Is the practice of selling a product in foreign countries for a lower price?

Dumping refers to the practice of exporting goods to a foreign country at lower prices than the price of the same goods in the exporting country’s domestic market. As a result, affordable or cheaper exported goods invade the market in the importing country.

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Its evaluation involves the comparison between the export price and its normal price. Its main purpose is to gain a competitive advantage over the other suppliers in the importing country’s market. Therefore, it is advantageous for the exporting firm to dump the product until it beats the competition in the foreign market.

Table of contents

Key Takeaways

• Dumping occurs when the exporter exports a good to another country at a lower price than the product’s domestic price. Hence it is a practice associated with international trade.
• Its classification includes sporadic, predatory, reserve, and persistent.
• It helps exporters increase sales, expand business internationally, obtain government subsidies, solve problems due to excessive stock, etc.
• It helps importers access certain products at affordable prices and lessen the shortage scenarios. However, it can disrupt the local manufacturers of the importing countries by selling the product at cheaper rates, even lower than the cost of the production.

Dumping In Economics Explained

Dumping is a phenomenon observed in the context of international trade. It has a significant role in the interaction between the domestic factor markets and the international commodities markets. In addition, It explains an example and occurrence of price discrimination because the exporter follows different prices at different markets.

This low pricing practice affects the producers in the importing market. As a result, it is considered an unfair practice in many countries. As a result, imports may decline as a result of anti-dumping measures. Nations are embracing anti-dumping to establish protective measures. The unemployment rate, the exchange rate, and import penetration all influence adoption of anti-dumping. Its widespread use is not restricted to high-income industrialized nations; middle-income and lower-income nations are also using it more and more frequently.

The implementation of anti-dumping measures by WTO members is governed by the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (the “AD Agreement”). Members are permitted to take certain actions under the Anti-dumping Agreement to protect their domestic industries against dumping.

Types of Dumping

Let’s look into some of the significant types:

1. Predatory dumping: Under the predatory type, exporters drive out competition in the international market by selling goods at low prices. Once the competition is eliminated, the firm can raise the product’s price and gain additional revenue. The importing country can be skeptical and cautious of this practice because it can result in a foreign monopoly controlling its market.
2. Sporadic dumping: It is the practice of occasionally dumping products at lower prices primarily to eliminate excess inventory stocks. It signifies that the business does not regularly sell its products at such low prices. Hence it is an impermanent phenomenon.
3. Persistent dumping: This type is the most popular form of cross-border dumping due to constant demand for a particular product. It helps exporting entities establish a presence and a significant market share in overseas marketplaces. 
4. Reverse dumping: In this type, the scenario is the product is priced low in the local market. At the same time, the product price is set high in the foreign market because high prices do not affect the demand.

Examples

Let us look at the dumping examples to understand the concept better:

Example #1

Suppose country X manufactures toys and exports them to country Y. X dumps many toys in country Y at cheaper rates than the original price of the toys in Y’s market. As a result, X can subsidize or reduce the price of the toys until the companies of country Y are beaten at competitive toy prices. Then, country X can reach normal price levels, at which they would stop reducing the prices of the toys.

Example #2

China is the leading steel-producing country in the world, and Russia is also on the top 10 list. The government of Britain planned to have restricting measures resembling anti-dumping duty on the dumping of cold-rolled flat steel imports from China and Russia until 2026. If the restriction is lifted, cold-rolled flat steel from China and Russia would be dumped in Britain, affecting UK companies that cater to 40–50% of the local market.

Advantages & Disadvantages

Let us look at the advantages and disadvantages in detail as follows:

Advantages

• The method helps firms who want to grow their financial footprint globally. They enter a foreign nation, seize control of the existing market, and remove the competitors by selling goods at cheaper rates. 
• Importers gain from the lower price of products.
• Production on a large scale enables producers to take advantage of economies of scale in their operations. As a result, they reach a point where they fully utilize limited available resources. 
• Exporters can obtain subsidies from the government.
• Increases in production and market contribute to an increase in employment in the exporter’s country.

Disadvantages

• Sometimes the revenue from the export is less than the production cost, indicating that the business is losing money on exports.
• The cost of subsidies affects the government.
• The exporting entity can form a monopoly and sets its prices. Moreover, they could grow to such a size that they begin to influence the government in the importing country and its policies, which would harm any nation.
• Dumping below the cost of production affects the local markets.

Frequently Asked Questions (FAQs)

What is dumping in economics?

It is the practice of disposing of goods at a lower price in the foreign market compared to their price in the domestic market in the exporting country. It is a discriminatory price practice to gain a competitive advantage in the international market. 

Why is dumping important?

It is important to increase sales, grow markets in new economies, and reduce excess stock levels. In addition, it makes it possible for buyers in the importing nation to access certain goods at reasonable prices.

What are the effects of dumping?

The exporting entity benefits from government subsidies, a growing market, and other assistance from the government, while the importing entity may take advantage of the reduced pricing. As a result, the importing nation’s domestic market might be destroyed, leading to job cuts and business losses.

Recommended Articles

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