What Is a Countervailing Duty and How Does It Work?

A countervailing duty is a tariff imposed on imported goods to offset a financial benefit, known as a subsidy, that a foreign government provides to its producers. When a government subsidizes an industry, its producers can often sell goods in other countries at lower prices than domestic producers can afford. The duty counteracts this by increasing the price of the subsidized import, restoring a more level competitive environment for domestic industries.

Defining a Countervailable Subsidy

For a government program to be subject to a countervailing duty, it must be considered a “countervailable subsidy.” The program must satisfy three criteria established under international trade agreements and U.S. law. If any element is missing, a duty cannot be applied.

The first requirement is a “financial contribution” from a government or public entity. This includes direct transfers of funds, such as grants or loans. It also covers instances where a government forgoes revenue it is otherwise due, such as through special tax credits. A government providing goods or services for less than fair market value also constitutes a financial contribution.

Next, a “benefit” must be conferred upon the recipient. The financial contribution must provide the company with an advantage it would not have obtained in the normal course of business. For example, a government loan is a benefit only if its terms are more favorable than what a company could secure from a commercial lender. A tax credit is a benefit because it directly reduces a company’s tax liability.

The final element is “specificity.” A subsidy is countervailable only if it is provided to a specific enterprise, industry, or group. Government programs that are broadly available and do not favor certain sectors, such as public road construction, are not countervailable. A subsidy is considered specific if its eligibility is limited by law or if it is predominantly used by a particular industry in practice.

The Investigation and Determination Process

Imposing a countervailing duty begins when a domestic industry, such as producers or a trade association, files a petition. The petition must be submitted to two U.S. government agencies: the Department of Commerce (DOC) and the U.S. International Trade Commission (ITC). To be accepted, the petition must be filed on behalf of domestic producers who account for at least 25% of the total domestic production of the product.

Once the petition is accepted, the DOC and ITC launch parallel investigations. The DOC’s role is to determine whether a countervailable subsidy is being provided to foreign producers and to calculate its amount. This involves analyzing foreign government programs against the criteria of financial contribution, benefit, and specificity.

Concurrently, the ITC investigates whether the domestic industry is being materially injured or threatened with material injury by the subsidized imports. The ITC examines economic indicators like lost sales, declining profits, decreased market share, and job losses. For a countervailing duty to be imposed, the DOC must find a countervailable subsidy exists, and the ITC must find that it is causing material injury.

Within 45 days of the petition filing, the ITC makes a preliminary injury determination. If the ITC finds a reasonable indication of injury, the investigation continues. The DOC then makes its preliminary subsidy determination, which is due 60 days after initiation. If the DOC’s preliminary finding is affirmative, importers must post cash deposits or bonds with U.S. Customs and Border Protection (CBP) to cover potential duties.

Following the preliminary stages, both agencies proceed to their final determinations. This process can take several more months to complete. If both the DOC and ITC issue final affirmative determinations, the DOC will issue a countervailing duty order.

Calculating the Duty Rate

After the Department of Commerce (DOC) makes a final determination that a countervailable subsidy exists, it calculates the duty rate. The rate is designed to precisely offset the advantage conferred by the subsidy. The goal is to quantify the benefit the foreign producer received and translate it into a percentage.

The calculation results in an ad valorem duty rate, which is a percentage of the value of the imported goods. To arrive at this percentage, the DOC calculates the total value of all countervailable subsidies received by a foreign producer or exporter.

The total subsidy amount is then divided by the total value of the company’s relevant sales. For subsidies tied to exports, the denominator is the total value of the company’s export sales. For domestic subsidies, the denominator might be the company’s total sales. This calculation yields the final duty rate that importers must pay.

Managing an Active Countervailing Duty Order

After a countervailing duty (CVD) order is published, the process shifts to long-term administration. Importers of the targeted merchandise are required to make cash deposits with U.S. Customs and Border Protection for all future entries. This deposit is based on the rate determined by the Department of Commerce (DOC) for the specific exporter.

The initial duty rate is not permanent. Each year, interested parties can request an administrative review during the anniversary month of the order’s publication. This process allows the DOC to re-examine the subsidies received by foreign producers. Based on this review, the rate can be adjusted for future imports from that company.

Every countervailing duty order is subject to a “sunset review” every five years. The DOC and the International Trade Commission (ITC) determine if terminating the order would likely lead to a recurrence of subsidies and material injury. If both agencies make affirmative determinations, the order is continued for another five years; otherwise, it is revoked.