– This article was originally published by Akash Shrestha in the Himalayan Times on the May 26, 2019.
For many years now, we’ve been holding the Safeguards, Anti-Dumping and Countervailing Billin the Parliament for discussions. In the preamble, the Bill clearly states that it aims to protect local industries from any potential threat due to abnormal surge of imports and/or sale of imported goods on a price below the cost of production via tools like safeguards, anti-dumping duty and countervailing duty. So far so good! But the Bill also talks about promoting local industries and strengthening the economy. Here, one could find some logical incongruity and that is what this article will attempt to delve into and present a viewpoint.
Since safeguards, anti-dumping and countervailing duty are three heavy jargons, it will be worthwhile to decipher them first. Safeguards is an emergency measure by which a government ‘temporarily’ limits/restricts the import of a foreign product if it stands to ‘substantially’ threaten local producers of identical or similar goods. Anti-dumping is a measure employed when a company sells its products in the host country at a price lower than in its home country (dumping). Finally, countervailing duty is employed to offset the subsidy that a foreign company has enjoyed in its home country.
All three are instruments of trade protection, and they can yield substantial negative repercussions for the economy id used haphazardly esp. in our effort to build a strong economy and raise the living standards of our people.
Protections can go wrong
First of all, protection distorts incentives. When a company is operating in a competitive environment without any forms of protection, it has to continually improve its technologies and practices to be in business. Being able to sell quality products at cheaper prices necessitates them to enhance their efficiency and productivity and put scare resources to optimal use. Protection distorts that – it promotes sub-optimal use of scare resources. In other words, net loss to the economy.
Second of all, there is the risk of the trading partner retaliating when we impose these instruments on their products. Should that happen, it will negatively affect our net trade. But that is not all there is to it. When our goods are not selling, then we will also invariable be losing jobs that are producing those goods in the first place. Yes, Nepal does not really export much to the world, but reciprocating our instruments is not the sole way to retaliate, and we do not have to travel very back in history learn about alternative retaliation tools – remember the experience with “unofficial” blockade!
More importantly, these are largely instruments of firm-specific protection. It is important to weigh these instruments from a consumer point of view as well. Imagine Nepal produces a pair of shoes in Rs. 1500 while China has been dumping a similar product at Rs. 800. For the ease of math, let’s just say that Nepalis, in the name of protecting the domestic industry are forced to buy the Nepali product. Is it fair to have 30 million Nepalis pay additional Rs. 700 per pair just to protect one domestic industry?
But then our industries might never be able to compete, right?
Perhaps that is so. But then again, if foreign companies are willing to sell their products at costs lower than their own costs of production, then why should we not let that happen as long as they can sustain it? As consumers, there is nothing but benefit. And even as producers, we can use their intermediate goods and cut down our own costs of production. This will allow us to enhance our economic power as a nation.
Or, if the foreign government is willing to tax its taxpayers to ensure that Nepali consumers can enjoy cheaper products, why should we reject this alternative foreign aid?
What do evidences say?
In an article written by Hylke Vandenbussche in 2008, she has written about a study of 4000 European Union producers involved in anti-dumping cases in the mid-1990s. The analysis showed that an average protected firm is much less productive compared to a similar firm prior to protection. Interestingly, firms filing for protection but not getting it maintain higher productivity than the protected ones. This only goes on to prove that protection benefits inefficient firms.
Among the protected firms, study showed that productivity did increase, but only negligibly; so negligibly that it did not even close the efficiency gap with similar firms belonging to different sectors. More importantly, productivity grew only to the point of firms that requested protection but did not get it. These evidences pose a serious question over the desirability of protection
What if our firms exit market?
There is no easy way of putting this, but what that means is that resources being used up by inefficient firms will be released which can be put to more efficient use by other industries/sectors.
Yes, it is Nepali industries that will suffer if foreign companies play foul or if foreign companies outcompete Nepali industries. But it is also true that ordinary Nepalis should not be made to pay for the inefficiency or incapability of domestic firms. As long as we do not accept that, it will be very difficult to promote industries and strengthen the economy, as the Bill aspires to.