Negotiations on Trade Remedy Rules governing anti-dumping, and subsidies and countervailing duties agreement.

WORLD TRADE ORGANIZATION
DOHA DEVELOPMENT AGENDA

Negotiations on the Anti-Dumping (GATT Article VI)
and Subsidies and Countervailing Duties Agreements

British Columbia’s Comments and Recommendations for
Canada’s Initial Negotiating Position

Province of British Columbia
September, 2002

Introduction

At the World Trade Organization ministerial meeting in Doha, Qatar in November 2001, Trade Ministers agreed to seek improvements and clarifications of existing rules on the application of anti-dumping and countervailing duty measures. The Negotiations are to be concluded no later than January 1^st 2005.

The application of anti-dumping and countervailing duty measures is also likely to be a major issue in concluding Free Trade Area of the Americas (FTAA) negotiations, also scheduled to be completed by January 1^st 2005.  Many of the major South American countries have indicated that the achievement of clearer rules restricting the use of such measures is a priority. In negotiating he Canada-United States Free Trade Agreement of 1989, and the North American Free Trade Agreement of 1994, Canada had a primary objective of obtaining an exemption from United States anti-dumping and countervailing duty laws.  (This was not achieved, although Canada did obtain the right to appeal final determinations in these cases to bi-national panels.)

The purpose of this paper is to set forth the Province of British Columbia’s perspective and recommendations on Canada’s initial negotiating position in the new World Trade Organization negotiations on the Anti-Dumping (GATT Article VI) and Subsidies and Countervailing Duties Agreements and, by extension, the Free Trade Area of the Americas (FTAA) negotiations.  In our view, these negotiations provide an historic opportunity, unlikely to be seen again in this generation, to advance longstanding Canadian objectives to secure Canadian access to international markets, and advance the establishment of a strong, rules-based international trading system that is free and fair for all countries.

The application of anti-dumping and subsidy/countervailing duty measures are issues of both current and longstanding importance for British Columbia. In recent years, the number of countries using anti-dumping and countervailing duties has greatly increased.

British Columbia’s forestry and lumber industries have been significantly impacted by anti-dumping and subsidy/countervail cases brought by the United States against Canada, stretching back over two decades. Four separate cases have been pursued: Lumber I (1982-3), Lumber II (1986), Lumber III (1991-3) and Lumber IV (2001 – present). The 1996-2001 Softwood Lumber Agreement (SLA) was reached after the conclusion of Lumber III and constituted an agreement between the two parties that in return for certain export limiting measures on the part of Canada, the United States would not pursue dumping and subsidy cases against Canadian softwood lumber imports for the duration of the Agreement. Lumber IV was launched shortly after the SLA expired in 2001. The latest United States action is currently before the World Trade Organization, and we are confident that when current rules are finally applied and implemented the United States measures will be found to be unwarranted and unjustified.  For now, the bottom line is that British Columbia’s exports are currently subject to both countervailing and anti-dumping duties with significant consequences for provincial industry, employment and revenues.

British Columbia’s agriculture and food industries have also been involved in significant anti-dumping and countervailing duty actions.   In the 1980s and early 1990s, the British Columbia industry was a major user in Canada of anti-dumping measures to restrict imports from the United States. Actions were taken on a regional or national basis against imports of United States potatoes, onions, red and golden delicious apples, sugar, beer and lettuce. 

The use of anti-dumping measures by others has now become a significant challenge for the provincial agriculture sector. In 1998, United States cattle producers filed subsidy/countervailing duty and anti-dumping petitions against Canadian cattle producers, including those in British Columbia and preliminary duties were imposed. Although the United States authorities eventually determined that imports of cattle from Canada were not injuring, or threatening to injure, the United States industry, the dispute was very costly for Canadian cattle producers. 

More recently, in June 2001, six United States greenhouse tomato companies filed a petition with the United States trade authorities seeking imposition of anti-dumping duties on imports of Canadian greenhouse tomatoes.  Preliminary duties of 50.75 per cent (later corrected to 33.95 percent) were levied against British Columbia exports of greenhouse tomatoes. In April, 2002, the United States authorities found that imported greenhouse tomatoes from Canada had not materially injured or threatened the United States industry.  Although all duties are to be returned to  producers, these actions caused significant industry disruption while the duties were in place.

British Columbia’s agriculture sector has also been impacted by preliminary anti-dumping actions taken in Canada.  In November 2000, Canada Customs imposed substantial temporary duties on imports of United States feed corn into western Canada, including British Columbia. This was of significant concern to British Columbia cattle, dairy and poultry producers, including the organic industry, dependent on United States feed corn for their livestock.  In March 2001, the Canadian International Trade Tribunal found that that the dumping and subsidizing of grain corn in all forms had not caused injury to the producers of like goods in western Canada, and the duties were terminated.

British Columbia’s Assessment and Recommendations

In light of the impact of the application of anti-dumping and countervailing duty measures on British Columbia industry and the province, British Columbia responded to the federal government’s request for provincial input on the development of an initial Canadian negotiating position by undertaking intensive analysis and consultation with British Columbia industry stakeholders.  Based on this analysis and consultation the province recommends that Canada should pursue the following objectives in the World Trade Organization negotiations:

British Columbia is continuing its consultations with its stakeholders in this area and will be making further detailed submissions in due course.

At present, the exact methodology for calculating the amount of a subsidy is a matter for national trade law, subject to the condition that this national law be consistent with the guidelines laid down in the Subsidies/Countervail Agreement. The guidelines state that government provision of equity capital, loans, loan guarantees or other goods or services shall not be considered as conferring a benefit, unless they are provided at less than usual, commercial or adequate rates. More precise calculation methodologies should be negotiated and included in the Agreement.  This is especially important with respect to the provision of goods which has already been controversial in the U.S. subsidy investigation of lumber.

The Province of British Columbia is continuing its consultations with its stakeholders in this area and will be making further, detailed submissions in due course.

At issue is the question of whether subsidies provided to one enterprise are passed through to other enterprises for which the subsidised product is an input, or whether such subsidised inputs are purchased at arm’s length, or market rates. This is, for example, an issue in the present lumber dispute with respect to logs purchased at arm’s length by a lumber mill and also with respect to re-manufacturers who buy wood inputs.

The Anti-Dumping and Subsidies/Countervail Agreements both provide that investigations shall be terminated if the volume of dumped/subsidised imports is found to be negligible. The Anti-Dumping Agreement quantifies negligible imports as imports accounting for 3% or less of the total imports of the subject goods being imported into the investigating country. The Subsidies/Countervail Agreement quantifies negligible imports into developing countries ( 4%) but contains no standard for negligible imports into developed countries.  

Many Canadian producers are price takers and, in perishable and cyclical commodity sectors particularly, often face market prices below their total cost of production. Under the present rules, producers forced to sell at prices below their cost of production face an increased likelihood of being found to be dumping, despite the fact that there is no price discrimination and no intention to dump. This is a particularly acute problem in agriculture as most commodities are cyclical/perishable. It is also an issue in the current lumber dispute.

The Anti-Dumping Agreement currently provides that domestic sales made at prices below the cost of production can be excluded from the calculation of Normal Value when such sales are not made “in the ordinary course of trade”. Sales are deemed to be not made in the ordinary course of trade when over an extended period of time (six to twelve months), either 20% or more of these sales are made below per unit (fixed plus variable) cost, or  when the weighted average domestic selling price is below the weighted average per unit cost, and when such sales do not allow for the recovery of full costs within a reasonable period of time. Excluding sales below cost from the calculation of Normal Value will, by definition, result in a higher Normal Value calculation and an increased likelihood of an affirmative dumping determination.

Especially for perishable and cyclical commodities, and in other settings, it is common for more than 20% of domestic sales to be made at prices below the cost of production for reasons that are outside of the control of the producer. There may be no price discrimination and no intention to dump in these circumstances - producers are simply price takers facing a market price below their cost of production and the 20% test should therefore not apply. Domestic sales should be deemed to be in the ordinary course of trade if the domestic prices are above variable cost or if, in the aggregate, those prices allow for the recovery of full costs over the normal business cycle for the product in question, i.e. the weighted average per unit selling price is above the weighted average per unit cost over the normal business cycle.

If all producers in a tariff free area face a single market price below the cost of production, use of a Constructed Value benchmark will automatically result in an affirmative dumping determination against whichever set of producers is subject to investigation, despite the fact that there may be no price discrimination or intention to dump. This situation is clearly illogical and affects, particularly, Canadian producers of perishable and cyclical commodities since they tend to face market prices that (a) are determined by United States based producers accounting for the preponderance of North American production, and (b) are most likely to periodically fall below the cost of production.

The Anti-Dumping Agreement currently provides that when either the volume of domestic sales is so low as to preclude a calculation of Normal Value, or there are no domestic sales made at prices above the cost of production, a Constructed Value (constructed domestic price) can be used in place of Normal Value as a comparison to export price to determine if dumping is taking place. A Constructed Value is comprised of the cost of production plus selling and administrative costs plus a reasonable amount for profit.

In the case where there are actually no or very few domestic sales at all, clearly no Normal Value can be calculated and the use of a Constructed Value therefore seems logical. When price taking producers in an integrated market face a market price below the cost of production however, and are by definition unable therefore to make any domestic sales above the cost of production, use of a Constructed Value seems illogical, since it will result in an automatic and quite possibly erroneous finding of dumping. In such a situation findings of dumping should be conditional on finding price discrimination between the domestic price (comprised of all domestic sales) and the export price.  Similarly, below cost sales should not be excluded from the calculation of Normal Value in price discrimination analysis.

When a cost of production figure is calculated for use in either a normal value or a constructed value, some Members apply this cost of production figure to joint products or all grades of the product under investigation and then compare it to individual export prices.  It is an arithmetic certainty in such a scenario that some products will be found to be dumped.  The British Columbia lumber and tomato industries have both been significantly damaged by this practice.

British Columbia is continuing its consultations with its stakeholders in this area and will be making further, detailed submissions in due course.

 Zeroing is the practice whereby a Member, in calculating the margin of dumping for the product it alleges is being dumped, divides this product into sub-categories, or product types, and calculates margins on a weighted average to weighted average basis for each product type, rather than for the product as a whole. When some of the resulting dumping margins are negative, and others positive, the Member adds all these margins together, having first set the negative margins equal to zero. Then, finally, having added up the positive dumping margins and the zeroes, the Member divides this sum by the cumulative total value of all the export transactions involving all types of the product to arrive at an overall margin of dumping for the product under investigation. Clearly this methodology is flawed, as the Appellate Body in Bed Linen from India clearly found. For further clarity, the prohibition on zeroing should be explicitly codified in the Agreement.

 The “standing” of industry associations as petitioners in initiating anti-dumping and subsidy/countervail cases has become an issue of contention for British Columbia industry, particularly in the present lumber case, where the United States Coalition for Fair Lumber Imports (the petitioner) has been given standing by United States authorities despite refusing to disclose which enterprises it represents and, by extension, what level of industry support it represents.

In order for a dumping or subsidies case to be initiated, the Agreements currently require petitioners to demonstrate that they have “standing”, i.e. that the application for an investigation is made “by or on behalf of the domestic industry”. The standard that must be met to establish standing is that petitioners must represent producers who account for a minimum of 25% of total domestic production of the subject goods. Further, petitioners must demonstrate that producers expressing a positive opinion on a petition must account for at least 50% of the production of all those producers who express an opinion, positive or negative, on that petition. The fact that a petitioner is an industry association clearly does not exempt them from these requirements. However, in the interests of clarity, the applicability of these requirements to industry associations should be explicitly codified in the Agreements.

In order to find injury (or a threat thereof) in dumping or subsidy investigations a significant or substantial change must be demonstrated with respect to a fairly comprehensive set of indicators, including quantity of imports, market share, capacity utilisation and domestic prices in the importing country. Significant and substantial change is not defined however, and injury (and threat of injury) determinations are therefore made by a vote of the investigators in light of the evidence before them. Quantifying significant and substantial change would increase the predictability and decrease the subjectivity in injury determinations.

One option would be to include definitions of significant and substantial change in the Agreements, expressed in terms of measurable percentage changes to the various indicators. For example, the Agreements could be amended such that injury could not be found unless imports of the subject good had increased by more than 25% during the period of investigation and domestic prices in the importing country had fallen by more than 10% over the same period.

With respect to threat of injury determinations, the Agreements require that such determinations be made with “special care”, but this apparent higher standard is, again, not quantified. Requiring that some minimum percentage change to, for example, capacity and capacity utilisation in the exporting country be demonstrated before a threat of injury determination could be made would, again, reduce the subjectivity and increase the predictability of such determinations. Setting the level of change that must be found for each indicator in a threat of injury determination higher than the level that must be found for an injury determination, would make the special care standard meaningful and enforceable.

Clearly the thresholds for each indicator would need to be negotiated by WTO Members and written into the Agreements.

For perishable and other cyclical commodities it is much easier to find injury during a downturn in their price cycle. United States trade law therefore requires that injury investigations concerning such commodities take into account what the stage of the product’s cycle is during the period of investigation. The Agreements should be amended to incorporate this provision.

In line with the provisions of Article 15.5 of the Subsidies/Countervail Agreement, Article 3.5 of the Anti-Dumping Agreement and numerous Appellate Body rulings, investigating authorities are required to separate and distinguish injury caused by other factors in ensuring that such injury is not attributed to allegedly unfairly trade imports. For the purposes of clarity, and in light of the United States International Trade Commission’s refusal to follow WTO rules in this area, we advocate that this obligation be more strictly codified.

This is a key issue for British Columbia, where a number of industries have been significantly damaged by preliminary duties that were found, in the final determination, to be unwarranted. 

Currently, the standard that must be met in order to impose preliminary duties is low, and affirmative preliminary determinations are increasingly overturned in final investigations.  All that is currently required under the WTO agreements for preliminary anti-dumping or countervailing duties to be imposed is that (i) an investigation must have been initiated, (ii) preliminary determinations of dumping and/or subsidy must have been made, and (iii) a preliminary determination of injury must have been made. Since there is currently no standard in the Agreements that must be met specific to making an affirmative preliminary determination of dumping/subsidy, other than that a preliminary investigation must have been undertaken, the only substantive hurdle to imposing preliminary duties is the injury test. The current evidentiary threshold for the injury test is sufficiently weak to render preliminary determinations unreliable.

There are several possible solutions here.  The rules could be changed to raise the bar in preliminary determinations by codifying the more stringent injury criteria outlined above in the Injury Test recommendation.   Alternatively preliminary determinations could be retained, but preliminary duties eliminated. This would allow for a negotiation period of up to 4 months during which time the parties could attempt to come to an accommodation while a final investigation was taking place. Only after the final determination could duties be imposed.  Another option would be to eliminate preliminary determinations altogether, in all or some circumstances, and to shorten the investigation process for a final determination. This latter solution would have the dual advantage of requiring investigators to meet the higher evidentiary standard that exists in final determinations, while not leaving genuinely injured petitioners without remedy for an unacceptable period of time.

In anti-dumping and countervailing duty investigations, some countries assess and impose final duties prospectively, at the time a final determination is made, while others assess final duties retrospectively, up to a year after a final determination, levying an estimated final duty in the interim. This latter, retrospective, methodology prolongs the period of uncertainty for both exporters and importers, and should be prohibited.

The Anti-Dumping and Subsidies/Countervail Agreements establish the basic rules that no duties should be imposed unless they are consistent with a member country’s obligations under those Agreements. This means WTO Panel rulings should be promptly and effectively implemented by countries when these rulings conclude that the continued application of an anti-dumping or countervailing duty order is not warranted under WTO rules. This is particularly important in the circumstances of the United States system where products subject to an anti-dumping or countervailing duty order are imported into the United States on an unliquidated basis and are subject to duty liabilities to be determined at a future date. The WTO Agreements should be clarified to ensure that members must refund duties on all prior unliquidated entries   made before the date of an adverse WTO Panel decision to the extent those duties are in excess of what is consistent with the rules as interpreted by the WTO.

At present, if petitioners and respondents wish to pursue alternative dispute resolution, or if petitioners decide unilaterally to withdraw a petition, there is no mechanism explicit within the Agreements by which an investigation can be terminated without prejudice.  There is no consistency between WTO Members in this area. The rationale for some Members in not permitting termination without prejudice may be to discourage nuisance cases. This rationale needs to be balanced against the advantages to be gained by enabling parties to reach timely, negotiated settlements in cases where the dumping, subsidy or injury ceases during the course of an investigation, or where the parties otherwise agree that the costs of continuing an investigation outweigh the benefits.  In our view nuisance cases can best be dealt with by improving the preliminary determination process, as detailed above, and we therefore recommend incorporating a provision in the Agreements that allows, explicitly, for termination without prejudice.

The Agreements provide that each exporter of the subject goods in an investigation be assessed individually to establish margins of dumping and/or subsidisation. If the number of enterprises is so large as to make this impractical, individual rates can be assessed for the principal enterprises and an “all-others” dumping margin or “country-wide” countervailing duty rate can be applied to all other enterprises. Enterprises not dumping or subsidised, or who are dumping/receiving subsidies at a lower rate than other enterprises, therefore suffer unduly.

It is recognised that the administrative burden of assessing individual enterprises can be substantial.  One option would be to charge a fee to enterprises requesting individual assessments that would allow national authorities to increase their own capacity in this area or to contract out the work to approved law firms/consultants. The fee would be refunded if the enterprise was assessed a lower margin than the all others rate, or if it was found not to be dumping/subsidising.

The purpose of the Anti-Dumping Agreement and the Agreement on Subsidies and Countervailing Measures is to remove injury caused by dumped/subsidised imports, yet anti-dumping and countervailing duties can currently be levied in an amount in excess of that required to remove injury.

At present the Agreements provide that national authorities may, after making an affirmative dumping or subsidy determination, assess duties in an amount less than the full margin of dumping or subsidisation. The Agreements state, in fact, that imposing duties in an amount less than the margin of dumping/subsidy “is desirable…if such lesser duty would be adequate to remove the injury to the domestic industry”. However, the Anti-Dumping and Subsidy/Countervail Agreements do not currently require that “lesser duties” be imposed.  

The Agreements should therefore be amended to require that all duties be assessed in an amount not greater than that required to offset injury.

The presence of dumped and subsidised products in a market can have beneficial effects for industrial users and consumers of such products, in the form of lower prices. The Agreements require national authorities to provide opportunities for industrial users and consumers of goods subject to investigations to provide information during investigations, but do not currently require that this input be given any weight in actually making determinations or assessing duties. There is a clear economic welfare argument for only imposing duties when there is a net gain, that is when producer gain from such duties exceeds consumer loss.

An important step towards achieving this economic objective could be taken by amending the Agreements to require that Members consider the public interest in assessing final duties in cases where interested parties make submissions to this effect.

The Agreements provide that in response to an affirmative dumping or subsidy determination, exporting enterprises may propose an undertaking whereby they would agree to raise prices to a level sufficient to offset injury, or to a level equal to their assessed margins of dumping or subsidisation, in lieu of paying duties. Governments can likewise undertake to reduce subsidies.  National authorities are not currently obliged to accept such undertakings. If an undertaking is accepted then (depending on the price elasticity of the subject goods) the benefit of the higher price is captured by the exporting enterprise, as opposed to the benefit from the duty being captured by the government of the importing country. The petitioning industry (in the country of importation) benefits under either scenario, but does benefit somewhat less if an undertaking is accepted than if a duty is imposed.

If the Agreements are amended to make the imposition of lesser duties automatic, the acceptance of undertakings sufficient to offset injury should, likewise, be made automatic.

The evidentiary burden for respondents in anti-dumping and subsidies cases is significant, and can be prohibitive. The Agreements provide that when respondents refuse or otherwise fail to provide the information necessary for investigating authorities to make determinations, such authorities may use other facts available to them, including those provided by petitioners. The Agreements recognise that this may lead to less favourable results for the respondents.

Some countries, most notably the United States, often reject the information provided by respondents and resort to the use of adverse facts available seemingly at will and without a good explanation. The language in the Agreements dealing with the resort to facts available should therefore be clarified. At a minimum, the provision in the Anti-Dumping Agreement that requires investigating authorities not to disregard information provided by a party that is less than ideal, as long as that party has acted to the best of its ability, should be included in the Subsidies/Countervail Agreement. Further, the Agreements should be clarified to include the requirement that if data provided by respondents is less than ideal, use of non-punitive surrogate information should be the first default, and use of adverse facts available should be reserved as the final option.

Conclusion:

Revisiting the Anti-Dumping Agreement and the Agreement on Subsidies and Countervailing Measures raises a wide range of issues of importance for the Province of British Columbia. This document discusses those issues identified by the province as being of the most immediate and pressing concern, but is not considered to be either final or exhaustive. As our consultations with stakeholders continues, we will therefore look forward to making further recommendations with respect to the improvement of these two important Agreements.

For further information on British Columbia’s position with respect to any of the issues raised in this initial submission, please contact Robert Musgrave.

last updated December 2005