Dumping: Predation or Creative Destruction?

Dumping is a potentially predatory trade practice, which would make it unfair even by the very restricted meaning of "fair" used by economists.  In theory, a company could sell its product at a price below cost in a market and, thus, drive competitors out of business. Once that happens, the predator company could raise its prices to recoup its losses. If the new price is higher than the one that existing prior to the company's predatory pricing, then this would represent a loss to the society. That would be unequivocally bad.

Note that the essential part of the "badness" here is that the predator company takes advantage of the diminution of the competition produced by its below cost price to later raise its price above the initial market price. In such a case, the competition between companies is not based on who can produce goods more efficiently, but on who can suffer short term losses the longest.

This is what sets predatory behavior apart from good old fashioned competition in which one company eliminates the competition because they are able to produce at a lower cost. In this type of competition, the success of the more efficient company drives down prices and increases the surpluses generated from production and exchange. The companies that can't compete go out of business and free up their resources of labor and capital for other companies to use. This type of economic carnage would be considered creative destruction but it might be indistinguishable from the carnage produced by predation to those suffering from it.

Concerns about predation are not unique to foreign trade, and, indeed large national companies like Wal-Mart are often accused of this type of predation against small local businesses. However, claims of dumping are most common in international trade where there is the added concern that foreign governments might enable their domestic companies to endure short term losses in a foreign market. Governments might do that by providing export subsidies or tax credits (which are much the same thing) or by protecting their own market so that their companies can sell their products at a higher price in the domestic market to compensate for selling at a lower price abroad.

This possibility has led to "dumping" being defined rather simplistically as selling at a lower price overseas than at home. The Generalized Agreement on Tariffs and Trade (GATT) and the rules of the World Trade Organization allow nations to apply corrective or retaliatory tariffs on goods that are being dumped by this definition. The WTO explains dumping and it rules for anti-dumping actions as follows:

If a company exports a product at a price lower than the price it normally charges on its own home market, it is said to be “dumping” the product. Is this unfair competition? Opinions differ, but many governments take action against dumping in order to defend their domestic industries. The WTO agreement does not pass judgement. Its focus is on how governments can or cannot react to dumping — it disciplines anti-dumping actions, and it is often called the “Anti-Dumping Agreement”.... 

The legal definitions are more precise, but broadly speaking the WTO agreement allows governments to act against dumping where there is genuine (“material”) injury to the competing domestic industry. In order to do that the government has to be able to show that dumping is taking place, calculate the extent of dumping (how much lower the export price is compared to the exporter’s home market price), and show that the dumping is causing injury or threatening to do so.

Note that the WTO expresses an ambivalence about the fairness of dumping in the above passage.  This is partly because the simple definition of dumping misses key aspects of the predatory scenario, i.e., that the companies are selling below cost (or at an unsustainably low price) and that the ultimate result will be higher prices due to decreased competition. Therefore, not everything labeled as dumping will necessarily be predatory and it is possible that companies engaged in beneficial efficiency based competition will be accused of dumping.

Furthermore, the domestic import competing industry will suffer injury whether the low prices of the foreign industry are predatory or not. Creative destruction may be good for the economy, but it is not good for the less efficient (or comparatively disadvantaged) businesses or industries. Therefore, an accusation of dumping may simply be camouflage for protecting a domestic industry from competition. In this sense, complaining about dumping may be the "last refuge of a scoundrel" under the current rules of international trade.

To put this in the context of something we have more personal experience with, consider the case of Wal-Mart. As mentioned earlier, Wal-Mart is often accused of selling below cost to drive out competition, though this seems to have been a more popular charge to make in the 1990s and 2000s. The question is, has Wal-Mart later raised prices to benefit from the loss of competition? I think it is pretty clear that they have not since a reputation for low prices is key to the success and stock value of the company. Also, Wal-Mart faces very significant competition from Target (or tar-Jay) which comes close to matching its prices and has a reputation for higher quality goods.

The story I would tell about Wal-Mart is that they came up with a more efficient way to sell products in comparison to local and regional retailers. This means that their lower prices are not a short-term phenomena. The proof of their retail model's superior efficiency lies in the fact that Target has been able to copy it and, thus, negate the possibility that Wal-Mart can charge monopolistic prices after driving out competitors. Wal-Mart's so called downtown busting effect is, therefore, creative destruction not predation.

For an example of international dumping, consider the case of shrimp imports to the US. In 2004, the US ITC announced that it had officially found that exporters of frozen and canned shrimp to the US from  Brazil, China, Ecuador, India, Thailand, and Vietnam were dumping and that this was causing significant injury to the US shrimp industry. Tariffs were placed on shrimp imports from these nations with the proceeds from those tariffs being distributed to US shrimp companies affected by the imports (this last part is due to the somehwat controversial Byrd Amendment).

As part of the US anti-dumping process, the Department of Commerce (DoC) investigated the domestic prices of frozen and canned shrimp in three countries and compared it to the price being charged for shrimp exported to the US. In the case of Chinese exporters, the DoC calculated that most Chinese exporters were selling shrimp 55% below the price of shrimp in China (with a couple of companies selling at a margin of above 80% below domestic prices). However, in Ecuador and Vietnam the margin was about 3-5%, the margin in Thailand was about 6%, and in India and Brazil it was about 10%.

So what do we make of these numbers? You might make the case that China is doing something strategic here or that they have significantly manipulated their domestic prices to inflate the price of shrimp in China for other reasons (it is China after all). However, the other nations have much lower margins that might be accounted for by reasons other than predatory pricing. Perhaps consumers in these countries are willing to pay more for frozen and canned shrimp than US consumers. Maybe, the domestic companies are able to charge a higher domestic price due to a pro-home product bias among consumers in their country (and a anti-foreign product bias among US consumers). Of course, it could also be that the governments in these countries are supporting exports by giving tax credits for exports or preventing foreign suppliers of shrimp into their domestic markets.

A bigger point here is that, with six countries exporting shrimp to the US, is there really any danger of them raising prices if the US shrimp industry shrinks? That is to say, can we tell a convincing story about these nations colluding to swamp the US with cheap shrimp, drive US shrimpers out of business, and then collectively raise prices (like some kind of shrimp OPEC) to recoup their losses and make future profits? Or, is it more likely that whatever export supporting policies are in place will remain in place in these nations and competition between them will keep the price of shrimp low even if there are less US shrimpers? This latter scenario is not much better for the US shrimp industry, but is quite favorable for US consumers of shrimp.