Sep 13, 2006 00:52
International Pricing Dilemma: To Dump or Not to Dump!
In 1998, in the wake of the global financial crisis, U.S. steel producers realized that their industry was being hurt by the low price of imported steel. In a desperate move to save their companies, 12 U.S.-based steel producers filed anti-dumping charges against the producers of hot-rolled steel in Japan, Russia and Brazil.
If you study the state of the global steel industry closely you would also find that the U.S. steel industry was highly inefficient. The cost of production was significantly higher than that of steel produced globally, especially in countries like Japan, Russia and Brazil where the manufacturers had established highly efficient state-of-the-art micro steel mills.
Did global steel manufactures from these countries act illegally by pricing their products at competitively low price? I will let you be the judge.
As many of you are well aware, establishing, coordinating and managing prices across country markets is an extremely complex process. The complexity is enhanced for the international marketer primarily due to the interplay of multiple uncontrollable factors that affect pricing decisions. These include but are not limited to: costs, competition, product life cycle stage (PLC), economic environment and buyer purchasing power, government policies and exchange-rate fluctuations, price controls, issues of counter-trade, gray marketing, dumping, and transfer pricing.
You have already read my articles on Gray Marketing and Countertrade. In this article, I will address the issue of dumping as it is applicable to pricing in international markets. I will also highlight the anti-dumping legislation that cautions companies about the ill-effects of setting prices below costs in international markets.
Cost-Based Pricing
One of the standard pricing procedures for exporting a product or product line involves a ?cost-plus? pricing method. A firm using this method arrives at an export price by adding up the various costs involved in producing and shipping the product and then affixing a reasonable mark-up.
When calculating prices using this method, companies may include the manufacturing cost, administrative cost, allocated research and development (R&D) cost, selling cost and transport charges, custom duties, and required fees for various facilitating agencies such as advertising agencies and distribution companies. Depending on corporate and pricing objectives and the competitive environment, firms may use full cost or only variable costs while calculating the price.
Business logic dictates that if the home country market for a product category is saturated and thus unable to absorb the output that your firm is producing or is capable of producing, exporting is a viable option. If the firm does not incur any incremental fixed cost when marketing a product in additional country markets due to economies of scale, it may opt to adopt a penetration pricing strategy whereby the pricing objective is to capture a large market share overseas.
The price charged under this strategy is normally low and sometimes lower than the full cost of production or the price you charge in your home country market. This strategy is economically viable but could actually hurt you in the long term, especially if it is construed as dumping.
One basic limitation of calculating price on a cost-plus basis is that the price calculated on this basis may be too high or too low compared to the value the product delivers in specific market segments or target customer groups. Many factors that can affect pricing in a country market include: competitive environment, state of the economy, value placed by customer to a particular product or brand, customer buyer purchasing power, marketer?s unutilized production capacity, experience curve effects, image and reputation of brand.
Your pricing objectives, positioning and differentiation strategy and country specific pricing regulation also influence your selling price. Hence, it is extremely shortsighted to develop pricing based on cost alone. In view of the constraints stated above, managers must continually grapple with the issue of determining an optimal price that will allow them to achieve their pricing and overall marketing objectives without violating country specific pricing regulations.
Now the question: ?What does pricing have to do with dumping?
Dumping and Pricing
Dumping is often equated with cheap or below-cost imports; in reality the issue is often much more complicated. If left unchallenged, dumping gives the country exporter an unfair competitive advantage with considerable negative consequences for a particular industry in the host country market.
Since there is no single way of defining ?dumping? I have provided a few definitions:
Classically, dumping is considered a subset of predatory pricing and is defined as the act of selling a product at a loss price initially in order to drive competitors out of business. Once competitors have been driven out of a market, a company can then raise their prices to recoup the investment. In many countries, including the United States, predatory pricing is considered an anti-competitive practice and is illegal under antitrust legislation.
In international trade law, dumping is defined as the act of a manufacturer in one country exporting its product to another country at an export price below the domestic price in the manufacturer's own country.
As a business strategy, dumping is a way of setting differential prices to achieve certain market objectives. If the strategy is used internationally to destroy the domestic industry, it becomes a matter of concern for the host country and its national interests.
The U.S. Congress has defined dumping as an unfair trade practice that results in ?injury, destruction, or prevention of the establishment of American Industry.? Under this definition, dumping occurs when imports sold in the U.S. market are priced either at the level that represents less than cost of production plus an eight percent profit margin or at levels below those prevailing in the producing country or both.
Of course in lay person terms, dumping means the illegal disposal of trash. This article is definitely not about illegal trash disposal.
Simply stated, dumping occurs when foreign exporters sell their goods in international markets at prices lower than the price in their home market or at prices below the full cost of production. Many governments have enacted anti-dumping legislation to protect against these practices. Anti-dumping suits, along with safeguards and countervailing measures, are tools used by governments around the world for protecting domestic industries from surges of cheap foreign imports.
Global Anti-Dumping (AD) Legislation
Anti-dumping actions are allowed under the provisions of the World Trade Organization (WTO). The WTO states: If a company exports a product at a price lower than the price it normally charges on its own home market, it is said to be dumping the product.
In fact the WTO believes that dumping is known to occur as long as two criteria are met: ?Sales are made at less than fair value? and there is evidence of ?material injury? to a domestic industry. The WTO AD Agreement allows countries to impose anti-dumping duties to protect their producers from injury caused by imports of dumped goods.
Prior to the adoption of the WTO Agreements in 1995, the use of anti-dumping measures was primarily made by a few, largely developed countries including the United States, Canada, the European Union (EU), Mexico and Australia. Since the implementation of the WTO Agreements in 1995, the number of countries with anti-dumping laws has increased dramatically.
Although the most common argument in favor of strong and effective anti-dumping measures is that it relieves the competitive tension of free trade, many nations uphold that the measures to protect the safety of their citizens. For example, the EU has had to raise import duties on certain foods that it must inspect for certain antibiotics and hormones it has banned for food safety reasons.
Today there are 64 countries with anti-dumping regimes in place and many more likely to enact such legislation in near future.
Enforcement Mechanism?In an anti-dumping suit or investigation, a nation retaliates against specific trading partners who are exporting goods at prices lower than those dominant in the domestic market. Each country establishes its own anti-dumping enforcement mechanism. The cases are filed by domestic companies as well as by labor unions and trade associations to their respective government enforcement agencies.
In the United States the U.S. Commerce Department is responsible for determining whether products are being sold at or below market prices. The International Trade Commission (ITC) determines whether the dumping has resulted in injury to US firms. The litigation, however, is time consuming and expensive, especially for small U.S. companies.
Burdon of Proof?To prove that dumping has occurred there must be proof of dumped imports as well as material injury to a domestic industry, and a causal link between the two. The usual penalty for manufacturers whose products are found in violation of the antidumping laws is ?countervailing duty.? Countervailing duty is an assessment levied on the foreign producer or producers to bring the prices back up over production costs and to impose a fine on producers from various countries found guilty of dumping.
In February 2006, for example, Turkish authorities imposed anti-dumping duties on 14 Asian PET resin producers based in India, Thailand, Taiwan, Malaysia, China and South Korea. According to government documents, levies imposed by Turkish authorities ranged from between 6.5% for producers of PET in Indonesia to 26.57% for those in Thailand.
Trends in Anti-Dumping Initiatives
Over the past decade the worldwide use of anti-dumping recourses has become very widespread. During 1995-2003, 41 WTO-member countries initiated antidumping cases. U.S. exporters were subjected to 139 antidumping cases during this period by enforcement agencies representing 20 countries.
Some of the global trends in anti-dumping activities are highlighted below:
Initiators of AD Investigations in 2005?Looking at all categories of merchandise exports, WTO members launched 191 anti-dumping cases in 2005, down from 213 in 2004. India initiated the most cases with 25, followed by China and the EU with 24 each. The WTO report said that the total number of anti-dumping measures imposed in year 2005 was 131, down from 151 in 2004. The 25-member European Union imposed more measures than any other WTO member with 21, followed by the U.S. with 18, India with 17 and China with 16.
Most measures in 2005 were imposed on exports of Chinese goods. Beijing has also been increasingly willing to use its own anti-dumping action to help local companies and has accounted for 16 of the investigations recorded by the WTO. Investigations frequently involve multiple countries involved in dumping activities in a specific industry.
Target Countries for AD Investigations?East Asian countries have long been the main targets of AD actions, accounting for about one-third of all AD actions during the 1980s, more than 40% of all AD actions during the 1990s, and almost 50% of all AD actions in recent years. After controlling for factors that might influence filings such as the exchange rate and trade volume, it is estimated that East Asian countries are subject to about twice as many cases as either North American or Western European countries.
A WTO report released on May 9, 2006, highlights that China is tops in the world for its anti-dumping cases. For the 11th time, in 2005, one-third of the cases implementing anti-dumping sanction involved China. In 2005 alone 57 anti-dumping initiations were launched against China by their global trading partners.
Even though the total number of anti-dumping cases declined globally in 2005, the case volume involving China did not decline at all. Of the roughly 2,500 anti-dumping cases brought between the establishment of the WTO in 1995 and June 2004, 386 were against China, with measures imposed in 272 cases.
Target Industries for AD Investigations?According to the anti-dumping investigation reports of the EU, America, India and other countries, chemical products like polystyrene, nitrite and citric acid have suffered serious anti-dumping sanctions closely followed by bicycles, shoes and silk products. Foods like garlic, honey and crayfish as well as textiles were also involved.
In China the 15 categories of products under investigation include products like coke, sugar, alcohol and pure magnesium powder, even some electronic and machinery products, automobile parts and steel products. The countries involved in these AD cases include the EU, Canada, the U.S., South Korea and India, all of which are major exporting markets for China. In 2005, chemical and industrial products have become the prey of the anti-dumping legislation.
It is expected that the scale of the products involved in anti-dumping cases will continue to increase and will move from light industry, textile and the electromechanical industry to the steel and white goods industries. While the trend in AD case filings against East Asian countries is increasing, these countries are also initiating AD filings against other countries in Asia as well as Europe and North America.
Final Words
If you price your products at a lower level in the host country than you do in the home country market, or if you establish prices below the cost of production, an antidumping investigation could be initiated against your firm. No international marketer can hide behind the penetration pricing strategy in a country to gain market share.
Antidumping legislation has been adopted by more than 64 countries around the world, and the number is likely to grow. As WTO reports indicate there are no safe havens since any industry or country is prone to anti-dumping investigations.
Since it is extremely costly to defend your position in anti-dumping cases and the penalties for violation are high, it is wiser to be patently responsive to the consequences of establishing prices that have a potential of hurting the domestic industry in your target country markets.
