Opinion Learn to say thank you

Chemicals,pharmaceuticals and vitamins,artificial yarn and fibres,rubber,tyres,ball-bearings,paper,newsprint and board,CFL lamps,CDs,compressors,cement and steel products — all these have one characteristic in common. They are items against which anti-dumping investigations have been started in India,and sometimes,anti-dumping duties imposed. There’s a technical definition of dumping under the WTO. Just because Chinese manufacturing costs are lower than Indian numbers doesn’t mean the Chinese are dumping. Dumping hurts inefficient domestic producers. But it benefits consumers,who obtain lower prices. Whenever anti-dumping duties are imposed,there is a trade-off. Domestic producers are protected. But in the process,domestic consumers are hurt. Every student of economics is taught protectionism is bad,through simple static diagrams. While the diagram varies according to the type of import protection (tariffs versus quantitative restrictions),the fundamental proposition is unaltered and simple. Through import protection,producers gain. However,consumers lose and loss to consumers is more than gain to producers. Therefore,there is net welfare loss to society. By the same token,if anti-dumping duties are imposed,producers may gain. But consumers lose and loss to consumers is more. Thus,sensible countries shouldn’t impose anti-dumping duties. As a counter-argument,red herrings of unfair competition will be raised.Don’t look at short-term static gains to consumers. There is the longer term,the dynamic angle. Foreign producers will drive out domestic competition. Once they have accomplished that,they will become monopolies and raise prices. Consumers will suffer. The WTO’s anti-dumping agreement (unlike initial national anti-dumping legislation) doesn’t have tests for predatory intent. In any event,predatory intent is impossible to ascertain in advance and one also faces the issue in discussions of domestic competition policy instruments. To take a clichéd example,three businesspersons were penalised by the competition authority and traded notes on why they had been punished. The first was penalised as a result of charging a higher price than the rival and was accused of monopolistic practices. The second was penalised as a result of charging the same price as the rival and was accused of collusive behaviour. The third was penalised as a result of charging a lower price than the rival and was accused of predatory intent. In theory,anti-dumping practice is supposed to check gains to consumers (who needn’t always be end-users) and consult them. But especially if they are end-users,this is rarely done in practice. Will consumers of CFL lamps be consulted before an anti-dumping duty is imposed on these? Instead,duties will be imposed and we will pay higher prices.While the issue of dumping is always topical,there is a parallel in two other instances too. First,there is the matter of the undervaluation of the Chinese yuan. The Chinese have effectively returned to pre-2005 in exchange-rate determination. The yuan hasn’t appreciated by as much as was expected,because while Chinese reserve composition moved away from US dollars,other countries moved into dollars. Therefore,economists believe the yuan is still undervalued. Disagreement is about degree. Let’s ignore broader issues of global macro imbalances,US-China trade surpluses,reform of global finance and institutions and even speculation about India confronting similar currency appreciation pressures if the Indian growth and export story continues to be robust.

There is a narrower question. What’s our problem if the Chinese undervalue their currency? There is a line propagated by industry and export associations. This undervaluation hurts India’s exports of garments,toys,light engineering goods and chemicals. By extrapolation,we are losing exports,employment and growth. For several reasons,this is doubtful. First,even if yuan exchange rates become more realistic,the differential between Chinese and Indian price competitiveness will remain. It is too large for even a 20 per cent appreciation to remove.

Advertisement

Second,outside these named sectors,contrary to popular impression,China and India don’t possess similar export baskets,services being an instance. Third,even if the yuan appreciates,in these named sectors,beneficiaries might be other countries. For example,Bangladesh and Vietnam will probably gain more in garments. Fourth,China has moved up the value chain and increased productivity. Consequently,price elasticity of Chinese exports is lower.

And fifth and most important,an undervalued yuan makes imports from China artificially cheap and,in welfare terms,these gains to consumers are more than losses to producers and exporters. Conceptually,an undervalued yuan is bad policy for the Chinese. They are subsidising Chinese exports and suffering costs,including making the inflation problem worse. But it is good policy for us,including making our inflation problem better. This is a bit like Indian subsidised kerosene making it across the border to Bangladesh. We end up subsidising the poor

of Bangladesh. Why should Bangladesh be unhappy about this? Milton Friedman was once asked on the right policy response to subsidised exports from a trading partner. He said,Americans should only smile and say,thank you very much. That’s precisely the pointConsider another similar issue: domestic and export agricultural subsidies in developed countries. This crops up in WTO negotiations and our line is we cannot contemplate liberalising agricultural imports as long as markets are distorted through these subsidies. The Doha negotiations may be stuck,but the issue arose again,because an EU-India FTA (free trade agreement) is reportedly being negotiated. It is doubtful this FTA will cover agriculture,most FTAs don’t. However,all kinds of organisations are up in arms. Indian farmers will be adversely affected. On agriculture,India is at the margin. Barring the last few years,when export restrictions got in the way,we were a marginal net food exporter,with aspirations of becoming a large food exporter if agro reforms happen. Agro import duties are also high,though barring dairy and edible oils,Indian agriculture is price competitive. The threat isn’t from the EU,but from Australia,Malaysia and Brazil,where there aren’t agro subsidies. We do want agro reforms. However,the commerce ministry’s negotiations apart,how do subsidies in Europe hurt us in net welfare terms,trading off consumer and producer interests? That’s the same reason net food importers in Africa have been concerned about the WTO removing agricultural subsidies. Their food prices will increase and they will suffer,an even more important issue in the context of global food price inflation. The EU and many other developed countries are no longer fiscally able to sustain these subsidies (EU expansion is also a problem) and will eventually have to reform. But in the interim,and to the limited extent we make agro imports from the developed world,it’s a good thing for us. Unfortunately,while Indian languages have words for thank you,we rarely use the expression.

The writer is a Delhi-based economist,express@expressindia.com