When the dumpers have certain monopoly power to separate the domestic and foreign markets efficiently, and consider the higher elasticity of demand in foreign markets, the firms will sell the like products at lower prices in foreign markets for increasing market shares. In this study, the analysis from antidumping was provided to demonstrate the decision made by dumping behavior. Dumping is traditionally defined as a discriminating behavior of international prices. From the trade sphere, exchange rate plays an important role on evaluating “LTFV” (less than fair value) to cause the domestic industry to suffer “material injury”. Moreover, this article also discusses the equilibrium whether antidumping law exists or not under the consideration of profit maximization. A staged game is applied to analyzing the players’ behaviors and to influencing the decisions of government trade policies.
This study contributes to antidumping (AD) discussed by exploring the real trade phenomena from the regulation of the GATT/WTO. The AD determination from theoretical viewpoints will be influenced by the AD filing procedure. Through various definitions of dumping and other issues of trade protection, the domestic government will consider the optimal strategy to solve the unfair trading problems without hurting the local industries, and also at same time without disturbing the trade harmony with foreign countries. Under perfect competition in all markets, it is well known that the optimal trade policy of a small country is free trade, while a large country benefits from imposing a positive import tariff. This article constructs a price-competitive duopolistic model to analyze the behavior of firms on AD law, and to derive an optimal tariff on social welfare by considering the exchange rate endogenously decided by the price.
Moreover, this study discusses the AD decisions from a staged game to stress the determinants of trade policies, which are specifically affected by the domestic government decisions. The significance of AD regulation is measured by both economic consideration and national welfare. The conclusions will carefully contrast results from previous studies. The objective of this research is to throw new light on the following questions:
1) If the exchange rates were endogenously decided, would the import tariff be good for the home country’s social welfare in the equilibrium of imperfect competition without AD law?
2) If the model is simplified so that two firms sell the like products and compete in prices, then a two period duopoly model can be created in order to maximize the profit by considering whether or not AD duty is good for home country’s social welfare?
The reminders of this study are organized as follows. A brief literature review is presented in Section 2. In Section 3, a model is described and set out to determine the effects on the government’s announcement of the optimal trade policy without AD law. The model is then extended further to allow for the possibility of AD law. Section 4 contains concluding remarks and possible extensions.
Under the conditions of imperfect competition, asymmetric information, or incomplete capital market, the aim of dumping strategies for foreign companies with low pricesare probably to destroy and drive the competitors out of the market (Matschke and Schöttner (2009) [
Dixit (1988) [
Webb (1992) [
Wares (1977) [
The dumping literature distinguishes between price dumping and cost dumping. Price dumping happens if the sale price charge in the imported-country market is lower than in the exported-country market, and this behavior forms a kind of price discrimination. Cost dumping occurs when a foreign firm sells its products in the imported-country market below its average total costs. The purpose of cost dumping is to capture the overseas market share, and to interrupt international competition.
Nevertheless, according to the current national antidumping regulation, when the imported countries identify the causal relationship of dumping with domestic injury, most of the cases only think about the domestic industrial profit and sacrifice the benefit of consumer and down-stream firms (Wang, 2004) [
Matschke and Schöttner (2009) [
Blonigen and Haynes (2002) [
Regarding the influence of the antidumping system on domestic industries and total national welfare, there exist different economic viewpoints between the two approaches. The economists belonging to the Neoclassical approach, like Viner (1966) [
This study discusses antidumping theories from real phenomena to assume that product markets are imperfectly competitive with constant return to scale, but different in each country. Brander and Spencer (1985) [
The model presented is as follows. The home government acts first to set the import tariff level, and then a duopoly will be set up to identify how AD regulation will affect the foreign firm’s pricing decision. There are two firms: domestic and foreign, and each will produce the like products, but not identical one, which means that the trade products can substitute for one another. The domestic firm only supplies the local market while the foreign firm could export the products to satisfy the insufficiency from Webb’s (1992) [
Dumping, which seeks ultimately to gain a larger market, will therefore be influenced in terms of social welfare. However, dumping is an observed phenomenon in the real world. Historical experience tells us that governments are subject to political pressure, economic variation, social activities, and so on, to deal with AD decision (Wang, 2004) [
The character of actual dumping petitioners indicates that most dumping filings occurred in the intra-industry trade of nearly-homogenous goods, like steel, chemicals, commodities, etc. In contrast to Brander and Krugman’s (1983) [
Further analysis of the issue of antidumping was provided by Knetter and Prusa (2003) [
The practice of international trade is complicated by the existence of different currencies. The offering price is the monetary factor in studying national economies in the international sphere. According to the definition of absolute purchasing power parity (PPP)1, the nominal exchange rate can be expressed as the relative value of prices between the two countries and is considered in equilibrium if there existsthe same “basket” of goods.
Here, the nominal exchange rate is assumed to be
Here, the domestic firm serves the home market with local production
Taking the first order condition of the Equations (1) and (2), we obtain
Since the second order conditions are satisfied as
If taking total differentials of Equations (1) and (2), we have
Since
where the determinant of the Jacobianmatrix
The above results represent the depreciation of the domestic currency (e increases) that makes the price value of the product go down. The depreciation of the exchange rate will also decrease the domestic and foreign prices. On the contrary, the appreciation of the domestic currency will increase the prices. This is expressed in
Under the appreciation situation, the exchange rate will make the domestic and foreign prices increase, and the margin of increasing domestic price is larger than that of the foreign price. If the foreign firm dumps its products onto the domestic market, it is easy to hurt the domestic industry. On the other hand, if the domestic currency depreciates, it is not easy for foreign firm to dump its products onto the domestic market, because the margin of decreasing domestic price is larger than that of foreign price. If it is still dumping under the depreciation situation, it would be in the LTFV (less than fair value) situation.
Compared to the results of Knetterand Prusa (2003) [
This will contribute to an uncertain effect on AD filings due to the exchange rate fluctuations. In addition to trade and economic factors, political issues appear to have some importance in the model setups.
When home country levies tariff
The optimal pricing strategy for the domestic firm is based on the government’s consideration of the influence of the exchange rate. Under the best pricing condition, the first order condition of maximizing utility with respect to the local price using exchange rate exogenously is:
Therefore, the initial tariff rate would be obtained from the above Equation (8) and shown in Equation (9):
Accordingly, free trade is the best policy for the domestic country if the exchange rate is exogenous. Owing to the fact that the exchange rate influence the trend of domestic and foreign prices, if the exchange rate is endogenous for price, the optimal reaction of maximization under the consideration of exchange rate is presented as follow:
From the equation (10),
if
Based on the above analysis, if the firms compete in prices and there is no antidumping law, the optimal policy for home government is to levy an import tariff. An import tariff decreases the after-tariff profit of the foreign firm. On the other hand, the domestic country will get extra benefits by levying an import tariff. It is a serious issue that the foreign firm does not want to be found guilty under dumping investigations. If it is found guilty, the foreign firm has to carry out the antidumping duty as a punishment, and this will decrease the foreign firm profit7. Therefore, the foreign firm will use its influence on the domestic government to avoid the punishment of imposing an antidumping duty, such a threat of retaliation.
Here, a two-period duopoly model is applied to identify how the AD law is influenced by the foreign firm’s pricing decision. Suppose there are two periods during the analysis, t = 1, 2. Without the threat of AD, the domestic and foreign firm simply maximizes their own profit in each period. The production of trade goods from foreign firm to overseas markets will threaten the local industry. Based on the Article 2 of GATT/WTO antidumping regulation, the firms sell the like products to the marketing places. To simplify the model, two firms (domestic and foreign) sell the like products and compete in price, and a two-period duopoly model for profit maximization and discounted by δ can be described as follows:
When the domestic and foreign firms compete in price in the domestic market under the consideration of AD law, the foreign firm will be punished under the LTFV (less than fair value) and material injury determination. If the foreign firm sells in the domestic market at the LTFV price in the value of domestic currency during the first period, this means that the foreign price in domestic currency is less than the domestic price. LTFV sales can occur if
Assume that both the domestic and foreign firms know the benchmark price
The definition of injury, unless otherwise specified, shall be taken to mean material to a domestic industry, threat of material injury to a domestic industry or material retardation of the establishment of such an industry, and shall be interpreted in accordance with the provision of Article 3 in the GATT/WTO antidumping regulations. An injury determination will also be made before the AD duty is levied, when the domestic firm has been injured and if the after-injury profit is less than the normal profit. If the minimum profit under injury determination is
The timing of playing the game is as follows: If the exchange rate is announced by the domestic government, it will determine the realization of first period prices, sales, and profits. Without AD investigation and retaliation, the optimal trade policy for the home country is to impose an import tariff. When foreign import dumping occurs in the domestic market, and harms the domestic firm, the domestic government will initiate an AD investigation. Here, we assume that the domestic firm is a small-medium enterprise, which has not enough ability to investigate whether the foreign firm is dumping or not, and asks for the local government to practice this investigation. Based on the consideration of LTFV, material injury, retaliation and other situations, the government will announce the antidumping decision. If dumping is found to have taken place, consistent with the investigation under the GATT/WTO rules and national antidumping law, a dumping duty will be levied on the imported goods.
To solve the recursive model, the firms will understand that the duty has been levied to affect their pricing decisions. If an antidumping duty is not levied, both firms will maximize their profits as they did without AD law. On the other hand, if dumping behavior has been found, it turns that the dumping price is
Moreover, if a dumping duty is levied on the foreign firm, the expected loss ofthe foreign firm can be presented as follows:
At the moment, it will be assumed that the domestic government finds it profitable for file an AD petition. Considering the LTFV and material injury situations, the two individual firms’ expected profit function under the AD law situation will become:
Taking the first order condition of Firms’ profit function with respect to the first period price, the result is obtained as follows:
Under the dumping situation, the foreign firm adopts a dumping trade strategy in the second period to maximize its profit by expanding the sales in the domestic market. According to the above analysis, dumping has obviously occurred during the period of domestic currency appreciated. Therefore, the appreciation pressure will push the domestic price increase to enlarge the dumping margin, and then the domestic firm will ask for an antidumping investigation and formally request home government to levy an antidumping duty.
In Equations (20) and (21), the first term in both equations can be interpreted as the marginal change to the first period profit, while the bracketed terms can be interpreted as the expression of net price change effects on the second period profit under the dumping situation. By contrast, as far as the foreign firm is concerned, the first period profit is not the only way of maximizing its eternal profit. Using dumping strategy is a tool of obtaining the future profit and crowds out the competitors in the sale market, so that the first period price has a direct impact on the LTFV and injury determination. In particular, the increase of the first period price will lower the probability of LTFV and injury, and reduce the second period loss.
As for the domestic government, antidumping determination will be decided by the consideration of antidumping law, industrial injury, and retaliation. When an antidumping duty is levied, the outcome is susceptible to national welfare effect in the second period. If the domestic government files an AD investigation and imposes an AD duty on the imported goods to maximize the social welfare, it will evaluate the effects of tariff revenue and retaliation loss. Retaliation might produce a tangible but invisible loss, which is the key evaluation for the domestic government when making an antidumping determination. Assuming that retaliation will have an impact on the domestic market demand, like shortage of import products; it will moreover increase unemployment due to increasing the wage rate and so on. Therefore, the two-period social welfare function will be decided as follows:
Here,
This means that the expected payoff from filing an AD petition will not exceed the loss from investigation and retaliation. It is estimated that filing an AD investigation is positive to the likelihood of LTFV, injury and dumping margin. The exchange rate can be used as an indicator to reflect the price difference of the dumping margin and trade-off effects between
Based on Equation (20), the best pricing behavior for the domestic firm under the antidumping situation will be decided by maximizing the social welfare function.
From the equation (19), we see that
Therefore, antidumping duty is strongly influenced by the wage rate, unemployment, and the amount of imported goods. If we take the exchange rate into account and reflect it in the prices to maximize the social utility function, the optimal effect is
Here,
Under this scenario, the extra tariff rate (which is equal to the antidumping duty) that the foreign firm has to pay for its export is determined by the home country’s welfare. Comparing the result from the equation (26), we see that the outcome of such antidumping duty will be decided by the result of
In imperfect competition, the duopoly model assumes that the exchange rate is exogenous, but it is endogenously determined in the real world to influence the variation of price level. The government has an incentive to administrate import tariffs when foreign firms are increasing their domestic market shares or levy antidumping duties when the foreign firms are growing too much due to selling at a lower price. Under the endogenous trade protection policy10, the market sale price will be determined by the impact of the exchange rate during the international trade situation. Moreover, the exchange rate will influence the sale price in the domestic and foreign markets. In this model, it is clearly seen that most of the dumping investigation will take place when the domestic currency is strong, because the appreciation will increase the price index and production cost in the domestic market. On the other hand, the foreign price relatively depreciates, leading to cheaper foreign imported goods. This study produces a result that is more reasonable than that derived by Knetter and Prusa (2003) [
Under the consideration of antidumping law and retaliation, the domestic government agency will evaluate the pros and cons to levy an AD duty. If it is worth filing an AD determination, the government agency will punish the foreign firm; if not, it will subsidize the domestic firm as the best policy of reaching maximization of utility. The dumping margin is a good indicator but difficult to determine for the investigation. Due to the fact that variations on economic variables can influence the price differentials, the government agency should not consider the dumping margin when determining the presence of material injury. The legislation points out that commissioners must determine whether material injury is caused by “the reason of dumped imports”, rather than whether “the dumping per se causes injury”.
Since most antidumping cases occur when there exists substantial intra-industry trade of the like products, the factors of price dumping and cost dumping were considered in this analysis. Moreover, an antidumping duty as a government choice protects domestic industries from unreasonable foreign competition. But it is very important for the domestic government agency to decide whether to levy an antidumping duty or not by comparing antidumping effects and normal effects under the consideration of national welfare. Now, for the future study we can extend this model to include all the industries for consideration of the economic environment, the total production for all industries will be reflected in GDP. Moreover, exchange rates, wage rates, price index, unemployment rates, exports and imports are good indicators for analyzing the antidumping petition.