Keep It Simple #3: What is 'Injury'?
Question: What is 'dumping'?
Question: We know that if the dumping margin is more than 2 per cent, the imports are considered ‘dumped’. Is that sufficient to impose an anti-dumping duty on such products?
No. It must be established that the domestic industry suffered injury (or may suffer injury) at the hands of the dumped imports.
Question: What is ‘domestic industry’?
Question: How do we understand if the domestic industry has been ‘injured’?
An anti-dumping duty can be imposed if the domestic industry:
(i) is suffering injury (material injury) or
(ii) will potentially suffer injury if the trend of dumping continues (threat of material injury).
A duty may also be imposed if an a group of producers or a single producer is trying to establish an industry for a new product, and the dumped imports are not allowing such an establishment (material retardation of the establishment of such an industry).
There are three ways to know if a domestic industry has been injured:
1. Price Effect
This is the most obvious impact dumped imports will have on the domestic industry. Dumped imports will have the following impact on price:
The prices of dumped imports will be lower than the prices of domestic undumped goods. For example, if the domestic industry is selling a product at INR 10, and the dumped imports are being sold at INR 8, the price undercutting is INR 2. However, price undercutting does not necessarily mean that the price of the dumped goods is less than the cost at which the domestic industry is producing and selling its goods.
The prices of dumped imports are lower than the cost undertaken by the domestic industry to produce and sell the goods (including reasonable profit). For example, if it costs the producer INR 7 to produce and sell the products, and the dumped imports are being sold at INR 5, the price underselling is INR 2.
The prices of the dumped imports are so consistently low, that they don’t allow the domestic industry to increase their prices (as they would have increased with time!)
To break down this comic:
Price Undercutting: The fact that the sellers of dumped products are selling at a price which is less than the domestic producer (INR 55 here)
Price Underselling: Assuming that INR 250 is the lowest the domestic producer can go in terms of cost of production, selling and making a reasonable profit, the fact that the sellers are selling less than that. (INR 55 with the assumption)
Price Suppression: Assuming this trend continues for a while, the domestic producer would not be able to increase his price, and would run into losses/ suffer injury.
2. Volume Effect
Simply put, if there are only a few dumped products in the market, they do not have the potential to overwhelm the market. However, if these dumped products keep increasing, they are bound to have a significant impact on the market. The prices will keep getting pushed down, and the majority of the market will be claimed by the dumped imports.
3. Economic Parameters of the Domestic Industry
This is where it hits the hardest- the tangible effect dumped imports have on domestic producers. Eventually, the domestic producer will have to decrease their prices and suffer losses, or will have to witness a decrease in sales. Losses or decrease in sales will lead to the requirement of lesser production, investments to expand capacity would not be needed or possible, the company may get caught in a debt trap to keep afloat, or just might be at the verge of shutting down. There are the following parameters which may be indicative of an industry’s health:
Actual and potential decline in sales
Return on investments
Utilization of capacity
Factors affecting domestic prices
The magnitude of the margin of dumping
Effects on cash flow
Stocked up Inventories
Ability to raise capital or investments
Question: How do we know that a domestic industry is facing a threat of being injured?
In analyzing whether there exists a threat of material injury to the domestic industry, the facts surrounding dumping must be analyzed. If the (i) dumped imports are on a rise, (ii) it appears that the dumping country has the potential to produce more of the said goods without the domestic or international demand, (iii) free inventories in the exporting markets, (iv) the price effect of the imports is severe, then an investigating authority may conclude that there exists a threat of material injury to the domestic industry.