Antidumping and Countervailing Duties: A Preventive Approach

The antidumping and countervailing duty laws have become the most effective and most commonly used forms of import relief used by U.S. manufacturers seeking to restrict imports to the United States. Over a thousand cases have been filed since 1980. Congress has amended the law on a number of occasions – most recently in 1994 – in ways designed to make it easier for U.S. petitioners to obtain relief. The U.S. Department of Commerce – which handles antidumping and countervailing investigations – has been imposing more and more stringent requirements on respondents in terms of the amount of information they are required to supply and the time within which they must supply it. Although there has been a decline in the number of cases filed in the last two years, probably due to the healthy state of the U.S. economy, the pace is likely to pick up again as soon as the economy slows down. U.S. industries will be in greater need of relief, and in times of recession it is easier for them to make the necessary showing of injury. In addition, Antidumping and countervailing duty investigations are enormously burdensome. The information-gathering requirements under tight time limits impose significant strains on a company's resources, and the legal expenses of defending a case are often high. Failure to participate in an investigation will result in the Department of Commerce using the "facts available" — usually the allegations in the petition — to determine the highest possible dumping margin or subsidy rate.

Once an antidumping or countervailing duty order is issued against an exporter, its ability to continue to do business with the United States may be severely hampered. The importer will be required to post cash deposits with each entry. If these are large, the importer may decide to switch to a supplier from another country that is not subject to the order. And the importer's exposure to antidumping or countervailing duties may be even higher than the size of the cash deposits, for upon request of any party, including the petitioner, the Department will conduct a review each year to determine the actual amount of duties owed. If these are higher than the cash deposits, the importer will receive a retroactive bill for the additional duties up to two years after the date of importation. Thus, an importer of goods subject to an order is constantly faced with a potentially huge contingent liability for additional duties.

It is extremely difficult to get an antidumping or countervailing duty order lifted. Other than abandoning the U.S. market altogether, virtually the only way to be released from an antidumping order is to participate in three annual reviews — each of which can be as costly and time-consuming as the original investigation — and to satisfy the Department that there has been no dumping during this period. Since each review lasts at least one year, this means that it is impossible to have the order revoked in less than four years. In the case of a countervailing duty order, a company must show that it has received no subsidy for at least five years.

For all these reasons, it has become increasingly important for companies exporting to the United States to take a close look at their possible exposure under the U.S. import relief laws, and to determine whether there are ways in which they can reduce that exposure. While it is impossible to predict the precise level of dumping that the Commerce Department will find in any particular case, a company, through careful analysis of its selling practices and cost structure, can usually make a reasonable estimate of its exposure. Likewise, it is usually possible to predict whether the Department will view a particular form of government assistance as a countervailable subsidy, and, if so, the amount of duty that would be assessed.

More importantly, by making the analysis in advance, a company can sometimes make changes in its business practices and accounting techniques that will lower or eliminate the exposure, without significantly reducing the company's competitiveness in the United States. In part, the task is simply a matter of ensuring that the company's books and records are kept in such a way that will enable the company to demonstrate the accuracy of its questionnaire response to the satisfaction of the Department of Commerce. In addition, however, it may be possible to make changes that will favorably affect the results of a dumping comparison or a countervailing duty investigation, without significantly changing the company's economic position.

This paper will examine some of these possibilities, after briefly describing the import relief laws and explaining some of the technical terms used in this rather esoteric field of law.

Before doing so, however, a few points of caution are in order.

First, the Commerce Department is alert to attempts to evade the import relief laws, and has on a number of occasions changed its interpretation of the laws or the regulations in order to prevent what it believes to be abuses of the laws.

Second, a number of suggestions in this paper may not be practicable or effective from a particular company's standpoint. Each company does business in its own way, and what will work for some will not work for others. A preventive approach to the import relief laws must be handled on a case­by­case basis.

Third, it is essential to make any changes in business practices or recordkeeping before an investigation begins. During an investigation, the Department examines prices (and, where relevant, costs) or government assistance prevailing during a period (usually one year) prior to the filing of the petition. Thus, changes made after the petition is filed will not alter the outcome of the determination whether or not dumping or subsidization has taken place, although they may affect the company's ultimate liability for antidumping or countervailing duties. The company may thus be subjected to the substantial uncertainty and administrative burdens associated with an antidumping or countervailing duty order notwithstanding changes made after the petition has been filed.

I. OUTLINE OF ANTIDUMPING AND COUNTERVAILING DUTY LAWS

First, it may be helpful to provide a brief outline of the import relief laws and to explain some of the terms used. An antidumping or countervailing duty investigation falls into two distinct phases. First, the Department of Commerce determines whether imports of the product under investigation are being sold or are likely to be sold at less than normal value, in the case of an antidumping investigation, or whether they are receiving subsidies in the case of a countervailing duty investigation. Second, the International Trade Commission determines whether the imports are causing or threatening to cause material injury to the U.S. industry producing the like product. Affirmative determinations by both tribunals must be made before an antidumping or countervailing duty order can be entered.

A Department of Commerce antidumping investigation involves a comparison of U.S. prices with "Normal Value." The U.S. price is based on the foreign exporter's price to the importer where the two are unrelated, in which case it is known as "Export Price." Where, on the other hand, the exporter and importer are related, U.S. price is based on the importer's price to unrelated customers, known as "Constructed Export Price." Normal Value is based on home market sales of the "foreign like product" where they exist in sufficient quantities and are made above cost. If, however, there are insufficient home market sales or such sales are made below cost, Normal Value will be based on sales to third countries or on constructed value, i.e., cost of production plus an allowance for profit.^/ The prices being compared are subject to a series of deductions and adjustments designed to bring them back to an ex­factory price and to achieve a fair comparison (e.g., by making adjustments to reflect differences in the merchandise, in transportation costs, and in selling costs).

In a countervailing duty investigation, the Department determines whether the foreign producers have received countervailable subsidies from the government. Virtually all kinds of assistance can constitute subsidies, e.g., outright grants, loans, loan guarantees, tax exemptions, worker training assistance, and preferential freight rates. Export subsidies, i.e., subsidies paid only with respect to exports, are almost always countervailable. Domestic subsidies, i.e., subsidies which are not based on exports, are countervailable only if they are provided to specific regions of the country or to a specific company or group of companies or a specific industry or group of industries. For example, government assistance that is only available to the steel industry would be countervailable; assistance open to all manufacturing industries would not be, unless the industry or company under investigation obtained a disproportionate share of the benefits.

The International Trade Commission will make an affirmative injury determination if it finds that the imports in question are causing or are threatening to cause injury to the domestic industry. In making its determination, the Commission will examine such factors as the imports' share of the U.S. market, whether or not that share is increasing, whether imports are underpricing the domestic product, and whether imports are capturing sales from U.S. suppliers.

II. REDUCTION OF DUMPING MARGINS

Let us assume that a foreign company conducts a careful analysis of the prices at which it is selling to the United States and concludes that it may be selling at dumping margins. What steps might it take to reduce or eliminate those margins?

A. ADJUSTMENT OF PRICES

The first and most obvious way for the exporter to reduce or eliminate dumping margins would of course be to adjust its prices. The exporter could raise its prices in the United States or reduce its prices in the home market, or it could implement a combination of the two.^//

In most cases, of course, this will not be a desirable course of action. Raising U.S. prices will most likely reduce the competitiveness of the product in the U.S. market; lowering prices in the home market will reduce profits. Lowering home market prices might make some sense where the bulk of the company's sales are for export, so that lowering prices on a relatively small number of home market sales may be worthwhile in order to lessen the antidumping exposure.^// However, home market prices will not be used if they are below cost, so there is a limit to how far they can be lowered.

If the company sells mostly for export, so that normal value would be based on its third country prices rather than home market sales, it may wish to consider increasing the volume of its home market sales to above five percent of its exports to the United States. It can then avoid dumping by keeping those prices in line with U.S. prices, even if its third country prices are higher.

B. STRATEGIES AFFECTING HOME MARKET PRICE

1. Lower Home Market Price on Selected Sales.

If the manufacturer can accurately identify a limited number of home market sales that would be used as the basis for normal value, it might consider lowering its prices on those sales alone. For example, it may be selling a large range of models of the particular merchandise in the home market, but only a few in the United States. It could lower the home market price on only those home market models that are comparable to those it is selling to the United States.

Another possibility arises where the manufacturer is selling to different levels of trade in the two markets. Under the law, the Department will compare sales at the nearest comparable level of trade. If the foreign manufacturer is selling to wholesalers or distributors in the United States but to retailers in the home market, it might consider making a few sales to wholesalers in the home market at a low enough price to avoid dumping margins, while maintaining its prices to retailers.

2. Circumstances of Sale.

In making comparisons between U.S. price on one hand and home market or third country price on the other, the Department will make adjustments for differing circumstances of sale. In doing so, the Department draws a somewhat artificial distinction between so­called directly­related selling expenses and indirect selling expenses. Directly­related expenses are those expenses such as credit expenses, certain warranty costs, and selling commissions, which can be expected to vary more or less directly with the volume of sales. Indirect selling expenses, on the other hand, are more in the nature of overhead expenses, such as salesmen's salaries, rent of sales offices, etc.

Because of the different ways in which the Department treats adjustments for differences in direct and indirect selling expenses, it is advantageous for as many home market (or third country) selling expenses as possible to be treated as directly­related, and, conversely, for as many U.S. selling expenses as possible to be indirect. There are a number of ways of achieving this result:

(a) Advertising. To be treated as a directly­related expense, advertising must cover the specific product under investigation, and it must be aimed not at the direct customers of the manufacturer, but at their customers. Thus, in the case of a consumer product, advertising in trade magazines will usually not be accepted as directly­related, whereas advertising in the consumer press probably will be. Also, generic, "brand­name" advertising will not be treated as directly-related. The company should therefore ensure that as much as possible of its advertising in the home market is product­specific and directed towards the ultimate purchasers rather than its own customers; its U.S. advertising should, to the extent practicable, be generic.

(b) Warranty. Many companies do their warranty repair work on an in­house basis, using their own employees to perform repair functions. The Department generally regards salaries of company employees as indirect expenses, and it makes no distinction for those employees performing warranty as opposed to selling and administrative functions.^// In this situation, therefore, only the cost of parts and other "variable" expenses would be treated as directly­related. Accordingly, it may be in the company's interest to have more repairs in the home market performed by independent organizations rather than by in­house service centers, in which case the entire payments to the outside organizations would be treated as direct expenses. The reverse strategy should of course be followed on the U.S. side. Wherever practicable (e.g., where the foreign manufacturer is selling through a related subsidiary in the United States), as much work as possible should be done by the company's own employees.

(c) Technical Services. The Department has become more restrictive as to the types of technical services which it will allow as direct selling expenses. In order to be accepted as direct, such expenses must be incurred pursuant to sales made during the period of investigation,^// and there must be a specific tie­in to sales. One way to satisfy these criteria is to link the services performed to a clause contained in the written agreement or term of sale. Thus, when a home market sale is made, any after-sale services which are contemplated should be specifically referenced in the sales agreement. It might also be sufficient to reference after­sale service provisions in the customer order, customer's acceptance form, or purchase order.

As in the case of warranty expenses, the Department will treat only "variable" technical service expenses as direct. Thus, where the technical services are performed by the company's own employees, their salaries will be treated as indirect expenses, and only variable costs, such as travel expenses and cost of material, will be treated as direct. Again, then, it is preferable to have technical services in the home market performed by independent organizations, and the technical services in the United States performed by employees of the U.S. subsidiary.

(d) Commissions. The Department commonly treats the salaries of company salesmen as indirect expenses. On the other hand, commissions paid to salesmen are usually treated as directly­related expenses. Thus, if the company converts some or all of the salaries of its own salesmen to commissions, an adjustment could be made to home market price to reflect the amount of those commissions. There is, however, a danger in that the Department might conclude that the company salesmen are "related parties," in which case the Department would not make adjustments for commissions paid to related parties.^// But companies may be able to overcome this situation by contracting more home market sales work to independent commission agents, at least with regard to large accounts. Whenever possible, U.S. sales functions should be carried out by salaried employees of the manufacturer or of a related company.

C. STRATEGIES AFFECTING U.S. PRICE^//

Sales Through a Trading Company.

The Department of Commerce applies a special rule for deciding what price to use as the basis for U.S. Price where the merchandise is sold to the United States through a trading company. If the manufacturer knows at the time of sale to the trading company that the merchandise in question is destined for the U.S. market, the Department will use the manufacturer's price to the trading company as the basis for U.S. price, and the manufacturer's home or third country prices for normal value. If, on the other hand, the manufacturer does not know the destination of the goods, U.S. Price will be based on the trading company's price to the United States and it will be compared with the trading company's prices in other markets. In this situation, U.S. Price will be higher by the amount of the trading company's markup. Moreover, unless the trading company is selling in the home market, foreign market value will be based on its export prices to a third country market, which may be more closely aligned with its U.S. prices than the manufacturer's prices in the home market.

In many cases, the manufacturer cannot avoid knowing the destination of the merchandise, for example, where it has to meet particular specifications or marking requirements for the U.S. market. But if the product involved is fungible (e.g., a chemical), the manufacturer may be able to arrange shipments to the trading company in such a way that it does not have knowledge of the specific destination of each shipment.^//

An alternative would be to change the relationship between the manufacturer and the trading company so that the trading company becomes a "commissionnaire," i.e., receives a commission for its services. Instead of purchasing the product outright and then reselling it in the United States, the trading company could sell the product in the United States as an agent of the company and receive a commission. U.S. Price would be based on the price at which the agent sells the product on the company's behalf. The commission would be deducted from U.S. Price; however, the advantage here is that the manufacturer would be able to offset that deduction with home market indirect selling expenses.^// The dumping margin will be reduced by the amount of the offset.

D. RECORDKEEPING REQUIREMENTS

The antidumping statute requires the Department to verify all information submitted by the foreign producer in the course of an antidumping or countervailing duty investigation. Where information cannot be verified, the Department will rely on the "facts available," which is usually unfavorable to the foreign producer. The Department sends a team of investigators, which often includes an accountant, to ensure that the information supplied to the Department accurately reflects the producer's books and records. The process resembles a thorough financial audit.

It is essential, therefore, that the company keep its records in a way that will enable it to prove that it is entitled to the adjustments claimed.^// This is a complex subject, and we will mention just a few examples here.

If warranty expenses are recorded in the company's books without identifying the particular products to which they relate, they will be treated as indirect rather than direct expenses. Warranty expenses in the home market should therefore be associated in the books with the specific products. Similarly, home market advertising expenses should be recorded in such a way that will enable the company to identify the cost of advertising specific products.

Factory costs are, of course, relevant in every cost of production investigation.^// They are also relevant where there are physical differences between the merchandise sold to the U.S. and that sold in the home market, for the Department will make an adjustment based on the cost of the difference, i.e., labor, material and direct factory overhead. At verification, the Department will insist on tracing the factory costs through the company's books to the audited financial statements of the company.^// To be adequately prepared for an antidumping investigation, the company must ensure that this will be possible.

E. ASSEMBLY AND MANUFACTURE IN THE UNITED

STATES USING IMPORTED COMPONENTS

Until a few years ago, it was possible for a company to avoid an antidumping or countervailing duty order applicable to finished products using the simplest of assembly operations in the United States or in a third country, provided that the principal components were shipped into the United States or the third country separately and that none of the components was sufficiently advanced as to be capable of performing the major functions of the completed product. This result followed from application of two long-established principles of U.S. customs law. Beginning in the mid-1980's, however, the Department of Commerce began to take the view that strict adherence to these principles was permitting significant evasion of antidumping orders by allowing foreign manufacturers to perform simple "snap-together" assembly operations using entirely components imported from the subject to the order. In effect, the final stage of the assembly line was simply transferred to the United States. The Department indicated in a series of decisions that it would no longer rigidly apply the old customs principles, but, would instead apply an antidumping or countervailing duty order covering a finished product to components of that product used in a U.S. assembly operation unless it was satisfied that significant value was being added in the United States.

In 1988, Congress codified the rules developed by the Department in an amendment to the antidumping statute. Under the current version of this provision, which was tightened in 1994, where a finished product from a particular country is subject to an antidumping order, the Department may extend the order to cover parts and components of that product imported from the same country for use in a U.S. or third country assembly operation if the value of those parts and components is significant and the process of assembly or completion in the United States or the third country is "minor or insignificant." In deciding whether to act under this provision, the Department is required to consider "the pattern of trade," whether the manufacturer or exporter of parts is affiliated with the U.S. exporter, and whether imports of the parts or components have increased since the antidumping order was entered. The Department is also likely to consider the degree of sophistication of the U.S. or third country assembly operations.

The 1988 amendment also codified the Department's practice with respect to later-developed merchandise. Interesting questions arise, for example, as to whether an order covering simple electric typewriters should be viewed as extending to memory typewriters which were developed after the date of the order, or even to word processors. The statute provides that the Department may include later-developed merchandise within the scope of the order if the new merchandise has the same physical characteristics as the original merchandise, the expectations of purchasers are the same, it is sold through the same channels of trade, and it is advertised and sold in the same manner.

It should be clear from this discussion that a company subject to an antidumping or countervailing duty order which decides to move part of its operations to the United States or to a third country, or to alter the product in an attempt to avoid the impact of the order, must pay very careful attention to the anticircumvention provision. Otherwise, it may spend considerable sums of money in an exercise that turns out to be futile.

III. REDUCTION OF EXPOSURE TO COUNTERVAILING DUTY ORDER

As explained above, an export subsidy that applies to exports to the United States is almost always countervailable. The only way to avoid liability in this situation without losing financial benefits would be to persuade the foreign government to eliminate the benefit on U.S. exports while increasing the subsidy on exports to other countries by a commensurate amount.

In the case of a domestic subsidy, if the program is one that would be countervailable because it is regional or is limited to particular industries, it may be possible for the government to change the parameters of the program in order to make it non-countervailable. Also, under the WTO Subsidies Agreement, there are limited exemptions from countervailability for programs designed to assist areas of economic hardship, for environmental clean-up, and for research and development programs, provided that they fall within the specified parameters.

IV. THE INJURY DETERMINATION

The more aggressively a foreign company engages in the U.S. market, the more likely is the domestic industry likely to file an import relief case, and the more likely is an affirmative injury finding. To some extent, of course, there is an inherent contradiction between a foreign company's commercial interest in maximizing its sales to the U.S. market and its interest in not being subject to an import relief case. Nevertheless, there are a few guidelines which, if feasible, may reduce the chances of an affirmative injury finding. First, the company should try to avoid underpricing the U.S. product. Underpricing is one of the prime determinants of injury. If the imported product can be sold on non-price factors, e.g., faster delivery, better service, imported reliability, the chances of an affirmative injury finding will be lowered. Also, if possible, it is preferable not to take customers away from the domestic suppliers, but rather to supply their incremental needs, or to take customers away from other exporters. A rapid increase in U.S. market share is more likely to lead to an injury determination, so that slow and steady growth is preferable.

* * * * *

These are just a few ideas on ways of reducing exposure to import relief cases. A comprehensive preventive plan requires careful analysis of the exporter's individual situation. Given the serious consequences of an adverse antidumping or countervailing duty finding, this type of analysis may save a great deal of cost and disruption in the long run.

TABLE I

ANTIDUMPING PETITIONS AND ORDERS

*/ Through July 15.