WORLD TRADE
ORGANIZATIONWT/WGTCP/W/90
3 September 1998
(98-3374)
Working Group on the Interaction
between Trade and Competition PolicyOriginal:  English
COMMUNICATION FROM THE REPUBLIC OF KOREA
The following communication, dated 27 July 1998, has been received from the Permanent
Mission of Korea.
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Impact of Trade Policy on Competition:
An Assessment of Anti-Dumping Rules
I. INTRODUCTION
There has been considerable controversy over the inconsistencies between trade policy and
competition policy to date.  In particular, many have voiced concerns about the apparent
inconsistency between anti-dumping rules and competition laws and policy.  These concerns reflect
the fundamental difference in the objectives of the two concepts:  while anti-dumping rules aim at
protecting "competitors" (i.e. domestic industries) from allegedly unfair trade practices, competition
laws and policy seek to protect  "competition" itself.
This paper addresses the issue of whether anti-dumping rules are justifiable from an economic
perspective, analyzes some major anti-competitive factors of existing anti-dumping rules, and
suggests some guidelines for reform of the curr ent multilateral anti-dumping regime and for future
discussions in this Working Group.
II. ECONOMIC ASSESSMENT OF THE RATIONALE FOR ANTI-DUMPING
MEASURES
Dumping is regarded as an unfair trade practice and is subject to anti-dumping measures
under the current multilateral trade regime.  This section evaluates the rationale for anti-dumping
measures with respect to price discrimination, sales below cost and predatory dumping.
A. PRICE DISCRIMINATION
Article VI of GATT 1994 defines dumping as the sale of products in foreign markets at less
than the price at which they are normally sold in the domestic market.  As defined above, dumping  is
a type of international price discrimination in which a firm sets a lower price in the export market than
in the domestic market.
From an economic perspective, there are two preconditions for a firm to engage in
international price discrimination.  First, the firm should have a strong monopolistic - or at least
oligopolistic - position in its home market.  Second, the firm should be protected from foreignWT/WGTCP/W/90
Page 2
competition in its home market by natural or artificial barriers to trade.  Dumping is unlikely to occur
if there are no barriers to trade due to the arbitrage effect of dumped goods across borders.
When these conditions are met, it is quite natural for firms to dump, as illustrated in Figure 1.
Suppose that a firm in country A exports product X to country B.  If the firm enjoys a strongmonopoly position in its home market then it would expect to face less elastic demand for its product
in its home market than abroad.  This implies that the demand curve for the product in its home
market (D(a)) is steeper than that in the importing market (D(b)).  To simplify the analysis, suppose
that the firm also faces the same marginal costs (MC)  in both countries.  In this case, the firm should
sell quantity Qx(a) at price Px(a) in its home and quantity (Qx(b)) at price (Px(b)) in the importing
country in order to maximize its profits.
Figure 1:  International Price Discrimination
Px
    Px(a)
<Home Market> <Importing Market>
      Px(b)
MC(a)=MC(b)
_______________________________________________________________
D(a) MR(a) D(b)
MR(b)
________________________________________________________________
Qx Qx(a) Qx(b)Hence, dumping is quite a natural phenomenon, and is not necessarily unjust in cases where
the firm meets both preconditions mentioned above.  Therefore, there is no economic justification foranti-dumping rules that condemn all sales of exports at prices lower than home-market prices.
Furthermore, it is not low pricing in the foreign market that should be condemned, but rather
the high pricing in the home market that needs to be addressed.  Dumping results from the abuse of
monopoly power in the home market, not in the im porting-country market.  Although monopolies will
lower social welfare in the home country, the low price will increase the social welfare of the
importing country.  Therefore, anti-dumping policies have little justification particularly from the
point of view of the importing country.
B. S
ALES BELOW COST
"Sales below cost" occurs when a firm sets it s price below the average costs (for example, in
an earlier stage of production).  Such price-setting is fairly natural from the economic perspective.
When some portion of average costs is fixed, it may be rational and inevitable that a firm sells a
product at a price below average costs so long as the price is above marginal costs.
Additionally, in the case of products with high fixed costs, it is not unusual for a firm to sell
products at a price below [average] costs for a certain period in anticipation of a sharp decrease in
average costs in the near future.  This may result from the fact  that firms generally determine theWT/WGTCP/W/90
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price on the basis of expected profits to be realized over the entire life cycle of a given product.  In
this sense, there is no economic rationale for restricting dumping solely on the basis that a firm sets a
price below costs.
During the Uruguay Round negotiations, one of the most controversial issues was the issue of
whether sales below cost could be disregarded in th e determination of normal value.  In the end, it
was agreed that sales below cost could be admitted as a normal value under certain conditions.
However, such a rule may not fully reflect the case for start-up operations and business/product
cycles.
C. PREDATORY DUMPING
Among the various types of dumping (i.e., sporadic dumping, predatory dumping and
persistent dumping), only predatory dumping is condemned as detrimental to the importing country.
Predatory dumping is a price-setting device practiced by firms to obtain a monopoly in the importing
country by driving out rivals from the market.  The consumers of the importing country may get some
temporary advantage from predatory pricing, though they are likely to eventually suffer when
predators begin to recoup their monopoly profits.  Such a practice can also result in resourcedislocation and some form of economic deterioration.
However, predatory dumping is so unlikely that anti-dumping action can hardly be justified
on such grounds.  For predatory dumping to be successful, not only does a monopolist have to drive
rivals out of the market, but it also needs to keep out any potential entrants.  This requires themonopolist to continue charging a price so low that it forgoes profits forever, a highly unlikely
scenario.  In fact, documented instances of succes sful predatory dumping are extremely rare in the
history of international trade.  Furthermore, it is extremely difficult to discern whether a firm is
merely pricing aggressively in order to compete with its rivals, or to induce the exit of its rivals to
gain a monopolistic position in the market.
When there is no predatory intent, the imposition of anti-dumping duties may divert efficient
exporters to other markets, reducing competitive pressures in the importing country.  This may harm
only domestic consumers through an increase in the domestic price.
III. ANTI-COMPETITIVE EFFECTS OF ANTI-DUMPING RULES
As examined in the previous chapter, such practices as price discrimination, sales below
[average] costs, and price competition are general and natural phenomena and should be considered as
competition-promoting rather than competition-re stricting behaviour, contributing to consumer
welfare and efficient allocation of resources.  In practice, such price-setting is not regulated under the
competition laws and policies of most countries.  The anti-dumping rules that regulate these practices
in many cases protect domestic competitors (i.e., domestic industries) while deteriorating competitionitself.
The WTO Anti-Dumping Agreement introduced several major reforms to the earlier Anti-
Dumping Code in such areas as comparison of prices, sales below cost, standing of a petitioner, de
minimis and cumulation, expiry of anti-dumping actions, etc.  However, the new agreement has beencriticized for not addressing certain core concerns regarding the anti-competitive effects of anti-
dumping rules.  The main concerns can be summarized as follows:
First, the definition of dumping is so mechanical that the motive of dumping is not
considered.  A firm is likely to be subject to an anti-dumping investigation automatically if it exportsa product at a price lower than the normal value in  the home market, regardless of whether there is a
predatory intent or not.  As a consequence, duties could be imposed on low but justified pricing.  InWT/WGTCP/W/90
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contrast, most competition laws and policies regulate only the price discrimination with the predatory
intent to drive competitors out of the market.
Second, under current anti-dumping rules national authorities are allowed to exercise
enormous discretion.  Since the criteria for determining the export price and the normal value areneither stringent nor specific, the importing country can determine incidents of dumping at will.  This
implies that small changes in methodological ru les could yield important advantages for domestic
firms contesting dumping cases.  Furthermore, there are no specific criteria to determine material
injury.  In addition, there is no generally accepted mechanism to examine the causal relationship
between dumping and injury.  Therefore, poor performance by domestic firms in the related domestic
industries may easily be attributed to the dumped products during economic recession.
Third, price undertakings may induce price cartels, which would hinder fair price
competition.  Anti-dumping rules allow exporters to avoid anti-dumping actions if exporters agree to
raise their prices.  While such agreements are a means of suspending ongoing or imminent anti-
dumping cases, they can be used to promote anti-competitive behaviour.  Specifically, such rules may
promote cartelization, reflecting the interests of certain producers in the importing country who seekfurther protection.
Fourth, an anti-dumping petition itself could act as a powerful protectionist tool, inducing
voluntary export restraints by exporting firms.  Even though Article 11 of the WTO Agreement on
Safeguards prohibits certain measures like voluntary export restraints or orderly marketingarrangements, on many occasions an exporting country may act unilaterally without any formal
indication of an international agreement or even any consensus arrangement.  Therefore, as far as the
export-restraining effects of anti-dumping actions are concerned, a petition itself may be enough to
diminish a firm's incentive to export, which may in turn lead to voluntary export restraint.
Fifth, anti-dumping rules are inconsistent with the WTO's most fundamental principles, i.e.
the principle of national treatment and MFN, as such  rules are applied selectively rather than to all
foreign exporters and all domestic producers.  Such discriminatory import restriction will certainly
distort competition and trade, which should take place based on international comparative advantage.
IV. GUIDELINES FOR REFORM OF CURRENT ANTI-DUMPING RULES
It has been argued above that unless predatory intent is confirmed, anti-dumping regulations
do not make economic sense and have only anti-competitive and protective effects.  Therefore, anti-
dumping regulations are certainly not the optimal response to dumping.  The best policy is rather to
remove the main cause of dumping, i.e. to break down the monopoly status of firms in the exporting
countries.  In this respect, the following reform s should be considered in the current anti-dumping
rules:
In the long term, it is preferable to deal with dumping under competition policy rather than
under the current anti-dumping rules.  If it proves too difficult to abolish all anti-dumping rules, the
principles and procedures used in competition policy to deal with price discrimination could be
substituted for the relevant parts of anti-dumping rules.  For example, an investigating authority
would be allowed to make a positive dumping determination only when a predatory intent has been
confirmed.  In addition, the investigating authority would be allowed to make a positive injury
determination only when the anti-competitive effects of dumping have been proven.  To reduce the
difficulty of proving predatory intent, some indices should be developed that reflect the possibility of
predatory pricing as much as possible.  Such indices could include market shares, concentration ratios,and duration of sales below average or marginal costs.  Furthermore, it is very important to consider
all relevant economic factors and indices that have a bearing on the state of the industry concerned.WT/WGTCP/W/90
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Finally and most importantly, national treatment should be assured in dealing with all types of
unfair price discrimination.  There is no reason why regulations of unfair price discrimination should
be different between domestic and international settings.  This is particularly important in order to
keep dumping regulations from being abused as a protectionist instrument.
V. CONCLUSION
As business activities become more globalized, there is a growing need for multilateral rules
governing competition policy which all nations can agree upon.  However, more immediate concern
should be focused on addressing inconsistencies between existing trade and competition rules and
policies and anti-competitive effects of current trade rules and policy as described above.
For this reason, Korea shares the view that di scussions in this Working Group should point to
reforming the current WTO rules in a competition-oriented manner with a focus on Interaction
between trade and competition policy rather than on competition rules per se .  In this vein, a special
emphasis should be placed on government measures affecting competition such as anti-dumping
duties.WT/WGTCP/W/90
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