4772020 Dumping — Meaning, Types, Price Determination and Etects of Dumping Dumping — Meaning, Types, Price Determination and Effects of Dumping Article shared by : Smriti Chand ADVERTISEMENTS: Dumping is an international price discrimination in which an exporter firm sells a portion of its output in a foreign market at avery low price and the remaining output at a high price in the home market Haberler defines dumping as: “The sale of goods abroad at a price which is lower than the selling price of the same goods at the same time and in the same circumstances at home, taking account of d definition is simple. in transport costs” Viner’s Contents 1. Meaning of Dumping 2. Types of Dumping 1. Sporadic or Intermittent Dumping 2. Persistent Dumping 3. Predatory Dumping ADVERTISEMENTS: 3. Price Determination under Dumping wv youratcleibrary.com/economis/dumping-meaning-lypes-price-determination-and-ellects-of-dumpingl 28069 ans4772020 (Dumping — Meaning, Types, Prce Determination and Eft of Bumping 1. Conditions 2. Explanation 4. Effects of Dumping 1. Effects on Importing Country 2. Effects on Exporting Country 5. Anti-Dumping Measures 1. Tariff Duty 2. Import Quota 3. Import Embargo 4. Voluntary Export Restraint 1. Meaning of Dumping: ADVERTISEMENTS: Dumping is an international price discrimination in which an exporter firm sells a portion of its output in a foreign market at a very low price and the remaining output at a high price in the home market Haberler defines dumping as: “The sale of goods abroad at a price which is lower than the selling price of the same goods at the same time and in the same circumstances at home, taking account of differences in transport costs” Viner’s definition is simple. According to him, “Dumping is price discrimination between two markets in which the monopolist sells a portion of his produced product at a low price and the remaining part at a high price in the domestic market.” Besides, Viner explains two other types of dumping. One, reverse dumping in which the foreign price is higher than the domestic price. wn youratceibrary.com/economicsdumping-meaning-lypes-price-determinaion-and-ellects-of-dumpingl28069, 2n64772020 Dumping Meaning, Types, rie Deternraion and Ete of Oumping This is done to turn out foreign competitors from the domestic market. When the product is sold at a price lower than the cost of production in the domestic market, it is called reverse dumping Two when there is no consumption of the commodity in the domestic market and it is sold in two different foreign market, out of which one market is charged a high price and the other market a low price. But in practice, dumping means selling of the product at a high price in the domestic market and a low price in the foreign market. We shall explain price determination under dumping in this sense. 2. Types of Dumping: ADVERTISEMENTS: Dumping can be classified in the following three ways: 1. Sporadic or Intermittent Dumping: It is adopted under exceptional or unforeseen circumstances when the domestic production of the commodity is more than the target or there are unsold stocks of the commodity even after sales. In such a situation, the producer sells the unsold stocks at a low price in the foreign market without reducing the domestic price. This is possible only if the foreign demand for his commodity is elastic and the producer is a monopolist in the domestic market. His aim may be to identify his commodity in a new market or to establish himself in a foreign market to drive out a competitor from a foreign market. In this type of dumping, the producer sells his commodity in a foreign country at a price which covers his variable costs and some current fixed costs m order to reduce his loss. wn youratceibrary.com/economicsdumping-meaning-lypes-price-determinaion-and-ellects-of-dumpingl28069,4772020 Dumping — Meaning, Types, Price Determination and Etects of Dumping 2. Persistent Dumping: ADVERTISEMENTS: When a monopolist continuously sells a portion of his commodity at a high price in the domestic market and the remaining output at a low price in the foreign market, it is called persistent dumping. This is possible only if the domestic demand for that commodity is less elastic and the foreign demand is highly elastic. When costs fall continuously along with increasing production, the producer does not lower the price of the product more in the domestic market because the home demand is less elastic. However, he keeps a low price in the foreign market because the demand is highly elastic there. Thus, he earns more profit by selling more quantity of the commodity in the foreign market. As a result, the domestic consumers also benefit from it because the price they are required to pay is less than in the absence of dumping. 3. Predatory Dumping: The predatory dumping is one in which a monopolist firm sells its commodity at a very low price or at a loss in the foreign market in order to drive out some competitors. But when the competition ends, it raises the price of the commodity m the foreign market. Thus, the firm covers loss and if the demand in the foreign market is less elastic, its profit may be more. Objectives of Dumping: The main objectives of dumping are as follows: ADVERTISEMENTS 1. To Find a Place in the Foreign Market: wn youratceibrary.com/economicsdumping-meaning-lypes-price-determinaion-and-ellects-of-dumpingl28069, ans4772020 Dumping Meaning, Types, rie Deternraion and Ete of Oumping A monopolist resorts to dumping in order to find a place or to continue himself in the foreign market. Due to perfect competition in the foreign market he lowers the price of his commodity in comparison to the other competitors so that the demand for his commonly may increase. For this, he often sells his commodity by incurring loss in the foreign market. 2. To Sell Surplus Commodity: When there is excessive production of a monopolist’s commodity and he is not able to sell in the domestic market, he wants to sell the surplus at a very low price in the foreign market. But it happens occasionally. 3- Expansion of Industry: A monopolist also resorts to dumping for the expansion of his industry. When he expands it, he receives both internal and external economies which lead to the application of the law of increasing returns. Consequently, the cost of production of his commodity is reduced and by selling more quantity of his commodity at a lower price in the foreign market, he earns larger profit. 4. New Trade Relations: The monopolist practices dumping in order to develop new trade relations abroad. For this, he sells his commodity at a low price in the foreign market, thereby establishing new market relations with those countries. As a result, the monopolist increases his production, lowers his costs and earns more profit. 3. Price Determination under Dumping: wn youratceibrary.com/economicsdumping-meaning-lypes-price-determinaion-and-ellects-of-dumpingl28069, ens4772020 Dumping Meaning, Types, rie Deternraion and Ete of Oumping Under dumping, the price is determined just like discriminating monopoly. The only difference between the two is that under discriminating monopoly both markets are domestic while under dumping one is a domestic market and the other is a foreign market. In dumping, a monopolist sells his commodity at a high price in the domestic market and at a low price in the foreign market. a. Conditions: Price determination under dumping is based on the following conditions or assumptions: 1. The main aim of the monopolist is to maximise his profit. He, therefore, produces that output at which his marginal revenue equals marginal cost. Since he sells his commodity in the domestic market and the foreign market separately, he adjusts the quantity such wise in each market that marginal revenues in both markets are equal. Given the marginal cost of producing the commodity, the most profitable monopoly output will be determined at a point where the combined marginal revenue of both the markets equals the marginal cost. In other words, dumping profit = MRy + MRg = MC. 2. The elasticity’s of demand must be different in the two markets. The demand should be less elastic in the domestic market and perfectly elastic in the foreign market. As a result, the monopolist sells his commodity at a low price in the foreign market and at a high price in the domestic market. Thus, the price and MR are related to each other by this equation: MR = p (=AR) (1 - 1/E), where e refers to the elasticity of demand. ADVERTISEMENTS: wv youratceibrary.com/economis/dumping-meaning-lypes-price-determinaion-and-ellects-of-dumpingl28069, ansama Dumping Meaning, Types, rie Deternraion and tects of Oumping 3. The foreign market should be perfectly competitive and the domestic market is monopolistic 4. The buyers in the domestic market cannot buy the cheap commodity from the foreign market and bring it in the domestic market. b. Explanation: Given these conditions, price and output under dumping will be determined by the equality of the total marginal revenue curve and the marginal cost curve of producing the commodity. Figure 5 illustrates price-output determination under dumping. 3 Price and Cost OU ° ADVERTISEMENTS: The foreign market demand curve faced by the monopolist is the horizontal line PDg which is also the MR curve because the foreign market is assumed to be perfectly elastic. The demand curve in the home market with a less elastic demand for the product is the downward sloping curve Dy and its corresponding marginal revenue curve is MRu. The lateral summation of MRy and PD, curves leads to the formation of TREDy as the combined marginal revenue curve. In order to determine the quantity of the commodity produced by the monopolist, we take the marginal cost curve MC. E is the equilibrium wn youratceibrary.com/economicsdumping-meaning-lypes-price-determinaion-and-ellects-of-dumpingl28069, 716seo Dumping Meaning, Types, rie Deternraion and Ete of Oumping point where the MC curve equals the combined marginal revenue curve TREDy. Thus OF output will be produced for sale in the two markets. Since FE is the marginal cost, equilibrium in the domestic market will be established at point R where the marginal cost FE equals the MRy curve (FE = HR). Now OH quantity will be sold at HM price in the home market and the remaining quantity HF will be sold in the foreign market at OP (= FE) price. Thus the monopolist sells more in the foreign market with the more elastic demand at a low price and less in the home market with the less elastic demand at a high price. His total profits are TREC. 4. Effects of Dumping: Dumping affects both the importer and exporter countries in the following ways: 1. Effects on Importing Country: The effects of dumping on the country, in which a monopolist dumps his commodity, depend on whether dumping is for a short@@@H0@ or a long period and what are the@i@tGFetoGuieprodwep and the @iifPof dumping. 1. Ifa producer dumps his commodity abroad for a @HOEEpSHOG) then the industry of the importing country is affected for a @HOEEWHIG Due to the (GWAC of the dumped commodity, the industry of that country has to GHEGPALGSD {for some time because (ESSIGUALIEP of its commodity is ld. 2. Dumping is harmful for the importing country if it continues for a CGABPEHCA This is because it takes time for @HAHBMEPLOAHCHH in the importing country and its domestic industry is not able to6@D wv youratceibrary.com/economis/dumping-meaning-lypes-price-determinaion-and-ellects-of-dumpingl28069,samnoo comping Meaning Tp, Pre Dae ang fe Cun (GGMPELGD. But when @HEAPPSETEWP or dumping does not exist, it becomes difficult to ¢hangertherproductionagain. 3. If the dumped commodity is a @omsumMengood, the GEMAHA of the people in the importing country @illi@hanige for the €i@apIgeods) When GRMPINGSOPS this demand willeverse thereby CHANGINGUHEMASHES of the people which will be H@EMEUD{or the €8OHomy” 4. If the dumped commodities are @H@apRapitallgoods, they will lead to the @6HHinglup of a @owlindustry. But when the imports of such commodities stop, this (@USE=0iD) also be shutdown. Thus Gltimately, the importing country will @e@umalloss. 5. If the monopolist dumps the commodity for €HOVing@MiSIOMpeutors from the foreign market, the importing country gets the benefit of 4984p commodity (EHEDEginning But Qereompetitionenas and he sells the same commodity at a diighgmonopolysprice, the importing country incurs a loss because now it has to pay a high price. 6. If aCERGREP is GPOSEA to force the dumper€SleGualiselpriees of the domestic and imported commodity, it willjgi6Nbenefip the importing country. 7. But a (6werhixed tanittduty GEnehtS the importing country if the dumper delivers the commodity at a lower price. 2. Effects on Exporting Country: Dumping affects the exporting country in the following ways: 1. When domestic consumers have to buy the monopolistic commodity at ahigh price through dumping, there is loss in their consumers’ surplus. But if a monopolist produces more commodities in order to dump it in wv youratceibrary.com/economis/dumping-meaning-lypes-price-determinaion-and-ellects-of-dumpingl28069, ons4772020 Dumping Meaning, Types, rie Deternraion and Ete of Oumping another country, consumers benefit. This is because with more production of the commodity, the marginal cost falls. As a result, the price of the commodity will be less than the monopoly price without dumping. But this lower price than the monopoly price depends upon the law of production under which the industry is operating. If the industry is producing under the law of diminishing returns, the price will not fall because costs will increase and so will the price increase. The consumers will be losers and the monopolist will profit. There will be no change in price under fixed costs. It is only when costs fall under the law of increasing returns that both the consumers and the monopolist will benefit from dumping. 2. The exporting country also benefits from dumping when the (GONOPULiSEPLOMUCESIMOTECOMMOAIty. Consequently, the CEHTAHD for the required inputs such as ayiitatetial etc. for the production of that commodity @HGfSA88, thereby expanding the means of @SBIOVHIER in the country. 3. The exporting country @@mistOreigmeunreney by selling its commodity in large quantity in the foreign market through dumping, As a result, its 5. Anti-Dumping Measures: The following measures are adopted to stop dumping: a. Tariff Duty: wv youratceibrary.com/economis/dumping-meaning-lypes-price-determinaion-and-ellects-of-dumpingl28069, r0n6020 (Dumping —Mesning, Types, Prce Determination and Eft of Dumping To stop dumping, the importing country @MpOS@Sitaniif on the dumped commodity consequently, the @#i8@of the importing @6mmedig> (GHEE and the fear of dumping ends. But it is necessary that the@atep (GFAWP on imports should be €@i@alitD the GHFEFENCSIDEEWEER the domestic price of the commodity and the price of the dumped _ @mmodity Generally, the tariff duty éSGiipesedMiGTe than this GiffeFENES to end dumping, but it is likely to have(HAPHTRUNEHEEES on other imports. b. Import Quota: Import quota is another measure to stop dumping under which a commodity of a @PSGiiGVOMM® or TATENSAIGWED to be imported into the country, For this purpose, it includes the@iipOSiGHOMORAGUty along with @ixingiquota, and providing a GimitedaMountOnforeigmexchange to theGiiPOREES> c. Import Embargo: Import embargo is an important retaliatory measure against dumping. According to this, the imports of certain or all types of goods from the dumping country are Gained? d. Voluntary Export Restraint: To restrict dumping, developed countries enter into bilateral agreements with other countries from which they fear dumping of commodities. These agreements ban the export of specified commodities so that the exporting country may not dump its commodities in other country. Such bilateral VER agreements exist between India and EU countries in exporting Indian textiles. Conclusion: wv youratceibrary.com/economis/dumping-meaning-lypes-price-determinaion-and-ellects-of-dumpingl28069, nsama Dumping Meaning, Types, rie Deternraion and tects of Oumping It is generally observed that anti-dumping measures explained above (GQAAANERUANEHEREEECOUTIEFVdopting these measures. The (PROMUCEISTORENECOMNLTMEVERWANBthat commodities should be EEE They, therefore LAAT to (@@striettEEMPOM of better and cheap imports byeallingthenydumped commodities. The reason for this is to misinterpret dumping. According to Article IV of GATT 1984, which now forms part of the World Trade Organisation (WTO), a country@anjadoptantisdumping measures only if the dumped imports @Bjuneutheinaduste of the country. A commodity is regarded as dumped which is exported to the other country at a @@IM@I6WEBthan its normal value. Or it will also be regarded as dumped if the export price of the commodity is less than its comparable price for final consumption in the exporting county. Under these situations, the importing country can impose anti-dumping duty, provided the margin of dumping is more than 2% of the export price or is more than 7% of the dumped import. 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