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Oct 16

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China “Dumps” on the US

On Wednesday, October 10, 2012, the US Commerce Department came to a final ruling on a trade dispute with China, wherein certain Chinese manufacturers of solar panels and cells were accused of “dumping” their goods on the United States. In response, tariffs were imposed on imports from companies such as Suntech and Trina Solar, ranging from 34 to 47 percent of sales.

 

“‘The verdict is in,’ Gordon Brinser, president of SolarWorld, said in a prepared statement. ‘In addition to its preliminary finding that Chinese solar companies were on the receiving end of at least 10 WTO-illegal subsidies, Commerce has now confirmed that Chinese manufacturers are guilty of illegally dumping solar cells and panels in the U.S. market.’” [1]

 

“Dumping” is an anti-competitive predatory pricing strategy which is illegal under US law. Predatory pricing can generally be described as pricing items below marginal or variable cost in order to injure or eliminate competitors.

Marginal cost is the additional cost associated with production of one more unit of a product. Many fixed costs, such as executive salaries and rent, generally stay fairly constant and are excluded, while costs that vary with sales, such as cost of goods sold and commissions, are included. Economies of scale can lead to a lower marginal cost at the subject company.  However, a significant increase in sales could lead to an increase in items that are normally fixed costs, such as when additional rent is required for warehouse space to house substantial increases in inventoried goods.

To maximize profits, a free enterprise entity would not normally sell goods at a price that does not cover its marginal cost. The above ruling indicates that by selling products below their marginal costs, the Chinese companies hoped that their short term “investment” in the form of temporary losses would cause the competitors to go out of business or abandon this product line. If they could achieve a monopolistic hold on the market, the subject companies could obtain abnormally high profits in the future by raising prices. Adding fuel to the fire was the fact that the Chinese government was subsidizing these companies’ losses to keep them in business and offset this “investment.”

This isn’t the first time China has been accused of unfair trade practices (recall the Chinese tires charade during the summer of 2012). While, some feel that China is a simply an easy political target during an election year, anti-competitive practices are a legitimate threat to free trade.

 

 

[1] http://www.washingtonpost.com/business/economy/us-imposes-tariffs-on-chinese-solar-panels/2012/05/17/gIQAz59XWU_story.html

About the author

Maksim Dvorkin

Maksim Dvorkin is a consultant at Fulcrum Inquiry, an accounting, finance and economic consulting firm specializing in complex litigation, forensic investigations and appraisal issues across a broad spectrum of industries.

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