We received some great questions from readers on our recent article about free trade, many of which had to do with how we should respond to unfair trading practices by foreign firms or governments. One practice commonly labeled unfair is dumping, where trading partners sell a commodity at a price deemed artificially low by some standard, thus threatening our domestic industry. Thinking carefully about this pricing strategy and our potential responses involves careful consideration of one’s views on free trade as well as government intervention in markets both foreign and domestic.
A 1977 AIER research brief took up this question in the context of practices by Japanese manufacturers that were deemed unfair. “If Japanese authorities refuse to remove these barriers and U.S. authorities retaliate with their own barriers, what would be the probable result? Aside from the possibility of escalating retaliation, the result would be further forced adjustments to third-best alternative means of production, with consequent further higher costs of production and reduced standards of living. This hardly seems to be a course of action favorable to the interests of U.S. citizens.” In other words, two trade wrongs do not make a right and could lead to a trade war that hurts everyone involved. But what if our trading partners engage in practices that we would consider illegal in our domestic market?
We first need to think carefully about what we mean by “dumping.” If foreign producers are offering a product at a lower price than domestic ones because of greater supply or lower costs, this is simply comparative advantage. Though some in the domestic industry will be harmed, it’s likely best for the economy to adjust to producing other goods. There are two definitions of actual dumping. One is importers selling at a lower price than they do in their home country. But this definition overlooks differences in demand or other market conditions that could justify such price discrimination, which is typically legal in a domestic context. The other definition of dumping is selling at a price below cost to force competitors out of the market, at which point the seller can raise the price and make monopoly profits. Domestically, this is called predatory pricing, and it is illegal under antitrust statutes.
In a 2015 paper, Heritage Foundation Legal Fellow Aldon Abbott argued that the predatory pricing standard that is applied in domestic cases should also be the one applied to allegations of dumping from abroad. Legislation in the 1970s and 1980s loosened this standard in the trade context to the price discrimination view. If one supports the enforcement of current U.S. antitrust laws, this view is perfectly consistent. But what if one disagrees with current antitrust policy? In a 2001 Cato Institute Policy Analysis, Clyde Crews, then director of technology studies, argues that successful predatory pricing is virtually impossible. A firm would have to incur significant losses to force others out of the market, and once it could reap monopoly profits, others would be incentivized to enter again. Furthermore, he argues that such a strategy is easy to spot early on. Customers, suppliers, and even public opinion would make it difficult to execute. If predatory pricing isn’t really a threat domestically, is it a threat from foreign firms or governments?
The purpose of this analysis is not to take a position on antitrust law but to call attention to what it means to support free trade. If one generally supports the free movement of goods across borders, it is worth asking if there is any reason our view of market regulation should differ at home and abroad.