011 October 2021

Social dumping (types and causes) 

By Matías Riquelme

Social dumping is a kind of economic crime that implements unfair competition, whereby companies minimise costs in order to take advantage of the conditions and low wages of workers in underdeveloped countries to achieve lower labour costs of production and thus offer prices that could be highly competitive in the market to maximise profits.

This practice of selling goods and services at low prices is mostly used in international trade and is a bad way to make sales abroad at lower prices compared to those sold in the domestic market, which will help to stay ahead of direct competition.

On the one hand, there is the high protection that developed countries give to all their employees through various measures such as wages, regulation on job security, and compensation for dismissal causes. But, on the other hand, these will be some of the expenses that companies will try to reduce if possible avoid.

On the other hand, there are underdeveloped countries where labour legislation is still in development. In most of these countries, the wages offered are quite low, and the working conditions are set in a much less demanding way, which generates lower costs for companies.

Because of these two situations, multinational companies can move their production from countries that are already developed to countries that are still in the process of development in order to save costs. However, when these cost savings are made due to the bad labour situation, this leads to more competitive prices and social dumping.

Consequences of social dumping

The main social dumping effect in developed countries is the disadvantage of lost business investment, especially in jobs and tax revenue. This is because when they set up in other countries to save costs, these companies reduce the number of employees in developed countries to avoid paying taxes to the state.

In developing countries, the consequence of this effect is the casualisation of labour, i.e. if governments use the lack of labour protection as a lure to attract foreign investors, employees will be without any protection, and companies will be able to use this to lower their costs. This is a situation that can arise because corrupt governments have the authority to prevent workers from claiming their rights.

However, the competition produced by the arrival of many companies in underdeveloped countries may allow for wage increases and improved working conditions for employees.

Classification of social dumping

The types of dumping are classified as follows:

Occasional

It is the occasional loss of sales, which allows price discrimination by the appearance of surpluses in the production of a certain product, in this case, so that the producer does not have an internal imbalance and avoid financial costs included, try to divert these excesses to the international market at low-cost prices, which will help the importing country, to increase its potential.

Predatory

It is determined as unfair competition and as the most damaging way of selling at a loss. It is the sale by the exporter of the foreign production of the market, allowing a loss and at the same time making a profit, thus excluding the competition and setting new prices that will benefit the exporter in the long run.

Persistent

It is the continuation of exporting below prices to increase the opportunity to take advantage of the price flexibility demanded by the domestic market as opposed to exporting.

What is international dumping?

It is a technique that focuses on international markets to make pricing below the real cost at which the company has made an export. This will allow the prices of the product sold are lower in the foreign country than in the country that exported it.

This execution can generate differences since, in many countries, it is forbidden to sell below the actual costs of production. Despite this, there are some exceptions, such as in the case of overproduction or if it is demonstrated that the sale can produce losses by having to sell the product at full manufacturing cost.

Those who defend the market claim that this is of great benefit to consumers because they can get the products at a low cost. However, this is not allowed all the time.

The producers in the country for which the dumped product is destined can lose some credibility by offering their products at higher prices than those brought in from other countries. Dumping can be prevented using high taxes on the products where dumping occurs and can be reported to the World Trade Organisation.