You are on page 1of 17

IMPACT OF COUNTER VAILING IN LEGAL STUDIES

BY
ABHISHEK KUMAR
LLM
2015-2016
15010143056

UNDER THE GUIDANCE OF


PROF. SEMANTI CHOUDHARY

SYMBIOSIS LAW SCHOOL

SYMBIOSIS INTERNATIONAL UNIVERSITY, PUNE

PTO

Introduction
1.1 Introduction
The concept of countervailing in international trade has a long history. Countervailing, less
than one name or another has been part of the rhetoric of political economy for a long time.
Jacob Viner, the first scholar who noted that a sixteenth century English writer who charged
foreigners with selling paper at a loss to smother the infant paper industry in England. Viner
also noted an instance in the seventeenth century in which the Dutch were accused of selling
at low prices in the Baltic regions in order to drive out French merchants. He further noted
statements made by Alexander Hamilton about foreign country practices of underselling
competitors in other countries so as to frustrate the first efforts to introduce a business
into

another

by

temporary

sacrifices,

recompensed,

perhaps

by

extraordinary

indemnifications of the government of such country1


Hamilton further declared that the greatest obstacle encountered by new industries in a
young country was the system of export bounties, which foreign countries maintained in
order to enable their own workmen to undersell and supplant all competitors in countries to
which these commodities are sent.

Historical Reference
Countervaliling duties (cvds)are selective tariffs on impoets allegedly stimulated by
government subsidies in the exporting nation .such duties are supposed to level the playing
field for international competition .since they may mitigate distortions , CVDs are generally
not condemned as strongly as other supposed safeguards such as antidumping tariffs and e
escape clause protection (finger,1995, Brennan and pincus 1993).The suspicion remain
1 Alexander Hamilton in debates in the USA in 1791

PTO

however, that this protection curefor subsidies is far more harmful than the subsidies
themselves .CVD protection may reflect internal political forces of the countrt imposing the
protection rather than the threat actual or perceived ,the subsidies present2.Dispute over tariffs
designed to counter unfair trade practices , whether in the form of subsidies or dumping
,constitute the most contentions portions of the trade relationship between the united states
and its major trading partner .Both subsidy use and imposition of duties against unfair trade
practices are growing rapidly .consequently ,either the subsidy disease or the protection cure
or both constitute major challenges to continued liberalization of the international trading
system. Finally the GATT subsidies code underwent a major rewrite as part of Uruguay round
negotiation (Schott,).the new subsidies code agreement enshrine a broad definition of what
constitutes subsidy ,increase the size of the subsidy would automatically or nearly
automatically trigger countermeasure define a set of permitted subsidies and allow less
developed countries more flexibilities to impose subsidies intended to spur development
.these code represent a compromise in which neither conception of the role of CVDs gave
way to the other .the net result of these changes may be a increase in cvd sought through out
tthe world
1.2 Definition
Countervailing duty is levied on goods which have received Government subsidies in the
originating or exporting country, thus enabling the goods to be imported into the Community
at prices substantially lower than the normal commercial value.
For customs purposes CD is treated in the same way as ADD, it is possible to have both ADD
and CD on the same product.
2 The contrasting view of countervailing duties are nicely summarized in patrick
messerlin s widely quoted remark encapsulating the divergent view of uruguay
round negotiation circa 1986 . To the united states the {Subsidies} {code}is an
instrument to control subsidies to the rest of the world , it in and instrument to
control US countervailing duties Quoted by finger (1995), p.52

PTO

The exporting country is normally the country of origin, but it can be another third country,
except where, for example, the products are merely transshipped through that country, or the
products concerned are not produced in that country, or there is no comparable price for them
in that country.
ADD and/or CD do not apply to goods (irrespective of country of origin) , which are in free
circulation in the Community. However, there is provision whereby ADD and/or CD may be
imposed on products that are assembled or produced in the Community from components
imported from outside the Community.
1.3 Countervailing Duties : Meaning
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.
Countervailing Power, or countervailence, is the idea in political theory of institutionalized
mechanisms that the wielding of power within a polity having two or more centers can, and
often does, provide counter forces that usefully oppose each other. This political organization
stands in contrast to polities such as principalities where "various princes were absolute rulers
in their domain" or in modern examples of totalitarian governments.

PTO

1.4 Overview
Agreement on Subsidies and Countervailing Measures (SCM Agreement)
1. The Agreement as it originally entered into force contained a third category i.e nonactionable subsidies. This category (along with a provision establishing a presumption of
serious prejudice in respect of certain specified types of actionable subsidies) applied
provisionally for five years ending 31 December 1999, and pursuant to Article 31 of the
Agreement, could be extended by consensus of the SCM Committee. As of 31 December
1999, no such consensus had been reached. 3
2. To mitigate this problem, the SCM Agreement established, during a five-year provisional
period which ended 31 December 1999, a sub-category of actionable subsidies with respect to
which a rebuttable presumption of serious prejudice existed. Under Article 31, this provision
(along with the provisions concerning non-actionable subsidies) could be extended by
consensus of the SCM Committee. As of 31 December 1999, no such consensus had been
reached. A standard technical definition of dumping is the act of charging a lower price for a
good in a foreign market than one charge for the same good in a domestic market. This is
often referred to as selling at less than "fair value". Under the World Trade
Organization (WTO) Agreement, dumping is condemned (but is not prohibited) if it causes or
threatens to cause material injury to a domestic industry in the importing country. 4
Countervailing Duty CVD is charged under import of specific goods listed by government of
importing country as per their Foreign Trade Policy. CVD (Countervailing Duty) is imposed
to balance the price of the same product of domestic producers and the price of foreign
3 WTO website, https://www.wto.org/english/tratop_e/scm_e/subs_e.htm

4 WTO website, https://www.wto.org/english

PTO

producers based on the export subsidy they avail from their exporting country. If CVD is not
imposed on such products, the said products seriously makes adverse impact in importing
country thereby minimize the economic growth. So the main reason for charging CVD is to
balance the market price of importing country to protect domestic manufacturers from the
subsidies extended to the export subsidy to same product at exporting country. In other
words, the countervailing duty CVD is charged in an importing country to counter the
negative impact of import subsidies to safeguard domestic manufacturers. When imposing
CVD to such products, the price of such imported products is being equally competitive.5
1.5 Size and Growth of Countervailing duty
A countervailing duty is defined in Article VI of the GATT 1994 and footnote 36 to the SCM
Agreement as: a special duty levied for the purpose of offsetting as any subsidy bestowed,
directly, or indirectly, upon the manufacture, production or export of any merchandise.6
In order to determine the source and impact of countervailing duties, it is necessary to review
their past use .This section provides description statistics on the history of cvd use in the
united states as well as an indication of cvd growth in the recent past in the rest old world
.The principle focus here on America behavior is a consequences of the early and continuing
use of CVD in the united states The United states has been the leading exponent and most
intensive employer of CVD .ours review of CVD activity touches in passing on antidumping
petitions as well while theoretical distinction may be drawn between these two sources of
administered protection ,in practice they are almost indistinguishable ,linked in law and in
incidence as we show below.
5 http://howtoexportimport.com/meaning-of-cvd-countervailing-duty-underimport-du-1115.aspx
6 paragraph 3 of Article VI of GATT 1994.

PTO

These two types of protection are both covered by title VII of the tariff act of 1930. In the
section adopted by the united states in 1979 in response to the GATT ROUND
ANTIDUMPING and subsidies code .each type of petition is evaluated by the ITA. Ehich is
responsible for determining whether the alleged unfair practice subsidy or dumping has
occurred and then for determining the appropriate ad valorem duty.7
1.5.1 Conditions for the imposition of countervailing duties
It follows from Article VI of the GATT 1994 and Article 10 of the SCM Agreement that
WTO Members may only impose countervailing duties when three conditions are fulfilled:

there are subsidised imports, i.e. imports of products from producers who benefited
from specific subsidies within the meaning of Articles 1, 2 and 14 of the SCM
Agreement, as discussed in detail above;8

there is injury to the domestic industry of the like products within the meaning of
Articles 15 and 16 of the SCM Agreement, as discussed in detail above;9 and

there is a causal link between the subsidised imports and the injury to the domestic

industry and injury caused by other factors is not attributed to the subsidised imports.
1.6 Objectives of Counter vailing :1. Restricting Imports for conserving foreign exchange.
2. Protecting Industries from undue competition.
3. Prohibiting imports and exports of goods for achieving the policy objectives of the
Government.
4. Regulating exports.
5. Prevent Smuggling.
6. Facilitate implementation of laws relating to Foreign Trade Act, Foreign Exchange
Regulation Act, Conservation of Foreign Exchange, Prevention of Smuggling Act, etc.
7 Countervailing duties by Howard P Marvel & ors
8

On the concept of subsidies and the specificity of subsidies,

On the concepts of like products, domestic industry and injury (including material injury, threatof material injury and
material retardation),

PTO

1.7 Advantages of Countervailing:A tariff is seen as a measure to protect local industry but at the same time sending a message
a message to local manufacturers to be competitve globally. In any country with a tariff, the
home market price would be the tariff-inclusive price, while the export price would be the
lower, tariff-exclusive price.10
1.8 Disadvantage of Countervailing
While for the past twenty years the world has seen a drastic fall in tariff barriers, trade
protection is still around - albeit in a different form. the fall in tariffs has coincided with a
spectacular increase in the number of antidumping measures, which have become the most
frequently used instrument of trade protection. While there has been a downward trend in the
number of Antidumping measures since 2003, since the beginning of the global financial and
economic crisis, Antidumping measures and investigations have increased rapidly and this
seems to continue in 2009.11
Under the WTO agreements which aim at promoting free trade, by reducing barriers to trade
among its members, a number of exceptions are specified, such as the possibility to impose
Antidumping measures in case of unfair trade. However, current antidumping rules are not
well equipped to distinguish between "fair" and "unfair" trade. When foreign producers
produce goods more cheaply, their prices are bound to be lower, especially when they export
to a large market like the US or the EU where they are likely to face more competition than in
their own domestic markets. What appears to be unfair trade may well be an indication of
foreign comparative advantage, this would then imply that it is the less efficient firms that
10 http://www.ukessays.com/essays/economics/examining-pros-and-cons-of-the-antidumpingprotection-economics-essay

11 http://www.ukessays.com/essays/economics/examining-pros-and-cons-of-the-antidumpingprotection-economy

PTO

have an interest in filing for and receiving protection so to get sheltered from international
competitive pressure.
1.9. Difference between anti- dumping duty/ Countervailing duty and Normal Customs
duty12
Although anti dumping duty is levied and collected by the Customs Authorities, it is entirely
different from the Customs duties not only in concept and substance, but also in purpose and
operation. The following are the main differences between the two:

Conceptually, anti dumping and the like measures in their essence are linked to the
notion of fair trade. The object of these duties is to guard against the situation arising
out of unfair trade practices while customs duties are there as a means of raising
revenue and for overall development of the economy.

Customs duties fall in the realm of trade and fiscal policies of the Government while
anti dumping and anti subsidy measures are there as trade remedial measures.

The object of anti dumping and allied duties is to offset the injurious effect of
international price discrimination while customs duties have implications for the
government revenue and for overall development of the economy.

Anti dumping duties are not necessarily in the nature of a tax measure inasmuch as
the Authority is empowered to suspend these duties in case of an exporter offering a
price undertaking. Thus such measures are not always in the form of duties/tax.

Anti dumping and anti subsidy duties are levied against exporter / country inasmuch
as they are country specific and exporter specific as against the customs duties which

12

Directorate General of Anti-Dumping & Allied Duties Ministry of Commerce, Government of India.

PTO

are general and universally applicable to all imports irrespective of the country of
origin and the exporter.
Thus, there are basic conceptual and operational differences between the customs duty and
the anti dumping duty. The anti dumping duty is levied over and above the normal customs
duty chargeable on the import of goods in question.
1.10. Types of Subsidies and countervailing measures 13
The WTO agreement does two things: it disciplines the use of subsidies, and it regulates the
actions countries can take to counter the effects of subsidies. It says a country can use the
WTOs dispute settlement procedure to seek the withdrawal of the subsidy or the removal of
its adverse effects. Or the country can launch its own investigation and ultimately charge
extra duty (known as countervailing duty) on subsidized imports that are found to be
hurting domestic producers.
The agreement contains a definition of subsidy. It also introduces the concept of a specific
subsidy i.e. a subsidy available only to an enterprise, industry, group of enterprises, or
group of industries in the country (or state, etc) that gives the subsidy. The disciplines set out
in the agreement only apply to specific subsidies. They can be domestic or export subsidies.
The agreement defines two categories of subsidies: prohibited and actionable. It originally
contained a third category: non-actionable subsidies. This category existed for five years,
ending on 31 December 1999, and was not extended. The agreement applies to agricultural
goods as well as industrial products, except when the subsidies are exempt under the
Agriculture Agreements peace clause, due to expire at the end of 2003.

13 WTO website

PTO

Prohibited subsidies: subsidies that require recipients to meet certain export targets,
or to use domestic goods instead of imported goods. They are prohibited because they
are specifically designed to distort international trade, and are therefore likely to hurt
other countries trade. They can be challenged in the WTO dispute settlement
procedure where they are handled under an accelerated timetable. If the dispute
settlement procedure confirms that the subsidy is prohibited, it must be withdrawn
immediately. Otherwise, the complaining country can take counter measures. If
domestic producers are hurt by imports of subsidized products, countervailing duty
can be imposed.

Actionable subsidies: in this category the complaining country has to show that the
subsidy has an adverse effect on its interests. Otherwise the subsidy is permitted. The
agreement defines three types of damage they can cause. One countrys subsidies can
hurt a domestic industry in an importing country. They can hurt rival exporters from
another country when the two compete in third markets. And domestic subsidies in
one country can hurt exporters trying to compete in the subsidizing countrys
domestic market. If the Dispute Settlement Body rules that the subsidy does have an
adverse effect, the subsidy must be withdrawn or its adverse effect must be removed.
Again, if domestic producers are hurt by imports of subsidized products,
countervailing duty can be imposed.

Some of the disciplines are similar to those of the Anti-Dumping Agreement. Countervailing
duty (the parallel of anti-dumping duty) can only be charged after the importing country has
conducted a detailed investigation similar to that required for anti-dumping action. There are
detailed rules for deciding whether a product is being subsidized (not always an easy
calculation), criteria for determining whether imports of subsidized products are hurting

PTO

(causing injury to) domestic industry, procedures for initiating and conducting
investigations, and rules on the implementation and duration (normally five years) of
countervailing measures. The subsidized exporter can also agree to raise its export prices as
an alternative to its exports being charged countervailing duty.
Subsidies may play an important role in developing countries and in the transformation of
centrally-planned economies to market economies. Least-developed countries and developing
countries with less than $1,000 per capita GNP are exempted from disciplines on prohibited
export subsidies. Other developing countries are given until 2003 to get rid of their export
subsidies. Least-developed countries must eliminate import-substitution subsidies (i.e.
subsidies designed to help domestic production and avoid importing) by 2003 for other
developing countries the deadline was 2000. Developing countries also receive preferential
treatment if their exports are subject to countervailing duty investigations. For transition
economies, prohibited subsidies had to be phased out by 2002.
The role of the government in tackling the problem of anti-dumping should be to protect the
smaller industries rather than concentrating on the major industries. This is because; it is
these small scale industries which suffer the most as a result of imposition of anti-dumping
duties. However, safeguarding competition in domestic industry is not the only purpose that
anti-dumping laws serve and in the present situation, they are acting as barriers for free trade
and

domestic

producers

are

concerned

about

avoiding

competition.

In case of allegations and anti-dumping duties slapped on economically weaker nations, it


could result in a stunt of economic growth for these developing countries, as they are unable
to develop secure and stable long term industries. Even the threat of imposition of antidumping duties has a serious adverse effect on the functioning of small and medium size
firms, resulting in a fall in production, heavy unemployment and declines in incomes and

PTO

increases in poverty levels. Anti-dumping duties were imposed by developed countries to


protect their industries against the low priced imports Developing countries wanted antidumping rules to be tight and explicit as possible, allowing minimum transparency.
Developed countries wanted to retain and even expand their discretion to meet what they saw
as being used by companies to get around the present rules of anti-dumping code and thereby
cause injury to domestic industry, their proposals tended to be the most radical and
controversial.
1.11 OBJECTIVES OF THE STUDY
The objective of the study is to find out and showcase the affect & effect of countervailing
duty in India and some of the developed and developing countries along with the effect of
countervailing in economic and legal prospective.
1.12 LITERATURE REVIEW
These following literature are being reviewed during the course of this study:
1. Directorate General of Anti-Dumping & Allied Duties Ministry of Commerce,
Government of India.
2. INFOFISH: INFOFISH International 4/2003
3. Charles Woodhouse: Fish Farming International, September, November December 2003
4.

ML Jhingan, International Economics , Vrinda Publication, 2001

5.

Bhala, Raj, International Trade Law: Theory and Practice, Lexis Nexis, 2003

6.Jackson, John; The World Trading System - Law and Policy of International Economic
Relations, The MIT Press, New York, 2nd Edn., 2000
ARTICLES:
Wikipedia/ countervailing (Pricing Policy)

PTO

http://useconomy.about.com/od/glossary/g/Dumping.html
http://unctad.org/en/docs/edmmisc232add14_en.pdf
http://www.expressindia.com/latest-news/india-tops-list-of-final-antidumping-measureswto/234827/ , Nov 01, 2007
Apart from these above literature, more databases are needed to be reviewed during the
course of this research.
1.13 SIGNIFICANCE F THE RESEARCH PRBLEM
This research is important to analyze the effect of Countervailing in a nation's economy and
also to measure the effect of Countervailing in a developing country and also measure the
advantages on a developed countries along with its legal impacts.

1.14 RESEARCH METHODOLOGY


Types of research:a. Doctrinal Research:- Doctrinal Research is concerned with legal prepositions and
doctrines. in doctrinal research the sources of data are legal and appelate court decesions and
moreover doctrinal research is not concerned with people but documents. The scope of
doctrinal research is narrower as compared to non doctrinal since it studies about what the
doctrine or the authority says yet more encouragement is given to doctrinal type of research
than the non doctrinal. There is no requirement of imparting training for collection and use of
sources and field work is not needed library is sufficient.
b. Non Doctrinal research:- non doctrinal research is concerned with people, social values
and social institutions where the sources of data are less and mostly new techniques have to

PTO

be used. Non-doctrinal more importance is given to the society and people and training is
needed to use new techniques in the non doctrinal research and in non doctrinal research the
field work is most important ingredient.
In this work, I have adopted purely Doctrinal method and analytical method of research since
the topic relates to Countervailing including its affects and effect in legal as well as in
economies. The materials have been used from various primary and secondary sources
provided by the college library and online data bases. The material used in the work have
been collected from various national and international books, magazines, journals, internet
sources and reports of the law Commissions and other committees. For supporting and
supplementing the work in proper manner and to get up to dated information, help from some
internet and web materials have also been taken.

1.15 LIMITATINS F THE STUDY


The fllwing limitatins are t be considered while evaluating the study:

Data Constraints: Limited data are available.


Time Constraints: The time alltted fr this research is t shrt due t which an in
depth analysis f the issue cannt be undertaken and there is also accessibility
cnstraints.

1.16 RESEARCH QUESTIONS


This paper has sught t establish the main areas f research that have s far been cnducted
n the nature and effects f Countervailing. Clearly, CVD has becme a majr fcus fr
research in the brad area f trade plicy in recent decades. It is likely t cntinue t attract a

PTO

great deal f interest in the next few years,. While a great deal f research has already been
carried ut, a lt remains t be dne. In particular, much mre wrk needs t be dne n :Q1 How countervailing affects the concept of free trade globally?
Q2 What are the existing loopholes in the legal framework of countervailing duties which is
affecting the domestic industry?
Q3 What are the changes in the legal framework regarding countervailing duties is needed to
suit the domestic industry?
Q4. What is the role of "Countervailing duty" in the legal scenario?
Q5. What are the various categories of subsidies
Q6. What is the purpose of having countervailing duty measures in international trade?
Q7. What is nullification or impairment of benefits?
Q8. What is the relief/remedy available to domestic industry against import of subsidized
goods?

Bibliography

BOOKS:
1. Bhala, Raj, International Trade Law: Theory and Practice, Lexis Nexis, 2003
2. The Law and Policy of the World Trade Organization by Peter Van den Bossche,
Maastricht University
3. ARTICLES:
PTO

Wikipedia/ countervailing. (Pricing Policy)


http://useconomy.about.com/od/glossary/g/Dumping.html
http://unctad.org/en/docs/edmmisc232add14_en.pdf
http://www.expressindia.com/latest-news/india-tops-list-of-final-antidumping

measures-wto/234827/ , Nov 01, 2007


http://www.nri.org/projects/fishtrade/issues-dumping.pdf
www.globalpolitician.com/23989-business
http://economictimes.indiatimes.com/news/economy/foreign-trade/us-imposes-anti-

dumping-duty-on-steel-pipe-imports-from-india/articleshow/13491165.cms
Smith, The Wealth of Nations, sourced online http://www.memoware.com/?
screen=doc_detail&doc_id=8811&p=category%5E!Philosophy~!

&sort_by=downloads&start=0 ,
Hindley, Brian, Edwin Vermulst, Zeroing in on Zeroing: Anti-dumping in WTO
dispute settlement.
Ikenson, Dan, Zeroing In: Antidumping's Flawed Methodology under Fire, sourced
online

PTO