Understanding Dumping in Trade: Price Discrimination and Global Attitudes

What Is Dumping?

Dumping is the export of a product at a lower price in foreign markets than in domestic markets. Dumping is controversial because it's seen as an unfair pricing strategy in international trade. It can cause financial harm to domestic producers in the importing nation. Dumping is allowed by WTO rules unless the importing country can prove harm to its local producers. Individual countries use tariffs and quotas to shield their local producers from dumping.

How Dumping Impacts International Trade

Dumping is considered a form of price discrimination. It occurs when a manufacturer lowers the price of an item entering a foreign market to a level that is less than the price paid by domestic customers in the originating country. The practice is considered intentional with the goal of obtaining a competitive advantage in the importing market.

Pros and Cons of Dumping in Trade

The primary advantage of trade dumping is the ability to permeate a market with product prices that are often considered unfair. The exporting country may offer the producer a subsidy to counterbalance the losses incurred when the products sell below their manufacturing cost. One of the biggest disadvantages of trade dumping is that subsidies can become too costly over time to be sustainable. Additionally, trade partners who wish to restrict this form of market activity may increase restrictions on the good, which could result in increased export costs to the affected country or limits on the quantity a country will import.

Global Perspectives on Dumping Policies

While the World Trade Organization (WTO) reserves judgment on whether dumping is an unfair competitive practice, most nations are not in favor of dumping. Dumping is legal under WTO rules unless the foreign country can reliably show the negative effects the exporting firm has caused its domestic producers. To counter-dumping and protect their domestic industries from predatory pricing, most nations use tariffs and quotas. Dumping is also prohibited when it causes "material retardation" in the establishment of an industry in the domestic market.

The majority of trade agreements include restrictions on trade dumping. Violations of such agreements may be difficult to prove and can be cost-prohibitive to enforce fully. If two countries do not have a trade agreement in place, then there is no specific ban on trade dumping between them.

Case Study: An Example of Dumping in Action

In January 2017, the International Trade Association (ITA) decided that the anti-dumping duty levied on silica fabric products from China the previous year would remain in effect based on the investigation by the Department of Commerce and the International Trade Commission that showed that the silica products from China were selling at less than fair value in the United States. The ITA ruling was based on the fact that there was a strong likelihood that dumping would repeat if the tariff was removed.

The Bottom Line

Dumping is the practice of exporting goods at prices lower than in the domestic market. It's considered a form of price discrimination and can be used to gain a competitive edge in foreign markets. While dumping can provide short-term benefits for exporters, it often harms domestic producers in importing countries and may disrupt international trade relations. The potential negative effects of dumping on domestic industries include the risk of business closures and market manipulation. Countries defend their domestic producers against dumping by establishing tariffs and quotas. The WTO permits dumping unless it is shown to harm domestic producers.