Advantages and Disadvantages of Dumping in International Trade

What do we mean by Dumping?

Dumping is a practice in international trade that takes place with the import and export of goods. It occurs when an exporter exports or sells goods to another nation at a price that is lower than the selling price of those goods in his domestic market. The practice is named so because the exporter “dumps” the products in the importing nation. Dumping usually involves the trade of huge quantities of goods with a view to capturing the foreign market. As with every strategy, dumping also has its share of advantages and disadvantages in the international trade. And it may be beneficial for some, and harmful for others.

While dumping goods in other nations, exporters may sell at a price that is even lower than their cost. The government may also provide subsidies and financial assistance for some years to destroy the competition in the foreign markets. Or for pushing the exports from the company to improve the trade balance. Since dumping happens in bulk quantities, the idea is to keep the factories running at their full capacity all year-round. This will help the manufacturer to reap the benefits of economies of scale and scope. Labor will also become specialized in their respective fields of work that will result in higher productivity. And thus the cycle goes on with all round improvement in cost, efficiency and capturing to new markets.

The importing nations will be flooded with lower-priced goods than what they can produce themselves. The local competition or the producers will have to shut their production and exit the market. The country will soon become dependent on the dumping country or the exporter for their total needs of those products or product lines. Then the exporter can raise the prices gradually and start making profits from those markets.

Advantages and Disadvantages of Dumping in International Trade

What are the Advantages of Dumping?

Let us have a look at the advantages of dumping in international trade in detail.

Advantages to the Exporter or the Dumping Nation

Increase in Market Share and Revenue

The practice of dumping helps the producers who engage in dumping to expand their business footprints globally. They penetrate a country, capture the entire market and throw out the competition. Their sales rise substantially and gradually they witness an increase in their market share, both domestically and across borders.

Better Utilization of Scarce Resources

Massive production is required for sustainable dumping practice. Large-scale production helps the producers to reap the benefits of economies of scale in their production activities. They get in a position where they can utilize their scarce resources better and make full capacity utilization. Specialization and proper division of labor also help to reduce labor costs and increase productivity.

Setting up of Allied Industries

The practice of dumping does not just benefit the producer or the exporter. It also benefits a large number of allied and ancillary industries that start mushrooming to cater to the needs of the exporter. For example, a manufacturer who engages in dumping will need more raw materials, labor, and support services such as packaging, transportation, etc. to support his manufacturing activities. He will have to rely on other smaller manufacturers and service providers to fulfill his needs in order to produce more. Thus, dumping will result in thousands of new jobs creation and overall development of the region and economy as a whole.

Advantages and Disadvantages of Dumping in International Trade

Advantages to the Importing Nation

Availability of Cheaper Products

Dumping results in flooding the markets of the importing nation with products at rock-bottom prices, sometimes at lower than their cost price. Consumers benefit from this tremendously. Low prices result in a lot of savings which they can use to buy other products or for investment purposes. Thus, consumers end up being better off till the time they get those products at low prices.

Economic Development

Many times, the product being dumped is an input or raw material for further production in the importing nation. This will result in a fall in the cost of the input products. For example, a country may dump integrated circuit chips in various countries. ICs are an essential input in most electronic devices. Low-cost ICs will lead to a fall in the input costs of the products using them. This will lead to the lower cost for the final product. Producers will be better-off, and some benefits will be passed on to the consumers too. The importing nation thus will benefit from increased savings, investments, and economic development.

Disadvantages of Dumping in International Trade

Dumping has many disadvantages too. Let us have a look at them.

Disadvantages to the Exporter or Dumping Nation

Drain of Resources

Dumping often results in a drain of national resources or that of a company. Goods are dumped in foreign countries at prices that are below the selling price in the domestic market. Sometimes the export price is below the cost price too which means that the company is exporting at a loss.

The government may provide temporary subsidies to the manufacturer to cover this loss. Subsidies are a form of a drain of natural resources and eat up the funds of the government. If the product faces stiff competition from the manufacturers in the country where it is being dumped, the results can be devastating for the exporter. He will not be able to raise the prices of his goods for long, resulting in selling his produce at huge losses or marginal revenue. This model may not be sustainable in the long run. The exporter may have to eventually withdraw from that country, resulting in heavy losses.

Creation of Monopoly

Sometimes the dumping company becomes so huge that it eats away all the competition, both in the domestic market as well as abroad. It becomes a monopoly, raising and charging prices as it likes. They may become so huge that they start controlling the government and its policies, which may be very harmful to any country.

Disadvantages to the Importing Country

Disruption of Local Industries

Dumping of goods below their cost prices leads to the disruption of local competition and industries. The local manufacturers are unable to match the rock-bottom prices of such goods. They are forced to operate at nominal profits or even at a loss. Even if they somehow continue to operate in the short run, they fail to operate for long. They have to eventually close down and exit the industry. The local industry is completely destroyed, taking away the jobs and source of livelihood of thousands of workers.

Complete Dependence upon the Exporting Nation

The countries in which goods are being dumped at rock-bottom prices become totally dependent upon the exporter for their needs. The local industry also shuts down, leaving the exporter as the only supplier for those products and product lines. This situation is dangerous for any importing country, as they have to operate as per the whims and fancies of the exporter. If the exporter stops the supply of goods for any reason, the supply chain of the importing nation will be disrupted. This can result in delays in production, loss of supply and orders, and huge losses.

High Prices

The end-stage of the process of dumping is an increase in prices by the dumping country or company. After the elimination of the local sources of supply, the importing country becomes totally dependent upon the exporter for those particular goods. The exporter then starts raising the prices. The importing nation has to buy those goods at the higher prices, as finding out and establishing a new source of supply is a lengthy and cumbersome process. Thus input costs rise, resulting in an increase in prices of finished goods and inflationary trends in the economy.

Summary- Advantages and Disadvantages of Dumping in International trade

Dumping is undoubtedly an unfair international trade practice. Any country should carefully weigh the merits as well as demerits of dumping in the long run before allowing it in its country. While it may be very beneficial for the importing nation in the short run, dumping may leave irreversible long term damage on the economy of the nation. Therefore, countries should implement laws and regulatory bodies to continuously monitor and check such practices from other countries while engaging in international trade and take prohibitory actions when necessary.

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Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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