Dumping

Definition

Dumping refers to the practice of a country or company selling products in a foreign market at prices below the normal market value or below the cost of production. This is often done to gain market share or undercut domestic producers in the foreign market.

5 Must Know Facts For Your Next Test

1. Dumping is considered an unfair trade practice and can lead to the imposition of anti-dumping duties by the affected country.
2. Dumping is often used by countries or companies with excess production capacity or a desire to gain market share in a foreign market.
3. Domestic industries can suffer significant harm from dumping, including reduced sales, lower profits, and even plant closures and job losses.
4. The World Trade Organization (WTO) has rules and agreements in place to address and regulate the practice of dumping.
5. Governments may also use subsidies or other policies to support domestic industries that are threatened by dumping from foreign competitors.

Review Questions

• Explain how dumping can be used as an argument in support of restricting imports.
  • Dumping can be used as an argument to support restricting imports because it is considered an unfair trade practice that can cause significant harm to domestic industries. When a country or company sells products in a foreign market at prices below the normal market value or cost of production, it can undercut and displace domestic producers, leading to reduced sales, lower profits, and even plant closures and job losses. Governments may impose anti-dumping duties or other trade barriers to offset the effects of dumping and protect their domestic industries from this unfair competition.
• Describe how the concept of comparative advantage relates to the practice of dumping.
  • The concept of comparative advantage, which states that countries or companies can benefit from specializing in the production of goods they can produce more efficiently, can be used to understand the motivations behind dumping. Countries or companies with a comparative advantage in the production of certain goods may engage in dumping to gain market share in foreign markets, even if they are not the most efficient producers overall. This can undermine the comparative advantage of domestic producers in the foreign market, leading to calls for trade restrictions to protect those industries.
• Evaluate the potential long-term consequences of allowing unchecked dumping in a domestic market.
  • Allowing unchecked dumping in a domestic market can have significant long-term consequences. If domestic industries are unable to compete with the artificially low prices of dumped products, they may be forced to shut down, leading to job losses and a decline in domestic production capabilities. This can weaken the overall competitiveness of the domestic economy and make it more dependent on imports, potentially leading to a loss of economic sovereignty. Furthermore, the absence of effective anti-dumping measures may encourage other countries or companies to engage in similar unfair trade practices, further eroding the domestic industry's ability to compete. In the long run, this can lead to a loss of domestic jobs, reduced innovation, and a decline in the standard of living for the affected country's citizens.

Related terms

Predatory Pricing: The act of setting prices artificially low to drive out competition, with the intent of raising prices once competitors have been eliminated.

Anti-Dumping Duties: Tariffs or other trade barriers imposed by a country to offset the effects of dumping and protect domestic industries from unfair competition.

Comparative Advantage: The ability of a country or company to produce a good more efficiently and at a lower opportunity cost than another, which can lead to international trade and specialization.