Dumping

What is Dumping?

Dumping is a way of undermining pricing. This is usually observed in the context of international trade. It occurs when a product is exported to a country at a price lower than the normal price by the manufacturer of the product.

This, in practice, refers to selling the product at relatively higher prices in the home country or domestic market than in the foreign market. The ability to flood a market with low-priced products is considered unfair. 

For example: if UK businesses start to sell apples to the US market for way less than what they value in the US, then consumers get attracted to the low price of apples resulting in a hard time for the US apple producers. 

Understanding Dumping

Dumping aims to create a monopoly by increasing the market share to drive out the competition in the foreign market. The purpose behind it is to undercut the producers in an importing country.

The main objectives are:

• To make a place in the foreign market: The producer lowers the price of his commodity to ensure an increase in demand.
• To sell commodities in surplus: The excessive production done by monopolists is sold at a very low price in the foreign market.
• Expansion of industry: To avail both internal and external economies leading to applying the law of increasing returns. 
• To develop new trade relationships across the world.

There is a possibility of censorship by trade organizations at the international level.

Advantages and Disadvantages of Dumping

Some of the advantages and disadvantages of dumping are:

Types of Dumping

The following are four types:

1. Sporadic 

This kind of discarding is performed to eliminate the excess merchandise by the manufacturers. Manufacturers avoid a price war in the home country if they have unsold inventories to protect their competitive position in the market.

Example: To destroy excess supply, Asian farmers dump small chickens into the sea or dump the product in the market where it is not sold generally. This process aims at dissolving the excess stock.

2. Predatory 

Contrary to the occasionally occurring nature of sporadic type, predatory or intermittent is of permanent nature. It reflects sales of goods in the foreign market at a price relatively lower than the home market.

To eliminate competition and gain access to the overseas market, manufacturers sell their products at a loss. Subsequently, they use their monopoly position to increase the prices.

For example, Japanese Television manufacturers were accused of predatory dumping by renowned manufacturer Zenith in the US. They claimed that Japanese manufacturers tried to drive out the US firm to gain a monopoly.

3. Persistent 

It is a long- period of discarding which involves consistent selling in one market at a lower price than the rest of the world. The process assumes that markets differ from each other based on demand characteristics and overhead costs.

The firm follows marginal cost pricing in the foreign market. It also follows full-cost pricing in the domestic market, which covers the fixed cost.

For example, Japanese manufacturers sold electronics at a higher price in their country as they did not have any foreign competition. However, they sold products at a lower cost in the US market to maintain market share.

4. Reverse 

As the name suggests, this refers to selling products by manufacturers at a lower price in the domestic market. This is done because the market overseas or abroad is tolerant of higher prices due to less elastic demand.

Anti-dumping measures

The measures are some unilateral remedies the importing country's government may apply. The producers in the home country discourage imports from abroad and pressure the government to opt for measures to restrict imports.  

These measures are:

1. Tariff duty

Tariffs are imposed on the dumped commodity by the importing country. The fear of commodity flood ends with an increase in the prices. However, tariffs can harm imports of other items if not imposed properly.

2. Import Quota

It limits imports in a country by laying down a base of specific value and volume, providing a limited foreign exchange.

3. Import Embargo

This important measure is a retaliation against the outpouring of goods and bans imports of certain goods.

4. Voluntary Export Restraint

Developed countries make bilateral agreements to restrict dumping. For example, a bilateral voluntary export restraint agreement exists between European Union countries and India in Indian textile export.

On the other hand, the actions are considered a form of third-degree price discrimination. Therefore, governments may take action to protect the domestic industry from unfair competition.

The World Trade Organization permits the General Agreement on Tariffs and Trade (GATT), which allows the government to take action against unfair competition whenever they find a genuine injury caused to the domestic industry.

The AD Agreement and GATT operate together. An AD action refers to charging extra import duty on products of the exporting country to bring their price close to the normal price of that product. 

The agreement laid down methods to calculate the normal value of a product. The three methods are:

1. Evaluation based on the price in the domestic market of the exporter.
2. The price is charged in another country by the exporter.
3. The calculation is based on the combination of the production cost of the exporter, other expenses, and the normal profit margins.

The five percent rule stated in the AD Agreement is a globally applied test performed by comparing the amount sold of a similar product in the two markets. A product's domestic sale is sufficient to base normal value if it has a 5% share in sales.

Examples of Anti-Dumping Actions

Some examples of Anti-Dumping actions are as follows:

1. Actions in the United States

• Under regulations set by the US Department of Commerce and the International Trade Commission, a petition can be filed by domestic firms against the practice of flooding goods.
• The US Department of Commerce and the International Trade Commission determine less than fair value and injury.
• The dumper's country imposes anti-dumping duties on the imported goods at a percentage rate ascertained to curb the dumping margin.
• Countervailing duties are imposed under World Trade Organization rules as anti-subsidy duties to neutralize the negative effects of excessive subsidies.
• Third country dumping is a kind of indirect effect as exports in country one are affected by exports made by country two to country three at a price lesser than the fair price. 

To protect itself, the US industries have procedures laid by the Omnibus Trade and Competitiveness Act of 1988.

2. Actions in the European Union

• Under the purview of the European Commission and governance of Council Regulation (1995), anti-dumping protects against the stream of imports from markets that are not a part of the European Community.
• The community industry can request an AD investigation with advice from the Directorate-General for Trade.
• Recommendations are made to the Anti-Dumping Advisory Committee, where each member accounts for a vote.
• The actions are a part of the trade defense portfolio, where the trade defense is a kind of collection of safeguard measures designed to prevent harm to the economies of European Union members caused by unfair trade practices. 
• The investigation focuses on the damages caused and sets tariffs according to them, which the producers of the community face.
• The most popular example of AD duty action is the 48.5% duty imposed on imports from China.

3. Actions in India

• The laws against this problem are defined in Customs and Tariffs Act 1975 (amended 1995).
• The AD rules mention that an AD duty must be imposed on imported goods exported to India at less than their normal value.
• The Indian government imposed a duty in 2017 on color-coated steel products imported from China and the European Union.
• The government also imposed a duty on fireboards that came from Vietnam and Indonesia.
• The Directorate General of AD and Allied Duties levied a duty with the following characteristics:
  • The range is between 4.58% and 57.39%.
  • It was in effect until December 2020.
  • Certain grades of stainless steel were exempted from the duty.
  • The countries covered were China, South Korea, Taiwan, South Africa, the United States, Thailand, and the European Union.
• India and China, as a form of a safety valve, use AD Duty to ease competitive pressure in their home country. 

An AD duty is a protectionist tariff that a domestic government imposes on imports that it believes are priced below fair market value.

Researched and authored by Parul Gupta | LinkedIn

Reviewed and Edited by Manya Bhardwaj  | LinkedIn

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