Dumping, the practice of flooding the market with cheap imported products, is receiving more and more multimedia attention. One of the reasons is that as the global trade between countries increases, its impact becomes more obvious. In this article, we will look at dumping from the perspective of the free market.
Dumping and predatory pricing
Dumping is accused of stifling domestic production, leading to layoffs in industries that compete with cheap foreign goods. The usual argument is that the product is unfairly priced-that is, the producing country sells it at a price below cost.
This is where the problem arises. Predatory pricing occurs when goods are deliberately sold at a loss and have been proven to be defective everywhere. When a company sells goods at a loss to kill the domestic market, it usually backfires. In most cases, consumers and producers buy products because it is cheaper, and when consumers use it, producers sell foreign products back to the international market at a fair price.
Therefore, companies that use predatory pricing will have to sell to every country at a loss and may go bankrupt before forcing all other producers to exit. Some producers may be forced to temporarily shut down, but once companies that sell at a loss are forced to raise prices again to make a profit, they may start quickly.
Give trade a bad reputation
If we assume that dumping does not involve predatory priced goods—that is, another country can produce goods cheaper than any other country—then the correct word is “trade”, not dumping. The number of products sold does not matter. How much counts as dumping? Did Toyota (NYSE: TM) commit dumping crimes because so many Americans bought cars?
If a foreign company or a domestic company produces more goods than demand, it cannot force consumers to buy. The company’s idea of ”dumping” goods in the market shows that consumers have no choice whether to buy. In fact, oversupply flooding the market may only lead to large unsold inventory. Then, these stocks may be cleaned up at a discount to ensure that consumers get a good deal, but ultimately reduce the manufacturer’s profit on the product.
To give a real example, a lot has been done about China’s “dumping” of cheap textiles into foreign markets. China can do this because its labor costs are almost a small part of all other countries. If you are engaged in textile production, cheap Chinese goods may lead to salary cuts and even unemployment. This is bad, it is understandable.
On the other hand, cheap imports mean that more Americans enjoy lower prices in stores with Chinese textiles, while people in retail stores sell more. Retailers saw their profit margins rise, and investors in these retailers saw some of the profits. Part of the profits brought about by China’s falling labor costs will be consumed by investors and retailers, as will the savings enjoyed by consumers.
In this way, “dumping” can become a boon to the overall economy. In addition, the resources and labor related to the domestic textile industry can now be used where the United States has an advantage.
Over time, Chinese wages may rise and cause the domestic market to pick up because their products become more expensive, or people will choose the quality of American textiles instead of import prices. At the same time, it is best to move to areas with absolute or comparative advantages.
To put it bluntly, the wage expectations of American workers make the textile industry an unprofitable industry, so they have to find an industry where their wages are reasonable, or accept lower wages.
The only other option is to subsidize textiles with taxpayer money — through tariffs, quotas, or direct government loans — to make clothes more expensive. This reduces the salary of every American to keep a few Americans working. Unfortunately, the latter situation is the standard practice of the government in industries with strong labor unions, where collective voting or political perspective exists.
Protect industry without government
The solution to the worst effect of dumping—domestic unemployment—may simply be to differentiate between products. If there is an area where foreign products often fail, it is consumer safety. Components and products that are easy to mass-produce are usually outsourced to developing countries where labor is cheaper.
Because of the fierce competition between these countries, corners are often cut off. This may result in the use of unsafe chemicals on the product or inferior components that degrade the quality of the product.
Negative perceptions of these products give smart American manufacturers an advantage. If enough people refuse to “manufacture” the higher value per dollar of the product, then American producers have more opportunities to differentiate their products. In the 2007 leaded toy scandal, long-suffering US manufacturers saw a significant increase in orders. Their high-quality (usually handmade) toys are worth a premium not only because they are good toys, but also because they are considered safer.
Chinese toy companies, some of which produce toys with unsafe lead content and are sold in the United States, have begun to tighten standards to make their products safer. However, the advantages that American companies can gain at this time indicate that there will always be a market for domestic products that can differentiate itself from foreign competition by justifying higher prices.
Cheap imported products can help people on a tight budget find the best value in dollars. They may harm the salaries of workers in industries driven out by foreign competition, but due to the same competition, such reduced salaries will also go further in shopping malls. Basically, a small number of people will suffer for the greater good. If their industry is completely squeezed out, this kind of suffering may include retraining and job hunting. However, tariffs and anti-dumping quotas harm the interests of the majority and benefit the minority.
If the domestic industry is dying, it is because consumers are unwilling to pay a premium for the product’s American counterparts. If people want American-made goods, then differentiated domestic brands will have a niche market—a niche market created by consumers through demand, not through any government initiatives. Only by differentiation, these “low-end” products can survive.
Dumping, the international trade of another name, is not terrible. On the contrary, it should stimulate domestic industrial innovation and seek competition and comparative advantage. In contrast, tariffs and anti-dumping quotas are a good remedy for economic stagnation and taxpayer relief.