dumping

Two additional causes for retaliation in trade are dumping and subsidies. We can define dumping in three ways; it consists of selling a product abroad for less than the cost of production, less than the price in the home market, or less than the price to third-party countries. A manufacturer may dump products to sell excess production without disrupting prices in its domestic market, as a response to cyclical or seasonal factors (during an economic downturn or at the end of a fashion season), or as a way to increase market share. A manufacturer may also lower its export price to force the importing nation's domestic producers out of business, expecting to raise prices once that objective has been accomplished. This is called predatory dumping.

The United States became the first country to prohibit the dumping of foreign goods into its own market, in 1916. There is no U.S. law prohibiting U.S. firms from dumping their goods abroad, however. The area of dumping, its regulation, prosecution, and prevention, is now within the domain of the WTO, yet most governments retaliate when they perceive dumping to be harming local industry. For example, the United States imposed punitive tariffs of 31 percent and more on Chinese solar panels in retaliation for China's dumping of under-market-priced panels. China holds 60 percent of the solar panel market and is alleged to have forced several U.S. manufacturers out of the business with under-market pricing.⁴⁸

Social dumping occurs when producers have lower wage rates, lower social costs such as unemployment taxes and environmental regulations to support the general welfare, poor worker benefits, and poor working conditions, all of which undermine social support systems. And environmental dumping occurs when an exporter can sell at lower costs due to the country's lax environmental standards.

Another cause of retaliation is subsidies a government makes to a domestic firm, either to encourage exports or to help protect the firm from imports. Subsidies can take the form of cash payments to the firm, government participation in ownership, low-cost loans to exporters and foreign buyers to encourage purchase, and preferential tax treatment. For example, as shown in Figure 5.5, OECD nations provide billions of dollars per year to their farmers in subsidy supports. Perhaps the greatest damage caused by this assistance in developed economies is its effect on the millions of farmers in the poorest nations. Most of the agricultural subsidies in developed countries go to a small percentage of recipients, usually large enterprises. The subsidies enable them to undersell unsubsidized, small farmers in developing economies on the world commodities markets. These agricultural subsidies are the current focus of the WTO, and talks on them have been making very slow progress. The Global Debate box provides a more detailed example of subsidies for sugar producers in the United States.