What is Anti-Dumping Duty?
Anti-dumping duty is the amount of tax or duty that is imposed on import of products or services when the imports are priced by foreign sellers lower than the price that those products or services will fetch in the open market of the domestic country of those foreign sellers.
How does Anti-Dumping Duty Work?
- Whenever foreign exporters export their goods to another country at a price less than the price prevailing in their local markets, there is a risk to the manufacturing companies operating in the domestic country of importer. This is because, due to lower prices, the importer will tend to purchase the goods from a foreign manufacturer, instead of the local manufacturer.
- In order to protest the interest of the domestic business houses, the government of the land, imposes a reasonable amount of duty on such foreign imports, keeping in mind the amount by which prices are being reduced by the foreign exporters.
- After anti-dumping duty is imposed, the import price and domestic price of a product come to equilibrium and the domestic business houses and foreign exporters come at par, in terms of competition. The duty is imposed by a government only when some serious threat is caused by domestic industries.
How to Calculate Anti-Dumping Duty?
We have understood by now that the basis for imposing the anti-dumping duty is the difference in prices of a product at which it is exported as compared to the price of such product in the open market of the exporter country (i.e. the fair price of such product).
Now, let us understand what does “Normal Value” and “Export Value” mean.
#1 – Normal Value
- The normal value of a product means the domestic fair value of such or any similar product in the country of exporter.
- In case the normal value can’t be evaluated in the absence of domestic sales by the exporter in his country, then there are two other ways by which we can calculate Normal value.
- The price at which such product or any similar product is exported to some other country may be considered.
- If such price is also not available then the cost of production as increased by overhead expenses and a reasonable profit marginProfit MarginProfit Margin is a metric that the management, financial analysts, & investors use to measure the profitability of a business relative to its sales. It is determined as the ratio of Generated Profit Amount to the Generated Revenue Amount. may be considered to be normal value.
#2 – Export Value
- As the term suggests, it is the value at which a product is exported. It means the FOB (Free on Board) price of the product. This is because the value of dumping can be calculated when the normal value of the product in the exporter’s country is compared against the FOB price of the product (and not CIF price, since Cost, Insurance and FreightCost, Insurance And FreightCost, Insurance and Freight (CIF) are the expenditures borne by the seller to cover not just the regular costs but also the charges on the freight and insurance for securing the losses that may arise out of probable damage or theft of a customer’s order. price will include the effect of freight and insurance too).
- Having talked about the manner of calculation of Anti-Dumping duty, let us look at a few examples of the same.
Examples of Anti-Dumping Duty
Below are the examples of anti-dumping duty.
Let us suppose Mr. John of the USA exports machinery to Mr. Ram of India. He sells the machine to Mr. Ram for $ 40,000 on the FOB contract. However, Mr. John sells the machinery of the same kind in the local markets of the USA for $44,000. Then, anti-dumping duty is calculated as below:
Calculation of Anti-Dumping Duty can be done as follows:
- Anti-Dumping Duty = $44,000 – $40,000 = $4,000
Now, assume if in case of the first example, the machinery of the same kind is not being sold by Mr. John in the USA and the same was made on the custom request of Mr. Ram. However, a machine with similar features and functions was exported by Mr. John to Mr. Gayle of South Africa for $ 50,000 on CIF Basis. The expenses incurred on freight and insurance on the machinery was $ 1,000. Now, let us see how the anti-dumping duty will be calculated.
Calculation of Normal Value can be done as follows:
- Normal Value = Export price of a product in 3rd Country – Freight and insurance expenses
- Normal Value = $ 50,000 (CIF Value) – $ 1,000
- Normal Value = $ 49,000 (FOB Value)
Calculation of Anti-Dumping duty can be done as follows:
- Anti-Dumping Duty = $49,000 – $40,000 = $9,000
Again, moving with the same example, let us assume that no such machinery was sold to anyone other than Mr. Ram. However, we have the following data about the production of machinery.
- Cost of production of machinery = $32,000
- Allocation of overhead costs to machinery = $ 4,000
- Mr. John earns an average profit of 20% on all his productions.
- Normal Value = $ 32,000 + $4,000 + 20% of ($32,000 +$4,000)
- Normal Value = $43,200
Calculation of Anti-dumping duty can be done as follows:
- Anti-Dumping Duty = $43,200 – $40,000 = $3,200
Benefits of Anti-Dumping Duty
- Imposing of anti-dumping duty protests the domestic businesses of a country against the unfair competition, created by foreign exporters by reducing the export prices as against their fair price.
- The intention of such exporters for dumping is to establish market shares in other countries by offering lower prices. As a result, the market share of domestic business houses gets affected. Thus, anti-dumping duty acts as a weapon to curb such unfair pricing policies and competition becomes fair.
- As everything has its pros and cons, anti-dumping duty has its share of cons too. While anti-dumping duty protests the interest of domestic industries, it creates a barrier in free trade between economies.
- As a result, the economy of such a country that imposes a duty suffers the results of restrictive entry into its market. Moreover, it is against the interest of domestic consumers as they are restrained from obtaining the products at lower prices.
Anti-dumping Duties and Countervailing Duties
Apart from anti-dumping duty, sometimes countervailing duty is also imposed by governments. It is imposed to nullify the effect of subsidies available to exporters in their countries.
Anti-dumping Duty intends to protect the domestic industries from the impact of unfair price reductions by foreign exporters, it must be imposed with the utmost care and only when it causes some threat to domestic industries.
This has been a guide to what is the anti-dumping duty and its definition. Here we discuss the working and calculation of anti-dumping duty along with its benefits and drawbacks. You can learn more about financing from the following articles –