The term dumping has been thrown around the various trade media as of late, but what exactly is dumping? In terms of international trade, the Merriam-Webster dictionary defines dumping as “the selling of goods in quantity at below market price.” In this blog post we will breakdown the general concept of dumping a little further, but without going into the specifics of the various forms of dumping, such as price to price dumping and price cost dumping.
Dumping involves two aspects. The first, the exporter, or a group of exporters working together, is selling a product, to an importer at a price that is lower that what the exporter would sell in their domestic market or would cost the exporter to produce the product. The second aspect of dumping is the quantity of goods that is sold. Dumping involves the repeated selling of large quantity of goods. These two aspects in conjunction would eventually grant the exporter(s) the ability to control a percentage or a segment of the foreign market. Dumping is a form of price discrimination. Price discrimination occurs in many forms, but they all involve selling the same product at different prices to different groups of consumers. Regarding international trade dumping, customers of the importing country are being favoured by being able to purchase a commodity at a lower than market price. This reduced price ensures that the importer continues to purchase from that exporter to continue customer patronage and maintain a competitive selling advantage.
This sounds great for the bottom-line customers, however, there are two main drawbacks regarding dumping. Dumping leaves little room for other international exporters and domestic businesses the ability to compete against that exporter. Then, once the exporter has a good grasp on that foreign market and other businesses are no longer able to successfully compete or seen as a threat, the exporter can now control the supply, quality and price in the future of that commodity, thus having a monopoly on the market.
With so much attention and unfavorable press, one would think that the practice of dumping would be prohibited. The World Trade Organization (WTO), the only organization that has the authority to deal with rules of trade between countries does not prohibit dumping, nor does it act against exporters accused of dumping. The WTO does however monitor and regulate what measures a country can and cannot take when they believe that an exporter is dumping product in their country. Unless a country can prove that exporter is dumping product and causing harm to domestic industries there is often no recourse against dumping.
As a result of these factors, most countries are not a fan of dumping, and aim to prevent it as opposed to combatting it. Usually, when a country enters a free trade agreement with other countries, there is a stipulation surrounding dumping and the imposing of tariffs and quotas to exporters to be proactive against dumping. Taking this proactive approach has been more successful to combat dumping, as for a country to prove that dumping is occurring is a costly and time-consuming activity.
So why would an exporting country risk industry backlash and financial recourse if dumping is proven? In the short term, dumping can benefit the exporting country with job creation and sustainability of employment. As the exporter continues to increase their market share in the importing country, individuals will be able to maintain their employment, as well new jobs being created as the exporter foreign market share increases. On the flip side, in the importing country, dumping has the ability to promote innovation in domestic industries as well as other international competitors, in their quest to remain current and competitive. Domestic companies are going to need to get creative and find additional ways to keep or recoup their share of their domestic market and grow internationally.
In conclusion dumping is a complex issue with many factors, and numerous arguments can be made to be in favour of or to oppose dumping depending on your position or role. There are valid points that an exporter can make, as well as importers, government and even the consumer.