What is dumping in simple words?

The main reason for dumping is the desire of one country (or company) to increase its share in the foreign market due to competition and thereby create a monopolistic situation where the exporter can clearly dictate the price and quality of the product. In modern trade, it is considered a kind of dirty trick.

Definition

In simple terms, what is dumping? The essence of this definition is very simple and unambiguous. Dumping is the act of charging a similar product in a foreign market for a lower price than its normal market value. In accordance with the World Trade Organization (WTO) anti-dumping agreement, dumping is not prohibited unless it threatens to cause material damage to the industry of the importing country. Dumping is prohibited when it causes a “material delay” in creating an industry in the domestic market.

Local dumping

Local dumping is an understatement of the price of a product in the domestic market. The term has a negative connotation, as it is perceived as a form of unfair competition. In addition, workers' rights advocates believe that protecting enterprises from practices such as dumping helps mitigate some of its more severe consequences at different stages of economic development. For example, European right-wingers often call EU trade policy “social dumping” because it encouraged competition between workers, an example of which was the stereotype of “Polish plumbing” as a collective image of people from Eastern Europe who agreed to work in wealthier countries at lower prices, crowding out from the local handyman market. Of all types of dumping, it is considered the safest.

Rockefeller example

There are several examples of local dumping, which created a monopoly in regional markets for certain industries. Ron Chernow cites regional oil monopolies as an example in Titanium: The Life of John D. Rockefeller Sr., he mentions a strategy whereby oil in one market, such as Cincinnati, will be sold at a price lower than generally accepted to reduce competitor’s profit and knock him out of the market. In another area where other independent businesses have already been expelled, namely in Chicago, prices will be increased by a quarter. Thus, an oil company that has resorted to such a dumping policy will benefit and get rid of competitors. After that, it becomes clear why they are trying to fight such dirty tricks in all modern states.

Dumping

If a company exports a product at a price that is lower than the price that it usually charges in its own domestic market, or at a price that does not match the full cost of production, it is considered that it “dumps” the product, and this is dumping. It is considered a form of price discrimination of the third degree. Opinions differ as to whether such a practice is unfair competition, but many governments are taking measures against dumping to protect domestic industry. However, the WTO does not make a clear decision on this issue. The WTO focuses on how governments can or cannot respond to dumping - it can be said to “discipline” anti-dumping actions. Since dumping is an artificially low price, the WTO allows importing countries to push exporters to raise it to accepted standards.

The WTO agreement allows governments to act against dumping when there is genuine (“material”) injury to competing domestic industries. To do this, the government must prove that dumping is taking place, calculate its degree (how much lower the export price compares with the market price of the exporter) and show that dumping causes harm or threatens economic stability.

Antidumping Agreements

Although dumping is permitted by the WTO, the General Agreement on Tariffs and Trade (GATT) (Article VI) allows countries to take action against it. The Anti-Dumping Agreement clarifies and extends Article VI, allowing countries to act together.

There are many different ways to calculate how much a product’s price drops. The agreement narrows the range of options. It provides three methods for calculating the “normal value” of a product. The main one is based on the price in the domestic market of the exporter. When this cannot be determined, two alternatives are available: the price charged by the exporter in another country, or the calculation based on the aggregate of the exporter’s production costs, other costs and normal profit. The agreement also indicates how a fair comparison can be made between the export price and the regular price.

Five percent rule

According to footnote 2 of the Anti-Dumping Agreement, domestic sales of a similar product are sufficient to ensure normal value if they account for 5 or more percent of sales of the product in question on the market of importing countries. This is often called the five percent rule or domestic viability test. This test is applied worldwide by comparing the amount of a similar product sold in the domestic market with the amount sold in the foreign market.

The normal value cannot be based on the price in the domestic market of the exporter when there is no domestic sales. For example, if products are sold only in an external market, the normal value should be determined on a different basis. In addition, some products may be sold in both markets, but the amount sold in the domestic market may be small compared to the amount sold in the foreign market. This situation is often found in countries with small domestic markets such as Hong Kong and Singapore, although similar situations may also occur in larger markets. This is due to differences in factors such as consumer taste and maintenance.

Economic damage

Calculating the degree of dumping is not enough. Anti-dumping measures can only be applied if dumping acts harm the industry in the importing country. Therefore, a detailed investigation must first be carried out in accordance with these rules. The study should evaluate all relevant economic factors that affect the state of the industry in question. If it turns out that dumping takes place and infringes on domestic industry, the exporting company can raise its price to an agreed level to avoid anti-dumping import duties.

Investigations

Detailed procedures are outlined in relation to how to initiate anti-dumping cases, how investigations should be conducted, and the conditions to ensure that all interested parties can provide evidence. Anti-dumping measures should stop five years after the date of adoption, unless analysis shows that stopping them will harm the economy.

The essence of the procedure

An anti-dumping investigation usually develops as follows: a domestic manufacturer makes a request to the appropriate authority to start an anti-dumping investigation. An investigation is then conducted for the foreign manufacturer to determine if this is true. It uses questionnaires completed by stakeholders to compare the export price of a foreign producer (or producers) with a normal value (the price on the domestic market of the exporter, the price charged by the exporter in another country, or a calculation based on a combination of the costs of the exporter’s production, other expenses and normal profit) . If the export price of a foreign manufacturer is lower than the regular price, and the investigating authority proves a causal link between the alleged dumping and the damage caused by the domestic industry, it concludes that the foreign manufacturer dumps the price of its products. It is necessary that the actions of the exporter in each such case fit the concept of dumping.

According to Article VI of the GATT, dumping investigations, with the exception of special circumstances, must be completed within one year.

Investigation failure

Anti-dumping investigations are immediately terminated when the authorities determine that the dumping margin is minimal or insignificant (less than 2% of the export price of the product). Among other things, other rules are established. For example, an investigation should also end if the volume of dumped imports is negligible.

The agreement states that member countries must promptly and thoroughly inform the Committee on Anti-Dumping Practices about all preliminary and final anti-dumping actions. They should also report all investigations twice a year. When differences arise, members are encouraged to consult with each other. They can also use the dispute resolution procedure provided for by WTO rules.

An example of European agricultural policy

The common agricultural policy of the European Union has often been accused of dumping, despite significant reforms, under the Agriculture Agreement in the Uruguay Round of GATT negotiations in 1992 and subsequent agreements, in particular the Luxembourg Agreement in 2003. CAP sought to increase European agricultural production and support European farmers in a market intervention process whereby a special fund, the European Fund for Agricultural Guidelines and Safeguards, would buy up agricultural surpluses if the price falls below that provided by centralized intervention.

A “guaranteed” price for their products was set for European farmers when they were sold in the European Community, and an export compensation system ensured that European goods were sold at prices below world prices, in no way inferior to the European producer. Such a policy fits the definition of dumping, and therefore has been subjected to serious criticism as distorting the ideals of the free market. Since 1992, EU policies have somewhat departed from the practice of market intervention and direct payments to farmers. In addition, payments are typically dependent on farmers meeting certain environmental or animal requirements to promote responsible and sustainable agriculture through so-called multi-functional agricultural subsidies. The social, environmental, and other benefits of subsidies will no longer include simple production growth. Dumping in Russia is not prohibited, unlike the EAEU, of which the Russian Federation is a member.