The Development of Countervailing Duties - Essay Example

? AN ANALYSIS ON THE COUNTERVAILING DUTIES Table of contents Introduction I. Brief presentation on the development of countervailing duties The General Agreement on Tariffs and Trade (GATT) The Tokyo Round Subsidies Code The World Trade Organization II. Administrative aspects of countervailing duties Categories of subsidies Enforcement process Remedies III. Problems of dealing with countervailing duties On cases of distributive justice The United States countervailing duties practices IV. Conclusion Introduction The concept of countervailing duties roots from the principle of equity. Countervailing duties, in the main aims to enhance and develop fair trade, advance global trade and interests and to promote equal opportunities among nations. Countervailing duties are tariffs or tax charged by an importing country to the country of origin. These duties are basically being imposed on the basis that the produce or products being exported were subsidized disproportionately. By doing so, the importing country can neutralize the effects of unfair trade practices. Countervailing duties work in different ways. These can be levied on imported goods from producers who were not subjected to sales taxes or turnover taxes. Countervailing duties may also be imposed on the domestic production of sale of goods for the benefit of foreign manufacturers. Generally, the idea of countervailing duties is protection both of the importers and exporters. However, in the framework of uneven development, how possible can the concept of fairness be pursued? Many believes that along with other trade instruments, the concept and implementation of the countervailing duties can be prone to abuse and misuse. Furthermore, countervailing duties may only serve few giants of trade but may be irrelevant to small export-oriented countries falling under the bracket of so-called less developed and developing countries. This paper aims to delve on the analysis of the countervailing duties based how these are being implemented, enforced and resolved under the umbrella of the World Trade Organization. Also, this paper will give particular emphasis on the practices of the United States of America, as a country that tails countervailing duties forcefully1 compared to other countries in the world. I. Brief presentation on the development of countervailing duties The General Agreement on Tariffs and Trade (GATT) There were only two provisions in the General Agreement on Tariffs and Trade that categorically regulate subsidies. These are Articles VI and XVI. GATT Article VI principally provides that the importing country may levy countervailing duties on subsidized imports if these may threaten or be the source of material injury to an established domestic industry2. This Article generalizes the rules on the application of antidumping and countervailing duties. It disapproves the export-sales under normal value, especially when these cause or threaten the material injury. It also describes the basis for the determination of sales below normal value: when export price is less than comparable price. According to Article VI, when these criteria are fulfilled, the importing country is entitled to levy an antidumping duty3. This Article however has been open to different interpretations and inconsistent practices due to its profound formulation. Much more, countries like Canada and the US, despite being the two of the biggest users of antidumping duties excuse themselves from being bound to this provision asserting that their domestic antidumping laws were much ahead of the GATT. Meanwhile, Article XVI stipulates that all subsidizing countries, either the increase their exports or reduce their imports are duty-bound to be notified and follow a consultation procedure for limiting subsidization that may cause prejudice to other countries4. However, because Article XVI was stated in a slack one-paragraph provision, this article was widely taken for granted by many countries on the basis that states were reluctant if not playing it safe as the gesture for notifying granting of subsidy would lead to the imposition of countervailing duties on their products5. Furthermore, specific sections of Article VXI such as three stipulates the responsibility of the contracting parties to avoid the grant of subsidies on exports of primary products, and if ever, subsidy is inevitable, contracting parties must guarantee that the application of its application should not result in more than an equitable share of world export trade of the product in favor of the contracting party6. The Tokyo Round Subsidies Code The first general comprehensive plurilateral regulations agreed upon on subsidies and countervailing duties were adopted in 1979 through the Tokyo Round Subsidies Code7. The Tokyo Round Subsidies Code signaled a focal point in the advancement of the discipline on subsidies and countervailing duties. The Tokyo Round Subsidies Code on the Agreement on the Interpretation and Application of Articles VI and XXII of the GATT, was recognized as a significant gain by trade negotiators. It provided the landmark rule on administering the conduct of proceedings about export subsidies in relation to domestic complaints8. This Agreement matched to the provisions of the Tokyo Round Anti-Dumping Code wherein rules on subsidies were specified and export subsidies were prohibited. Although the Tokyo Round Subsidies Code served well in terms of elaborating GATT’s obligations on subsidies, it is however, fall short in terms of its attitude towards domestic subsidies. On one hand that it recognizes that domestic subsidies may be useful in the promotion of important objectives of economic and social policy, on the other hand, it also warns against the negative effect it may cause to the interests of other signatories9. Tokyo Round Subsidies Code’s profound position is prevalent in its Article 11 when it combined important goals advanced by the governments through domestic subsidies at the same time pursuing them to stay away from practicing domestic subsidies that could affect negatively the conditions of the normal trade competition10. The code encourages balance, yet how and where the balance was to be achieved were left unsaid. The World Trade Organization As the global trade advances, so is the concept of countervailing duties. The World Trade Organization (WTO) introduced a new set of rules on subsidies dubbed as the Agreement on Subsidies and Countervailing Measures. In the main, Agreement on Subsidies and Countervailing Measures improved the rules of the Tokyo Round Subsidies Code in all aspects, as it introduced, for the first time, more precisely the definition of subsidy and the concept of specificity11. Under the World Trade Organization, dumping is being defined as the sale of goods in an importing nation at a price below normal value. This is considered to be price discrimination in favor of buyers in the importing nation because they can sell the products below their normal value12. From a bounty or subsidy granted either directly or indirectly upon the manufactures, either in the production or export of any merchandise arise the concept of subsidization. The GATT Agreements allow importing nations to neutralize dumping and subsidization with the imposition of import duties that would otherwise violate negotiated GATT tariffs ceilings13. The Agreement on Subsidies and Countervailing Measures provided a detailed definition of subsidy as a government (or any public institution) financial support or contribution or any other income or price support that express an advantage to a specific industry or group of manufacturers14. The distinction between dumping and countervailing duties has been one of the earliest problems as far as legislation is concerned15. Dumping and subsidization bring together an extremely political nature in framing countervailing legislation as the basic difference of the two is that dumping is an activity of the firms of businesses while subsidization is administrative activity of the state or governments. Thus, imposing countervailing duty on the government’s exports makes a revengeful measures being taken16. The World Trade Organizations’ definition stands up above the rest as it succinctly pointed out the subsidies must be provided to fixed industries and should not be made available to all industries and firms. The Agreement also elaborates on the idea of subsidy which became inclusive of other financial benefits other than direct payments from governments. Other financial benefits may include equity positions in firms, providing loans or loans guarantees, purchasing a firm’s goods or services or foregoing due government revenue. More importantly, the definition provides that the subsidy must put across a clear-cut benefit for the country parties17. Generally, the Agreement on Subsidies and Countervailing Measures actually defines subsidies that are determinant of whether and to what extent subsidies are legitimate and are clearly regulated with different procedures and remedies in respect to subsidies varying categories. II. Administrative aspects of countervailing duties There are a lot of subsidies labeled as an unfair trade. Subsidies tend to introduce distortions in prices and give a relative leverage to the subsidized firms in the international market. Thus, under the cloak of the cloak of the World Trade Organization, issues and concerns on subsidies were desired to be unanimously agreed upon by the Member States. In cases countries could not resolve the issues concerning subsidy, then one recourse in to invoke countervailing duty equal to the net amount of the subsidy18. . Categories of subsidies Subsidies have different classifications according to the Agreement on Subsidies and Countervailing Measures issued from the Uruguay Round19. These categories are non-actionable, actionable and prohibited. Actionable subsidies are government assistance to firms or industries that comes in specific forms20 and prejudicial or could cause serious injuries to trade21. Basically, actionable subsidies are objectionable on the grounds that they may damage the domestic industry of another country. Also, actionable subsidies can be revoked if they entail nullification or injury of benefits accumulated from other country, this includes benefits of concessions. All export subsidies or subsidies party to the use of domestic products rather than imported goods are categorized as prohibited subsidy. And the non-actionable subsidies include wide-range of subsidies, for instance subsidy on education expenditures or infrastructure. The WTO dispute settlement process dictates different rules in dealing with the different categories of subsidies. In the case of actionable subsidies, foe example, WTO rules call for the use of verifiable evidence that could prove the case for the material injury or serious prejudice on the aggrieved party of the subsidy. This could take the form of a domestic industry harm or nullification. Distinct from the case of a prohibited subsidy that the challenging country is only required showing that the subsidy exists, regardless of injury22. Meanwhile, all contracting parties can appeal to the dispute settlement mechanism as far as actionable and prohibited subsidies are concerned, except for the non-actionable subsidies23. Nevertheless, all Member States are bound to notify the Committee on Subsidies and Countervailing Measures for all the three kinds of subsidies before implementing the said subsidies. This is to ensure that Member States will comply with the various conditions attach with the subsidy24. Enforcement process Notification and surveillance procedures of the countervailing duties were further developed under the facilitation of the Committee on Subsidies. Conceptually, notification duties in terms of regularity and content were enhanced. With the guidance of the World Trade Organization, the right of the Member States to seek for information and clarification on a given program has increased a bit25. In cases of dispute that would be too much for the Subsidies Committee to handle, the dispute resolution process in relation to the different categories of subsidies would be organized. An importing member has the final say if it wants to enforce countervailing duties. Although countervailing duties must be applied based on the principle of fairness and non-discriminatory. Countervailing duties, as a rule of thumb must not exceed the amount of the subsidy per se26. In the specific case of an offensive unfairness committed by foreign firms against domestic firms is identified as a case of countervailing laws. The complaint must establish that the foreign firms’ had an artificial leverage because of the use of government subsidies or other related benefits were able to out-compete domestic firms in their on market. Dumping by foreign firms can be countered by importing nations through the imposition of anti dumping duty. Anti-dumping duty, however, should not be greater than the amount compared to the margin of dumping. Countervailing duty, on the other hand, is a response to subsidization. These can be imposed on imported merchandise as long as it is not more than the amount equal to the estimated bounty or subsidy determined to have been granted. However, before an anti dumping or countervailing duty may be imposed, GATT requires the importing nation to foremost indentify that the effect of the dumping or subsidization, as the case maybe, is such as to the cause or threaten material injury to an established industry, or is such as to retard materially the establishment of a domestic industry. This requirement is labeled as the injury test or material injury test27. Generally speaking, though, unfairness claim are usually hard to establish and to control. For one, it is always contentious, as one can reasonably argue that consumers I the export market are better off because of foreign subsidy that can be interpreted as foreign aid rather than governmental subsidy in relation to balance the increases of the people’s welfare in the importing country. Also, the claim of offensive unfairness is just literally, very hard to establish because any of the wide-range of scope relating to foreign government’s actions, it simply just has no natural limits to it28. Suffice it to say, that despite the new guidelines and implementing procedures, the system still lacks efficiency. The most basic duty of Member States to at least notify has been neglected severely, over the years. The Subsidies Committee that theoretically should serve as a clearing house of peer control has in effect incapacitated, instead more confrontational approach has been resorted to by Member States, particularly involving big countries29. Also, the determination of the existence of the countervailing duties have gone difficult and tedious, especially using the cash-flow or benefit oriented approach. In practice, no consistent distinctions could be drawn between benefits accumulated from a foreign firm subsidy and competitive benefits from a simple subsidy. The cash flow of the benefit-oriented approach, government actions tend to present a countervailable subsidy on a foreign firm whenever such action allows the foreign firm to receive something other than what it received from the market. The difference which occurs in the firm’s cash flow as a result of subsidy is primarily, the benefit which would be defused by the countervailing duties. This would be inevitable as countervailing duties tend to pro-rate the value gained by a company and of the countervailing duty over the amount of merchandise produced30. This approach engenders all sorts of largely uncontrollable difficulties. Remedies With regards to remedies, unilateral countervailing duty action or the two tracks of dispute settlement have been confirmed and developed. Although, in most cases, only one remedy can be applied, both the unilateral and two tracks can be used in solving an issue. Perhaps, one of the biggest developments, so far, is that the World Trade Organization’s establishment of the review board that serves as part of the mechanism for dispute settlement. Panels and Appellate Body can no review complaints regarding subsidy programs adopted by Member States. Depending on the category of the subsidy, the body could directly recommend the removal of the effects of the subsidy, or to the extent of withdrawing such subsidy. They may also review and recommend concrete actions on national countervailing duty laws and how these are being applied by domestic agencies31. In dealing with resolution, ultimately, the governments in importing countries can choose between the policies either to attempt to persuade or induce the country of origin to harmonize its laws up to standards prevailing in the importing country; or for the importing country to harmonize its laws down to the level of those prevailing in the exporting country. They could also harmonize to some agreed intermediate solution. Or as the last resort, to impose unilaterally some border measure, like countervailing duty designed to neutralize whether artificial advantages are claimed to be associated with these domestic policy differences32. Investigations of countervailing duties may be resolved on four basic outcomes. These resolutions may turn out to be determined either as positive or negative with the indication that a countervailable subsidy has or has not been identified. Cases can also be suspended, provided that there has been a previous agreement. Ultimately, cases can also be terminated. Usually, suspended cases are cases that were actually intended to offset or eliminate the subsidy. Upon agreement and when the petition has been dismissed, termination follows33. III. Problems of dealing with countervailing duties Subsidies and Countervailing duties both raise fundamental economic questions and concerns. Subsidies may either be good or bad, based on the economic perspective. It depends whether subsidies intend to improve economic efficiency in the framework of rectifying market failures or misallocated resources in the introduction of market distortions. Also, countervailing duties can be a dubious response to subsidies, in many cases if it is the result on an unclear economic effects in the act of restoring market balance or a mere act of protectionism34. Countervailing duty laws also have two fundamental problems. One is that their unilateral nature serves to increase trade frictions even more, and to some extent even the protectionist tendencies. The second is that countervailing duties fail to distinguish between subsidies that use to distort and those subsidies that are actually harmless or benign35. On cases of distributive justice In cases that there are no efficiency or fair trade justifications on countervailing duty laws, arguments arises for countervailing duty laws that take account of the unsettling impact of imports on vulnerable members of the society. One particular instance that countervailing duty may be acceptable and justifiable is the use of distributive justice or communitarian values. These cases are vindication on the use of the form of protectionism36. On the grounds of distributive justice, countervailing duty laws are justifiable as it attempts to improve the lot of least advantaged members of the society, as whole. However, it can be considered as a loophole of the concept of countervailing duty laws for this particular concern is irrelevant to countervailing duty laws. Countervailing laws application principally focused on factors of ill-suited subsidies in uncovering injury suffered by an industry as a result of foreign subsidies and factors even less-suited to discovering impact on the least advantaged stake-holders in these industries. In practice, distributive justice concerns have not been addressed for countervailing duty cases when, in fact, these should be given due consideration and attention. In principles, some of the least advantaged members of the society should be seen as deserving of protection because the threat to their welfare derives from the subsidized imports rather than the unsubsidized imports, domestic competition of other internal factors. In the main, policies in relation to the vindication of communitarian values must be adopted to prevent the disruption of long-standing communities. However, countervailing duties are not really suited to deal with this challenge. The present formulations of the injury test focus narrowly on the disruptive impact on the industry without taking into consideration whether these impacts are being sustained by dependent communities37. Generally, countervailing duties as a trade remedy must not be viewed as the most appropriate policy instrument in dealing with protection. In the main, the still most effective policies that must be developed and enhanced are the labor adjustment programs, or short-term safeguard relief that addressed more directly and effectively transition costs suffered by workers38. The United States countervailing duties practices In 1994, the United States adopted the Final Act Embodying the Uruguay Round of Multilateral Trade Negotiations in the Uruguay Act. In this round of agreement the countervailing and subsidy laws were seen as the most comprehensive provisions. Apparently, they were also heavily influenced by the United States. In a consolidated effort to find ways to minimize conflict over subsidy use, avoid costly disputes and to secure reliance on countervailing duties, the settlement put heavy emphasis on the Subsidies Agreement39. There are considerable problems in the current implementation of countervailing duty laws by the United States of America. It has been said that the current and proposed countervailing duty practices in the country cannot be patterned with the foundation laid off which countervailing duties were conceptualize. The US’ rules promulgated and proposed, as far as countervailing duties are concerned seems to be alienated from the international norms of countervailing laws. Conceptual gaps have been detected when representation chosen have no conceivable relationship to the effect which the foreign subsidy has on the ability of foreign firm to compete. It is apparent that internal inconsistencies are committed when the grasp was based on perception of competitive effects. This causes the override of cash flow principle which US has adopted40. The United States International Trade Commission deals with these problems by mainly estimating the effects on the US economy of removing countervailing duty orders. This is in response with the perception that import fall on those products that were previously covered under countervailing duty orders. Subsequently, consumers of these products substitute less expensive imported products for domestically produced goods. However, consequently also, the import competing firm in the United States could inevitably expect to lose sales, reduce production and lay off workers41. These actions of the United State have a much deeper impact in terms of income and employment effects. Inevitably, firms have to downstream, or for those who use the goods produced by once protected US industry, and no pay lower prices for foreign inputs, and then passed on to the consumer, no causes demand for their products to increase. Naturally, increased demands would mean increased to employment. Meanwhile, upstream industries which produce for the firms that were once protected lose for there ill be a decrease in demand for their products as production falls in the once protected firms they ere supplying42. The United States does not distinguish between subsidies that alter a firm’s production costs and those that do not43. Furthermore, the US treats subsidy to decommission a plant and under-write adjustment costs or subsidies that were used to support workers that were displaced or used to clean up environmental damage the same way as a wage subsidy or subsidies related to outputs. In terms of pro-rating subsidies and multiple product line of many foreign firms, the United States government has also become arbitrary. Especially in determining the amount of the subsidy in the case of equity infusions or loans, the US has resorted to capricious practice. The allocation of the benefit have been delayed over time instead when subsidy maybe given up front to alleviate affected sectors44. One problematic area also is the issue of causation wherein the central weight of the matter is given to the impact of foreign imports which happen to be subsidized rather than on domestic producers. In the process, this practice takes for granted the competitive significance of the subsidy. Domestic producers require prior determination of the competitive significance of the subsidy, but this, altogether has totally been taken for granted by the cash flow or benefit-oriented approach that the United States system on countervailing embraces45. Deficiencies of the countervailing duties For others, countervailing duty laws may serve as a useful restraint on wasteful subsidy practices. As government subsidies tend to distort market outcomes and inevitably divert resources away from high-valued uses, the problem worsens when political pressures exists fo0r governments that equate this through subsidization. In other cases, due to lack of efficiency, governments sometimes subsidize the same sectors in the industry, thus wasting resources while accomplishing little to provide benefits to the recipients of the subsidy. In line with this, a threat of countervailing duty can very well resolve this problem. However, a more realistic perception on the issues of subsidy and countervailing duties can easily refute this claim. From a more general framework, the concept of countervailing duties is much more deficient than effective in the true sense of trade instrumentalism. The ability of the countervailing duty to discourage wasteful subsidies is actually questionable. It is immeasurable and the specificity test may yield to more questionable results. For instance, broad subsidies to agricultural producers may be non-specific for the benefit more than group of industries, even though agricultural sector is ideally considered to be distorted by subsidies in many countries46. To an importing nation, subsidized imports are usually beneficial, in general. This is regardless of the reason why imports are cheap. In terms of equality, an improvement in the terms of trade will definitely yield cumulative gain in the national economic welfare. Also, the effect of countervailing duty in the area of welfare is usually undesirable, just like the welfare effect of any tariff47. There are special conditions that countervailing duties may result favorably to the importing nations. Countervailing duties do allow the removal of monopsony rents by more powerful states that controls the market power and have also the control over price of its imports. Also countervailing duties can make large nations afford useful protection to an industry that fits their strategic trade paradigm. However, the World Trade Organizations runs short in terms or limiting countervailing duties to the cases where possible benefits might arise. On the contrary, the gains of importing nations from making use of its power against monopsony or from protecting its strategic industries come at the expense of its trading partners and therefore, global welfare can decline rather than develop, if all the nations would pursue countervailing duty laws in the future. In the countervailing duty law, there is a tradeoff between the welfare costs that may arise in cases where duties are actually used and any welfare that arise in other cases from the discouragement of wasteful subsidy practices. Thus, trade balance is not easy to decipher as claimed. Countervailing duties are designed as a unilateral process embarked by importing nations without coordination. For instance, when the United States imposes countervailing duty on a product from another country, it is usually the only country in the whole trading system that would impose countervailing duty on that product. The subsidized produce can just be diverted to another market and in effect can very likely to damage the beneficiary of the subsidy in relation to the value of the subsidy. Thus, the capacity of the countervailing duty to discourage wasteful subsidy practices is highly doubtful. Furthermore, the use of the countervailing duty is very much limited to the injury test that one can easily conclude that the prospect of uncoordinated countermeasures can lead to further protectionism48. Unfortunately, only powerful countries, which have the will and the capacity to protect their economies, can do this easily. In relation to this, not all subsidies are should be treated as waste. As a matter of fact, subsidies can develop the volume of trade towards free trade and enhance global welfare. A subsidy program can only be deemed wasteful if it persuades a net diversion of resources into the subsidized activity relative to a proper benchmark. The global economy is still dominated by many trade barriers and that usually, the least develop countries are very much affected by these. Countervailing duties, as a unilateral policy tends to invariably examine programs in isolation. By subjecting firms to a wide array of tax regulation and subsidy policies, the possibility to distort the behavior of the firm relative to the ideal of free market also increases. As it is, many distortions may be offsetting49. In general, the World Trade Organization failed to clearly require an importing nation to demonstrate that a subsidy program has caused injury to its producers before imposing the concept of countervailing duty. In cases where subsidies are considered to be beneficial, specific policies must be addressed. IV. Conclusion In the name of global welfare, the world seeks for the improvement of policies. It is in this light that revisions to the subsidy and countervailing duty laws must be enforced. In doing so, the need to evaluate the larger economic spectrum must also be put in a primary consideration. The need to evaluate the larger net economic effects of both subsidies and countervailing duties must be done. Economic tradeoffs within the domestic economy must be taken into consideration also as part of the economic tradeoff between foreign firms and domestic producers. While specific sectors or industries benefit from the protection afforded by the countervailing duties, there is also an economy-wide cost to implementing these orders. In the long run, various interests which should benefit the majority should be the basis of generally agreed upon rules as far as the issues of subsidy and countervailing duties are concerned. The World Trade Organization, should also adhere to the suggestions of the economic advocates like policy alternatives such as relying more on multilateral solutions rather than the unilateral system that countervailing duties offer. Even if the countervailing duty laws have some positive effect favoring greater consumption of domestic goods, a far more pressing concern is that whether the economy as a whole benefits from these. Thus, the concept of nationalist economic policies must also be pursued to counter the tendencies of the countervailing duty laws to rule out protectionist bias and high cost to consumers. Bibliography Bentley, Anubrey Silberston and Philip. Anti-Dumping and Countervailing Action Limits Imposed by Economic and Legal Theory. Chentelham: Edward Elgar Publishing Limited, 2007. Bentley, Clive Stranbook and Pilip. Dumping and Subsidies: The Law and Procedures Governing the Imposition of Anti-Dumping and Countervailing Duties in the European Union. London: Kluwer Law International Ltd., 1993. Cass, Ronald. "Introduction: Economics and International Law." In Economic Dimensions in International Law, by Jagdeeo S. Bhandari and Alan O. Sykes, 70-90. Cambridge: Press Syndicate of the University of Cambridge, 1997. Holiday, Arlene Wilson and George. "Subsidies, Countervailing Duties and the WTO." In World TRade Organization Issues and Bibliography, by A.M. Babkina. New York, 2000. 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