Onkvisit S., Shaw J. International Marketing: Analysis and Strategy

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overhead expenses by spreading these costs over an

expanded production volume. Furthermore, a low

price may be necessary, at least at the beginning, to

penetrate a foreign market.

The second school of thought, however, argues

that the cost-plus method (i.e., full cost)

should be used in pricing a product for the overseas

market. All costs – including domestic marketing

costs (e.g., sales and advertising expenses, market-

ing research costs) and ﬁxed costs (e.g., research,

development, and engineering) – must be paid for

by all other countries.As such, the company begins

with a domestic price and then adds to its various

overseas costs (e.g., freight, packing, insurance,

customs duties). This pricing practice, with its

high degree of centralization, is also ethnocentric.

In effect, with an allowance for transportation costs

and tariffs, the same price prevails everywhere

in the world. Although the method is simple and

straightforward, it is far from being ideal, because

it is easy for the price to end up being too high.

Traditionally, Mercedes-Benz used the cost-plus

method when pricing its cars, making engineers

insensitive to costs.The company found that its costs

were 30 percent above Lexus.Now the company has

shifted toward setting prices according to the com-

petition. Engineers and plant managers are required

to meet the market-driven target price.

A number of international marketers use mar-

ginal-cost pricing,which is more polycentric and

decentralized.This pricing method is oriented more

toward incremental costs.An implicit assumption is

that some of the product costs, such as administra-

tion costs and advertising at home, are irrelevant

overseas. In addition, it is likely that research-

and-development costs and engineering costs have

already been accounted for in the home market and

thus should not be factored in again by extending

them to other countries.The actual production costs

plus foreign marketing costs are therefore used as

the ﬂoor price below which prices cannot be set

without incurring a loss. Japanese companies often

rely on this type of pricing strategy to penetrate

foreign markets, as well as to maintain market

share. For the Japanese, breaking even is regarded as

a success.The Japanese are thus willing to sacriﬁce

proﬁt in order to keep their factories going.

The incremental cost method has the advantage

of being sensitive to local conditions. Subsidiary or

afﬁliate companies are allowed to set their own

prices.A potential shortcoming in using this method

is that, because research-and-development costs and

the costs of running the headquarters’ operation

must be borne solely by the home-country market,

full cost may not be adequately taken into account

by overseas subsidiaries.

In the long run, it is dangerous to be price com-

petitive without being cost competitive. Grundig,

for example, tried to gain market share in the

VCR market by lowering its higher priced product

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While consumers in afﬂuent countries often view

developing countries’ products with distrust, their

counterparts in developing countries may often

share the same view. When multinationals begin to do

manufacturing in Nepal, they have to contend with

consumers’ bias against the made-in-Nepal products.

Many are upset that they can no longer get real Indian

soaps and that instead they have to buy Lux soaps

that are made by Nepal Lever. Unilever has launched

a campaign to educate consumers in Nepal. The

company wants to change consumers’ beliefs that

Nepalese-made goods are inferior. The campaign

seems to be working. Prior to the campaign, the

Indian version of the company’s Fair & Lovely skin

cream beat the local version by a margin of three

to one while commanding a price premium of 10

to 20 percent. The price premium has narrowed

signiﬁcantly.

Source:

“Battle for Dominance in the Soap Market Washes

over Nepal,”

Asian Wall Street Journal

, June 28, 2001.

MARKETING STRATEGY 16.1 REAL INDIAN SOAPS

model, only to realize that it was losing $40 for

every unit sold. There is, however, a possible solu-

tion for ﬁrms with high costs resulting from high

tariffs, transportation costs, and high manufacturing

costs at home.They have a choice of either produc-

ing their products in the overseas market or grant-

ing licenses to local producing ﬁrms there.

If a company is unable to control costs or to price

its product sufﬁciently high to cover costs, sooner

or later the company will be forced to leave the

market.

Elasticity and cross-elasticity of demand

Because of the elasticity and cross-elasticity of

demand, a company does not usually have the option

of changing or holding its price steady, independent

of action taken by its competitors. Ford, thinking

that its number-one position in England was insur-

mountable, moved unilaterally to end price wars by

eliminating discounts and incentives. This action

proved to be a strategic error because competitors

did not follow suit, and Ford’s dominant market

share dropped from 32 percent to 27 percent.

Always remember that it takes only one company to

start or continue a price war.

To be competitive does not mean that a

company’s price must be at or below the market.A

superior or unique product can command a higher

price. US beef, generally from grain-fed cattle, sells

better in Japan than does low-priced Australian and

New Zealand beef because cattle in those countries

are raised on grass and yield leaner meat.A product

with a desirable image can also hold its price above

the market.This has always been Sony’s strategy, and

Sony has stayed away from price wars that may

damage its image. But Sony has on occasion been

forced to lower prices when, as a result of com-

petitors’ price cuts, the price gap between it and

other competitors has widened too far.

A company can insulate itself against cutthroat

pricing to a certain extent by cultivating a unique

and desirable image. A prestigious image allows a

ﬁrm to act more or less as a monopolist and to

gain additional pricing freedom. Cartier takes full

advantage of its reputation. A watch made by its

subcontractor for $125, for example, was sold by

Cartier for almost ﬁve times that amount. More

than two-thirds of BMW owners are repeat buyers.

Because of their brand loyalty, BMW is able to price

its cars 10 to 30 percent above its competitors’

comparable models.

For most consumer goods, a country’s per capita

income is a good indicator of a market’s ability to pay

which may indirectly determine a product’s elastic-

ity of demand. However, some chic products have a

strong demand, and low per capita income is not

a deterrent. As in the case of Levi’s 501 jeans, the

product’s worldwide success indicates that a high

price can succeed in countries with low per capita

income.In fact, it is possible that, for such products,

a higher price may even propel the rise in demand.

Exchange rate

One pricing problem involves the currency to be

used for billing purposes. As a rule, a seller should

negotiate to bill in a strong currency, and a buyer

should try to gain acceptance in a weak currency.

European ﬁrms can also minimize exchange risk by

using euros in place of an individual currency for

quotation and billing.

The exchange rate is one factor that generally has

no impact in domestic marketing but is quite crucial

in international marketing. Since March 1985, a

sharp drop in the dollar value against other major

currencies caused the earnings of US MNCs to jump

because their overseas proﬁts when repatriated

brought in extra dollars after exchange. In contrast,

the devalued dollar brought nothing but displeasure

to Japanese exporters. Because of the upward spiral

of the yen, Komatsu was forced to raise its prices

three times in 1985 and 1986. Komatsu’s loss of

price advantage forced the company to open a plant

in the USA in 1986. Other companies such as

Nissan, Honda, and Toyota also had to increase their

prices several times.The largest price increase was

in a market virtually controlled by the Japanese

(e.g., expensive consumer electronics such as CD

players and fancy VCRs). Their ability to increase

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price was, however, more limited at the low end

of the market, where the Koreans were right on

their heels.

Domestic manufacturers cannot expect to gain

competitive advantage solely because of the drop in

their home currency. Since its peak in 1985, the

foreign exchange value of the US dollar had

dropped by more than 50 percent by 1987. In 1994,

the US dollar lost more than 10 percent in value

against the Japanese yen. In the ﬁrst three months

of 1995, the dollar dropped about 20 percent more

in rapid succession to hit one new all-time low after

another again and again against the Japanese yen.

Japanese car makers had to increase their US prices

repeatedly in the 1990s. According to Nissan

Motor Co., for each single yen increase against the

German mark, Nissan’s revenue and net income

were reduced by six billion yen.

For each one-yen

increase against the dollar, the company lost six

billion yen annually in sales and proﬁts. For every

one-yen drop in the value of the US dollar, the losses

for these Japanese ﬁrms are as follows:Toyota Motor

Co. (ten billion yen), Sony Corp. (ﬁve billion yen),

and NEC Corp. (two billion yen).

The signiﬁcant decline of the US dollar should

have dramatically reduced – but did not – the deﬁcit

in US international trade. Instead, the deﬁcit in US

merchandise trade rose. Explanations ranged from

the J-curve to the dollar’s strengths against the cur-

rencies of Canada and many newly industrialized

countries.

Even though dollar prices of imports to the USA

indeed increased substantially, a depreciating dollar

by itself cannot close the trade gap. A falling dollar,

although making imports more expensive, has little

meaning if prices for domestic substitutes increase

to allow imports to maintain a price advantage.The

potential price effects on trade resulting from an

exchange rate change require taking into account the

domestic price developments for competing goods.

One must examine how importers, exporters, and

domestic producers price their products in terms

of the falling dollar.

The real issue is the relationship between import

prices and prices for domestically produced com-

petitive goods.These exchange rate/price relation-

ships are basic in measuring the impact of an

exchange rate change on countries’ actual trade

balances.

Market share

A high market share provides pricing ﬂexibility

because the company has the advantage of being

above the market if it so chooses.The company can

also choose to lower its price because of the better

economies of scale derived from lower production

and marketing costs. Market share is even more

crucial for late entrants because market share acts

as an entry barrier.That is, without market share, a

company cannot achieve the high volume necessary

to improve its efﬁciency.

Market share can be bought with a very low price

at the expense of proﬁt. Compaq shocked the

Japanese market in 1992 by selling desktop PCs for

less than half the price of Japanese manufacturers.

Other US ﬁrms soon joined in and grabbed one-

third of the market. Fujitsu, Japan’s biggest com-

puter company, then started dumping in its home

market and lost $300 on each $2000 machine that

it sold, amounting to more than $1 million each day.

Various hypotheses explain the differences in

pricing behavior between US and Japanese ﬁrms,

and they range from the dollar’s dominant inter-

national role and the substantial market power of US

goods to the large size of the US domestic market,

which permits insensitivity to exchange rate ﬂuctu-

ations.Another explanation is a model based on dif-

ferences in planning horizons and hystereses.

Hysteresis is a type of market inertia that says

that the relationship between two or more variables

depends crucially on past history. Hysteresis can

occur when a ﬁrm has increasing returns to scale or

when consumers are loyal to particular brands,

making it very difﬁcult for new entrants to sell their

products at the same level of proﬁt as established

ﬁrms. In a hysteretic environment, when there is a

differentiated shock (i.e., something that temporar-

ily changes costs for some but not other producers),

those ﬁrms facing higher costs must either raise

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PRICING STRATEGIES

prices to maintain proﬁts in the short term and risk

losing market share in the long run or raise prices

less sharply to keep market share in the long run

and maximize long-term proﬁts. Japanese price

behavior may thus be a rational strategy for long-

run proﬁt maximization rather than a predatory,

singled-minded obsession with market share.

Because US manufacturers usually do not prac-

tice price discrimination between domestic and

foreign customers, a change in the value of the dol-

lar appears to be reﬂected entirely in the foreign

currency price of US exports (i.e., complete pass-

through of the exchange rate change). Japanese

manufacturers, on the other hand, have a tendency

to maintain stable yen prices domestically while

keeping their export prices fairly stable by absorbing

a signiﬁcant part of yen ﬂuctuation in the form of

ﬂexible proﬁt margins.This pricing behavior, reﬂect-

ing incomplete pass-through, generates “dumping”

when the yen appreciates and lower prices domesti-

cally than abroad when the yen depreciates.

Tariffs and distribution costs

As a rule, when dumping and subsidies are not

involved, a product sold in a host country should

cost more than an identical item sold in a manufac-

turer’s home market. This is the case because the

overseas price must be increased to cover tariffs

and extra distribution costs.In Japan,both tariffs and

quotas combine to restrain imports and force the

prices of imported goods upward. In addition,

the long distribution channel (i.e., many middle-

men) common in many countries around the world

is responsible for price escalation, often without any

corresponding increase in distribution efﬁciency.

Foreigners in Japan may be shocked to ﬁnd that

an order of plain toast (without coffee) can cost a

few dollars.

Culture

US manufacturers should keep in mind that neither

the one-price policy nor the suggested list price

will be effective in a number of countries. In the

USA, a common practice is for retailers to charge

all buyers the same price under similar buying

conditions. In most other countries, a ﬂexible or

negotiated price is common practice, and buyers

and sellers often spend hours haggling about

price.Thus, price haggling is an art, and the buyer

with the superior negotiating skills is expected to

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Rice is a very emotional issue among the Japanese

and Filipinos. For decades, the Japanese have been

told that rice grown in foreign countries is unsuitable

for their palates as well as possibly unhealthy. Japan’s

tariff rate on rice is 580 percent. In the Philippines,

rice is an integral part of the country’s culture and

history, and rice imports are a national shame.

When Thai rice was ﬁrst imported into Japan,

there was a great deal of controversy and ongoing

media hysteria.

Weekly Gendai

, a Japanese magazine,

ran a headline reading “Can You Still Trust Foreign

Rice?” next to a photo of a dead mouse, cigarette

butts, and liquor bottle caps atop a basket of Thai rice.

American rice faces the same problem. Japanese

media have used scare campaigns and alleged that

pesticides used on California rice have caused

unwanted abortions and cancer.

Because of government controls on rice imports,

the prices of rice are substantially higher in the

Philippines when compared to its Asian neighbors

at the comparable levels of economic development.

Filipino farmers are able to get 28 US cents per

kilogram of rice, even though Indonesian, Thai,

Vietnamese, Indian, and Chinese farmers are paid only

12to 18 cents.

Source:

“The Philippines’ Iron Rice Bowl,”

Asian Wall

Street Journal

, June 19, 2001.

CULTURAL DIMENSION 16.1 RICE: A SACRED CROP

do better on price than those unfamiliar with the

practice.

ALTERNATIVE PRICING STRATEGIES

Pricing involves more than simply marking up or

down, and a price that can change in terms of an

increase or decrease is not the only answer to

moving a product.There are several other alterna-

tives available for making price changes that should

be considered. These strategies include the timing

of the price change, number of price changes, time

interval to which price change applies, number

of items to change, use of discount and credit, and

bundling and unbundling. US car makers have

become rather ingenious in employing these strate-

gies. They change the price by small amounts a

number of times over the year. By increasing price

signiﬁcantly at the end of the current model year

and then doing so again for the new model year one

month later, the company can claim that the price

increase for the new model is small because the cal-

culation of the increase is based on the last price of

the current year’s model. Not surprisingly, GM

saves the heftiest price increase for the end of the

year in order to facilitate high sticker prices on the

new models that are shortly introduced.

The effect of price can be masked and greatly

moderated by ﬁnancing or credit terms. Airbus, a

European consortium owned jointly by four com-

panies from France, Germany, the United Kingdom,

and Spain, assembles and markets airplanes as an

alternative to carriers that prefer not to buy

American. In its eagerness to penetrate the US

market, the consortium provided export ﬁnancing

that subsidized Eastern Air Lines by more than $100

million. For Boeing, the consortium engaged in

predatory export ﬁnancing just to get sales.

Discounts (cash, quantity, functional, and so on)

may be used to adjust prices indirectly. Large buyers

are in a position to command a higher discount if it

can be granted legally.Although a quantity discount

may provide an incentive for dealers to work harder,

it often discriminates against smaller middlemen.

Ricoh, concluding that it was not a sound practice

to compete on price, decided to ignore tiered

pricing that rewarded dealers with large orders.

Ricoh uses only ﬂat-rate prices, and small dealers

pay the same price as large dealers.

Another method used to moderate the price

effect is to bundle or unbundle the product.The price

reﬂects the bundling or unbundling of the product.

Bundling adds value and increases prices a little or

not at all for added value.This is the strategy used

by Japanese car makers, who increase the base price

of their cars just enough to cover actual costs.The

Japanese also sell cars in the USA with more stan-

dard equipment and fewer options. The strategy

makes sense because their vehicles must be shipped

from overseas factories, and any custom orders

would only serve to delay production and shipment.

Moreover, the price charged covers a “bundle” of

standard equipment and represents good value for

buyers.

Detroit takes the opposite route. US car makers

keep prices low by offering a base price for a bare-

bones product.Any other equipment is optional and

at an added cost. US car makers thus offer a car with

several hundred options. By allowing a buyer to

choose any equipment combination at extra cost for

each option, a fully equipped US car can become

quite expensive, as Detroit charges and seeks to

make a proﬁt from each additional item in the

option combination.

Ford has begun to experiment with the bundling

approach by making available three levels of trim

(bundling), each containing many items as standard

equipment.The approach provides several beneﬁts.

It simpliﬁes the production-and-assembly system

while cutting costs and speeding up delivery time.

Without having to stock a large and confusing num-

ber of options, better inventory control is achieved.

With fewer combinations available, quality control

should also be improved. In addition, the method

provides a clearer market image for the brand.

It cannot be said that a bundling strategy is always

superior or inferior to an unbundling strategy.

Bundling offers a buyer more product for less

money while simplifying production and marketing

activities.The overall bundle, of course, is not likely

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to match the buyer’s need completely. On the other

hand, a product can be unbundled so that the buyer

does not have to pay for any extras not wanted. In

effect, the price can be made more affordable by

unbundling the product.

When a company faces escalating export prices

due to the addition of transportation charges,

customs duties, extra packing costs, and so on, it

should consider strategies to moderate the impact

of price escalation.

Foreigners usually regard US and German goods

as being of good quality and performance but also

as being too expensive. Because they are price-

conscious, exporters should consider means to keep

prices reasonable. They may want to adapt their

products by taking out those features that are attrac-

tive but not crucial. Larger shipments will lower

freight costs, or they may want to consider local

manufacturing so as to eliminate expensive freight

altogether. On the other hand, exporters should

realize that affordable prices will result in repeat

business. Furthermore,an initial order for a piece of

equipment will lead to demand for spare parts and

components and auxiliary equipment. Finally, they

should stress that the superior quality of their prod-

ucts ultimately results in lower production costs.

DUMPING

Dumping, a form of price discrimination, is the

practice of charging different prices for the same

product in similar markets. As a result, imported

goods are sold at prices so low as to be detrimental

to local producers of the same kind of merchandise.

Boeing and McDonnell Douglas, for example,

accused Airbus of receiving $9 billion in subsidies

from the government consortium, enabling the

company to price each airplane at some $15 to 20

million less than the true cost. Dumping also applies

to services. Japanese banks in California were

accused of dumping money in the US market by

pricing their loans at an interest rate lower than that

charged by US banks.

Types of dumping

There are several types of dumping: sporadic,

predatory, persistent, and reverse. Sporadic

dumping occurs when a manufacturer with unsold

inventories wants to get rid of distressed and excess

merchandise.To preserve its competitive position at

home, the manufacturer must avoid starting a price

war that could harm its home market. One way to

ﬁnd a solution involves destroying excess supplies,

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In 2003, the US Department of Commerce made a

ﬁnal determination in two cases. It ruled that South

Korea’s Hynix Semiconductor received unfair subsi-

dies for its DRAMS from 2001 to mid-2002. If the

US International Trade Commission decides that these

imports harm or threaten American industries, the

USA could impose countervailing duties of 44.71

percent against Hynix.

In another case, the ﬁnal determination was that

Vietnam was dumping its products on the US catﬁsh

market. If conﬁrmed by the US International Trade

Commission, antidumping tariffs of up to 64 percent

could be imposed. Vietnam strongly denied the dump-

ing charges and accused the USA of protectionism.

It claimed that its low-priced exports were due to the

ability of Vietnamese producers to breed whiskered

ﬁsh far more cheaply than American farmers. The

USA countered by saying that, due to Vietnam’s

“non-market economy,” its supposedly low labor costs

could not be measured properly against those of a

free market. In addition, US farmers were successful

in persuading the US Congress to force Vietnam to

change the name of its catﬁsh to the Vietnamese terms

“tra” and “basa.”

Sources:

“US May Slap Big Tariffs on Two Imports,”

Bangkok Post

, June 19, 2003; “Vietnam Fears Tariffs on

Shrimp,”

San José Mercury News

, July 26, 2003.

IT’S THE LAW 16.1 FISH AND CHIPS

as in the example of Asian farmers dumping small

chickens in the sea or burning them. Another way

to solve the problem is to cut losses by selling for

any price that can be realized.The excess supply is

dumped abroad in a market where the product

is normally not sold.

Predatory dumping is more permanent than

sporadic dumping.This strategy involves selling at a

loss to gain access to a market and perhaps to drive

out competition. Once the competition is gone

or the market established, the company uses its

monopoly position to increase price. Some critics

question the allegation that predatory dumping is

harmful by pointing out that if price is subsequently

raised by the ﬁrm that does the dumping, former

competitors can rejoin the market when it becomes

more proﬁtable again.

Hitachi was accused of employing predatory

pricing for its EPROM (electrically programmable

read-only memory) chips.A memo prepared by the

company urged US distributors to “quote 10

percent below competition (until) the bidding

stops, when Hitachi wins.” The Justice Department,

after a year-long investigation, dropped the probe

because it found that there was insufﬁcient evidence

to prosecute.

Zenith has long accused Japanese television man-

ufacturers of using predatory dumping. It charged

in its antitrust suit that major Japanese manufactur-

ers, through false billing and secret rebates, con-

spired to set low, predatory prices on TV sets in the

US market with the purpose of driving US ﬁrms

out of business in order to gain a monopoly. Both

the Japanese and US governments defended the

Japanese ﬁrms’ cooperation on the grounds of “sov-

ereign compulsion.” In other words, the defendants’

cooperation was the result of compliance with the

Japanese government’s export policy. After sixteen

years of legal maneuvering, the US Supreme Court

dismissed the conspiracy theory but ordered a trial

concerning the dumping charge.

Persistent dumping is the most permanent

type of dumping, requiring consistent selling at

lower prices in one market than in others.This prac-

tice may be the result of a ﬁrm’s recognition that

markets are different in terms of overhead costs and

demand characteristics. For example, a ﬁrm may

assume that demand abroad is more elastic than it is

at home. Based on this perception, the ﬁrm may

decide to use incremental or marginal-cost pricing

abroad while using full-cost pricing to cover ﬁxed

costs at home. This practice beneﬁts foreign con-

sumers, but it works to the disadvantage of local

consumers. Japan, for example, is able to keep

prices high at home, especially for consumer elec-

tronics, because it has no foreign competition there,

but it is more than willing to lower prices in the US

market in order to gain or maintain market share.

Japanese consumers, as a result, suffer by paying

higher prices for Japanese products that are priced

much lower in other markets.

The three kinds of dumping discussed above have

one characteristic in common: each involves charg-

ing lower prices abroad than at home. It is possible,

however, to have the opposite tactic – reverse

dumping. In order to have such a case, the overseas

demand must be less elastic and the market will

tolerate a higher price. Any dumping will thus be

done in the manufacturer’s home market by selling

locally at a lower price.

Legal aspect of dumping

Whether or not dumping is illegal depends on

whether the practice is tolerated in a particular

country. Switzerland has no speciﬁc antidumping

laws. Most countries, however, have dumping laws

that set a minimum price or a ﬂoor on prices that

can be charged in the market.

Illegal dumping occurs when the price charged

drops below a speciﬁed level.What is the unfair or

illegal price level, and what kind of evidence is

needed to substantiate a charge of dumping? The

case of Melex golf carts from Poland illustrates the

difﬁculty in determining a fair price.The success of

Melex in the USA led to an accusation of dumping.

The US Treasury Department was unable to ascer-

tain whether Melex’s US price was lower than

prices at home in Poland because Poland has no golf-

courses and no demand for such a product.The cost

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of production was unsuitable for determining its fair

price. Poland, as a socialist economy, does not allow

market forces fully to dictate the costs of factors of

production.For this reason, the 1974 Trade Act does

not allow production costs in a communist/social-

ist country to be used for comparison purposes.

To determine fair costs, the Treasury began to

use a small Canadian manufacturer’s costs as refer-

ence prices, only to see the Canadian ﬁrm stop

making golf carts. In addition, Poland protested that

the Canadian ﬁrm’s production costs were too high

and unsuitable for comparison.The Treasury’s next

step was to rely on reference prices of a compara-

ble product from free-market countries. Mexico

and Spain were chosen because they were consid-

ered to be similar to Poland in terms of their level

of economic development. Even though Mexico and

Spain do not produce golf carts, they were used

anyway to determine what their production costs

would be if they produced such a product. After

much review and discussion, the ruling was that the

“constructed” value did not differ appreciably from

Melex’s actual price.

The 1980 ruling did not end the matter. The

American producers still wanted Melex to pay the

dumping charges for the years 1979 to 1980, and

the Commerce Department’s 1992 review imposed

a duty of $599,053.51 plus interest. Melex has

continued to ﬁght the case which has outlasted ﬁve

US administrations, Poland’s martial law, and the

Soviet Union empire.

One item of evidence of dumping occurs when

a product is sold at less than fair value. The

Commerce Department, for example, made a ﬁnal

determination that imports of certain small business

telephone systems and subassemblies from Japan

and Taiwan were being sold in America at less than

fair value. Subsequently, the US International Trade

Commission made ﬁnal determinations and found

injury to industries in the USA from such imports.

The Commission’s injury ﬁnding led to antidump-

ing duties being placed on imported products to

offset their price advantage.

Another example of dumping evidence is a

product sold at a price below its home market price

or production cost. The USA relies on the ofﬁcial

US trigger price, which is designed to curb dumping

by giving an early signal of an unacceptable import

price. In the case of steel, the trigger price sets a

minimum price on imported steel that is pegged

to the cost of producing steel in Japan.According to

the General Accounting Ofﬁce, some 40 percent of

all imports at one time were priced below the

trigger price.

To provide relief, the Antidumping Act requires

the US Department of Commerce to impose duties

equal to the dumping margin.The antidumping duty

is based on the amount by which the foreign market

value or constructed value exceeds the purchase

price or an exporter’s sale price.

Petitioning or threatening to petition can create

harassment effects by forcing foreign ﬁrms to

restrain sales. Due to investigations and the threat

of duties, importers frequently reduce shipments,

increase prices, or both.

It is understandable why domestic ﬁrms want

antidumping policies. However, whether such poli-

cies beneﬁt the economy is another issue altogether.

As concluded by an economist of the International

Monetary Fund, “antidumping, as currently prac-

ticed, is anticompetitive, threatens to further distort

trade patterns, and undercuts the beneﬁts of multi-

lateral liberalization efforts.”

Indeed, the US Inter-

national Trade Commission’s study (“The Economic

Effects of Antidumping and Countervailing Duty

Orders and Suspension Agreements”) has come to

the conclusion that the overall effect of antidump-

ing duties is negative.

The USA deems dumping to be illegal if: (1)

the Department of Commerce makes a ﬁnal

determination that dumping has taken place,and (2)

the International Trade Commission rules that

such imports harm or threaten the US industries. In

the case of dynamic random access microchips

(DRAMs), most American producers ceased

production under pressure of low-price imports,

primarily those from South Korea. Micron Tech-

nologies, the only signiﬁcant remaining producer,

suspected Taiwanese and Korean manufacturers

of unfair trade practices. In the end, the US

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International Trade Commission ruled that the US

computer chip industry was not harmed or threat-

ened with injury by Taiwan imports that were sold

for less than fair value, thus ending Micron’s com-

plaint.

However, with regard to Korea, the Import

Administration ruled that Korean manufacturers

sold DRAMs in the USA at prices below their cost

of production, and duties were imposed at the

border.

Dumping is a controversial practice. Just as con-

troversial are the antidumping laws, especially those

of the USA.The 1916 Antidumping Act of the USA

has infuriated trading partners.As may be expected,

these partners asked the WTO to intervene. The

WTO ruled that the ancient US law violated inter-

national trade rules.The USA appealed, arguing that

the law was not about dumping but about antitrust

instead. The WTO appeals panel conﬁrmed the

lower court ruling, explaining that the penalties

were too severe and that the standards for applying

them were too weak.

Economists generally argue that the widely used

antidumping measures have been abused for pro-

tectionist purposes. Over 1800 antidumping inves-

tigations have been initiated since 1995. While

industrial countries have traditionally been the main

users of such measures, developing countries have

been more active in recent years; between 1994 and

2001, they initiated almost two-thirds of all investi-

gations. Most antidumping actions have been con-

centrated in a small number of sectors, especially

steel, chemicals, textiles, and consumer electronics,

often at the low-tech end of a product range.

For

the USA, import-sensitive companies (especially

steel makers) are responsible for ﬁling nearly half of

all dumping petitions.

How to dump (legally and illegally)

Dumping is a widespread practice. Exporters and

their importers insist on its use, when necessary,

and will ﬁnd ways to cancel the practice. One can

learn from the Mitsui case. Mitsui was responsible

for generating the largest dumping case and pleaded

guilty to all twenty-one counts involving kickbacks

and the falsifying of documents to customs ofﬁcials

in order to sell steel below trigger prices. Mitsui

attempted to conceal its dumping activities through

several means. It hid the origin of the Japanese

steel products by disguising them as US made (e.g.,

wire rope imported to Houston). It submitted

false documents to conceal the true merchandise

value and backdated invoiced to avoid trigger

prices. Furthermore, it gave its US customers a

rebate equal to the difference between the nominal

exchange rate and the actual exchange rate, and the

calculations were made after product entry. These

illegal rebates totaled $1.3 million between 1978

and 1981. Another deceptive method involved the

use of damage claims. Mitsui honored false claims

that goods were damaged during shipment and

granted credits of $22,676 for damaged Korean

wire nails without investigating or reporting these

losses to its insurance company. In spite of these

ingenious methods, Mitsui was exposed and paid

heavy ﬁnes for dumping and fraud.

Without doubt, dumping is a risky practice that

can cause a great deal of embarrassment, in addition

to the payment of large ﬁnancial penalties. Thus a

preferable strategy is to use other means to legally

overcome dumping laws. One method that can help

avoid charges of dumping is to differentiate the

exported item from the item being sold in the home

market. By deliberately making the home product

and its overseas version incomparable, there is

no home market price that can be used as a basis

for price comparison. This may be one reason why

Japanese car makers market their automobiles

under new or different names in the USA. Another

method used to circumvent dumping laws is to

provide ﬁnancing terms that can have the same

effect as price reduction.

The dumping problem may also be overcome if

the production of a product, rather than its impor-

tation,is carried out in the host country. This option

has become necessary for Japanese manufacturers,

who have no desire to lower prices in Japan because

they do not have to contend with foreign competi-

tors.The high prices at home, however, work to the

disadvantage of Japanese manufacturers because it is

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easy to prove that they are engaged in dumping in

the US market. For Japanese VCR manufacturers

there is a dilemma: they cannot make their US

prices too low without violating dumping laws, and

yet the prices charged cannot be so high as to

encourage Korean ﬁrms to move in and take market

share away. One solution may be to manufacture the

sets in the USA.To minimize the higher costs pre-

vailing in the USA, Japanese ﬁrms could import as

many components and parts from Japan as practi-

cal. As in the case of Japanese forklift makers, they

were accused of dumping by the Hyster-Yale unit of

NACCO Industries Inc. When the International

Trade Commission ruled in Hyster’s favor and when

the US government imposed import duties of up to

51.3 percent on Japanese models, the Japanese

ﬁrms quickly set up US assembly plants and were

able to avoid paying the duties. By doing so, they

held their US market share at about 50 percent.

PRICE DISTORTION

Dumping laws are not the only cause of price vari-

ations. The power of the market force in setting

prices can be moderated by a government’s price

policy. Few governments allow the market to set

prices completely of its own accord. When a gov-

ernment is actively involved in buying and selling

local and foreign goods, price deviations usually

and readily follow. Because of the political inﬂuence

of the agricultural sector in Japan, Japanese rice

farmers are able to price their rice at several times

more than US prices, resulting in Japanese con-

sumers paying double or triple the world price.

On most occasions, a government sets the price

artiﬁcially high in order to discourage the domes-

tic consumption of imported products. Generally,

however, government policy is to keep prices arti-

ﬁcially low in the case of necessities that are essen-

tially for public welfare. A government’s licensing

policy and patent enforcement can affect market

prices indirectly as well.

Inﬂation is often the primary cause of price

controls. Inﬂation affects public welfare and encour-

ages workers to demand higher wages. In addition,

inﬂation increases the pressure of currency devalu-

ation which will affect prices of virtually all prod-

ucts and services.

When a situation of price distortion exists, a

company must devise a strategy to deal with it. In

1985, Argentina was experiencing an inﬂation

rate of 1000 percent. Merchants knew that price

controls were inevitable, and they increased their

prices rapidly and drastically in order to circumvent

the restrictions when price controls were imple-

mented.Another method of dealing with price con-

trols involves the creation of a “new” product that is

not subject to old or existing prices. A new brand

name or a new package may or may not be adequate

for this purpose.

Companies themselves are sometimes responsi-

ble for price distortion. The European Union has

initiated an investigation to determine whether

major ﬁlm companies may have deliberately intro-

duced mechanical differences in their products so as

to enforce price differences across markets. The

investigation centers on whether Disney and six

other major ﬁlm companies may have made their

DVDs incompatible in different regions so as to

prevent a disc bought in one country (e.g., the USA)

from being played in Europe or elsewhere.

For a long time, Europe tolerates or encourages

corporate cooperation. Some governments have

supported price-ﬁxing to protect small shops.

Germany does not permit retailers to reduce more

than 3 percent off manufacturers’ suggested prices,

and books cannot be discounted. Cartels were legal

in the Netherlands until 1996. The beer industry

does not seem to have vigorous competition. Big

brewers enjoy huge market shares in their home

markets. Interbrew, the owner of brands Stella

Artois and Abbaye de Leffe, makes almost 60

percent of beer consumed in Belgium. Heineken’s

market share in the Netherlands is about the same.

These brewers own a large number of bars and often

use exclusive deals that last for up to ten years,

shutting out new entrants. Because of almost non-

existent price competition, critics believe that the

brewers have a long history of collusion. Breweries

naturally deny any price ﬁxing or market conspiracy.

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