Social dumping is an unfair competition practice whereby companies reduce costs by taking advantage of low wages and poor working conditions in an underdeveloped country.
This practice is called "dumping" because it is considered that the companies that practice it are selling below the cost that they would really have to bear if their workers enjoyed working conditions in force in more developed countries.
Social dumping consists of a regulatory arbitrage whereby companies try to reduce their costs by investing in countries with less strict labor, environmental and fiscal regulations. In this way, international companies achieve great savings in labor and regulatory costs.
Causes of social dumping
Social dumping can be understood from a double perspective. On the one hand, there is the high protection that developed countries grant to their workers. Measures such as minimum wages, labor safety regulations or compensation for dismissal, among others, generate costs that companies will try to avoid or reduce.
On the other hand, we find developing countries in which labor legislation is barely developed. In these countries much lower wages can be offered and working conditions are much less strictly regulated, thus reducing costs for companies.
Faced with these two situations, multinational companies may choose to move their production from developed countries to developing countries to save costs. When this cost savings derived from the worst employment situation leads to more competitive prices, we can speak of social dumping.
It may happen that situations that at first seem of social dumping really are not. Sometimes the reduced labor cost is motivated by the low cost of living in general in the country, not by the lack of protection of its workers. In Cambodia, for example, the salary of $ 140 for textile workers is equivalent to that of a teacher and there are basic rights such as the right to strike. Therefore, a low wage (compared to those in developed countries) does not have to imply the existence of social dumping.
Effects of social dumping
For developed countries, the main effect of social dumping is the loss of business investment and, therefore, of employment and tax collection. By preferring to establish in other countries to save costs, companies dispense with their workers in developed countries and stop paying taxes to their governments.
For underdeveloped countries, the main consequence of social dumping is job insecurity. If governments use the lack of labor protection as a claim to attract foreign investment, the country's workers will find themselves unprotected, and companies can take advantage of this lack of protection to reduce costs. This situation is usually accompanied by corrupt or authoritarian governments that impede the mobilization of workers and the fight for their rights.
But it can also happen that the competition generated by the massive arrival of companies to an underdeveloped country generates an increase in wages and an improvement in working conditions. In fact, this is the logical consequence of the increase in demand in the labor market if there are no factors such as those mentioned above that slow down this process. These types of consequences are beginning to be seen today in some areas of China, where the reduced labor cost is no longer one of the demands for foreign investment.