumping is defined as the selling of foreign goods in the domestic market at a price lower than that found in the country in which the goods were produced. For example, if Chinese-made T-shirts cost $15 in the U.S. market but $18 in the Chinese market, that would be price-based dumping. The other kind of dumping, cost-based dumping, is defined as the selling of products in a foreign market for a price lower than that of the cost of production. So if the average cost of production for a Chinese T-shirt is $2 dollars but it’s sold for $1.50 in the U.S., this would be considered cost-based dumping.
The problem is that it’s usually quite difficult to ascertain whether dumping is occurring. Take price-based dumping, for example. Not every T-shirt made in China costs the same. Some Chinese-made T-shirts likely cost more in the U.S. than in China, but for others, the opposite is the case. Cost-based dumping is even harder to determine because it requires knowing the production costs of foreign firms. Needless to say, this is often quite difficult to obtain because foreign firms are rarely eager to divulge all of their costs and production techniques to the governments of other countries. Furthermore, these kinds of cost-based analyses don’t even make sense when analyzing non-market economies like China or Vietnam because their entire economies are manipulated heavily by the state. When countries set quotas and heavily subsidize and tax different industries in order to shape the direction of economic growth, it simply isn’t possible to use microeconomic metrics designed for capitalist economies to measure average costs of a firm. All of this complexity lends itself to bias, and, as will be demonstrated, this bias leads to some comically hyperbolic assessments of the level of dumping occurring in the U.S. market.
The generally accepted way of measuring price-based dumping is to average the price of a good in the domestic market and compare it to the average cost of that good in the foreign market in which it was produced. To demonstrate, I’ve generated some random prices for Australian paper products in the U.S. Let’s assume that the average cost of paper in Australia is $3.75 per ream. In the U.S., there are four Australian paper brands: Brand A (42% market share), Brand B (12% market share), Brand C (26% market share), and Brand D (20% market share). Brand A sells for $4.00, B for $3.60, C for $3.48, and D for $3.78. To calculate the average price, then, one simply multiplies the cost of each brand by the market share of the brand. So, in this case, that equation would look like APus = .42*4.00+.12*3.60+.26*3.48+.2*3.78. In this example, the average cost of Australian-made paper products in the U.S. in $3.77, so there is no dumping. However, the U.S. Department of Commerce uses a slightly different way of calculating dumping known as “zeroing.” This involves subtracting the cost of each individual brand in the U.S. from the average price in the foreign country. So, using the data from the aforementioned example, we would get the values of -.25, .15, .27, and -.03. Then, the DoC removes any data that result in a negative value when zeroed (yes, they actually do this) and recomputes. So, the average price determined by the DoC method would be .316*3.60+.684*3.48, or $3.52. Now there is dumping! A few years ago, it was ruled that this method of “zeroing” violated WTO regulations, and the U.S. promised to eliminate it. However, the U.S. has reserved the right to use “zeroing” in cases of “targeted dumping,” a term that refers to abnormal price changes during certain times. Miraculously, since the U.S. decided to only use “zeroing” in cases of “targeted dumping,” the number of “targeted dumping” cases rose from less than 1% to about 50%.
As one might imagine, the U.S. is able to almost always find price-based dumping. Indeed, 93% of price-based dumping investigations conclude that dumping is occurring. In the 7% that don’t, though, the U.S. DoC can then look for cost-based dumping. Usually, this involves the government simply guessing what the costs of production are for foreign companies and then using these guesses to look for dumping. This can lend itself to bias, but it’s at least theoretically possible to generate a good guess based on data from similar firms in the U.S. However, things get more interesting when non-market economies are involved. In this case, the U.S. government picks a surrogate country that has a market-based economy to approximate labor costs and other economic indicators in the non-market economy. However, this leads to all sorts of manipulation. For example, a dispute in 1974 between Poland and the U.S. over Polish golf carts led the U.S. to use Canadian labor costs in their estimation of Polish firms’ production costs. Poland, then a communist country, rightfully complained to an arbitration board and won. More recently, China disputed a similar instance of cost-based dumping shenanigans in solar panels. Usually, the U.S. uses India as a proxy for China when evaluating complaints of cost-based dumping. However, in the solar panel case the DoC allowed American industry the right to choose which country would be used as the surrogate, and, naturally, they picked the most absurd surrogate they could think of in order to maximize their chances of receiving a favorable ruling. The country they picked was Thailand, and, predictably, China was found to be engaged in cost-based dumping. The problem, though, is that solar-panel production involves huge economies of scale. China was able to achieve these economies of scale due to the immense size of their market. But Thailand, being a much smaller country, simply wasn’t able to produce enough solar panels to create scale economies.
As I’ve hopefully demonstrated, dumping evaluations are one of the most rigged systems in the government. If people like Trump and Sanders really want to decry the corrupt “system,” they have a perfect candidate in dumping evaluations. Of course, both of these guys actually like protectionism, so in this case they support the rigged system (oh well). Ironically, though, despite all the craziness used to determine if dumping occurs, it isn’t even clear that dumping is a bad thing. For one, it lowers prices for domestic consumers, which means that everyday Americans pay less for the same products. Furthermore, it is far from obvious that most dumping is deliberately aimed at hurting domestic firms. In the case of cost-based dumping, foreign firms might have simply underestimated marginal costs. But, since fixed costs have already been sunk, these firms nevertheless choose to produce at below market costs to minimize losses. So yes, in this case firms will have negative operating profits, but this is purely by accident and thus does not represent any malevolent intent. In the case of price-based dumping, it is possible that the domestic market is simply more elastic than that of the foreign market producing the good. In this case, prices will always be lower in the domestic market simply due to relatively higher consumer price sensitivity. That is just basic economics, not evil price manipulation by foreign firms.
The idea that dumping by foreign companies hurts U.S. economic interests is intuitive. It’s easy to spin a narrative about evil foreign firms driving U.S. industry into the ground and crushing the dreams of hard-working American laborers. Our future president Donald Trump certainly exploited this kind of fearmongering to its fullest. In reality, though, this narrative is largely a lie. Dumping occurs far less frequently than the Department of Commerce’s rulings might lead one to believe, and even when dumping does occur, it is far from clear that it is intentional or detrimental to the broader U.S. economy.