Dumping

Given the option of deliberately making a loss with the opportunity to recover significantly more than the initial losses at a later time, some people would consider losing deliberately. As unrealistic as this may sound, it represents the concept of dumping in international economics. Some companies would not mind selling their products in a foreign market for cheaper than it costs to make them, provided that it helps them establish a stronger presence in that market. This is known as dumping, which is highly frowned upon in most cases. Why? Read this article to learn all about dumping in economics!

Dumping Definition Economics

Dumping in economics can be defined as the sale of a product by a foreign company for less than its production cost in a domestic market. Here, a foreign company that wishes to create competition or strengthen its competitive position in a domestic market deliberately sells its product below the domestic market price or below the production cost. Domestic consumers, wanting to buy more of a product when the price goes down, will then buy more of the product sold by the foreign company.

Dumping Economics

When it comes to dumping in economics, the reduction in the price of the product in a domestic market is often considered "trickery." This is because the producers in the domestic market often believe that once the act gains the foreign producer's popularity and drives some domestic producers out of business, prices will rise to where they should actually be or even higher. Below is an example that simplifies the concept of dumping.

As the example demonstrates, Santos was willing to take losses in the US market, knowing that the pressure would drive out the domestic competitors. Through this, Santos becomes a leader in the market, increasing prices once the domestic competitors are gone.

Since the foreign company sells the same product for different prices in different markets, this constitutes price discrimination.

So, how is dumping possible? To some extent, the differences in input costs in different markets play a key role in this. This is because labor may be cheaper in a foreign market, and this means that the foreign company can actually sell the product for cheaper than the domestic market price and only risk minimal losses.

While all seems to be great for the foreign company that dumps in the domestic market, this makes life significantly harder for domestic companies, and this is why dumping is usually frowned upon. As a result, many domestic markets tend to implement anti-dumping measures in the form of trade restrictions.

The main trade restrictions domestic markets implement to protect against dumping are:

• import tariffs and
• import quotas.

First, an import tariff is a tax the government of the domestic market places on the imported product in question. In such an instance, the price of the imported product is raised to either match domestic prices or exceed domestic prices. This gives domestic companies a competitive edge since consumers will buy more from domestic companies. The illustration in Figure 1 shows how the domestic market responds to an import tariff.

Fig. 1 - Import tariff

With a tariff, the price increases from P₁ to P₂, and the quantity demanded decreases accordingly. If there is no trade, domestic producers will sell at a much higher price (P₃).

Now, let's discuss import quotas. An import quota is a limit placed on the quantity of a product that can be imported. If the import quota of a given product is zero, the domestic companies have more liberty in pricing, and the price of the product will be higher than the world price. However, the absence of the import quota means that the consumers will buy the product at the world price, and this is where foreign companies can implement dumping. Figure 2 illustrates how import quotas protect against dumping.

Fig. 2 - Import quota

An import quota raises the price of the product from P₁ to P₂. The quantity demanded shifts to Q₂, and the foreign company is allowed to import a limited quantity. At P₃, the foreign company is not allowed to import any quantity of the good.

Issues of Dumping in Economics

Dumping in economics comes with some issues. These issues can be either positive or negative, both of which are discussed in this section of the article.

Advantages of dumping

The advantages of dumping are as follows:

1. The consumers in the domestic market enjoy reduced prices. They get more value for their money when dumping takes place in their market.
2. The domestic companies are forced to innovate and improve their production processes to remain competitive. This is because dumping does not technically give domestic producers only the option of going out of business. While difficult, domestic producers may be able to innovate their production processes and offer domestic consumers either a unique variation of the product, or the same product at the reduced price.
3. The foreign company can benefit through selling backlogs of products. This is particularly true in cases where the foreign company failed to sell all its inventory due to unforeseen macroeconomic conditions. Selling the backlog of products for cheaper in another market will help the foreign firm to reduce its losses and boost revenue. For instance, a laptop manufacturer may want to sell its backlog of older laptops for cheaper in a different market where there is a demand for older laptops.

Disadvantages of dumping

The disadvantages of dumping are as follows:

1. Domestic firms may be forced out of business. As consumers stop buying from the domestic producers, whose products have now become more expensive, these domestic producers may have no choice but to go out of business.
2. The domestic economy can end up depending too much on importation. Because the imports are cheaper compared to the products made in the domestic market, the domestic economy may end up without domestic producers, which means they will depend greatly on imports.
3. Dumping can lead to a monopoly. If a foreign company is able to force domestic companies out of business, that foreign company can acquire monopoly power and increase the price of the product unreasonably.

Types of Dumping in Economics

There are four types of dumping in economics. They include sporadic dumping, predatory dumping, persistent dumping, and reverse dumping.

• The types of dumping in economics are sporadic dumping, predatory dumping, persistent dumping, and reverse dumping.

1. Sporadic dumping - here, the foreign company dumps its backlog of inventory in a different market where its products are not sold. The main point here is that the excess inventory is only temporary; this type of dumping is only occasional.
2. Predatory dumping - the foreign company deliberately targets a domestic market with products that are priced below the market price of that domestic market. This is done to obtain a competitive edge in the domestic market.
3. Persistent dumping - in this case, the foreign company consistently exports its product to a different market and sells below the market price. This takes place in a market where there is a constant demand for the product being offered by the foreign company.
4. Reverse dumping - in some markets, the demand for certain products is inelastic or less elastic compared to other markets. In such an instance, foreign companies will sell their products at a higher price in other markets, while they sell them at a lower price in their domestic markets.

Dumping Economics Example

Let's look at a real-life example of dumping in economics.

The case described provides a good example of dumping as well as a trade protection action in real life.