Social Dumping (types and causes)

By Matías Riquelme

Social dumping is a class of economic crime that puts into practice competition with a lack of loyalty, through which companies minimize costs to take advantage of the conditions and low wages of workers in underdeveloped countries, in doing so, they get reductions in the business’ labor costs of production and in this way offer prices that could be highly competitive in the market to maximize their profits.

This practice of selling goods and services at low prices, is used more than anywhere in the content of international trade. It is a bad way to make sales abroad at lower prices, compared to those sold in the domestic market, which help them stay above their direct competition.

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

On the other side are the underdeveloped countries, where their labor legislation is still in the process of development. In most of these countries, the salaries offered are quite low and the working conditions are established in a much less demanding way. This generates lower costs for companies.

Due to these two situations, multinational companies can take their production from countries that are already developed to those still in that process in order to save costs. When this cost saving is carried out due to a bad labor situation, the prices of greater competition are derived and social dumping occurs.

Effects of social dumping

In developed countries, the main social dumping effect is the disadvantage due to the loss of business investment, especially in jobs and tax collection. When they are established in other countries to save costs, these companies reduce the number of employees in developed countries to stop paying taxes to the state.

In developing countries, the consequence of this effect is job insecurity. That is, if governments use lack of labor protection as a claim to attract foreign investors, employees will be without any type of protection and thus companies will can use that to lower their costs. It is a situation that can be produced by corrupt governments with the authority to prevent workers from claiming their rights.

However, it may happen that the competition produced by the arrival of a large number of companies in underdeveloped countries, allow wage increases to be made and improve the working conditions of the employees.

Classification of social dumping

The types of dumping are classified as follows:

Sporadic

It is the occasional loss of sales, which allows price discrimination due to the appearance of surpluses in the production of a certain product. In this case, so the producer won’t have an internal imbalance and can avoid the financial costs included, it tries to divert these excesses to the international market in low-cost prices, which will help the import country to increase its potential.

Predatory

It is seen as unfair competition as well as the most damaging way to lose a sale. It is the sale that the exporter makes of the external production of the market, allowing a loss that at the same time gives him profits and thus he can exclude the competition, and set new prices that will benefit him in the long term.

Persistent

It is the continuity of exports carried out below normal prices, to increase the opportunity to take advantage of differentiating the flexibility of prices that the domestic market demands against exports.

What is international dumping?

It is a technique that focuses on international markets, to set prices below the real cost at which the company has exported. This allows the prices of the product sold to be 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 make sales below the real costs of production. Despite this, there are some exceptions such as excess production or if it is shown that the sale can lead to losses by having to sell the product at the full manufacturing cost.

According to those who defend the market, they affirm that this end of being of great benefit to consumers, because they can get the products at a low cost, however, this is not allowed all the time.

Obviously, the producers of the country in which the product dumping is carried out is destined to lose some credibility, due to having to offer their own products at higher prices than those that have been brought from other countries. Dumping can be avoided through high taxes on the products where it is carried out and can be reported to the World Trade Organization.