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Dumping occurs when the export price, net of trade costs, for a firm's goods is less than the price it charges domestic consumers. Anti-dumping policies are often justified as legitimate actions by governments in their efforts to protect domestic producers from unfair foreign competition. In Discussion Paper No. 1272, Research Fellows Jan Haaland and Ian Wooton investigate the impact of anti-dumping rules on firms' production decisions as to how much and where to produce. The use of anti-dumping rules is considered a strategic trade instrument. They construct an oligopolistic model in which each firm chooses either to produce all of its output in a single plant in its home country or to establish a factory in each country. Their analysis is set in a world with economies of scale and imperfect competition. The paper analyses the effects of anti-dumping and a comprehensive programme of market integration - such as the 1992 programme in the EU. In the strategic interplay between governments, they find that governments that care only about the profits of their firms should commit to a mutual laissez faire approach rather than anti-dumping measures, as firms would lose both from effective anti-dumping measures and from relocating their production. In some cases however, (depending on relative costs) the countries could have individual incentives to introduce unilateral policies, even if there are losses in the equilibrium outcome. Consequently, international co-ordination may be necessary to achieve the best solution. If the government cares more about consumers' welfare, then anti-dumping policies could be advantageous, if they induce foreign firms to set up local plants and thereby increase competition.Reciprocal Anti-Dumping |