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Dumping is the intentional mass export of goods to other countries where those goods are sold below the importing country's market price. This is done to turn out foreign competitors from the domestic market.

Types of Dumping

There are 4 types of dumping: 

  1. Predatory Dumping - Under the predatory type, exporters drive out competition in the international market by selling goods at low prices. Once the competition is eliminated, the firm can raise the product's price and gain additional revenue.
  2. Sporadic Dumping - It is the practice of occasionally dumping products at lower prices primarily to eliminate excess inventory stocks. It signifies that the business does not regularly sell its products at such low prices. Hence it is an impermanent phenomenon.
  3. Persistent Dumping - This type is the most popular form of cross-border dumping due to constant demand for a particular product. It helps exporting entities establish a presence and a significant market share in overseas marketplaces.
  4. Reverse Dumping - In this type, the scenario is the product is priced low in the local market. At the same time, the product price is set high in the foreign market because high prices do not affect the demand.

Objectives of Dumping

Dumping is done, keeping in mind the following objectives:

  1. To Find a Place in the International Market (Market Entry) - In a highly competitive global arena, new entrants find it difficult to break the brand loyalty of established local players. By "dumping" goods at extremely low prices, an exporter can quickly capture a significant market share. Once the brand is established and competitors are weakened or driven out, the exporter may gradually increase prices to normal levels.
  2. To Sell Surplus Commodity (Sporadic/Occassional Dumping) - When a domestic producer overcalculates demand or faces a sudden slump at home, they end up with massive unsold inventory. Keeping this surplus in warehouses incurs high storage costs and risks obsolescence. To recover at least the variable costs, the producer "dumps" the excess in a foreign market. This clears the stock without crashing the price in their own domestic market.
  3. Expansion of Industry - Large-scale production typically lowers the "per unit" cost of a product. If a company's domestic market is too small to support massive production, they use dumping to sell larger volumes abroad. This allows the factory to run at full capacity, helping the industry expand, adopt better technology, and ultimately lower production costs through the "Law of Increasing Returns."
  4. New Trade Relations - Lowering prices can help in building long-term commercial ties with a new country. By providing cheap essential goods or raw materials, an exporting nation can foster dependency or goodwill, paving the way for future bilateral trade agreements, joint ventures, and broader economic cooperation that extends beyond the initial product being dumped.

Effects of Dumping

Effects of dumping differs with respect to importing/exporting country.

Effects of Dumping on Importing Counry:

  1. Impact of Domestic Producers - In the short run, local firms lose revenue because they cannot match the "predatory" low prices. In the long run, if dumping continues, these firms may go bankrupt, leading to deindustrialization.
  2. Consumer Benefit - While there is harm to industry, consumers in the importing country benefit from lower prices and increased purchasing power, at least until the dumper achieves a monopoly and raises prices again.
  3. Market Instability - If dumping is sporadic, it creates a "yo-yo" effect. Local production stops when imports are cheap and tries to restart when they stop, leading to massive inefficiency and wasted capital.

Effects of Dumping on Exporting Country:

  1. Conusmer Surplus Paradox - Where the domestic consumers have to buy the monopolist commodity at a high price through dumping, there is a loss in the consumer surplus. But if the monopolist produces more commodity in order to dump it in another country, there is consumer’s  benefit. This is because, with more production of a commodity the marginal cost falls and as a result, the price of a commodity will be less than the monopoly price without dumping.
  2. Employment and Input Demand - The exporting country also benefits from dumping when the monopolist produces more commodities. Consequently, the demand for the required inputs such as, raw materials for the production, increases the overall production and thereby, the means of employment in the country.
  3. Balance of Trade (BoT) and Foreign Exchange - The exporting country earns foreign currency by selling the commodity in large quantities in foreign market through dumping. As a result, Balance of Trade (BOT) improves.

Anti – Dumping Measures

Anti-dumping measures are actions taken by an importing country to counteract the effects of dumping. These measures are usually in the form of anti-dumping duties, which are essentially taxes imposed on the dumped imports to raise their price to a more competitive level. 

Why are Anti-Dumping Measures Used?

Anti-Dumping measures are used for:

  1. Protecting Domestic Industries: Anti-dumping duties help protect domestic industries from unfair competition caused by dumped imports. 
  2. Ensuring Fair Trade: They are a mechanism to ensure that international trade is conducted fairly and that businesses are not disadvantaged by predatory pricing practices. 
  3. Remedying Injury: Anti-dumping measures are applied only when the dumping is causing or threatening to cause material injury to the domestic industry in the importing country.