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Countervailing duties: Meaning, calculation and example

Countervailing duties are tariffs imposed by governments to neutralize the impact of subsidies provided. Learn more about it in this blog.
countervailing duties
Global trade often faces challenges when exporting countries subsidize industries, giving foreign goods an unfair cost advantage in international markets. This can lead to cheaper imports flooding domestic markets, undercutting local businesses, and causing significant harm such as job losses and business closures. To address this imbalance, countries implement countervailing duties (CVDs), which are tariffs specifically aimed at neutralizing the benefits of these subsidies. By leveling the playing field, CVDs play a crucial role in promoting fair competition and protecting domestic industries from unfairly low-priced imports. In this blog post, we’ll explore what countervailing duties are, why they matter, how they operate, and their broader impact on global trade.

What is a countervailing duty (CVD)?

CVD is a specific kind of tax that the importing country imposes on goods to protect domestic industries by offsetting the negative impact of subsidies offered by the exporting country. In certain situations, the World Trade Organization (WTO) permits the introduction of countervailing duties. The nation implementing the duty must first demonstrate that the subsidy is impacting local businesses.1

Importance of countervailing duties

As competitors obtain a subsidy to export goods, domestic producers selling the same products may get adversely impacted. CVD ensures that domestic producers are not put at a disadvantage because of foreign subsidies on imported goods.

Functions of countervailing duties

A countervailing duty resolves or neutralizes the impact of an excessive subsidy given by a foreign government to the producers, sellers, or exporters of a particular product category. The government of the importing country levies countervailing duties so that domestic businesses do not have to compete with artificially lowered product prices.

Types of countervailing duties

Import duties

Taxes on imported goods are known as import duties. By raising the price of imported goods, import duties help domestic businesses with international competition.

Export tariffs

Taxes on exports are known as export tariffs. For each unit, certain countervailing duties are levied.

Subsidies

Government payments known as subsidies are given to native sectors to help them compete with international businesses.2

How do countervailing duties (CVDs) work?

The World Trade Organization (WTO) has established specific processes to identify circumstances under which an importing country can levy countervailing tariffs. The terms under which an export subsidy can be utilized are specified in the WTO’s ‘Agreement on Subsidies and Countervailing Measures’, which is part of the General Agreement on Tariffs and Trade (GATT), 1994. The WTO also controls the steps that countries might take to lessen the impact of these subsidies like requesting the elimination of subsidy through the WTO’s dispute resolution process and putting CVDs on subsidized imports that are impacting domestic manufacturers.3

Example of countervailing duties

Let us understand how countervailing duties work with the help of an example. Country ‘A’ offers its domestic widget manufacturers an export subsidy. These widget producers export widgets in large quantities to country B INR 800 each. But B has its own widget industry, and its domestically produced widgets are sold for INR 1000 per unit. In such a scenario, country B learns that the unchecked inflow of subsidized widgets is harming its domestic widget industry. It then decides to levy a 25% countervailing charge on widgets imported from A to protect the country from further losses and an economic crisis.

How is CVD duty calculated?

Countervailing duties are determined by calculating the exact price difference made possible with the foreign government’s financial aid, that is the countervailable subsidy. The amount of the price difference may vary depending on the nature of the foreign government subsidy, the prescribed utility of the subsidy, the normal commercial interest rate, and other factors. Domestic factors such as the potential damage to domestic industries and the margin of dumping also influence the calculation.4

Difference between anti-dumping and countervailing duties

Anti-dumping taxes are tariffs that a domestic government imposes on imports that it believes are priced below fair market value by the seller. Anti-dumping taxes are put in place by governments to stop imports that are priced low from hurting their domestic markets. On the other hand, countervailing duties are imposed by the domestic government on imports that have benefited from government subsidies in their country of origin.

Understanding different types of taxes and its importance helps exporters like you run a smooth business. With e-commerce exports, the process to obtain documentation and licenses, and export from India has become simpler than before.

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Frequently Asked Questions

1. Who imposes countervailing measures in India?
In India, the Directorate General of Trade Remedies (DGTR) is responsible for investigating and recommending countervailing duties, which are then imposed by the Ministry of Finance.
2. Are countervailing duties permanent?
No, countervailing duties are typically reviewed periodically and may be adjusted or removed based on changes in the foreign subsidy or market conditions.
3. Who pays countervailing duties?
The importer of the subsidized goods is responsible for paying countervailing duties, which are collected by customs authorities at the point of entry.
Published on March 29, 2023.

Sources:
1. https://www.business-standard.com/about/what-is-countervailing-duty
2. https://www.dripcapital.com/en-us/resources/blog/what-are-countervailing-duties
3. https://www.investopedia.com/terms/c/countervailingduties.asp
4. https://www.dgtr.gov.in/sites/default/files/DGAD_Countervailing_duty_rules_0.pdf

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