What does the word dumping mean? It is an economic term used within the context of international trade to describe a method of eliminating competition or as others would say an unfair business strategy. Which definition is more appropriate?
Table of Contents:
- What is dumping?
- How this tactic looks step by step?
- Types of dumping
- Why companies use dumping?
- What are the effects of dumping?
- Anti-dumping policies
- Real-world examples of dumping
- Summing up
To answer this question it is necessary to learn what this tactic consists of, how it works and understand what are the effects of putting it into action.
Dumping is a pricing policy that relies on selling goods in importing country at price which is less than what they are sold for in the domestic market. Producers that use this method may even sell their products for price lower than marginal cost of production. The specifics of this strategy vary between respective subtypes of dumping: sporadic, predatory or persistent.
Although World Trade Organization (WTO) does not specify whether this method is a fair competitive practice, the majority of countries are reluctant about it. They conclude trade agreements that prohibit this kind of price discrimination and impose restrictions to make this tactic inviable.
What is dumping?
The Anti-dumping Agreement and Article VI, in paragraph 1 of the General Agreement on Tariffs and Trade (GATT) defines dumping as a practice “by which products of one country are introduced into the commerce of another country as less than the normal value of the products.”
General idea of this strategy is to sell exported products for less than a “normal value”, which is a price charged in domestic market. The primary goal of this practice is to gain competitive advantage over producers in foreign country.
How this tactic looks step by step?
The manufacturer exports his produced goods to foreign market. He charges for his products a price that is lower than other prices charged by domestic producers. It is usually a price that does not fully reflect the real value of the product and is lower than cost of producing a certain good. Sometimes the origin country of the firm that use dumping may help it with subsidies to minimize losses until the goal is achieved.
The foreign market is flooded with underpriced products, which is good for the customers (only in the short run!) but not for domestic manufacturers.
Types of dumping
There are three main forms of dumping: sporadic, predatory and persistent. However, some sources mention also fourth type – reverse dumping.
As the name suggests this policy is temporary. It is usually used by companies that have stocks of unsold goods due to demand in the domestic market being lower than expected. Producers can sell their goods in the foreign market without lowering price in the domestic market, what brings them higher profits.
The main purpose of this strategy is to drive foreign companies out of their domestic market. Company sells its products underpriced or even at a loss so that it can gain competitive advantage and power of monopolist. Then the firm rises price of product in the foreign market, covers its loss and makes greater profit in the long run.
It is permanent policy that occurs when a company frequently sells its products at high price in the domestic market and exports the remaining part of output to sell it at lower price in foreign market.
This strategy relies on selling products at low prices in domestic market and charging high prices for the same product in foreign countries. The purpose of this strategy is to gain competitive advantage at a local level.
Why companies use dumping?
Why would firms sell their products for the price that does not compensate them costs of production?
In the short run the firm may lose from using such a tactic just like consumers benefit from it. The things change in the long run. When firms of domestic producers are pushed out of business or simply withdraw from the market because of the impossibility to offer their products for so low prices, the firm that sell exported goods starts to rise prices of their product.
Since the exporting firm gained a monopolistic position on the market of a certain good, it can easily charge a price even higher than the one before dumping and gain greater profits.
What are the effects of dumping?
To start with positive effects, this pricing policy may force companies form importing markets to become more innovative and competitive, which will earn them profits in the long run. Consumers are those who benefit from lower prices the most. The less expected effect of dumping is reduced level of waste. Companies that can not sell all their products in domestic market export them and sell for low price. That way the waste is not created and company has lower loss.
However, dumping may be an intermediate cause of rise in unemployment in importing market. The companies that go bankrupt are forced to dismiss their staff. This method of eliminating competition is a real threat for importing industries and markets. In the long run, when monopoly firm rises price of a product consumers may also be affected by negative effects of dumping.
By means of GATT, dumping is not prohibited unless it threatens to cause material injury to an industry of the importing country. Although WTO allows countries to act against dumping, their actions must be justified.
Duties imposed on imported products, which prices are believed to being dumped are an example of anti-dumping policy applied by governments to protect their local economy. In the United States the institution responsible for imposing anti-dumping duties is the International Trade Commission (ITC). In Europe the European Commission investigates dumping claims and impose measures.
Real-world examples of dumping
In 2007 the European Commission imposed a minimum price on Chinese frozen strawberries because they were too cheap compared to those from Europe. The price floor aimed to punish Chinese exporters for selling the frozen fruit in the European market below their real value.
Ten years later, in 2017, an investigation by the Department of Commerce and the International Trade Commission found that prices of silica products from China exported to the US were dumped. Therefore, the International Trade Association (ITA) decided to impose anti-dumping duty on these goods.
– In conclusion, dumping is a pricing policy usually used to gain a competitive advantage in foreign markets.
– There are 4 types of dumping: sporadic, persistent, predatory, and reverse.
– Whether a company chooses to use this method depends on its needs and a strategic plan.
– It is important to remember that although the WTO does not define dumping as illegal, countries that suspect that their economy may be affected by such a method can take action and impose a duty on importing countries.