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What is Dumping?


The term 'Dumping' is included in the Economics edition of the Financial Dictionary. Get yours now on amazon in ebook or paperback format. Read more here...

Dumping in economics refers to a country attempting to enforce its own firms’ predatory pricing on other nations in the context of international trade. It also happens if a company exports its goods to a rival nation for a price that is under the one it would charge in its own domestic market or at a lower cost than the expenses it incurs to produce the goods. The reason companies and nations do this is typically to build up their foreign national market share. Sometimes they engage in this despicable practice so they can drive away their competitors.

The technical definition of dumping boils down to charging other countries cheaper prices for similar goods in their foreign markets than they do charge in their domestic market for the identical good. Many economists call this undercutting the nominal value in the act of international trade. Dumping has been officially condemned by the WTO World Trade Organization and an agreement which the member states all signed. This is especially the case when it inflicts material harm on a national industry within the nation who is importing.

There can be no doubt that the term dumping comes with an extremely negative connotation. Free market capitalist proponents consider this to be a thinly veiled kind of protectionist policy. The advocates of labor maintain that businesses must be protected from these forms of predatory practice in order to reduce the more painful consequences of trade between unequally developed economies.

International dumping has not been so successful except for in a few examples. One such case is the Chinese steel dumping dilemma. For years, the Chinese have sold steel at prices which are well below those any other nations’ steel producers can match. They sell it for less than their own cost. They are also sometimes selling their steel at lower prices than they do within China. The venerable steel industry in Great Britain has been all but destroyed because of this practice. Britain was once the world’s largest steel producer. Other European and American steel makers have similarly suffered from the illegal Chinese steel dumping practice.

A more controversial case pertains to OPEC’s Saudi Arabian led efforts to drop the price of oil over the past several years. Because competition from American shale oil industry had become so intense and America and U.S. companies had massively increased their oil and natural gas outputs, Saudi Arabia became concerned by the excessive supplies of oil washing over the world energy markets. They decided to eliminate the U.S. shale oil company business through a covert form that might be considered dumping.

Saudi Arabia had the ability to produce oil for a substantially lower cost per barrel than the more expensive fracking process that releases the shale oil in America (and Canada). They decided to force down the prices of oil within OPEC by making the other Persian Gulf (Iraq, Iran, Kuwait, Qatar, Bahrain, United Arab Emirates, Oman) and non Gulf (primarily Nigeria and Venezuela) countries sell their oil at a lower price. They manipulated these price levels for oil down to the point that oil traded in the low $40’s per barrel. At this point, the price of oil had declined to below the cost of production for several of the oil producers in the OPEC cartel, but not for Saudi Arabia.

As the Saudi’s hoped, the American shale oil producers began to lay off workers and shut down production. Many of the firms in the U.S. shale industry shuttered their doors at least temporarily and some permanently. Saudi Arabia successfully dumped the Gulf and OPEC oil on world markets at prices lower than their rivals could conceivably match, permanently harming the domestic industry in the U.S. (and to a lesser degree Canada with their oil sands projects). The Saudis claim it was not dumping as they at least can produce oil for $20-$30 per barrel. So far, no action has been enforced by the World Trade Organization against either the OPEC oil cartel or Saudi Arabia for this underhanded ploy. There is still controversy regarding whether or not this particular case is technically dumping.

The term 'Dumping' is included in the Economics edition of the Financial Dictionary. You can get your copy on amazon in Kindle or Paperback version. See more details here.