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PRACTICAL TRADE & CUSTOMS STRATEGIES

November 30, 2012 Volume 1, Number 6

Anti-dumping Investigations:
Rejection of Exporters Actual Costs if Deviant from Market
By Renato Antonini and Eva Monard (Jones Day)1 In principle, in anti-dumping investigations, costs are calculated on the basis of records kept by investigated companies. In recent proceedings, certain investigating authorities took the view that investigated companies costs can be rejected when such costs, as reported in the companies records, do not reasonably reflect market-based costs. The concept of market-based costs has been interpreted by reference to international market prices. Costs can have an important effect on the calculation of the dumping margin, which will in turn (in principle) be the basis of the duty eventually imposed. As a result, this approach of course inflates dumping margins and has a negative effect on exporting producers. The present article will analyze this practice on the basis of investigations conducted in the European Union (EU), the Republic of India (India) and the Republic of Turkey (Turkey), and provide some
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In This Issue
Anti-dumping Investigations
In attempt to apply domestic anti-dumping legislation, some investigating authorities disregard actual cost data if costs are not in line with international market conditions. This can harm exporters who are involved because it inflates their dumping margin. Page 1

Transparency in C-TPAT

Within international trade, the CTPAT program represents an effort to balance risk and reward in a proactive partnership between government and industry. An optimal partnership should be facilitated by transparency, and this is especially true for C-TPAT. Page 1

Transparency in C-TPAT
By Suzanne I. Offerman (Thomson Reuters) Port security has always been an important issue for nations. After the terrorist attacks of September 11, 2001, security became an extraordinarily pressing concern in the United States and throughout the world. At the same time, the emergence of a global economy and the expansion of trade among nations made clear that nations could not close their borders or even restrict access by means that would seriously impede trade. This has left nations struggling to balance the need for security with the equally pressing requirement for the free flow of commerce. As part of that struggle, states and their agencies must strive to maintain transparency in their regulations, both to improve the legitimacy of the action, and to promote more effective processes, such as better security and the swifter movement of goods. It is hoped that nations efforts to maintain transparency while developing their trade-security measures will result in programs that effectively secure their ports with the least amount of trade interference. In the wake of September 11, 2011, the United States adopted the CustomsTrade Partnership Against Terrorism (C-TPAT), a voluntary supply chain
C-TPAT, continued on page 14

Small Businesses in Global Trade

Technology has enabled many small businesses to reach international customers in a way comparable to what was once exclusively an advantage of large corporations. There are several ways to improve trade rules to cater to this rise of Internet-enabled merchants. Page 3

Trans-Pacific Partnership (TPP) Pressure

The 11 nations involved in the TransPacific Partnership will meet next week in New Zealand to discuss the U.S.-led free-trade pact, putting pressure on stakeholders to move forward with a potential make-orbreak decision. Page 8

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comments about the legality of this approach on the basis of the law of the World Trade Organization (WTO). Disregarding Costs When They are not in Line with International Market Conditions: EU, India and Turkey In past investigations, the EU, Indian and Turkish investigating authorities have applied their domestic anti-dumping legislation concerning costs by considering that actual cost data can be disregarded if costs are not in line with international market conditions. With respect to the EU legislation, Article 2(5), paragraphs 1 and 2, of the basic Anti-Dumping Regulation2 read as follows: [c]osts shall normally be calculated on the basis of records kept by the party under investigation, provided that such records are in accordance with the generally accepted accounting principles of the country concerned and that it is shown that the records reasonably reflect the costs associated with the production and sale of the product under consideration. If costs associated with the production and sale of the product under investigation are not reasonably reflected in the records of the party concerned, they

shall be adjusted or established on the basis of the costs of other producers or exporters in the same country or, where such information is not available or cannot be used, on any other reasonable basis, including information from other representative markets. Thus, in line with Article 2.2.1.1 of the Anti-Dumping Agreement (see below), the first paragraph of Article 2(5) states that costs must be calculated on the basis of the investigated companys records, unless: (i) the companys accounts are not in line with the generally accepted accounting principles of the country concerned, or (ii) the records do not reasonably reflect the costs associated with the production and sale of the product under consideration. Article 2(5)(2) of the basic Anti-Dumping Regulation allows adjusting the costs of production when it is found that they are not reasonably reflected in the records of the company. This provision is meant to cover cases where certain doubts remain as to whether all actual costs borne by the company have been duly reflected in the companys accounting. If this is not the case, an adjustment should be made. The EU investigating authorities have consistently applied this provision by considering that cost data could be
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Published by WorldTrade Executive, a part of Thomson Reuters

Editorial Staff Publisher: Gary A. Brown, Esq.; Senior Editor: Matthew Nolan (Arent Fox LLP) Development Editor: Linda Zhang; Assistant Editor: Dana Pierce
Renato Antonini (Jones Day-Brussels) Jim Bartlett (Northrop Grumman) Steven Becker (Becker Law Offices) Lisa Crosby (Sidley Austin LLP) Justin Miller (White & Case LLP) Mark Neville (International Trade Counselors) Matthew Nolan (Arent Fox LLP) Suzanne Offerman (Thomson Reuters) Kristine Price (Ernst & Young) Laura Siegel Rabinowitz (Sandler, Travis & Rosenberg)

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Advisory Board

Practical Trade & Customs Strategies is published twice monthly, except in August and December, by WorldTrade Executive, a part of Thomson Reuters, P.O. Box 761, Concord, MA 01742 USA, Tel: (978) 287-0391, Fax: (978) 287-0302. Email: jay.stanley@thomsonreuters.com. www.wtexecutive.com. Subscriptions: $600 per year. Unauthorized reproduction in any form, including photocopying, faxing, image scanning, or electronic distribution is prohibited by law. Copyright 2012 by Thomson Reuters/WorldTrade Executive
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disregarded if they did not reflect international market conditions. In particular, the EU investigating authorities adopted this approach in several anti-dumping investigations involving Russia. For instance, in the 2009 review, investigation regarding imports of solutions of urea and ammonium nitrate originating, inter alia, in Russia,3 the EU concluded that the investigated companys records did not reflect the actual costs of the product concerned since the costs of gas in Russia was well below international market prices. In particular, the EU Institutions determined that: It was established that the domestic gas prices paid by the applicant were abnormally low. By way of illustration, they amounted to between one fourth and one fifth of the export price of natural gas from Russia. In this regard, all available data indicates that domestic gas prices in Russia were regulated prices, which are far below market prices paid in unregulated markets for natural gas. Since gas costs were not reasonably reflected in the applicants records, they had to be adjusted accordingly. In the absence of any undistorted gas prices relating to the Russian domestic market, and in accordance with Article 2(5) of the basic Regulation, gas prices had to be established on any other reasonable basis, including information from other representative markets. 4 This practice is presently under review of the EU General Court in a case started in 2008. In particular, the applicant EUROCHEM claims that the EU erred in law and violated Article 2(3) and (5) of the Basic Regulation, by disregarding a major part of the applicants costs of production as being unreliable and/or by de facto applying a nonmarket economy methodology for establishing the major part of the applicants normal value. It will be important to follow up on this case to see if the EU General Court will uphold the methodology followed by the EU. Also India has applied this approach. For instance, in Paragraphs 63-82 of a 2010 decision5, the Indian investigating authority concluded that the costs data concerning propane prices had to be amended since they were not market-based. In particular, the Indian Authority concluded that [b]ecause of existence of dual pricing policy prevailing in Saudi Arabia in respect of propane, the domestic selling prices of the subject goods cannot be considered as competitively set. It is seen that the cost of propane to the Saudi producers of the subject goods when compared to the export price of propane, does not reasonably reflect the costs associated with the production of the subject goods. In view of the above, the Indian investigating authority concluded that the domestic costs of the producers / exporters in Saudi Arabia

could not be accepted on their face value [] in view of the fact that the costs do not reasonably reflect the costs associated with the production and sale of the product under consideration (Par. 81). The Indian investigating authority noted that for conducting a fair and proper comparison, the Authority considered it appropriate to modify the cost of production in respect of Propane prices (Par. 82). A similar approach has been followed by the Turkish investigating authority in an investigation on imports of monoethylene glycol (MEG) originating from Bulgaria, Saudi Arabia and Kuwait.6 In particular, the Turkish investigating authority found that the basic raw material (ethane) required to produce MEG was supplied by State-owned companies at unfair prices in the subject countries. In Article 8, paragraph 1 of its Communiqu, the Turkish investigating authority decided to disregard the costs data in relation to the raw materials provided by the exporters and to rely instead upon raw material costs based on

In recent proceedings, certain investigating authorities took the view that investigated companies costs can be rejected when such costs, as reported in the companies records, do not reasonably reflect market-based costs.
market conditions. In the Communiqu, this decision is explained as follows: [i]n the dumping determinations carried out for S.Arabia and Kuwait, the domestic market sale prices, costs and export prices provided by the cooperating manufacturer firms in their responses to the questionnaires and declared by them at further stages were taken as a basis. However, it was determined that in such countries, the Ethane which is one of the fundamental raw material used in MEGs production is produced only by the firms which are owned by the governmental authorities and its price is determined and announced by state authorities in lieu of the supply/demand terms. Furthermore, it was determined by the examination of the price determination mechanism with respect to raw materials other than ethane such as prophane, butane used by some of the manufacturers in S.Arabia, that such prices also do not reflect the market conditions and according to the factor in the formula of which prices are calculated, such raw materials are given to the domestic manufacturers at a more preferable price than manufacturers in the export markets. Therefore,
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it has been decided that the total cost data provided by such firms are not reflecting the costs which would arise at market conditions and therefore even though the labor costs and other general production costs were taken as a basis as provided by the firms, for the raw material costs, Ethylene product, of which costs arisen under market conditions is identifiable was taken as a basis. For the costs of Ethylene, Western Europe cost calculation related to first, second, third and fourth quarters of the year 2008 of CHEMSYSTESMS which conducts research activities in this sector with respect to international price and costs information and prepares data base, was taken into consideration. WTO Law Considerations Against the Practice of Disregarding Costs When They are not in Line with International Market Conditions Article 2.2.1.1 of the Anti-Dumping Agreement allows investigating authorities to disregard the records kept by the exporters when, inter alia,

The WTO case law does not provide conclusive guidance as to whether investigating authorities can legitimately disregard costs data of raw materials on the ground that the prices of raw materials are not market-based.
such records do not reasonably reflect the costs associated with the production and sale of the product under consideration. In their decisions, certain investigating authorities interpreted this provision as meaning that costs can be disregarded when they are not in line with international market prices. The WTO case law does not provide conclusive guidance as to whether investigating authorities can legitimately disregard costs data of raw materials on the ground that the prices of raw materials are not market-based. Indeed, the particular situations as addressed by the EU, India and Turkey in the abovementioned proceedings, have not yet been brought before the WTO Dispute Settlement Body. However, WTO case law has elaborated on the interpretation of Article 2.2.1.1 in other cases. One first criticism could be that the mere fact that costs data kept in a companys records do not reflect market prices does not imply per se that these records do not reasonably reflect the costs associated with the production and sale of the product under consideration.

In U.S. Softwood Lumber V, the Panel was confronted with the following situation. The investigating authorities took into account the revenue from by-products in calculating the cost of production for two Canadian respondents. The investigating authorities treated the revenues obtained from the sale of these by-products as income that was used to offset the cost of production of softwood lumber, the product under investigation. The issue before the Panel was the valuation of these by-products. In the investigation, with respect to one of the two respondents, Tembec, the investigating authorities refused to disregard the records although the values recorded therein were well below market prices. The Panel concluded that Article 2.2.1.1 does not mandate the rejection of records which are not reasonably associated with the production and sale of the product under investigation.7 It continued its reasoning, however, by assuming, arguendo, that Article 2.2.1.1 imposes on an investigating authority the positive obligation to reject the records in certain circumstances.8 Its main conclusions in relation to the relevance of the concept of market value to Article 2.2.1.1 read as follows: Canada argues that Article 2.2.1.1 requires that a by-product offset must reasonably reflect the market value for the by-product at issue; otherwise, the cost of production of the main productin our case, softwood lumberwould be either overstated or understated. The United States disagrees. We do not find any textual basis in Article 2.2.1.1 on which we could concludeas Canada arguesthat, for the requirements of Article 2.2.1.1 to be met, it is necessary that the by-product revenue offset reflect the market value of those by-products.446 Nor, has Canada pointed to any justification. For this reason, we do not consider that DOC was precluded from using the actual cost of the inputas it appeared in Tembecs recordsas the benchmark for valuing the by-product revenue offset in the case of Tembec. Nor, we consider that using the actual cost of the input in case of transactions between divisions of the same legal entitywhere this is done in a consistent and non-discriminatory fashionis inconsistent with Article 2.2.1.1 or shows any bias or non-objectiveness on the part of an investigating authority.9 446 Indeed, to accept Canadas argument that Article 2.2.1.1 requires an investigating authority to ensure that the by-product offset reasonably reflects the market value would require us to read into the text words which are simply not there. Neither a panel nor the Appellate Body is allowed to do so. (Appellate Body Report, India Quantitative Restrictions, para. 94) The Panel thus rejected the position that the records cannot reasonably reflect the costs associ-

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ated with the production and sale of the product under consideration in case they do not reflect the market value. This statement could suggest that the mere fact that costs data kept in the companys records do not reflect market prices does not imply per se that these records do not reasonably reflect the costs associated with the production and sale of the product under consideration. However, the analysis of these findings also reveals that the Panel considered that another justification might be given to support the decision to disregard certain elements of the costs data. Indeed, the Panel stated that Nor, has Canada pointed to any justification. This suggests that investigating authorities might provide other, more compelling, justifications to disregard costs data. Moreover, it could be argued that the records need to reflect the costs associated with the production and sale of the product in the domestic market. In general, as stated by the Appellate Body in US Hot-Rolled Steel in paragraph 140, the normal value should be the normal price of the like products in the home market of the exporter. Consequently, it could be argued that the fact that the price paid for raw materials in the export market is higher is irrelevant. In particular in relation to Article 2.2.1.1, WTO case law clarified that the determination under Article 2.2.1.1 depends on the particular facts of the investigation. The Panel in Egypt Steel Rebar clarified that: We believe that the provision itself makes clear that the calculation of costs in any given investigation must be determined based on the merits, in the light of the particular facts of that investigation. This determination in turn hinges on whether a particular cost element does or does not pertain, in that investigation, to the production and sale of the product in question in that case.10 Applying these standards to the case before it, the Panel recalled that to resolve this claim, we must consider whether the evidence of record indicates that the short-term interest income is related to the production and sale of rebar in the Turkish home market.11 The Panel thus explicitly referred to the domestic market. On the basis of this statement, it could be argued that the relevant test for the costs data is whether the evidence indicates that the data provided by the exporting producers reasonably reflect the costs associated with the sale and production of propane in the domestic market. Conclusion Certain investigating authorities apply their domestic anti-dumping legislation concerning costs by considering that actual cost data can be disregarded if costs are not in line with international market conditions. This often has very negative effects for the exporters concerned, since this approach tends to inflate their dumping margin (and as a result the duty eventually imposed).

It could be argued that the relevant test for the costs data is whether the evidence indicates that the data provided by the exporting producers reasonably reflect the costs associated with the sale and production of propane in the domestic market.

The analysis of the WTO case law seems to suggest that this approach presents some issues relating to the consistency with Article 2.2.1.1 of the Anti-Dumping Agreement, on two main grounds. First, the reference to market value or market conditions might be found to be unsupported by the wording of Article 2.2.1.1. Second, it could be questioned whether, even assuming that market conditions can be considered a relevant threshold, the comparison should be carried out by reference to prices in the markets other than the domestic market. o
1 The views adopted in the present article represent the personal opinions of the author and not the position of Jones Day. 2 Council Regulation (EC) No 1225/2009 of 30 November 2009 on protection against dumped imports from countries not members of the European Community. 3 Council Implementing Regulation (EU) No 1251/2009 of 18 December 2009 amending Regulation (EC) No 1911/2006 imposing a definitive anti-dumping duty on imports of solutions of urea and ammonium nitrate originating, inter alia, in Russia, OJ [2009] L 338/5. 4 Recital 17. 5 Decision of 23 August 2010 adopted by the Government of India, Ministry of Commerce & Industry, Directorate General of Anti Dumping & Allied Duties concerning the anti-dumping investigation on imports of Polypropylene from Oman, Saudi Arabia and Singapore. 6 Communiqu No. 2010/11 of 2 May 2010 adopted by the Turkish Undersecretariat of Foreign Trade.
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