The today’s world of business has become more globalised. Many countries are now realizing the value of international trade and have called for active participation of their domestic industries in the international trade market to improve their economic growth (Giddens, 2018). This has highly increased the percentage of firms selling goods and services beyond their national boundaries. International trade is very competitive as every nation tries to be smart enough in its economic goals and strategies to achieve the international trade standards and hence attain competitive advantage in the international trade (Bhagwati, 2014). The advantages associated with being the dominant player in the international market has lured many nations to enter the international trade and have aggressively addressed trade strategies to be adopted by their industries and firms which participate in the international market in an attempt to achieve the best out of it. As many nations ranging from developed, developing and less developed try their best to cope up with stiff competition in the international trade, many have adopted various trade strategies one of which is dumping.
In the context of international trade, dumping refers to a situation whereby industries and firms participating in a country’s export market sell their goods in a foreign market at lower prices than those charged for the similar goods in the domestic market (Brander & Krugman, 2013). The prices for the goods sold in the foreign market by the exporters are actually lower than the normal value of the goods and may even be lowered further below the good’s cost of production. In international trade, dumping is viewed negatively as exporting nations involved in the act are viewed as trying to win the international market unfairly. Competitors in the international market view it as some sort of protectionism and call for serious investigation before it’s allowed. Various trade organizations such as the World Trade Organization condemn dumping (but do not prohibit it) in case it causes or intends to cause material injury of the importing nation’s domestic industries. Therefore, for fairness to prevail in the international market trade, dumping should be carefully investigated by various trade unions of the countries in the international market before it’s allowed.
Dumping is classified into three categories and the type of dumping adopted by a nation depends on the nation’s set economic goals and objectives. They include:
Persistent dumping
This type of dumping occurs when a firm in the exporting country sells part of its goods and services in the domestic market at relatively higher prices and the remaining portion is exported and sold at lower prices in the foreign market continuously (Hillman & Katz, 2009). This usually occurs if the international trade is characterized by monopolistic competition and product differentiation. The reason for its persistence is that exporters find it hard to change or rather get out of this pattern since doing so means that the exporter may be competed out and hence be forced to exit the market. Persistent dumping is possible in cases where the domestic demand for a certain good is less elastic while on the other hand the foreign demand for the same good is highly elastic. This therefore means that as costs fall due to an increase in production, the producers or rather the firms do not lower the price of the commodity so much in the home market since the demand is less elastic. However since the foreign demand is highly elastic, the firms/producers must keep low prices in the foreign market. As a result the firms gain more profit from selling much of the commodity in the foreign market. Domestic consumers benefit as well since the price they pay for commodity in the domestic market is actually lower than that which could otherwise be charged if there was no dumping.
Predatory dumping
This type of dumping is temporal and its main objective is to reduce or eliminate competition in the foreign market by forcing competitors out of the market (Hartigan, 2016). The exporting firm in the foreign market sells its commodities at very low prices or even at a loss so as to drive away competitors out of the market. When the competitors exit the market, the firm then raises the price of its commodities so as to recover the loss incurred during the dumping period. The firm may make more profit if the foreign market demand is less elastic. This type of dumping is risky as it may take a relatively longer period than expected and also the competitors may possibly retaliate, hence it can only be done by large firms which have a huge base of resources.
Sporadic dumping
This type is adopted in case the production of a domestic product exceeds the target or when stock remains unsold. The main objective of the seller is to sell off the surplus products or dispose old fashioned products as they are replaced by newer ones (Von Amerongen, 2010). This type of dumping is only possible if the selling firm is monopolistic locally in the domestic market and the foreign demand for the product is elastic. The surplus commodity being disposed off is sold at lower price in the foreign market but its price remains high in the domestic market.
There are various types of dumping. The main ones include:
To secure market share in the foreign market
Many firms in the international trade undertake dumping in order to win market share or rather remain in the foreign market. Foreign market involves perfect competition. Due to this reason a firm lowers the prices of its commodities as compared to those offered by competitors in the foreign market so as to increase the foreign demand of its commodities (Vernon, 2012). For this reason a firm may opt to sell at a loss in the foreign market so as to increase the demand for its commodities and drive away competitors from the market and later on raise the prices so as to recover and make profits.
To sell surplus commodities
In order for a firm to sell off its surplus commodities in the foreign market, it must be monopolistic in the domestic market. A firm may produce a product which exceeds the target. This means that the product cannot be sold fully in the domestic market. As a result the firm opts to sell the surplus product at relatively lower prices in the foreign market and get rid of it hence recovering its production costs and eliminating losses which could otherwise result.
To expand industry
Firms in the international trade undertake dumping in order to expand their operations. The expansion of firm’s productivity makes it enjoy the economies of scale (both internal and external) hence increasing its returns (Yeaple, 2015). Industry expansion also reduces the cost of producing commodities greatly enabling producers to offer their commodities at relatively cheap prices and increase their market base. A firm sells much of its commodities by offering lower prices in the foreign market and hence improves its profitability in the long-run.
To build new trade relations
Exporting firms in a given country may wish to build new good trade relations with countries participating in the international trade. Due to this reason the monopolistic firm may opt to sell its commodities in the foreign market at relatively lower prices. As a result the firm increases its productivity as the foreign demand for its commodities increases. Increased productivity lowers the costs of production as the firm enjoys the internal and external economies of scale. Lower costs of production mean that the firm continues to offer its commodities in the foreign market at lower prices and hence make more profit.
To dispose older commodities
A monopolistic firm may face a situation whereby its older technology goods and services are being replaced by newer technology ones. As a result, the firm tries its best to sell them off and avoid losses. Therefore the firm opts to sell the older commodities at cheaper prices in the foreign market in order to avoid losses since in future the older commodities may become totally obsolete.
Dumping is a two edged sword. It can be beneficial and at the same time be disadvantageous to a given nation. Generally, dumping benefits the exporting country and negatively affects the importing country.
Effects on the importing country
Effects of dumping on the importing country depend on the period of dumping (short or long), dumped product nature and the dumping aim of the firm.
Decline in sales and profit of the domestic industries
A country may import cheap goods and services which are produced by domestic industries. Consumers in the domestic industry will obvious shift to buy the cheaper imported commodities. As a result the demand for similar goods and services of the domestic industries decreases. This adversely lowers their sales and as a result their profits decline.
Unfavorable balance of payments
The balance of payments indicates the international transactions undertaken by a country. It reflects a country’s dependence on foreign commodities. It is indicated by the difference between a country’s exports and imports (Allen, 2010). Unfavorable balance of payments means that a country is actually importing much than it exports. The importing country of the dumped commodity suffers unfavorable balance of payments and this may adversely decrease its economic growth which is actually measured by the gross domestic product.
Long term inflation
A dumping firm may have the objective of driving away the competitors from the foreign market. This means that at first it will offer its commodities at cheaper prices compared to those of the competitors. The importing country will buy the dumped commodity at lower prices at first. However after the competitors quit the foreign market, the dumping firm raises its commodities’ price in order to recover the lose it incurred and make profit. As a result the importing country will be forced to buy the commodity at higher price in future (Shen & Corning, 2011). This means that the importing country’s consumers purchase the same commodity they used to at lower prices at the current higher prices. The long term effect of the raised price will be inflation in the importing country.
Future changes in consumer tastes and preferences
The dumped commodity may be a consumer good. This means that the demand of consumers of the importing country shifts to the cheap consumer good. In future dumping may stop. This means that the demand for the same good will reverse as consumers change their tastes and preferences towards other commodities. This may adversely affect the domestic economy especially if the consumer good is totally neglected for another.
Effects on the exporting country
Without possible retaliation by the trading partners, dumping generally benefits the exporting country in the following ways:
Lower prices for dumped commodities to domestic consumers
Dumping increases the market base for the dumping firm. As a result it increases its productivity. This means that the firm enjoys internal and external economies of scale associated with increased productivity. As a result the cost of productivity of the firm decreases. This means that the firm continues to offer the dumped commodity at a lower price in the foreign market and also lowers the price of the same commodity in the domestic market though not so much. This means that the domestic consumers purchase the commodity at lower price which may not be the case in case dumping was not there.
Favorable balance of payments
A favorable balance of payments means that a country’s export activities are doing well than imports from abroad. Dumping involves selling of more exports in the foreign market and this increases the total exports of a country. As a result, the dumping activity improves the exports as compared to the imports. This enables the country to improve its economic growth and compete internationally. Atesoglu, (2015) in his article cited out that most nations in the United States had more exports as compared to their imports. A good example is Mexico which dominates the chemicals market.
Creation of employment opportunities
Dumping expands the market of the dumping firm. As a result the demand for its commodities increases. The increased demand calls for increase in productivity. The increased productivity by the dumping firm increases the demand of the domestic factor inputs as more raw materials are required to produce more commodities to cater for the increased demand. As a result more people are employed to undertake the increased productivity and this reduces the level of unemployment in a country (Krugman, 2011).
Measures to counter dumping
Dumping is viewed as unfair in international trade although it benefits the exporting country. In international trade, antidumping targets mostly the following nations where cases of dumping have been severe: Latin America (12%), China (32%), Russia (16%), Eastern Europe (31%) and Taiwan (9%). This is represented in the pie chart below:
For this reason the importing countries try to stop it through various measures which include:
A tariff refers to a duty or tax that is imposed on imports (Blonigen, 2012). In case dumping occurs, the importing country may impose tariff on the dumped commodities in order to stop it. The tariff duty imposed should be equal to the difference in price of the dumped commodity and the domestic price of the commodity. However in practice the tariff duty imposed is usually more than this difference in order to totally end dumping. A good example is the tariff duties imposed on the Chinese aluminum foils by the U.S government under the leadership of President Donald Trump to prevent further dumping of the foils in the United States. According to Randy Woods (2018), in his article the U.S government has been raising tariff duties on some goods from China such as the Aluminum on increasing bases from the beginning of this year and further threat from the imported goods will lead to further increase of the duties. The data shown is in terms of billions.
Import quotas restrict the amount of the dumped commodity which enters the importing country (McCorriston, 2016). Tariff duty is imposed along with the fixed import quota. The dumped commodity which enters the importing country must not exceed the set target and hence this enables the importing country to control the dumped commodities. Dominic Patton (2018) in his article, cited out that China increased its import quotas on the U.S imported cotton from 894000 tones, to 500000 tones to reduce the U.S cotton imports and hence minimize its dumping in China which earlier on impacted the local farmers to a great extent. The following graph indicates the increased import quotas on the U.S cotton by China in tones:
This is a form of retaliation dumping. Some or all types of dumped commodities from the dumping country are banned by the importing country and as a result they do not enter the importing country and hence the dumping is stopped (Hobbs & Kerr, 2016).
This is a type of anti-dumping whereby the international trade partners make an agreement to ban the dumping of certain commodities in the foreign market from the countries they fear might dump their commodities into the foreign market. This was the case when the EU nations and India made an agreement concerning the export of India’s textile as it was cited by Murray (2013) in his article on the voluntary export restraint.
Conclusion
Currently, the world of business has become more globalised. Many countries have realized the value of international trade and have encouraged their domestic industries to venture into the trade (Freund & Weinhold, 2012). This has seen many businesses sell their products beyond their national boundaries. International trade is more competitive and this makes many businesses to play smarter with economic strategies so as to win market share in the international trade. As businesses try their best to dominate the foreign market, they adopt various trade strategies some of which include dumping. Although dumping benefits the exporting countries it is considered unfair and many countries try to eliminate it (Horstmann & Markusen, 2011). There are various types of dumping which include sporadic, persistent and predatory dumping. A nation adopts a type of dumping based on its economic set goals and objectives. Some of the objectives of dumping include: to secure market share in the foreign market, to sell surplus commodities, to expand the industry, to build new trade relations and to dispose old fashioned commodities. Dumping has various effects both on the importing and exporting countries. Dumping generally has the following negative effects the importing countries: unfavorable balance of payments, long time inflation, changes in future consumer tastes and preferences and the decline in sales and profit for the domestic industries which similar commodities as the dumped imported ones as cited by Wilczynski (2016) in his article about the dumping and central planning. Exporting countries benefit from dumping in that it lowers the price of domestic commodities, offers employment opportunities and enables the nation to attain favorable balance of payments. Dumping can be prevented in the following ways: tariff duties, import quotas and embargoes and voluntary export restraints.
In a nutshell, dumping is considered unfair in the international market. According to Johnson, H. G. (2015) dumping agreements between various trading organizations should be made to solve it. For instance India considered U.S cotton unfair to its domestic industries and increased its import quotas. A nation undertaking dumping should be carefully investigated to make sure that it is not for protectionism purpose as this may negatively impact other competitors in the foreign market. This was the agreement made between the World Trade Members on implementation of their article six part two on antidumping policy making where they agreed first to investigate the need for imposing dumping before allowing it.
References
Allen, R. G. D. (2010). Balance of payments. In An Introduction to National Accounts Statistics (pp. 56-68). Palgrave Macmillan, London.
Atesoglu, H. S. (2015). Balance-of-payments–constrained growth model and its implications for the United States. Article of Post Keynesian Economics, 19(3), 27-33.
Bhagwati, J. N. (2014). On the underinvoicing of imports. In Illegal Transactions in International Trade (pp. 138-147).
Blonigen, B. A. (2012). Tariff-jumping antidumping duties. Journal of international Economics, 57(1), 31-49.
Brander, J., & Krugman, P. (2013). A ‘reciprocal dumping’model of international trade. Journal of international economics, 15(3-4), 313-321.
Dominic Patton (2018). China to Issue more cotton import quotas amid U.S trade Talks. Reuters Business Article, 54 (3), 14-15
Freund, C., & Weinhold, D. (2012). The Internet and international trade in services. American Economic Review, 92(2), 236-240.
Giddens, A. (2018). Globalization. In Sociology of Globalization (pp. 19-26). Routledge.
Hartigan, J. C. (2016). Predatory dumping. Canadian Journal of Economics, 228-239.
Hillman, A. L., & Katz, E. (2009). Domestic uncertainty and foreign dumping. Canadian Journal of Economics, 403-416.
Hobbs, J. E., & Kerr, W. A. (2016). Consumer information, labelling and international trade in agri-food products. Food Policy, 31(1), 78-89.
Horstmann, I. J., & Markusen, J. R. (2011). Endogenous market structures in international trade (natura facit saltum). Journal of international Economics, 32(1-2), 109-129.
Johnson, H. G. (2015). An economic theory of protectionism, tariff bargaining, and the formation of customs unions. Article of political economy, 73(3), 26-23.
Krugman, P. R. (2011). Industrial organization and international trade. Handbook of industrial organization, 2, 1179-1223.
McCorriston, S. (2016). Import quota licenses and market power. American Journal of Agricultural Economics, 78(2), 367-372.
Murray, T. (2013). On the equivalence of import quotas and voluntary export restraint. Article of International Economics, 14(1-2), 11-14.
Randy Woods (2018). U.S Imposing Anti-Dumping Duties on Chinese Aluminum Foil. Bloomgerd Article, 86(2), 7-8.
Rauscher, M. (2014). On ecological dumping. Oxford economic papers, 822-840.
Shen, P., & Corning, J. (2011). Can TIPS help identify long-term inflation expectations?. Economic Review-Federal Reserve Bank of Kansas City, 86(4), 61-87.
Vernon, R. (2012). International investment and international trade in the product cycle. In International Economic Policies and their Theoretical Foundations (Second Edition) (pp. 415-435).
Von Amerongen, O. W. (2010). Commentary: Economic Sanctions as a Foreign Policy Tool?. International Security, 5(2), 159-167.
Wilczynski, J. (2016). Dumping and central planning. Article of Political Economy, 74(3), 20- 24.
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