written by | January 16, 2023

Understanding Countervailing Duties | Impact on International Trade

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Countervailing  Duties are applied to level the playing field by making imported goods more expensive and less competitive with domestic products. Dumping occurs when a country exports a product to another country at a price that is lower than the price of that same product in the domestic market of the exporting country. This can happen for several reasons, including government subsidies, economies of scale, or a simple desire to gain market share in the importing country. Learn more about countervailing duties in this blog.

Did you know? The Indian government has recently stipulated to extend antidumping charges on Chinese tyres for another three years.

What are Countervailing Duties (CVDs)?

A countervailing duty is a type of trade barrier imposed by a government to offset the subsidies given to businesses by foreign governments. A countervailing duty aims to level the playing field so that businesses in the country imposing the duty are not at a competitive disadvantage. Subsidies are often given to businesses by foreign governments to encourage them to locate in that country or buy from it. For example, a government may subsidise a company to encourage it to set up a factory in that country. This can make it difficult for businesses in the country to impose the countervailing duty to compete.

The World Trade Organization (WTO) allows for the imposition of countervailing duties in certain circumstances. For a countervailing duty to be imposed, the country imposing the duty must first prove that the subsidy is causing harm to its businesses. The WTO also limits the amount of duty that can be imposed.

Also Read: What are the Advantages and Disadvantages of Exporting in India - A Complete Guide

Types of Countervailing Duties

There are four types of countervailing duties: import tariffs, export tariffs, quotas, and subsidies. 

  • Import tariffs are taxes imposed on imported goods. They are designed to protect domestic industries from foreign competition by making imported goods more expensive. 
  • Export tariffs are taxes imposed on exports. Specific countervailing duties are imposed on a per unit basis. 
  • Quotas limit the quantity of a good that can be imported or exported.
  • Subsidies are payments made by the government to domestic industries to help them compete with foreign enterprises.

What Is the Purpose of Countervailing Duty?

The purpose of countervailing duties is to protect domestic industries from foreign subsidies that give those foreign producers an unfair advantage in the marketplace. When foreign producers can sell their products at artificially low prices due to subsidies, it hurts domestic producers who cannot compete. Countervailing duties are tariffs imposed on imported goods that the foreign government subsidises. 

Countervailing duties help protect domestic industries and jobs by levelling the playing field. 

In general, countervailing duties (CVDs) are tariffs imposed on imported goods that benefit from subsidies in the exporting country. 

  • The purpose of a CVD is to offset the subsidy and level the playing field between domestic and foreign suppliers. 
  • CVDs are often imposed in response to a complaint from a domestic industry that is being harmed by subsidised imports. To succeed, the domestic industry must show that it is “materially injured” or “threatened with material injury” by the subsidised imports. Once the CVD is in place, the domestic industry is typically protected from the harmful effects of the subsidy. This can lead to increased production and jobs in the domestic sector.
  • The importing country typically imposes CVDs after an investigation finds that the subsidising government is providing unfair subsidies. The importing country's trade authorities conduct the investigation, and if they find that the subsidies are unfair, they will impose a CVD.
  • CVDs can be imposed on a wide range of products, and they are often used in response to subsidies provided by developing countries. They can be an effective tool for protecting domestic industries, but they can also lead to retaliation by other countries and higher consumer prices.

Also Read: List Of Import-Export Business Ideas To Carry Out In India

When can CVD be Imposed?

CVD can be imposed in several situations, most commonly when there is evidence of dumping or subsidies. In the case of dumping, CVD can be imposed to equalise the playing field between imported and domestically produced goods. In the case of subsidies, CVD can be imposed to offset the advantage that the subsidised good has in the market. In both cases, the goal of CVD is to create a level playing field so that domestic producers can compete fairly in the marketplace.

When a country's producers are at a competitive disadvantage due to subsidies, CVD can be imposed to equalise the playing field. CVD can also be imposed when a country's producers are unfairly harmed by dumping. Dumping occurs when a foreign company sells its products in the domestic market at a price below the cost of production. This can harm domestic producers by driving down prices and making it difficult for them to compete. It can also encourage firms to relocate to the country, imposing the tariff to take advantage of the lower prices.

What Is the Process for Imposing Countervailing Duties?

  • The WTO member imposing the duties must first notify the WTO of its intention to do so. 
  • The WTO member that is the target of the duties must then be allowed to respond. 
  • The WTO member imposing the duties must decide whether the subsidies are being provided
  • .If the WTO member determines that the subsidies are being provided, it can then impose the countervailing duties.
  •  The amount of the duties must be equal to the subsidy. 

Countervailing Duties in India

In India, countervailing Duties are levied on imported goods which are found to be subsidies by the Government of India. This is done to protect the domestic industry from being adversely affected by such subsidies. In India, the Directorate General of Anti-Dumping & Allied Duties (DGAD) is responsible for investigating dumping, subsidising, and imposing anti-dumping and countervailing duties.

In 2018, the DGAD recommended the imposition of a definitive anti-dumping duty on imports of ‘Certain Hot-Rolled Carbon Steel Flat Products’ (HR Coils) originating in or exported from China, Japan, Korea, and Ukraine. This was in response to an injury complaint filed by the Steel Authority of India Limited (SAIL). The final duty was imposed in 2019. India imposed a countervailing duty of 6% on imports of certain hot-rolled flat products of stainless steel from China after finding that the Chinese government was providing subsidies to its producers. The duty was imposed for five years.

India has imposed CVD on several imported products, such as certain steel products, chemicals, and agricultural goods, to counter subsidies provided by foreign governments to their domestic industries, which is considered to be trade distorting. 

Also Read: How To Make An Import-Export Business Plan : Tips And Tricks

Conclusion

A countervailing duty is a trade measure implemented by a country to offset subsidies being provided to foreign producers of a good or service. This type of duty aims to level the playing field by making imported goods more expensive and thus less competitive with domestic products.It is possible that India continues to impose CVD on certain products, but I can't confirm that without more recent information.

Countervailing duties are often controversial, as they can be seen as protectionism. Critics argue that they lead to higher consumer prices and can start a trade war if other countries retaliate with their countervailing duties. Supporters argue that they must level the playing field and protect domestic industries from unfair competition.

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FAQs

Q: Who decides to impose countervailing duties?

Ans:

The decision to impose countervailing duties is made by the WTO member setting the duties.

Q: Are there any exceptions to the rule that WTO members can impose countervailing duties?

Ans:

There are several exceptions to the rule that WTO members can impose countervailing duties. WTO members are not allowed to impose countervailing duties on certain types of subsidies, such as those that are provided to promote regional development, to support research and development, or to promote the use of domestic over imported goods.

Q: What are the consequences of imposing countervailing duties?

Ans:

The WTO member imposing the countervailing duties may be subject to retaliation by the WTO member that is the target of the duties.

Q: Are countervailing duties permanent?

Ans:

No, countervailing duties are not permanent, and they are typically imposed for a period of five years, although they may be extended.

Q: Does World Trade Organization(WTO) play any role in imposing Countervailing Duties?

Ans:

Yes. The WTO can play a role in imposing countervailing duties in certain circumstances. For example, if a country believes that another country is providing subsidieswhich are  unfairly harming its domestic industry, it can request that the WTO investigate. If the WTO finds the subsidies unfair, it can order the country to remove them.

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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.