What Is Dumping?
Dumping is when a country or companyexportsa product at a lower price than its domestic sale price. In the context of international trade, dumping is often considered an unfair pricing strategy. Becausedumping typicallyinvolves substantial export volumes of aproduct, it often endangersthe financial viability of the product's manufacturer or producer in the importing nation.
Key Takeaways
- Dumping occurs when a country or companyexportsa product at a price that is lower in the foreign importing market than the pricein the exporter's domestic market.
- The biggest advantage of dumping is the ability to flood amarket with product prices that are often consideredunfair.
- Dumping is legal under World Trade Organization (WTO) rules unless the foreign country can reliably show the negative effects the exporting firm has caused its domestic producers.
- Countries use tariffs and quotas to protect their domestic producers from dumping.
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Understanding Dumping
Dumping is considered a form of price discrimination. It occurs when a manufacturer lowers the price of an item entering a foreign market to a level that is less than the price paid by domestic customers in the originating country. The practiceis considered intentional with the goal of obtaining a competitive advantage inthe importing market.
Advantages and Disadvantages of Dumping
The primary advantage of trade dumping is the ability to permeate amarket with product prices that are often consideredunfair. The exporting country may offer the producer a subsidyto counterbalance the lossesincurred when the products sell below their manufacturing cost.One of the biggest disadvantages of tradedumping is that subsidiescan become too costly over time to be sustainable. Additionally, trade partners who wish to restrict this form of market activity may increase restrictions on the good, which could result in increasedexport coststothe affected country or limits on the quantity a country will import.
International Attitude on Dumping
While the World Trade Organization (WTO) reserves judgment on whether dumping is an unfair competitive practice, most nations are not in favor of dumping. Dumping is legal under WTO rules unless the foreign country can reliably show the negative effects the exporting firm has caused its domestic producers. To counter-dumping and protect their domestic industriesfrompredatory pricing, most nations use tariffs and quotas. Dumping is also prohibited when it causes "material retardation" in the establishment of an industry in the domestic market.
The majority of trade agreements include restrictions ontrade dumping. Violations of such agreements may be difficult to prove and can be cost-prohibitive to enforce fully. If two countries do not have a trade agreement in place, then there is no specific ban on trade dumpingbetween them.
Real-World Example of Dumping
In January 2017, the International Trade Association (ITA) decided that the anti-dumping duty leviedon silica fabric products from China the previous year would remain in effectbased on the investigation by the Department of Commerce andthe International Trade Commission that showed that the silica products from China were selling at less than fair value in the United States. The ITA ruling was based on the fact that there was a stronglikelihood that dumping wouldrepeatif the tariff was removed.
What Is Bad About Dumping?
Dumping can be detrimental in many respects. Most obviously, it can result in the flooding of imported goods in a foreign market. This can harm local and existing producers and potentially even drive them out of business. From a political standpoint, dumping can also disrupt relations between countries.
Why Do Companies Do Dumping?
Companies can be driven to engaging in dumping for a number of reasons. Primarily, it allows them to gain a foothold in new markets abroad. If done for an extended period of time, dumping can eventually drive out competitors, allowing a company to establish an monopoly on a good or service.
What Is the Dumping Margin?
The dumping margin is the difference between the cost of a product in a domestic market and the cost at which it's being exported abroad.
The Bottom Line
In the context of international trade, dumping is when a country or company exports products abroad at lower prices than that at which they are sold domestically. Though unsustainable over extended periods of time, the practice can give businessees an advantage in entering a new market. Many countries have policies in place to protect against dumping, such as tariffs.
