What Is Predatory Dumping?
Predatory dumping is a type of anti-competitive behavior in which a foreign company prices its products below market value in an attempt to drive out domestic competition. Over time,
outpricing peers can help the company to create a monopoly in its targeted market. The practice is also referred to as "predatory pricing."
- Predatory dumping refers to foreign companies anti-competitively pricing their products below market value to drive out domestic competition.
- Those who practice predatory dumping are forced to sell at a loss until the competition is wiped out and monopoly status is achieved.
- Predatory dumping can be financed by selling products at higher prices in other countries or, if possible, by tapping into a company’s resources.
- Globalization and World Trade Organization (WTO) rules banning predatory dumping make it increasingly difficult to pull off.
How Predatory Dumping Works
"Dumping" in international trade refers to a company selling goods in another market below the price at which it would sell in its domestic market. There are three main types of dumping:
- Persistent: Indefinite international price discrimination.
- Sporadic: The occasional sale of goods at cheap prices in foreign markets to combat a temporary surplus of production back home.
- Predatory: Driving out domestic and other competitors in the targeted market by knocking down prices.
Those who practice predatory dumping are forced to sell at a loss. For the process to work, the foreign company needs to be able to finance this loss until it can drive its competitors, both domestic rivals and other exporters active in the market, out of business. This can be achieved by subsidizing these sales through higher prices in the home country, or by tapping into other resources, such as a big war chest.
Once domestic producers and any other players in the market are eventually driven out of business, the foreign company should achieve monopoly status, enabling it to raise prices as it sees fit.
The global economy is highly interlinked and open through trade liberalization. Globalization has spurred fierce international competition, making it increasingly difficult for companies to successfully pull off predatory dumping.
Moreover, predatory dumping is illegal under World Trade Organization (WTO) rules—if it is deemed to harm producers in the targeted market. Countries that can prove this to be the case are given permission by the WTO to implement anti-dumping measures, enabling governments to impose stiff duties on products being shipped in from overseas.
Anti-dumping measures are used in many countries. However, they only protect domestic producers and not the innocent exporters that also get punished by a fellow foreign firm artificially lowering prices.
Anti-dumping measures are not considered protectionism, as predatory dumping is not a fair trade practice. The WTO rules are designed to help ensure that any anti-dumping measures that countries take are justifiable and are not simply used as a guise to protect local businesses and jobs from foreign competition.
Example of Predatory Dumping
In the 1970s, Zenith Radio Corp., then the largest U.S. TV manufacturer, accused its foreign rivals of engaging in predatory dumping. The inventor of subscription television and the modern remote control was losing market share and blamed this on Japanese firms creating a price-fixing cartel, selling their televisions in the U.S. at rock bottom prices.
It was alleged that these firms were selling televisions in the U.S. below their marginal costs and then recouping these losses by selling the same products in Japan at twice the price. The case eventually made its way to the U.S. Supreme Court, where it was dismissed. Zenith filed for Chapter 11 bankruptcy in 1999 and was bought out by Korean company LG Electronics.