What Is Trade Dumping?

Pros, Cons and Anti-dumping Measures

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China was accused of dumping cheap shrimp to gain market share in the U.S. Photo: Patrick Yuen/Getty Images

Definition: Dumping is when a country's business lowers the sales price of an export to gain unfair market share. It usually drops the price below what it would sell for at home. It may even push it below its actual cost to produce. For example, the Bush Administration accused China of dumping cheap shrimp in 2004. (Source: "Bush Accuses China of Dumping Shrimp," New York Times, July 7, 2004.)

Advantages

The main advantage of dumping is selling at this unfairly competitive lower price.

A country subsidizes the exporting business to enable them to sell below cost.

The country is willing to take a loss on the product to increase its comparable advantage in that industry. It may do this because it wants to create jobs for its residents. It often uses dumping as an attack on the other country's industry. It hopes to put that country's producers out of business, and dominate that industry.

Disadvantages

The problem with dumping is that it's expensive to maintain. It can take years for dumping to work. Meanwhile, the cost of subsidies can add to the export country's sovereign debt.

The second disadvantage is retaliation by the trade partner. It can lead to trade restrictions and tariffs. The third is censure by international trade organizations. These include the World Trade Organization (WTO) or the European Union (EU).

Anti-dumping

A country prevents dumping through trade agreements.

If both partners stick to the agreement, they can compete fairly and avoid it. But violations of the dumping rules can be difficult to prove and expensive to enforce. Unfortunately, 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. However, if that country is a member of the WTO or 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 Role of the World Trade Organization in Anti-dumping

Most countries are members of the World Trade Organization. Member countries adhere to the principles laid out during negotiations of the GATT multilateral trade agreement. Countries agree that they won't dump and that they won't enforce tariffs on any one industry or country. Therefore, 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 gives three ways to calculate this price:

  1. The price in the exporter’s domestic market.
  2. The price charged by the exporter in another country.
  3. 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 without violating the GATT multilateral trade agreement. (Source: WTO, Anti-dumping, subsidies, safeguards: contingencies, etc.)

The EU and Anti-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. Also, the EC must find two other conditions before it imposes duties:

  1. Dumping is the cause of the material harm.
  2. 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 it can impose a minimum price. (Source: EC, Anti-dumping

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