Introduction to Economics                                             Lesson 10 / 07

 

DUMPING

Virtually all economists are agreed on the desirability of engaging in trade and the benefit to be achieved by all concerned in its practice.  This is the result of the fact that trade is not, as it is often mistakenly thought to be, an exchange of items of equal value.  Rather, absent violence or fraud, each party to a trade or exchange acquires something that he or she values more than what he or she is giving up.  If this were not the case the trade or exchange would not take place.

In the parlance of games, trade is thus not a zero-sum activity, in which the gain of one participant is matched or paid for by the loss of the other.  Rather trade is properly described as a positive-sum game; it is a win-win situation for the parties concerned.

 

Protectionism

Protectionism is the application of force to restrain the occurrence of trade, which would otherwise take place.  Since being forced to abstain from trade is, on its face, detrimental to the parties restrained, proponents of protectionism have been required to produce arguments and explanations to justify such measures.  As the fallacies in the more traditional reasons advanced for protection have been exposed, would be protectionists have been forced to seek newer and more sophisticated arguments. For modern protectionists, the concept of dumping has proven particularly attractive.

In economic terms, dumping can refer to any form of predatory pricing, including the practice of a domestic firm selling its product in the domestic market at a low price, even below cost, with the aim thereby of achieving market share, and of ultimately driving its competitors out of business.  This having been achieved, the dumper is then theoretically in a monopoly position, and able to exploit the consumer by charging supra competitive prices, in the process recouping the losses previously incurred in the process of dumping

In popular terms, however the word dumping has been used to refer to the concept of a foreigner exporting a product into a countryís domestic market and selling it there at a price below the normal price of such product, as charged in the foreign producerís own domestic market.  In theory such could occur with the intent of driving local producers out of business and thereafter the foreign producer being able to exploit that countryís consumers by charging supra competitive prices.  The reality is however almost impossible.  To that extent, the concept of dumping is political rather than economic.

As a general proposition lower prices benefit consumers.  Lower prices in particular benefit poorer consumers.  However because individual producers have generally a greater interest and incentive to achieve producer protection than individual consumers have in achieving consumer protection, what tends to occur in practice is the effective capture of consumer protection instrumentalities and authorities by producers, who then use the power of such instrumentality or authority against rather than in favour of the consumer, Trying to prevent this tendency is akin to trying to make water run uphill; it is contrary to the natural order.

Under the World Trade Organization Agreement, dumping, defined as the act of charging a lower price by the producer in a foreign market than for the same product in the producerís domestic market, is condemned but not outlawed.  What can take place however is the initiation, if domestic producers in the importing country are injured by such practice, of anti-dumping duties on such imported produce.  Similarly if the country of export has subsidised its producers in exporting the product the importing country can impose a countervailing duty to offset the effect of the subsidy.  In Australia, such a program is conducted by the Australian Customs Service.  In affect it is seen as an aspect of border protection.

As a concept, Dumping, needless to say, is subject to considerable criticism by free trade and consumer organisations, particularly for its methodology in attempting to establish what is the alleged normal or fair price for the product being allegedly dumped.      

   

A Case Study

The Australian prawn industry provides an interesting case study of the interaction of various competing interests.  Australian prawns [or shrimp as they are sometimes referred to] are reputed by many to be the best tasting in the world, particularly those from the waters of northern Australia.  For the Australian consumer, however, they have in the recent past been somewhat of a delicacy, retailing in urban supermarkets at around $30+ per kilo.

 In the last year or two, purchasers of prawns have seen the price plummet.  Cooked and peeled prawns are now available for purchase at less than $10 a kilo.  They are in affect, now cheaper than beef or lamb.   Australians are eating an increasingly greater volume of prawns.  This is not however a result of increased Australian productivity but because of a flood of cheap imports of frozen, farm-produced prawns from China, Vietnam and Thailand.

Australiaís northern waters, from Kimberley in the west to Weipa on Cape York Peninsula in the east, an area of roughly 1 million square kilometres, supports an industry worth annually in recent years about $100 million.  It is however an industry in significant decline.  In 1983 there were 298 trawlers operating in the Northern Prawn Fleet.  Last year the number was down to about 80.  Rising costs, particularly for diesel and crew wages and reduced catches have been partly to blame.  Largely however the problem is one of cheap imports.

Australian prawn fishermen are not the only ones to suffer.  In the USA, a similar situation prevails.  Shrimp consumption has never been higher and prices are low and falling.  Shrimp trawling in the Gulf of Mexico, however, the traditional shrimp fishing area, has significantly declined.  In the movie, Forrest Gump made his fortune from shrimp trawling, but today it is likely that he would be filing for bankruptcy.  Fishermen in both countries have reacted in similar fashion, turning to the government for assistance and for protection against cheap foreign imports, allegedly being dumped in the home market by their foreign producers.

As claimed, the foreign producers of farmed prawns have conspired together to flood Australia with frozen prawns sold below cost with the intention of driving Australian prawn fishermen out of business.  When that object has been achieved, it is claimed the foreign suppliers will be able to control the Australian market and will exploit Australian consumers by charging excessively high prices for their product.  On the evidence, however, the reality is significantly different.

Modern prawn farming largely began in the early 1970s and has grown steadily ever since.  In 1985 it accounted for 10% of the world production.  In 2001 this had grown to 40%.  Farming is a less expensive, more efficient and more reliable way of producing prawns for food than trawling.  Prawn farming now occurs in more than 50 countries and the idea that any group of foreign producers, having driven the Australian fishermen out of business, could thereafter hold Australian consumers to ransom is laughable.  Whilst a niche luxury market for trawler-caught, wild prawns is likely to continue, the bulk of prawns produced in the future are almost inevitably going to be farmed.  

 

                                   David Sharp

                                      10 July 2007     

  

 

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