The agreement among national representatives at the WTO in Geneva earlier this month appears to have gone down well with the Indian political establishment. At least, I have not seen an adverse comment. The detail that has got highlighted the most is the acceptance by the US and the EU to cut their export subsidies in agriculture. Heads of farm organisations in India have hailed this as a triumph for farmers in India, which it is of course. Unlike these simple men, the political class has rushed to claim this as a triumph of India’s national interests. However, as I have said in my last article here, rare is the occasion when trade affects all groups in a country in the same way. Let us look at some scenarios following from the proposed removal of western subsidies. If, as our farm representatives believe, it will raise world grain prices rendering Indian farmers competitive then the chances of domestic prices in India rising are high. This can hardly be in the interest of the non-farm households, some of them already very poor. In most cases trade causes income-distributional shifts within countries. Often these can be more contentious than income distributional shifts between countries. And when there are such cleavages within a country, talk of overarching national interests really only serves to obfuscate. Of course, the tendency is by no means confined to worthies in our neck of the woods. The United States government is constantly at this game. For instance, when it speaks of TRIPS serving American interests it is really only a variation on the theme that what’s good for General Motors is good enough for America, only this time it means the US pharma companies. Actually, rigid application of TRIPS could mean that US citizens do not have access to affordable aids drugs from India so long as patents held by US companies on these drugs are yet valid. So, quite often trade policy can end up pitting corporations and governments versus the citizen rather than the Americans versus the Indians. In this article I wish to continue with the theme that so often in the negotiations over trade the interests of producers are palmed off as the national interest.
A news item in the national press dated July 31 speaks of the United States Department of Commerce slapping a 13 percent ‘anti-dumping’ duty on three Indian exporters of shrimp. Actually, 13 percent is the average rate of duty. The rate to be faced by Hindustan Lever Limited is reported to be as high as 27 percent, which as anyone can see is normally enough to knock a firm out of competition. To an economist this is an instance where “fair is foul and foul is fair”. Technically, ‘dumping’ is used to describe a firm charging a lower price for a good when it is exported. In the United States this it is branded ‘unfair competition’. This is an odd charge, as price discrimination would be recognised as sensible business strategy for a firm facing segmented markets. Markets are segmented when a firm’s actions in one market have no repercussions in the other markets where it sells. The world market for many goods is segmented due to transportation and protectionist barriers. This makes it possible for firms to practice price discrimination. But why would they want to do it at all? Because it is profitable. When a firm’s domestic sales exceed its sales abroad, and a factor of ten is not inconceivable, the revenue gain from a unit reduction in prices is far greater in the case of foreign sales than it is in the case of domestic sales. This introduces an incentive to lower the export price while retaining the domestic one. Another way to see this is that as firms have less monopoly power in the world market than they do domestically their market share is very likely lower and, as a consequence, their sales revenue will be far more sensitive to price reduction there.
There is no good economic justification for regarding price discrimination as an unfair trading practice. However, US trade law prohibits foreign firms from selling at a lower price in the Untied States market. Terming such a practice as ‘dumping’ the United States government automatically imposes tariffs whenever it is discovered. US firms that claim to have been injured by foreign firms selling at lower prices in the US market can appeal to the US Department of Commerce. If their charge is ruled valid, and it mostly has been, an anti-dumping duty is imposed equal to the calculated difference between the actual and the ‘fair’ price of imports. The point however, is that there’s nothing fair about this practice. Only, as a result, inefficient American producers get protection, Indian firms become uncompetitive, and Johnny pays more for shrimp cocktail.