Anti Dumping As a Form of Protectionism

Dumping can be defined as the act of a manufacturer in one country exporting a product to another country at a price which is either below the price it charges in its domestic market or is below its cost of production. Over the past few decades, the liberalization in international trade has progressed at rapid speed and many conventional forms of barriers to trade such as tariffs and quotas have been declining worldwide. While tariffs and quotas have been and continue to be reduced, another type of trade barrier, antidumping, is being used very frequently as a measure of protection. Industries such as consumer electronics in Europe and US have shown a continual pattern of protection from competition from newly industrialised countries. Anti-dumping measures are being used mainly by developed countries to shelter domestic firms from import competition.

Agreement on implementation of Article VI of the GATT (Anti-dumping)

The anti-dumping law was not regulated under international law until the adoption of GATT 1947. GATT 1947 incorporated the basic conditions for adopting anti-dumping measures. Article VI of the GATT provides the right of contracting parties to apply anti-dumping measures if such dumped imports cause injury to a domestic industry in the country of the importing contracting party. Detailed rules governing the application of anti-dumping measures are currently provided in an Anti-dumping Agreement concluded at the end of the Tokyo Round. Negotiations in the Uruguay Round have resulted in a revision of this agreement by addressing many areas in which the current Agreement lacks correctness and detail. The revised Agreement provides for clearer and more detailed rules in relation to the method of identifying whether a product is dumped. It also determines the criteria to be taken into account in a determination that dumped imports cause injury to a domestic industry and the procedures to be followed in starting and conducting anti-dumping investigations. It also gives guideline for the implementation and duration of anti-dumping measures. Furthermore, the new agreement clarifies the role of dispute settlement panels in disputes relating to anti-dumping actions taken by domestic authorities.

The new Agreement adds relatively specific provisions on issues such as determining whether a product is exported at a dumped price by establishing criteria for allocating costs when the export price is compared with a normal value, and there are rules to ensure that a fair comparison is made between the export price and the normal value of a product. This mechanism prevents the arbitrary creation or inflated margins of dumping.

The agreement reinforces the requirement for the importing country to establish a clear causal relationship between dumped imports and injury suffered to the domestic industry. The examination of the dumped imports on the industry concerned must contain an evaluation of all relevant economic factors that affect the state of the industry concerned. The agreement defines the existing interpretation of the term “domestic industry” and subject to a few exceptions, “domestic industry” refers to the domestic producers as a whole of the like products or to those of them whose collective output of the products constitutes a major proportion of the total domestic production of those products.

Straightforward procedures have been established on how anti-dumping cases are to be initiated and how such investigations are to be conducted. There are conditions to ensure that all interested parties are given an opportunity to present evidence. There are also emphasis on the provisions on the application of provisional measures, the use of price undertakings in anti-dumping cases, and on the duration of anti-dumping measures. Thus, a significant improvement over the existing agreement consists of the addition of a new provision under which anti-dumping measures shall expire five years after the date of imposition of the measure, unless a determination is made that, in the event of termination of the measures, dumping and injury would be likely to continue.

A new provision requires the immediate termination of an anti-dumping investigation in cases where the authorities determine that the margin of dumping is less than 2 per cent, expressed as a percentage of the export price of the product or that the volume of dumped imports from an individual country accounts for less than 3 per cent of the imports of the product in question into the importing country. The Trade must decide upon an analogue market. Analogue market is a market which does have market economy status such as USA.

The agreement allows parties the opportunity of consulting on any matter relating to the operation of the agreement and to request the establishment of panels to examine disputes.

Article 18.5 of the anti-dumping agreement requires members to notify their domestic laws and/or regulations relating to anti-dumping to the committee on Anti-Dumping Practice and members that have no anti-dumping laws or regulations should notify that fact as well. Article 16.4 requires Members to submit a report of all anti-dumping actions they have taken, as well as a list of all anti-dumping measures in force, twice a year. Article 16.5 requires members to notify the committee on Anti-Dumping Practice which of its authorities are competent to initiate and conduct anti-dumping investigations.

Article 1 of the anti-dumping agreement establishes the basic principle that a member may not impose an anti-dumping measure unless it determines, pursuant to an investigation conducted in conformity with the provisions of the anti-dumping agreement, that there are dumped imports, material injury to a domestic industry, and a causal link between the dumped imports and the injury.

Article 2 contains rules for the determination of dumping. Dumping is calculated on the basis of a fair comparison between normal value which is defined as the price of the imported product in the ordinary course of trade in the country of origin or export and export price. Article 2 also contains detailed provisions related to the calculation of normal value and export price.

Article 3 of the anti-dumping agreement contains rules for the determination of material injury caused by dumped imports. The basic requirement for determinations of injury is that there is an objective examination, based on positive evidence of the volume and price effects of dumped imports and the consequent impact of dumped imports on the domestic industry. Article 3.5 requires, in establishing the causal link between dumped imports and material injury. If there are known factors other than dumped imports which may be causing injury must be examined, and that injury caused by these factors must not be attributed to dumped imports. A significant new provision, Article 3.3, establishes the conditions in which a cumulative evaluation of the effects of dumped imports from more than one country may be undertaken.

Article 4 of the anti-dumping agreement sets a definition of the domestic industry to be considered for purposes of assessing injury and causation. The domestic industry is defined as producers of a “like product”, which term is defined in Article 2.6 as a product that is identical to, or in the absence of such a product, one that has characteristics closely resembling those of, the imported dumped product under consideration. Article 4 also establishes that domestic producers may be excluded from consideration as part of the domestic industry if they are in effective control to exporters or importers of the dumped product.

The Doha implementation decision

Repeated investigations: If a government receives a request for a second anti-dumping investigation into a product, within a year of a first negative finding on that product, the ministers agree that their investigating authorities must examine this request “with special care”, and only go ahead if circumstances have changed.

Developing countries’ exports: Article 15 of the Anti-Dumping Agreement says developed countries must give special regard to the special situation of developing countries when they consider anti-dumping measures. It is also emphasised that the alternative beneficial remedies have to be explored before anti-dumping duties are applied which is mandatory. The ministers instructed the Anti-Dumping Practices Committee’s Implementation Working Group to try to clarify how it could be implemented, asking for recommendations on how to put the provision into practice within 12 months.

Time for determining dumped volume: Article 5.8 says that if the volume of dumped imported products is negligible, the investigation must be terminated and no anti-dumping action be initiated. But the article does not specify the time period to be used in determining the volume of dumped imports. The ministers instructed the Anti-Dumping Practices Committee’s Implementation Working Group to prepare recommendations within 12 months. The aim is to make the application of time periods as predictable and objective as possible.

Annual reviews: Every year, the Anti-Dumping Practices Committee reviews how the agreement has been implemented and how it has operated. The ministers instructed the committee to prepare guidelines to improve the reviews, and to report its views and recommendations to the General Council within 12 months.

 Anti-dumping measures and China

Though China has successfully convinced New Zealand, Singapore, Malaysia, Kyrgyzstan and Thailand of its position as a market economy country, it has been refused official market economy status by the European Union and the USA in the matter of anti-dumping measures. Anti-dumping associated with dumping from nonmarket economy countries, especially from non-market countries in transition, is always a complicated and controversial worldwide issue. Since most NMEs are in transition to greater market orientation, the statutory label of ‘nonmarket economy country’ for anti-dumping is not appropriate and certainly creates an unfair and undesirable treatment of such countries. China is the largest such country and has to face up to and endure the dilemma of anti-dumping measures from their frequent users, especially the EU and the USA. Furthermore, China joined the WTO (World Trade Organization) on 12th November, 2001 and the full membership of the WTO will inevitably modify and influence the trade relations between China and the EU. Since then, China has to undertake more obligations in furtherance of trade liberalisation; mean while it is entitled to utilise its WTO rights and Dispute Settlement System to contend with unfair treatment from other contracting parties, for example, to challenge unfair anti-dumping measures.

Anti-dumping duty law objectives

As a general rule, dumping is deemed as unfair trade; in turn, an anti-dumping regime is designed to provide relief for aggrieved industries from this unfair trade practice. The anti-dumping duty imposed will usually be equal to the amount by which the normal value (fair value) exceeds the dumped price.

An anti-dumping duty law aims to protect domestic industries from imported products that are priced below their fair value by forestalling the actual or threatened material injury, otherwise caused by such dumping. Anti-dumping duty laws are not designed to exclude or limit imports which compete with domestic products. Rather, they are designed to deter foreign producers from using discriminatory pricing practices to injure domestic industries. This objective is accomplished by the imposition of anti-dumping duties or accepting a price undertaking in respect of the dumped products, not by the denial of entry of dumped products on to the importing market.

It is worth pointing out that if anti-dumping measures are wrongly used, it will result in several serious consequences, namely:

blocking the free circulation of goods in the global marketplace, contrary to the policy of most liberal market economies and GATT/WTO. For example, Chinese light industry products, including shoes, suitcases and bags, were blocked from entering the EU market in the early years of the EU anti-dumping campaign against China. Subsequently, the target shifted to mechanical and electronic products of which the television industry is the most convincing example;

strangling infant industries which are in an already weak competitive position, particularly those infant industries in developing countries.

Anti-dumping measures against China

China has become the biggest target of the EU anti-dumping regime since the 1990s and anti-dumping proceedings against China have increased dramatically. The EU anti-dumping measures against China accounted for 21 per cent of the whole. Furthermore more than half of new investigations initiated by EU between were against China.

Most of these investigations against China resulted in artificially high anti-dumping duties or minimum undertakings, which severely undermined the competitive capability of many Chinese industries, involved, and virtually excluded them from the European market; however, the increasing competitiveness of Chinese industries in the European market inevitably annoys their European counterparts. The principal reason for this unfair and reprehensible outcome is the imposition of non-market economy status on China by the EU anti-dumping regime. Though the Community removed China and Russia from the list of NMEs (non-market economies) in 1998, which is a welcome step to reflect the rapid economic reforms in China towards market economy principles, there still exists a discriminatory calculation of dumping margins under the current EU anti-dumping regime since China is not yet, in practice, accorded full market economy status.

Analogue country rule

Legal analysis

The first step in the determination of normal value for imports from NMEs is the selection of an analogue market economy country in which normal value of the like product will be established. Article 2(7) of the Basic Regulation sets forth the three following rules concerning the selection of the analogue country.

(i) The analogue country chosen shall be ‘appropriate’ and shall be chosen ‘in a reasonable manner’, with due account taken ‘of any reliable information made available at the time of the selection’;

(ii) Where appropriate, a market economy third country which is subject to the same investigation is to be used, and account will also be taken of time limits;

(iii) The analogue should preferably be a third country, but not exclude the Community, which is clearly a last resort.

It is obvious that the Commission has extremely wide discretion in the selection of an analogue country. The concerned parties must be informed shortly after the initiation of the market economy third country envisaged to be used, and ten days must be given to comment and submit an alternative proposal if there is one. This new provision of the time limit of only ten days operates against foreign respondents, since it is far too short to submit any meaningful comments and proposals, given the complexity of the processes of comparison of production in different countries and the difficulties of the access to necessary information. In contrast, the EC industry and the Commission, in order to prepare the complaint, will have had sufficient time to explore various market economy third countries and to choose one of their preferences; in turn, the opportunities for foreign respondents to influence the process of the selection of the analogue country will be very circumscribed given that strict time limit. Such a provision further increases the discretionary power to the Community institutions. The unwillingness is possibly due to three main reasons, namely, lack of incentive, the complexity of the questionnaires and a fear of disclosure of their dumping as well, if it is the case. As a result, the Community’s experience has shown that problems always are encountered in obtaining the cooperation of producers of the analogue country chosen.

Criteria for selection of an analogue country

In the practice of the Community, the following criteria are usually of importance.

Comparability of products produced.

Representation of domestic sales to independent customers in the reference country as compared to exports of the product concerned originating in the non-market economy country.

Competition in the analogue country

Comparability of access to raw materials, components and energy in the non-market economy country and in the reference country

Comparability of the production process or the structure of cost of production.

Readiness of producers in the reference country to cooperate with Community authorities

The Commission’s method of determining allegations of dumping from non-market economy countries has, over the last 20 years, given rise to many debates and controversies, of which the issue of selection of an analogue market country is a prominent one. It has been criticised as quite arbitrary and may, therefore, lead to a non-representative high normal value, with significant impact on the dumping margin calculation.

The EU anti-dumping law presumes that costs and prices in NMEs are unreliable for purpose of establishing normal value and therefore currently provides that normal value is based on that of the third market economy country. Looking at the 1995 anti-dumping investigations towards China, in three out of six cases the USA was chosen as an analogue country and Japan was selected in one other case. At the very least, prima facie, very developed countries such as the USA and Japan were and are not at a similar level of development as is China. It obviously shows that there are many ramifications and potential unfairnesses inherent in the analogue country test, which apparently denies all of the most obvious advantages enjoyed by Chinese producers, such as access to natural resources and cheap labour, since these benefits will not be used to assist penetration of exporters of non-market economy countries through an analogue country with high or relatively high production costs. Thus, the determination of dumping becomes inevitable in these circumstances, typically ending in high dumping margins.

The broad discretion enjoyed by the Commission results in an inevitable uncertainty which makes it difficult for exporters to avoid anti-dumping action by ensuring that their export prices are equal or superior to their domestic prices and that of a potential analogue country. It is submitted here that the system of choosing an analogue country is inherently flawed. The discretionary powers of the Community institutions might overrule the principle of legal certainty. Law should be predictable in order to fulfill its normative and directive function.

Normal value rules

Once the analogue market country has been selected, normal value must be determined on the basis of one of the following exhaustive list of calculation methods set out in Article 2(7) of the Basic Regulation:

Domestic prices of the like product in the analogue country

Constructed prices of the like product in the analogue country. The Basic Regulation ruled that ‘the constructed value’ is the costs of production plus a reasonable margin for selling, general, administrative costs (SGA) and profits.

The export price of the analogue country

Other reasonable methods. The last alternative method is referred in Article 2(7), which states that ‘any other reasonable basis including the price actually paid or payable in the Community for the like product, duly adjusted if necessary to include a reasonable profit margin’.

Impact of the EU anti-dumping campaign on Chinese industries

Monetary losses

The inferior position of Chinese exporters within the EU market

As discussed above, the anti-dumping duties imposed on Chinese exporters are somewhat or quite artificially higher than they should be, due to the unfair analogue country rule.

The longstanding and far-reaching impact on emerging industries

The longstanding and negative impact on China’s foreign investment

Legal strategies and steps

A prompt and effective response to the EU anti-dumping investigation

By its very nature, developing an effective response to an anti-dumping investigation is extremely time-consuming and costly, especially when a country-wide duty rule is typically imposed on Chinese exporters (this creates a ‘free-ride’ incentive); thus, Chinese exporters have been reluctant to respond to such an investigation. Chinese industries have been severely damaged by the tragic consequence of inaction, ranging from 30 per cent to 400 per cent of anti-dumping duties imposed on Chinese industries in most cases. By way of contrast, Samsung Electronics Co. Ltd and LG TeleCom of South Korea formed a strategic alliance during the case review, provided complete data for responding, lobbied through different channels, and defeated the claims. With a 15.1 per cent anti-dumping duty, South Korean firms easily took over the market share previously enjoyed by Chinese exporters. It is worth noting that such a response should be made promptly because of the very strict time limits stipulated in the EU anti-dumping laws.

A strong and sound defense

The capacity to handle anti-dumping proceedings

In order to achieve the above goals successfully, a good performance from professionals, including lawyers and accountants, and the concerned exporter’s own role in handling anti-dumping proceedings are equally vital. First of all, professionals hired by concerned exporters should determine a right and feasible strategy for the concerned exporters according to the current EU anti-dumping rules and individual circumstances. Secondly, due to the extremely complex anti-dumping procedures and strict time limits, concerned exporters should set up in advance a corporate structure to challenge any possible anti-dumping campaign. A prompt, strong and persistent response is a precondition of any achievement because of the stringent time limits and punitive treatments imposed on any failure to respond in time and in accordance with procedural requirements.

Taking advantage of the recent WTO membership

Since China has been a member of the WTO since 2001 and given the severe consequences caused by the unfair EU anti-dumping campaign towards China, the Chinese government should take advantage of the membership to address at least some of these problems. In fact, the EU has already taken into account China’s WTO membership within its legislation. A series of amendments have been made to the Basic Regulation, such as Council Regulations (EC) No. 2238/2000, No. 1972/2002 and No. 461/2004, to be in line with WTO rules. It is crucial now that China should be entitled to invoke the DSS (Dispute Settlement System) to challenge any violation of Chinese WTO rights by other members.

A close investigation of EU anti-dumping cases against China reveals that three issues are important in relation to the impact of anti-dumping measures on trade. First, the calculation of dumping margins is a challenging task. Although great efforts have been devoted to make anti-dumping investigation a fair process, the scheme suffers from imperfect information that is highly likely to lead to biased rulings. Second, the high rate of termination due to withdrawal of complaints also poses the question whether the scheme tends to be used by industries to fight against fair competition as opposed to unfair competition. Investigations and provisional duties levied can be highly disruptive to exporting firms even if eventually no definitive measures are imposed. Third, as anti-dumping measures tend to significantly change bilateral trade flows, the percentage of imports subject to anti-dumping measures is not a good indicator of the effects of anti-dumping duties on trade. A more appropriate measure of the impact of anti-dumping on trade is to estimate the extent that anti-dumping duties affect bilateral trade flows.

South African Poultry Industry

In order to understand the dumping case the South Africans brought against the U.S. dark meat chicken products, the nature of the U.S. and South African markets, the costing of chicken products, and information on the U.S. and South African poultry industries must be introduced. The market is such in the United States and other countries (such as the EU, Canada and Mexico) that the breast meat (the white meat) commands a higher price than the dark meat. This is because consumers in these countries prefer, and therefore demand, more white meat than they do dark meat. Traditionally, dark meat pieces sell for less than half the price of a whole chicken and less than a quarter of the price of breast meat. Costs in the United States and other industrialized countries are based on net realizable value.

Because of the low consumer demand for dark meat in the United States, the producers look for other markets to export the dark meat to. Outside of the industrialized countries (in places like South Africa), dark meat is typically in higher demand because of different consumer preferences. Because it is in higher demand in South Africa, South African producers charge a higher price for the dark meat. This provides a perfect export market for the surplus of dark meat. The U.S. producers are able to sell dark meat at low competitive prices abroad because they make back the majority of the cost of production from the sale of breast meat at home. Because of the high demand in the export markets, U.S. producers are able to sell the dark meat at a higher price abroad then they are able to in their home market. If producers find themselves in a situation where they have to sell a product below the market price, as a loss-minimizing option they would rather send it to the rendering plant than transport it and sell it overseas. For the U.S. poultry industry, the world market prices are the best value they can expect to get for their products. Any price below the world market price is not worth.

When competing firms in countries like South Africa realize that low-priced imports are adversely affecting their sales and profits they are quick to claim that the U.S. is engaging in unfair competition. This is why dumping investigations ensue, not because dumping is actually occurring, but because of the low competitive prices of the dark meat that the import competing industry is unable to compete with. The United States happens to be the largest poultry industry in the world. Tyson Foods and Gold Kist, two companies at the center of the South African investigation, are the largest poultry companies in the United States. The success of the U.S. poultry industry can be attributed to several factors.

The industry is vertically integrated,

it has the most updated technology,

the production process is highly efficient,

there is good disease control,

the U.S. has a perfect climate for raising chicken

the U.S. has unlimited access to a cheap and plentiful grain supply which accounts for 50% to 60% of the production cost.

The foreign industries seek protection from the U.S. poultry products, not because they are actually being dumped, but because they lack the factors that can make them competitive with the U.S.

South African poultry producers have a hard time being competitive with the United States because the South African poultry industry is plagued by high production costs that can be attributed to several factors;

The production process in South Africa is highly inefficient.

Although South Africa has plenty of cheap labor, the workforce is poorly trained.

The South African poultry industry has also had problems with trade unions which have been distrustful to production.

The chicken flocks are plagued by disease.

The poultry industry has to contend with high transportation costs due to underdeveloped rail and roads.

Due to South Africa’s inefficiency, they are unable to compete with the United States, not because the United States is engaging in unfair trade practices, but because of the various inefficiencies in the factors discussed above. With high costs assigned to both cuts of meat in South Africa, the United States had a real advantage with their dark meat products. South Africans depended on the high market price of both their white and dark meat products to cover their high production costs. The South African poultry industry has been struggling ever since South Africa joined the WTO and was forced to let down its protectionist barriers, opening up the market to foreign competition. The foreign competition proved to be too competitive and the South African poultry industry sought protection from chicken imports. In 1997, in order to grant some relief to the South African poultry industry, however, this granted little relief to the highly inefficient and troubled South African poultry industry. Imports still entered the market, and even with the added tariff, the foreign chicken products remained competitive with the South African prices.

In 1999, Rainbow Farms, in conjunction with the Southern African Poultry Association, went to the Board on Tariffs and Trade accusing the United States of dumping chicken leg quarters into the South African market. The Board on Tariffs and Trade initiated an investigation into the dumping allegation in 1999. The Board on Tariffs and Trade imposed preliminary duties on the chicken leg quarters from the United States. In December 2000, the Board finalized the dumping duties after concluding that the United States had dumped chicken leg quarters into the South African market and that the South African poultry industry had experienced and was in threat of material harm. The dumping duties were equal to the dumping margins that had been calculated by the South Africans. These duties were equal to the large dumping margins of 209 percent to 357 percent. After the imposition of the tariff in 1997, U.S. chicken leg quarter imports fell significantly in the following years. After the incredibly high dumping duties were initiated in 2000, chicken leg quarters from the United States basically stopped.

Needless to say, the poultry producers in the United States were not pleased with the outcome of the South African case for one very important reason. The South Africans’ case, and the tools they used to prove their dumping case against the United States, could easily be adopted by other countries whose import-competing industries were also struggling under the intense competition from the low price of U.S. leg quarters. Compared to the other markets the United States exported leg quarters to, the South African market was small. But a dangerous precedent could be allowed to set, which could potentially result in the U.S. losing its biggest export markets, like Russia and China/Hong Kong. It was on this basis that the U.S. poultry industry insisted that this case be appealed to the WTO. The U.S. government reported that it is working cooperatively with the South African government to address the poultry industry’s concerns.

This case is a clear-cut case of protectionism. The United States was not dumping leg quarters into the South African market. The cost-allocation system of the U.S. poultry industry, net realizable value, was historically used and longstanding. It not only reflected the reality of the U.S. market but also was representative of the world market for poultry as well. Based on net realizable value, the records of the United States should have been used to determine the “normal value.” The U.S. industries were selling the leg q