The macroeconomic definition of price discrimination states a situation where similar or identical goods or services are sold at different prices. This form of competition eventually allows the price discriminator to gain supernormal profits at the cost of its rivals shutting down.
The progressive trading policies set by the General Agreement on Tariffs and Trade (GATT) aim to create a multilateral trading system by reducing trade barriers. Dumping is a discriminatory price strategy where the producer intentionally tweaks its product prices in foreign countries below the average price paid for such goods.
What Is Dumping in International Trade?
Dumping is a destructive practice that harms a country's internal trading mechanism.
Manufacturers selling products in a foreign country at less than fair or average value are liable to be charged an anti dumping duty. The International Trade Association rules that manufacturers selling at dumping prices will continue to do so till the tariff is dropped.
However, since enforcing trade agreements is complex and not cost-effective, countries with no mutual trade agreements can experience trade dumping. Consequently, anti-dumping policies are also subject to disapproval. Prominent academicians and business moguls claim that anti-dumping is a reactionary measure undertaken when domestic manufacturers suspect a price hike from their foreign competitors.
What are the Types of Dumping in International Trade?
Depending on the foreign firm’s approach to selling products at a ‘dumping rate’, there are four different forms of dumping.
1. Predatory dumping
When the dumping company consciously adopts unethical market grabbing practices to create unfair competition, it is called predatory dumping. This forceful expropriation eliminates competition and eventually may force them to shut down.
Predatory dumping in international trade can ruin the manufacturing industry and cause reduced investments. International trade agreements try to minimize dumping by forcing sellers to adopt lenient pricing or levying charges.
2. Intermittent and persistent dumping
Foreign producers may choose to reduce the price of their commodities in the foreign market without altering the price in their home country. This practice, called intermittent dumping, occurs when such companies have a surplus or unsold stocks and elastic demand for these goods abroad.
The dumping is persistent if the company continues selling its unsold stocks in a foreign market at lower prices. Since domestic price is inelastic, they reap more profits by increasing their foreign production.
3. Official dumping
When countries have specific tax evasive policies or subsidies that facilitate lower prices, they fall prey to official dumping. Although the profit margins are lesser, it helps foreign companies occupy a substantial customer base. While trade organizations consider official dumping legal and transparent, it adversely affects local companies.
4. Social dumping
Social dumping is the intentional reduction of prices of essential and emergency goods. Countries often pass laws facilitating social dumping, especially during distress or emergencies.
For example, many countries introduced price reductions on essential commodities, antigen tests, and masks during the COVID-19 pandemic.
What are the Negative Impacts of Dumping on International Trade?
Foreign dumping in domestic markets can adversely impact the latter’s domestic production. Some of its negative impacts include
1. Domestic production
When companies sell their excess stocks at low prices in another country, it ruins domestic production there. As a monopolist grabbing the market, they set their prices lower than the average prices prevalent.
Intermittent and persistent dumping can cause domestic industries to suffer for some time. However, predatory dumping causes an irreversible effect on domestic companies and may even force them to shut down.
2. Shift in demand
When the dumped commodity is a consumer product, it will initially cause a shift in demand when the prices are low. When dumping stops and the prices rise, customers find it difficult to return to their preference patterns. Also, when imports stop, the artificial demand and supply forces fall apart.
3. Market failure
The market fails when the economy's demand and supply forces cannot sustain the equilibrium owing to an external or adverse condition. The artificial demand for the dumped product reverses when dumping stops, thus creating a demand vacuum.
4. Creation of collusive oligopolies
To tackle the forceful dumping of foreign goods, trading companies can form associations and initiate a price war. This gives rise to intense fancied product differentiation for consumer goods, which still holds the artificial demand.
However, since domestic companies are losing revenue, they find it challenging to participate in intensive marketing strategies. In the absence of governance, this may result in foreign takeovers.
Also Read: Duty vs Tariff - What's the Difference?
An Example of Dumping
In 1947, the US launched an investigation against Polish golf carts allegedly being dumped in the US market. The problem was that no golf carts were then being sold in Poland. Poland, at that time, did not even have any golf courses. The Polish factory’s production was 100 percent exported. Hence, no distinction can be made between the US market price and the Polish market price for a golf cart. Moreover, the only other import of golf carts into the US was from Canada, whose economics and cost structure was hardly comparable to those of Poland.
Many countries have also blamed China for dumping its excess supply of goods at less than normal prices. India and the US have announced that China’s dumping policies have adversely affected employment and caused domestic markets to crash.
How to Get Rid of Dumping?
While dumping companies may receive export subsidies and help their home country to generate employment, it can ruin their host country’s economy. Domestic governments or international trade agreements can impose the following to reduce dumping:
1. Tariff imposition
Domestic governments may impose tariffs on the exporting company to prevent dumping from foreign countries. It is beneficial if the tariff equals the difference between domestic prices and dumped prices.
2. Import quota
Domestic governments may fix the maximum level of imports of certain commodities to prevent dumping. Quota fixation is often clubbed with tariff imposition, ensuring a steady flow of foreign capital. Sometimes governments impose import embargoes to ban imports from the dumping countries completely.
3. Voluntary Export Restraint (VER)
Countries may form bilateral agreements to remove instances of potential dumping.
However, anti-dumping measures like tariffs and quotas are subject to criticism owing to their protectionist policies. Domestic producers may pressure governments to impose these measures irrespective of whether it negatively affects domestic industries.
While the World Trade Organization does not necessarily illegalize dumping, it can impose censure if host countries can prove instances of dumping by foreign companies. Host countries can encourage dumping practices to boost trading and help increase their market share. But in the long run, importing countries may block such imports or recommend censure, thus damaging trade relationships.
Frequently Asked Questions
1. Can a ban on dumping affect trade relations?
To prevent dumping, importing countries may impose protectionist policies like tariffs, quotas, or embargoes. However, in extreme cases, they can engage in a trade war with the dumping company and eventually ruin trade relationships with that country.
2. What is the purpose of anti-dumping policies?
Anti-dumping policies are meant to stop companies from dumping their excess supply of stocks to the importing country at a lower price than in the exporting country. WTO does criminalize dumping, but it may direct such companies to stop. Anti-dumping policies may include imposing a tariff equal to the difference between the dumping price and the average price of such commodities in the domestic market.