Dumping: An Evil or an Opportunity?

Mr. Huemer is a Ph.D. student in economics at Columbia University. This essay won first place in the 1988 Milton Friedman Essay Contest conducted by the Americanism Educational League, Buena Park, California. The contest drew over 4,000 entries, with Milton and Rose Friedman judging the finalists.

In the latter half of the nineteenth century, America’s rail barons were engaged in a titanic struggle for control of the nation’s commercial rail traffic. Notable in this conflict was the attempt by Cornelius Vanderbilt to drive the Baltimore & Ohio Railroad out of business. Confident of success, Vanderbilt slashed the rates on his New York Central line’s cargo fares, knowing Baltimore & Ohio couldn’t hope to compete. Soon, however, the flush of victory turned to crimson rage: the head of the B & O railroad, Jim Fisk, had bought most of the cattle in Buffalo and shipped them to New York City for resale, on Central trains, at the ridiculously low fare of $1.00 per head. The rate war had failed, and Vanderbilt was humiliated.

Over 100 years later, titanic struggles are again taking place. This time, the principal actors are huge multinational corporations, and instead of “rate wars” we observe the heralded consequences of their competition: international dumping.

The act of dumping is defined as “foreign sales below the home price.” The term has been used in recent years to describe myriad competitive activities undertaken by international firms, until it has become difficult to identify dumping as an activity apart from fair competition. The European Community Commission recently accused five Japanese companies of dumping because they were importing low-priced parts from Japan for their typewriter assembly plants in Europe. Meanwhile, Chrysler Corporation has been accusing the Japanese of dumping automobiles in the U.S. market, while deflecting accusations of import dumping themselves by arguing “the core of the [dumping] issue goes to the manufacturer of the cars, not distributors, such as ourselves.”

In the press, in political speeches, and in the statements of interested parties, the term “dumping” has become a vague catchword with which to abuse every kind of foreign competition.

This statement was made by Gottfried Haberler in 1933. Abuse of the term “dumping” is not a modern phenomenon, but has resurfaced recently because of the awful images the term evokes: images of protected international monopolies overwhelming domestic markets, forcing Americans out of work and destroying strategic industries. But the images are exaggerated, the truth far less daunting.

Firms finding themselves exceeding their predicted inventories are often obliged to get rid of their excess stock of goods by temporarily selling below the usual retail price. When sold abroad in this fashion, we refer to it as intermittent or sporadic dumping, since sustained dumping of excess inventories cannot be maintained. This type of dumping is usually harmless; most firms can survive a temporary drop in the market price of their good. Moreover, foreign firms faced with excess inventory problems will not simply cut prices abroad, but domestically as well.

Another type of dumping is that performed by foreign monopolies. When faced with increasing returns to scale of production, and unable to increase its profits by raising domestic sales, a firm may still reap greater profits by expanding production for foreign markets. So long as the costs of producing the good are met by foreign demand, the fall in per unit production cost will increase profits in the domestic market.

Therefore, a firm may competitively charge less for its product abroad than at home. However, any fall in cost of production will lead a profit-seeking firm to expand domestic sales as well. To spur demand for its good, the firm will cut the domestic price, and the best dumping price will fall again, but somewhat less. Ultimately, the prices in the two countries must converge, following a process of successive domestic and foreign price cuts. Such dumping cannot be sustained indefinitely.

It is not necessary, therefore, to introduce tariffs or duties to equalize the price of dumped goods at home and abroad remedies likely to be suggested by those firms operating too inefficiently to compete fairly with the foreign firms. Rather than enjoy the inexpensive product of efficient foreign industry, while we concentrate on developing our own, we are being asked to accept higher prices from aging, un-competitive industries.

Arguing against dumping as a product of unfair foreign trade practices, many people have pointed out that domestic industries might effectively compete with dumping firms if they could sell goods in unprotected foreign markets, expanding domestic output and reducing costs of production. Unfortunately, in the midst of making this perfectly reasonable argument, many people are inexplicably stricken with an attack of hypocrisy. They reason that if foreign nations are successfully dumping because they are protectionist, our best response is to be protectionist in turn. In a sense, they attack the symptom by aggravating the disease. The results are higher prices, crippled trade, and the persistence of industrial inefficiency.

There is one other type of dumping: that arising from predatory pricing. It has been suggested that foreign firms dump their goods in an effort to drive their competition out of business, with the object of cartelizing the market in those goods. This is potentially the most damaging, yet least likely form of dumping to occur. In addition to being very costly to maintain, the resultant domination of the market would be exceedingly difficult to exploit. Any attempts to raise the price of the good above the competitive price would encourage other firms to come into the market and force the price down again.

How Should We Respond?

In the meantime, how should we respond to the dumping? For an answer, we need look no further than the example set by Jim Fisk: If foreign firms are prepared to sell us their goods below costs, we should let them. We can improve our standard of living and economic power by consuming their finished goods, and use their intermediate goods to cut our own production costs. Acts of predation can become opportunities for subsidy, if we are wise enough to take advantage of them.

Many people feel that we risk losing a great deal more than markets to foreign competition. It has been argued that we may lose our culture, our national security or even our power over our own government! Any careful consideration of these issues will lead us to reject these fears as groundless. As for companies influencing government policy, The Economist remarked recently, “This should more reasonably concern a tiny Pacific island . . . than a nation as large and diverse as the United States.” On national security grounds, we must have access to strategic resources; but we needn’t own them, and anti-dumping legislation has done much more to deny than to improve that access. Lest we fear for our culture, we should remind ourselves that as a free people, we needn’t patronize those industries which do not cater to our tastes, or which offend our ideals. In the end, we need to realize that “ownership is no longer the main source of economic well-being.”

What have we gained by criticizing international dumping? The only recent prosecution of a dumping case in our country has resulted in a trade agreement with Japan on the quantity and price of semiconductors the Japanese may sell us. While U.S. semiconductor producers continue to rail against the Japanese for questionable violations of the agreement, U.S. computer manufacturers are complaining of severe shortages of memory chips and semiconductors, resulting in serious production delays and mark-ups of as much as 400 percent. In Europe, the Japanese are finding it difficult to continue establishing factories, while the Europeans are, as The Wall Street Journal observed recently, “on the one hand inviting companies to create employment and improve the trade balance with Japan, and on the other hand restricting use of vital components that are often difficult to procure . . . .

What Would Happen Today?

If we were to rewrite our story of the rail barons in modern terms, it might go something like this: Cornelius Vanderbilt slashes the rates on his New York Central cargo fares. This time, Jim Fisk complains to Senator “Boss” Tweed in Albany. Securing an injunction against Vanderbilt, Fisk appeals to the people against “the shameful predatory pricing” of the New York Central Railroad, and justifies the sudden legal barrier to lower rates as “‘necessary” for the preservation of jobs, national security, and the sanctity of government institutions. Jim Fisk, no longer the wily entrepreneur, has become a coward and a scoundrel.

We, too, have an image to maintain. Where once Americans might have taken advantage of dumping to reap a tidy profit on finished goods and inexpensive consumption from cheap foreign exports, we now seek protection from them with barriers to fair trade and shrill condemnation of our allies and trading partners. In the name of dumping, we have humiliated ourselves internationally. Worse, in facing our problems we have denied our heritage of freedom and equality for the “opiate” of protectionism. It is time for us to reclaim that heritage, and with it the opportunity of a better future for America. It is time to overcome the “evil” of dumping, that evil which is in ourselves, and reclaim those opportunities which made America great.