Currency dumping is... Exchange rate as an element of the monetary system

23.07.202327.05.2017

General concept of dumping

In the modern world market there is an oversupply of various goods and services, and there is rapid development of competition. Consequently, this also affects the relations between countries. Many countries, instead of using trade restrictions, are increasingly using various measures to promote their goods in foreign markets.

Dumping, in turn, is one of these measures, a kind of manifestation of price competition, as well as a form of price discrimination. Dumping in English means to dump, throw, unload.

In other words, dumping is a means of financial policy that is carried out by promoting goods to foreign markets by reducing the level of export prices below the nominal level that is established in these countries.

Dumping– is a prohibited method of competition, which is formalized in national anti-dumping laws with permission to apply an anti-dumping duty if the fact of dumping is established.

The main purpose of dumping can be called the capture of new foreign markets, and the export of cheap goods that will be more competitive than domestic products.

Thus, from the political side one can also see an interest in obtaining new markets for international trade with less developed countries. Then, upon receiving a new foreign market, we can talk about establishing economic control over this country and reducing the level of competition with national producers.

After World War II, global trade experts identified four types of dumping:

1) price– meant the sale of goods on foreign markets at a price lower than on the national market.

2) dumping of the service sector– the price of export goods is reduced due to transportation with the use of benefits

3) social– low prices of imported goods are caused by the use of prison labor.

4) currency– manipulation of the exchange rate in order to gain an advantage from producers of goods in importing countries.

The essence of currency dumping

Currency dumping- This is the export of goods at lower prices than competitors, with profit from currency devaluation.

Currency dumping tends to apply to almost all goods, but they are not sold at prices below production prices.

Dumping can be carried out under the following conditions:

Market conditions and imperfect competition
Division of the market into segments - the ability to separate prices of the domestic market from the external foreign market
The difference in the elasticity of demand for a product in the markets of foreign countries - abroad, the demand for a product should be more elastic than in the national market

Dumping is directly related to the prices of goods, and its use is primarily associated with the goal of capturing a new foreign market. Under the conditions of dumping, companies always initially suffer large losses, however, after a certain time they are able to receive excess profits. If state-owned enterprises use dumping, then their losses are covered from the state budget by receiving subsidies when carrying out export operations.

The mechanism of action of currency dumping

The concept of currency dumping began to be used in 1929-1933, during the Great Depression. Its occurrence was associated with the uneven level of development of the crisis in the world. Japan, the USA, Germany and the UK began to use exports at low prices.

Currency dumping cannot be called a positive quality for the development of the country, since it disrupts international economic ties and creates unfair competition. In general, for the organization of international trade, currency dumping is even dangerous, as it leads to complete market disorganization and there is the possibility of a trade war.

The impact of exchange rate changes on national and international relations

When the exchange rate increases:

Inefficiency of export operations
Expanding imports, receiving premiums for importers
Decrease in the volume of national production and industries that export goods
Increased profits
Reduction in the real amount of external debt in foreign currency

When exchange rates depreciate:

Reduced export of capital and investments
Reducing external debt in national currency
Expanding the production of goods replacing imported ones
Inflation– rising prices in the country
Import reduction
Large-scale export of goods from the country
Obtaining exchange rate differences by exporters when converting an increasingly expensive foreign currency into a cheaper national one.

The fight against currency dumping

Anti-dumping measures are one of the main tasks of the World Trade Organization, which includes Russia. This organization is primarily designed to regulate trade relations, as a result of reducing the likelihood of currency dumping in developing or highly developed countries. But the World Trade Organization could also lead to undesirable consequences, such as the ruin of a number of businesses.

When defining currency dumping, it is customary to use fair prices, the determination of which causes some difficulties. The price of a product may vary due to a number of factors, such as seasonality, market factors related to competitive conditions, and tariff or tax policies in various countries.

It was 1967 that became decisive in regulating currency dumping issues, since the Anti-Dumping Code was adopted, which contained sanctions on the use of dumping, including currency dumping. Thus, the right was provided for the state that suffers losses from dumping to impose a special anti-dumping duty on the product, which served as a kind of exchange rate difference between the price of the exporting country in the domestic market and the export price of this product.

In the modern world, when exporting goods, their competitiveness will most likely be determined by quality, warranty service, level of sales organization, and not just by their price, therefore, conquering a new export market through dumping becomes a difficult task.

Anti-dumping policy may also be implemented due to changes in exchange rates. Raising inner rate-exporter or depreciation of the national currency to such a level at which import will be completely unprofitable, that is, its effectiveness will decrease.

If there is an oversupply of national goods, then export operations are subsidized at the expense of the state, export duties are reduced, and a hidden form of export subsidization is also possible (instead of subsidies, additional payments are provided to producers of national products).

Consequences of currency dumping

A country that uses currency dumping increases profit exporters, while reducing the standard of living of the population due to rising prices on the domestic market.

Then the country, the object of currency dumping, reduces economic development in various industries that are not able to compete with cheap foreign goods, there is an increase in unemployment.

We should not forget also producers of other countries who are participants in foreign economic relations, and dumping measures of one country can negatively affect the economy of another country.

Manufacturers of goods in the importing country always suffer losses from currency dumping due to overcoming fierce price competition. Then it is local companies that are in a disadvantageous position, since they reduce prices and are not able to compensate for their expenses by selling goods at high prices in other markets.

Consequently, companies lose market share and incur large losses. In order to protect its national producers, each state applies anti-dumping measures against foreign exporters.

The gap between external and internal depreciation of a currency, i.e. the dynamics of its exchange rate and purchasing power, is important for international economic relations. If the internal inflationary depreciation of money outpaces the depreciation of the currency, then, other things being equal, the import of goods is encouraged for the purpose of selling them on the national market at high prices. If the external depreciation of a currency outpaces the internal one caused by inflation, then conditions arise for currency dumping - massive export of goods at prices below the world average, associated with the lag between the fall in the purchasing power of money and the fall in its exchange rate, in order to displace competitors in foreign markets.

The following processes are characteristic of currency dumping:

– the exporter, buying goods on the domestic market at prices that have increased under the influence of inflation, sells them on the foreign market in a more stable currency at prices below the world average;

– the source of the decrease in export prices is the exchange rate difference that arises when exchanging the proceeds of a more stable foreign currency for a depreciated national one;

– export of goods on a mass scale provides super-profits for exporters.

The dumping price may be lower than the production price or cost. However, it is not profitable for exporters to have too low a price, since competition with national goods may arise as a result of their re-export by foreign counterparties.

Commodity dumping arose before the First World War, when enterprises relied mainly on their own savings to conquer foreign markets. Currency dumping first began to be practiced during the global economic crisis of 1929–1933.

Foreign exchange dumping

Foreign exchange dumping. The gap between external and internal currency depreciation, i.e. the dynamics of its exchange rate and purchasing power...

foreign exchange dumping

In inflationary conditions, when external currency depreciation outstrips internal, conditions arise for foreign exchange dumping, the essence of which is...

Foreign exchange dumping

Next question." Foreign exchange dumping. The gap between external and internal currency depreciation, i.e. the dynamics of its exchange rate and purchasing power.

Foreign exchange dumping. The gap between external and internal currency depreciation, i.e. the dynamics of its exchange rate and purchasing power. Loading.

The following processes are characteristic of currency dumping:

– the source of the decrease in export prices is the exchange rate difference that arises when exchanging the proceeds of a more stable foreign currency for a depreciated national one;

– export of goods on a mass scale provides super-profits for exporters.

66. Purchasing power parity theory

Purchasing power parity theory is based on the nominalistic and quantity theories of money. Basic provisions This theory consists of the statement that the exchange rate is determined by the relative value of money of two countries, which depends on the price level, and the latter - on the amount of money in circulation. This theory is aimed at finding an “equilibrium rate” that would maintain a balanced balance of payments. This determines its connection with the concept of automatic self-regulation of the balance of payments.

The most complete theory of purchasing power parity was first substantiated by the Swedish economist G. Kassel in 1918. This theory denies the objective cost basis of the exchange rate and explains it based on the quantity theory of money.

Proponents of the theory of purchasing power parity argue that the equalization of the exchange rate according to the purchasing power of currencies is carried out unhindered under the influence of factors that automatically come into play, since changes in exchange rates affect money circulation, credit, prices, the structure of foreign trade and capital movements in such a way that equilibrium is restored automatically.

The development of state regulation revealed the inconsistency of the idea of a spontaneous market economy with its thesis of automatic restoration of balance. Further development of the theory of purchasing power parity went along the line of adding additional factors influencing the exchange rate and bringing it into line with the purchasing power of money. These include government-imposed trade and currency restrictions, the dynamics of credit and interest rates, etc.

Currency dumping, being a type of commodity dumping, differs from it, although they share a common feature - the export of goods at low prices. But if, with commodity dumping, the difference between domestic and export prices is repaid mainly at the expense of the state budget, then with foreign exchange dumping, it is due to the export premium (exchange rate difference). Commodity dumping arose before the First World War, when enterprises relied mainly on their own savings to conquer foreign markets. Currency dumping first began to be practiced during the global economic crisis of 1929-1933. Its immediate prerequisite was the uneven development of the global currency crisis. Great Britain, Germany, Japan, and the USA used the depreciation of their currencies to export junk goods.

It is known that currency dumping exacerbates contradictions between countries, disrupts their traditional economic ties, and increases competition. In a country that carries out currency dumping, exporters' profits increase, and the living standards of workers decrease due to rising domestic prices. In a country that is the target of dumping, the development of economic sectors that cannot withstand competition with cheap foreign goods is hampered, and unemployment increases. Large exporting firms use currency dumping as a means of currency and trade war to suppress their competitors. In 1967, at the conference of the former General Agreement on Tariffs and Trade (GATT), the Anti-Dumping Code was adopted, providing for special sanctions for dumping, including currency dumping. GATT rules provide for the right of a state that has suffered damage from dumping to impose a special anti-dumping import duty on the corresponding product, equal to the difference between the domestic price in the market of the exporting country and the price at which the product is exported. Nowadays, when the competitiveness of export goods is determined not so much by their price as by quality, organization of sales, after-sales service and other services, the importance of dumping as a means of conquering the export market is falling.

Thus, changes in exchange rates affect the redistribution between countries of the part of the gross domestic product that is sold on foreign markets. In conditions of floating exchange rates, the impact of exchange rates on pricing and the inflation process increases. According to available estimates, a 20% depreciation of the currency of a country that has an export quota of 25% causes an increase in the prices of imported goods by 16% and, as a result, an increase in the general price level in the country by 4-6%. Under the regime of floating exchange rates, this factor of influence on domestic prices acquired a permanent character, while under the regime of fixed exchange rates it appeared sporadically during official devaluation.

In the context of floating exchange rates, the impact of their changes on the movement of capital, especially short-term ones, has increased, which affects the monetary and economic situation of individual countries. As a result of the influx of speculative foreign capital into a country whose exchange rate is rising, the volume of loan capital and investment may temporarily increase, which is used to develop the economy and cover the state budget deficit. The outflow of capital from the country leads to a shortage of capital, a curtailment of investment, and an increase in unemployment. The consequences of exchange rate fluctuations depend on the country’s monetary and economic potential, its export quota, and positions in the IEO. The exchange rate is the object of struggle between countries, national exporters and importers, and is a source of interstate disagreements. For this reason, exchange rate problems occupy a prominent place in economic science.

Currency dumping is one of the methods of economic expansion, which is based on the struggle for foreign markets. Its essence is to reduce prices for export goods in order to increase their competitiveness.

This measure provides an opportunity for the exporter to make a profit through currency devaluation.

The essence of currency dumping operations

Translated from English, the term dumping means “dumping”. The essence of dumping policy is that the manufacturer massively supplies goods at bargain prices in order to ruin competitors and capture new markets. This is a prohibited method of competition and is subject to national anti-dumping laws.

Currency dumping (CD) can be considered as one of the options for commodity dumping. Only in this case does the exporter manipulate exchange rates. It is possible to obtain additional profit from the difference between exchange rates and the purchasing power of national money. Conditions for the mass export of goods at a reduced cost are created if the rate of internal inflation in the country lags behind currency exchange rate fluctuations. As national money depreciates, it becomes possible to expand the supply of goods abroad at bargain prices.

For example, an exporter purchases goods within the country taking into account inflation (more expensive by 5%) and sells them abroad at prices lower than global prices for foreign currency (more expensive by 10%). The source of profit is the difference in rates when exchanging foreign money for a depreciated national currency. The release of cheap goods on a large scale is a means to combat competitors, since by increasing sales volumes, it is possible to effectively displace other producers.

An exporter can sell goods at bargain prices (reducing them below cost) and still make a profit. At the same time, it is dangerous to “drop” prices too much, since you may encounter competition from foreign companies re-exporting national goods.

Consequences

The consequence of this financial policy is the receipt of excess profits by exporting enterprises while simultaneously increasing the level of inflation within the country and reducing the purchasing power of the population.

Enterprises that become objects of internal trade cannot always compete with inexpensive imported goods and face the threat of bankruptcy. As a result, unemployment in the country is growing, the standard of living of workers is falling, and the development of various sectors of the economy is slowing down. TD poses a serious threat to international trade, as it causes market disruption and increases the risk of trade wars.

In 1967, at the GATT (Tariffs and Trade) Conference, a number of anti-dumping laws were adopted, allowing for the application of special penalties against countries resorting to unfair competition policies. Anti-dumping measures are also being developed by the WTO, which includes Russia.

The state that suffered the damage has the right to impose duties on imported goods - the profit received from dumping operations is canceled. As a result, such competitive measures become unprofitable. Thus, each country can apply anti-dumping measures to exporters in order to protect national producers from major losses and ruin.