What are 'Countervailing Duties'
Tariffs levied on imported goods to offset subsidies made to producers of these goods in the exporting country. Countervailing duties (CVD) are meant to level the playing field between domestic producers of a product and foreign producers of the same product who can afford to sell it at a lower price because of the subsidy they receive from their government. If left unchecked, such subsidized imports can have a severe effect on domestic industry, forcing factory closures and causing huge job losses. As export subsidies are considered to be an unfair trade practice, the World Trade Organization (WTO) – which deals with the global rules of trade between nations – has detailed procedures in place to establish the circumstances under which countervailing duties can be imposed by an importing nation.
BREAKING DOWN 'Countervailing Duties'
Consider the following example of countervailing duties. Assume Country A provides an export subsidy to widget makers in the nation, who export widgets en masse to Country B at $8 per widget. Country B has its own widget industry and domestic widgets are available at $10 per widget. If Country B determines that its domestic widget industry is being hurt by unrestrained imports of subsidized widgets, it may impose a 25% countervailing duty on widgets imported from Country A, so that the resulting cost of the imported widgets is also $10. This eliminates the unfair price advantage that widget makers in Country A have due to the export subsidy from their government.
The WTO’s “Agreement on Subsidies and Countervailing Measures,” which is contained in the General Agreement on Tariffs and Trade (GATT) 1994, defines when and how export subsidies can be used and regulates the measures that nations can take to offset the effect of such subsidies. These measures include the affected nation using the WTO’s dispute settlement procedure to seek withdrawal of the subsidy, or imposing countervailing duties on subsidized imports that are hurting domestic producers.
The definition of “subsidy” in this regard is quite broad. It includes any financial contribution made by a government or government agency, including a direct transfer of funds (such as grants, loans and infusion of equity), potential direct transfer of funds (for example, loan guarantees), fiscal incentives such as tax credits, and any form of income or price support.
The WTO only permits countervailing duties to be charged after the importing nation has conducted an in-depth investigation into the subsidized exports. The agreement contains detailed rules for determining whether a product is being subsidized and calculating the amount of such subsidy, criteria for establishing whether these subsidized imports are affecting domestic industry, and rules for the implementation and duration of countervailing duties, which is typically five years.