Dumping: what it is, how it works and its effects on markets

What is dumping?

Dumping is a commercial practice that consists of selling a product in a foreign market at a price lower than that applied in the domestic market, which may even be below its production cost.

Why is it wrong and should be prosecuted?

According to international trade experts, this strategy seeks to gain market share and eliminate competitors, which is why it is prohibited by the World Trade Organisation (WTO). In this case, according to the International University of La Rioja (UNIR), it is a matter of unfair competition, the definition and regulation of which in Spain is set out in Law 3/1991 of 10 January on Unfair Competition. Any behaviour that is objectively contrary to the requirements of good faith is considered unfair competition.

Main objectives of dumping

Dumping responds to commercial, economic and even political interests. These are its main objectives:

2. Market control:

Dumping allows competitors to be cornered or eliminated, generating a progressive gain in market share and ultimately leading to market control in the territory where it is carried out.

3. Maximisation of long-term profits:

Once control of the market in question has been established, the party engaging in dumping has no competition and can therefore raise prices and maximise profits in the long term.

Types of dumping

Dumping is mainly classified into three types:

It occurs occasionally when a company has excess production and needs to get rid of it quickly.

The company sells the surplus at lower prices on the international market to avoid losses.

It is a temporary practice and is not intended to harm competitors. 

2. Predatory dumping:

It consists of lowering prices to eliminate competitors and, once this has been achieved, raising them again. Characteristics:

It involves a deliberate strategy to eliminate competition.

The company sells its products at artificially low prices, even below the cost of production, to drive its competitors out of the market.

Once it achieves a monopoly or significant dominance, it raises prices to recoup losses and make a profit.

It is considered an anti-competitive and unethical practice. 

3. Persistent dumping:

It involves a systematic strategy of lowering prices in the long term. These are its characteristics:

The continuous practice of marketing products at lower prices on the international market than on the company's domestic market.

The aim is to gain competitive advantages in the global market, often by exploiting differences in demand or production costs.

It is a more stable and prolonged practice compared to sporadic and predatory dumping.

In addition, there are other types of dumping, such as subsidy dumping (when a government provides subsidies or support to its producers so that they can sell their products on the foreign market at lower prices), reverse dumping (selling cheaper abroad than on the domestic market due to internal competitive pressure), and social and environmental dumping (when companies in countries with laxer labor and environmental standards produce goods at lower costs and export them to countries with stricter standards, which can lead to unfair competition).

How does dumping work?

The scheme of dumping works as follows:

A company produces for the domestic market at normal costs.

It exports the product at artificially low prices: the same company sells the same goods outside its borders at a much lower price, even below production costs.

Objectives:

To gain market share in the importing country.

Weaken or eliminate local competition.

Benefit from economies of scale in the future.

Find an outlet for surplus production.

Consequences of dumping on the economy:

In the short term: local consumers benefit from low prices. Local producers and companies can withstand the onslaught if the dumping does not last too long.

Long term: dumping harms local producers and companies, stifling their situation and potentially leading to bankruptcy, destroying local competition, and creating dependence on foreign products to monopolize the local market in that country. In this way, once control of the market in a given territory has been achieved, prices can be increased, also affecting local consumers.

Measures to prevent dumping

Dumping can be combated through various measures and strategies:

1. Anti-dumping measures:

- Anti-dumping tariffs: affected countries can impose additional tariffs on imported products that are considered to be dumped.

- Quotas: affected countries can establish quotas to limit the quantity of imported products that are considered to be dumped.

- Anti-dumping investigations: Affected countries can initiate investigations to determine whether dumping is occurring and whether measures are necessary to protect their domestic industry.

2. Promote and sign international and trade agreements:

- World Trade Organization (WTO) agreements: The WTO has rules and procedures to address dumping and promote fair competition in international trade.

- Bilateral and regional trade agreements: Countries can negotiate trade agreements that include provisions to address dumping and promote fair competition.

3. Other measures:

- Promoting transparency: Countries can promote transparency in pricing and information on production costs.

- Strengthening domestic industry: Countries can implement policies to strengthen domestic industry and improve its competitiveness.

Dumping can be combated through various measures and strategies:

1. Anti-dumping measures:

- Anti-dumping tariffs: affected countries can impose additional tariffs on imported products that are considered to be dumped.

- Quotas: Affected countries can establish quotas to limit the quantity of imported products considered to be dumped.

- Anti-dumping investigations: Affected countries can initiate 

- International cooperation: Countries can cooperate internationally to address dumping and promote fair competition in international trade.

- Action by international organizations:

World Trade Organization (WTO): The WTO is the main international body dealing with rules and procedures for international trade, including dumping.

European Commission: In the European Union, the European Commission is responsible for investigating and taking action against dumping.

It is important for countries and international organizations to work together to prevent and combat dumping and promote fair competition in international trade.

Dumping can be combated through various measures and strategies:

1. Anti-dumping measures:

- Anti-dumping duties: affected countries can impose additional duties on imported products that are considered to be dumped.

- Quotas: affected countries can establish quotas to limit the quantity of imported products that are considered to be dumped.

- Anti-dumping investigations: affected countries can promote 

- International cooperation: countries can cooperate internationally to address dumping and promote fair competition in the 

There are national regulations on dumping, i.e., the set of laws and mechanisms that each country establishes to protect its local industry from unfair foreign trade practices, such as dumping. Although all countries must comply with WTO rules, each country implements these rules in its own way through domestic legislation and administrative procedures.

The role of supervisory bodies in relation to dumping is to detect, investigate, and sanction unfair trade practices that affect domestic industry. These bodies function as technical and legal entities that ensure that international trade rules are correctly applied within the country. The main functions of supervisory bodies, in general terms, are:

Receiving complaints

Preliminary assessment

Initiating formal investigations

Collecting and analyzing data

Indicators of causal relationship: even if dumping and damage exist, it must be demonstrated that dumping caused the damage; their mere coexistence is not sufficient. These are the main indicators:

Temporal comparison between the increase in imports and the deterioration of the local industry

Exclusion of other causes (economic crisis, technological changes, internal policies, etc.)

Assessment of the relative impact of each cause

Impacto social del dumping

El impacto social del dumping puede ser notorio y negativo tanto en el país importador como en el país exportador. Estos son los principales impactos:

1. Desempleo en el país importador

Esto es debido a que las empresas locales no pueden competir con precios tan bajos. Sobre todo, afecta a pequeñas y medianas empresas, que suelen tener una menor capacidad de reacción y aguante financiero.

Si las empresas nacionales se ven obligadas a cerrar, esta situación provoca despidos masivos y aumento del desempleo.

2. Destruction of strategic companies

If dumping continues for too long and affects key sectors such as agriculture or industry, strategic companies in these sectors may disappear, creating a dangerous dependence on foreign countries.

Countries affected by dumping lose the technological development capacity and human capital associated with these strategic companies, which has a significant negative impact on the national economy.

3. Job insecurity

In order to compete with these low prices, domestic companies may cut wages, as well as social and labor rights and conditions.

This situation can lead to greater social inequality and a reduction in workers' quality of life.

4. Long-term impact on consumers

In the short term, consumers benefit from buying at low prices.

But in the long term, eliminating local competition can lead to the exporting country raising prices after eliminating its competitor, damaging the purchasing power of the population.

5. Social and political tensions

Company closures and rising unemployment can lead to social protests, popular discontent, and political destabilization.

It can also generate anti-foreign sentiment or a trend toward economic protectionism.

6. Inequality between countries

Stronger economies can use dumping as a tool to control and dominate markets, marginalizing developing countries and accentuating global economic inequalities by imposing unfair prices in the long term, mainly affecting the middle and lower social classes.