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In the world economy dumping plays a major role, it is the act of selling a product in an importing country at a lower price than that charged for the same product in the exporter’s domestic market.
Most countries and businesses all over the world use dumping as a competitive strategy. It can be used to increase market share, undercut the foreign competition, and drive out local competitors, leading to monopolies in the export market.
It might seem like a profitable solution for the exporter, but it can destroy local markets, reduce the wages of local workers, and can lead to social instability as a result of dumping.
What is Dumping
Most countries and businesses around the world engage in international trade. WTO (The World Trade Organization) defines dumping as “the sale of a product on the export market at a price lower than the domestic market or below its production cost”.
In simple words, when a country or business buys something at a lower price from abroad and sells it for a higher price in its market, this practice is known as Dumping.
Dumping has both positives and negatives depending on the perspective. On one hand, it can help to reduce the price of goods in domestic markets and increase competition.
On the other hand, by lowering prices, domestic producers are put at a disadvantage which can be damaging to their businesses.
Types of Dumping
There are four primary types of Dumping:
- Predatory Dumping
Predatory dumping is when a company from another country sells its products for less than it costs to make them. They do this to try to get rid of the companies that sell the same thing in the country where they are trying to sell their products.
The company that is doing the predatory dumping has to keep selling at a loss until all of the other companies go out of business. Then that company will be the only one selling that product and they can charge any price they want.
- Sporadic Dumping
Companies often dump unsold excess inventories to protect their business, either by destroying the supplies or exporting them overseas. This allows them to dodge price wars in their market and maintain a competitive edge.
This means the goods are priced below the cost of production, so the company isn’t making a profit.
- Persistent Dumping
When a nation continually offers its products at a cheaper rate abroad in comparison to domestic prices, it is called persistent dumping and generally occurs when the demand for said product persists in foreign markets.
In simple words, if the products of a nation remain in demand in foreign markets, that nation may keep selling them at lower prices than domestic ones to maximize its profits.
- Reverse Dumping
Reverse dumping occurs when a product is less elastic in the foreign market and more elastic in the domestic market. This means that the demand for the product is not affected by price changes in the foreign market.
So companies can sell at a higher price in the foreign market and low price in the domestic market to maximize profits.
Advantages and Disadvantages of Dumping
Dumping can have both positive and negative effects on an economy.
Dumping can lead to an increase in international trade and more competition, which can often result in lower prices for consumers. It also allows countries to make use of their surplus production, which reduces the cost of storage and wastage.
The biggest disadvantage of dumping is that it puts domestic producers at a disadvantage as they are competing with foreign goods that are sold at a lower price.
This can lead to job losses and a decline in economic growth for the country as well as putting strain on public finances if subsidies have to be offered to domestic producers.
Dumping also has implications for environmental sustainability, as goods may be produced in factories abroad with little or no environmental regulation. This can lead to pollution and damage to ecosystems in the importing country.
In conclusion, governments need to be aware of the potential implications that dumping can have on their economies and take steps to protect domestic producers from any adverse effects. It is also important to ensure that goods produced abroad are done so in a sustainable way.
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