Thursday, 27 July 2017

Investopedia: What is 'Dumping'?

Dumping
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What is 'Dumping'

Dumping, in reference to international trade, is the export by a country or company of a product at a price that is lower in the foreign market than the price charged in the domestic market. As dumping usually involves substantial export volumes of the product, it often has the effect of endangering the financial viability of manufacturers or producers of the product in the importing nation.
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BREAKING DOWN 'Dumping'
Considered a form of price discrimination, dumping occurs when a manufacturer lowers the price of a good entering a foreign market than it charges domestic customers. The identification of trade dumping can be performed simply by comparing the sales price of a good in its market of origin and the price listed in an importing market. Trade dumping is considered intentional in nature in that the primary purpose is to gain an advantage within the market that imports the goods.

Advantages of Trade Dumping

The primary advantage of trade dumping is the ability to permeate the market with product prices often seen as unfair. The exporting country may offer the producer a subsidy to counterbalance the losses that may be incurred, especially when the products are sold at a price below the costs associated with production.
Disadvantages of Trade Dumping

Trading dumping can be costly to maintain over time. This is due in part to the lower sale price being offered on the good as well as the costs involved in subsidizing the activity, if applicable. Additionally, trade partners who wish to restrict this form of market activity may increase restrictions on the good in question, which either makes it more expensive to export into the affected country or limits the quantity of the good the importing country will accept.
International Attitude on Dumping

While the World Trade Organization (WTO) reserves judgment on whether dumping is unfair competition, most nations profess to be against the practice. Dumping is legal under WTO rules unless the foreign country can reliably show the negative effects of the exporting firm on the domestic producers. To counter dumping, most nations use tariffs and quotas to protect their domestic industry from the negative effects of predatory pricing.

The majority of trade agreements include restrictions regarding trade dumping. Violations of such agreements may be difficult to prove and can be cost prohibitive to fully enforce. If two countries do not have a trade agreement in place, then there is no specific ban on trade dumping governing the trades between the aforementioned countries.
Example of Dumping Tariffs in International Trade

In 2016, the International Trade Association stated that, based on investigations completed by the Department of Commerce and the International Trade Commission (ITC), the antidumping duty associated with tissue products from the People’s Republic of China would remain in effect. This was deemed necessary due to the likelihood that previously experienced dumping would occur again if the tariff was removed.
Anti-Dumping Duty
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An anti-dumping duty is a protectionist tariff that a domestic government imposes on foreign imports that it believes are priced below fair market value. Dumping is a process where a company exports a product at a price lower than the price it normally charges on its own home market. To protect local businesses and markets, many countries impose stiff duties on products they believe are being dumped in their national market.
BREAKING DOWN 'Anti-Dumping Duty'
In the United States, the International Trade Commission (ITC) imposes anti-dumping duties based upon investigations and recommendations from the Department of Commerce. The ITC is an independent government agency. Duties often exceed 100% of the value of the goods. They come into play when a foreign company is selling an item significantly below the price at which it is being produced. Part of the logic behind anti-dumping duties is to save domestic jobs, but they can also lead to higher prices for domestic consumers and reduce the international competition of domestic companies producing similar goods.

The World Trade Organization

The World Trade Organization (WTO) operates a set of international trade rules. Part of the organization's mandate is the international regulation of anti-dumping measures. The WTO does not regulate the actions of companies engaged in dumping. Instead, it focuses on how governments can or cannot react to dumping. In general, the WTO agreement allows governments to "act against dumping where there is genuine (material) injury to the competing domestic industry." In other cases, the WTO intervenes to prevent anti-dumping measures.
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