A2 EconBus and A2 Macroeconomics: How does the WTO settle a trade dispute?

In 2009, the USA introduced a 35% tariff (i.e. a 35% increase on the import price) on car tyres imported from China. China complained about this tariff by writing to the World Trade Organisation. You can see a record of their complaint here.  After careful consultations and deliberations and by analysing the costs and revenues of Chinese tyre manufacturers, the WTO has now written its verdict on the dispute.

Click the image below to see both countries' arguments. Normally, the WTO seeks to break down trade barriers rather than confirm that tariffs are fair. However, in this case it calculated that China sold its tyres for less than their cost of production and transport to the USA. This is known as "dumping" and not allowed by WTO rules. A country does not have to accept imports if they are dumped on it (= sold below average cost of production).


Tyres and tariffs

 












Source: http://cheapcartyres.net/discount-tyres/

China has also complained about the EU, which has put tariffs on imports of screws, nuts and bolts. This time, the WTO calculated that the screws weren't sold at dumping prices and its verdict was that the EU has to abolish the tariff. Click on the picture below for the story.

Source: http://www.bbc.co.uk/news/business-11909049

The Dumping Price is almost always above a firm's variable cost (otherwise the loss would increase with every unit sold) but does not quite cover the contribution to fixed cost. It is sometimes better for a firm to sell at the dumping price than not sell anything, especially if it hopes that prices will recover, because it can continue to pay some of its costs rather than shut down.