Trade war tactics, Part 1: Predatory pricing and tariffs.

Trade war tactics, Part 1: Predatory pricing and tariffs.

by tonytran2015 (Melbourne, Australia).

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(Blog No. 144).

#trade war, #predatory pricing, #product dumping, #tariffs,

Trade war tactics, Part 1: Predatory pricing and tariffs.

1. Predatory pricing

Every company has to produce more than a minimum number of products to survive and any new company entering an established market may not have enough share in that market.

Rather than avoiding a crowded market, some company may adopt a strategy of selling well under its costs for a while to edge out all its competitors to capture the WHOLE market then using its newly gained monopoly to impose higher than previous (fair) market price to recover the expenditure incurred in knocking out its competitors. The method of selling under costs to knock out competitors is called predatory pricing and is an illegal practice in the US as well as in many other English speaking countries.

2. Known hard to enter established markets.

Most industries have minimum levels of productions. Some even need a whole national market to operate.

Example 1:

International airlines need to have 60% of their seats filled to break even and are usually backed by their own countries.

Example 2:

Railway industries are hard to profit from but are usually subsidized by their nations.

Example 3:

Steel industries can only operate their furnaces and machinery at production levels which are usually high.

Example 4:

Even a restaurant also needs minimum number of clients every day to pay its rent and outgoings.

3. Resisting predatory pricing.

A new enterprise entering an established market may sell under cost to introduce itself to customers, such practice is legal in the US.

“Pricing below your own costs is also not a violation of the law unless it is part of a strategy to eliminate competitors, and when that strategy has a dangerous probability of creating a monopoly for the discounting firm so that it can raise prices far into the future and recoup its losses.” [1]

So it is difficult for affected competitors to argue against such practice using the antitrust law [2].

The difficulty is compounded when when the company selling below costs is a foreign company obtaining partially built products from oversea. The Federal Trade Commission of the US and of similar countries [3] may not have jurisdiction. The rules by World Trade Organization [4,5] may have to be relied on.

4. Predatory pricing between national economies.

Each nation wants to have a self-sufficient economy so that in time of imminent war the nation can close its border (for fear of attack, infiltration and espionage from its neighbors). It has been an established practice of closing the border when there is any possibility of war (This has also been a teaching by Sun Tzu in his ancient text Art of War [6]).

In peace time, traders from each country may carry their goods across the borders to other countries to make their own profits from the difference in prices. This cross border trade supplies people in different countries with goods at lowest prices and benefits all countries.

Unfortunately, there are always aggressive rulers who want to use the surplus capacity of their economy to disrupt the self-sufficiency of their neighbors. For example, a country C with a command economy (taking orders from the government regardless of profit or loss) may use its surplus capacity in its steel making to sell its (nationally subsidized) steel cheaply to its neighbor A. Such selling for a prolonged time will certainly destroys the steel production capacity of country A. After 20 years or so of selling steel to A, country C may suddenly cut off its steel trade with A and declare war against A. In such scenario, the country A would be totally defenseless against C as it has no steel to produce weapons and armament for its army.

In a less dramatic scenario, the country C may sell its steel cheaply to another neighbor V to destroy its steel production capability then C throttle its steel supply to V (both with quantity and with types) to control the economy of V.

Similarly, country C may sell cheaply agricultural produces to agricultural neighbor V to destroy the agriculture of V. Country C then can dictate to V what crop and when to plant. In this way country V is totally under the command of C.

5. Assessing susceptibility to predatory pricing.

Chinese population is 1.500 millions while American is 326 millions, Australian is 22 millions.

If China produces clothing for all its citizen and export part of its clothing to Australia, Australian clothing industry has to go bankrupt (and it had).

If China produces hardware for all its citizen and export part of its hardware to Australia, Australian hardware industry has to go bankrupt (and it had).

If China produces steel for all its citizen and export part of its steel to America, American steel industry may go bankrupt.

6. Tariffs to the rescue.

Fortunately, sovereign governments can use tariffs to protect their vital industry such as steel, aluminum, defense, telecommunication.

The tariffs can be set at various levels suitable for the protection of the vital industries while still allowing other industries access to imported goods. The question is only what is an appropriate level.

Too low a tariff may not offer enough protection for the vital industries while too high a tariff may deny access to imported goods for other industries and weaken the overall economy.

7. Trade war by predatory pricing and tariffs.

Without tariffs aggressive countries may use predatory pricing to harm their trading partners.

The defending countries may use tariffs for their protections and the aggressor may accuse the defenders of engaging in trade war and the aggressor also put up its retaliatory tariffs. The others may again increase their tariffs and the tariffs level may increase without bounds [7,8,9,10].

The level of mutual tariffs may increase such that there will be any international trade left and a number of countries may enter their recession. The self-sufficiency of each nation will then be its survival factor.

8. Conclusions

a. Tariffs are not nice to advocate of free-trade but they are here to stay.

b. Tariffs are necessary, only their appropriate levels have to be determined.

c. Once countries enter trade war, there will be reduction in international trade and a number of countries may enter their recession. Countries with self-sufficiency will outlast their competitors.







[6]. Sun Tzu, The Art of War. First published in Chinese before 200BC.





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