Delivery costs are usually not controversial, either in the way they are calculated or in the effect they have on the outcome. The statute and Commerce Department policy are quite clear. The Commerce Department subtracts United States delivery costs from United States price and comparison market delivery costs from normal value, provided the cost has been included in the gross price. If the item is charged separately and is not included in the price, the Commerce Department does not deduct the item. Examples of delivery costs (sometimes called 'movement charges') include inland freight, inland insurance, warehouse charges, ocean freight, ocean insurance and brokerage fees. Delivery costs include all of the expenses of moving the product from the place of shipment (usually the factory) to the customer; the costs of moving the product within the factory, however, are not subtracted from United States price and comparison market value.

 

As a practical matter, delivery costs seldom affect the outcome of an investigation. Often the delivery costs in the two markets being compared are virtually the same - for example, when the Commerce Department compares exports to the United States with exports to another market. Even if the delivery costs are somewhat different, they are well known by the company when it makes its pricing decisions. The prices charged in the various markets therefore generally reflect differences in the delivery costs.

 

To the extent possible, a foreign company wants to maximize the delivery costs in the home market or third country market, and minimize the delivery costs in the United States market. Lowering the net price in the home market or third country market and raising the net price in the United States market will lower the dumping margins. Unfortunately, foreign companies have limited discretion in how they calculate delivery costs. Such costs are usually quite unambiguous.

 

Historically, movement expenses have raised four areas of controversy - shipment-by-shipment versus average calculation, the proper numerator for an average, the proper denominator, and expenses from factory to sales warehouse.

 

Shipment-by-shipment versus average calculation

 

If the freight company charges the foreign exporter for inland freight each time a shipment is made, the Commerce Department might expect the inland freight charge to be reported using the freight invoice for that particular shipment. As discussed earlier in this chapter, to calculate shipment-by-shipment expenses on home market sales serves no purpose, as the averaging of the prices washes out any sale-by-sale differences.

 

Proper numerator for average calculation

 

Companies often ship a variety of products at the same time. These will include the products that are subject to the investigation but perhaps many more that are not. In this case the Commerce Department usually understands the problem and accepts a calculation based on the average expenses for all the products, as long as it does not appear to distort the expense factor for the subject products.

 

The company should be especially careful in this case to ensure that the calculation is not open to a charge of distortion. Whether or not there is a distortion with a multi-product average often boils down to what denominator is used for the allocation among products.

 

Proper denominator for average calculation

 

When charges are not reported on a shipment-by-shipment basis, the Commerce Department accepts a reasonable allocation of total expenses to individual units. The allocation methodology should be based on the same method used to calculate the charge. This is normally by weight or volume. For example, suppose the exporter sells ten units of Product A and five units of Product B. The volume of Product A is 5 m3 for each unit, and that of Product B is 7 m3 for each unit. The total volume is 85 m3 and the total freight charge is $2,000. The freight charge can be allocated as follows:

 

$2,000/8 5m3 = $23.5/m3

Product A: (5 m3) ($23.5/m3) = $117.5

Product B: (7 m3)($23.5/m3) = $164.5

 

If the information in the company's accounting records does not permit the precise calculation of per-unit charges, the foreign company should develop an allocation based on cost of goods sold or sales value. The Commerce Department will accept these denominators when the company can show that nothing else is available. Commerce Department will almost never accept an allocation based on quantity, unless the charge is incurred on that basis.

 

The exporter can use the same basic methodology for other movement expenses. The only difference is that the basis for the allocation will change. The general rule is that the expense should be allocated using the same basis on which the expense is incurred. Following this basic principle, the bases below are commonly used for these various expenses:

 

Expense	Allocation basis
Freight	Volume or weight
Insurance	FOB value
Warehousing	Volume
Brokerage/handling	FOB value
Bank charges	FOB value
Port charges	FOB value

 

In any particular case, however, the foreign company should try to use the basia on which it actually paid the expense.

 

Expenses from factory to sales warehouse

 

When home market products are sold out of a distribution centre or warehouse after transfer from the factory, the Commerce Department regularly denies any direct adjustment for the movement expenses between the factory and warehouse. Commerce Department adjusts only for movement expenses from the warehouse to the unrelated customer in the home market. What is the reasoning? The Commerce Department believes that the expenses between factory and warehouse are incurred `prior to sale' and therefore are not directly related to the home market sale. The inconsistent part of this reasoning is that movement expenses from the factory to the port on United States sales are deducted entirely from the United States price, even when these expenses occur prior to the sale in the United States.

 

The Commerce Department's reasoning does not hold up to any serious scrutiny. A simple example will show why. Assume Producer A and Producer B both sell on delivery terms of `FOB producer's warehouse'. Prior to sale, however, Producer A has stocked its warehouse with 10 units, while Producer B's warehouse is empty. Customer X orders 10 units from both Producer A and Producer B, FOB producer's warehouse. To put the 10 units in a condition necessary to satisfy the delivery terms to Customer X, both Producer A and Producer B must ship the units to the warehouse, incurring freight expenses between the factory and the warehouse. Producers A. and B incur the same expenses and the customer in each case receives the same benefit — delivery terms of 'FOB producer's warehouse'.

 

Nevertheless, the Commerce Department's methodology arrives at two different calculations. Producer B's home market sales price will be net of the factory-to-warehouse freight expense because shipment to the place of delivery occurred after sale. Producer A's home market sales price, by contrast, will have no such adjustment because the goods were shipped to the place of delivery before sale. The Commerce Department's calculation, in other words, erroneously distinguishes two situations in which delivery terms are identical, costs to the producers are identical, and benefits to the customer are identical, purely on the detail of whether movement of the goods to the warehouse occurred before or after the customer's order.

 

The purpose of adjusting for differences in inland freight is to make a fair value comparison based on ex factory prices. By including all inland freight incurred on United States sales, while excluding a portion of inland freight incurred for the home market, the Commerce Department ends up making an `apples-to-oranges' comparison between ex-factory United States prices and ex-warehouse home market prices. Exporters involved in anti-dumping cases should challenge this practice until the Commerce Department gives it up.

 

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