Economic Dumping

Price-Cutting is the Preferred Lubricant on »Liberalized« Markets – It Causes Distortion of Competition and Devastating External Costs

An Article in the Compendium of Market-Based Social-Ecological Economics

Key issues in view of the neoliberal crisis:
How can we guarantee employment and fair income?
How can we protect the environment effectively?
How should we shape the economic globalization?
What should the economic sciences contribute?
What must be the vital tasks of economic policy?
How can we legitimize economic policy democratically?

Click here for the list of all articles: Compendium
Click here for the German-Language version: Wirtschaftliches Dumping

Table of Contents

  1. Overview
  2. Clarification of Terms
    > Dumping in the Broadest Sense
    > Dumping in a Narrow Sense
  3. The Diversity of Neoliberal Dumping Methods
    > Social Dumping
    > Ecological Dumping
    > Structural Dumping
    > Economic Policy Dumping
  4. The WTO’s Understanding of Dumping
  5. How Should a Sustainable Anti-Dumping Strategy be Designed?

1. Überblick

DumpingJPG01Nothing characterizes the ruling neoliberal economic system as much as the prices driven into a downward spiral by various dumping methods worldwide. Nobody would object low prices if they were not associated with devastating costs for man and nature. The variety of dumping methods is remarkable and gives an impression of the ruthlessness and reprehensibility of our economy. If insight is the first step towards sustainability, then it is worth looking into the abysses of the neoliberal system.

2. Clarification of Terms

Dumping in the Broadest Sense

The term dumping is used in economic context in the broadest sense to describe the deliberate price cutting down to levels below the production costs of a product or the substance preservation costs of raw materials. Concerning this practice, economic policy methods and entrepreneurial methods have to be distinguished:

The economic policy methods, which are based on deliberate regulation or political negligence, can be targeted at all economic sectors of an economy, at individual sectors or at individual products. Meaning that costs are deliberately or negligently not added to the prices but imposed on society and the natural environment, i.e. costs are externalized. Under neoliberal conditions economic policy dumping is characterized by the fact that externalized costs are not or only inadequately recorded in national accounts, and the effects are therefore underestimated or ignored, so that social and ecological devastations such as mass poverty and soil erosion can occur unexpectedly.

In addition, companies pursue self-reliant dumping under their own responsibility by cutting their prices below their imputed production costs and on top of possible economic policy dumping. They usually do this in the given environment to either penetrate new, price-sensitive markets as quickly as possible or to drive competitors out of established markets in a targeted manner. Since entrepreneurial dumping directly reduces revenues and reduces or excludes profits, companies have an interest in raising prices as soon as they have reached their dumping target. When competitors have been successfully squeezed out of a market by dumping, there are immediate incentives to direct the price spiral upwards and siphon off extraordinary profits. In the case of a market-dominating position or a market monopoly (like microsoft), there are ultimately incentives for exorbitant prices.

Dumping in a Narrow Sense

In the narrow sense of the current neoliberal free trade, the term dumping refers exclusively to export prices that have been cut below the level of domestic prices or the level of production costs of identical products by economic policy and/or entrepreneurial measures. The World Trade Organization (WTO) has committed itself to this restricted dumping definition and thus pursues two objectives:

First the WTO can obscure the fact that domestic prices under neoliberal conditions (on open markets) must inevitably follow the downward spiral of export and import prices. Domestic suppliers can only resist the price-dumping as long as they are still profitable, until they are eventually squeezed out of their markets.

Secondly the WTO can obscure the diversity of dumping methods practized under its regime as well as their devastating consequences so as not to jeopardize its multilateral agreements on global free trade and in particular the dismantling of tariffs and trade quotas.

With its definition and its correspondingly harmless anti-dumping agreements, the WTO has become a promoter of all varieties of dumping, indeed it tacitly understands dumping as an essential driving force for the »liberalization« of markets. Thus price-cutting has become the lubricant of neoliberal free trade under its regime.

3. The Diversity of Neoliberal Dumping Methods

Under the regulations of the economic post-war order negotiated in Bretton Woods (see also the article Bretton Wood System), dumping was largely limited to self-reliant entrepreneurial measures sought to achieve competitive advantages on domestic markets, but, with the then fixed and periodically adjusted exchange rates, achieved only moderate advantages on international markets. Antitrust laws ensured that the distortions of competition did not become excessive. With the failure of the Bretton Woods System at the beginning of the 1970s and the emergence of open global markets (euphemistically referred to as »market liberalization«), economic policy and entrepreneurial incentives and constraints arose to achieve direct advantages through price-cutting of all kinds in the newly emerging global US dollar area. National economic policy makers and local companies inspired each other in the exchange of dumping ideas. The resulting cost pressure on global and subsequently national markets led to the aforementioned downward spirals in prices and standards indispensable to welfare. This »race to the bottom«, in which nation states and companies have been jointly involved ever since, causes irrevocable squeezing out of competitors from their markets, increases concentration of economic power and capital as well as structural desertification to the point of widespread de-industrialization and ultimately leads to unemployment, poverty and environmental damage.

Social Dumping

Social dumping is a method that has reached devastating proportions under the prevailing neoliberal conditions. There is no other method that can counter cost pressure in global competition more instantaneous than the reduction of the largest corporate cost item: labor costs. Since the trade unions are not capable of criticizing the causes of the neoliberal devastations, they run out of arguments in collective bargaining and thus become the pawn of industrial interests. Without social counter-power, however, the neoliberal social dumping is gradually extended by the profiteers to all social services. Since the 1980s we have been observing:

  • stagnating, falling and precarious wages,
  • demands for extended weekly working hours,
  • unpaid overtime and work intensification,
  • extended working life (pension at 67),
  • precarious subcontracted temporary work and precarious fixed-term employment contracts,
  • job cuts through rationalization of production
  • phasing out employer contributions to health and social insurance,
  • relocation of jobs to low-wage countries, where child labor and inhumane working conditions prevail,
  • and finally: the opening of labor markets in high-wage countries to workers from low-wage countries with intent to stimulate competition in wages and social benefits – sending standards into a downward spiral.

And: Wage increases have been below productivity growth for years – weakening domestic economic cycles as a result of declining purchasing power and demand, and accelerating structural economic desertification (concentration of economic power and capital including de-industrialization of peripheral areas). Tax revenues are falling, so that precarious wages cannot be topped up sufficiently by transfer payments and slide below the subsistence minimum. Unequal distribution of income and wealth as well as private and public poverty are on the increase.

Ecological Dumping

Besides social dumping, the greatest cost savings can be achieved by lowering ecological standards (eco-dumping). However, it also generates correspondingly high external costs, most importantly through long-term and sometimes irreversible consequential damage to the biosphere, and its benefits are quickly exhausted. Since the environment does not have a strong lobby, eco-dumping poses the greatest existential threat to mankind. In the ecological context, the English word dumping ironically does justice to its common meaning as »squandering« or »discarding«.

The following are the worldwide spread types of eco-dumping:

  • Overfertilization and monocultures in agriculture: soil infertility,
  • Application of agricultural pesticides: soil and health damage and extinction of species,
  • Industrial and agricultural contamination and overexploitation of groundwater and surface water: shortage of drinking water and dwindling fish stocks,
  • Waste disposal into groundwater and surface water: shortage of drinking water and dwindling fish stocks,
  • Waste disposal into sea water: extinction of species and dwindling fish stocks,
  • Structural sealing of soils: climate change, extinction of species, and famines,
  • Exhaust gas emissions into the atmosphere: Climate change and health damage,
  • Insufficient recycling of non-renewable raw materials or insufficient replacement of non-renewable raw materials with renewable raw materials: shortage of raw materials, soil and health damage,
  • Chemical contamination of products of all kinds: soil, water and health damage.

Structural Dumping

This method is usually not perceived as dumping, but rather as the preferred means of increasing productivity in neoliberal predatory competition, as demonstrated by the constant process of corporate takeovers and mergers into ever larger units up to monopolies. The business rationale for this development simply reads: economies of scale and economies of scope.

Structural dumping is the case if companies achieve economies of scale and economies of scope that go beyond socially and ecologically acceptable levels. Economies of scale are achieved by continuously reducing unit costs through indefinite centralization of mass production. Economies of scope are achieved by designing takeovers and mergers specifically with a view to synergy effects, i.e. such that operational processes of merged companies mutually enrich each other and/or costs are saved by merging departments, for example: purchasing, administration and personnel.

The drawback of exaggerated economies of scale and scope lies the fact that business cost accounting as such is not objectionable, but the externalized economic costs get out of hand due to a lack of economic policy guidelines and control. A detailed description of the seemingly productive neoliberal use of economies of scale and scope can be found in the article Scale Economies and Productivity.

Structural dumping causes both external social and external ecological costs. The social costs arise in the course of the centralization of economic power and capital through the destruction of decentralized businesses and the corresponding joblosses, accompanied by declining decentralized democratic decisions and responsibility. Ecological costs are in general caused by the ignorance regarding the preservation of natural resources that arises from central exercise of economic and political power. And because economic centralism always goes hand in hand with extreme export orientation, markets and structures in the importing countries are also affected.

Common examples of structural dumping are:

  • Centralized mass livestock farming in agriculture: lack of animal welfare, poor product quality, job losses, inhumane working conditions, long transport routes and harmful imports of animal feed,Zentralisierte Massentierhaltung in der Landwirtschaft,
  • centralized mass production of consumer goods: job losses, work intensification, loss of regional specialities and regional knowledge, preferential treatment of urban conurbations, geographical extension of value chains with nonsensical, long distance transport movements of semi-finished products,
  • centralization of retail trade: job losses, poor working conditions, long transport routes,
  • centralization of state administrations: no proximity to citizens, poor product quality, unsatisfactory working conditions, tendency to misuse data.

Economic Policy Dumping

Under neoliberal conditions, national and supranational (EU) economic policy dumping has advanced to become an effective method of making one’s own business location attractive for entrepreneurial investment and at the same time giving resident companies an advantage in the competition for export markets.

Common types of economic policy dumping are:

  • Valuta dumping: To achieve price advantages on export markets, countries devalue their own currency against the key currency (US dollar) and other currencies through measures of their central bank’s monetary policy and through control of capital movement. China is using these methods, followed recently by other emerging economies.
  • Tax and levy dumping: The main aim is to reduce business-related taxes and levies to keep domestic companies in the country and attract investment from foreign companies. As a supposed »Celtic tiger«, Ireland had thus achieved its longstanding upswing at the expense of the other EU countries in the early years of the 21st century (Irish taxes and levies are still half as high as those in Germany). However, in the wake of the financial market crisis that started in 2008, the country plunged even deeper due to the extreme financial speculation of its banks and was forced to seek refuge under the rescue umbrella of the EU and IMF.
  • Export subsidization: This involves direct or hidden financial support for certain industries or products to increase their competitiveness on export markets or to deliberately conquer certain export markets on grounds of national interest. Such subsidies are usually defended with the argument that the industries or products are not yet competitive on open global markets. The EU’s subsidies for agriculture, which currently have an annual volume of 56 billion euros, are an example for the preferential treatment of industrialized large-scale agricultural enterprises and their seemingly productive scale economies and scope economies to conquer foreign markets by means of dumped prices. Thus the EU is destroying both the small-scale agricultural structures in developing countries as well as the agricultural structures within the EU and: is guilty of complicity in the worldwide spread of hunger and poverty.
  • Standards Dumping: This usually involves lowering safety and health standards to give industries or individual products price advantages on export markets. This variant is particularly used by emerging economies that do not have to overcome any political hurdles to simply use their less developed domestic standards as a yardstick. But even in Western industrialized countries standards are disregarded, especially in the privatization of state-owned enterprises, when the new owners are looking for quick profits. The accumulation of accidents following the privatization of British Rail between 1994 and 1997 is a typical case where private owners have criminally neglected investment in rail network, rolling stock and signalling.

As a supplement see the article EU: Federal Superstate or Confederation?.

4. The WTO’s Understanding of Dumping

DumpingJPG02The World Trade Organization deliberately avoids definitions and evaluations of the different dumping methods, because this would unduly thwart its multilateralist negotiations and agreements on free trade. The overriding principle of their free trade is the so-called Most-Favoured-Nation (MFN) clause, which obliges countries to grant concessions on customs duties, quotas and levies that they have granted to one country to immediately grant to all other and future trading partners without exception. Once a country has opened its markets, any WTO member may export to these markets without restrictions. Unquestionably, countries will give up and lose their influence on their own trade policy under the WTO regime for all time.

In order not to jeopardise the pursuit of the neoliberal ideal, the WTO speaks of dumping only if the price of an export product is below the price of the same product on the exporter’s domestic market. This definition is absurd in the context of the WTO doctrine of »market liberalization« because, as indicated above, domestic prices in open global markets are constantly under pressure from import prices. Domestic suppliers must therefore continuously adjust their prices downwards to the level of export and world market prices if they do not want to be driven out of their markets. As a rule, they will only be able to adjust and survive if, in conjunction with national economic policy, they can reduce their labor and environmental costs accordingly.

In other words, based on its doctrine, the WTO promotes the dumping of export and domestic prices likwise and in step. Its definition of dumping is therefore nothing but pure eyewash to achieve its doctrinal objectives without hindrance. That is why the WTO is relentlessly intervening when disadvantaged countries use protective tariffs and other means of protection to defend themselves against price-reduced imports. And the WTO is not afraid to blur the fundamental difference between meaningful protection and nonsensical protectionism, with the result that the mutual accusations of protectionism among WTO members have reached an inflationary level (see also the article Protection and Protectionism).

Moreover, the WTO has set up a number of hurdles to nip disputes between trading partners in the bud as far as possible: It initially adopts a neutral position and declares dumping to be a problem of purely bilateral pricing. And it requires countries who are convinced they have been cheated to carry out »objective investigations« and present »positive evidence« that the quantities and prices of imports have a detrimental effect on domestic markets and producers. Since this effect is the normal case in predatory competition and the cause of the downward spiral of all prices, the bureaucratic procedures for arbitration usually will run into the sand and the harmless anti-dumping measures of the WTO are not applied at all.

It should be noted that the contradictions of the neoliberal doctrine cannot, by their very nature, be resolved by means of tricky procedures. Negotiations among WTO members are therefore also registering an increasing number of appeals against the WTO’s anti-dumping practice. Above all, developing countries are demanding better protection for their uncompetitive industries against the powerful export initiatives of industrialized countries. From 1995 to 2007, WTO members therefore carried out 3097 dumping investigations among themselves, of which India alone was involved in 474 proceedings. It comes as no surprise that the 2006 Doha round of negotiations ended without an agreement between old industrialized countries and developing countries. See also the article World Trade Organization (WTO)!

5. How Should a Sustainable Anti-Dumping Strategy be Designed?

Sustainability presupposes that the destructive mechanisms of the neoliberal economic system are overcome. What is needed are redesigned national economic systems that complement each other to form a new global economic order. Since the highest social and ecological costs are caused by neoliberal free trade, the most urgent need is for a redesign of foreign trade.

To this end, the exchange rate must regain its original function as a binding element of international trade and as a guarantor of mutual trade gains. Therefore it must balance the natural differences in the progress of productivity and at the same time give fresh impetus for productivity growth and progress in competition. In concrete terms this means that the bilateral exchange rate of two economic and currency areas is to be calculated directly from the two average prices of all trade products in each national currency. Thus, a product whose price corressponds to the average price level of its country of origin, has the same monetary value in each of the currencies when the exchange rate is applied. In other words, the differing price and productivity levels are neutralized by the exchange rate on average, restoring the original function of the exchange rate, so that competition shifts from absolute price advantages in key currency (US dollar or euro) to comparative relative price advantages in the ratio of two national currencies.

Since the exchange rate only neutralizes prices that correspond to the average price level of a country, competition arises for prices that deviate from the average price levels: A product whose price is below the average price level of its country in comparison to a similar product of the trading partner, and that has therefore been produced with a relatively higher productivity, has a relative price and competitive advantage and thus becomes an export candidate of the country. If exported, a buyer in the importing country would pay less for such a product than for a similar domestic product, always based on the exchange rate calculation described. The importing country thus achieves a trade profit which it can pass on to its customers undiminished or skimmed off by tariffs to such an extent that domestic competition is optimally stimulated but domestic producers are not jeopardised existentially. In addition, an importing country can define import quotas to protect domestic companies against being squeezed out of their markets and to achieve an optimal supply diversity at the same time.

Thus the indispensable distinction between meaningful and corrosive adjustment of prices and quantities at the foreign trade interfaces can find its way back into economic thinking, i.e. the distinction between sensible protection through exchange rates, tariffs and trade quotas on the one hand and nonsensical protectionism for economic-nationalistic or economic-imperialist reasons on the other hand. And: With the multi-bilateral trade relations prevailing under these conditions, trade profits can be maximized by importing products in each case from the (relatively) low priced trading partner. For a deeper insight, I recommend the articles Future-Proof Foreign Trade and Comparative Advantage – Upgraded.

Even with trade based on comparative relative price advantages, countries can, of course, favor certain industries or products through price dumping and thus give them competitive advantages in foreign trade as well as in domestic trade. However, since economic autonomy is the prerequisite for agreeing on calculated bilateral exchange rates as well as for fixing tariffs and trade quotas, market capture and suppression in international competition are ruled out and there are virtually no incentives for price dumping in foreign trade. National trade strategies can thus regain their freedom to concentrate on beneficial competition, on the diversity of domestic supply, on the balance of import and export trade (trade balance), and on the balance of the national account.

Under the conditions decribed, economic areas should limit economic policy dumping including subsidization to industries that serve to secure the future in the national interest. While it should be the task of a national antitrust and competition agency to keep entrepreneurial dumping, above all structural dumping, within reasonable production-related limits and within socially and ecologically compatible limits.

Click here for the German-Language version: Wirtschaftliches Dumping.

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