In the modern economy, nations of the world take part in international trade to exchange goods, improve economic growth, and boost local industries. However, when specific governments subsidize their exports significantly, it tends to create an uneven ground, negatively impacting producers in other nations. To minimize the negative effects, countries that import goods tend to impose countervailing duties.
Let us understand the meaning of countervailing duties in detail.
What are Countervailing Duties?
Countervailing duties refer to charges imposed by countries that might offset (countervail) the price effect of major foreign government subsidies on a good.
For instance, if a particular country delivers significant production subsidies to oil & gas organizations, the subsequent country might impose a countervailing duty on the import of oil & gas from the former country. This allows the latter country to ensure that oil & gas producers remain equal when compared with foreign competitors.
By imposing the countervailing duty, the country that imports goods is responsible for adjusting the price of subsidized goods to the fair market value. This helps create an equal field for local manufacturers and sellers. The duty amount is typically calculated depending on the subsidy value, making sure that the subsidized products do not end up outpricing commodities due to external financial assistance.
Who is Responsible for Countervailing Duty?
Usually, the importer of goods is responsible for paying all customs duties related to the import of goods. This includes the countervailing duty.
As these expenses are mostly passed in some form to the product’s end consumers, it can be slightly complicated. In a broader sense, everyone in the supply chain is responsible for paying a specific portion of the countervailing duty.
What is the Importance of Countervailing Duty?
The main function of the countervailing duty is to minimize the effect of excessive or unfair subsidies imposed by a foreign government on the sellers or producers of the commodity. As sellers or producers are not able to sell their products at an unreasonably lower price, their domestic competitors end up competing fairly.
Some more benefits to consider are:
- Ensuring Fair Competition: Countervailing duties tend to create a fair marketplace where prices are a true reflection of the total cost of production. In this scenario, prices are not artificially reduced by foreign subsidies. This results in the development of a fair business environment for local manufacturers while boosting competition.
- Protection of Domestic Industries: As subsidized goods enter the market, domestic industries or businesses start struggling with intense competition. Usually, this phenomenon results in reduced profitability, prospective business closures, and even job losses. Through the use of countervailing duties, a nation is capable of preventing foreign commodities from taking over the local industries.
- Maximizing Economic Stability: Domestic industries and businesses play a crucial role in offering employment opportunities and boosting the economy. Therefore, it is crucial for governments to protect these industries from unfair competition to ensure the economic health of the country.
How is CVD Calculated?
Usually, the country that aims to impose a countervailing duty is expected to conduct an in-depth investigation of the industry and the nation where the goods are produced or marketed. Once the impact and amount of subsequent subsidies are analyzed, a countervailing duty is imposed. This duty is responsible for increasing the price of the good to where it is supposed to be in the destination country.
How Does a Countervailing Duty Function?
Typically, countervailing duty is imposed on goods that have been subsidized by some foreign government to balance the price difference created due to these subsidies. Here is a detailed overview of how CVD functions:
- Subsidy Identification: Authorities of the importing nation investigate foreign goods to understand whether or not they benefit from government subsidies. The WTO, or World Trade Organization, is responsible for providing essential guidelines for identifying and categorizing such subsidies.
- Harm Assessment: Specific bodies within the realm of domestic industries, like the ITC or the International Trade Commission, are responsible for determining whether or not subsidized items can potentially cause any harm to local businesses or industries. If it is obvious that some harm or damage will take place, these bodies can proceed with the next series of steps.
- Duty Calculation: The countervailing duty is calculated based on the subsidy amount. The duty strives to increase the price of imported goods to the fair market value. This helps in reducing the pricing advantage due to subsidies.
- Implementing Countervailing Duty: Once the CVD amount is finalized, the importing nation applies the duty to the imported items. In this case, it is the responsibility of the customs agencies to collect the duty at the entry point.
What is the Economic Impact of Countervailing Duties?
Some points to consider are:
- Market Fairness: As the overall impact of foreign subsidies is addressed effectively, countervailing duties are able to create a balanced trading environment. These duties aim to protect domestic businesses and industries from unfair low-priced imported goods while encouraging healthier market competition.
- Trade Relations: When countervailing duties are imposed on subsidized foreign goods, trade relations between nations tend to strain, particularly when the exporting nation disagrees with the agreement. In these cases, nations can leverage the dispute resolution procedure as put forth by WTO to come up with proper solutions and minimize trade disputes.
- Consumer Prices: Countervailing duties tend to increase the price of subsidized goods. Therefore, consumers have to incur higher costs on imported items. However, these price adjustments are usually essential to maximize local industry stability.
Conclusion
Countervailing duties play a crucial role in ensuring fair trade practices while making sure that local industries are able to compete without getting affected by subsidized imports. These duties are also helpful in protecting jobs, promoting economic stability, and fostering a level field for businesses.
