IB Economics IA Commentary. Title of Extract: EU imposes dumping tariffs on Chinese tile-makers

He added: “There is no reason why we should be less competitive in Europe than when we export outside of the EU.”

The provisional duties apply to glazed and unglazed ceramic flags and paving, hearth or wall tiles and unglazed ceramic mosaic cubes.

© 2011 European Voice. All rights reserved.

     According to the provided article, the European Commission (an executive branch of the European Union) has recently resorted to the implementation of a protective tariff of up to 73% on Chinese ceramic products in order to protect the European market from Chinese dumping techniques (Protective tariff – “a tariff designed to shield domestic producers of a good or service from the competition of foreign producers.”; Dumping – “the sale of products below cost in a foreign country,”1 often done to gain a monopoly over that product in a particular country).  Facing pressure from the European Ceramic Tile Manufacturers' Federation (CET), an organization representing numerous European tile firms who suffer from cheap competition with Chinese firms, the Commission imposed these duties to drive up the cost of imports and stimulate profit for domestic producers (Competition – “the presence in a market of independent buyers and sellers competing with one another.”1; Imports – “spending be individuals, firms, and governments for goods and services produced in foreign nations.”1; Profit – the amount of money a business earns after paying all expenses.)

     The conflicting economic values of free trade and protectionism are disputed in this situation as to which forces are allowed to control a nation’s economy – the government and domestic producers or the global market and consumer welfare (Free trade – “the absence of artificial barriers to trade among individuals and firms in different nations.”1; Consumer welfare – individual consumer satisfaction depending on prices and income.)  Since domestic ceramic suppliers are threatened with economic ruin from such cheap products, the Commission turned to protectionism to force a more equal domestic competition and punish dumping companies through a tariff despite the consequences of higher prices (Protectionism -  “ policies that aim at restricting the flow of imports into a country.”).

     The anatomy and economic effects of a tariff can be demonstrated in Figure 1 where the perfectly elastic world supply (Sworld) has increased in price (to P2) due to the tariff (Sworld + tariff) and, thus, have reduced the quantity of Chinese imports from the difference between Q1 and Q2 to that of Q3 and Q4.  The benefits of a tariff not only include a reduction in imported ceramic, but also gains in producer surplus and tax revenues earned by the government  (Producer surplus – the difference between the minimum price a producer is willing to accept for their good and the price they actually receive).  Due to this tariff, the original quantity supplied domestically at Q2 has now increased to Q4 and domestic suppliers can now sell their ceramic at higher prices (P2), allotting for an increase in producer surplus (Area 1).  Since the government collects the fees paid by the tariff, they now have more funding of which they would presumably return to the public.

     While tariffs may be advantageous for domestic producers and the government, they reap these benefits at a primary loss to the consumer from the higher prices needed to buy ceramics, and Chinese suppliers whose product is less demanded in the European Union.  The major disadvantage of a tariff comes from the reduction in consumer surplus where it had originally occupied Areas 1,2,3,4, & 5 and was reduced to only Area 5 because consumers must now buy ceramics at a higher price (P2).  Although Areas 1 through 4 represent the total consumer surplus reduction, since Areas 1 and 3 are beneficial to a society, so Areas 2 and 4 represent the net loss to society through higher prices.  

     Therefore, in order to protect the European ceramic producers from being completely swept from the market due to the dumping efforts of Chinese ceramic exporters, the Commission is justified in the imposition of an anti-dumping tariff because the societal loss of an entire industry is greater than that of forcing higher domestic prices to the consumer.