04.07.2019 in Management

International Trade

International trade is often hampered by predatory pricing in instances where sellers use various inexplicable means to sell their products at extremely low prices that defeat logic with an aim of driving their competitors out of the market since the said competitors would not be a position to compete with them without making losses. This in essences gives the predatory seller very few competitors or in some cases, a de facto monopoly. Dumping is one such type of predatory pricing that is mainly used in international trade context and occurs when manufacturers of a given product export their wares to another country while charging a price below the price it charges in its home market. In most cases, the prices and quantities of export do not follow the rules of normal market competition. While there are widely differing opinions on whether dumping constitutes unfair, the General Agreement on Tariffs and Trade (GATT) formulated by the World Trade Organization (WTO) allows nations to take actions according to their legislative procedures on their trade partners for dumping.

The WTO does not explicitly illegalize dumping. As the neutral arbiter, WTO has set in place trade laws that ensure that before any punitive anti-dumping steps are taken by any government, the said government has the burden of proof and has to prove that indeed dumping is taking place, show the extent of the dumping i.e. the differences in price of the product between the exporter’s home market and export market and prove that the dumping of the product is causing or threatening to cause economic injury. A more explicit definition that the WTO uses in establishment of whether a trading party ought to be punished for dumping is the 5% rule that provides that domestic sales of a product similar to the one in question can be sufficiently used to base normal value in cases where they account for at least 5% of the product under consideration’s sales to the importing country. This five percent rule is alternatively referred to as the home market viability test and is usually applied on the global trading scene. The People’s Republic of China has in the recent past put in place aggressive measures to assert her dominance in electrical and electronics manufacturing. Firms from the country have partially achieved and many Chinese firms have effectively edged out American and European firms from their previous dominance.

Trade between Africa, previously a huge market for European and American technological goods and China rose by 46% to over $ 200,000,000,000 in the year 2012 while trade between the United States and Africa fell almost by a similar magnitude. The economic giant has especially cut a niche in the export of Electrical machinery and equipment and power generation equipment with both exports in both classes of goods exceeding $ 698,600,000,000 in 2011.  The rapid, aggressive expansion of Chinese companies has forced them to adopt some measures that amount to unfair competition. One such measure is may be dumping. While the measures have seen the country’s firms establish their market dominance in many world markets, some of the firms, including Suntech, one of the country and the world’s biggest manufacturers of solar panels fall bankrupt. Should the European Union enforce the anti- dumping measures against Chinese manufacturers of solar panels and charge the tariffs they intend to, the move will be a double blow to these companies whose operations are already strained in their operations and are making marginal profits owing to a market over flood, the low prices they sell their products at and high cost of production as most of the raw materials in the production of solar panels, including  polysilicon, the primary raw material is imported.

Other firms such as Yingli Green Energy, Trina Solar and LDK Solar have in the recent past reported heavy losses. The foreign market which is currently under threat from the EU allegations and investigations has been the solace of most Chinese solar company due to a weak demand in the domestic market that is further worsened by competition from small producers which were lured into the business by the decision by Chinese government to offer tax breaks and subsidies to those in renewable energy business in a bid to promote the industry and Korean solar panel firms which have infiltrated the Chinese market. The question remains on whether the European Union’s planned investigations and subsequent trade actions are worth the effort especially after China’s threat to retaliate on the EU’s exports to China. China is the European Unions’ second largest trading partner. The table below shows the volume of trade in the years 2010 and 2011 between the two trading partners.

Trade Direction Goods (2011)(billion Euros) Services (2010)(billion Euros) FDI(2010) (billion Euros)
EU-China 136.2 22.3 7.1
China-EU 292.1 16.3 0.7

While many experts agree that the relationship between the West and China is multifaceted and complex, there is concurrence that the need each other on mutual basis. The question is who needs the other more.  While china needs the European market for its solar panels, the EU firms definitely need the Chinese market for their liquor. It would be to both’s advantage if they resolved the standoff more amicably. After all, it is China that bailed out the Eurozone countries of Ireland, Greece, Italy, Portugal and Spain by buying out their junk Eurozone debts. 

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