Antidumping on Tax-induced Dumping

This study theoretically investigates the effects of antidumping protection on tax-induced dumping. When the goods are exported from a high-tax to a low-tax country, the exporters have an incentive to set a lower internal price to their distribution affiliates in the destination country. By doing so, they are able to avoid high taxes and also gain a stronger position in the product market. The politically-motivated importing country can implement antidumping protection to protect domestic firms. It is shown that a more stringent regulation on transfer pricing can trigger the antidumping protection, which benefits the exporting country due to larger tax revenues and larger consumer surplus. It also improves the world welfare. However, when the antidumping protection is implemented, a further tightening of the transfer-price regulations may worsen the exporting country’s welfare and the world welfare. These results suggest an important link between tax policies and trade policies.