What is dumping? Why do firms dump goods?

In economics, dumping refers to manufacturing firms exporting goods at a lower price than their domestic price or their cost of production. It is a type of predatory pricing. It also refers to agricultural subsidies paid out to farmers in the US and European Union, who then sell many foods around the world at artificially low prices.

According to ft.com/lexicon, dumping is:

“The sale of an imported commodity at a price lower than the cost of producing it in the exporting country. In securities trade, the dumping of shares means the substantial sale of stock.”

There are three main different types of dumping: persistent, predatory, and sporadic.

DumpingMany say US farming subsidies have destroyed Mexican agriculture, causing farmers to abandon their lands and migrate northwards.

Persistent-dumping

This is international price discrimination that goes on indefinitely.

Exporting firms benefit from this when demand in a foreign market is more elastic than the demand in the company’s home market.

Predatory-dumping

Used by manufacturers as a means of eliminating competition in a foreign market. High domestic prices are used to supplement the reduced revenue of exporting cheaper goods.

By exporting goods at cheap prices exporters are able to drive off any competition in the area. Once competition has been eliminated, the firm can then raise the price of the product and generate more revenue.

The importing country usually complains, because its market might end up being controlled by a foreign monopoly.

Sporadic dumping

This occurs when there is a temporary surplus of a specific product. Businesses will dump surplus goods in foreign markets without having to reduce prices in their domestic market. The domestic market refers to the market within a country’s borders.

Anti-dumping measures

The World Trade Organization’s (WTO’s)  “Anti-dumping Agreement” ensures that its members do not dump things abroad arbitrarily.

The agreement states that measures can be carried out only if sales of a dumped product causes material injury to a domestic industry that produces a similar good.

In the US, domestic firms can start a petition, and the United States Department of Commerce will determine “whether the alleged dumping or subsidizing is happening, and if so, the margin of dumping or amount of subsidy.”

In the European Union firms can file petitions, and an investigation by the European Commission will investigate the case to determine whether: “there is dumping by the exporting producers in the country/countries concerned, material injury has been suffered by the Community industry concerned, there is a causal link between the dumping and injury found, the imposition of measures is not against the Community interest.”

The EU’s Common Agriculture Policy has been accused by many economists of undermining the livelihoods of millions of farmers in developing countries who cannot compete against ‘dumped’ cheap produce in their markets.

Video – Anti-Dumping Basics