From Nov. 21, 2013, China will impose anti-dumping duties on the pyridine imported from India and Japan. Commerce department of China made the announcement that after investigation, there was evidence shown that dumping really existed in the process of importing pyridine from India and Japan. The benefit of domestic pyridine industries was hurt because of the dumping action.
In Economics, dumping is regarded as an aggressive pricing strategy. It only occurs when manufacturers export a product to another country at a price either below the price charged by the same firm in its domestic market or at a price blows costs of production. Anti- dumping duty is an action taken by the Home country in order to protect domestic manufacturers. Since dumping action hurts domestic manufacturers’ benefit, anti-dumping duty can protect those firms in the short run. However, in the long run, it can be harmful to the overall social welfare and lead to even worse results.
First, let’s take a look at a graph below that shows how the anti-dumping duty affects the supply and demand, and price in domestic market. We can see that the price is Pworld before tariff (which is the anti-dumping duty in our case). Supply is Qs1 and demand Qc1 in the domestic market. With tariff, the price goes up to Ptariff which increases the supply to Qs2 and decreases demand to Qc2. Actually, the price of pyridine was 32,000 CNY per ton before the duty, but it is expected to be growing to 40,000 CNY with tariff. Producer surplus and tax revenue increase while consumer surplus decreases. Domestic industries can benefit with higher price but the consumers suffer the lost. Though government gains revenue from imposing tariff, the overall all social benefit decreased. The domestic manufacturers produce more and the whole country imports less, but the consumption by consumers is also lower.
Besides, those exporting companies who face anti-dumping duty might direct invest in the importing country. By foreign direct investment, foreign companies can set up subsidy companies to produce pyridine in the home country. Because the subsidy company might have better technology and big enough to benefit from economy scale, the company’s cost of production is lower than other companies in the domestic market. Thus the price it charges could be so competitive that domestic companies cannot sell at the previous price any more. So the anti-dumping duty cannot protect those companies effectively.
When anti-dumping duties were applied to raw materials such as pyridine, the cost of its upstream product will be higher. This is called Ripple Effect. When the cost of the upstream product increases, its competitiveness in the global market will decrease. The overall price level of goods which involve with the raw material will goes up. This will have a series of bad impacts on the economy.
The exporting country may want to revenge to the home country because of the anti-dumping duties. The exporting country could impose tariff on the goods which the home country exports. This could lead to big problem: two countries cannot have free trade any more. Both countries’ welfare will be lower.
Therefore, in the short run, the anti-dumping duties imposed on pyridine would protect the domestic manufacturers. The consumer surplus and social welfare will decrease. However, the result can be even worse because those foreign exporting company can direct invest in the home country and the price of pyridine will be too low to make the domestic manufacture survive. Also, the cost of the related products will be higher. The demand on those products in the global market will shrink. Last but not the least, since Japan and India trade with China quite a lot, they might impose tariff on the goods imported from China. And this is not a good result for any country.
Steven Husted, 2009, International Economics