1 Law
International Trade Law
The Anti-dumping Agreement under the WTO
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UNIVERSITY GRANTS COMMISSION
e-PATSHALA MODULE
James J. Nedumpara
Associate Professor of Law, O.P. Jindal Global University;
Executive Director, Centre for International Trade and Economic Laws.
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An initiative by the University Grants Commission, MHRD under the National Mission on Education through Information and Communication Technology.
Personal Details
Role Name Affiliation
Principal Investigator Prof. (Dr.) Ranbir Singh
Vice Chancellor, National Law University, Delhi
Co-Principle Coordinator, if any
Prof. (Dr.) G.S.
Bajpai
Registrar, NLU, Delhi
Co-ordinator Dr. Saloni
Khanderia-Yadav
NLU, Delhi
Content Writer (CW) James J. Nedumpara O.P. Jindal Global University Content Reviewer (CR) Prof. (Dr.)
Jayagovind
NLU, Delhi Language Editor (LE) Dr. Saloni
Khanderia
NLU, Delhi
Description of Module
Items Description of Module
Subject Name
International Trade Law Paper
Name
e-PG Patshala Learning Module on the Anti-Dumping Agreement World Trade Organization
Module Name/Title
Anti-Dumping Agreement under the WTO Module
Id
9 Pre-
requisites
The concept of unfair trade practice under the GATT and the justification of anti-dumping and countervailing duties.
Article 6 of the GATT and the Anti-dumping Agreement under the WTO
Dumping, material injury and the concept of causation.
Objective s
To Understand:
The concept of unfair trade practice under the GATT and the justification of anti-dumping and countervailing duties.
Article 6 of the GATT and the Anti-dumping Agreement under the WTO
Dumping, material injury and the concept of causation.
Keyword s
Anti-dumping, causation, material injury, WTO.
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TABLE OF CONTENTS
ABBREVIATIONS/SHORT-HAND ______________________________________________________________ 6 LEARNING OUTCOME ___________________________________________________________________________ 7 1. INTRODUCTION _____________________________________________________________________________ 8 1.1. Rationale for Anti-Dumping Actions ______________________________________________________ 11
1.2. Administration of Antidumping Investigations ___________________________________________ 12 2. DETERMINATION OF DUMPING _______________________________________________________ 13
2.1. Normal Value ________________________________________________________________________________ 14 2.1.1. Domestic Sales Transaction Method _____________________________________________________________ 14 2.1.2. Alternative methods to calculate Normal Value ________________________________________________ 17 2.2. Export Price _________________________________________________________________________________ 26 2.2.1. Fair price comparison _____________________________________________________________________ 28 2.2.2. The Obligation to Compare Prices at the Same Level of Trade _______________________________ 29 2.2.3. Due Allowances ____________________________________________________________________________________ 29 2.2.4. Comparison between Normal Value and Export Price ________________________________________ 30 2.2.5. Calculation of Dumping Margin _________________________________________________________________ 32
3. DETERMINATION OF INJURY___________________________________________________________ 36
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3.1. Investigation of Injury ______________________________________________________________________ 36 3.1.1. Evidentiary standards for injury ________________________________________________________________ 39 3.2. Injury factors ________________________________________________________________________________ 44 3.3. Determination of Causation ________________________________________________________________ 46 3.4. Non-attribution ______________________________________________________________________________ 46
3.5. Threat of Injury _____________________________________________________________________________ 47 4. Procedural Requirements ____________________________________________________________________ 53
4.1. Introduction__________________________________________________________________________________ 53 4.2. Application ___________________________________________________________________________________ 53 4.4. Due Process Rights __________________________________________________________________________ 55 4.4.1. Public Notices and Explanation of Determinations ______________________________________________ 55 4.4.2. Confidentiality and disclosure of essential facts __________________________________________________ 56 4.4.3. Other Rights ________________________________________________________________________________________ 57 4.4.4. Facts Available/Administrative Deadlines ________________________________________________________ 57 4.4. Provisional Measure ___________________________________________________________________________ 57 3.5. Price Undertakings ____________________________________________________________________________ 57 3.6. Anti-dumping Duties __________________________________________________________________________ 58 4.7. Retroactivity ___________________________________________________________________________________ 59 4.8. Reviews _________________________________________________________________________________________ 60 4.9. Judicial Review ________________________________________________________________________________ 61 4.10 AD Application on behalf of a third country _______________________________________________ 61 5. Initiation of a Dispute under ADA in the WTO ______________________________________________ 64
5.1. Identification of Measures in Request for Establishment __________________________________ 64 5.2. Special Standard of Review ___________________________________________________________________ 64 5.3. Specificity of Claims in Request for Establishment _________________________________________ 64 5.3.1. New Claims _________________________________________________________________________________________ 64 5.3.2. Standing ____________________________________________________________________________________________ 65 5.4. Panel Recommendations and Suggestions _________________________________________________ 65 6. DISPUTES REFERRED IN THE MODULE _____________________________________________ 66
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ABBREVIATIONS/SHORT-HAND
AB Appellate Body
ABR Appellate Body Report
ADA Anti-Dumping Agreement
ADD Anti-Dumping Duty
Art. /Arts. Article/Articles
EU European Union
GATT General Agreement on Tariffs and Trade
IA Investigating Authority
Members WTO Member States
PR Panel Report
US United States of America
WTO World Trade Organization
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LEARNING OUTCOME
The module shall aim to clarify the substantive and procedural aspects of the Anti-Dumping Agreement (World Trade Organization). Students shall gain insight as to current jurisprudential underpinnings into various concepts imbibed in the ADA for an in-depth appreciation of the complexities involved in the interpretation of the respective text.
Briefly, the aim of the module is to cover:
a) Meaning and rationale of dumping;
b) Origin of Anti-Dumping Agreement;
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c) Meaning and calculation of Normal Value;
d) Meaning and calculation of Export Price;
e) Explanation on and calculation of dumping margin;
f) Conditions to calculate and analyse injury and causation;
g) Various procedural details to initiate an investigation and impose anti-dumping duties to filing; a dispute in the WTO under the Anti-Dumping Agreement.
1. INTRODUCTION
Antidumping laws are the most widely used instruments of trade contingent protection. At a fundamental level, the purpose of antidumping measures is to offset the injury to the domestic industry in the importing country. The first internationally-accepted definition of the term „dumping‟ is provided under Article VI of the General Agreement on Tariffs and Trade (GATT) 1947.1 It consequently formed the basis for drafting the Anti-Dumping
1Michael J. Trebilcock, Understanding Trade Law (Edward Elgar, 2013) 65.
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Agreement (ADA) by the GATT Secretariat during the Uruguay Round of Trade Negotiations from 1986-1994.2 Therefore, the official name of the ADA reads as the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994.
„Dumping‟ is an act of a firm to sell goods abroad at a lower price than it sells them in its home market. There has been a general understanding among nations before the establishment of the World Trade Organization (WTO) that „dumping‟ is an unfair trade practice, and that each importing country should have the right to impose anti-dumping duties on goods that are dumped in its market, to protect its domestic industry.3
Art. VI GATT 1994 authorizes Members to impose anti-dumping duties (ADD) in addition to other tariffs as negotiated among Members.4 ADDs are levied if the domestic investigating agencies find that specific imported products are sold at less than normal value and such imports cause or threaten to cause injury or material retardation to the domestic industry.5 The ADA aims to expand and clarify the application of Art. VI of GATT 1994.6 It allows WTO Members, when taking action against dumping, to depart from key GATT principles including the Most-Favoured Nation (MFN) principle7 and self-help which is prohibited under the Dispute Settlement Understanding (DSU).8
Box 1.1: Definition of Dumping Article VI of the GATT
A product is considered as introduced into the commerce of an importing country at less than its normal value if the price of the product exported from one country to another: (a) is less than the comparable price, in the ordinary course of trade for the like domestic product when destined for consumption in the exporting country; (b) in the absence of such, domestic price, is less than either:
(i) the highest comparable price for the like product for export to any third country in the ordinary course of trade; or (ii) the cost of production of product in the country of origin, plus a reasonable addition of selling cost and profit.
The Appellate Body (AB) in the US – 1916 Act provides that Art. VI: 1 GATT 1994 must be read together with the provisions of the ADA.9 It referred to the text of Art. 110 of the
2 K.D. Raju, World Trade Organization Agreement on Anti-Dumping (Kluwer Law International, 2008) 6.
3 John H. Jackson, Jean-Victor Louis and Mitsuo Matsushita, „Implementing the Tokyo Round: Legal Aspects of Changing International Economic Rules‟ [1982-83] Mich. L. R., 18, 273.
4 Bossche, (n 2) at 513.
5 Rudiger Wolfrum, Peter-Tobias Stoll and Michael Koebele, eds., Max Planck Commentaries on World Trade Law: WTO Trade Remedies (Martinus Nijhoff Publishers, 2008).
6 ibid.
7 MFN treatment under Article I GATT 1994 and the obligation to not to impose duties in excess of bound duties under Article II GATT 1994.
8 Article VI GATT 1994 allows a member to initiate counter-measure against the dumped products whereas such self-help measures are prohibited under Article 23 of the Dispute Settlement Understanding.
9 WTO, United States – Anti-Dumping Act of 1916- Report of the Appellate Body (28 August 2000) WT/DS136/AB/R [137] (US Antidumping Act 1916).
10 Article 1: Principles
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ADA to state that anti-dumping measures taken under the ADA must also adhere to Art. VI of GATT 1994.11 It further stated that Article VI is applicable to any specific action against dumping of exports, i.e., action that is taken in response to situations presenting the constituent elements of „dumping‟.12
It should be noted that Art. VI GATT 1994 and the provisions of the ADA together limit the permissible responses against „dumping‟ to definitive anti-dumping duties (ADD), provisional measures and price undertakings.13 Furthermore, Art. 18 of the ADA provides that any specific action against dumping should be in accordance with the provisions of Art.VI of GATT 1994.
Table 1.1: Evolution of Antidumping Agreement
Art. VI of the GATT does not provide much guidance on the circumstances under which Members are allowed to impose countermeasures against the unfair trade practices.14 Nor does it include any procedural safeguards to ensure that this instrument is not used in a protectionist manner.15 However, significant regulations and clarifications in this respect were included in the Tokyo Antidumping Code.16 The ADA builds on the general statement contained in Art. VI GATT 1994 and the Tokyo Code by specifying the conditions under which Members are authorized to act against dumped imports.17
An anti-dumping measure shall be applied only under the circumstances provided for in Article VI of General Agreement on Tariffs and Trade (GATT) 1994 and pursuant to investigations initiated and conducted in accordance with the provisions of this Agreement. The following provisions govern the application of Article VI of GATT 1994 in so far as action is taken under anti-dumping legislation or regulations.
11 US Antidumping Act 1916 (n. 9) [120].
12 ibid [124]-[126].
13 ibid [137].
14 Peter-Tobias and Frank Schorkopf, Max Planck Commentaries on World Trade Law- WTO: World Economic Order, World Trade Law (Martinus Nijhoff Publishers, 2003).
15 ibid.
16 ibid.
17 ibid.
ROUNDS OF TRADE NEGOTIATIONS
Year Place/name Subjects covered Countries
1947 Geneva Tariffs 23
1949 Annecy Tariffs 13
1951 Torquay Tariffs 38
1956 Geneva Tariffs 26
1960-1961 Geneva, Dillon Round Tariffs 26
1964-1967 Geneva, Kennedy Round Tariffs and ant-dumping measures 62
1973-1979 Geneva, Tokyo Round Tariffs, non-tariff measures “framework” agreements 102 1986-1994 Geneva, Uruguay Round Tariffs, non-tariff measures, rules, services,
intellectual property, dispute settlement, textiles, agriculture, creation of WTO
123
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The current text of ADA contains detailed rules for national anti-dumping investigation procedures and stipulates methods for defining the phrases used in Art. VI, such as „dumping‟,
„normal value‟, „export price‟ and „injury‟.18 Art. 1 of the ADA clarifies that the national anti- dumping measures shall be adopted only pursuant to investigations initiated and conducted in accordance with the provisions of the ADA.19
ADA imposes a series of both substantive and procedural obligations which are meant to bind the discretion of a national investigating authority (IA) when performing such calculations. The former is meant to substantiate a fair comparison-standard that an IA must abide to and the latter reflect a due process standard that an IA must respect.
1.1. Rationale for Anti-Dumping Actions
There are three broad theories which support the application of ADD. These three theories consider ADD measure as:
Response to unfair trade
Mechanism of special protection
Strategic weapon
Response to unfair trade: The first argument understands ADD to be a protection against unfair trade by exporters.20 The theory provides that dumping is a price discrimination between markets.21 However, it should be noted that the ADA provides for imposition of ADD in cases where the dumped imports are found to have caused or threatens to cause material injury and the causal link has also been established.22 Therefore, practically, the ADA does not provide a mechanism against unfair trade per se.
Mechanism of special protection: The second argument provides that AD measures facilitate trade liberalization by allowing countries to increase tariffs in order to protect domestic industries which are injured by imports.23 This has been referred to as the Safety Valve Theory. According to this argument, AD measures act as a safeguard mechanism.24 According to the Safety Valve Theory, AD measures provide a temporary reprieve to the domestic industry from the shock of tariff cuts arising out of tariff liberalization.
Strategic weapon: The third argument provides that ADD is a strategic or a protectionist policy in the hands of the WTO Members. It is also known as the Retaliation Theory. This is due to the evidence that such protection was granted to politically significant industries.25 Michael Finger notes that countries using ADD protection form a „club‟ and tend to apply ADD against another rather than against the „non-club‟.26 Thomas Prusa argues that
18 ibid.
19 ibid.
20 Raju (n 2) 8.
21 ibid.
22 ibid.
23 ibid.
24 ibid.
25 Raju (n 2) 9.
26 ibid.
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countries target ADD against those countries which have previously initiated investigations or imposed duties, providing a tit-for-tat behaviour.27
According to Hansen and Prusa, the first two arguments estimate ADDs as a welfare enhancing mechanism. The third argument, however, perceives it as a loophole in the WTO regime and that the growth of ADD can have a detrimental impact on the fundamental aspirations of the WTO.28
1.2. Administration of Antidumping Investigations
All WTO members who have imposed antidumping measures have authorized various domestic agencies to conduct antidumping investigations. The investigating agencies will have to determine three elements:
Dumping
Material Injury
Causal Link
Dumping or dumping margin is determined by the national investigating authorities of the respective WTO Member States. There is no international agency to perform this task.
Table1.2: Antidumping Agencies
Country AD Investigation Agency
India Directorate General of Anti-Dumping and Allied Duties (DGAD), Ministry of Commerce.
China MOFCOM –Ministry of Commerce
United States ITA of the Department of Commerce European Union European Commission
Japan Ministry of Finance ('MOF') and the Ministry of Economy, Trade and Industry ('METI') Brazil CAMEX and DECOM (as a technical branch of SECEX), deals specifically with trade remedies.
Source: WTO
In certain jurisdictions, dumping, injury and causal link determination are determined by the same agency. For example, in India and the EU a single agency is tasked with the dumping and injury determination. The DGAD (India) is tasked with the determination of both dumping and injury. In the case of Canada and the US, a bifurcated determination process is employed. Further, in Canada the dumping determinations are conducted by Revenue Canada whereas the injury determinations are conducted by the Canada International Trade Tribunal. In the case of the US, the International Trade Administration under the Department of Commerce conducts the dumping determination. The International Trade Commission conducts the injury determination.
27 ibid.
28 Thomas J. Prusa, The Trade Effects of US Antidumping Actions, NBER, January 1997, http://www.nber.org/chapters/c0313.pdf (last visited 12 July 2014). See also, Hasnat Shah, Syed and Ahmad Nawaz, Hakro, Economic rationale, trade impact and extent of antidumping – case study of Pakistan, 12 The Lahore J. Eco. 1 (2007).
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2. DETERMINATION OF DUMPING
The key issue in an antidumping investigation is whether a product is being dumped and if so, the calculation of the dumping margin. Art. 2 of the ADA provides important provisions to determine the margin of dumping. First of all, an IA will have to determine the “normal value”
and the “export price”. These are the two main elements necessary for the determination of margin of dumping:
Normal value is the price at which the like product is sold in the exporting country during the ordinary course of trade.29
Export price is ordinarily based on the transaction price at which the producer in the exporting country sells the product at issue to an importer in the importing country.30
Dumping, under the ADA (Art. 2.1), occurs when the normal value is more than the export price of like product in the importing country market during the ordinary course of trade.
Dumping and the margin of dumping under the ADA means one and the same thing. The AB in the US-Stainless Steel (Mexico) provided that the definition of dumping is applied for the purpose of the „ADA‟ and therefore, „dumping‟ and „margin of dumping‟ have the same meaning throughout the ADA.31
Dumping = Normal Value – Export Price
Flowchart 2.1: Determination of dumping involves the following steps
29 ibid.
30Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (“ADA”) (15 April 1994) LT/UR/A-1A/3 art. 2.1 <http://wtodocumentsonline.org>.
31 WTO, United States – Final Anti-Dumping Measures on Stainless Steel from Mexico- Report of the Panel (30 April 2008) WT/DS344/AB/R [94], FN 208 (Mexico Steel).
Normal Value Price at which the product or its 'like' product is sold in the home market of the exporting country in the ordinary course of trade
Export Price Price at which the exporter sells the product in the importing country
Dumping occurs when the normal value is more than the export price of the like product in the ordinary course of trade.
Calculation of Normal Value
Calculation of Export Price
Calculate the Adjusted Export Price and Normal
Price
Calculate the Margin of Dumping
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2.1. Normal Value
Art. 2.2 of the ADA provides that the normal value (“NV”) is the price of a like product in the home market of the exporting country during the ordinary course of trade. There are three defined methodologies under the ADA to calculate the NV. The basic method is to assess domestic sales transaction of the product in the exporting country‟s domestic market. In case the normal value cannot be determined on the basis of domestic market sales, two other alternatives have been provided in the ADA: Third Country Market Price Method and Constructed Normal Value Method. A substantive discussion on the three methods is provided in the sub-subsections below.
Flowchart 2.2: Methods to calculate the Normal Value
DIRECT METHOD ALTERNATIVE METHODS
2.1.1. Domestic Sales Transaction Method
Assessing domestic sales transactions is the standard way to determine the normal value for the purposes of calculating dumping margins. There are four conditions on the basis of which domestic sales transactions can be used to determine the normal value:
Sale must be in the ordinary course of trade;
Sale must be of the like product;
Products must be destined for the consumption in the exporting country;
Price must be comparable.32
2.1.1.1. Sales in the Ordinary Course of Trade (OCT Test)
Art. 2.1 of the ADA authorizes the IAs to exclude sales not made in the “ordinary course of trade” (“OCT”) from the calculation of normal value. The purpose of the OCT test is to ensure that normal value is, indeed, the “normal” price of the like product, in the home market of the exporter.33 Art. 2.2.1 of the ADA does not define the concept „in the ordinary course of trade‟ but it provides an example of sales which are not in the OCT.
32 ADA (n 30) 2.1.
33 WTO, United States- Anti-Dumping Measures on Certain Hot-Rolled Steel-Report of the Appellate Body (24 July 2001) WT/DS184/AB/R [140] (Hot Rolled Steel AB rep).
Calculation of Normal Value
Third Country Price Method
Constructed Normal Value Method Domestic Sales Price Method
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It provides that sales made below per unit (fixed and variable) cost of production plus selling, general and administrative expenses (SGA) may, under certain circumstances, be considered as not in the ordinary course of trade. It is further enquired if the sales were made within an extended period of time34, in substantial quantities35, and at prices which do not allow for the recovery of all costs. This additional test is conducted to find out whether a loss resulting from a comparison of prices and costs on a transaction basis is eliminated if prices are compared to long-run costs, i.e., the Period of Investigation.
An assessment as to whether sales in the domestic market of the exporting Member are made in the OCT can be a complex task. There are many situations where the transactions are not in the OCT. Such circumstances include:
Sales below cost.36
Sales to affiliated parties;
Aberrationally high priced sales/abnormally low priced sales;
Sales not made in the OCT may be disregarded in determining the NV.37 The NV would then be determined on the basis of the remaining sales.
Box 2.1: OCT and Below Cost Test
WHETHER DETERMINATION OF SALES ARE MADE IN THE ORDINARY COURSE OF TRADE
ʘ Calculate the cost of manufacturing.
ʘ Calculate the general expenses.
ʘ Calculate the total cost (add the cost of manufacture and general expenses).
ʘ Calculate the domestic price.
ʘ Compare net domestic prices to total cost (adjusted).
ʘ Identification of sales at prices below cost.
ʘ Verify whether sales made below cost were made:
ʘ Within an extended period of time ʘ In substantial quantities; and
ʘ At prices which do not provide for the recovery of costs within a reasonable period of time.
ʘ If all three conditions are met, the sales concerned may be excluded from the calculation of normal value.
It must be noted that the ADA does not treat sales below cost as outside the OCT by definition. Selling below cost may be a normal business practice if such sales are made in the short run and for relatively low volume of sales or if the firm can recover the losses in the long run (See Item 7 in Box 4 of this Module). Article 2.2.1 of the ADA states that prices which are below total cost at the time of sale, but above the weighted average total cost during the POI can be considered to provide for cost recovery within a reasonable period of time. The total cost of the product would include the cost to make and sell the product. To determine whether the below cost sales are in made in substantial quantities, the ADA also
34 Normally one year but in no case less than six months.
35 If the weighted average selling price of the transactions under consideration is below the weighted average per unit costs, or if the volume of sales at a loss represents at least 20% of the volume of transactions.
36 ADA (n 30) art. 2.2.1.
37 ibid.
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provides for the 80: 20 test. Sales below total cost are made in substantial quantities when sales below cost represent 20 percent, in volume, of all domestic sales in the country of export or export sales to third country. When the home market sales or sales to third countries do not satisfy the 80:20 test, such sales can be treated as not being in the OCT and may be disregarded for determining normal value.
The AB in the US-Hot-Rolled Steel confirmed that the ADA does not define the term „in the ordinary course of trade‟. The issue in this case was whether the US could exclude some of the sales of hot-rolled steel within the Japanese market from the calculation of the normal value. The US Department of Commerce had used a methodology which excluded from dumping calculation home market sales by an exporter to a related or affiliated party unless the price was at least 99.5 percent of the average price charged to unaffiliated or independent third party customers.
Even though, Art. 2.1 provides for a method to determine whether „sales below cost‟ are
„in the ordinary course of trade‟; the provision does not purport to exhaust the range of methods for determining the same and it does not cover the specific issue of sales between affiliated parties.38 It held that the IA‟s discretion under Art. 2.1 to determine how to avoid distortions in the NV should be exercised in an even-handed manner which is fair to all parties.39
Box 2.2: Arms’ Length Test in OCT determination
“…[W]e observe that, under the 99.5 percent test, a great range of low-priced sales to affiliates can be excluded from the calculation of normal value because they are deemed not be “in the ordinary course of trade.” The effect of the test is to minimize, to an extreme degree, possible downward distortion of normal value that might result from sales to affiliates.”40
AB, US- Hot-rolled Steel
As opposed to the 99.5 percent test for low-priced transactions, there was no similar rule for OCT determination for high-priced transactions between affiliates. As far as high-priced transactions were concerned, in the US- Hot-Rolled Steel, the US Department of Commerce excluded those sales from the calculation of normal value only if those prices were
“aberationally” or “artificially high”. According to the AB, there was a lack of even- handedness in the tests applied by the US. The AB observed that the combined application of these two rules operated systematically to raise NV, through the automatic exclusion of all high-prices sales, coupled with the automatic inclusion of all high-priced sales.41
2.1.1.2. Volume of Sales
38 Petros C. Mavroidis, George A. Bermann and Mark Wu, The Law of the World Trade Organization (WTO):
Documents, Cases & Analysis (American Casebook) West; 1 edition (2012) 447.
39 ABR, Hot-Rolled Steel, rep (n 33) [148].
40 ibid [150].
41 ibid [154].
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Sufficiency of sales in the home market is a key determinant in the OCT analysis.42 The volume expressed in relative terms is determinative of the number of sales made in the domestic market compared with the number of export sales. Footnote 2 of ADA in sales shall normally be considered sufficient in volume if they represent at least 5% of the sales of the product to the importing/investigating country. It is clear that the 5% benchmark is not an absolute criterion. Assuming evidence that sales at a lower ratio are still of sufficient magnitude to provide for a proper comparison, a lower volume of sales should be acceptable for the purposes of the NV determination.43
The ADA does not specify whether the sufficient volume-test relates to all domestic sales by an investigated exporter, or to only those sales by the exporter which are made in the OCT.44 It has been argued that the purposes of the test is to determine whether the domestic market is sufficiently large to enable domestic sales to serve as a legitimate measure of NV, and all sales, even those outside the OCT, should be taken into account in making this benchmark determination.45
2.1.1.3. Particular Market Situation
Particular market situation of the given prices in the exporting country should be properly assessed as such situations can influence the market price which shall effect the NV calculation. A GATT Panel (EC-Cotton Yarn) found that hyper-inflation combined with a fixed exchange rate did not necessarily constitute a particular market situation.46 What needs to be demonstrated is whether or not the sales concerned would permit a proper comparison.47 The Panel considered that the complainant had failed to demonstrate that prices used as the basis of the NV were themselves so affected by the combination of high domestic inflation and a fixed exchange rate such that those sales did not permit a proper comparison.48
2.1.2. Alternative methods to calculate Normal Value
The ADA provides for two alternatives under these three situations to determine the NV:
There are no sales of the like product in the ordinary course of trade in the exporting country;
When the particular market situation do not permit a proper comparison, and
The low volume of sales in the domestic market of the exporting country does not permit a proper comparison.49
The two alternatives are:
42 ibid (n 59) 448.
43 ADA (n 30) footnote 2.
44 Mavroidis (n 38) 448-449.
45 ibid.
46 Mavroidis (n 38) 449.
47 ibid.
48 ibid.
49 ADA (n 30) art. 2.2.
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Third Country Market Price Method;
Constructed Normal Value Method.
In other words, Art. 2.2 of the ADA considers three special situations and provides two alternative methods for calculating normal value in such cases (third country exports and constructed normal value). The Panel in US-Salmon (Norway) noted that there is no order of preference to apply the below-mentioned alternative methods to establish NV.50
The ADA does not allow full discretion to IAs when constructing the NV. In short, they must:
(a) With respect to cost of production, follow the disciplines included in Art. 2.2.1.1 of the ADA; and
(b) With respect to SGA and profits, follow the disciplines included in Art. 2.2.2 of the ADA.
Flowchart 3.1: Conditions when the alternative methods to calculate NV are applied
2.1.2.1. Third Country Price Method
Art. 2.2 of the ADA provides that the calculation of NV on the basis of export price to a third market, should be “appropriate”, and that the export price to that county should be
“representative”. However, there is no other guidance under the ADA as to the method of calculation while using the data from a third country. However, the WTO Members have over time developed an understanding about these terms. Thus, for example, they generally test the volume of exports to a given third country against the volume of exports to the importing Member, i.e. the Member conducting the investigation.
Normal Value Determination Involving Non-Market Economy/ Use of Surrogate Country
The Non-Market Economy (“NME”) treatment in antidumping investigation assumes special importance in view of the frequent use of this methodology against People‟s Republic of China.
A number of GATT/WTO Members do not accept prices or costs in non-market economies as an appropriate basis for the calculation of normal value on the ground that such prices and costs are controlled by the Government and therefore are not subject to market
50 United States – Anti-Dumping Duties on Imports of Fresh and Chilled Atlantic Salmon from Norway- Report of the Panel (27 April 1994) ADP/87, 391 (Chilled Atlantic Salmon Panel).
Alternative methods
Third Country Price Method Constructed Normal
Value Method
No sales of the like product in the ordinary course of trade in the domestic market
A particular market situation which do not let a proper comparison
Low volume of sales in the domestic market of the exporting country
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forces.51 There is no definition of NME, other than a rather incomplete definition provided in the Interpretative Note ad Art. VI GATT, “a country which has a complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the state”.
While using NME methodology, an investigating agency will resort to prices or costs in
a third country as the basis for normal value. This means that export prices from the NME to the importing Member will be compared with prices or costs in this surrogate/analogue country. It should be noted that for several reasons the surrogate country concept tends to lead to findings of high dumping. A number of IAs collect production costs from firms or enterprises situated in market economy surrogate countries. Details on finance cost, wage cost, etc., are taken from agencies such as Department of Labour in the US or organizations such as the World Bank. This can at times be an arbitrary exercise. Again, the producers in surrogate countries may not cooperate effectively with the IAs. Most of such surrogate country producers will be competing in the market place with the NME exporters and it is therefore not in their interest to minimize a possible finding of dumping for their NME competitors.
Notwithstanding the NME methodology, several countries provide that individual companies from China or other NME countries may prove that they operate under market economy conditions and receive Market Economy Treatment (MET). If individual companies can get MET, they can escape the surrogate country values and determine their normal value based on their actual cost. The definition of what constitutes a market economy is by and large similar in most jurisdictions employing antidumping measures and the focus is on criteria such as the absence of state interference and of market distortions carried over from the former economic system, currency convertibility, and the freedom to hire employees and negotiate wages, etc.
Hypothetical
51 WTO, United Sates- Definitive Anti-Dumping and Countervailing Duties on Certain Products from China- Report of the Panel (22 October 2010) WT/DS379/R [17.68] (AD CVD Panel).
Box: 2.3: China’s Accession Protocol
Sub para (a) (ii): Investigating member to a use methodology not based on a strict comparison with domestic process or costs in China if the producers cannot clearly show that market economy conditions prevail in the industry for the manufacture, production and sale of the product.
Provisions of sub para. (a) (ii) to expire after 15 years from the date of accession
In a situation where China dumps laptops at below than fair market value into the United States and
the USITC wants to assess the NV from a third market…
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Box 2.4: Non-Market Economy Treatment and China
In the case of China, several agencies including the US Department of Commerce have treated India, Philippines, Thailand, Indonesia, Colombia, Peru as surrogate countries for the determination of cost data. Article 15 (a) of China‟s Accession Protocol makes an attempt to limit the use of NME methodology beyond 2016. However, Chinese exporters have the opportunity to establish under the national law of the importing Member that it is a market economy. For an interesting appreciation of this topic you may read:
William P. Alford, “When is China Paraguay? An Examination of the Application of the Anti- Dumping and Countervailing Duty Laws of the United States to Nonmarket Economy Nations,”
61 Southern California Law Review 79 (1987).
2.1.2.2. Constructed Normal Value
Art. 2.2 of the ADA distinguishes three elements of constructed normal value:
Cost of production;
Reasonable amount for administrative, selling and general costs (often called SGA);
Reasonable amount for profits.
On the basis of the above three elements the IA in the importing Member country calculates the constructed normal value. A WTO Panel in Thailand-H-Beams provides that the underlying goal of the constructed normal value is to ensure a result as close to what would be obtained on the basis of a price-to price comparison.52
The ADA provides rules on how the costs should be calculated while it also establishes a set of rules for the calculation of SGA as well as of profits. In dumping investigations, the agency routinely requests both price and cost information to check whether domestic sales are made below cost. 53 Art. 2.2.2 of the ADA provides that the amounts for SGA and for profits shall be based on an actual data pertaining to production and sales in the ordinary course of trade of the like product.
2.1.2.2.1. Calculation of Cost Price
52 WTO, Thailand- Anti-Dumping Duties on Angles, Shapes and Sections of Iron or Non-Alloy Steel and H- Beams from Poland-Report of the Panel (28 September 2000) WT/DS122/R [7.127] (Thailand H-Beams Panel).
53 WTO, Guatemala – Anti-Dumping Investigation Regarding Portland Cement from Mexico- Report of the Panel (19 June 1998) WT/DS60/R [8.183] (Guatemala AD).
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Art. 2.2.1.1 of the ADA contains three types of obligations relating to an IA‟s cost calculations for the purpose of determining whether home market sales are in the ordinary course of trade and for calculating a constructed NV:
Art. 2.2.1.1 of the ADA, first sentence, requires the IA to normally base their calculation on actual cost data of the examined producer or exporter, provided that:
ʘ Such records are in accordance with the generally accepted accounting principles (GAAP) of the exporting country, and
ʘ They reasonably reflect the costs associated with the production and sale of the product under consideration;
The second sentence of Art. 2.2.1.1 of the ADA requires the IAs to consider all available evidence on the proper allocation of costs including that which is made available by the exporter or producer in the context of an anti-dumping investigation, provided that such allocations have been historically utilized by the exporter or producer;
The final sentence then provides for the appropriate adjustment of costs for non-recurring items of cost which benefit future and/or current production or for circumstances in which costs during the period of investigation are affected by start-up operations.
Art. 2.2.1.1 provide that costs shall normally be calculated on the basis of records kept by the exporter or producer under investigation. The records should be in accordance with the generally accepted accounting principles of the exporting country and reasonably reflect the cost of production and sale of the product under consideration.54 The IAs are required to consider all available evidence on the proper allocation of costs, including that which is made available by the exporter or producer in the course of investigation.55
The IAs will also examine whether the allocations have been historically utilized by the exporter or producer, in particular in relation to establishing appropriate amortization and depreciation periods and allowances for capital expenditures and other development costs.56
The third rule in Art. 2.2.2.1 provide that costs shall be adjusted appropriately for non- recurring components which benefit future and/or current production. An adjustment is also foreseen for circumstances in which the costs during the period of investigation have been affected by start-up operations.
The Panel in US-Broiler Products provides that the consideration of the appropriate cost allocation methodology necessarily includes the consideration of the methodologies used in the exporter‟s books and records.57
Box 2.5: Antidumping on Broiler Products: Cost Allocation
54 Mavroidis (n 38) 450.
55 ibid.
56 ibid.
57 WTO, China- Anti-Dumping and Countervailing Duty Measures on Broiler Products from the United States- Report of the Panel (2 August 2013) WT/DS427/R [7.195] (China AD CVD Broiler).
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One of the interesting issues involved in the WTO dispute China- Broiler Products was the cost allocation methodology for constructing the normal value of the US producers. Interestingly, the most important category of broiler products exported by China was chicken feet, or known otherwise as chicken paws, which are hardly consumed in the US or were regarded as a waste or used in animal feed products. In China, by contrast, they are delicacy and command higher prices. This necessitated the constructed cost methodology to determine the normal value for the product concerned.
Since the antidumping investigation by China involved broiler chicken products and not the whole chicken, it was important to allocate the costs. In the course of the proceedings, the three US producers, namely Pilgrim‟s Pride, Keystone and Tyson (US Producers) had reported that given the nature of production of chicken products they would use a “relative sales value” allocation methodology in the determination of the constructed normal value.
Chicken products have common costs up to the point of spilt-off of the various parts from the whole chicken such as breast, leg, quarters and chicken feet. For example, companies or firms producing joint or co-products which have a single production cost up to a certain point allocate that cost across the various resulting products. In the above example, if a single chicken was divided up and the breast was sold for $5, the thigh for $ 3, wings for $ 1 and paws for $1, then 50 percent of the pre-split-off production cost would be allocated to the breast, 30 percent to the thighs and 10 percent each to the wings and paws.
However, if there are by-products which are not part of the commercial business of the firm, there products will not have any spilt up costs assigned to them. The other allocation methodology is the “weight based allocation”, according to which the split up costs would be allocated according to the weight of the product concerned. Under this approach, China first estimated the average cost of producing a chicken and then calculated MOFCOM adopted the “weight-based allocation” whereas the respondents insisted on the “value-based allocation” in the underlying investigations.
According to the MOFCOM, the cost allocation methodologies of the three US respondents, treated paws improperly by allocating too little of the cost of production to them. China alleged that certain broiler items such as paws, which accounted for most of the US exports to China, were allocated a very small portion or none of the total costs which led to distortion of the normal value.
Art. 2.2.1.1 of the ADA states that costs shall normally be calculated on the basis of records kept by the exporter or producer under investigation, if those books are records (i) are consistent with the GAAP of the exporting country, and (ii) reasonably reflect the costs associated with the production and sale of the product under consideration.
According to the Panel, the term “normally” in Art. 2.2.1.1 means that an IA is bound to explain why it departed from the norm and declined to use the respondent‟s books and records. In other words, in the language of the Panel, there is a presumption that the books and records of the respondent shall be used in order to calculate the cost of production to determine the normal value.
The IAs retain the right to decline the use of such books or records if they are either: (1) inconsistent with GAAP or, (ii) do not reasonably reflect the costs associated with the production and sale of the product under consideration. The Panel, accordingly, found that China acted inconsistently with the first sentence of 2.2.1.1 when MOFCOM declined to use Tyson‟s and Keystone‟s books and records.
The US producers suggested during the investigation that their own cost allocation methodology
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should be the basis for determination of constructed normal value. In such a situation the key question is whether MOFCOM complied with the obligations in the second sentence of Art. 2.2.1.1 when it devised and applied its own allocation methodology as opposed to the alternate methodology suggested by the respondents?
To address this question, the Panel examined the analytical framework established by the AB in US-Softwood Lumber V, China-GOES and EC-Salmon. Especially relying on the reasoning of the AB ruling in US – Softwood Lumber V, the Panel observed that in instances where there is "compelling evidence" available to the IA that more than one allocation methodology potentially may be appropriate to ensure that there is a proper allocation of costs, the IA may be required to "reflect on"
and "weigh the merits of" evidence that relates to such alternative allocation methodologies. In the opinion of the panel, such an assessment was necessary in order to satisfy the requirement to
"consider all available evidence".
The cost allocation methodology has been a controversial topic, but this is the first time a WTO Panel had an opportunity to give an authoritative ruling on this issue. The Panel ruling has given primacy to the recording keeping of affected exporters and has shifted the burden to the IAs to establish how the exporter‟s books or records do not “reasonably reflect the costs”.
2.1.2.2.2. SGA and Profits & Constructed Normal Value
According to Art. 2.2.2 of the ADA, the Administrative, Selling and General Costs (“SGA”) are to be calculated on the basis of actual sales and production data obtained in the OCT of the product under investigation. However, when the data is not available, Paragraphs (i), (ii), (iii) of Art. 2.2.2 of the ADA provide alternative methods for calculating SGA. The three options are as follows:
the actual amounts incurred and realized by the exporter or producer in question in respect of production and sales in the domestic market … of the same general category of products;
the weighted average of the actual amounts incurred and realized by other exporters or producers….in respect of production and sales of the like product….;
any reasonable method……;
(Emphasis added)
Art. 2.2.2 paragraph (i) provides that the amounts can be based on the actual amounts incurred and realized by the investigated exporter for the same general category of products (which may include the like product). How broad the general category of products may be, is not defined in the ADA. The Panel, in Thailand-H-Beams, found that the text of Art. 2.2.2 of the ADA does not provide precise guidance as to the required breadth or narrowness of the product category.58 It did note, however, that the narrower the category, the fewer products other than the like product will be included in the category, and this would seem to be fully consistent with the goal of obtaining results that approximate as closely as possible the price of the like product in the OCT in the domestic market of the exporting country.59
58 Thailand H-Beams, Panel (n 53) [7.111].
59 ibid [7.113].
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In the underlying investigation in EC- Bed Linen, a landmark dispute in the WTO, the EC (respondents) relied on the constructed normal value under Art. 2.2.2 ADA for certain exporters of cotton-type bed linen products from India. One of the issues involved in this dispute was the determination of NV of Indian exporters who did not have representative domestic sales in the OCT of the product under investigation, i.e. Bed Linen.
The EC determined the SGA and profits for some of the exporters based on the methodology mentioned under Art. 2.2.2 (ii). India argued before the Panel that EC improperly used a figure from one “other producer” (Bombay Dyeing) without calculating the weighted average of the actual amounts incurred and realized by other exporters or producers. India contended that the relevant part of Article 2.2.2(ii) provides that the amounts for SGA and profits shall be based on: “. . . the actual amounts incurred and realized by other producers or exporters. . . ” (Emphasis added).
According to India, the reference under Art. 2.2.2 to the terms “other exporters and producers” along with the term “weighted average” meant that the production and sales amounts are required to be averaged among more than one firm and thus could not be based on one firm‟s data. The Panel had rejected India‟s claim saying that a mere implication that plural words in the provision envisages situations of consisting of more than one exporter should not be a basis to reject the EC methodology.60 According to the panel, the existence of data of more than one exporter or producer is not a necessary prerequisite for the application of the “weighted average” approach in calculating the S, G& A.
However, the AB overruled the Panel‟s reasoning as such was not a correct interpretation of Art. 2.2.2 (ii) of the ADA. The AB provided that the plural usage in the provision of Art.
2.2.2(ii) “other exporters or producers” is obviated by the usage of “weighted average” as an average of amounts for SGA and profits cannot be calculated on the basis of data on SGA and profits relating to only one exporter or producer.61 Further, the usage of „weight‟ the‟
average‟ further supported the view because average reflects the combination of data from different producers and exporters which should provide the relative importance of these different exporters or producers in the overall mean.62
In EC-Pipe Fittings, a trade dispute involving Brazil and the EC, the question arose whether data relating to sales that has been discarded by the EC‟ IA under Art. 2.2 of the ADA could still be used for the purposes of constructing SGA and profits in the context of Art. 2.2.2 of the ADA. It may be worth noting that the term ordinary course of trade is not expressly mentioned in Paragraphs ((i), (ii) and (iii) of Art. 2.2.2.
The AB made it clear that the IA, which has discarded the actual data for the reason that such sales were made outside the ordinary course of trade, can make use of the actual data for
60 European Communities- Anti-Dumping Duties on Imports of Cotton-Type Bed Linen from India- Report of the Panel (n. 55) [7.65] (EC-Bed Linen).
61 WTO, European Communities – Anti-Dumping Duties on Imports of Cotton-Type Bed Linen from India – Report of the Appellate Body [74].
62 ibid.
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the calculation of SGA when constructing the NV.63 In the context of Paragraph (ii) of Art.
2.2.2 of the ADA, the AB emphasized that in the calculation of weighted average, all of the actual amounts will have to be included, regardless whether the underlying sales were made in the ordinary course of trade or not.
The Panel in EC- Salmon (Norway) addressed a claim by Norway regarding the meaning of “reasonable” in the context of Art. 2.2.2 (iii) ADA. The Panel noted that the actual domestic profit data and actual SGA data should not be excluded because of the low volume of domestic sales or the low level of profitability of the sales to which they pertain.64
The determination of what could be SGA itself can be matter of dispute. The Panel in US-Softwood Lumber V noted that Art. 2.2.2 of the ADA does not define the terms SGA costs, nor does it states which cost items should be considered to be general or administrative costs.65 The Panel noted that the ordinary meaning of general costs as costs affecting all or nearly all product manufactured by a company, while administrative costs were defined as costs concerning or relating to the management of the company‟s affairs.66 As such, costs can only have a bearing on all the products manufactured by a company.67
SGA costs have to be based on actual data pertaining to production and sales of the like product.68 The Panel in US-Softwood Lumber V provided that SGA costs benefit the production and sale of all goods that a company may produce, they must certainly relate or pertain to those goods including to the product under investigation. It thus concluded that:
Unless a producer/exporter can demonstrate that the product under investigation did not benefit from a particular SGA cost item, an investigating authority is not precluded from attributing at least a portion of that cost to the product under investigation.
The Panel then held that it was not unreasonable of the USITC to allocate part of a large settlement amount relating to claims concerning hardwood to the production and sale of softwood lumber as this settlement cost was a cost bore by the company as a whole.69
Flowchart 3.2: Summary on the Calculation of Normal Value
63 WTO, European Communities- Anti-Dumping Duties on Malleable Cast Iron Tube or Pipe Fittings from Brazil- Report of the Appellate Body (22 July 2003) [101] (EC – Malleable Cast).
64 European Communities – Anti-Dumping Measure on Farmed Salmon from Norway- Report of the Panel (n 50) [7.309], [7.318].
65 WTO, United States- Investigation of the International Trade Commission in Softwood Lumber from Canada-Report of the Panel (22 March 2004) WT/DS277/R [7.263] (US Softwood V).
66 ibid.
67 ibid.
68 ibid [7.267].
69 ibid.
