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I N T E R N AT I O N A L T RA D E
C O M M E N TA RY
ARTICLE
http://www.google.com/hostednews/afp/article/ALeqM5jJ9V-qGi0i6vsoB_lSr1QmqdrXw?
docId=CNG.6a119bbeec8558b2164e0e9605bcd163.761

South Korea puzzled by French


dumping accusations
(AFP) Oct 18, 2012

PARIS South Korean Trade Minister Taeho Bark said he was puzzled
by statements made by the French government, which has accused the
Korean automobile industry of flooding the French market, in an
interview posted online Thursday.
Bark said in the interview with the French daily Les Echos that he
understood the concerns of France's Minister for Industrial Renewal,
Arnaud Montebourg, but not his arguments.
Starting July, Montebourg has on several occasions claimed that South
Korean manufacturers were effectively dumping their cars on the
European market, a practice of selling goods for less than they cost to
garner market share.
In August, France formally asked the European Union to begin
monitoring car imports from South Korea in the first step towards a
possible re-introduction of tariffs, in a request made under the terms of
an EU-South Korea free trade agreement signed in 2010.
Bark denied the dumping accusations in the interview Thursday,
insisting South Korea offered no subsidies at all to the automanufacturing sector.
He said it was not South Korea's fault that French automakers were
struggling, adding that he thought France had benefitted from the free
trade agreement.
Over the last 14 months, France had increased its exports to Korea,
Bark said, putting his country at a trade deficit with France.
France's car sector has been weak for months following the end of a
cash-for-clunkers government bonus to support car sales at the height

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of the eurozone financial crisis.


The manufacturers' organisation CCFA announced earlier this month
that French car sales dropped 18.3 percent year-on-year in September,
signalling more gloom for domestic firms struggling with plummeting
demand in Europe and high production costs.

COMMENTARY
When countries are trading freely among each other its important that the
selling of goods by a country dont have a lower price than its cost of
production in the other country, as this dumping phenomenon might have
negative effects on the importing countrys economy. Government
subsidies are seen as one of the major incentives to dumping, as firms
receive money from the government for each unit of output, costs of
production decrease.
Recently France has accused South Korea of subsidizing the automobile
industry and dumping their goods in France.
In order to prevent dumping, protectionism measures can be put up.

Graph 1 Dumping of South Korea automobiles on French Market

As we can see on graph 1, If we consider France as being a closed market,


where barriers to trade existed, they would have been consuming at Q3
due to the high prices charged by French manufacturers. In this case,
there are no barriers to trade, and French people realized that they could
pay the cheaper price for cars from South Korea, and import as much as
they wished. French are now consuming at Q5, but at the price South
Korea is charging, only 0Q1 is interesting for French manufacturers to
produce, the rest from Q1 to Q5 is imported from South Korea. This
represents a major decline in the French automobile sector, as they cannot

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compete against South Korean low prices, to the French economy as in an
attempt to cut costs unemployment will rise, as well as an increase in the
import expenditure that might lead to deficit on the current account.
In order to protect the French Economy, the government is urging the
European union to put up a tariff on South Korean goods, as this would act
as a tax on imported goods that would protect French interests.
Graph 2 Tariff on South Korean cars

As we can see on graph 2, before the tariff, at P South Korea, French were
consuming at Q5, and South Korea was supplying everything between
Q1Q5. After the tariff the price of cars increased by the amount of the tax,
this resulted in a fall of demand for cars to Q4, the increase in price of the
good would work as an incentive for French producers to produce cars, and
they would be responsible for supplying 0Q2. South Korea is now only
supplying Q2Q4, its income falls to I,j. French income rises to a,b,c,g,h as
they dont have to pay for the tariff. Government now receive tariff
revenue of d, e.
Along with this measure come on one side, the dead-weight loss of welfare
due to the loss of consumer surplus, equivalent to f, because customers
would have liked to spend that money in cars, but with the increase in
price, the cars are not purchased. On the other side, South Korean
producers are able to produce more output for less units of input, 0Q2 of
cars are now being produced by inefficient domestic producers; that are
using more of worlds resources than necessary, c represents this
inefficiency and loss of world efficiency.
Putting up the tariff will allow to protect domestic employment, as the high
prices will encourage firms to hire more people to supply the good at this
price level, lowering unemployment levels.

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However, this protectionism measure can have negative outcomes, such
as raising prices to French consumers, lowering the range of cars available
for consumers to chose, domestic firms when protected, as we have seen
before tend to become inefficient as they have no incentive to lower costs
because theyre not affected by competition, a fall in innovation can also
occur; finally protectionism can cause retaliation from other countries and
may overall hinder economic growth.
This would have been the best way to eliminate South Koreas cost
advantage on cars over France, however France needs to prove that
dumping has taken place, and South Korea states that they havent
granted any subsidies for the automobile industry. South Korea can be
producing cars at a lower cost than France because they have an absolute
advantage over them in this particular area.
In theory, countries should import goods for which the opportunity cost of
production is higher, and produce the goods for which the opportunity cost
is lower.
Therefore, if Frances automobile industry is not able to keep up with
worlds competition we can assume that this sector is in decline, as this is
a large sector high levels of structural unemployment might arise. If the
industry is not set up to improve their productivity, it will definitely keep
declining, the government by trying to protect their domestic employment
by taxing imports, will probably just be prolonging the process. It would be
better for France to employ the resources used in the declining automobile
industry in to expanding areas of the economy. France could use the high
skilled labor they benefit to expand in areas such as nuclear energy.
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