The Bed Linen Case - a Case Study

20 Pages Posted: 8 Feb 2006

See all articles by Shaswata Dutta

Shaswata Dutta

National University of Juridical Sciences

Date Written: January 30, 2006

Abstract

India is one of the founding members of the WTO (World Trade Organization) formerly known as GATT. The WTO like the GATT is nothing but a contractual framework between the members countries by virtue of which each one of them have to follow certain rules and also enshrines with it their rights in the International Trade. This agreement also underlines certain guidelines that are to be followed in case of rise of any disputes between the member countries and their subsequent settlement. The disputes are generally settled under Article 1 of the GATT agreement which provides for the rules and procedures for the same.

Dumping is defined in Oxford Dictionary as sale of goods in foreign market at low price. But this simple definition has a very deep and complicated impact on the global economy. According to the exponents of anti dumping, the anti dumping is justified on the fact that it would facilitate the importing countries to safeguard their domestic market whereas on the other hand certain other exponents who are against this duty believe that these are against the principle of fair competition and in today's globalized economy this type of economy may dampen the trade relations as this may lead to the stagnation in the economy of any developing country. The economists in favour of argue that a certain scale of production and consequent cost reduction which, without the ability to dump, could not have achieved. To a lay man dumping is a vague term. According to the GATT dumping is often defined as the sale of products for export at a price less than 'normal value' where normal value means roughly the price for which those same products are sold on the 'home' or exporting market. (Home market price - export sales price = margin of dumping). When this margin is greater than 0 then the product is said to be dumped. But the question arises that why do firms dump at all? After all when it is selling a product in another country at a lower price there must be loss it must be suffering, and if that be the matter then what is the reason that there so fuss about this matter. Actually the reason behind this is not as easy it seems. Garten had advised four major reasons for dumping:

· Closed home market for exporters · Anti-competitive practices in the exporting country market which permit export sales below cost · Government subsidization · Non-market conditions

The researcher would be discussing these factors in more details while answering the research questions.

The present case is concerned with the imposition of definitive anti dumping duties by European Communities on 'Cotton Type BED LINEN' from India. The case became debatable in the field of international trade because there was an attempt on the part of India to apply the principle of zeroing in determining the margins of dumping. Moreover this is significant on the part of the developing countries as it is among those few instances where the interests of a developing country were safeguarded against a powerful nation. This case can be seen from two point of origins of the less attractive dimensions of the international trade regime: · the special rules governing trade in 'low-cost' textiles and clothing, · and the rules governing procedures and penalties to offset injurious 'dumping', i.e., the sale of goods in the export market at lower prices than they are offered for sale in the home market.

Both sets of rules have proven very attractive to mature textile and clothing industries in the industrialized world competing against low-cost imports from developing countries exploiting their comparative advantage of low labour costs. If seen from the side of the domestic country, i.e. India, exports of textile and clothing products are an important part of the benefits to be derived from participation in the international trading system. With a population of a billion people, many of them poor and unskilled, the production of standard-technology, labour-intensive products such as textiles and clothing is a natural and important contributor to employment and economic development. Given the high volumes and wide range of qualities of cotton grown in India, it is little wonder that Cotton textiles constitute the largest part of the Indian textile industry. As a result, India has become one of the world's major exporters of these products and, together with Pakistan and Egypt, major suppliers of lower-end bed linen to the markets of EU members. From the perspective of the EU, on the other hand, low-cost textile imports raise some sensitive political issues. EU consumers may welcome these products, but well-organized lobbies of textile manufacturers and workers have mounted powerful campaigns to slow down the inroads of these products, arguing that such imports amount to unfair competition, driving EU firms out of business, and leading to unemployment for some of Europe's most vulnerable workers. EU firms have made some adjustments, restructuring and modernizing to remain competitive, but in the 1990s, firms were still closing, each time throwing hundreds of workers on the streets. The special rules governing textiles and clothing, first introduced in the GATT in 1961, have been one response, arguably providing industries in developed countries more time to adjust to the new competition from developing countries. Resort to anti-dumping procedures is a second, and one that began to be used more frequently following the implementation of the WTO Agreement on Textiles and Clothing, which provides for the phased elimination of the special regime for textiles and clothing by the end of 2004. By the end of 2001, for example, EU industries had successfully launched 26 complaints about dumping from India, many of them in the textiles sector. This case focuses on India's complaint to the WTO, pursuant to the procedures of the WTO's Dispute Settlement Understanding that a series of antidumping orders affecting its exports of cotton-type bed linen to the EU relied on procedures and methods that were inconsistent with the EU's obligations under the WTO's Agreement on Antidumping (the 'ADA').

THEORETICAL IDEAS

The major ideas that this project would incorporate are those of Dumping and Zeroing.

A monopolistic firm chooses an output at which marginal revenue, the increase in revenue form selling an additional unit equals marginal cost, the cost of producing an additional unit. In a monopolistic competition model of economy there are two key presumptions. One being that the firm must always differentiate its product from its rival because if there is only a slight price difference from its rival then customers may be attracted towards it and the firm may not be able to establish a monopoly. The other assumption being that the firm would ignore the price charged by its rival and would only act as if it is the lone producer and thus ignores the impact of its price on the price of other firms. Though in actuality there may be there may be a competition that is faced but that factor is completely ignored.

Dumping: In imperfectly competitive markets, firms sometimes charge one price when it exported but when sold in the domestic market at a higher price. In reality one can surely say this to be imperfect competition. The practice by which the producer charges its customers different prices based upon the different market demands is known as price discrimination. One can thus easily observe that dumping involves the practice of price discrimination. According to Krugman, dumping if the following two conditions are met:

· The industry has to be perfectly competitive only if there is an imperfect competition, and the prices are set by the firms itself and not taking into account the market prices. · The markets must be segmented so that the domestic residents cannot easily purchase goods intended for export.

To prevent this dumping by a firm in a foreign country the foreign country generally imposes a duty on the firm, equal to the difference between the actual and the 'fair' price of imports. In the present scenario the 'fair' price is generally determined based on estimates of foreign production costs. The very fact that price discrimination when practiced by airlines and railways in case of charging different prices to students and senior citizens is promoted but when the same strategy is followed by a firm to enter into a market and is willing to incur losses, anti-dumping duties are imposed. Zeroing: A critical element in realizing the margins of dumping was the EU practice of 'zeroing.' US law professor Joel Trachtman describes the issue as follows:

The practice of zeroing involves establishing a set of categories of the product under investigation. Within each category, a weighted average normal value is calculated by reference to home-country sales, third-country sales or a constructed value. This normal value is then compared with a weighted-average export price for that category. Then the normal value is compared with the export price. If the normal value is higher, the difference is a positive dumping margin: the goods are being exported at less than their normal value. If the normal value is lower than the export price, a negative dumping margin would exist. Under EC practice, in calculating a total weighted average for all categories of the product under investigation, the negative dumping margins are changed to zero. This is zeroing.

STUDY GOALS

Anti Dumping in world trade is amongst the most debated issue in world trade not only recently but from several decades. There has been provisions in the WTO which try to safeguard the interests of the developing nations but due to their lack of knowledge in this regard the developing countries fail most of the times in this regard. In an important WTO dispute settlement case, India set out to test whether it is possible to protect hard won rights to market access in the face of an intransigent European Union (EU) and a determined EU textile lobby. To succeed, however, India would need to deploy its scarce resources strategically and well, prove that it would and could defend its rights, and persevere against formidable odds. The researcher's aim is to address the major issues that were raised in this case. He wishes to discuss mainly the principles of zeroing and calculation of margins of dumping. He would also like to put forward the interpretation of certain clauses in the ADA which help his readers to understand the relation between the theory given and the set standards of the WTO. But he researcher would not into great details of each of the areas of dispute. The researcher not only wants to discuss this case but also wants to provide a in depth analysis of the matter and thus he would give a comparative analysis of other cases which involved similar issues as the case in discussion.

The researcher due to time and space restraints is not able to discuss all the issues in contention. Furthermore based on the limited knowledge of the researcher it is quite difficult on his part to give his own views on this matter.

The researcher apologizes for any unintentional error committed by him during the course of the project. His sole aim would be to at least analyze the major areas of concern in details.

Keywords: Anti Dumping

Suggested Citation

Dutta, Shaswata, The Bed Linen Case - a Case Study (January 30, 2006). Available at SSRN: https://ssrn.com/abstract=880347 or http://dx.doi.org/10.2139/ssrn.880347

Shaswata Dutta (Contact Author)

National University of Juridical Sciences ( email )

12, LB Block, Sector III
Salt Lake City
Kolkata, Kolkata 700 064
India

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