Dumping in business refers to the practice where a company or country exports a product at a price lower than its normal value.
This “normal value” can be:
- The price in its domestic market: Selling goods cheaper abroad than they are sold in the exporting country.
- The cost of production: Selling goods in a foreign market for less than it costs to produce them.
Dumping is essentially a form of price discrimination in international trade.
Objectives of Dumping
Companies might engage in dumping for several reasons:
- Gaining Market Share: To penetrate a new foreign market quickly and establish a strong presence by offering lower prices than local competitors.
- Surplus Disposal: To get rid of excess inventory that cannot be sold in the domestic market without lowering prices there.
- Predatory Pricing: In some cases, the intention is to drive out local competitors in the importing country. Once the competition is eliminated or weakened, the dumping company might raise prices to monopolistic levels.
Why is Dumping Considered Unfair?
Dumping can harm domestic industries in the importing country because they struggle to compete with the artificially low prices of the dumped imports.
This can lead to:
- Loss of market share for domestic producers.
- Reduced profits and potential bankruptcies of local companies.
- Job losses in the domestic industry.
- Long-term harm to the overall economy of the importing nation.
International Regulations and Anti-Dumping Measures
While not explicitly illegal under World Trade Organization (WTO) rules, dumping is frowned upon, especially when it causes material injury to the domestic industry of the importing country. The WTO allows member countries to take anti-dumping measures to counteract dumping.
These measures often include:
- Anti-dumping duties: Tariffs imposed on the dumped imports to raise their price to a fairer level. The duty amount is usually calculated based on the “dumping margin,” which is the difference between the export price and the normal value.
- Anti-dumping investigations: Formal inquiries conducted to determine if dumping is occurring, the extent of the dumping, and whether it is causing injury to the domestic industry.
- Price undertakings: Agreements where the exporting company voluntarily raises its prices in the importing market to avoid anti-dumping duties.
Most countries have their own anti-dumping laws and procedures to protect their domestic industries from the adverse effects of dumping. These measures aim to create a level playing field and ensure fair competition in international trade.
