DUMPING
Dumping in the financial world occurs when a company or a country exports its
products at a price lower than its domestic price. Exporters dump to compete
with the producers and sellers in the importing country.
How Dumping Takes Place
It may seem that the dumping company may lose a lot of money by charging a
lower price. However, it is not the case in real life, as the dumping company is
not losing money.
The majority of multinational companies (MNC) practice international price
differentiation. They price a certain item depending on what each nation’s
customer can afford. For example, Tide detergent in China is sold for less than
one-fifth of the U.S. price. However, if a particular country is willing to pay
more for a product, the MNC will price the product at a higher cost.
Types of Dumping
Below are the four types of dumping in international trade:
1. Sporadic dumping
Companies dump excess unsold inventories to avoid price wars in the home
market and preserve their competitive position. They can either dump by
destroying excess supplies or export them to a foreign market where the
products are not sold.
2. Predatory dumping
Unlike sporadic dumping, which is occasional, predatory dumping is
permanent. It involves the sale of goods in a foreign market at a price lower
than the home market. Predatory dumping is done to gain access to the foreign
market and eliminate competition. It creates a monopoly in the market.
3. Persistent dumping
When a country consistently sells products at a lower price in the foreign
market than the local prices, it is called persistent dumping. It happens when
there is a constant demand for the product in the foreign market.
4. Reverse dumping
Reverse dumping happens when the demand for the product in the foreign
market is less elastic. It means that price changes do not impact demand.
Therefore, the company can charge a higher price in the foreign market and a
lower price in the local market.
Advantages of Dumping
Consumers in the importer’s country can gain access to products at lower
prices.
Exporters receive subsidies from their government to sell at lower prices
abroad.
The exporter’s country can generate employment and become industry
leaders.
Disadvantages of Dumping
The debt of the exporter’s country will increase due to subsidies provided
to sell at lower prices abroad.
Dumping is expensive, and it will take the exporters years to sell at a
lower price and put competitors out of business.
The target company can retaliate and cause a trade war.