Dumping in Economics: Definition & Effects

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  • 0:02 Definition of Dumping
  • 1:26 Positive Effects
  • 2:38 Negative Effects
  • 4:02 Lesson Summary
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Lesson Transcript
Instructor: Aaron Hill

Aaron has worked in the financial industry for 14 years and has Accounting & Economics degree and masters in Business Administration. He is an accredited wealth manager.

Find out what dumping in economics means and the effects it can have on markets, both positive and negative. Learn why you might either benefit from lower prices or potentially lose your job from the effects of dumping.

Definition of Dumping

You may not realize it, but economic dumping is taking place all around you. The steel used to build buildings, the solar panels put onto houses, and the fruits and agricultural products that you buy at the store... these are all common items that countries 'dump.' So, what exactly is economic dumping?

Dumping is when a country exports or sells products in a foreign country for less than either:

  1. The price in the domestic country
  2. The cost of making the product

For example, if a television manufacturer in the U.S. sells televisions domestically for $500 dollars, but costing them only $300 dollars, and then sells them in France for $250, that could potentially be categorized as dumping. The U.S. manufacturer is not only selling the televisions below the prices they offer in the U.S. but also selling them at a loss! This could harm French television manufacturers, who simply can't compete.

Under the World Trade Organization Agreement, dumping is not favorably looked upon, though it is not prohibited, if it causes, or threatens to cause, material injury to a domestic industry in the importing country. Some countries will go as far as to make it illegal to dump various products, because the government is trying to protect certain industries or companies that are vital or could potentially fail.

Positive Effects

Let's explore the effects of dumping, both positive and negative. The positive effects are:

Consumers of the product being dumped in the importing country benefit from lower prices. This will save them money.

Dumping can force industries or companies in the foreign markets (importing markets) to become more competitive and innovative. If they believe the dumping may continue for the long-term, they'll have no choice but to look for ways to reduce costs or improve quality to differentiate their product. Either way, this benefits the consumer.

Dumping allows the exporting countries and companies to sell backlogs of inventory and product that may otherwise go to waste. This can result in better revenue numbers, which could lead to more jobs or higher pay for employees and ultimately a better standard of living for many in the exporting country. For example, if a cell phone manufacturer had 500,000 extra phones in inventory that they couldn't sell in the U.S., they would be better off selling at least some of them cheaply in other countries that may need them. Holding onto them could lead to obsolete technology and worthless phones. Any money received from foreign countries would be better than none at all.

Negative Effects

Now, let's turn our attention to the negative effects of economic dumping.

Dumping can push producers and manufacturers in the foreign (importing) country out of business, which can result in loss of jobs and higher unemployment. For example, if the U.S. has lots of corn, potatoes, and beans and dumps them onto Mexico, it may result in many small and local Mexican farmers going out of business. They may not be able to produce the goods as cheaply as U.S. agricultural products.

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