Definition: Dumping, in economic terms, is when a country lowers the sales price of one of its exports for the express purpose of gaining unfair market share in that industry in another country. The exporter usually lowers the price below what it would sell for at home, and sometimes even below its actual cost to produce.
The main advantage of dumping is being able to sell at this unfairly competitive lower price. Generally a country will have to give the exporting businesses a huge subsidy to enable them to sell the export 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, in the hopes of putting that country's producers out of business, and dominating that industry.
The main disadvantage of dumping is that it's very 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. This can lead to trade restrictions and tariffs. The third is censure by international trade organizations, such as the World Trade Organization (WTO) or the European Union (EU).
A country prevents dumping through trade agreements. If both trade partners stick to the agreement, then they can compete fairly and avoid dumping. However, 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 agreements. Therefore, more extreme measures must be taken.
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 good old-fashioned 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 GATT multi-lateral 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 tariff, WTO members must prove that dumping has occurred.
The WTO is very specific in its definition of dumping. First, a country must prove that its local industry has been harmed by dumping. 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:
- The price in the exporter’s domestic market.
- The price charged by the exporter in another country.
- A calculation based on the exporter’s production costs, other expenses and normal profit margins.
The EU and Anti-DumpingThe 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 specifically define dumping by using a formula to determine that the price is lower than in the exporter's market. In addition, the EC must find two other conditions must be met before it imposes duties:
- Dumping is the cause of the material harm.
- 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 its own minimum price. (Source: EC, Anti-dumping) Article updated April 11, 2012
Examples: China has been suspected of dumping shrimp into the U.S. market to dominate this industry.