Reasons for trade restrictions: avoid dumping

IGCSE Economics 0455 – Topic 6: Globalisation, Trade Restrictions and the Balance of Payments

6.1 Specialisation & Free Trade

• Specialisation: Countries concentrate on producing the goods and services for which they have a comparative advantage – i.e. a lower opportunity cost than other nations.
• Free trade: The removal of all barriers (tariffs, quotas, licences, subsidies, embargoes) so that goods and services can move across borders without restriction.
• Benefits of free trade:
  • Greater variety of goods for consumers.
  • Lower prices because firms compete internationally.
  • More efficient use of resources – output rises and overall welfare improves.
• Potential costs:
  • Domestic firms that cannot compete may shrink or close.
  • Job losses in protected industries.
  • Dependence on imports for essential goods.

6.2 Globalisation – Causes and Consequences

Causes of globalisation

• Fall in transport costs (containerisation, cheaper air freight).
• Advances in communication and information technology (Internet, satellite).
• Growth of multinational companies (MNCs) that operate in several countries.
• Liberal‑trade policies and regional trade agreements.

Economic consequences

• Increased trade flows and foreign direct investment (FDI).
• Greater competition → lower prices and more choice.
• Technology transfer and productivity gains.
• Risk of de‑industrialisation in some regions.

Social and environmental consequences

• Spread of ideas, cultures and lifestyles (cultural convergence).
• Income inequality – gains may be unevenly distributed.
• Environmental pressure from higher production and transport.

6.2.3 Role of Multinational Companies (MNCs)

• Definition: Firms that own or control production facilities in more than one country.
• Advantages for host countries:
  • Creation of jobs and skills development.
  • Access to new technologies and managerial expertise.
  • Boost to export earnings.
• Disadvantages for host countries:
  • Profits may be repatriated to the parent country.
  • Potential crowding‑out of local firms.
  • Market dominance that can limit competition.

6.2.4 Types of Trade Restrictions

Restriction	Purpose	Typical Example
Tariff (import duty)	Raise the price of imports; generate revenue.	5 % duty on imported steel.
Import quota	Limit the quantity of a good that can be imported.	Maximum 10 000 t of wheat per year.
Export subsidy	Encourage domestic producers to sell abroad.	Government pays farmers £50 per tonne of exported corn.
Import licence	Control who may import a particular product.	Licence required for importing pharmaceuticals.
Subsidy to imports (import subsidy)	Make imported goods cheaper for domestic consumers.	Government provides a cash rebate on imported cars.
Embargo / trade ban	Political tool – stop all trade with a country.	EU embargo on certain goods from Country X.
Anti‑dumping duty	Neutralise the effect of dumping (see Section 6.5).	25 % duty on cheap imported cars.

6.2.5 Reasons Governments Impose Trade Restrictions

• Protect infant industries that need time to become competitive.
• Shield declining industries that are important for employment.
• Safeguard strategic sectors (defence, energy, food security).
• Prevent dumping (selling below normal value or below cost of production).
• Correct balance‑of‑payments problems (reduce import bill).
• Restrict imports of de‑merit goods (e.g., tobacco, alcohol).
• Protect the environment (e.g., bans on products that cause deforestation).

6.2.6 Consequences of Trade Restrictions

Home country (import‑restricting)	Partner country (export‑restricting)
Protects domestic producers and jobs. Generates revenue (tariffs, licences). Higher consumer prices and reduced choice. Potential retaliation – risk of a trade war. May worsen the balance of payments if foreign‑exchange earnings fall.	Reduces export opportunities. Loss of foreign‑exchange earnings. Possible retaliation (tariffs, quotas). Pressure on domestic producers to find new markets.

6.3 Foreign Exchange Rates

Key definitions

• Foreign exchange rate: The price of one currency expressed in terms of another (e.g., £1 = $1.30).
• Floating (market‑determined) rate: The exchange rate is set by supply and demand in the foreign‑exchange market.
• Fixed (pegged) rate: The government or central bank sets the rate and intervenes to keep it at that level.
• Appreciation: The home currency becomes stronger – it buys more foreign currency.
• Depreciation: The home currency becomes weaker – it buys less foreign currency.

Why countries buy or sell foreign currency

• To pay for imports.
• To receive foreign currency from exports.
• To invest abroad or repatriate profits.
• For tourism (outbound and inbound).

Factors that influence exchange‑rate movements

• Interest‑rate differentials.
• Inflation differentials.
• Current‑account balances (trade surplus/deficit).
• Speculative expectations and investor confidence.

Consequences of exchange‑rate changes

• Depreciation:
  • Exports become cheaper → may boost export volumes.
  • Imports become more expensive → can raise inflation and reduce import demand.
• Appreciation:
  • Imports become cheaper → lower consumer prices.
  • Exports become more expensive → may reduce export earnings.

6.4 Current Account of the Balance of Payments

Structure (three components)

Component	What it records
Trade balance (goods & services)	Exports minus imports of goods and services.
Net primary income	Income earned from abroad (e.g., dividends, interest) minus income paid to foreign investors.
Net secondary income (transfers)	Unrequited transfers such as foreign aid, remittances, and gifts.

Formula

Current‑Account Balance = Trade Balance + Net Primary Income + Net Secondary Income

Causes of a current‑account deficit

• High domestic demand for imports.
• Low competitiveness of domestic export industries.
• Strong domestic currency (makes exports expensive).
• Large outflows of primary income (e.g., profit repatriation by MNCs).

Causes of a current‑account surplus

• Strong export performance (high demand for domestic goods abroad).
• Weak domestic demand for imports.
• Weak domestic currency (makes exports cheap and imports expensive).
• Net inflow of secondary income (e.g., large remittances).

Consequences of a deficit

• Increased foreign‑exchange borrowing → higher external debt.
• Pressure on the exchange rate (possible depreciation).
• Potential loss of investor confidence.

Policy responses to a current‑account deficit

• Exchange‑rate adjustment: Allow depreciation to make exports cheaper.
• Fiscal policy: Reduce government spending or raise taxes to lower import demand.
• Monetary policy: Raise interest rates to attract foreign capital.
• Supply‑side measures: Improve productivity, support export‑oriented sectors.

6.5 Dumping

What is dumping?

Dumping occurs when a firm exports a product to another country at a price that is lower than:

• the price it charges in its home market (or a comparable domestic price), or
• the cost of production plus a reasonable profit (i.e., below normal value or below cost).

It is usually intended to gain market share quickly, but it can damage producers in the importing country.

Why governments seek to avoid dumping

• Protect domestic industries – prevent loss of market share and closures.
• Maintain employment – keep jobs in affected sectors.
• Preserve fair competition – ensure price competition is based on efficiency, not artificially low prices.
• Prevent market distortion – avoid long‑term price suppression that could lead to monopolistic practices once rivals exit.

Measuring dumping – the dumping margin

The dumping margin shows how much lower the export price is compared with the normal (home‑market) value.

Formula:

$$\text{Dumping Margin (\%)} = \frac{\text{Normal Value} - \text{Export Price}}{\text{Normal Value}} \times 100$$

• Normal Value = price of the product in the exporter’s domestic market (or a comparable price).
• Export Price = price at which the product is sold in the importing country.

Anti‑dumping measures

• Anti‑dumping duties: Additional tariffs equal to the dumping margin.
• Import quotas: Limits on the quantity that can be imported.
• Safeguard measures: Temporary restrictions to give domestic firms time to adjust.

Example calculation

Foreign car price:

• Home‑market price = $20 000
• Export price to Country A = $15 000

$$\text{Dumping Margin} = \frac{20\,000 - 15\,000}{20\,000} \times 100 = 25\%$$

An anti‑dumping duty of 25 % raises the import price to $18 750, narrowing the gap with the domestic price.

Pros and cons of anti‑dumping policies

Advantages	Disadvantages
Protects domestic jobs and industries.	Higher prices for consumers.
Promotes fair competition.	May provoke retaliation from trading partners.
Encourages foreign firms to price fairly.	Administrative costs for investigations and enforcement.

Steps in an anti‑dumping investigation (simplified)

Step	Action
1	Domestic industry files a complaint with the investigating authority.
2	Pre‑investigation to decide if there is a case to answer.
3	Full investigation – collection of data on prices, costs and market conditions.
4	Calculation of dumping margin and assessment of injury to domestic industry.
5	Decision – imposition of anti‑dumping duties (often provisional, then final).
6	Review – duties are reviewed periodically (usually every five years).

6.6 Links to Other Parts of the Syllabus

• Anti‑dumping duties raise the price of imported goods → can contribute to inflation (link to macro‑economic aim of price stability).
• Trade restrictions affect employment (protecting jobs in protected industries) – connects to the labour‑market objectives.
• Changes in the current account influence exchange‑rate policy, which in turn affects export‑import volumes and national income (GDP).
• Multinational companies affect the capital account (FDI) and can influence the current account through profit repatriation.

Key Points to Remember

• Specialisation is driven by comparative advantage (lower opportunity cost).
• Free trade brings lower prices and greater choice but can cause job losses in uncompetitive sectors.
• Globalisation is powered by cheaper transport, better communication, MNCs and liberal‑trade policies.
• Trade restrictions are used for infant‑industry protection, strategic reasons, dumping, BOP correction, de‑merit goods, and environmental protection.
• Anti‑dumping duties are calculated using the dumping margin formula and are one of several tools to counter unfair pricing.
• Exchange‑rate movements (appreciation/depreciation) have opposite effects on imports and exports.
• The current account records trade balance, net primary income and net secondary income; a deficit signals a need for policy action.