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Dumping (International Sales) – Definition

Dumping in International Business Definition

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 What is 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

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.

References for Dumping of Goods

Academic Research on Dumping

A ‘reciprocal dumping‘ model of international trade, Brander, J., & Krugman, P. (1983). Journal of international economics15(3-4), 313-321. This work develops a model in which rival oligopolistic firms naturally resort to dumping of output in foreign markets, and that such dumping can become a two-way practice. The findings show that the benefits of such a practice are difficult to clearly define, while the waste of resources and monopolistic distortions in competition are clear.

The WTO anti-dumping agreement: a commentary, Vermulst, E. (2005). OUP Catalogue. This book provides an analytical overview of the World Trade Organization’s (WTO’s) Anti-Dumping Agreement. While the Anti-Dumping Agreement is quite complex, the author provides a detailed analysis that demystiphies many of the more detailed, procedural elements of the agreement. This work covers the calculation of dumping and injury margins, as well as the various terms of the agreement and the functioning of the WTO’s Appellate Body as a method of dispute resolution.

Dumping: Trade policy in need of a theoretical make over, Kerr, W. A. (2006). Canadian Journal of Agricultural Economics/Revue canadienne d’agroeconomie54(1), 11-31. This article suggests that the idea of dumping in regards to international trade, as well as the policies surrounding it, is in need of an overhaul. The author outlines the historic definitions of dumping and provides a critique as to their shortcomings. Suggestions are made as to how the definitions under international law could be improved, and how those improvements would provide a sound basis for international trade.

Anti-dumping policies in the EU and trade diversion, Brenton, P. (2001). European Journal of Political Economy17(3), 593-607. This paper examines the impact of anti-dumping measures in the EU. The results suggest that anti-dumping policies cause trade diversion primarily to non-EU suppliers. The author looks at the impact by distinguishing between named and non-named countries in the rest of the world, and non-named countries in the EU.

Anti‐dumping: A growing problem in international trade, Prusa, T. J. (2005). World Economy28(5), 683-700. This paper examines anti-dumping (AD) proliferation by reviewing AD filing patterns from the point of view of the countries seeking protection against dumping. The findings show that AD measures are increasingly filed by middle and lower-income countries against first-world trading partners. The author suggests that the adversarial nature of these AD claims makes it unlikely that U.S. or EU will do much to push for AD reform, and that AD will confirmed as a failed policy.

Dumping and the Far East trade of the European Community, Hindley, B. (1988). World Economy11(4), 445-464. This article from the late 1980s provides a look at concerns voiced by the U.S. and the European community regarding dumping from Asian trading partners. The concept of dumping is defined, and specific examples are cited.

Dumping on free trade: the US import trade laws, Stiglitz, J. E. (1997). Southern Economic Journal, 402-424. The author takes advantage of the passing of the Uruguay Round to examine possible trade policy reforms for the U.S. The author suggests that current laws have drifted from national welfare into the arena of protectionism, and that reforms are needed. Possible reforms and their implications are discussed.

Repeated games and the ‘reciprocal dumping‘model of trade, Pinto, B. (1986). Journal of International economics20(3-4), 357-366. This paper offers a natural extension to the Brander Krugman analysis. The author shows that no trade, which is welfare-reducing when transportation costs are negligible, is a strong Nash equilibrium of the supergame. Threat strategies, discount rates, and transportation costs are also discussed.

Multiproduct multinationals and reciprocal FDI dumping, Baldwin, R. E., & Ottaviano, G. I. (2001). Journal of International Economics54(2), 429-448. This paper builds on the traditional notion that global patterns of trade and foreign direct investment (FDI) are similar enough to act as substitutes. The authors propose a model where multiple firms, each producing multiple products, engage in FDI and interindustry trade. They find that while a company engaged in FDI does negatively affect its own exports, it also creates trade via reverse imports.

Is free trade in the interest of exporting countries when there is ecological dumping?, Walz, U., & Wellisch, D. (1997). Journal of Public Economics66(2), 275-291. The authors of this study offer an analytical view of export-promoting policies in relation to the effect of these policies on the practice of ecological dumping. Their study shows that free trade agreements are not made obsolete by national policies in a country that subsidizes their local exporters.

WTO agreement on agriculture: A decade of dumping, Murphy, S., Lilliston, B., & Lake, M. (2005

 

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