Countervailing duties are trade measures designed to protect domestic industries from unfair competition caused by subsidized imports. Understanding these duties is essential for industries to defend against harmful trade practices. This article offers a comprehensive look at the meaning of countervailing duties, how they work, their examples, and how to do their calculations.
What are Countervailing Duties?
Countervailing duties are taxes on imported goods subsidized by the country of origin, also known as anti-subsidy duties. Countervailing duties aim to protect domestic industries from unfair competition by levelling the industry field through offsetting subsidies' value. Understanding countervailing duties protects your company against the negative domestic impacts of unfair practices.
How do Countervailing Duties (CVDs) work?
Countervailing duties are meant to eliminate negative effects caused by subsidies imposed on imported goods in a specific country where the product is not subsidized. If the effects are not met with severe measures, it will affect the domestic industry, causing certain implications for local companies.
Also Read: Duty vs Tariff vs Tax: Learn the Key Differences
The implications may include the closure of the industries, leading to major job losses. Understanding how countervailing duties work will ensure you prevent any negative implications that these subsidies may cause.
The countervailing duties in the USA work in the following steps:
- The Department of Commerce(DOC) conducts investigations on various petitions that have been filed by American businesses to determine whether necessary action should be taken.
- The DOC then checks to determine if the petition meets the requirements to facilitate an investigation.
- The DOC then determines the Countervailing Duties rate and announces it.
- The final step involves the collection of the CVDs by the U.S. Customs and Border Protection(CBP). After this, necessary action is taken against the subsidized products in the country.
A study by the United States Government Accountability Office shows that as of March 2022, the United States received 657 countervailing duty orders that affected imports from 59 countries. The Subsidies Agreement sets rules and specific procedures that govern WTO members' application of anti-subsidy or countervailing duty concerning subsidized imports. It states that the CVD measures are to be applied if a subsidy is found to cause negative impacts on local industries in the country.
Example of Countervailing Duties
The following is an example of CVDs. Consider country C, which offers great export subsidies to a product at $9; country D has its product at $11. If country D determines that country C's products are largely subsidised and are causing negative effects on their products, it may petition a 25% CVD on the imported product for it to be at $11. This will eliminate the unfair pricing of country C due to its product subsidies.
What are other types of anti-subsidy measures?
Apart from Countervailing duties, other anti-subsidy measures can combat the unfair and negative effects of subsidized goods in the U.S. They include:
- Voluntary export restraints
This measure limits the amount of goods a specific country can export to another. The exporting country chooses the limit, whereas the importing country doesn't have to use quotas, tariffs, or other importation control measures. It is usually imposed in an exporting country that has a competitive advantage against the importing country.
- Price undertakings
This is a voluntary agreement between the exporting industry and the government, imposing the sale of products above the minimum price. This, in turn, helps address the unfair competition that comes with subsidies for foreign products.
- Anti-Dumping duties
This is imposed to help the domestic country's industry negatively affected by unfair pricing. It prevents foreign industries from selling products in the U.S. at less than the fair price. It also imposed additional duties on imported goods to offset the foreign and U.S. price differences.
These measures ensure industries have fair competition across countries and prevent market distortions.
How to Calculate Countervailing Duty?
Understanding countervailing duties and how to calculate them is essential in preventing unfair competition from exporting industries. The following are the steps involved in the calculation of the CVDs:
- Identify the amount of subsidy imposed by the exporting country on the product, including cash payments, low-interest loans, tax breaks, or other financial assistance relating to the said product.
- Determine the countervailing duty rate by expressing the subsidy as a product price percentage. This is done by dividing the subsidy amount by the exported product's price.
- Apply the rate to the imported product value by multiplying the subsidy rate by the import value of the specific product to get the countervailing duty amount.
Example: An exporting company provides a $20 subsidy per unit for a product that should cost $35.
Calculation: Subsidy rate = ($20 subsidy) / ($35 product cost) = 57% If the value of the imported product is $40, the countervailing duty would be: ($40 import value) x (57% subsidy rate) = $23
Countervailing duties are important in international trade policy, as they eliminate unfair competition caused by unfair pricing of imported goods. By imposing the CVDs, countries can prevent negative impacts caused by subsidies and protect their economy through fair competition globally, hence being crucial in understanding what are countervailing duties.
Frequently Asked Questions
1. What is the Difference Between Anti-Dumping & Countervailing Duties?
The difference between Anti-dumping and Countervailing Duties is that anti-dumping duties prevent foreign industries from selling products in the U.S. at less than fair prices, while countervailing duties target foreign governments that provide subsidies to their exporters, allowing them to sell at unfairly low prices.
2. Who can file a petition for a CVD investigation?
A local industry or any interested party can file a petition to facilitate countervailing duty investigations.
3. Can a CVD be applied retroactively?
Yes, CVD can be applied retroactively, specifically when a government agency determines "critical circumstances" exist. This means a company may have imported a large amount of goods before a countervailing investigation was conducted to avoid paying for potential duties.
4. What are the potential downsides of CVDs?
The negative impacts of countervailing duties include:
- The increase in consumer prices
- Potential trade wars
- It can be harmful to international trade.
- This may cause complexities in determining subsidies.
