Countervailing Duties

Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Are Countervailing Duties?

Countervailing duties or CVDs are charges levied on imported goods to counterbalance the subsidies provided by the exporting country. Their primary objective is to bring the price of imported goods closer to their actual value, thereby ensuring fair competition in the domestic market.

ountervailing Duties

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Countervailing Duties (wallstreetmojo.com)

It originated long before the Tariff Act of 1890 in the United States. These duties have been practiced for centuries to protect domestic industries from the advantages foreign exporters take through subsidies. In addition, the aim is to shield domestic producers and foster ethical practices within the market. These duties create a level playing field and promote fair trade practices.

Key Takeaways

  • The countervailing duties meaning refers to special charges applicable to foreign goods (imports) for the subsidy obtained by exporters from their government.
  • In 1994, World Trade Organization (WTO) allowed countervailing duty as per the Article VI of “The Agreement on Subsidies and Countervailing Measures.”
  • However, the origin dates back to the 1890s when the United States imposed this duty in the Tariff Acts of 1890.
  • It helps offset export subsidies (export bounties) and protect domestic producers from its side effects.

Countervailing Duties Explained

The countervailing duties meaning states that specific tariffs are levied on imported goods to neutralize the subsidies obtained by the exporting country. The World Trade Organization (WTO) permits CVDs on imports under Article VI of the “Agreement on Subsidies and Countervailing Measures.”

Let’s explore the relationship between subsidies and countervailing duties in international trade.

The primary purpose of CVDs is to ensure fair competition in international trade. Often, exporters receive subsidies from their governments, resulting in cheaper goods and increased demand in the global market. However, these subsidies can disadvantage domestic producers (importers) as they struggle to compete. To counteract this, importing countries may impose CVDs.

These duties are essential to protect domestic industries and prevent the market from being flooded with subsidized imports. By levying CVDs, the government can restore the original value of the imported goods that decreased due to the subsidies.

The countervailing duty rate depends on the subsidy received and the type of imported goods. In the United States, the Department of Commerce determines this rate. At the same time, the US International Trade Commission (ITC) assesses whether the imported goods are causing any harm to the country’s economy. If the ITC finds evidence of harm CVDs may be imposed on the relevant goods.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

History

The history of countervailing duties dates back to the late 19th century in the United States and Europe. These duties were introduced to address unfair trade practices resulting from subsidies provided by exporting countries to their industries.

In the United States, CVDs were established as early as the Tariff Act of 1890 (also known as the McKinley Tariff). The act authorized the imposition of duties on goods subsidized by foreign governments. The primary focus of these early countervailing duties in the US was on specific industries, such as the sugar industry.

The early 20th century saw further developments in countervailing duties as countries continued to address issues related to subsidies and unfair trade practices.

After World War II, CVDs became an integral part of international trade disputes. As countries engaged in more global trade, CVDs were used as a tool to address issues related to subsidies and to protect domestic industries from unfair competition.

Examples

Let us look at the examples of countervailing duties to understand the concept better.

Example #1

Suppose Italy and Spain are both actively engaged in international trade. Italy exports leather, rubber, and petroleum products, while Spain boasts over 77 leather companies and a diverse range of leather goods with strong demand. However, Italy’s government subsidies have reduced retail prices for Italian leather goods in Spain, potentially disrupting the local leather market.

To address this issue, Spain has imposed CVDs on Italian goods, resulting in an additional charge that brings the imported products’ prices in line with domestically produced goods. This move aims to ensure fair competition and protect the domestic leather industry in Spain.

Example #2

According to the 2022 article, the demand for Spanish olives in the United States decreased by 60%. Before 2017, Spain flooded the US market with olives at a lower price, which impacted the domestic olive industry. In response, the United States imposed CVDs of 27% on Spanish olives to offset the advantages gained through subsidies provided by Spain.

Benefits

Let us look at the benefits or advantages of countervailing duties to comprehend the concept better:

  1. Protection or shield for domestic countries: CVDs are protective gear for domestic firms. It shields them from the unfair competition created by foreign firms.
  2. Acts as a revenue source for the government: These tariffs serve as an income-generating model for the existing government. So, if a country imposes a countervailing duty, it will receive a recurring revenue.
  3. Balances the market distortions: Export subsidies create various market distortions. As a result, CVDs offset the side effects of these subsidies.
  4. Creates job opportunities: Domestic firms can shift their operations to subsidy-providing countries as countries impose this duty. As a result, various jobs get created.

Difference Between Anti-Dumping And Countervailing Duties

Although countervailing and anti-dumping duties target foreign goods, they have slight differences. So, let us look at them:

BasisCountervailing DutiesAnti-Dumping
MeaningIt refers to the tariffs on imported goods when foreign producers get export subsidies.  Anti-dumping duties are charges applied to foreign producers when they sell goods at lower prices than in their home country.
ObjectiveTo protect the domestic producers from offsets of export subsidies.To shield the industry from the low-priced sold by global firms.
Type of goodsThis tariff is applicable on imported goods that avail certain subsidies.Here, low-priced goods include anti-dumping duty.
Also known asCVDsAD

Frequently Asked Questions (FAQs)

1. What is the function of countervailing duties?

The function of the countervailing duty is to remove the unfair competition created by the offsets of the subsidies. Since the domestic producers cannot sell their products at a low price, this tariff brings the low-priced foreign goods on par with other goods. 

2. How are countervailing duties calculated in international trade?

The amount of countervailing duty calculated is equal to the subsidy provided by foreign governments. Later, this amount is added to the price of goods. 

3. Who imposed anti-dumping and countervailing duties?

The importer’s government usually imposes countervailing and anti-dumping duties on subsidized goods. For example, the Department of Commerce and International Trade Commission impose them in the United States. Likewise, the European Commission of the European Union (EU) is prevalent in Europe. 

4. How long do countervailing duties last?

Generally, these duties last for five years or a short period. However, it can depend on the economic condition and situation of the nation. 

This has been a guide to What Are Countervailing Duties. We compare it with anti-dumping duties, and explain its examples, history, & benefits. You can learn more about it from the following articles –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *