Dumping

When a company or a country exports its products at a price lower than its domestic price

What is Dumping?

Dumping in the financial world occurs when a company or a country exports its products at a price lower than its domestic price. Exporters dump to compete with the producers and sellers in the importing country.

 

Dumping

 

Summary

  • Dumping enables consumers in the importing country to obtain access to goods at an affordable price. However, it can also destroy the local market of the importing country, which can result in layoffs and closure of businesses.
  • The WTO and EU regulate dumping by putting tariffs and taxes on trading partners. Sufficient proof must be provided that dumping has happened.
  • Dumping can also take place in the exporter’s home market. If the product can be priced at a higher cost abroad, the company can sell at a lower price at home.

 

How Dumping Takes Place

It may seem that the dumping company may lose a lot of money by charging a lower price. However, it is not the case in real life, as the dumping company is not losing money.

The majority of multinational companies (MNC) practice international price differentiation. They price a certain item depending on what each nation’s customer can afford. For example, Tide detergent in China is sold for less than one-fifth of the U.S. price. However, if a particular country is willing to pay more for a product, then the MNC will price the product at a higher cost.

 

Types of Dumping

Below are the four types of dumping in international trade:

 

1. Sporadic dumping

Companies dump excess unsold inventories to avoid price wars in the home market and preserve their competitive position. They can either dump by destroying excess supplies or export them to a foreign market where the products are not sold.

 

2. Predatory dumping

Unlike sporadic dumping, which is occasional, predatory dumping is permanent. It involves the sale of goods in a foreign market at a price lower than the home market. Predatory dumping is done to gain access to the foreign market and eliminate competition. It creates a monopoly in the market.

 

3. Persistent dumping

When a country consistently sells products at a lower price in the foreign market compared to the local prices, it is called persistent dumping. It happens when there is a constant demand for the product in the foreign market.

 

4. Reverse dumping

Reverse dumping happens when the demand for the product in the foreign market is less elastic. It means that changes in price do not impact demand. Therefore, the company can charge a higher price in the foreign market and a lower price in the local market.

 

Advantages of Dumping

  • Consumers in the importer’s country can gain access to products at lower prices
  • Exporters receive subsidies from their government to sell at lower prices abroad
  • The exporters’ country can generate employment and become industry leaders

 

Disadvantages of Dumping

  • The debt of the exporter’s country will increase due to subsidies provided to sell at lower prices abroad
  • Dumping is expensive and it will the exporters years to sell at a lower price and put competitors out of business
  • The target company can retaliate and cause a trade war

 

The World Trade Organization’s (WTO) and the European Union’s (EU) Fight against Dumping

The World Trade Organization (WTO) and the European Union (EU) continuously take measures to discourage countries from dumping by imposing tariffs and taxes.

 

The WTO’s Role

Member countries of the WTO lay down principles during the negotiation of the General Agreement on Trade and Tariff (GATT), where they agree not to dump and enforce tariffs on each other.

According to the WTO, if a country wants to put an anti-dumping tariff on a trading partner, then that country needs to prove the occurrence of the dumping and its impact on the local market.

They also need to show that the dumped price is much lower than the exporter’s domestic price. The disputing country should also determine what the normal price should be before the anti-dumping tariff is in place.

 

The EU’s Role

Like the WTO, the European Union also enforces anti-dumping measures through its economic arm – the European Commission (EC). If a member country accuses a trading partner of dumping, the EC needs to find that dumping has caused material harm to the complainant.

Before imposing the duties, the EC must find that the dumping has caused material harm to the local market. It also needs to ensure that the anti-dumping duties do not violate the best interests of the EU.

If found guilty, the exporter can agree to sell at a minimum price, and duties can be imposed if the EU rejects the price offered by the exporter.

 

Additional Resources

CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)™ certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Competitive Advantage
  • Legal Monopoly
  • Market Positioning
  • Predatory Pricing

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