What Is Dumping?
Dumping is a term used in the context of international trade. It’s when a country or company exports a product at a price that is lower in the foreign importing market than the price in the exporter’s domestic market. Because dumping typically involves substantial export volumes of a product, it often endangers the financial viability of the product’s manufacturer or producer in the importing nation.
- Dumping occurs when a country or company exports a product at a price that is lower in the foreign importing market than the price in the exporter’s domestic market.
- The biggest advantage of dumping is the ability to flood a market with product prices that are often considered unfair.
- 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.
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 practice is considered intentional with the goal of obtaining a competitive advantage in the importing market.
Advantages and Disadvantages of Dumping
The primary advantage of trade dumping is the ability to permeate a market with product prices that are often considered unfair. The exporting country may offer the producer a subsidy to counterbalance the losses incurred when the products sell below their manufacturing cost. One of the biggest disadvantages of trade dumping is that subsidies can 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 increased export costs to the 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 industries from predatory 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 on trade 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 dumping between them.
Real World Example
In January 2017, the International Trade Association (ITA) decided that the anti-dumping duty levied on silica fabric products from China the previous year would remain in effect based on the investigation by the Department of Commerce and the 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 strong likelihood that dumping would repeat if the tariff was removed.
View more information: https://www.investopedia.com/terms/d/dumping.asp