Product dumping is selling exports at a price that is less than “normal value.” The traditional definition of dumping is selling exports to buyers in a foreign country at a price that is less than the price that is charged to comparable domestic buyers (or to buyers in other foreign-country markets). A second, alternative definition, adopted starting in the 1970s, is selling exports to buyers in a foreign country at a price that is less than the average cost of producing the product (including allocation of fixed costs and profit).
Why would an exporting firm be dumping (according to one or the other of these definitions)? There are different reasons. A firm may be engaged in predatory dumping, planning to drive out other competitors and then raise its price once it has achieved monopoly power. A decline in market demand can drive the market price to a level that is below full average cost. A firm with substantial production or inventory of a product that is perishable or going out of fashion may optimally set a price that is below its full average cost. A firm may be introducing its product into a new foreign market, and to encourage initial sales it may set a low price. A firm with market power may be using geographic price discrimination, charging a higher price in its home market (where the price elasticity of demand is lower) and a lower price in the foreign market (where the demand elasticity is higher).
The rules of the World Trade Organization permit the importing country’s government to impose an antidumping duty if the government follows a process that finds that dumping is occurring and that the dumping is causing injury to domestic import-competing firms. The antidumping duty is intended to force the price of the imported product back up to its normal value.
For the well-being of the importing country (and the world overall), the process of imposing antidumping duties has two major shortcomings. First, the process does not require the government to consider possible benefits to other groups in the country (for instance, domestic consumers of low-priced imports). Second, the process is subject to political manipulation and bias. Import-competing producers can exert substantial pressure for favorable rulings. There is leeway in how a government body makes comparisons of prices in different national markets or measures full average costs of foreign producers. For instance, the U.S. Department of Commerce finds that dumping has occurred in more than 90 percent of the cases that it examines. But Brink Lindsey and Dan Ikenson (2002) examined a sample of cases in depth and concluded that in over half of them there was no dumping or much less than the Department of Commerce had determined. It appears that antidumping policy often is used not to combat unfair exporting policies that harm the importing country, but rather to provide new protection for domestic firms against competitive imports, with the typical inefficiency losses to national (and world) well-being.
Up to the late 1980s, only three countries (the United States, Canada, and Australia) and the European Union actively used antidumping policies. Since then, more countries have adopted antidumping laws (at least ninety-five countries as of 2005). According to data compiled by the World Trade Organization, the importing countries that initiated the most cases during the 2000-2006 period are India, the United States, China, Argentina, and Turkey, as well as the European Union. During this period, China is the exporting country whose firms were most often found to be dumping. Other exporting countries whose firms were often found to be dumping include Korea, Taiwan, Japan, and the United States.
SEE ALSO Beggar-Thy-Neighbor; Competition; Exports; Imports; Predatory Pricing; Trade; World Trade Organization
Lindsey, Brink, and Dan Ikenson. 2002. Antidumping 101: The Devilish Details of “Unfair Trade” Law. Cato Institute Trade Policy Analysis no. 20. http://www.freetrade.org/node/43.
Pugel, Thomas A. 2007. Pushing Exports. In International Economics. 13th ed. 209–237. New York: McGraw-Hill Irwin.
World Trade Organization. Anti-dumping. http://www.wto.org/english/tratop_e/adp_e/adp_e.htm.
Thomas A. Pugel