Friday, April 01, 2016

What is "dumping" - and are the Chinese doing it ?

Economists, businessmen and politicians would probably see the whole question of what "dumping" is slightly differently. Are the Chinese dumping excess Steel production at below cost? Let's try and analyse what "dumping" is.

Any manufacturer incurs fixed and variable costs in producing products. The fixed costs include labour (usually), rent, other asset related costs (e.g. Business rates), maintenance and repair, licence fees and so on. These fixed costs are not production level dependent. The variable costs include consumables, raw materials, energy, transport etc. Essentially the higher your production the higher your variable costs.

In China the  Steel production is around 820m tonnes (49% of world total) and Steel consumption around 710m tonnes (46% of world total). In other words China is a net exporter of steel - the largest in the world by far - as well as being the largest consumer and producer. 

Let's say that "China Inc." covers all of its inland demand and allocates all of its fixed costs to this demand. A reasonable thing to do. Then, within its capacity capability, it produces further steel which it exports in order to make a further positive contribution to its operations. The key point here is "positive contribution". Obviously the income stream from the exports must exceed the variable costs of that production. Otherwise every exported tonne would lose money. That would certainly be "dumping". But it is, in my view, not dumping to allocate only variable costs to that part of your production you export (less than 10% in the case of China). Others may disagree ! 

The enormous scale of China's steel industry (70 times that of the U.K.), its modernity and its comparatively low fixed costs (especially labour) gives it a huge competitive advantage in world markets. It is not primarily focused on exports at all though and can therefore afford to sell at prices which only as a minimum cover the variable costs of production. As I say my contention is that the Chinese could only be accused of "dumping" if they sell at prices below these variable costs.