Protection against Dumping:

Dumping is said  to occur when firms sell goods at significantly  lower prices in export markets than in their domestic markets, in a bid to capture a larger share of the foreign market.

Economic theory  provides  an  insight into why dumping occurs  in the first place. It can be shown  that when markets are imperfectly competitive, firms have an incentive to carry out price discrimination, whenever they face segmented markets for  their products.

Typically international markets are imperfectly competitive  and. naturally segmented, owing  to high transport costs and so on, thereby providing a classic opportunity for price discrimination.

Firms  in  the importing country consider dumping  an unfair,  predatory practice. By charging  a lower price foreign firms may suffer losses in the short term, but eventually  they stand to earn monopoly profits if they successfully drive out domestic firms.  In that case, consumers who benefit from'lower  prices in the short run, also stand to lose in the long run when the monopolist sets prices.

Therefore  firms in  the importing country lobby for imposition of antidumping duties as protection  against dumping. In  fact the WTO has put  in place an elaborate procedure for  investigation of anti-dumping charges  brought by domestic firms. Antidumping duties may be levied if the charges are found to be true. A few  safeguards have also been built into the WTO Anti-dumping Agreement, in a bid  to curb the protectionist bias inherent in anti-dumping duties.

However there are two problems with using antidumping  as a justification for protection. The  first relates to the misuse of this argument for  protection. Inefficient firms may get protection  by  successfully bringing antidumping charges against efficient foreign firms. In  this case domestic consumers lose out as they would have to pay higher prices.

A second problem relates to the way antidumping charges are investigated in practice. There is quite some ambiguity  regarding calculation of the 'dumping margin', which is the difference between the  'fair price' (the average cost of production of the foreign firm plus a 'reasonable margin of profit')  and  the price it actually charges  in the domestic market. However, most often foreign costs of production  are not exactly known  and  approximate figures  used instead, making the procedure somewhat arbitrary.