Anti-dumping duty on wire rods has little to do with predatory pricing, more to do with protectionism
June 29th, 2012 by Hafiz Noor Shams
It appears that protectionist sentiment within the steel industry just will not just die down. Earlier last year, Megasteel unsuccessfully lobbied for a levy on steel imports. That was shot down because users of steel protested. Megasteel, being the sole domestic producer of flat steel (used mainly for vehicles and major appliances), in its eagerness to protect itself from competition, wanted not only protectionism for domestic flat steel, but lobbied for across the board protectionism. That stepped on a lot of toes and it was good that the protest stopped the protectionist petition dead in its tracks.
In the news today however, the government is considering anti-dumping duty on foreign-produced steel wire rods. Wire rod is considered long steel product and most Malaysian steel manufacturers produce long steel. Contrast the fact about long steel with flat steel, which is only produced by Megasteel: one can immediately understand why the anti-dumping proposal may be more popular than Megasteel’s earlier protectionist proposal. The anti-dumping duty will benefit a lot more manufacturers (if not most in the industry) than Megasteel’s earlier proposal.
According to The Star, the government is mulling anti-dumping duty after an unnamed domestic manufacturer filed a complaint about how foreign steel manufacturers are dumping wire rods in Malaysia.
First, for laypersons’ benefits, what is dumping?
The typical definition of dumping is when a foreign manufacturer priced its products aboard at a price cheaper than the price its sell at its home country. The logic behind this is that foreign firm is flooding the market on purpose to kill off domestic competitor so that it will be a monopoly later. It is predatory pricing. The real concern is predatory pricing and the prices differential is just a proxy to that concern.
The problem is that not all of such pricing is predatory but regulators rely solely on the proxy to decide while disregarding the main concern, which is again, predatory pricing. This is flawed way of looking at the case.
It is all too possible for foreign firms to price their goods at home more expensive than aboard without engaging in predatory pricing.
One reason can be that a foreign firm has monopoly power over its home market while its export market is exposed to fierce competition.
Now, add another factor, which is likely the case for Malaysia since Malaysia steel manufacturers do not have the scale required to make it efficient: foreign steel manufacturers from large economies like China has the economies of scale to be efficient. In a world of pure free market with initial position as it is in the real world, Malaysian manufacturers would not be able to compete with the foreign manufacturers’ price.
Given both factors, efficient but monopolistic foreign firm can engage in such price discrimination across economies. So, a firm pricing its good in its export market lower than its home market is not embarking on predatory pricing at all. Rather, it is only responding to market reality. Under this scenario, anti-dumping measure by any government is highly inappropriate and in fact, protectionist.
The reality is the anti-dumping measure is aimed at protecting inefficient Malaysian steel industry.
This is not just an economic and ideological concern.
Long steel products are used for construction. An anti-dumping duty on long steel, for instance, will eliminate downward pressure on prices of raw material used for construction of houses and offices, even the MRT.
When prices of properties go up unreasonably, you know which policy to blame.