Question

“Dumping” is variously described as selling below fully allocated cost or selling below the home country price. The current administration has accused the Chinese of dumping steel products, for example. Why would a company in China want to do that?

Answer 1

Dumping is a form of price discrimination (charging the customers different prices for the same product), and the term is usually used in contexts related to international trade. Dumping refers to exporting a product at a lower price to another country to what the company/exporter charges in the home/domestic country. Dumping more than often involves an export of huge volumes (a key to profits for the exporter, through economies of scale). When the market of the importing country becomes flooded with a certain product, the domestic producers of the product are financially troubled, as their business is severely hampered. While dumping is legal as per WTO (World Trade Organization) rules and guidelines, it is prohibited when the importing country can show that such trade is threatening the importer nation’s economy and domestic producers. Countries may use tariffs/quotas for protecting domestic producers from dumping like the USA did when it imposed 25% tariffs on imported steel.

China produced half of the world’s steel in the year 2015 and can make 10 times more steel when compared to the USA. China has a large labor force and can produce steel at much lower costs when compared to the USA or European nations. Chinese firms also get the advantage in areas including bank loans, tax arrangements, environmental standards, land use rights, grants and in other areas when compared to their American counterparts. The country produces huge amounts of steel every year and can sell it at lower prices to keep the losses low. Even when China sells its steel in the USA at a lower price than the domestic market, it may still reap some profits in long terms and through economies of scale. Further, in the long term, the importing nations may become dependent on China for its Steel supply, as domestic producers might fail and shut down due to dumping when they are unable to compete.