What do we mean by Persistent dumping?
Persistent dumping is the most permanent form of cross-border dumping. And this strategy lasts for a long term, maybe a number of months or even years. This is a sort of unfair trade practice and involves selling goods at a very low price in the foreign region and at a higher price in the domestic region. The sole purpose of such a form of dumping is to create a presence and a substantial market share gradually in foreign markets. Low prices enable the company to enter new markets, establish its products in those markets, and fight and beat the competition by means of creating a price war. And finally, it became a monopoly power in the region.
Pre-requisite for Persistent Dumping
Before we move ahead, let us understand that for the success of the Persistent Dumping Strategy, there are two key requirements. And these are:
- What do we mean by Persistent dumping?
- Pre-requisite for Persistent Dumping
- What are the merits of Persistent Dumping?
- What are the limitations of Persistent Dumping?
Constant Demand of the Product
The products that are being dumped shall have a constant demand for the success of persistent dumping. Temporary demand for a product will create a short-term phenomenon. And that will go against the basic principle of persistent dumping that says that it is long-term in nature.
Price-Elasticity of the Product
Moreover, the demand for those products being dumped should be price-elastic in nature. In other words, the demand for the product should have a strong positive relationship with the price. Thereby the demand will increase with a fall in price. For the success of persistent dumping, this condition is very vital. The company can lower its prices in a foreign country to sell more and gain a larger market share.
How Pricing is Decided
The companies adopting the persistent form of dumping strategy generally follow the marginal cost pricing principle. In other words, the incumbent company has the leeway to reduce the price up to the level of marginal costing. And this is without incurring any loss on such dumping transactions. It means that they charge only what they actually incur for producing one extra unit of that product in the foreign region. This price does not cover any of its fixed costs. It only takes care of the marginal costs- the cost of the direct material and direct labor involved in production activities.
Of course, considering various other factors and to early capture the market, the companies may decide to lower the prices even below the marginal cost of the product. And thus, they may be willing to incur losses on the operations in the short term. And this is intends to get a substantial foothold in the foreign market. It means that they charge only what they actually incur for producing one extra unit of that product in the foreign region. This price does not cover any of its fixed costs. It only takes care of the marginal costs- the cost of the direct material and direct labor involved in production activities.
What are the merits of Persistent Dumping?
There are a number of advantages of persistent dumping. Some of them are:
Persistent dumping can be very beneficial for the consumers of foreign countries. They are able to get products at rock-bottom prices because the dumping company usually sells these products at their marginal cost. It may even sell the products at a loss for some time in order to capture the market. This also forces the local players and competitors to reduce the prices to sustain and retain their market share. In the absence of persistent dumping, the domestic companies would never sell those products at that price point. Hence, this dumping and lowering of prices by all lead to a lot of savings for the consumers of that region.
Healthy competition and innovation
Many times, persistent dumping leads to the growth of healthy competition and innovation in the region. Because of its long-term nature, the local competitors get time to make strategies to fight the foreign competition. They can invest in research and development, innovate and create new and better products at a lower cost. This creates a win-win situation for the local producers as well as the consumers.
Specialization and economies of scale
Persistent dumping can lead to the specialization of companies in a particular product or product line which they dump—increased specialization results in better quality products. Companies are able to reap the benefits of economies of scale and scope — large-scale production results in a lower cost of production. Companies are able to implement new technology due to their high scale of production. That further leads to a reduction in cost. All these factors help the company to strengthen its position in both the domestic and foreign markets with better quality of products at much lower prices than the competition.
What are the limitations of Persistent Dumping?
There are a number of limitations of Persistent Dumping too. Some of them are:
Unworthy in the long run
Persistent dumping is associated with the long run. Often, selling the dumped products at a huge subsidy in the foreign markets may become unsustainable and unviable for the company over a long period. Selling goods at marginal pricing may prove burdensome on the financial health of the company over that time period.
Also, domestic companies from the country where the products were being dumped may slowly stand up to the challenge. They may find ways to counter the pricing policy of the dumping company and match the prices. This may lead to a loss-making proposition for the dumping company due to low volumes. And this may eventually lead to the exit of the dumping company from that country. Furthermore, there is a chance that a competitor will emerge for the dumping company from its own country itself. It may result in a bitter price war between the two companies in order to capture the foreign markets. The end result would be a loss for the dumping company.
Disruption of local competition
Persistent form of dumping often results in disruption of local competition in the foreign countries, which is not the case in temporary forms of dumping such as sporadic dumping. Aggressive selling of goods at rock-bottom prices leads to the destruction of small companies and producers. They are forced to close down their businesses because they are unable to match the prices, and consumers no longer buy their products. Thus, such dumping can have devastating effects on the lives and livelihood of thousands of people who are associated directly or indirectly with those products and product lines in that country.
Import duties, tariffs, and restrictions
Persistent dumping always comes along with the risk of imposition of import duties and tariffs by the country where the products are being dumped. This will raise the price of those goods automatically. Thus, the dumping country/company will no longer be able to sell the products at low prices in the foreign country. It will dent the very purpose of capturing the foreign markets.
Countries can also implement import quotas wherein import quantities of goods are restricted or fixed. An upper ceiling is set on the volume of goods that can be imported from a foreign country. This can be a dampener on the plans of the dumping company or nation. Apart from fixing the import quota, the country/the Government of a foreign country can totally debar the import from one or a few countries in general or for a few specific products.
Furthermore, there are a number of international trade watchdogs and bodies that keep a check on dumping and anti-competitive trade practices. Examples of such bodies are the World Trade Organization(WTO), previously known as the GATT or General Agreement on Tariffs and Trade, and the European Union(EU). If some country feels that another nation or a foreign company is dumping its products inside its borders, it can approach these international bodies and file a complaint. If these bodies feel that the complainant is correct, they can pass restrictive and prohibitory orders to stop the dumping. This can pose a major challenge to the company or country involved in the persistent dumping of goods and can derail their plans.
Persistent dumping being long-term in nature, provides time to local competitors for the formulation of strategies. These local competitors can invest their time and funds both in the research and development to manufacture products at a lower cost. This will help them compete with the dumping company on the price and quality front.
The Exporter engaged in the practice of persistent dumping have to consider the following points:
a) The product being dumped should have a constant demand.
b) The products should be price-elastic in nature; that is, the demand should increase with a decrease in price.
c) Price of products should be kept after considering the marginal cost of products.
In order to restrict the practice of persistent dumping, countries can go for the following measures: Import quotas, setting upper limits, complete ban or ban from few countries. And more. Also, such trade is regulated by bodies like WTO, EU, etc.