Objectives of Module 5

Module

5

Trade Remedies

ESTIMATED TIME: 5 hours

OBJECTIVES OF MODULE 5

Present an overview of the disciplines and conditions provided in the WTO Agreements with regard to:

• the application of anti-dumping measures;
• the use of subsidies and the application of countervailing measures; and,
• the application of safeguard measures.

I.INTRODUCTION

In Module 2, you studied the basic principles on non-discrimination applicable to trade between WTO Members: The Most-Favoured-Nation (MFN) and National Treatment principles. In Module 3, you studied the WTO rules regarding tariff and non-tariff barriers (NTBs). Regarding tariff barriers, you learned that WTO Members have committed to maximum bound tariff rates. In addition, you now know that there is a general prohibition on quantitative restrictions (QRs) (such as quotas).

The WTO Agreements include provisions which allow Members to depart from the rules mentioned above, subject to certain conditions. You will study most of these provisions in Module 8 (Exceptions). In this Module, you will study only those provisions concerned with:

The application of anti-dumping measures taken against injurious dumping;

the use of subsidies and the application of countervailing measures to counteract injurious subsidization; and,

the application of safeguard measures in case of a surge of imports that causes, or threatens to cause, serious injury.

World Trade Organization (WTO) Members have retained their right to impose trade remedies, such as antidumping and countervailing duties, to correct the competitive imbalances created by unfair trade practices - dumping and subsidies -,when these cause injury. They have also agreed on multilateral disciplines governing the granting of subsidies. Members are also allowed to apply safeguard measures in case of a surge of imports that causes, or threatens to cause, serious injury. Unlike anti-dumping and countervailing measures, the application of safeguard measures does not depend on unfair trade practices.

This Module will present an overview of the WTO disciplines and conditions for the application of anti-dumping measures; subsidies and countervailing measures; and safeguard measures. The Specialized Course on Trade Remedies will develop further the rules applicable to these mechanisms.

Disputes arising regarding the granting of subsidies and the application of anti-dumping, countervailing and safeguard measures are subject to the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU), which will be introduced in Module 10. The Agreement on Subsidies and Countervailing Measures (SCM Agreement) also contains some special rules that apply to disputes involving subsidies.

Rationale behind trade remedies – A policy perspective
At first sight, it might seem that trade remedies "go against" trade liberalization. One may ask: Why have Members agreed on rules that provide them the right to restrict trade temporarily? What role do trade contingency measures -in the form of trade remedies- play in trade agreements?
Trade liberalization around the world has reduced tariff rates to low levels, producing "winners" and "losers" in each country. However, countries typically do not have identifiable mechanisms for extracting part of the income gains from the "winners" in order to compensate the "losers" from trade liberalization. Furthermore, economic circumstances may evolve in a way which makes the maintenance of policies in favour of trade liberalization untenable because of large adjustment costs.
In light of these considerations, trade agreements may provide governments with a means to depart temporarily from certain core obligations contained therein under well defined conditions. Safeguard, antidumping and countervailing measures are alike to the extent that they can be used temporarily to "shield" vulnerable sectors from the consequences of lower tariff protection in certain circumstances. Without the possibility of applying these measures, political pressures may build up to a point where protectionist forces would be able to engineer a permanent reversal of trade liberalization. Accordingly, trade remedies may be considered as a pragmatic –- and temporary -- tool to deal with the costs of adjustment resulting from trade liberalization as well as to deflate the build-up of domestic pressures against liberalization.
Based on: World Trade Organization (WTO), World Trade Report 2007, Geneva: WTO p. 152-153.

II.ANTI-DUMPING

IN BRIEF

ArticleVI of the General Agreement on Tariffs and Trade (GATT) 1994 and the Agreement on the Implementation of ArticleVI of GATT 1994 – the "Anti-Dumping Agreement" - explicitly authorize the imposition of anti-dumping measures by WTO Members, under certain conditions.
Anti-dumping measures are unilateral remedies which may be applied by a Member after conducting an investigation where it has been determined that an imported product is being "dumped" and that dumped imports are causing or threatening to cause "material injury" to a domestic industry producing like products (or would materially retard the establishment of a domestic industry). Antidumping measures normally are applied in the form of customs duties on imports of the product concerned from a particular source in excess of bound rates. Anti-dumping measures may also take the form of a price undertaking.
The identification of dumping involves a price comparison between a product's "normal value" and its "export price". A product is to be considered as being "dumped" (introduced into the commerce of another country at less than its "normal value"), if the "export price" of the product when sold in the importing country is less than its "normal value", that is, the comparable price, in the ordinary course of trade, for the like product in the market of the exporting country.
The Anti-Dumping Agreement sets forth certain substantive requirements that must be fulfilled in order to impose an anti-dumping measure, as well as detailed procedural requirements regarding the conduct of anti-dumping investigations, the imposition of anti-dumping measures and the review of the measures. A failure to respect the substantive or procedural requirements can be taken by the exporting Member to the WTO dispute settlement mechanism.
The Agreement does not condemn the practice of dumping unless it causes injury to the domestic industry in the importing country.

II.A.SUBSTANTIVE REQUIREMENTS FOR THE APPLICATION OF ANTI-DUMPING MEASURES

Conditions for the Application of Anti-dumping Measures
The Anti-DumpingAgreement provides that an anti-dumping measure shall be applied only after determining, pursuant to an investigation initiated and conducted in conformity with the provisions of the Agreement, the three following cumulative conditions:
Dumped imports;
injury to the domestic industry producing the like product; and,
causal link between the dumped imports and the injury.

Figure 1: Conditions for the Application of Anti-Dumping Measures

a.Determination of Dumping

1.What is Dumping?

What is Dumping?
Dumping is a form of price discrimination, which takes place when the price of a product when exported to another country is less than the price of that same product when sold in the market of the exporting country (ArticleVI of the GATT and Article2.1 of the Anti-Dumping Agreement).

In the simplest of cases, one identifies dumping simply by comparing prices in two markets. However, the situation is rarely that simple. According to the Anti-Dumping Agreement, dumping is calculated on the basis of a fair comparison between the normal value (the price of the imported product in the “ordinary course of trade” in the country of origin or export) and the export price (the price of the product in the importing country). Article2 contains detailed provisions governing the calculation of normal value and export price and elements of the fair comparison that must be made.

In order to make such a comparison, the investigating authority will have to determine the "like product" in the domestic market of the exporter. Article2.6 of the Anti-Dumping Agreement provides a definition of "like product", which will be developed later on to explain the concept of "like product" in the context of the injury analysis.

2.Normal Value

2.1General Rule

The normal value is generally the price, in the ordinary course of trade, for the like product at issue when destined for consumption in the exporting country market (Article2 of the Anti-Dumping Agreement).

A complicated question in anti-dumping investigations is the determination whether sales in the exporting country market are made in "the ordinary course of trade". The Agreement defines the specific circumstances in which home market sales at prices below the cost of production may be considered as not made in the "ordinary course of trade" and thus may be disregarded in the determination of normal value (Article2.2.1).

When there are no sales of the like product in the ordinary course of trade in the domestic market of the exporting country, or the sales are so low in volume that they do not permit a proper comparison of home market prices and export prices, it may not be possible to determine the normal value on this basis.

The Anti-Dumping Agreement provides alternative methods for the determination of normal value in such cases.

2.2Alternative Methods

Article2.2 provides two alternatives for the determination of normal value. According to them, the margin of dumping shall be determined by comparison with:

(i)the comparable price of the like product when exported to an appropriate third country (provided that this price is representative); or,

(ii)the constructed normal value of the product, which is calculated on the basis of the cost of production, plus a reasonable amount for administrative, selling and general costs and profits.

In relation to the determination of a constructed normal value, the Anti-Dumping Agreement contains rules governing the information to be used in determining the amounts for costs, expenses, and profits, the allocation of these elements of constructed value to the specific product in question and adjustments for particular situations such as start-up costs and non-recurring cost items.

2.3Special Situations

Where products are not imported directly from the country of origin, but are exported to the importing Member from an intermediate country, Article2.5 of the Anti-Dumping Agreement provides that the normal value shall normally be determined on the basis of sales in the market of the exporting country. However, comparison may be made with the price in the country of origin if, for example, the product is not produced in the exporting country, there is no comparable price for the product in the exporting country or the product is merely transhipped through the exporting country. In such cases, the normal value may be determined on the basis of the price of the product in the country of origin and not the price in the exporting country.

In the situation where a product is imported from a non-market economy (economy where the government has a complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the State), the Anti-Dumping Agreement recognizes, through a reference in Article2.7, that a strict comparison with home market prices may not be appropriate.

3.Export Price

3.1General Rule

The export price will normally be based on the transaction price at which the foreign producer sells the product to an importer in the importing country. However, the Agreement recognizes that this transaction price may not be appropriate for purposes of comparison in certain cases.

Article2.3 of the Agreement allows the use of an alternative method for determining an appropriate export price where: (i)there is no export price for a given product, for instance, if the export transaction is an internal transfer, or if the product is given in exchange for another product (barter transaction); or, (ii) the transaction price at which the exporter sells the product to the importing country is unreliable because of an association or a compensatory arrangement between the exporter and the importer or a third party.

3.2Alternative Method

When the transaction price cannot be used, the export price can be based on a constructed export price determined on the basis of the price at which the imported product is first resold to an independent buyer. If the imported product is not resold to an independent buyer, or is not resold as imported, the authorities may determine a reasonable basis on which to calculate the export price.

4.Fair Comparison between Normal value and Export Price

The basic requirements for a fair comparison are that the prices being compared are those of sales made at the same level of trade, normally the ex-factory level (to avoid the distorting effect of factors such as transport, insurance, etc), and of sales made at as nearly as possible the same time (Article2.4).

To ensure that prices are comparable, the Anti-Dumping Agreement requires that adjustments be made to either the normal value, or the export price, or both, to account for differences in the product, or in the circumstances of sale, in the importing and exporting markets. What sorts of factors require an adjustment? Due allowance must be made in each case, on its merits, for differences in conditions and terms of sale, taxation, quantities, physical characteristics and other differences affecting price comparability.

Example: Adjustment to the Export Price
A producer may sell "on sight" in its domestic market, while on its export market it may give 30 days credit. In this case, the investigating authority could adjust the export price by deducting from it the cost relating to the credit given by the exporter. In this example, no adjustment would be made to the normal value because selling "on sight" implies no cost to the producer.

The Agreement also provides specific rules on the adjustment to be made if the comparison of normal value is to a constructed export price. In those cases, allowances for costs, including duties and taxes, incurred between importation and resale, and for profits accruing, should also be made. Where the comparison of normal value and export price requires conversion of currency, the Agreement provides specific rules governing that conversion (Article2.4.1).

Investigating authorities shall inform the parties of the information needed to ensure a fair comparison, for instance, information regarding adjustments, allowances and currency conversion, and may not impose an "unreasonable burden of proof" on parties.

5.Calculation of the margin of dumping

The Agreement contains rules governing the calculation of dumping margins. The existence of margins of dumping during the investigation phase shall normally be established on the basis of: (i) a comparison of a weighted average normal value with a weighted average of prices of all comparable export transactions; or, (ii) a comparison of normal value and export prices on a transaction-to-transaction basis (Article2.4.2). A different basis can be used if a pattern exists of export prices differing significantly among different purchasers, regions or time periods, and if the investigating authorities provide an explanation as to why such difference cannot be taken into account appropriately by the use of a weighted averagetoweighted average or transaction-to-transaction comparison. In such a situation, the weighted average normal value can be compared to the export prices on individual transactions.

Example: Formula for Calculating the Margin of Dumping - Comparison of a weighted average normal value with a weighted average of prices of all comparable export transactions

Normally, the margin of dumping is expressed as a percentage of the adjusted weighted average export price. Thus, the difference between the "adjusted weighted average normal value" and the "adjusted weighted average export price" is divided by the "adjusted weighted average export price".
Example: Assume the adjusted weighted average normal value is US$ 4.50/kg and the adjusted weighted average export price is US$ 4.15/kg. According to the formula, the margin of dumping would be:
4.50 - 4. 15
______= 8.43% Margin of Dumping
4.15

The Agreement requires that a dumping margin be calculated for each exporter. However, it is recognized that this may not be possible in all cases, and thus the Agreement allows investigating authorities to limit the number of exporters, importers, or products individually considered and impose an anti-dumping duty on sources not investigated on the basis of the weighted average dumping margin actually established for the exporters or producers actually examined. The investigating authorities are precluded from including in the calculation any dumping margins that are de minimis, zero or based on the facts available rather than a full investigation, and must calculate an individual margin for any exporter or producer who provides the necessary information during the course of the investigation.

The Agreement also makes provision for the assessment of anti-dumping duties on exports from producers or exporters who were not sources of imports considered during the period of investigation. In this case, the investigating authorities are required to conduct an expedited review to determine a specific margin of dumping attributable to the exports of such a "new shipper".

TO KNOW MORE... PERIOD OF DATA COLLECTION FOR DUMPING INVESTIGATIONS

Although the Anti-dumping Agreement refers to the period of data collection for dumping investigations ("period of investigation"), it does not establish any specific period of investigation, nor does it establish guidelines for determining an appropriate period of investigation for the examination of either dumping or injury. The document "Recommendation Concerning the Periods of Data Collection for Anti-Dumping Investigations" (G/ADP/6), adopted by the Committee on Anti-Dumping, provides that this period normally should be twelve months, and in any case no less than six months, ending as close to the date of initiation as is practicable.

EXERCISES

1.What is dumping? How is it calculated?

2.Summarize the methods available for calculating the normal value.

3.Summarize the methods available for calculating the export price.

4.What main requirement does the Anti-Dumping Agreement impose for the comparison between normal value and export price?

b.Determination of Material Injury and Causal Link

Determination of Material Injury and Causal Link
After determining the existence of dumping and before imposing anti-dumping measures, the Anti-Dumping Agreement requires WTO Members to determine:
Material injury to the domestic industry producing the like product; and,
Causal link between the dumped imports and the injury.

1.Some Important Concepts