Countervailing Duties

A countervailing duty is intended to neutralize the competitive advantage that a firm gains when exporting to a foreign market due to the receipt of subsidies from its home government. It is an additional duty that removes the advantage gained by the receipt of the subsidy. Countervailing duties, like their counterpart antidumping duties, are intended to correct for unfair trade practices that create advantages for overseas firms that export products to the domestic market. While antidumping duties address unfair trade practices that are caused by dumping, i.e., selling goods in the domestic market below costs, countervailing duties, also known as anti-subsidy measures, are intended to address unfair trade practices that are caused by payment of subsidies to foreign firms. Under World Trade Organization (WTO) rules, subsidies may be countervailed if they cause material injury to the domestic industry.

To better understand what it means to countervail a subsidy, consider the following example with two symmetric firms, one domestic and one foreign, each of which produces goods in its home market. Both firms sell in the domestic market and each earns an operating profit of $25,000. Now suppose that the foreign firm receives a subsidy from its home government, and this subsidy enables it to undercut its competitor's price. With the subsidy, the foreign firm earns a profit of $37,000 while the domestic firm suffers a loss of $8,000. The domestic firm has been materially injured by the subsidy received by the foreign firm as reflected by the change in its profitability. Under these circumstances, a countervailing subsidy may be imposed as the material injury test has been met. Suppose further that the subsidy to the foreign producer is the form of an export subsidy of $1.30 per unit. To countervail this subsidy, the importing country imposes a specific duty of $1.30 per unit. This returns the foreign firm to the position it was in prior to receipt of the subsidy. It also returns the market to its pre-subsidy position with both firms earning an operating profit of $25,000. As a result of the countervailing duties, the material injury suffered by the domestic firm has been eliminated.

The export subsidy used in the example above is a prohibited subsidy under WTO rules because it is specifically designed to distort international trade flows and in the process create winners and losers. Export subsidies and other forms of prohibited subsidies can be countervailed. Actionable subsidies, unlike prohibited subsidies, are not designed to distort international trade flows but may nonetheless cause material injury to the domestic industry. Most subsidies fall into this category. Given that the trade distortion and hence material injury effect of actionable subsidies is no longer definitive, the WTO rules require a detailed [Page 426]investigation prior to the implementation of countervailing duties in these circumstances. Investigations must be conducted in accordance with the procedural requirements set forth in the WTO's Agreement on Subsidies and Countervailing Measures. National legislation in member countries, when adopted, is consistent with these requirements.

Typically, countervailing duty investigations must establish that a subsidy was received, that the domestic industry was materially injured, and that this material injury was a result of the subsidy. The WTO procedures allow for a preliminary determination of material injury. If the preliminary determination is positive, the foreign firm is generally required to post a bond that is equivalent to the estimated subsidy margin on all relevant imports pending final determination. If the final determination is positive, countervailing duties are imposed. Normally, countervailing duties are imposed for five years.

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