Myth Versus Reality: Dumping of Imported Chinese Goods
Inconsistency in Applying Surrogate Pricing Explained
With the new administration in place, anti-trade rhetoric has reached an alarming crescendo with imported Chinese goods squarely positioned in the bullseye. There appears to be a settled presumption that the Chinese goods are being dumped, i.e. deliberately pushed into the US market at artificially low prices in order to out-price the domestically produced goods, and that these goods are the main cause for the sputtering performance of the US domestic manufacturing industries and accompanying job losses.
This article seeks to demystify certain esoteric facts surrounding the alleged dumping of Chinese goods into the US market. Under US trade law, the US Department of Commerce applies a fundamentally different methodology for determining the dumping margin of goods exported from China than those being followed for most other countries. This is because pursuant to its World Trade Organization Accession Protocol signed in 2001, China agreed to be treated as a non-market economy (NME) for a limited period of 15 years (which expired on December 10, 2016). Notwithstanding, Commerce continues to treat China as a NME, against which China has recently filed a complaint at WTO.
Dumping margin is calculated based on the difference between the US sale price and the fair (or reasonable) market value of goods. In case of market economy (ME) countries like France, fair value of goods is the price at which the exported goods are sold in the French marketplace. As such, in ME Anti-dumping (AD) cases, the dumping margin is based on an objective criteria, and the exporter can exercise reasonable care while negotiating the export price to ensure that he is not later found culpable of dumping.
In contrast, due to China’s NME status, Commerce determines the fair value of export goods by applying a hypothetical two-step method. First, Commerce holds that the sale price of goods in the Chinese marketplace cannot represent fair value since they presume that these prices are not determined by free-market principles. As such, Commerce determines the fair value of goods in an economically comparable third country, called a surrogate country. Commerce has wide discretion to select a surrogate country. In recent Chinese AD proceedings, Commerce has chosen a variety of surrogate countries, including Thailand, for passenger tires; South Africa, for geogrids; Bulgaria, for decorative hardwood and plywood; Romania, for garlic; and Mexico, for hydrofluorocarbon gases.
Second, unlike ME cases, Commerce does not value the finished goods itself in the surrogate country; instead, it breaks down the finished goods into its (often) hundreds of components – material and non-material – values all of such components individually, and then aggregates them to arrive at a hypothetical fair value of finished export goods.
The resulting dumping margin arising from this hypothetical two-step methodology is unpredictable even for seasoned lawyers. Clearly therefore, unless a Chinese exporter is blessed with divine revelation, he can never envision, while setting his US export price, whether he’d later be ensnared in a US anti-dumping proceeding.
The situation is further complicated in case a Chinese exporter is engaged in exporting goods to several countries, in which case he must reckon with disparate rules being followed in different countries for establishing a fair market value of goods. For instance, different surrogate countries could be selected by the investigating authorities in different jurisdictions. Another important point of distinction to note is that in European Union countries, although the fair value is determined in a surrogate country, it is based on the price of finished goods as such, instead of an aggregation of input prices.
To sum up, on account of China’s theoretical NME status, the dumping margins established for Chinese exporters are nothing more than a hypothetical construct. At the least, it is unfair to charge Chinese exporters with an intent to dump goods in the US market, when the methodology used for computing dumping margins is based on a set of hypotheses.
This explains why Chinese exporters were so keenly awaiting the expiration of the transitional 15-year time period on December 10, 2016, when they would have had the first opportunity to stake a claim to be treated as a market economy country in AD proceedings, entitling them for application of objective instead of hypothetical rules and achieving a more predictable outcome. As noted above, China’s future NME status is in the hands of WTO.
Dharmendra N. Choudhary is a foreign trade counsel at the Washington, DC, office of international trade law firm, Grunfeld Desiderio et al. His practice area is focused on defending foreign exporters in US antidumping and countervailing duty cases.
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