Dumping, the practice of flooding a market with cheap imports, is getting more and more media attention. One reason is that its impact is more noticeable with the increasing global trade between nations. In this article, we'll look at dumping through a free market perspective.

Dumping vs. Predatory Pricing
Dumping is blamed for killing off domestic production, leading to layoffs in industries that compete against cheap foreign goods. The usual argument states that the products are unfairly priced - that is, the producing country is selling them below cost.

Here is where problems crop up. Predatory pricing occurs when goods are purposely sold at a loss and it has proven to be flawed at every turn. When a company sells goods at a loss in the hope of killing a domestic market, it usually backfires. In most cases, the consumers and the producers buy up the product because it is cheaper and, whereas consumers use it, the producers sell the foreign product back on the international market at fair price.

Therefore, a company using predatory pricing would have to sell at a loss to every country, and may go bankrupt before forcing out all other producers. Some producers may be forced to shut down temporarily, but could quickly start up once the company selling at a loss is forced into raising prices again to make a profit.

Giving Trade a Bad Name
If we assume dumping does not involve goods being predatorily priced, that is, goods that another nation can make cheaper than any other, then the correct word is simply "trade," not dumping. The amount of product being sold doesn't matter. How much constitutes dumping anyway? Is Toyota (NYSE:TM) guilty of dumping because so many Americans buy its cars?

If a foreign company, or a domestic one for that matter, is producing more goods than there is a demand for, it can't force consumers to buy. The idea that a company is "dumping" goods in a market suggests that consumers don't have a choice about whether to buy or not. In reality, flooding a market with excess supply will probably just lead to large unsold inventories. These inventories may then be discounted to clear, guaranteeing that consumers get a good deal, but ultimately cutting the producer's profits on that product. (To learn more about this economic equation, read Economics Basics: Supply And Demand.)

Taking a real example, much has been made about China "dumping" cheap textiles into foreign markets. China can do this because its labor costs are a fraction of those of almost every other nation. If you work in textile production, cheap Chinese goods may result in a pay cut or even the loss of your job. This is understandably bad. (Everyone's talking about globalization, but what is it and why do some oppose it? Read What Is International Trade? to find out more.)

The Flip side
On the flip side, cheap imports mean that more Americans enjoy lower prices at shops that stock Chinese textiles and people in retail sell more. Retailers see their profit margins go up, and the investors in those retailers see some of the profit. Some of these profits, garnished from the reduced costs of labor in China, will be spent by investors and retailers, as will the savings that consumers enjoy. In this way, the "dumping" can become an overall boon to the economy. Additionally, the resources and labor that were tied to the domestic textiles industry can now be used somewhere where the U.S. has an edge.

A Hard Choice
In time, wages may rise in China and cause a resurgence in the domestic market as their product gets more expensive, or maybe people will choose the quality of U.S. textiles over the price of imports. In the meantime it's better to move on to areas where there is an absolute or comparative advantage. To put it bluntly, American laborers have wage expectations that make textiles an unprofitable industry, so they have to find an industry where their wages are justified or accept lower wages. (For more insight, see What is comparative advantage?)

The only other choice is to subsidize textiles with taxpayers' money - either through tariffs, quotas or outright government loans - making clothes more expensive. This reduces the paycheck of every American to keep a select few Americans working. Unfortunately, this latter case is the standard practice of government in industries with powerful unions that vote as a block or in situations where a political angle exists. (For everything you need to know from the different types of tariffs to their effects on the local economy, check out The Basics Of Tariffs And Trade Barriers.)

Protecting Industry Without the Government
The solution to the worst effect of dumping - domestic job loss - may simply be to differentiate products. If there is an area where foreign products are often faulted, it is in consumer safety. Components and products that are easy to mass-produce are often outsourced to developing nations where labor is cheaper. Because the competition between these nations is fierce, corners often get cut. This can result in unsafe chemicals being used on the products or simply inferior components that lead to lower product quality.

The negative perception of these products gives clever American producers an edge. If enough people turn their backs on the better value per dollar of "made in ____" products, then American producers have an additional chance to differentiate their product. In the lead paint toy scandal in 2007, long suffering American producers saw a huge jump in orders. Their high-quality (often hand-crafted) toys were worth a premium not just because they were good toys, but also because they were perceived to be safer. The Chinese toy companies, some of which had produced toys with unsafe levels of lead and sold them in the U.S., went about tightening standards to make their products safer. However, the advantage the American companies were able to gain at this time suggests that there will always be a market for a domestic product that can differentiate itself from the foreign competition in a way that justifies a higher price.

The Bottom Line
Cheap imports help the person with a tight budget searching for the best value for his or her dollar. They may hurt the paycheck of workers in industries being pushed out by foreign competition, but that reduced paycheck will also go further at the shopping mall because of that same competition. Basically, a small group will suffer for the greater good, and that suffering may include retraining and a job search if their industry is completely squeezed out. Tariffs and anti-dumping quotas, however, harm the many in favor of the few.

If domestic industries are dying out, it's because the consumer is not willing to pay a premium for the American counterpart of that product. If people want American-made goods, there will be a niche for differentiated domestic brands - a niche that consumers create through demand, not through any government initiative. Only through differentiation can these "lower-end" products survive. Dumping, international trade by another name, isn't something to fear. Rather it should be a spur for domestic industries to innovate and seek out competitive and comparative advantages. Tariffs and anti-dumping quotas, in contrast, are a recipe for stagnation and taxpayer bailouts. (For additional reading, take a look at Free Markets: What's The Cost?)

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