Dumping and its Menace: How China evades Illegality?

Imagine the emergence of a new foreign firm selling its products at a comparatively lower price than the domestic market. Such a situation is a hazard to the native markets as it imposes a threat to local business with pressing competition. This scenario is noticeable in developing and less developed countries, as the market is dominated by price-sensitive consumers. The price is the major deciding factor in such countries as compared to product quality. This consequently leads to the local market turning into ‘dumping ground’ and sweeping away the market for domestic products, altogether. 

Source: Michael Czinkota

Dumping is an operation of selling goods in a foreign country at a price that is below the domestic price of the respective country’s selling price ensuing from differences resulting from transportation, tariffs, and other cost justification. The new foreign entrant into the domestic market covers its export prices to gain market share. In some cases, the prices are also pushed below the production cost to drive out all the domestic competition and subsequently raise the price to establish a monopoly situation. It is noticed that when the domestic consumers buy monopolistic products at a superior price as a result of dumping, the consumers’ surplus witnesses a loss. On the contrary, if a monopolist produces an excessive amount of commodity to dump in the target country, the consumers end up benefiting because of the decline in the marginal cost as an outcome of excessive production. 

Is dumping Illegal? 

Dumping is not considered to be illegal on economic grounds. It is very much justified to sell the products at a cheaper price than domestically manufactured commodities. If dumping is reliably justified to be not imposing any negative effects on the domestic market, by the exporting firms it is legal under the World Trade Organization (WTO) rules. To tackle the dumping from external countries, the importing country relies on tools such as high tariffs and quotas, as it obstructs the inflow of cheap goods from exporting countries’ firms. Dumping is an intentional effort by the manufacturers of exporting countries to obtain a competitive advantage in the importing market. Such a scenario is deemed to be legal until found illegal by the international organizations for not abiding by the said guidelines. 

How is Dumping by China illegal?

China, unlike other capitalist nations working purely on a free-trade approach, operates on a policy of mercantilism with an indeterminate market approach, it plays the game on the rules set by itself. Due to this, not just the economically vulnerable countries face the blow, but also major developed countries don’t remain unaffected by its unsaid strategies. The US deficit in China has skyrocketed from $83 billion in  2000 to $366 billion in 2015, rising more than 340 percent in just 15 years. Today it accounts for $3.6 of the debt of China. This showcases how China doesn’t differentiate between legality and illegality of trade practices followed across the globe. 

Source: PHD Research Bureau; Compiled from Trade Map Database

Many manufacturers of China exporting to other countries are supported by the Chinese government, without which they can’t function to dump goods beyond a permissible amount. The Chinese government ensures that the availability of factors of production to the manufacturers is at the cheapest cost assisting them in their moves to capture markets in foreign countries ‘illegally’. To keep up the prices of commodities dumped in foreign countries, it manipulates the currency Yuan to make its exports cheaper to be availed in the domestic country. China also keeps its interest rates very low to around 6 percent to make borrowing easy, ultimately lessening the cost of the product. Whereas its neighbour India keeps it comparatively higher at around 11-12 percent making it a more regulated system of the market. The illegality of China’s dumping instances has also been started by WTO as it doesn’t recognise China as a market economy usually because of its lack of transparency in trade decisions and policies. 

Illegal Dumping methods adopted by China 

China has driven out significant competition from many countries across the globe, leaving them indebted with a hefty amount. India itself has lost a whopping sum of $13 billion to China’s illegal dumping practices. It is also responsible for the loss of jobs in many countries including the US, wherein 5 million people lost their jobs with the increase in dumping practices of China. China is responsible for the adoption of various ways to penetrate the numerous world market. 

Source: The Economic Times

Firstly, to attain the major business share, China has sanctioned the practice of under-invoicing of exports goods in multifarious countries. Under invoicing also known as misinvoicing is a method of shifted money abroad. The invoice is made false to exhibit the price of exported goods below the original value paid by the importing country. This helps inflow of illicit money both ways from exporting to the importing countries and vice versa. There are innumerate ways of invoicing impacting the revenue of the importing countries as the imports are over-invoiced or under invoiced to avoid customs duties in the domestic country. On the other hand, the export can also be under-invoiced, to induce money in the importing country. 

Secondly, China enters several economies with prohibited goods with no measures of declarations. But this method is thwarted by many suffering economies, by boycotting the entry of china-made products. In India, the confederation of all India traders (CAIL), an influential lobby of 70 million big and small traders has addressed the issue of illegal entry of Chinese products into the Indian market, ranging from handbags and cosmetics to electronic items. Lastly, China doesn’t hesitate to re-routing its goods to make entry possible in foreign countries with the so-called practice of smuggling, with access to both land and sea routes. Recently, China was accused of exporting goods to the Indian market via countries like Singapore and Cambodia, forcing the government to charge anti-dumping duties for 5 years.  

Effects of illegal dumping by China on the Indian economy

Bilateral trade relations between China and India have observed a widening of the trade deficit on part of India. India has not taken any proactive measures to regulate the influx of goods from the Chinese market, resulting in imports from China increasing manifolds to $50 billion as against mere export to China of $2.5 billion. This results in china affecting the Indian economy adversely because of its illegal dumping practices, the notable effects of which are-

  • Adverse effects on the Indian Manufacturing Sector

The Indian manufacturing sector is the worst hit due to dumping by china’s economy. Indian manufacturing units showcase how reliant on China’s economy for raw materials for instance the pharmaceutical industry and the textile industry. This widens the impact on India’s small and micro industries. India’s telecom and pharma industry gets significant imports from china, wherein 2019-20 India saw flooding of mobile phones from China in large volumes accounting for 83 percent of total incoming. Along with this, India depends on china to supply 90 percent of life-saving drugs from china. 

Source: UN Comtrade Database
Source: UN Comtrade Database
  • Worsening unemployment conditions

A hard-hitting report produced by the parliamentary panel of India showcases how China’s imported goods are unsparing India’s problems of unemployment. At a time when India’s manufacturing sector needs a boost of 25 percent import of Chinese goods is aggravating the Indian job market unemployment, altogether. 

  • Reduction in tax revenue from tax collection

The influx of foreign goods into the Indian economy significantly with no legal permission can lead to a decline in taxes collected by the Indian government, leading to a decrease in government revenue. But India’s well-thought plan of reducing 25 percent of China’s imports will subsequently add to the revenue of the government and provide relief to the MSME sector. 

How International organisations tackle illegal dumping?

International organizations impose anti-dumping duty as its usual measure to check the imports from other countries at lower prices in contrast to the market price charged in the domestic country. Anti-dumping laws play a vital role in counteracting the ill-effects of dumping from countries like China. The WTO allows for wider scopes for imposing provisions for various vulnerable counties falling prey to practices of dumping. Strategies like anti-dumping agreement (ADA) are used to address major problems of dumping or allied problem viz. Predatory Pricing. 

Under ADA and Article VI of GATT 1994, WTO members can impose anti-dumping duty levied to protect the domestic country from exporting country to establish monopoly as part of discriminatory practices. 

Source: Business Standard

Conclusion

With the beginning of 21st century, India saw a huge presence of Chinese products growing exponentially in its markets. Imports from China saw a manifold increase of 33 times from $1.83 billion in 2001 to $60.48 billion in 2016. Surprisingly, the trade deficit of India has also seen a growth of 57 times during 2001-2016.

With the wave of industrialization gaining momentum in India, China’s import to the Indian market saw a dramatic shift from intermediate goods to capital goods rising by 10 percent, whereas that of intermediate goods falling by 8 percent. Due to factors such as cheap availability of labour, and economies of scale, China has succeeded in showcasing its significant presence in textile, electronics, pharmaceuticals, etc. this assists it in dumpling the low-value products into the Indian market by killing Indian units. But in recent times due to problems of unemployment and low tax revenue collection, India has taken proactive measures by imposing anti-dumping provisions set by international organisations. With a major planned shift in the Indian production capacity and consumption patterns of Indian consumers, the Chinese products will experience a bleak future by witnessing a significant decline in upcoming years. 

– Vasudha Jha (Guest Writer)

TYBA, St. Xavier’s College – Autonomous, Mumbai

Edited by: Vedant Shukla (Chief Editor, Econ Declassified)

References

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