What are anti-dumping & countervailing duties: Fully explained

In the world of global trade, not all practices are fair. Imagine a situation where foreign manufacturers flood the market with low-priced goods that local businesses can’t compete with.

This isn’t just an imagination; it’s a real threat known as “dumping.” 

To highlight the seriousness of this activity, the World Trade Organization (WTO) has actively conducted thousands of investigations about it in the last three decades. 

Yet, another situation exists; governments grant subsidies to their local producers to export products at low prices.

This usually creates an unfair advantage for foreign businesses when these subsidized products are sold in their countries. 

Thankfully, this led to the adoption of anti-dumping (AD) and countervailing duties (CVD). These regulations help to level the playing field for businesses of all sizes. But what exactly are these duties, and how do they work today?

This guide uncovers details and examples of how they support domestic markets.

What is anti-dumping duty?

Anti-dumping duty is a tariff that ensures foreign imports are sold at fair market value. It shields domestic businesses from being undercut by low prices set by foreign competitors.

In international trade, “dumping” can disrupt market equilibrium. It occurs when a company exports goods to a foreign market at prices lower than it charges in its home country.

While this practice benefits the supplier’s economy, it puts the importer’s market at huge risk. It leads to unfair competition, threatens domestic industries’ viability, and causes job losses and economic instability.

Thus, governments impose anti-dumping policies to counteract this unethical practice.

In the United States, the International Trade Commission (ITC) and the Department of Commerce oversee the investigation and recommendation of anti-dumping duties.

After thoroughly investigating the occurrence of dumping, they impose AD to offset the price differences. This allows domestic producers to compete fairly.

An example of anti-dumping duty

To better understand anti-dumping duty, let’s consider a real-life scenario.

In June 2015, several American steel companies filed a complaint with the United States Department of Commerce and ITC. They alleged that countries like China, India, Korea, and Taiwan dumped steel into the US market at unfairly low prices. 

This situation affected the local steel industry and created a trade imbalance.

Following a detailed investigation, the United States announced it would impose a heavy duty on steel products imported from the alleged countries the following year. 

This move mitigated the damage caused by the dumped steel and allowed American businesses to regain their competitive footing.

How are anti-dumping duties calculated? 

Anti-dumping duty is calculated by comparing two margins: the margin of dumping (MOD) and the injury margin (IM).

The margin of dumping is the difference between the normal price (the domestic price in the exporter’s country) and the price at which the product is sold abroad.

The injury margin is the difference between the fair selling price (the domestic price under normal conditions) and the landed cost (the total cost of the product, including overhead, shipping, customs duties, and other surcharges).

The duty is then set at the lower of these two margins to ensure fair trade practices.

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What is countervailing duty?

Countervailing duty is a tariff imposed on imported goods to counteract subsidies provided to producers in the exporting country. It helps create equal competition between local manufacturers and foreign producers who sell their goods at lower prices due to government support.

CVDs protect against unfair trade practices by ensuring the costs of imported goods are at fair market value.

Notably, the World Trade Organization outlines the circumstances under which this duty can be enacted via its “Agreement on Subsidies and Countervailing Measures.”

This arrangement establishes a framework for investigating subsidies and determining appropriate responses.

Thus, countries can impose countervailing duties if their domestic industries are adversely affected.

What is an example of countervailing duty?

To illustrate the idea behind the countervailing duty, let’s consider this example.

Country A offers substantial export subsidies to its manufacturers, which allows it to sell electronics at $10 each in country B.

However, companies in country B sell electronic products for $15.

Faced with this price disparity, country B’s local businesses struggle to compete against A’s subsidized imports, leading to economic instability and job loss.

B then imposes a 30% CVD on electronics imported from A to protect its domestics.

This action raises the price of imported electronics to $13, thus reducing the unfair price advantage of product makers in A.

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What is the difference between anti-dumping (AD) & countervailing duties (CVD)?

The main difference between AD and CVD lies in their purposes. AD protects the local market from foreign goods sold at unfairly low prices.

On the flip side, CVD targets foreign products that benefit from government subsidies.

Notably, both address unfair competition that harms domestic industries.

However, let’s explore more subtle differences between them in the table below.

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How are countervailing duties calculated?

A CVD is calculated by investigating and quantifying the subsidies received, determining the price difference, and imposing a duty. Here’s a breakdown:

1. An investigation is the first step

The first step involves a thorough investigation by the importing country’s authorities. They scrutinize the industry and the country of production to identify any subsidies the foreign government provides.

2. Calculate subsidies to measure impact

After key findings, they calculate the subsidies and measure their impact. These subsidies include direct financial support, tax incentives, or other forms of government assistance that lower production costs.

3. Determine the price difference

The authorities then determine the exact price difference created by these subsidies. This step is crucial to ensure that the duty they’ll impose accurately mitigates the unfair advantage.

4. Set duty

The imposed countervailing duty increases the price of the imported goods to what it would be without the subsidy, leveling the playing field for domestic producers.

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Understanding anti-dumping and countervailing duties is crucial for protecting your business from unfair international competition. These duties help ensure equity by addressing the challenges of low-priced and subsidized foreign goods.

However, it’s vital to note that financing can be a challenge for business owners who engage in international trades, especially with delayed payment terms. That’s why we’re here to offer you services like revenue-based financing and invoice financing. 

We understand the unique financial needs of SMBs operating across different markets and industries. As such, we prioritize customer support, providing personalized guidance and flexible financing options tailored to each business’s circumstances. This makes us a valuable ally for organizations seeking to navigate the intricacies of global trade confidently. 

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