Dumping is the practice of charging different prices for the same product in similar markets. It is a form of price discrimination. Imported goods are sold at prices so low as to be detrimental to local producers of similar merchandise. Japanese banks in California dumped money in the U.S market by pricing their loans at an interest rate lower than what U.S banks charged.
When do dumping occur?
Dumping occurs when the price of the product in overseas markets is lower than the price in home market. So, countries view dumping as an unfair trade practice. Anti dumping legislation is enacted to contain the ill effects of dumping.
Definitions of dumping
1. GATT’s 1979 anti-dumping code defined dumping as “sale of an important product at a price lower than that is normally charged in a domestic market or country of origin”.
2. The General Agreement on Tariffs and Trade also defines dumping as “the difference between the domestic price and the price at which the product is exported from a country”.
3. In the words of United States
“dumping is unfair trade practice – unfair price cutting having for its objectives the injury, destruction or prevention of the establishment of American Industry”.
Legal aspects of dumping
1. Dumping is an important global pricing strategy issue. Whether dumping is illegal or not depends on whether the practice is tolerated or not in a particular country. Most countries have dumping laws which set a minimum price (floor price) that can be charged in the market. So, illegal dumping occurs when the, price falls below a specified level. But difficulties arise in determining the floor price. Some evidence is required to substantiate dumping practice.
2. The evidence of dumping occurs when the product is sold at less than fair values. Small business telephone systems and sub assemblies were imported into U.S from Japan and Taiwan at less than fair price. The U.S international Trade Commission found injury to industries in U.S from such imports. Anti-dumping duties were placed on imported products to offset their price advantage.
3. The US relies on the official U.S trigger price which is intended to curb dumping. In the case of steel, 40% of all imports at one time were priced below trigger price. The Anti-dumping Act required the Department of Commerce to impose anti-dumping duty equal to the dumping margin.
4. Dumping was a major issue in the Uruguay Round of GATT negotiations. Many countries disapproved of the U.S system of anti-dumping laws. Their charge was that the Commerce Department always ruled in favor of U.S company, filing a complaint.
5. GATT prohibited governments from penalizing differences between home market and export prices of less than 2 per cent.
6. The leading countries bringing charges of dumping were South Africa, India, the European Union, the United States, and Brazil. About 20 per cent of the cases were brought against the E.U.
7. A U.S company, namely, Smith Corona Corporation of New Cannon, Connecticut filed an anti-dumping complaint against Brother Industries of Japan in 1974.
8. To constitute dumping in U.S., both price discrimination and injury to home industry must be demonstrated. The existence of either one without the other does not constitute dumping.
9. Kickbacks: Kickbacks are the device used to get rid of anti-dumping legislation. Kickbacks occurred in the import of Japanese television tubes to the United States. On the records, the export price matched the Japanese price thereby avoiding any possible notion of dumping. But the producer provided under-the-table payments to the importer. These kickbacks were detrimental to the Zenith, the U.S company.
10. Model Year discounts: Model year discounts are offered to make price variations from one country to another. For example, an exported item is designated as the previous year’s model and discounted in the foreign country. But the same model is sold at the current model year price in the home country.
11. Another loop hole for practicing dumping is government subsidies. United States imposed countervailing duties when government subsidies are involved. For example, the U.S imposed countervailing duties of 19.6 percent for cotton yarn and 15.8 percent for scissors imported from Brazil.
Example of Illegal Dumping
In the case of Melex golf carts from Poland, difficulty arose in determining the fair price. U.S has Anti-dumping Act (1921), which is enforced by the U.S Treasury. In United States, Melex was accused of dumping. But the treasury Department in U.S was unable to prove that Melex’s U.S price was lower than prices at home in Poland, because Poland had no golf courses and no demand for such a product. Again the cost of production was unsuitable for determining the fair price.
Poland was a socialist, economy where market forces did not fully dictate the costs of production. For this reason in 1974, Trade Act did not allow production costs of a communist or socialist country to be used for the comparison of domestic price and overseas price.
So, in order to determine fair costs, the U.S Treasury used Canadian manufacturer’s costs as reference prices. But Poland protested that Canadian firm’s manufacturing costs were too high and unsuitable for comparison. Then the Treasury chose Mexico and Spain, the free-market countries.
Although Mexico and Spain did not produce golf carts, they suggested the probable cost of producing golf carts. Finally, it was concluded that the floor prices furnished by Mexico and Spain did not differ from Melex’s price.