Anti-dumping and Trade

AN INTRODUCTION TO ANTI-DUMPING AND ORDINARY COURSE OF TRADE

– Srijeet Bhattacharya (Indian School of Business) and Devarchan Banerjee (National Law School of India University)

anti-dumping

That trade is the cornerstone of global GDP is hardly a secret. Apart from a handful of countries, most have embraced the increased choices, economic opportunities and interconnectivity that must inevitably follow globalisation and trade. Consumers enjoy options which would not have existed had only domestic producers functioned in the economy, that too at lower prices. Producers have the option to relocate parts of their supply chain to countries where lower wages and the cheaper factor of productions could lead to greater productivity and profitability. In a sense, it is only natural that this wide variety of benefits would bring with it’s own set of problems. Workers from industries that have been shifted abroad have suffered from economic hardship due to an inability to shift to alternate lines of work. The emergence of China as an export giant has led to manufacturing jobs in other parts of the world to go down as a whole. Freer borders and increased labour mobility, which are part and parcel of globalisation, has led to fears of average wages being driven down by immigrants who are not only taking away jobs from ordinary citizens but also doing them for far less monetary compensation. While such viewpoints are controversial in the wake of several studies which find immigration a net positive to the economy, what matters is that these perceptions persist. We have already witnessed an American President being elected on the back of protectionist promises and the repudiation of NAFTA, in an election where both candidates rejected the Trans-Pacific Partnership Agreement. Concerns about exchange rate manipulation by China in order to keep exports cheap and attractive brings with it the prospect of a war of currency devaluation. The point remains that with trade occupying such a central role in national and international narratives, sufficient safeguards need to be put in place to keep these concerns in check.

Dumping is a practice by which items are sold in the importing country at a lower price than in the domestic market, thereby causing material harm to the industry in the importing country which is producing the same or similar product. There can be various reasons for doing so. Let us assume there are two countries A and B with X being a company in country A which is producing a good that is sold in the domestic market A and also exported to country B. Now X might want to drive away competitors in country B offering the same product, and therefore it sells its product at a lower price than what the competitors are. This is a charge levelled against companies with deep pockets and therefore loss bearing capabilities. A lower price could also be offered in order to enter a nascent market or gain a larger market share, or simply to generate profits through sale of higher quantities rather than higher prices. The thing to be noted here is that the motivations are not relevant when it is being decided whether dumping has occurred or not. What needs to be seen is whether it is being sold at a lower price than in the home market and whether this is leading to material harm to the producers of the importing country. Another point is that the Anti-Dumping Agreement covers only goods. Therefore, services which form such a large part of global interactions (financial services, telecommunication services, etc) are not covered, nor are other forms of dumping not involving material goods. If it is found that the product is being dumped and sold at a lower price than what persists in the domestic market, then the company is asked to pay a dumping margin, which is the difference between the normal price and the actual price.

It can be seen almost immediately, that domestic industries have an incentive to prove that dumping is taking place in order to compete with foreign producers. The political establishment therefore also has an incentive, due to lobbying or the desire to portray the image of saving domestic jobs, to find exporting countries guilty of dumping. As expected, the WTO is regularly requested to look into cases where dumping is suspected. For the Anti-Dumping Agreement to be effective and followed by countries around the world, it needs to be fair and has provisions to address all exigency and concerns. The disproportionate amount of power handed to the importing country in the investigation of dumping needs to be checked through adequate mechanisms. All investigations are therefore conducted under the conditions of the ordinary course of trade, which is to say that the company has acted in the manner befitting a profit-seeking firm under normal conditions.

Article 2.1 of the Anti-Dumping Agreement (ADA) talks about the standard case where a product is sold both in the exporting country as well as the importing country. If after accounting for the transportation and other relevant fees, it is found that the product is being sold at a lower price in the importing country, then it could be considered whether the product is being dumped. This is fairly straightforward. A note here is that the company may not want to add the additional export charges (transportation, taxation, etc) since that would drive up the price or normal value of the product and increase the dumping margin if any.

The Anti-Dumping Agreement does not explicitly define the term ordinary course of trade, but it provides one example of sales which are not in the ordinary course of trade. Article 2.2.1 Anti-Dumping provides that

“Sales made below per unit fixed and variable cost of production plus selling, general and administrative expenses (SG&A) may under certain circumstances, be considered as not in the ordinary course of trade. This provision provides that this is so, only if such sales were made within an extended period of time (normally one year but in no case less than six months), in substantial quantities (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 percent of the volume of transactions), and at prices which do not allow for the recovery of all costs within a reasonable period of time. Sales made at prices which are below per unit costs at the time of sale, but above weighted average per unit costs for the period of investigation, shall be considered to provide for the recovery of costs within a reasonable period of time” (Mavroidis)

In Article 2.2, the discussion is how to come to the normal price should the product not be sold in the domestic market or sold in insufficient quantities for proper comparisons. If for example, the product is not sold in the domestic market at all, due to insufficient demand, prohibitive costs, or other factors then the investigating authority could consider the price in another like country where the product is also sold. If such a comparison is not possible or does not exist, then the normal value of the product can be constructed by adding the cost of production, a reasonable amount for administrative, selling and general costs, and a reasonable amount of profits. This is also the case when the product is sold in the domestic market in insufficient quantities (The 5 percent rule says that for the prices to be comparable, the volume of sales in the domestic market must be at least 5 percent of the volume of sales in the importing country). To come to what can be considered a reasonable amount, the cost and price data for other players in the industry of the exporting country could be considered and a weighted average used. However, this is only possible if the products are in reality sufficiently similar, and the WTO is extremely strict when it comes to this definition. Another case is when products could be sold in the domestic market of the exporting country at a price below cost for taxation or market share or other purposes which do not fall under the ordinary course of trade. Further, it could so happen that the producer in the exporting country and the distributor in the importing country are related. In such a case the price could be artificially increased to avoid or lower the dumping margin. In such a case, the value at which the product is sold to the first independent customer, after adjusting for resale costs, is considered for the construction of the normal value.

We see in Article 2.2 especially, the emphasis placed on the ordinary course of trade. Every reasonable precaution is taken to ensure that when the normal value is being constructed, the process is as fair as possible. In the absence of comparable data, or when the data available would not be able to provide the accurate picture, alternative mechanisms are put in place. This can be further seen in Article 2.7 which talks about non-market economies. When market economies do not exist in certain countries, i.e, some or all industries are State regulated, there may not exist reliable price and cost data, and secondly, the prices themselves can not be considered as existing under the ordinary course of trade. This is because, governments may keep prices artificially low or high in certain industries for a variety of reasons, thereby distorting the market. In such a case, the investigating authority would consider the prices and costs of the same or sufficiently similar product in a surrogate country, i.e, a country which is similar with regards to the particular industry to the non-market economy, but where market economy conditions prevail.

antidumping

Another case where ordinary course of trade tests are important is the decision on the duration of the investigation and a process known as zeroing. Suppose that for six months in the year the product is sold in the importing country for x amount less than the normal price, and for x amount more than the normal price for the remaining six months. Then, over the course of a year, one could say that the two have cancelled each other out and no dumping margin needs to be imposed. However many countries only consider the situation where the price is below the normal value and assign a value of zero if the price exceeds the normal value. The principle is that any dumping should be considered. However, efforts are on to put an end to zeroing, as well as the use of mathematical methods which can be manipulated to show evidence of dumping by changing the investigating period or in other ways ( using a weighted average instead of considering each transaction for example). The goal is to present the entire picture, as it occurs in the ordinary course of trade, and not just the parts which are convenient to the investigating country.

It is fairly obvious, that when jobs and incomes and livelihoods are in question, this will always be a contentious issue. For the WTO to maintain credibility and inspire faith in its member countries, the mechanisms used to determine whether dumping has occurred and if so, the amount of injury done, must always be fair and transparent. While existing loopholes and shortcomings must be resolved through multilateral discussions, the ordinary course of trade (OCT) test is at present an essential step towards achieving these goals and must be respected and recognised as such.

 

(Devarchan Banerjee is pursuing Master’s Programme in Public Policy at the National Law School of India University. He can be reached at devarchan@nls.ac.in)

 

 

Featured image source:

http://skanomics.blogspot.in/2011/10/i-dont-think-its-that-free-here-we-have.html

http://behindthelines.moadoph.gov.au/2012/the-economy/cartoons/102

 

 

 

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