Dumping in International Business – Explained
Dumping is a practice in international trade where the producer country or company sells a product in a foreign country at a lower price than the price paid by the domestic consumers.
A Little More on Dumping of Goods
Producers adopt this strategy to gain an advantage in the importing market. Sometimes they sell the product in the foreign country at a price which is below the costs incurred in production and shipment to get a hold on the market. It allows them to increase market share in a foreign market by eliminating the competitors and thus establishing a monopoly. It can have a ruining effect on the domestic producers of the importing country.
Broadly, there are two techniques of dumping, price-to-price dumping, and price-cost dumping. In price-to-price dumping, the exporter increases the price of the product in the home market in order to supplement the lower profit collected from the exported goods. The other technique is price-cost dumping where the local government encourages the dumping with subsidies and cash incentives.
Dumping is considered to be legal by the WTO unless a country can provide substantial proofs that this practice by a foreign company is negatively affecting the domestic producers. However, most of the nations consider dumping as injurious for their economy and resist it by imposing tariffs and quotas to protect the domestic producers.
Trade agreements between two countries generally include provisions restricting the trade dumping, but it is often difficult to prove. When the two countries do not have a trade agreement in place, then there is no restriction on dumping.
Dumping margin is the difference between the fair value of a merchandise and the constructed export price at which the exporter is selling it in the foreign country in case of dumping. The comparison of the prices may require a conversion of currencies. The conversion should be made using the exchange rate on the date of selling the product.
When a sale of foreign currency on forward markets is directly linked to the particular export sale, the exchange rate in the foreign sell should be used to calculate the difference.