Dumping is a term common in international trade. We can say it is an unfair strategy by an exporting nation to gain market share in the importing nation. In dumping, an exporting country reduces the price of its product to gain market share in the foreign market. The price at which the country exports are even less than the price they charge for the same product back home.
Moreover, the exporting country may even drop the price below the cost of the product to destroy the local competition. Later, when there is no local competition, the exporting nation raises the price. We can say that a higher price in the home market helps to subsidize the low prices in the foreign market. Dumping is thus a business strategy where price discrimination is practiced.
For example, a Chinese manufacturer sells a mobile in the U.S. for $200 but in China for $350. The cost of producing this mobile is $250. Such a tactic could disrupt the U.S. mobile industry.
The following are the reasons why an exporting nation goes for dumping:
- To gain market share in the importing country.
- Destroy the local completion and industry in the importing country/target country.
- It helps the company to minimize its investment risk by having a large market share in the importing country.
- Helps an exporting nation to reap the benefits of economies of large-scale.
- It helps to export country to clear their unsold inventory.
- Eventually, it helps the company to reduce the price in the domestic market as well as a cost-volume benefit effect.
- It also helps the company to earn various export incentives, recognition, and cheap funds for exports.
Conditions for Success of Dumping
Dumping of a product by one country may not always be successful. Instead, there are a few conditions that help ensure the success of this international trade strategy. These are:
- The company must have some degree of monopoly on the product, at least in the home market. Or well established and recognized brand.
- For a buyer in the foreign market, it should be impossible to re-sell the goods to another country, where the product costs more.
- Elasticities of demand in the home and foreign markets should be different. If this condition is not met, then price discrimination is not profitable.
- There should be a clear distinction between the home and foreign markets. This difference could be based on customs, nationality, language, currency, etc.
Types of Dumping
The following are the types of dumping:
A company practices sporadic dumping if it has a large amount of unsold inventory. In this, the company sells the product in the foreign market at a price that covers its variable and few fixed cost. Such a strategy may get successful only if demand for the product in a foreign market is elastic and the company has a monopoly in the home market. So, whenever there is a large inventory built up, to liquidate the same, this strategy is applied. So this strategy remains temporary to take care of the inventory liquidation.
This type of strategy is permanent, unlike the sporadic one, which is temporary. In this, the company regularly sells the product in the foreign market at a price less than the domestic prices. Often, a company sells the product at a loss to gain entry and destroy the local industry. Once the company gains some degree of monopoly in the foreign market or a substantial market share, it slowly starts to raise the price. Previously, Hitachi did face accusations of using a predatory dumping strategy for its EPROM chips.
It is even more permanent than the Predatory type. Here, a company or a country consistently sells a product at a lower price in the foreign market than in the home market. In a persistent dumping strategy, a company may use marginal cost pricing for foreign markets and total cost pricing in the home market. Usually, the demand for the product is less elastic in the home market, while the demand in the foreign market is highly elastic. Hence, price variation gives an excellent opportunity for dumping and expanding market share.
For example, Japan used to sell consumer electronics products at more prices in the home market than in the U.S. This is because Japan did not have any foreign competition in the home market.
In reverse dumping, the company dumps the products in the home market while selling at a higher price in the foreign market. It is usually the case when the demand for the product is less elastic in the foreign market. It could happen when the product is well established and has become iconic due to its features or status. Moreover, no such substitute product is available or possible in that country.
An importing country initially seeks help from international organizations, such as WTO, to prevent dumping. However, proving that a country is violating fair competition rules is practically very difficult. Thus, countries resort to anti-dumping measures to prevent the local industry. The following are the anti-dumping measures that a country may take:
In this, the importing country levies tariffs on the product. The tariff raises the prices of the imported product and thus, narrows down the gap between the foreign-made and local-made products.
In this, the country fixes the volume or value of the product that it imports into the country. Any volume or value above this quota is either blocked or is subjected to high tariff duties.
It is more of a retaliatory measure. Under this, a country bans some or all products from the dumping country.
Voluntary Export Restraint
It usually includes bilateral agreements between the countries to prevent the dumping of products. Both countries also decide on the set of rules that will lead to punitive actions and fines. In this case, there is a restriction on the export of products in general or a pre-set quota.
World Trade Organization (WTO) does not support dumping, but it does not prohibit it either. WTO reacts when a specific complaint is made. And Its decision is not universal and is on a case-to-case basis. Dumping is legal as per WTO unless the importing nation can prove its negative impacts on the local producers.
However, some countries make dumping illegal as it harms local industries or companies and results in job loss. These countries use tariffs and quotas to protect the local market. Also, countries enter into trade agreements to save the local economy from the negative impacts of dumping.
Let’s take a real-world example to understand it better. In 2017, the ITA (International Trade Association) came out with a decision that the anti-dumping duty on Chinese silica fabric products is valid. In its investigation, the ITA found that China sells silica products at less than the product’s fair value in the U.S. As per the ITA, if the U.S. removes anti-dumping duty, the chances of dumping would rise.
Also, refer to Anti Dumping Law.
Not Always Bad
Dumping may be wrong from an economic point of view, but it may also have positive impacts. The following are how dumping has a positive effect:
- The end-users benefit from the lower prices, and thus, results in savings.
- On many occasions, it is seen that dumping encourages or forces the local players to be competitive and innovative. It makes them try new techniques to reduce the cost further or differentiate their product. It, in a way, helps customers as well.
- For the exporting country, dumping results in more revenue. In some cases, companies may even dump their old inventory, resulting in more sales. It, in turn, eventually helps to boost the standard of living in the exporting country.
There are various merits and demerits of dumping. To know more about them, you can refer to our article: Advantages & Disadvantages of Dumping in International Trade.