Watch for it. Two closely related ideas are going to become a huge deal in the next few weeks/months/years: Dumping (or Anti-Dumping, AD) and Countervailing Duties (CVD). They go hand-in-hand as a legal specialty* called “AD/CVD”. So what are they?
Dumping, in a nutshell: let’s say the Republic of Kansas makes alarm clocks, and it costs them $2.00 to make a single clock. The Kingdom of Missouri also makes alarm clocks, but production costs are only $1.75 each. (Nobody else makes alarm clocks anywhere in the world.) Clocks sell for $2.25 in the marketplace, and Missouri makes a tidy profit. But Kansas doesn’t like this, so they flood the market with alarm clocks at $1.50 (they “dump” below-cost goods), and the government subsidizes the producers so they don’t lose.
Eventually, the Missouri clockmakers have to shut down, because to sell a clock, they have to lose a quarter on each unit. That ain’t happening in the Show Me Kingdom. We’ve got better things to do.
Once the Kansas clockmakers have no competition, though, the price goes to five bucks a unit.** Missouri, justifiably, wants to lay waste to their western neighbor, so they undertake anti-dumping measures, perhaps by dumping hula hoops into Kansas or prohibiting Kansas imports or… tacking on a countervailing duty.
Countervailing Duties are tariffs (import taxes) charged by an importing country in order to offset subsidies given to producers in the exporting country. Keeping the Kansas-Missouri clock analogy alive, Missouri assesses a countervailing duty of 75 cents on each Kansas clock, so they still sell for $2.25. Missouri clockmakers don’t lose their shirts, and Kansas doesn’t take an unfair portion of the market.
CVD’s are purely retaliatory, and they don’t only pop up in dumping cases.
So why is this a thing? Well, I’ll leave a more thorough description to my friends over at the China Law Blog, and today’s post, China is Getting Ready for a US-China Trade War. Click on over and read, or the following may not make sense.
[Bear with me here.] I’m 6’4″ and built like a tuba player. I’ve been in exactly one fistfight in my life, and it was with a buddy who was justifiably pissed at me. The reason that number is so low (mark my words here): guys my size don’t fight. There are only two possible scenarios, and they’re both bad:
- If the other fellow is smaller, I look like a bully when I beat him, and I look like a weakling when I lose.
- If the other fellow is my size or bigger, I might beat him soundly, but it’s going to hurt like hell. Win or lose, I’ll walk away bruised and limping, no question.
My point is this: as attractive as an America First policy might seem, it’s going to hurt, and it’s going to hurt badly. Agricultural exports would take a major hit in a Sino-American rift. Here in Kansas City, one of our biggest employers is already bracing for disaster if trade with Mexico is squeezed. Win or lose, we’ll look like either a bully or a weakling, and we’ll walk away bruised and limping.
* Yeah, yeah. We’re not supposed to say we “specialize.” But if you only handle divorces and adoptions and you’re really good at them, you specialize in family law. If all you do is wills and trusts and you’re really good at them, you specialize in estate planning. Lawyers specialize. But ethical rules say we can’t say as much, lest we give potential clients the false impression that we have certain expertise. This is a concept only a lawyer could come up with… and it all started with that one jerk who did it wrong and made things difficult for the rest of us.
** A real world example of dumping: rare earth metals, which are needed in the manufacture of critical components in electronics, and which make cell phone recycling so lucrative. Part of my J.D. thesis examined China’s dumping of rare earths into the U.S. market in the 1990s (before China joined the WTO), the end of rare earth mining in the U.S., and the subsequent skyrocketing of their costs. Today, the industry is making a comeback in the U.S.