Determining which comparison market (home market or third country) sales will be used in the calculation

Under United States anti-dumping law, although the preference is to compare United States sales prices with home market sales prices (i.e. prices of the merchandise in the targeted country), home market sales will be used only if they are deemed 'viable'. Home market sales will normally be considered to be viable as long as they constitute 5% or more of United States sales of the subject merchandise. The 5% test is typically performed on the basis of volume or quantity, rather than value. Consequently, if the foreign company's home Market sales by volume of the targeted merchandise constitute more than 5% of the foreign company's United States sales of the targeted merchandise, then the home market sales will normally be used in the dumping margin calculation.

 

Note the word 'normally'. United States law contains a possible exception to the viability standard. Under the statutory provisions, even if home market sales are greater than 5% of the volume shipped to the United States, the Commerce Department is allowed to refuse to use home market sales in the anti-dumping calculation if it determines that a 'particular market situation' exists in the home market that would not permit a proper comparison.

 

Neither the statute nor the Commerce Department's regulations define `particular market situation'. However, consistent with the legislative history, this exemption has been invoked only to address particularly unusual situations, for example, when there is only a single home market sale, when there is government control over pricing or when home market sales are of substandard merchandise that is only incidental to exports. For example, in the Commerce Department dumping determination Salmon from Chile, the Commerce Department ruled that a 'particular market situation' existed in the home market (and therefore home market sales would not be used as the basis of comparison) primarily because the grades of salmon which were sold in Chile were dramatically different from the grades sold in the United States, and would not have been saleable as an export product (i.e. the fish were decaying, diseased, or otherwise significantly damaged and could not be exported). Based on these facts, Commerce Department determined that the home market was merely incidental to the Chilean salmon export industry, and did not use these sales in determining normal value. A foreign company should be aware of the possible application of this exception.

 

If the foreign company's home market sales are not viable because they do not reach the 5% threshold or because a 'particular market situation' exists, the Commerce Department will seek to examine the foreign company's sales of the targeted merchandise to a third country. The question then becomes which third country sales should be used. Typically, the Commerce Department requires the third country that accounts for the foreign company's largest volume, provided that such volume constitutes at least 5% of the volume sold to the United States. In some rare situations, however, the Commerce Department may allow (or require) selection of another third country if it can be demonstrated that the type of targeted merchandise sold to another third country more closely resembles the type of targeted merchandise sold to the United States (provided that the volume to this other third country satisfies the 5% test). Choosing a comparison market other than the largest volume third country export market is very unusual, and generally the Commerce Department considers the size of the market to be much more important than relative product similarity between the third country and United States markets.

 

Which home market sales must be reported — the issue of affiliated customers

 

As with United States sales, the Commerce Department typically requires a respondent to report all sales of the targeted merchandise in the home market (or third country) to unaffiliated customers, and to affiliated customers that consume the merchandise. It is important to note, however, that sales to an affiliated customer who resells the subject merchandise are not to be included in the home market sales universe; thatetqlated reseller's sales to its unaffiliated customers are included instead. That is, sales by the foreign company's affiliates in the home market are potentially subject to inclusion in the home market sales anti-dumping universe.

 

 The only exception to the requirement to report all home market sales is for affiliated resellers who sell only limited quantities of the subject merchandise, or if the home market sales to the affiliated reseller are made at arm's length. Under the Commerce Department's regulations, if all of the sales by affiliated resellers of the subject merchandise amount to less than 5% of total home market subject merchandise sales, then the respondent need not report those affiliated resellers' sales of the subject merchandise. In this situation, the respondent can simply report the sales to the affiliated resellers instead.

 

Given these requirements, whether a customer is deemed 'affiliated' or `unaffiliated' takes on tremendous importance. The United States statute and the Commerce Department's regulations have significantly expanded the definition of 'affiliated persons'. In particular, the new provisions expanded the concept of affiliation by control. Under the new provisions, a customer or supplier will be considered 'affiliated' or 'related' to the respondent if the respondent is 'legally or operationally in a position to exercise restraint or direction over' the customer or supplier (or vice versa). It is important to emphasize that the expanded definition of affiliated persons can include entities even when there is no equity relationship. Under the Commerce Department's regulations, companies may be considered to be affiliated if a company is 'in a position to exercise restraint or direction, for example, through corporate or family groupings, franchises or joint-venture agreements, debt financing, or close supplier relationships in which the supplier or buyer becomes reliant upon the other'.

 

Because both reporting burdens and the anti-dumping calculation change significantly depending on whether the customer is considered 'affiliated', the new changes in the law on this issue are important. In general, if the customer is not related at all to the manufacturer, and the customer is a retailer that purchases the targeted merchandise from multiple suppliers, it is unlikely that there would be any concern. However, if the customer is a distributor that purchases the product from only a single manufacturer (i.e. the customer is a single brand distributor) there may be a concern that the customer is deemed to be affiliated, notwithstanding the absence of an equity relationship.

 

Note that if there is any doubt as to whether a home market customer (who resells the 'targeted merchandise) is affiliated, the Commerce Department will request the foreign company to submit, as part of its response, all of the affiliates' sales transactions of the targeted merchandise, just in case the ultimate decision is that the customer meets the definition of 'affiliated' under the law. This means that the foreign company could very well be forced to obtain significant sales and cost data from an affiliated customer over which it has little control, or risk punitive treatment by the Commerce Department. This is one of the biggest burdens of the Commerce Department's anti-dumping investigation. Accordingly, this issue needs to be examined closely during the preparation of the section A response.

 

When confronting sales to affiliated customers, the Commerce Department also has a test for determining whether sales are at 'arm's length'.(In November 2002, the Commerce Department modified its arm's length test to include in the normal value calculation a producer's sales to affiliated customers that fall, on average, within the range of 98%-102% of the sales price of the same or comparable merchandise sold by the producer to all unaffiliated customers. Additionally, in instances where a producer does not sell identical merchandise to its affiliated and unaffiliated customers, the Commerce Department will compare prices of products sold to affiliates with prices of non-identical products sold to unaffiliated customers and adjust normal value for differences in the physical characteristics. The adjustment is reflected in the variable costs of manufacturing attributable to the physical differences between the products.

 

Traditionally, it has used the so-called 99.5% test, which analyses whether the prices on transactions to an affiliated customer were at least 99.5% of or more than the prices on transactions to unaffiliated customers.

 

This test was challenged in WTO and the Appellate Body ruled in United States — Anti-dumping measures on certain hot-rolled steel from Japan that this Commerce Department test violated Article 2.1 of the Anti-Dumping Agreement. The Commerce Department adjusted its old 99.5% test in light of this WTO decision. However, the Commerce Department's adoption of the 98%-1O2% range effectively increases the likelihood that sales to affiliated parties will be rejected as unreliable. Whereas with the previous 99.5% threshold affiliated party sales' prices had to be nearly equal to or exceed unaffiliated party sales' prices, with the new arm's length test affiliated party sales' average prices must fall within a narrow 4% window of unaffiliated party sales prices. This is much more difficult to predict or achieve.

 

Determining which shipments to include in each database — the date of sale issue

 

Once it is determined how the United States and comparison market databases will be structured — which entity's sales must be included in the United States and comparison market sales databases — the company must then decide how to determine the appropriate universe of sales to submit.

 

On this issue the Commerce Department's questionnaire requires that the company report all United States and home market shipments that have a 'date of sale' within the 12-month period of investigation. Commerce Department regulations state that the Commerce Department normally will define 'date of sale' as 'the date of invoice as recorded in the company's books and records'. Most often, using the invoice date will be easiest for the company. The company would simply need to assemble data on all shipments made pursuant to invoices issued during the investigation period.

 

Commerce Department regulations also provide a significant exception to this general rule, however. If the price and quantity for the sale are both established at some time other than the date of invoice, and do not change after that time, the Commerce Department can decide that the 'date of sale' is some other date, such as the order confirmation date.

 

As a practical matter, if the foreign company can demonstrate that price and quantities can and do change after the date of order (or whatever other date the price and quantity are generally set), the Commerce Department will generally fall back to the regulatory presumption of using the invoice date. But if the domestic industry complains about the point, the Commerce Department can become quite persistent in investigating it. The foreign company should therefore be prepared for possible battles on this issue.

 

Source: Business Guide to Trade Remedies in the United States: Anti-dumping, countervailing and safeguards legislation practices and procedures