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Monday, 20 may 2019 | Redacción CEU
Market globalization, high mobility and the development of new technologies have helped to boost a new context in which borders are increasingly blurred. In response to it, more and more companies are turning their attention to foreign markets. This situation is reflected in the different news that we receive daily: tariff increases, international agreements, commercial wars, messenger robots,... Over time, citizens have learnt some terms about international trade, but not all of them are simple to understand. Today, we want to shed some light on one of these concepts: "dumping". What does this commercial strategy consist of? What are its possible causes and consequences? What are the different types of dumping? How is dumping combated?
In the international section of both written and audio-visual media, it is easy to find passing references to dumping strategies or anti-dumping measures which countries adopt. We find these terms especially in news related to the United States and China, but also to other states (including Spain). But, do we really understand what the media mean when they mention dumping?
Dumping and its different approaches
Dumping is a commercial practice that involves selling below the regular price or the production cost in a foreign market. This strategy enables exporters to access the market quickly and efficiently, since prices are substantially lower than the usual ones. This naturally has a positive effect on the sale of the product and a negative impact on direct competitors.
Dumping is considered as an unfair practice, as its main objective is to enter the foreign market eliminating competition at a single stroke. Meaning, it may become a very effective tool when it comes to monopolizing a market. However, there are also some exceptions. For example, this is the case of a company that resorts to dumping on only one occasion and in a timely manner in order to get rid of excess production.
On other occasions, the government of the exporting country fosters itself these practices providing subsidies for the export of a particular product or good. Thanks to them, companies can sell below the cost price without losing. When this happens, a situation of inequality arises, due to the fact that the national producers cannot compete with the prices of the companies that come to their country. This type of practices might put the industry and employment at risk.
Types of dumping
There are numerous types of dumping: social, cyclical, double, ecological, exchange,... However, below we have highlighted the most representative and significant modalities of this commercial practice:
- Sporadic or intermittent dumping: The domestic market is not able to absorb excess production and, for a short period of time, sells that surplus at a lower price than the foreign market does.
- Predatory Dumping: Its objective is to enter the market, eliminate competition quickly and take control of the market. As its name indicates, it is the most ferocious type of dumping, since the exporter is willing to face losses in order to fulfill its mission. Once its purpose has been achieved, prices go up.
- Persistent dumping: The exporter constantly sells to another country at lower prices than in the origin market. Thus, it is more competitive in foreign markets, as these tend to have a more elastic demand. This strategy seeks to maximize profits through the segmentation of markets after realizing that they are not connected.
The fight against dumping
The European Union can impose fines on non-EU countries when it proves that products are being exported to Europe through unfair practices. These sanctions are the tariffs on products that present an unfair price and the so-called anti-dumping rights. However, the EU must always follow the rules of the World Trade Organization (WTO), which is the institution in charge of establishing the framework for negotiating trade agreements and resolving disputes between states. This body authorizes governments to take action against dumping as long as it causes significant harm to the competing domestic industry.
Therefore, anti-dumping measures are an instrument of commercial defense. The European companies that are affected by these strategies can request an investigation either directly or through a member country. This procedure will be carried out by the European Commission which, in turn, may provisionally impose anti-dumping duties on offenders. In other words, importers will have to deposit the payment of the corresponding dumping rights, when European Commission considers it (his payment will be made effective when the Commission definitively agrees the imposition of anti-dumping duties).
Once the complaint is made, the European Commission will have a period of 45 days to conclude if there are enough arguments to open an investigation. For example, one of the conditions is that accusers represent 25% of the industry. When the Commission considers the claim is fair, it will open an investigation that must not last more than fifteen months. This institution will then have to determine if there is indeed dumping, what is the harm caused and its magnitude and whether the adoption of anti-dumping measures has a community interest.
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