Terms
of Delivery:
Dumping:
Dumping
is an international price discrimination in which an exporter firm sells a
portion of its output in a foreign market at a very low price and the remaining
output at a high price in the home market. Definition of dumping as: “The sale
of goods abroad at a price which is lower than the selling price of the same
goods at the same time and in the same circumstances at home, taking account of
differences in transport costs”.
“Dumping
is price discrimination between two markets in which the monopolist sells a
portion of his produced product at a low price and the remaining part at a high
price in the domestic market.”
Two
types of dumping.
One, reverse dumping in
which the foreign price is higher than the domestic price. This is done to turn
out foreign competitors from the domestic market. When the product is sold at a
price lower than the cost of production in the domestic market, it is called reverse dumping.
Two when there is no
consumption of the commodity in the domestic market and it is sold in two
different foreign market, out of which one market is charged a high price and
the other market a low price. But in practice, dumping means selling of the
product at a high price in the domestic market and a low price in the foreign
market.
Types
of Dumping:
Dumping
can be classified in the following ways:
1. Sporadic
or Intermittent Dumping:
It
is adopted under exceptional or unforeseen circumstances when the domestic
production of the commodity is more than the target or there are unsold stocks
of the commodity even after sales. In such a situation, the producer sells the
unsold stocks at a low price in the foreign market without reducing the
domestic price.
This
is possible only if the foreign demand for his commodity is elastic and the producer
is a monopolist in the domestic market. His aim may be to identify his
commodity in a new market or to establish himself in a foreign market to drive
out a competitor from a foreign market. In this type of dumping, the producer
sells his commodity in a foreign country at a price which covers his variable
costs and some current fixed costs m order to reduce his loss.
2. Persistent
Dumping:
When
a monopolist continuously sells a portion of his commodity at a high price in
the domestic market and the remaining output at a low price in the foreign
market, it is called persistent dumping. This is possible only if the domestic
demand for that commodity is less elastic and the foreign demand is highly
elastic. When costs fall continuously along with increasing production, the
producer does not lower the price of the product more in the domestic market
because the home demand is less elastic.
However,
he keeps a low price in the foreign market because the demand is highly elastic
there. Thus, he earns more profit by selling more quantity of the commodity in
the foreign market. As a result, the domestic consumers also benefit from it
because the price they are required to pay is less than in the absence of
dumping.
3. Predatory
Dumping:
The
predatory dumping is one in which a monopolist firm sells its commodity at a
very low price or at a loss in the foreign market in order to drive out some
competitors. But when the competition ends, it raises the price of the
commodity m the foreign market. Thus, the firm covers loss and if the demand in
the foreign market is less elastic, its profit may be more.
4. Reverse dumping
Reverse
dumping happens when the demand for the product in the foreign market is less
elastic. It means that changes in price do not impact demand. Therefore, the
company can charge a higher price in the foreign market and a lower price in
the local market.
Objectives
of Dumping:
The
main objectives of dumping are as follows:
1.
To Find a Place in the Foreign Market:
A
monopolist resorts to dumping in order to find a place or to continue himself
in the foreign market. Due to perfect competition in the foreign market he
lowers the price of his commodity in comparison to the other competitors so
that the demand for his commonly may increase. For this, he often sells his
commodity by incurring loss in the foreign market.
2.
To Sell Surplus Commodity:
When
there is excessive production of a monopolist’s commodity and he is not able
to sell in the domestic market, he wants to sell the surplus at a very low
price in the foreign market. But it happens occasionally.
3. Expansion
of Industry:
A
monopolist also resorts to dumping for the expansion of his industry. When he
expands it, he receives both internal and external economies which lead to the
application of the law of increasing returns. Consequently, the cost of
production of his commodity is reduced and by selling more quantity of his
commodity at a lower price in the foreign market, he earns larger profit.
4. New
Trade Relations:
The
monopolist practices dumping in order to develop new trade relations abroad.
For this, he sells his commodity at a low price in the foreign market, thereby
establishing new market relations with those countries. As a result, the
monopolist increases his production, lowers his costs and earns more profit.
Effects
of Dumping:
Effects
on Importing Country:
The
effects of dumping on the country, in which a monopolist dumps his commodity,
depend on whether dumping is for a short period or a long period and what are
the nature of the product and the aim of dumping.
1.
If a producer dumps his commodity abroad for a short period, then the industry
of the importing country is affected for a short while. Due to the low price
of the dumped commodity, the industry of that country has to incur a loss for
some time because less quantity of its commodity is sold.
2.
Dumping is harmful for the importing country if it continues for a long period.
This is because it takes time for changing production in the importing country
and its domestic industry is not able to bear competition. But when cheap
imports stop or dumping does not exist, it becomes difficult to change the
production again.
3.
If the dumped commodity is a consumer good, the demand of the people in the
importing country will change for the cheap goods. When dumping stops, this
demand will reverse, thereby changing the tastes of the people which will be
harmful for the economy.
4.
If the dumped commodities are cheap capital goods, they will lead to the
setting up of a now industry. But when the imports of such commodities stop,
this industry will also be shut down. Thus ultimately, the importing country
will incur a loss.
5.
If the monopolist dumps the commodity for removing his competitors from the
foreign market, the importing country gets the benefit of cheap commodity in
the beginning. But after competition ends and he sells the same commodity at a
high monopoly price, the importing country incurs a loss because now it has to
pay a high price.
6.
If a tariff duty is imposed to force the dumper to equalise prices of the
domestic and imported commodity, it will not benefit the importing country.
7.
But a lower fixed tariff duty benefits the importing country if the dumper
delivers the commodity at a lower price.
Effects
on Exporting Country:
1.
When domestic consumers have to buy the monopolistic commodity at a high price
through dumping, there is loss in their consumers’ surplus. But if a monopolist
produces more commodities in order to dump it in another country, consumers
benefit. This is because with more production of the commodity, the marginal
cost falls. As a result, the price of the commodity will be less than the monopoly
price without dumping.
But
this lower price than the monopoly price depends upon the law of production
under which the industry is operating. If the industry is producing under the
law of diminishing returns, the price will not fall because costs will
increase and so will the price increase.
The
consumers will be losers and the monopolist will profit. There will be no
change in price under fixed costs. It is only when costs fall under the law of
increasing returns that both the consumers and the monopolist will benefit from
dumping.
2. The
exporting country also benefits from dumping when the monopolist produces more
commodity. Consequently, the demand for the required inputs such as raw
materials, etc. for the production of that commodity increases, thereby
expanding the means of employment in the country.
3.
The exporting country earns foreign currency by selling its commodity in large
quantity in the foreign market through dumping. As a result, its balance of
trade improves.
Anti-Dumping
Measures:
The
following measures are adopted to stop dumping:
a. Tariff
Duty:
To
stop dumping, the importing country imposes tariff on the dumped commodity
consequently, the price of the importing commodity increases and the fear of
dumping ends. But it is necessary that the rate of duty on imports should be
equal to the difference between the domestic price of the commodity and the
price of the dumped commodity. Generally, the tariff duty is imposed more than
this difference to end dumping, but it is likely to have harmful effects on
other imports.
b. Import
Quota:
Import
quota is another measure to stop dumping under which a commodity of a specific
volume or value is allowed to be imported into the country. For this purpose,
it includes the imposition of a duty along with fixing quota, and providing a
limited amount of foreign exchange to the importers.
c. Import
Embargo:
Import
embargo is an important retaliatory measure against dumping. According to
this, the imports of certain or all types of goods from the dumping country are
banned.
d. Voluntary
Export Restraint:
To
restrict dumping, developed countries enter into bilateral agreements with
other countries from which they fear dumping of commodities. These agreements
ban the export of specified commodities so that the exporting country may not
dump its commodities in other country. Such bilateral VER agreements exist
between India and EU countries in exporting Indian textiles.
Advantages of Dumping
1. Consumers in the importer’s country
can gain access to products at lower prices
2. Exporters receive subsidies from their
government to sell at lower prices abroad
3. The exporters’ country can generate
employment and become industry
leaders
Disadvantages of Dumping
1. The debt of the exporter’s country
will increase due to subsidies provided to sell at lower prices abroad
2. Dumping is expensive and it will the
exporters years to sell at a lower price and put competitors out of business
3. The target company can
retaliate and cause a trade war.
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