What is Anti-Dumping Duty (ADD) – Its Working, Examples and Calculation
Anti-dumping duty refers to a tax or other charges levied on a particular imported product. The concept of dumping comes into the picture if a foreign country is producing goods in bulk at a very cheap rate and selling the same products to other countries to earn revenue. To keep a check on these imports, the Government imposes anti-dumping duty on foreign countries.
Countries draft an anti-dumping policy to protect local businesses’ interests and curb unfair competition that comes into the picture due to the dumping of foreign goods.
Read on to understand the anti-dumping policy and how a country implements anti-dumping measures.
How Does Anti-Dumping Duty Work?
Generally, the anti-dumping duty rates are decided based on the difference in the price of the imported goods and the price offered by the domestic players for that good. Let’s understand how an anti-dumping duty works:
- When a particular good is exported from a foreign country at a price lower than what is available in a particular country, the prices can hurt the local manufacturers within the country where the exports are made.
- Hence, to safeguard the interests of domestic manufacturers, the Government imposes anti-dumping duty on these exports. The anti-dumping duty is based on the markdown of the price compared to the prices at which the good is available domestically.
- Once the anti-dumping duty is imposed on the import, the price of the imports and the domestically produced goods reach the same level. Consumers can then decide their preferences and buy either imported or locally manufactured goods.
The anti-dumping taxes are not imposed on all imports. These apply to only those goods that can threaten domestic industries. These duties are in place to protect the interests of the local workers. However, these duties increase the landing cost of the products for domestic consumers. Still, they help reduce the competition between local and international manufacturers (as their prices reach equilibrium due to the implementation of anti-dumping duties).
Why is Anti-Dumping Important?
Anti-dumping duties are vital as they protect the interest of the local players in the domestic market. These duties are generally levied on imports that enter the US borders. However, several other countries also charge anti-dumping taxes to safeguard local manufacturers.
The products dumped into countries in bulk are generally priced lower than the price at which these products are produced.
How is Anti-Dumping Duty Calculated?
Now that you have understood the premise of anti-dumping duties, you must understand how these duties are calculated. The calculation takes a straightforward approach. Mostly, the amount of duty applicable on the imports is equal to the difference in the price of the locally manufactured goods and the price of the imported goods. The formula used to calculate the anti-dumping duty is:
Anti-dumping duty = Normal Value – Export Value
The normal value of the good is the domestic market value of a particular product. However, if the product does not exist in the domestic market, the Government uses the prices of any similar product available in the local market. If there are no similar products, the Government considers the cost of production and applies a reasonable profit margin to arrive at the normal value.
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Example of an Anti-Dumping Duty
A few anti-dumping examples will help you understand the concept better.
Example 1: If Company XYZ in the US exports a machine to Company ABC in India at $40,000 and the Company XYZ sells the product domestically at $44,000. What will be the anti-dumping duty on the product?
The normal value of the machine is $44,000, and the export value is $40,000. Hence, the anti-dumping duty will be $4,000 ($44,000 – $4,000).
Let’s take another anti-dumping example to understand the concept thoroughly.
Example 2: Let’s take the same case but assume that only Company ABC receives such products and there are no similar products in the market. We have the following information about the machine:
Cost of producing the machinery: $32,000
Overhead costs: $4,000
Profit Margin: 20%
In this case, you need to calculate the normal value of the machine. The formula for calculating the normal value is:
Normal Value: Cost of Production + Overhead Costs + Profit Margin
Hence, the normal value is:
$32,000 + $4,000 + $ 7,200 = $43,200
The anti-dumping duty, in this case, is $43,200 – $40,000 = $3,200
The calculation remains valid if there is no anti-dumping agreement. If the countries get into an anti-dumping agreement and fix the amount that will be charged as duty, the calculation is invalid, and the country has to pay the pre-decided amount as anti-dumping duty.
What are the Types of Dumping?
Different types of dumping of products are a part of international trade. The anti-dumping taxes are also decided based on the types of dumping that the foreign country gets into while exporting the products. Different types of dumping include:
1. Sporadic Dumping
If the companies have an excess inventory at their disposal, they choose to export it to other countries to diversify their revenue channels and to avoid a price war in the home country. A price war can impact the company’s position in the home country. Hence, the company either destroys the inventory or exports it to a country with market potential. This kind of dumping is occasional.
2. Predatory Dumping
Unlike Sporadic dumping, this has a proper strategy in place and is permanent. In the case of predatory dumping, a company produces goods with the sole intention of dumping the products in another country. The products are priced lower than the current market prices in the country where the products are to be dumped.
Here, the products are sold at a loss as the company wants to establish a market position in the domestic country and clear all competition. Predatory dumping aims to create a monopoly and then increase prices.
3. Persistent Dumping
The companies consistently export products to countries at a lower price than the market price of the product in these countries. They ensure that the demand for the products increases in the importing countries.
4. Reverse Dumping
In cases where price adjustments do not affect demand, reverse dumping occurs. As a result, the business can charge a higher price on the international market and a lesser price on the domestic market.
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List of Products that Have Anti-Dumping Duty
Several countries levy anti-dumping and countervailing duties on exports. Some of the products include:
- Ceramic tiles
- Pump trucks manufactured in China
- Flat steel products
- Bikes
- Ironing boards
The list is not exhaustive. You can check the complete list of products that come with anti-dumping and countervailing duties on the Government’s official website.
WTO’s Provisions Related to Anti-Dumping Duty
Several provisions laid down by the WTO govern the anti-dumping duties across countries. These provisions are:
- An anti-dumping duty agreement is valid for five years if no amendments are made to it or if the policy is not revoked before the expiry of the term.
- The policy period can be extended by conducting a sunset review of the duties applied by the country. The sunset review checks if the duties are still relevant to the nation. The review is conducted upon receiving a request from domestic companies that might be affected by the removal of the duties.
Advantages of Anti-Dumping Duty
There are some advantages to the application of anti-dumping duties. These benefits are:
- Anti-dumping duties protect the rights of domestic firms in the nation against the unfair competition produced by overseas exporters.
- These exporters who engage in dumping want to gain market share in other nations by providing lower prices. The market share of domestic businesses and manufacturers suffers as a result. Anti-dumping duties serve as a tool to stop such unethical pricing practices, promoting fair competition in the market.
Drawbacks of Anti-Dumping
There are a few drawbacks of anti-dumping duty as well:
- Anti-dumping taxes can obstruct free trade and commerce between two countries.
- The effects of market entrance restrictions and anti-dumping duties hurt the economy of the country that imposes the duty.
- Domestic consumers cannot purchase the goods at reduced rates as the duties are ultimately passed down to the end consumer, which goes against their best interests.
Final Word
It is the primary responsibility of the Government to protect the interest of the local manufacturers and businesses and promote healthy competition. And for the same reason, Governments across the world impose anti-dumping duties on imports. While the Government takes several measures to prevent unfair pricing of imports, the WTO oversees these duties to safeguard the trade relations between the countries.
FAQs
Ans: The World Trade Organization, or the WTO, looks after all the trade rules between two nations. It also makes necessary amends to the regulations to ensure that the trade between the countries is not hampered.
Ans: The formula for calculating the anti-dumping duty is:
Anti-dumping duty = Normal value – Export value
The normal value of the exported product is the market value of the product in the domestic market.
Ans: The Government imposes countervailing duties to neutralise the impact of subsidies available in the exporter’s country.
Ans: Yes, both methods are pretty different. In the case of the former, the foreign company wants to build a market share, so it exports the products even at a loss. However, in the case of Persistent dumping, the company is regularly exporting products at a low price and, hence, is not registering any losses.
Ans: The most commonly imported products in India that come with an anti-dumping duty include copper and copper alloy flat-rolled products from countries like China, Korea, etc.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
