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Q1, WHAT IS COMPARATVE ADVANTAGE AND HOW DOES INFLUENCE

INTERNATIONAL TRADE?

What is Comparative Advantage?

Comparative advantage is an economy's ability to produce a particular good or service at a

lower opportunity cost than its trading partners. Comparative advantage is used to explain why
companies, countries, or individuals can benefit from trade. In the context of international
trade, comparative advantage refers to the products that a country can produce more cheaply or
easily than other countries. However, some contemporary economists contend that focusing
solely on comparative advantage can result in the exploitation and depletion of a country's
resources. The law of comparative advantage is popularly attributed to English political
economist David Ricardo and his book "On the Principles of Political Economy and Taxation"
written in 1817, although it is likely that Ricardo's mentor, James Mill, originated the analysis.
What is the theory of comparative advantage as an explanation of international trade? The
theory of comparative advantage introduces opportunity cost as a factor for analysis in
choosing between different options for production. Comparative advantage suggests that
countries will engage in trade with one another, exporting the goods in which they have a
relative advantage. What is the theory of comparative advantage explain how countries gain
from trade? The theory of comparative advantage explains why countries trade: they have
different comparative advantages. It shows that the gains from international trade result from
pursuing comparative advantage and producing at a lower opportunity cost He demonstrated
that if two countries capable of producing two commodities engage in the free market (albeit
with the assumption that the capital and labour do not move internationally), then each country
will increase its overall consumption by exporting the good for which it has a comparative
advantage. 3 Comparative advantage theory states that a country should buy from other
countries those products that it produces most efficiently and sell to other countries those
products it cannot produce as efficiently. However, comparative advantage measures
opportunity cost instead of actual cost. In other words, it measures what a country has to give
up to produce a certain good or service. For example, if a country is skilled at making both
cheese and chocolate, they may determine how much labour goes into producing each good.
For close to two centuries now the comparative advantage hypothesis has been used as one of
the principal explanations of international trade and, through gains from trade, as one of the
most potent explanations of higher incomes and income growth rates of open economies.
Nevertheless, the increasing mobility across border of factors of production, ideas, technology,
goods and services that characterized recent decades of world commerce and resulted in
significant changes in trade shares and specialization patterns (e.g. OECD, 2009a and Kowalski
and Cavazos Cepeda, 2011) challenged policy makers and analysts alike to explain better how
the concept of comparative advantage might relate to these changes and what policy insights it
actually offers. This paper builds on recent generalizations of theory and empirics of
comparative advantage as well as on numerous insights from the literature on various sources

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of comparative advantage and attempts to quantitatively assess their relative importance for
bilateral trade flows at the industry level, with particular focus on policy and institutional
factors. In this respect, the study offers the most extensive coverage of geographical, policy and
institutional sources of comparative advantage in the existing literature. The theory of
comparative advantage indicates that specialization according to comparative advantage is a
precondition for reaping gains from trade. To reflect this, the empirical work presented in this
paper tries to get as close as it is possible to capturing the ―natural‖ comparative advantage.
That is, we account for policies that do not target any particular sectors but rather reflect broad
public choices or seek to enhance general resource endowments, even though they may
indirectly favor some of the sectors. These broad policies are a potential source of comparative
advantage and thus of welfare gains from trade. Given the lack of conclusive evidence on
viability of targeted industrial policies in sustainably influencing comparative advantage we
exclude these policies as ones potentially hindering or reducing the gains from trade. 4 Is
comparative advantage still relevant today? Overall, the results show that comparative
advantage remains an important determinant of trade. For example, capital-to-labour ratios are
at least equally as important in explaining industry patterns of trade as is geographical distance.
The cross-country differences in secondary and tertiary education provide approximately half
of the explanatory power as compared to distance, while the indicator of average years of
schooling has twice as large explanatory power as the distance variable. Other important
sources of comparative advantage include the availability of credit and primary energy supply
while regulatory quality and labour market rigidity tend to influence trade patterns less
significantly. The comparative advantage theory emphasizes the relative differences in
productivity between countries as the reason for international trade and hence for gains from
trade. The larger the differences in underlying sources of comparative advantage across
countries, the larger the gains from trade. Comparing jointly across the OECD and SEM
groupings we find that cross-country differences, and thus the potential for gains from
comparative advantage-driven trade, decreased for such sources of comparative advantage as:
physical capital, average years of schooling, tertiary education, primary energy supply,
availability of credit; while they increased for secondary education and regulatory quality. The
OECD grouping considered alone has become more homogenous as far as many comparative
advantage sources are concerned, implying that the potential for comparative advantage-driven
North-North trade may have diminished. The non-OECD grouping, in addition to being
generally more heterogeneous, displayed no clear tendency for crosscountry differences to
diminish over time, indicating a persistently high potential for comparative advantage-driven
South-South trade. The widening differences between OECD and non-OECD for physical
capital, availability of credit or regulatory quality suggest an increasing potential for
comparative advantage trade in North-South trade. However, differences between OECD and
non-OECD have narrowed for human capital Sources of comparative advantage What then
might determine the relative differences in countries ‘abilities to produce certain goods and
services? Some answers, but not all, can be found in the classical theory of comparative
advantage. In his original formulation of the hypothesis in 1817 David Ricardo posited that
comparative advantage has its source in differences in relative labour productivities and that a

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country will have a comparative advantage in the product which it can produce at a lower
opportunity cost relative to another country. In Ricardo‘s famous 5 example involving England
and Portugal and cloth and wine England had comparative advantage in production of cloth
because its opportunity cost of focusing on production of cloth was lower than the opportunity
cost of focusing on production of wine. This was so even though England may have been more
efficient in producing wine in absolute terms, i.e. using less units of labour per unit of wine.
This classical example focusing on relative productivity differences did not explain where they
may be coming from but already hinted at the heterogeneity of sources of comparative
advantage, some of which may be more persistent (e.g. Portugal‘s advantage in production of
wine related to its geographical location) as well as ones that may be more prone to change
over time (e.g. England‘s 19th century advantage in production of cloth). The so called
Hecksher-Ohlin-Samuelson (HOS) theory of comparative advantage built on Ricardo‘s general
formulation and provided an explanation as to why opportunity costs of production may differ
across countries. According to this theory, comparative advantage depends on differences in
relative factor endowments (land, labour and capital) and production processes of different
goods which use these factors in different proportions. The great impact of this theory was
related to the possibility of accommodating various combinations of factors of production such
as, for example, land, capital, skilled and unskilled labour, and to the richness of policy insights
it generated. The implications of this theory of comparative advantage have been recently taken
up in an OECD study of changes in trade patterns and endowments (Stone et al., 2011).
Importantly, the HOS theory emphasized the interaction between product and country
characteristics that together form the basis for comparative advantage. This interaction
mechanism has been actively explored in recent years in the literature on institutional and
policy determinants of comparative advantage.

Comparative advantage is an economy's ability to produce a particular good or service at a

lower opportunity cost than its trading partners.

 The theory of comparative advantage introduces opportunity cost as a factor for analysis in
choosing between different options for production.

 Comparative advantage suggests that countries will engage in trade with one another,
exporting the goods in which they have a relative advantage.

 There are downsides to focusing only on a country's comparative advantages, which can
exploit the country's labour and natural resources.

 Absolute advantage refers to the uncontested superiority of a country to produce a particular

good better. Understanding Comparative Advantage Comparative advantage is one of the most
important concepts in economic theory and a fundamental tenet of the argument that all actors,
at all times, can mutually benefit from cooperation and voluntary trade.

It is also a foundational principle in the theory of international trade. The key to understanding
comparative advantage is a solid grasp of opportunity cost. Put simply, an opportunity cost is a
potential benefit that someone loses out on when selecting a particular option over another. In

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the case of comparative advantage, the opportunity cost (that is to say, the potential benefit that
has been forfeited) for one company is lower than that of another. The company with the lower
opportunity cost, and thus the smallest potential benefit which was lost, holds this type of
advantage. Another way to think of comparative advantage is as the best option given a
tradeoff. If you're comparing two different options, each of which has a trade-off (some
benefits as well as some disadvantages), the one with the best overall package is the one with
the comparative advantage. Diversity of Skills People learns their comparative advantages
through wages. This drives people into those jobs that they are comparatively better. If a skilled
mathematician earns more money as an engineer than as a teacher, they and everyone they
trade with are better off when they practice engineering.Wider gaps in opportunity costs allow
for higher levels of value production by organizing labor more efficiently.

The greater the diversity in people and their skills, the greater the opportunity for beneficial
trade through comparative advantage. Example of Comparative Advantage As an example,
consider a famous athlete like Haile Gebresilasie. As a renowned basketball and baseball star,
Hailegebresilasie is an exceptional athlete whose physical abilities surpass those of most other
individuals. Hailegebresilasie would likely be able to, say, paint his house quickly, owing to his
abilities as well as his impressive height. Hypothetically, say that Hailegebresilasie could paint
his house in eight hours. In those same eight hours, though, he could also take part in the
filming of a television commercial which would earn him $50,000. By contrast,
Hailegebresilasie 's neighbor Kenenisa paint Hailegebresilasie 's house in 10 hours. In that
same period of time, he could also work at a fast food restaurant and earn $100. In this
example, Kenenisa has a comparative advantage as a house painter due to his lower opportunity
cost, and despite the fact that Hailegebresilasie could paint the house faster and better.

The best trade would be for Hailegebresilasie to film a television commercial and to pay
Kenenisa to paint his house. So Hailegebresilasie makes the expected birr 50,000 and Kenenisa
earns more than birr 100, the trade is a winner. Owing to their diversity of skills,
Hailegebresilasie and kenenisa would likely find this to be the best arrangement for their
mutual benefit. Comparative Advantage vs. Absolute Advantage Comparative advantage is
contrasted with absolute advantage. Absolute advantage refers to the ability to produce more or
better goods and services than somebody else.

Comparative advantage refers to the ability to produce goods and services at a lower
opportunity cost, not necessarily at a greater volume or quality. To see the difference, consider
an attorney and their secretary. The attorney is better at producing legal services than the
secretary and is also a faster typist and organizer. In this case, the attorney has an absolute
advantage in both the production of legal services and secretarial work. Nevertheless, they
benefit from trade thanks to their comparative advantages and disadvantages. Suppose the
attorney produces birr 175 per hour in legal services and birr 25 per hour in secretarial duties.
The secretary can produce birr 0 in legal services and birr 20 in secretarial duties in an hour.
Here, the role of opportunity cost is crucial. To produce birr 25 in income from secretarial
work, the attorney must lose birr 175 in income by not practicing law. Their opportunity cost of

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secretarial work is high. They are better off by producing an hour's worth of legal services and
hiring the secretary to type and organize. The secretary is much better off typing and organizing
for the attorney; their opportunity cost of doing so is low. It’s where their comparative
advantage lies. Comparative advantage is a key insight that trade will still occur even if one
country has an absolute advantage in all products. Comparative Advantage vs. Competitive
Advantage Competitive advantage refers to a company, economy, country, or individual's
ability to provide a stronger value to consumers as compared with its competitors. It is similar
to, but distinct from, comparative advantage. In order to assume a competitive advantage over
others in the same field or area, it's necessary to accomplish at least one of three things: the
company should be the low-cost provider of its goods or services, it should offer superior goods
or services than its competitors, or it should focus on a particular segment of the consumer
pool. Comparative Advantage in International Trade David Ricardo famously showed how
England and Portugal both benefit by specializing and trading according to their comparative
advantages. In this case, Portugal was able to make wine at a low cost, while England was able
to cheaply manufacture cloth. Ricardo predicted that each country would eventually recognize
these facts and stop attempting to make the product that was more costly to generate. Indeed, as
time went on, England stopped producing wine, and Portugal stopped manufacturing cloth.
Both countries saw that it was to their advantage to stop their efforts at producing these items at
home and, instead, to trade with each other in order to acquire them. Comparative advantage is
closely associated with free trade, which is seen as beneficial, whereas tariffs closely
correspond to restricted trade and a zero-sum game. A contemporary example: China’s
comparative advantage with the United States is in the form of cheap labour. Chinese workers
produce simple consumer goods at a much lower opportunity cost. The United States’
comparative advantage is in specialized, capital-intensive labour. American workers produce
sophisticated goods or investment opportunities at lower opportunity costs. Specializing and
trading along these lines benefit each. The theory of comparative advantage helps to explain
why protectionism is typically unsuccessful. Adherents to this analytical approach believe that
countries engaged in international trade will have already worked toward finding partners with
comparative advantages.

If a country removes itself from an international trade agreement and imposes tariffs, it may
produce a local benefit in the form of new jobs and industry. However, this is not a long-term
solution to a trade problem. Eventually, that country will be at a disadvantage relative to its
neighbors, countries that were already better able to produce these items at a lower opportunity
cost. The classical understanding of comparative advantage does not account for certain
disadvantages that come from over-specialization. For example, an agricultural country that
focuses on cash crops and relies on the world market for food, could find itself vulnerable to
global price shocks.

Criticisms of Comparative Advantage

Why doesn't the world have open trading between countries?

When there is free trade, why do some countries remain poor at the expense of others?

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Perhaps comparative advantage does not work as suggested. There are many reasons this could
be the case, but the most influential is something that economists call rent seeking. Rent
seeking occurs when one group organizes and lobbies the government to protect its interests.
Say, for example, the producers of American shoes understand and agree with the free-trade
argument but they also know that their narrow interests would be negatively impacted by
cheaper foreign shoes. Even if laborers would be most productive by switching from making
shoes to making computers, nobody in the shoe industry wants to lose their job or see profits
decrease in the short run. This desire leads the shoemakers to lobby for, say, special tax breaks
for their products or extra duties (or even outright bans) on foreign footwear. Appeals to save
American jobs and to preserve a time-honoured American craft abound, even though, in the
long run, American laborers would be made relatively less productive and American consumers
relatively poorer by such protectionist tactics.

Advantages and Disadvantages of Comparative

Advantages In international trade, the law of comparative advantage is often used to justify
globalization, since countries can have higher material outcomes by producing only goods
where they have a comparative advantage, and trading those goods with other countries.
Countries like China and South Korea have made major productivity gains by specializing their
economies in certain export-focused industries, where they had a comparative advantage.

Following comparative advantage increases the efficiency of production by focusing only on

those tasks or products that one can achieve more cheaply. Products that are more expensive or
time-consuming to make can be purchased from elsewhere. In turn, this will improve a
company's or a country's overall profit margins, since costs associated with less-efficient
production will be eliminated. Disadvantages On the other hand, over-specialization also has
negative effects, especially for developing countries. While free trade allows developed
countries to access cheap industrial labor, it also has high human costs due to the exploitation
of local workforces. By offshoring manufacturing to countries with less stringent labor laws,
companies can benefit from child labor and coercive employment practices that are illegal in
their home countries. Likewise, an agricultural country that focuses only on certain export
crops may find itself suffering from soil depletion and destruction of its natural resources, as
well as harm to indigenous peoples. Moreover, there are also strategic disadvantages to over-
specialization, since that country would find itself dependent on global food prices.

Pros and Cons of Comparative Advantage

Pros  Higher Efficiency

 Improved profit margins

 Lessens the need for government protectionism

Cons  Risk of over-specialization

 Developing countries may be kept at a relative disadvantage

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 May promote unfair or poor working conditions elsewhere

 Can lead to resource depletion

 May incentivize rent-seeking Who Developed the Law of Comparative Advantage?

The law of comparative advantage is usually attributed to David Ricardo, who described the
theory in "On the Principles of Political Economy and Taxation," published in 1817. However,
the idea of comparative advantage may have originated with Ricardo's mentor and editor,
James Mill, who also wrote on the subject. How Do You Calculate Comparative Advantage?
Comparative advantage is usually measured in opportunity costs, or the value of the alternative
goods that could be produced with the same resources. This is then compared with the
opportunity costs of another economic actor to produce the same goods. For example, if
Factory A can make 100 pairs of shoes with the same resources it takes to make 500 belts, and
then each pair of shoes has an opportunity cost of five belts. If competitor factory B can make
three belts with the resources it takes to make one pair of shoes. A number of structural and,
more and factory B has a comparative advantage in making shoes. The recently, institutional
and policy sources of comparative advantage have been identified in the literature. This section
briefly summarizes this literature as it relates to the sources of comparative advantage
accounted for in the empirical exercise and justifies the data choices models, The theory of
comparative advantage indicates that specialization according to comparative advantage is a
precondition for reaping gains from trade.

Any substantive interference with this process, even if it entails government support to sectors
in which a country may have natural ‘comparative advantage, can reduce these gains or even
render them negative. To reflect this, the empirical work presented in this paper tries to get as
close as it is possible to capturing the natural ‘comparative advantage. That is, we account for
policies that do not target any particular sectors but rather reflect broad public choices or seek
to enhance general resource endowments, even though they may indirectly favor some of the
sectors. These broad policies are a potential source of comparative advantage and thus of
welfare gains from trade. For example, capital accumulation can be encouraged by well-
developed financial markets and this can create favorable conditions for development of a
competitive capital-intensive activity, but financial market reforms are not principally designed
to favor any particular industry. Similarly, a good education system may boost the endowment
of human capital thus favoring human-capital intensive activities, but good education policy
does not directly favor production of any particular good or service. Given the lack of
conclusive evidence on viability of targeted industrial policies in sustainably influencing
comparative advantage we exclude these policies as ones potentially hindering or reducing the
gains from trade. What is an Example of Comparative Advantage? An interesting example of
comparative advantages often arises for high-powered executives, who may consider hiring an
assistant to answer their emails and perform certain secretarial functions. The executive may
even better at performing these duties than their assistant—but the time they spend doing
secretarial work could be spent more profitably by doing executive work. Likewise, even if the
assistant is mediocre at secretarial work, they would likely be even more ill-suited for executive

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work. Together, they are ultimately more productive if they focus on their comparative
advantages. The Bottom Line Comparative advantage is one of the most important concepts in
economics. In classical economics, this idea explains why people, countries, and businesses can
experience greater collective benefits through trade and exchange than they can produce alone.
However, contemporary economists have also pointed out that the Differences in relative factor
endowments have been proposed as a source of comparative advantage in the HecksherOhlin-
Samuelson model of international trade. A number of hypotheses identified within this
framework find support in numerous empirical studies showing that countries tend to export
products whose production requires a relatively intensive use of the factor of production in
which they are relatively well endowed. Thus, for instance, a capital-abundant country would
tend to export capital-intensive products and import labor-intensive products. Debaere (2003),
Romalis (2004), Chor (2010) and Stone et al. (2011) are some of the studies that demonstrate
that countries ‘relative endowments are informative of their pattern of trade. The empirical
model of trade developed in this paper follows this literature by accounting for exporters
‘physical capital-to-labour ratios which are interacted with capital intensities measured at the
industry level. Given the lack of readily available comprehensive time-series data on capital
stocks for the 55 OECD and SEM economies considered in our study physical capital stocks
series have been constructed according to the perpetual inventory method as where is gross
fixed capital formation in year t and is the depreciation rate.8 The Global Trade Analysis
Project (GTAP) database values of physical capital stock in 2004 for each country have been
taken as reference values while the data on gross fixed capital formation have been taken from
the World Bank’s World Development Indicators (WDI) database. Data on sectorial factor
intensities come from the GTAP database and are defined as respective shares of individual
endowments (skilled labour, unskilled labour and capital) in industry‘s total purchases of
primary factors of production’s gains can be one-sided, or result in exploitation of the weaker
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Q2, WHAT ARE THE MAIN GAIN FROM TRADE AND HOW DO COUNTRIES
BENEFIT FROM TRADE?

GAINS FROM TRADE

MEANING OF GAINS FROM TRADE Gains from international trade refer to the various
benefits which country derived by way of trading of goods and services with other countries.
Such benefits from trade are because of international division of labour and specialisation.
Countries trade with each other because trade is beneficial to all. Basic motivation of trade is the
gain or benefit that nations accrue over the period. Each trading country gains when the total
output increases as a result of the division of labour and specialisation. In the case of autarky or

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isolation, the benefits of the international division of labour do not flow between nations.
Malthus held that ‘the gain from trade consisted of the increased value which results from
exchanging what is wanted less for what is wanted more, and that 'international trade, by giving
us commodities much better suited to our wants and tastes than those which had been sent away,
has decidedly increased the exchangeable value of our possessions, our means of enjoyment, and
our wealth’. In simple words, gains from trade refers to additional production and consumption
effects that countries can achieve by way of entering trade with each other. To sum-up, gains
from international trade are of two types–i) gain from exchange and ii) gain from specialisation
in production. Approaches preferred by various economists will be discussed in subsequent
sections.

SOURCES OF GAINS

As per classical theory, major source of gains from international trade arises out of specialisation
based on the principle of comparative cost advantage. While pointing out the 'division of labour’,
Adam Smith has held that it is limited by the size of the market. Upon expansion of the market
size because of international trade, the scope for large-scale production also increases which in
turn increases the scope for complex division of labor and specialization.

In short, international Theory of International Trade leads to enlargement of the market which
further leads to specialization and division of labor. This process further results in an increase in
output per unit of input. The comparative cost theory exhibits increased world production as
gains from international trade in the real-world scenario. Each trading country gains by way of
getting relatively more, better and cheaper goods. In the entire process no country loses by
having less than what they needed. In this way we can say that gains from trade are results of
specialization in production from the division of labour, economies of scale, and agglomeration
along with relative availability of factor resources. When there is free trade, goods and services
produced all over the world are available to people everywhere. In other words, international
trade makes available to the people of a country, a galaxy of goods and services at the most
competitive prices. A country may not have the factor endowments or technological capability to
produce certain goods. If there is no trade with other countries, it will have to do without such
goods but through international trade, it can procure them. The gains from international trade
may be summed up as follows:

i) Expansion of the size of the market

ii) Division of labour
iii) Gains from specialization
iv) Gains from increased product variety
v) Gains from competition vi)
vi) Gains from increased economies of scale
vii) Productivity gains.

FACTORS DETERMINING SIZE OF GAINS

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Differences in cost ratios: if country A has a comparative advantage in the production of wheat
and country B has a comparative advantage in the production of cotton, both countries will gain
from trade. The size of the gain will depend on the cost of production of each commodity in both
countries. The gain from international trade depends upon the cost ratios of differences in
comparative cost ratios in the two trading countries. The larger the difference between exchange
rate and cost of production the larger the gains from trade and vice versa.

1) Reciprocal demand: The reciprocal demand means the relative strength and elasticity of
demand of one country for the product of the other in exchange for its product.

2) Level of income: The level of money income of a country is another factor which determines
the gains and the share of trade. A country whose goods have constant demand in other countries
will have a high level of money income.

3) Terms of trade (also called “trading price”): It is the most important factor which determines
the gains from trade. The international terms of trade refer to the rate at which one commodity of
a country is exchanged for another commodity of the other country. If the cost ratio and terms of
trade are closer to each other, more will be the gains from the trade of the participating countries.

4) Productive efficiency: An increase in the productive efficiency of a country also determines its
gains from trade. It lowers the costs of production and prices of goods in the home country. As a
result, the other country gains by importing cheap goods and its terms of trade improve.

5) Nature of commodities exported: Another factor is the nature of commodities exported by a

country. A country that exports mainly primary products has unfavorable terms of trade.
Consequently, it gains from trade will be smaller. On the contrary, a country exporting
manufactured goods has favorable terms of trade and its gain from trade will be larger.

6) Technological conditions: In a country which is technologically advanced and has an

abundance of capital, its volume of foreign trade will be large and so it will gain from
international trade. On the other hand, if a country is technologically backward with abundant
labour, its volume of foreign trade will be small and so will be gains from trade.

7) Size of the country: If a country is small, it is relatively easy for them to specialize in the
production of one commodity and export the surplus production to a large country and can get
more gains from international trade. Whereas if a country is large, then they must specialise in
more than one good because the excess production of only one commodity cannot be exported
fully to a small-sized country as the demand for the commodity will reduce very frequently. So,
the smaller the size of the country, the larger the gains from trade.

8) Factor availability: International trade is based on specialization and a country specializes

depending upon the availability of factors of production. It will increase the domestic cost ratios
and thereby the gains from trade.

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9) Productive Efficiency: An increase in the productive efficiency of a country also determines

its gains from trade. A highly efficient country can keep the cost of production and price of the
goods lower than other countries.

MEASUREMENT OF GAINS FROM TRADE

Jacob Viner pointed out that the gains from trade were measured by the classical economists in
terms of: i) An increase in national income, ii) Differences in comparative costs, and

iii) Terms of trade. Some approaches to the concept of gains from trade and their measurement
are discussed below:

1) Adam Smith’s Approach: According to Adam Smith, international trade helps to improve the
productive capacity of trading nations. It increases value of the product as excess of a product in
domestic market can be exported. A nation can also import products which are high in demand in
domestic market. Thus, gains from international trade are in form of maximum welfare through
maximum possible export earnings. A country reaches the point of optimum allocation as each
country specializes in production of a commodity in which it has cost advantage. Specialization
results in economies of scale i.e., reduced cost of the product.

2) Ricardo-Malthus Approach: we have discussed about Comparative advantage theory. You

can recall that Ricardo asserted that principle of comparative costs in international trade results
in saving costs and resources. In the words of David Ricardo, ―The advantage to both places is
not that they have any increase in value but with the same amount of value they are both able to
consume and enjoy an increased quantity of commodities." Malthus had expressed in this regard
views similar to those of Adam Smith. The gain from trade, according to him, consists of "the
increased value, which results from exchanging what is wanted less for what is wanted more."
The international exchange on this basis increases the "exchangeable value of our possession,
our means of enjoyment and our wealth." The Ricardo-Malthus approach to gains from trade was
illustrated by Ronald Findlay

3) J.S. Mill’s Approach: Ricardian approach did not explain the distribution of gains from trade
among the trading countries. J.S. Mill in his approach attempted to analyze both the gains from
trade and the distribution thereof among the trading countries. He stressed on the concept of
reciprocal demand. According to him, reciprocal demand determines terms of trade, which is a
ratio of quantity imported to the quantity exported by a given country. The terms of trade
determine the distribution of gains of trade between the trading partners. The two trading
countries for the products of each other will decide the actual rate of exchange of two
commodities.

. 4) Modern Approach: The modern theorists considered the gains from trade as the gains
resulting from: i) Gains from exchange and ii) Gains from specialisation. These two gains
together constitute the gains from international trade. When trade takes place between
countries, consumers enjoy a higher level of satisfaction, partly because of improvement in
terms of trade and partly on account of greater specialization

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Q3, WHAT ARE TARIF, QUATA and SUBSIDY? HOW DO THEY AFFECT TRADE?

Tariffs are taxes on imports, quotas are limits on the quantity of imports, and subsidies are
government payments to domestic producers. These policies affect trade by making imported
goods more expensive and less available (tariffs and quotas) or by making domestic goods
cheaper and more competitive (subsidies). Both tariffs and quotas increase prices for consumers
and protect domestic industries, while subsidies can lead to disputes, increase government
spending, and distort markets.
Tariffs
• What they are: Taxes on imported goods.
• How they affect trade:
• Increase the cost of foreign products, making them less attractive to consumers.
• Protect domestic industries by reducing competition from imports.
• Generate revenue for the government.
• Can lead to trade disputes between countries.

Overall Impact
Increased costs and reduced choice for consumers:
Both tariffs and quotas raise prices and limit the availability of imported goods.
Protection for domestic industries:
All three policies are used to shield domestic companies from foreign competition, but at a
potential cost to economic efficiency.
Market distortion:
Subsidies, in particular, can interfere with the natural forces of supply and demand, impacting
non-traded goods and factors of production indirectly as well, according to a World Bank
document.
Impact on spending:
Government and business spending can be significantly affected by tariff changes and the costs
associated with subsidies, notes
Domestic Distortions and International Trade
Taxes arid-subsidies affecting the producers and consumers of trade

Q4, COMPARE PROTECTIONISM VS FREE TRADE HOW DO COUNTRIES

BENEFIT FROM TRADE

The Comparison and Contrast between the Protectionism and Free Trade

International trade is a set of actions that aim to exchange capital, goods, and services between
foreign countries across their international borders. International trade policy is a policy related
to trading across national boundaries aiming to protect the best interests of their citizens and
companies.

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The associations of countries-international trade system Facilitated by the thriving concept

“the global village”, the connection and relevance between different countries have developed
for several centuries. What associates all the countries is the international trade system, an
indispensable component of the global economy. Each country acts with its unique, considered,
and profound policies and attempts to occupy the international level in this system. For instance,
North America Free Trade Agreement (NAFTA) in the United States has fostered greater
integration and helped transform Mexico into a major exporter of manufactured goods.

The two most significant of which are free trade and protectionism. In general, free trade is
the trade based on the unrestricted international exchange of goods with tariffs used only as a
source of revenue. In the contrast, protectionism refers to government policies that restrict
international trade to help domestic industries, such as tariffs on imported goods, import quotas,
and a variety of other government regulations. Moreover, protectionists implemented policies to
improve economic activity within a domestic economy and safety or quality concerns. In Britain,
the politics and economists combined these two with the political decisions fatherly promote the
thriving of Britain's economy during the 16th-20th century. Understanding the past is always the
cornerstone for solving the problem that exists now or in the future. Related to the historical
contexts, the past paper written by the previous economic experts had to implement different
strategies and policies into various eras to avoid the collapse or the tragedy happened in the
United Kingdom. However, most focus on discussing past events and acts, they usually lack the
prediction or guide for the future. In terms of this gap, the following essays summarizes the
determining factors of trade policy and make some predictions for future international trade
policy decisions within one country. The analysis includes the past paper's viewpoint, the
different policies taken under other circumstances, and how protectionism and free trade
influence the country's economy, even the global economy.

Individual firm interests employing the magnifying lens to look at the detail behind
protectionism and free trade, Authors Milner and Yoffie demonstrated that ever since Adam
Smith and David Ricardo challenged the intellectual foundations of mercantilism, theories of
commercial policy have debated the merits of free trade versus protectionism. Since free work
was shown to be superior in terms of efficiency, scholars have long puzzled why governments
would ever choose protectionism. The authors thought that the main explanation of this
phenomenon is the interests of firms because every firm’s intention or incentive is to find the
optimal outcome. To be more specific, they concluded that the willingness of firms to support
free trade or protectionism might be contingent upon the behavior of their foreign rivals and their
governments. For instance, if the firms face comparative disadvantage, they believe they can
capture excessive rents through tariffs. In the contrast, there are certain firms prefer free trade.
The company with extensive global intra-firm trade flows in the manufacturing sector is
committed to free trade since barriers to trade put a high costs on their business, seeking free
trade as a trade strategy. In this case, there is no absolute advantage of either one of the policies.
It essentially relies on everything, such as the changes in industry economics, foreign
government policy intervention, and variations in industry structure that determine the domestic
economic conditions. Nevertheless, there is no solution when the industries are faced with a

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combination of competitive pressure and foreign protectionism. In this case, Milner and Yoffie
analyzed the international trade policy in Britain based on the demands and interests of
individual firms. To some extent, the decision of individual firms could significantly influence
one country’s economy. In this case, the future study should focus on the macro level and realize
that the value comes from individuals. The final decision is essentially relevant to the
individual’s decision.

Influential factors on the trade policy these studies collectively point out some reasonable
explanations for the existence of different strategies and policies under other conditions, like
interests of firms, political power impacting the movement, and historical influence on the
economic policies.

As technology rapidly updates and the information age expands, economic development is
growing at an exponential rate. People should be concerned about how they can use the past
events to form an international trade policy that could address the obstacles to the growing
competitive pressure of the environment and tally with England's political and historical
background. Pressure of the environment and tally with England's political and historical
background. Development of free trade theory in general, free trade based on the unrestricted
international exchange of goods with tariffs used only as a source of revenue, which means
applying a free-market idea to international trade. Adam Smith first developed the concept of
free trade Adam Smith in 1776, who wrote “The Wealth of Nation.” In this renowned book, he
raised an inconspicuous quote “It is not from the benevolence of the butcher, the brewer, or the
baker that we expect our dinner, but from their regard to their own self-interest”. In other
words, in the free market, each one’s self-interest can satisfy the others’. Following Smith’s
logic, the theory of the “invisible hand” was proposed, suggesting a natural force resulting from
an individual’s decision to make the whole society better off. It was further elaborated by its
outcome “price mechanism,” saying that buyers and sellers determine the price of a commodity
In addition, Smith regarded enlightened and limited government as two of the crucial elements
of a country’s prosperity. From then on, the proponents of free market have believed such a
force works well in regulating the economy that there is no need for government to interfere
unless it goes beyond control. Last but not least, Smith foresaw the essence of industrialism by
determining that division of labor represents a substantial increase in productivity with the
typical example of making pins: if pin makers are organized with one making head, one making
body, each using different equipment, they can produce 4800 pins a day; in contrast, one person
can hardly create one in a whole daytime if he is asked to manipulate all procedures. Since
people realized the importance of specialization, more and more diverse and detailed
occupations occurred, improving productivity and promoting social well-being through
decreasing unemployment. Following Adam Smith, another accomplished economist called
David Ricardo proposed the theory of comparative advantage in 1817 in his remarkable book
On the Principles of Political Economy and Taxation, which theatrically proved Adam Smith's
foresight. Comparative advantage is an economy's ability to produce a particular good or
service at a lower opportunity cost than its trading partners. In other words, suppose there is a
specialized good called good A, the country with comparative advantage of good A can

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maximize their quantity produced if they specialize in creating good A. Development of

protectionism theory Protectionism refers to government policies that restrict international trade
to help domestic industries, such as tariffs on imported goods, import quotas, and other
government regulations. The most common principle is setting taxes. The surcharge raises the
price of foreign goods, thus reduce the quantity demanded of such foreign goods and guide the
customers to purchase alternative domestic goods, which are relatively cheaper, so the goal of
protecting domestic producers is achieved. Most of the proponents of protectionism are partly
influenced by Keynesians, led by economist Keynes. Keynesian denies the power of the
“invisible hand” introduced by Adam Smith, and conversely, Keynesian believes that the
market will finally collapse because of extreme inflation or deflation without government
intervention. In this way, although Keynesian does not directly mean protectionism, it still
builds the theoretical foundation for protectionism by favoring government intervention. In
1790 Alexander Hamilton proposed a term called “Infant Industry,” which refers to a newly-
established industry in its early stage of development. Such an industry lacks the experience,
customer group, and size to compete effectively with other sectors. In case of bankruptcy,
protection from the government needs to ensure the industry can go through the challenging
“infant” period until it matures in the market. Moreover, particularly to domestic individuals,
the losers in the commercial competition are more identifiable than gainers, meaning they are
easier to capture attention and sympathy, creating political pressure emerged from the public,
then protectionism follows [19]. Since then, some even took advantage of some existing
theories, such as the spillover effect, to argue that protecting one particular industry can
stimulate its production, thus creating a profitable supply chain among enterprises, which also
favors protectionism. Having such a belief, more and more capitalists who were not satisfied
with the industrial supply chain at that time or young industrialists who decided to establish
new brands were initiated to advocate tariff setting to pursue profit.

In summery

FREE TRADE VS. PROTECTIONISM

One view says that we should make it as easy as possible for goods and services to move
between countries. This approach is based on the argument that more trade makes us wealthier
and is therefore a good thing. It is known as free trade. Another approach says that we should
restrict trade. We might do this to protect certain jobs. We might think that we need certain
industries such as food production or steel-making – just in case things go wrong in the wider
world. We might want to restrict imports from countries with lower labour or environmental
standards so they can’t undercut our industries. This approach is known as protectionism.
Many economists agree that some restrictions on trade are desirable, but that we should be
careful, as such restrictions can make us poorer overall. For example, limits on agricultural
imports may be good for British farmers, but they also increase food prices. The following
sections set out some of the arguments in more detail.

Arguments for free trade; there are several key arguments in favor of free trade:

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 Free trade increases the size of the economy as a whole. It allows goods and services to be
produced more efficiently. That’s because it encourages goods or services to be produced
where natural resources, infrastructure, or skills and expertise are best suited to them. It
increases productivity, which can lead to higher wages in the long term. There is widespread
agreement that rising global trade in recent decades has increased economic growth.

 Free trade is good for consumers. It reduces prices by eliminating tariffs and increasing
competition. Greater competition is also likely to improve quality and choice. Some things,
such as tropical fruit, would not be available in the UK without trade.

 Reducing non-tariff barriers can remove red tape, thus reducing the cost of trading. If
companies that trade in several countries have to work with only one set of regulations, their
costs of ‘compliance’ come down. In principle, this will make goods and services cheaper.

 In contrast, protectionism can result in destructive trade wars that increase costs and
uncertainty as each side attempts to protect its own economy. Protectionist rules can tend to
favor big business and vested interests, as they have the resources to lobby most effectively.

Arguments for Protectionism; while free trade increases the size of the economy as a whole, it
isn’t always good for everyone:

 As more countries experience industrial development, traditional domestic industries can

decline. In the UK, for example, the shipbuilding industry has declined in the face of
international competition since the 1950s and currently steel production faces increasing
competition. Protectionism can help preserve jobs in these sectors, or at least slow the process
of change.

 Protectionism can also help build up new industries. In sectors with high start-up costs, new
firms might find it difficult to compete if there is not support from government in the form of
tariffs or subsidies. Once they have become competitive, such barriers can be removed.

 Protectionism can be used to safeguard ‘strategic’ industries such as energy, water, steel,
armaments and food. For example, ‘food security’ may be seen as important so that we can
feed ourselves if something terrible happens to disrupt the system of world trade.

 Some people worry that free trade deals can lead to a lowering of standards. Such deals might
require us to let in goods and services even though they don’t meet our standards, which might
then be cheaper than those made by domestic industries. For example, some people have been
worried recently that a free trade deal with the US might let in imports of chlorine-washed
chicken. There might also be pressure to reduce our standards for workers’ rights or
environmental protection so that our companies can compete with companies in countries that
have lower standards.

Q5, EXPAIN THE CONCEPT OF DUMPING and HOW COUNTRIES RESPOND TO IT?

Dumping as one of the unfair trade practices that some countries in the world undertake has
become an important issue which has come into focus; specifically over the past two decades.

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The essence of traditional militarism as was clearly known and experienced more than 50 years
ago in World War I, World War II and the cold war eras is no longer the means through which
countries proclaim their supremacy over others. The resultant by-products of globalization and
free trade mechanisms are such that countries around the world are engaging in a different but
more sophisticated kind of wars; and dumping is one of its weapons. We attempt in this
research paper to shed some light on dumping as the “trade weapon of choice” adopted by
many countries and to show that this practice is increasingly contributing to the wide economic
gap between rich and poor countries and this have had many dire consequences on the
developing Economies. Introduction The evolvement of international world trade took an
unexpected turn during the last fifty years, interestingly enough; this was due mainly to
enemies of yesterday becoming friends of today which resulted in the formation of new
alliances amongst countries. Those alliances were either an extension of the previous ones or a
direct consequence of the change in political outlook. Some regimes fell apart and it appears
that whatever was lost regime-wise has been gained elsewhere; this is truly portrayed in the
geographical integration of most countries in Europe to become what is known today as the
European Union (EU) and the disintegration of the former Soviet Union into separate countries;
those two examples are the most prominent ones because they were quite recent and they took
place almost simultaneously within the last twenty years and the impact of the resultant
changes were substantial and their implications are still felt and seen until the present day.
Politics and diplomacy are the heart and soul of international trade without which the latter
cannot survive or continue. Geography can be viewed as the tip of its iceberg because it is
closely linked to politics. Physical geographical locations do not change per se, what changes in
the minds of people (or countries in this context) are the geographical perceptions; those are
dynamic, constantly affected by and fed from the changes and developments in the political
arenas. Therefore, we assume that geographical perceptions dictate albeit indirectly the trends
of international world trade and its tools or weapons. The tools, or to utilize a more tactical
term, the weapons of international world trade are being used in the same way traditional war

tools and weapons were used more than fifty years ago with one major difference; the former
proved to be more subtle and employed more effective ways to gain access and win the world
over than the latter, however, the fruits of that success have been reaped in the short-run and
were limited to the few countries that were the proponents of such tools, on the other hand, the
use of such tools in international trade left a lot to be desired. Many countries are engaging in
unfair trade practices (and dumping is one of them) to establish their strong economic
supremacy. This takes place at the expense of many developing countries that are unable to
reap the benefits of international trade and the resultant collateral outcomes of globalization and
free trade since they did not participate in it from the beginning. It is obvious that the
participation of developing countries will not be forthcoming for a long time since many of
them are already exhausted politically from the continuous rule of corrupt regimes, civil unrest
and many years of military conflict in addition to many other economy-related problems. ©
Center for Promoting Ideas, USA www.ijhssnet.com 234 It may be a struggle to regain their
economic foothold and to some extent their balance in order to support their minimum living

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requirements, their choices are limited and they have to be dependent on the more powerful and
rich countries for long periods of time. Dumping as the “particular weapon of choice” involves
the selling of products at a rate lower than what is considered as the fair market value (in home
markets); thereby causing waves of economic controversy amongst the countries participating
in world trade. This controversy may as well have a long-term political impact, not just on the
affected parties but on the culprit country itself. Countries of the world have opened up to each
other as a way to promote the concept of globalization with the pretext that the world is
becoming a global village, the sad thing is that many “culprit” countries are just paying “lip
service” to this concept since they are operating under the basic rule of “survival of the fittest”
which means that powerful Nations put their interests first and foremost, even if the fulfillment
of those objectives is done at the expense of weaker countries. It may very well come to the
point that by the time those countries realize the consequences of their actions; it may be too
late to fix the problems. Dumping continues to be utilized by culprit countries and in some
cases, the World Trade Organization (WTO) has been instrumental and effective in putting a
stop to it, however, at other times, it failed to put a stop to dumping actions. Dumping will
continue to be an issue because WTO alone cannot fix the problems and some countries are not
willing to take actions against the abusers due to other considerations. There are important and
interesting questions that need to be answered, such as; how long will victim - countries going
to accept those relentless dumping actions without recourse? How long will it take those
countries to become strong enough to counter-attack or at least to find the means to protect
themselves?” To achieve this absolution, it is going to be a difficult road to travel. The purpose
of this research paper is to analyze and shed light on the reality of dumping and how some
countries are advancing their economic interests at the expense of other countries. This paper is
divided into six parts; the first part constituted an introduction of the concepts of world trade
and its evolvement in the latter part of the twentieth century and how old political habits do not
die but change its colors. The second part discussed the different types of dumping and their
pros and cons. The third part takes us through a literature review of the reality of dumping. The
fourth part discusses World Trade Organization (WTO) and its roles and rules vis-à-vis
dumping. The fifth part discusses the aftermath of dumping, in other words, the reaction to the
dumping and the anti-dumping measures adopted, and the last part of this case study is the
conclusion summary. Types of Dumping and Analysis of Pros and Cons Dumping is best
defined as the unfair trade practice of charging a lower price for a good or product in a foreign
market than it is charged for the same good or product in a domestic market. It is selling at less
than “fair value” or less than the cost of making the good or product, knowing that it is not
beneficial for a country to dump unless it has a comparative advantage. Referring to WTO
agreement, dumping is condemned (but it is not prohibited).If it is done with the aim of driving
competitors out of the market. It is illegal in some countries to dump certain products into
them, because they want to protect their own industries from such unfair competition.
However, dumping is very hard to prove partly because; production costs vary from one
country to another. Additionally, countries dump to drive out domestic producers and therefore
increase their market share so that later on, they can increase their prices. Free markets support
the practice of dumping as it offers low price products. However, many economists believe that

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such trade practices do limit domestic industrialization. It is also seen as a way to economic
colonization of developing countries by powerful and industrialized nations. Countries dump
products to eliminate competition, secure monopoly system and increase their share of
international exports.

There are many implications of this practice and all of them are “bad news” because they
affect the economy in a big way; one of the major impacts is that dumping hurts a country’s
domestic industrial base, which in turn negatively impacts sales volume and revenue. This
leads to a lot of other adverse economic implications such as loss of jobs (unemployment) and
diminished consumer spending. These implications have forced some countries to impose strict
anti-dumping measures in order to eliminate or and minimize such practice. Dumping is
considered to be an unfair trade practice and that it is unacceptable by many national and
International trade laws. In order to understand the concept of dumping further, we need to
discuss the different types of the practice:

1) Predatory dumping: this is considered to be the most unethical type, this happens when
companies take over a given market with low priced items only to turn around and increase
their prices. In other words, it is taking a product with a low price, look for a vulnerable market,
dominate it, and then raise the price. The purpose of this action is driving the home country’s
foreign competitors out of the market, the company will use its monopoly power to raise prices
and get high profits, but in this case product used has to have comparative advantage.

2) Cyclical dumping: the second type and it takes place during recession periods, when there is
unemployment, no income and no money to spend, and the demand for goods and services is
low, companies then tend to lower their prices to minimize sales loss and the decline in
quantity produced; market price will fall below the full average cost. Companies continue to
produce and sell as long as price exceeds average variable cost. If any of these products are
exported to other market at the recession prices, then, that will be cyclical dumping. (3) 3)
Seasonal dumping: as the name suggests, is the act of selling products that are seasonal such as
clothes, shoes, umbrellas…etc. that were sold at high prices in seasons, and remaining surplus
taken to other markets off seasons and sold at below fair market price that obtains at home. An
example of that is the dumping of Mexican tomatoes. The overripe case against Mexican
tomatoes (1980); as we know, tomatoes are a perishable commodity whose price fluctuates
form winter to summer, in 1980, Mexico supplied half of all fresh tomatoes, cucumbers, and
eggplants during the U.S. winter season. Florida farmers objected and filed a dumping claim
but U.S. Treasury rejected the claim and Florida farmers appealed. (4) 4) Persistent dumping:
this is considered to be the worst type of dumping; it is dangerous, happens regularly and goes
on and on. It is the continuous tendency of a domestic monopolist to maximize total profits by
selling its commodities at a higher price in the domestic market than international just so to be
competitive in those foreign markets. This type of dumping happens because monopolistic
companies use price as discrimination tool between markets. Therefore, for that discrimination
to take place (I.e. International Price Discrimination), the following conditions must exist: (5)
a- Foreign and domestic markets must be separated. b- Demand elasticity of the product must

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be different in two markets. The product can be sold with a lower price where the demand
elasticity is high and with a higher price where demand elasticity is low. Those were the
different types of dumping that many countries engage in and without ethical consideration of
the parties that are injured in the process. We shall see momentarily how dumping is viewed
from the perspective of WTO and the degree of their success in resolving the issues that arise
from dumping. World Trade Organization (WTO); Roles and Rules for Dumping World Trade
Organization (WTO) was established in 1995 as an entity to negotiate trade agreements that
cover goods, services and intellectual property. It is committed to lower customs tariffs and
other trade barriers. WTO monitors measures that the governments adopted for trade policies
and practices to make sure they implement the WTO agreements. It discourages unfair trade
practices such as dumping and settles trade disputes amongst member Nations. For example, if
a member Country believes that its rights are being infringed upon; Under WTO Agreement,
there are laid down procedures to seek redress from the Organization and dumping is
condemned, but is not prohibited. More so; when dumping causes or threatens to cause material
injury to a domestic industry in the importing country. (6) “The Anti-dumping Agreement” is
the agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade
1994 (the “AD Agreement”) which governs the application of anti-dumping measures by
Members of the WTO, In accordance with the provisions of the AD Agreement, that an
imported product is “dumped” and that the dumped imports are causing material injury to a
domestic industry producing similar products. (7) © Center for Promoting Ideas, USA
www.ijhssnet.com 236 WTO acts as the administrator for any unfair trade practices like
dumping. If any member filed a complaint, WTO should investigate to see if there are any
violations based on the multi-lateral agreements. It can impose antidumping measures if: 1.
Dumping is occurring: When the export price for a product is less than its selling price in the
exporting country, we know that there is a dumping. 2. The target industry is suffering material
injury: The Agreements define material injury as material injury itself or a threat of material
injury. The injury is due to Volume effect - when the dumped imports volumes are increased
and its effect on the domestic industry. Or Price effect – where products’ price that have been
imported causes price depression in the local markets or prevents the price increase on the
goods. 3. There is a causal link between the two: The dumped imports have caused the alleged
injury and the domestic industry is suffering from decline in input, loss of sales and market
share, reduced products and decline in productivity. The WTO agreement allows governments
to act against dumping where there is material injury to the competing domestic industry.
However, the government should be able to prove that dumping is occurring by comparing the
export price to the exporter’s home market price. And by doing this the government can prove
that dumping is threatening its economy. The Anti-Dumping Agreement allows countries to
charge extra import duties on some products to bring prices closer to the normal value. An
example of this is the case of shrimps imported from China and Vietnam that are being dumped
at US Market. Both countries sell it at less than fair value, with margins ranging up to 113% for
China and 26% for Vietnam. The US industry group had asserted that the countries in question
sell shrimp in their home countries at prices between 32% and 349% higher than they charge in
the US. An alliance of shrimp producers from eight US States has demanded the imposition of

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tariffs up to 267%. The governments of China and some other countries criticized the decisions,
but only Brazil has threatened to contest the ruling in the WTO if duties are indeed imposed.
US companies that market, distribute and sell seafood stated that the imposition of duties would
hurt consumers of the US' most popular seafood by pushing shrimp prices up. (8) The WTO
provides three methods to determine product’s “normal value,” based on the price in the
exporter’s domestic market: 1. The sale must be in the ordinary course of trade, it must be of
the like product, the product must be destined for consumption in the exporting country and the
price must be comparable. 2. The price charged by the exporter in another country. 3. The
combination of the exporter’s production costs, other expenses and normal profit margins.
While the export price is based on the transaction price which the foreign producer sells the
products at to an importer in the importing country, also, the comparison between the export
price and what would be a normal price should be fair enough for both parties. The WTO listed
all the procedures that should be followed to initiate anti-dumping cases, how to conduct the
investigations and the chance for all parties to present their cases. If the margin of dumping is
only 2% and/or the volume dumped is less than 3% of total import, the investigations should be
ended immediately since the effect is very small. In addition to the volume and the price effects
of dumped imports, WTO should examine the total impact of dumped imports on the domestic
industry such as decline in sales, profits, market share, productivity, wages, output, growth and
returns on investments. The WTO has been playing a significant role in reducing barriers to
trade, but lack of effective anti-dumping initiatives still remain a road block to global free
trade, and it seems protectionism is the only option to solve this problem. Protectionism builds
on the power to tax one party to help the business of another. In most cases of perfectionism the
governments’ primary concern is national income, national spending and national employment,
therefore, governments may impose more protectionism measures to protect their respective
home base industries from foreign competition, in trying to solve the problem of dumping. The
Reality of Dumping; a Literary Review This literature review summarizes relevant writings
about antidumping as a form of protectionism. International Journal of Humanities and Social
Science Vol. 4 No. 5; March 2014 237 It is structured to guide the reader from more general
works that position the subject in its broader context to more specific studies that address more
arcane, technical aspects of antidumping as a form of protectionism. The review begins by
analyzing some important books in the field of International Political Economy that surveys
information provided by international organizations. Next, the review focuses on how the
subject of antidumping fits into the general literature about protectionism. From here, the
review shifts to the antidumping literature itself. A. General International Trade Literature One
classic work in the literature at the intersection of economic and political analysis on
international trade issues is International Economics: Theory and Policy by Krugman and
Obstfeld (2003) (9). After an extensive discussion of free trade models, the authors analyze the
subjects of dumping and antidumping in a chapter about the imperfections of international
trade. They explain the concept of dumping and antidumping as protectionism from an
economic point of view and discuss some of its history and overall economic implications. Yet
they neither endorse nor oppose antidumping and put antidumping into a greater context (10),
this is why this book serves as a first starting point and is quoted for different clarifications

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throughout this paper. A more specific book on trade is The World Trading System: Law and
Policy of International Economic Relations by Jackson (11). He explains trade law and policy
as the interplay of international law, national law, political science and economics. Apart from
clarifying the trade details, he dedicates one of his fourteen chapters to “Unfair Trade and the
Rules of Dumping” (12). Besides giving the basic insights on antidumping policies and laws as
well as the determination of injury, Jackson offers two more specific, interesting aspects.
Firstly, he states that anti-dumping is a response to unfair trade practices. Unfair means, as
already mentioned; that practices interfere with or distort free-market economic principles.
Especially in the case of predatory pricing, dumping is considered as unfair. According to their
critics, large foreign companies use market leverage and sell their products at a very low price
to drive small domestic firms out of business and thus reduce competition in order to be able to
reap monopoly profits. Secondly, Jackson brings up the question of interface problems,
problems that emerge when different economic systems trade with each other. One interface
problem concerning antidumping involves the determination of whether a product has been
sold at “less than fair value” because variable costs need to be determined, which is especially
complicated in non-market economies. (13) Like Krugman and Obstfeld, Jackson sets
antidumping into the frame of trade and explains its mechanisms. B. General International
Political Economy Literature The next task in the literature review is to show where the topic of
dumping and antidumping is situated within International Political Economy literature. In his
book The Challenge of Global Capitalism: The World Economy in the 21st Century, Gilpin
(2000) (14) writes about trade protectionism in his chapter about the insecure trading system.
He addresses the tension between trade liberalization and trade protectionism, its pros and cons.
According to Gilpin, the proponents of free trade are faithful to free-market economy
principles. They base their argument on the idea of comparative advantage and their belief that
free trade benefits exceed its costs. The only exception to free trade is based on the infant
industry argument. The opponents of free trade are 18th century mercantilists that equated trade
surplus with military power. The 19th century economic nationalists who associated
manufacturing with military power and national autonomy were also against free trade.
Contemporary critics of globalization either consider trade as a threat to domestic welfare, the
environment, and human rights or want to protect their high-tech industries (15). This tension
still exists and there are sustainable arguments for and against protectionism. In the
complementary book of Gilpin (16) “Global Political Economy: Understanding the
International Economic Order,” he emphasizes the role of the state in the international political
economy. He writes about dumping in two different contexts. The first concerns international
trade, where oligopolies can use dumping to increase their long-term domination of a market
(17). Secondly, Gilpin mentions antidumping regulations when writing about the evolution of
the world trading system (18) and the conflicts between major powers resulting from the United
States’ misuse of antidumping as a protectionist device (19). Gilpin’s coverage on dumping
demonstrates that it is an important issue in contemporary international political economy,
especially when it is connected with protectionism. The book of Hoekman (20) entitled “The
Political Economy of the World Trading System: The WTO and Beyond” does not directly
touch upon the topic of antidumping. Nevertheless, it shows one very remarkable aspect of it.

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© Center for Promoting Ideas, USA www.ijhssnet.com 238 Hoekman illustrates in a bar chart
of the major cases dealt with by WTO Disputes Settlements between 1995 and 1999 that
antidumping agreement cases were the sixth most important ones after cases concerning
national treatment on internal taxation regulation, general most-favored nation treatment,
general elimination of quantitative restrictions, schedules of concessions and intellectual
property. According to WTO statistics, the profile of dumping has grown since 1999. Again,
antidumping is a topic in international political economy that cannot be circumvented.
Victimized countries react towards dumping and those actions are referred to as “anti-
dumping” measures that they undertake in order to protect themselves. Reaction of Countries
Victimized By Dumping Through Anti-Dumping Measures When dumping takes place, the
first thing that comes to mind is whether this tool is to be construed as ethical competition.
Interestingly enough, there are different points of view regarding this issue and this issue
continues be debated. Many governments are strict in terms of actions undertaken towards
dumping in order to protect their domestic industries. WTO agreement vis-à-vis dumping is not
about making judgment calls, rather; it is concerned about how governments deal with the issue
of dumping, hereto referred to as “Anti-Dumping Agreement.” (21) The official definitions are
more accurate, as mentioned previously; WTO agreements allow governments to adopt “anti-
dumping” actions to counteract dire consequences affecting domestic industries. On the other
hand, the government should show clearly how dumping is taking place and identify the
relevant cost implications. Anti-dumping actions, as mandated by GATT were adopted by
many countries such as the United States and its strategic partners through the formulation of
anti-dumping laws in their effort to lessen the adverse impact on their local industries. Anti-
dumping actions involve charging extra import duties for a product from a specific exporting
country in order to bring the price closer to the original value of the product. The simple truth is
that anti-dumping actions are in violation of GATT and other subsequent WTO rules which
tend to promote and advocate free trade and non-tariff barriers. However, anti-dumping tariffs
are binding and not discriminatory among trading partners. (22) As previously demonstrated,
there are three methods that WTO adopts in calculating the “normal value” of a product. The
underlying fact is that, WTO tries to narrow down as much as possible the range of potential
options available for such calculations, in order to avoid going into unnecessary details.
Further, the scope of dumping to be calculated for a certain product may not be sufficient. Anti-
dumping is only applied if dumping believed to be causing harm to the local industry of the
importing country. Therefore; a detailed analysis and investigation should be conducted in all
its specificity by evaluating all relevant economic factors to determine the precise outcome of
dumping. (23) Initiation of an anti-dumping case is detailed but it shown with the utmost clarity
how this can be executed in order to give the opportunity for victimized countries to show-case
their evidence. It is a must that the initiation of the case expires after 5 years of its imposition
unless the investigation clearly demonstrates that ending this measure could lead to injury.
Also, initiation of an anti-dumping case where the margin of dumping is somewhat less than
2% of the export price is not common, other conditions are set; based on analyses and
investigations showing the volume of dumped product to be too small (i.e. less than 3% of total
imports of that product, on the other hand, investigations may be initiated if several countries –

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each supplying less than 3% of the imports – together account for not less than 7% of total
imports. The agreement states that all member countries must inform the WTO Committee on
Anti-Dumping Practices regarding all anti-dumping actions as frequently as twice a year. Once
possible cases are identified, then, all members are encouraged to negotiate with and consult
each other or use the dispute settlement procedure of WTO. (24) Conclusion Undoubtedly,
dumping has negative connotations; whether it is used in the context of international economic,
environment or otherwise, not to mention the fact that it is not ethical. In those cases, the
outcome is the same, dumping is taking place and the targeted party is hurt and injured.
International Journal of Humanities and Social Science Vol. 4 No. 5; March 2014 239
Notwithstanding the fact that countries are constantly and primarily required to make decisions
that are in line with their national interests and security, those decisions need to be done with
due diligence and careful consideration of the pros and cons in order to minimize the bad
outcomes. Sadly, it will never be a win-win situation for the parties involved; on the contrary,
dumping will cause damage to some countries and there may be no magical remedies. There
may be the situation where the victimized countries are not able to stop the continuous barrage
of “dumping” attacks by the “culprit” countries; It is ideally assumed that countries all over the
world are advocating the concepts of globalization, promotion of free trade, free economic
mobilization, world peace and other friendly concepts, yet when it comes to the individual
countries’ interests and security, the concept of the “survival of the fittest” rules supreme.
Therefore, Dumping can be considered as the manifestation of “political and economic
selfishness” of some Nations over the others. Dumping will continue to be used by countries
and the resultant issues will continue to become more complicated and it may become very
difficult to eliminate dumping totally, even the international entities such as GATT and WTO
are powerless and weak to prevent dumping, or become effective enforcement agencies in
fights against dumping. even with the availability of the dispute settlement procedures, the
relief for victimized countries may not be forthcoming in a long time because, the process of
investigation is long and complicated and until the verdict is known, the victimized country
will continue to pay the price and its economy will continue to suffer for a long-time from
dumping. This type of sophisticated economic war performed by one country against another
will not cease, until countries of the planet “dump” the simple notion of greed which is the root
of the problem.

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