Dumping occurs when a country's businesses lower the sales price of their exports to gain market share. By flooding the target export market with drastically lowered prices, it often puts that nation's competing firms out of business.
Learn about the pros and cons of dumping, and what measures nations take to prevent it.
Definition and Examples of Dumping
With dumping, a country's businesses drop their product's price on the foreign market below what it would sell for at home. They may even push the price below the actual cost to produce. Then they raise the price once they've destroyed the other nation's competition.
For example, if France exported tires to the U.S. for less than their normal value, it could make it difficult for American tire manufacturers to compete. A prolonged "dumping" of cheap tires could force American tire manufacturers out of business. While this could also be costly to France, once it eliminated American competition for its tires, it could hike the price again and recoup some of the lost revenue.
How Does Dumping Work?
Dumping works by eliminating foreign competition through artificially depressing a product's prices in that country. It's often viewed as an unfair tactic that floods a market with products priced so cheaply that competitors can't keep up.
The country that is dumping the products may help its businesses with subsidies until the competition is destroyed and prices resume normal levels.
For instance, if France was dumping tires cheaply in the U.S., its tire manufacturers could be losing money on the production of the tires. The French government could subsidize its tire manufacturers until the American tire companies were pushed out of the market. Then the French tire makers could resume pricing the tires at normal levels, at which point their government subsidies could end.
A country prevents dumping through trade agreements. If both partners stick to the agreement, they can compete fairly and avoid dumping.
Violations of dumping rules can be difficult to prove and expensive to enforce. For example, the North American Free Trade Agreement (now the United States-Mexico-Canada Agreement) provides a mechanism to review violations of the trade agreement.
Trade agreements don't prevent dumping with countries outside of the treaties. That's when countries take more extreme measures. Anti-dumping duties or tariffs remove the main advantage of dumping. A country can add an extra duty, or tax, on imports of goods that it considers to be involved in dumping.
If that country is a member of the World Trade Organization (WTO) or the European Union (EU), it must prove that dumping existed before slapping on the duties. These organizations want to make sure that countries don't use anti-dumping tariffs as a way to sneak in trade protectionism.
The WTO and Dumping
Most countries are members of the WTO. Member countries adhere to the principles laid out during negotiations of the General Agreement on Tariffs and Trade. That was a multilateral trade agreement that preceded the WTO. Countries agree that they won't dump and that they won't enforce tariffs on any one industry or country. To install an anti-dumping duty, WTO members must prove that dumping has occurred.
The WTO is specific in its definition of dumping. First, a country must prove that dumping harmed its local industry. It must also show that the price of the dumped import is much lower than the exporter's domestic price. The WTO asks for three calculations of this price:
- The price in the exporter’s domestic market.
- The price charged by the exporter in another country.
- A calculation based on the exporter’s production costs, other expenses, and reasonable profit margins.
The disputing country must also be able to demonstrate what the normal price should be. When all these have been put in place, then the disputing country can institute anti-dumping tariffs.
The EU and Dumping
The EU enforces anti-dumping measures through its economic arm, the European Commission (EC). If a member country complains about dumping by a non-member country to the EU, then the EC conducts a 15-month investigation. Like the WTO, the EC must find that material harm has occurred to the industry.
Unlike the WTO, the EC doesn't explicitly define dumping by using a formula to determine that the price is lower than in the exporter's market.
The EC must find two other conditions before it imposes duties. First, it must find that dumping is the cause of material harm. Second, it must find that the sanctions don't violate the best interests of the EU as a whole.
If found guilty, the exporter can offer to remedy the situation by agreeing to sell at a minimum price. If the EC doesn't accept the offer, it can impose anti-dumping duties. These can be in the form of an ad valorem tax, a product-specific duty, or a minimum price.
Advantages and Disadvantages of Dumping
It increases market share for the dumping country's industry
It temporarily lowers prices for consumers
Expensive for dumping country to maintain
The target country could retaliate and cause a trade war
Censure by the WTO and EU
- Increases market share for the dumping country's industry: The main advantage of dumping is selling at an unfairly competitive lower price. A country subsidizes the exporting businesses to enable them to sell below cost. The nation's leaders want to increase market share in that industry. It may want to create jobs for its residents. It often uses dumping as an attack on its trading partner's industry. It hopes to put that country's producers out of business and become the industry leader.
- Temporarily lowers prices for consumers: There is also a temporary advantage to consumers in the country being dumped upon. As long as the subsidy continues, they pay lower prices for that commodity.
- Expensive for dumping country to maintain: The problem with dumping is that it's expensive to keep up. It can take years of exporting cheap goods to put the competitors out of business. Meanwhile, the cost of subsidies can add to the export country's sovereign debt.
- The target country could retaliate and cause a trade war: The second disadvantage is retaliation by the trading partner. Countries may impose trade restrictions and tariffs to counteract dumping. That could lead to a trade war.
- Censure by the WTO and EU: The third disadvantage of dumping is the possibility of censure by international trade organizations. These include the World Trade Organization and the European Union. Censure is a formal disapproval by member nations, and it can affect trade relations with those countries.
- Dumping occurs when a country lowers export prices to gain market share.
- As a result, it can often destroy the trading partner’s industry.
- Government subsidies cushion the losses until the target industry is destroyed.
- The WTO and the EU oversee anti-dumping measures.