What is Dumping?

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Definition:

Dumping occurs when a company or country floods a foreign market with products at an artificially low price, potentially driving competitors in the importing country out of business.

🤔 Understanding dumping

Dumping is when a company sells its export products at a lower price than it charges in its domestic market. If companies sell products below production costs, this can also be considered dumping. In both cases, a company engaged in dumping is usually trying to eliminate competitors and gain market share, potentially establishing a monopoly. If competitors must sell products below production costs, it can quickly drive them out of business. The World Trade Organization (WTO) does not ban dumping, but allows nations to retaliate against dumping under certain circumstances. Many trade agreements between nations include anti-dumping provisions.

Example

Imagine that a fictional company, Acme Soda, is entering the market in the make-believe country of Buransa. There's already a popular local soda company in the country, Buransa Sodas. Acme Soda wants to establish a monopoly in Buransa, so it dumps imported sodas and sells them for 25 cents a can. Even though it costs Acme Soda 35 cents to produce and import each soda, it costs Buransa Sodas 28 cents to produce a can locally. So Buransa Sodas will be losing money if they try to compete at 25 cents a can. As a big international company, Acme Soda can absorb the losses, but Buransa Sodas is forced out of business.

Takeaway

Dumping is like pouring a bucket of water over a fire…

Except instead of smothering flames, the company or country engaged in dumping is trying to snuff out the competition. The aggressing company will generally try to flood the market with cheap products, forcing competitors to slash their prices, potentially driving them out of business.

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Tell me more…

What is dumping?

Imagine a raging forest fire. Suddenly a plane skims over the horizon, heading for the flames. As it passes over the burning trees, the plane releases thousands of gallons of water, smothering the fire.

When a company dumps products into a market, it's acting similarly. Except instead of fighting fires, it's trying to smoother the competition.

Companies and countries that engage in dumping inundate a foreign market with products at an artificially low price. In some cases, the company sells exported products at a lower price than it charges in their home market. Some companies even sell products below production costs.

Dumping is considered a form of "predatory pricing," which could injure other companies — and in the long-run, consumers.

Why is dumping done?

Companies and governments may use dumping to secure market share. Taken to the extreme, dumping can drive competitors out of business and allow the aggressor to establish a monopoly. This is bad news for consumers.

If a company can establish a monopoly, it no longer has to worry about competition. This means it can raise prices and won't have to worry about being undercut by competitors. Further, in a competitive market, companies must innovate to survive. For a monopoly, however, innovation is a luxury.

Even if the aggressor doesn't secure a monopoly, it can often expand market share and increase revenues at the expense of its competitors. As companies grow, they secure economies of scale, allowing them to buy supplies at volume rates and otherwise lower production costs. This makes it harder for other companies, including new entrants, to compete.

Is dumping illegal in the United States?

Many countries, including the United States, have anti-dumping policies in place to protect domestic firms and markets. Often, trade authorities — rather than courts — review dumping allegations.

In the United States, industries can file complaints under the Tariff Act of 1930. Complaints are filed simultaneously with the U.S. International Trade Commission (USITC) and the U.S. Department of Commerce. The Department of Commerce will determine if goods are being sold for “less than fair value.” The USITC will determine if there is material injury or if the establishment of an industry will be materially harmed.

In the United States, complaints are usually filed by domestic firms, unions, or industry representatives. However, on rare occasions, the government files self-initiated complaints.

How does the World Trade Organization treat dumping?

Most countries are now part of the World Trade Organization (WTO), which works to ensure that international trade flows as freely, predictably, and smoothly as possible. In other words, the WTO tries to prevent protectionism and to ensure free trade. Countries sign binding agreements through the WTO and could face sanctions if they violate the signed contracts.

The WTO has outlined an "anti-dumping agreement" based on the General Agreement on Tariffs and Trade (GATT). The WTO doesn't outlaw dumping. Instead, a Committee on Anti-dumping Practices determines how authorities can react if a country or company is dumping.

The WTO allows countries to defend their home market with anti-dumping measures if another country or company is causing or threatening to cause material injury. Authorities can also act if dumping hinders the development of a domestic industry.

On paper, dumping might seem pretty straightforward. However, in practice, cases are complex, and there are a lot of gray areas. How do you prove that cheap imports are causing "material injury" or are hindering the development of a domestic industry? Cases can drag on for months or even years.

How do countries prevent dumping activities in their markets?

Countries can enact anti-dumping duties, which are tariffs designed to protect domestic markets. A tariff is a tax imposed on imported goods and services. These duties are usually charged as a percentage of the transaction price between the buyer and seller. By using tariffs, governments can increase the price of the products sold.

Authorities can also set quotas, which are hard import limits on specified products.

Governments can pressure countries to enforce export quotas as well. An export quota limits the amounts of exports a country will allow. In 1981, the United States pressured Japan into an export quota on Japanese cars. Japan dropped the quota in 1994.

Another option is to support domestic companies. When governments subsidize industries, they give sums of money to businesses to help cover costs and prevent them from going bankrupt. The United States subsidizes certain agricultural crops to ensure a steady food supply, for example.

What is the effect of dumping on international trade?

Dumping in international trade is a major issue. Unrestrained dumping would allow large companies and rich countries to dominate the global economy. A large company could enter a small country, flood the market with cheap goods, and then drive domestic companies out of business.

Once the competition is driven out of business, the large company would control the market. Having secured a monopoly, they could raise prices without worrying about competitors undercutting them.

For this reason, dumping remains one of the most contentious issues in geopolitics. Many countries guard their internal markets and may use tariffs and other measures to protect them. This can lead to contentious disagreements between national authorities.

In turn, political squabbles can affect international trade. Countries can erect trade barriers, refuse to export vital goods, and take other measures that affect trade. This can start a trade war and restrict free trade.

Ultimately, dumping undermines the global market economy.

What are the advantages and disadvantages of trade dumping for companies?

Dumping allows companies and countries to gain market share. This will help the exporting company grow and could lead to increased revenues and profits. The home country, meanwhile, is able to grow industries, which could create jobs and increase tax revenues.

There are many disadvantages of dumping, however. First, dumping can be expensive. The offending country or company often has to subsidize losses, which can add up to a lot as they wait for their competitors to exit the market.

Further, these costs are going to add up, while risks increase. The importing country’s government could place import quotas, apply tariffs, or file a complaint with the World Trade Organization.

After incurring losses to support exports, the aggressor company could find itself locked out of markets or dragged into international courts. On top of the losses already incurred, the aggressor might face duties or other punishments.

What are the ethical issues regarding dumping?

Dumping allows powerful companies and countries to take control of markets. Without restraint, some large companies would secure monopolies, which, in turn, would lead to higher prices and less innovation. This would hurt consumers.

Further, dumping could impede economic development, especially in smaller, poorer countries. This could result in lost jobs, tax revenues, and more. Dumping could trap less developed countries in poverty and allow wealthier countries to extract wealth from them.

If this leads to higher prices, it also means poorer countries and individuals will have to spend a larger portion of their limited income on expensive products and services.

For these reasons — among others — both governments and international authorities try to prevent dumping.

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