Question

What is dumping? Why does prohibiting it often work better in theory than in practice?

Short answer

Competition reducing method.

Step-by-step solution

Step1. Introduction

With the increased free trade and liberalized trade policies, it has become very easy to trade with countries across the globe. This opens up a great market for already developed economies.

Step2. Definition

Dumping refers to the practice of "dumping" products, i.e. exporting products at prices much lower than the general prevailing prices, and more often that not, even below the cost of production. This practice is commonly adopted by developed economies as only they can afford to invest such huge capital and sell the product incurring losses.

This is done to drive businesses out of market so as they can enjoy sole monopoly power and charge higher prices to recover the losses incurred initially.

Step3. Explanation

To prohibit dumping, often import tariffs are imposed so as the prices of the products become higher, making the product just as expensive as it is being sold in the domestic market.

But it definitely works better in theory than practice because how much tariff is enough to raise the prices differs from company to company and product to product. It is difficult to identify the correct price and correct it manually through tariffs. Also, government interference and corruption might divert away the purpose of anti-dumping policies.