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A Closer Look at Dumping

JUNE 01, 1991 by S. J. CICERO

Mr. Cicero is a computer software engineer in California.

One hears frequent complaints that foreigners, particularly the Japanese, “dump” their merchandise (sell it below cost) in American markets, thus making it difficult for U.S. manufacturers to compete. Is there any truth to these charges?

First, we need to bear in mind that there is generally no such thing as a single “cost”; costs can be calculated in several ways. There are average costs over various lengths of time, overhead costs that can be amortized by a number of techniques, quantity-related variations, and so on. When items are being mass produced, the “cost” of a specific finished product depends on operating costs, which are bound to fluctuate. Additionally, what about the cost of failing to sell the item in a timely fashion—the “opportunity cost” of manufacturing one kind of item instead of another?

There are many reasons for selling merchandise at or below “cost.” One of the most common is the attempt to secure a greater market share. Furthermore, a foreign market may be much larger than the home market, giving rise to economies of scale for goods shipped abroad which do not apply in the home market, so that even such price differentials as these are not sure signs of predatory intent.

Second, the sole purpose of production is consumption. This means that goods not consumed are wasted, and represent a loss of profit opportunity. In a competitive market, this prompts each manufacturer to concentrate on what he does best, and to continually improve his production techniques to hold the competition at bay. Profit is the essential link that drives this process. The profit incentive encourages innovation, and reinvested profits enable innovations to be brought on line. To operate deliberately at a loss is a risky strategy that, in the absence of government “assistance,” can be kept up only for a short time.

Third, while it is true that a country’s government may subsidize a favored industry, enabling that industry to outdo its rivals, this can be done only at the expense of other industries, rendering them less competitive. The net effect is to reduce overall productivity, putting the country as a whole at a competitive disadvantage.

This is so because the taxation required to shift capital to the favored industry tends to reduce incentives in both the favored and the taxed sectors. In addition, the act of collecting and distributing the tax is costly, with no offsetting increase in production. When the state diverts resources to its favored industries, the whole economy is rendered less efficient.

Fourth, the “dumping” of goods into the American market benefits U.S. consumers, who enjoy lower prices and thus increased purchasing power. The particular industry that competes with the cost-cutter does, of course, face a challenge. But rather than calling for tariffs and import quotas, a better strategy would be for the threatened company to cut overhead where possible, shift production to more profitable lines, and emphasize quality and/or promote product differences when advertising. Given this, an industry which is still uncompetitive will contract in favor of its rival, freeing up workers and capital for more profitable and therefore more productive endeavors.

If U.S. industries can’t compete, it is largely due to misguided policies, both within the industries themselves and inflicted upon them by our own government. Before we blame Japan or Germany for our troubles, we would do well to get our own house in order. Taxation and inflation hurt our ability to compete, as do burdensome regulations. Pro-union legislation, pitting labor against management and nonunion workers, drives up costs. Tariffs and import quotas, which enable a company to continue operating in an inefficient manner, hurt overall productivity and thus harm consumers. In the case of Japan, we are foolish to accuse the Japanese government of subsidizing their industries, when we subsidize virtually all of Japan’s defense, thus freeing much of their tax revenue for use in subsidies.

Economic principles are always the same, whether we consider trade across national boundaries, state borders—or across the street. People benefit from unrestricted trade. Attempts to restrain trade always reduce overall prosperity, particularly for consumers who would otherwise find the imported goods less expensive. It would be helpful if we could remember that the Japanese people trade with the American people, to the mutual benefit of both. We are partners in trade with the Japanese, not adversaries.

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June 1991

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