Price versus cost

 

The Commerce Department has struggled for many years with the proper treatment of adjustments to price for selling expenses and other costs. The issue is whether the adjustments should be based on the actual costs incurred, or based only on the extent to which the costs are reflected in the sales price. On the one hand, since the objective of the law is to create a comparison of ex-factory prices, one might argue that only costs that are included in the price should be eligible for adjustment. On the other hand, one must recognize that it is often impossible to measure how a particular cost, especially a selling expense, affects the price.

 

Although this issue is worthy of academic study, the foreign businessperson affected by the anti-dumping law also must understand enough about the issue to know that dumping can occur under United States law even when prices and costs in the home and export markets are the same. Rather than treat this subject theoretically, important instances in which the so-called cost versus price issue arises are identified below:

 

- Home market delivery costs prior to sale do not qualify for any adjustment because Commerce Department believes that only 'after-sale' delivery costs are reflected in the price. United States delivery costs prior to sale, however, are deducted fully from the United States price.

 

- The Commerce Department's adjustment for packing costs includes materials, labour, and factory overhead, without regard to any theoretical effect on the price.

 

- The adjustment for physical differences in merchandise (`difference-in-merchandise' or `difmer' adjustment) is expressly limited by law to costs reflected in the price. The Commerce Department limits the adjustment to differences in materials, labour, and variable factory overhead under the theory that variable overhead, but not fixed overhead, is reflected in the price.

 

- The anti-dumping law adjusts for the entire amount of duty drawback, i.e. home market import duties rebated or forgiven upon exportation. The theory is that import duties are entirely reflected in the sales price.

 

- The Commerce Department also includes in the difference-in-merchandise adjustment any differences in import duties paid on physically different components.

 

- The law expressly limits the adjustment for differences in quantities sold to differences affecting the price. The Commerce Department administers this requirement through a complex set of rules that are almost impossible for respondents to satisfy.

 

- The adjustment for further manufacturing performed in the United States assumes that the United States price equals the cost of production plus all selling expenses and allocated profit or loss. Thus, the further manufacturing calculation is a cost-based methodology.

 

There are two lessons in all this for the foreign exporter. First, in preparing a response, the exporter must examine the particular requirements of each adjustment to ensure that the response contains the information necessary to satisfy the requirements of that adjustment. A general approach will not do. Some of the price-cost criteria used by the Commerce Department simply do not square with common business sense.

 

Second, in setting prices so as to avoid dumping, the exporter cannot assume that equal profits in both the United States and the home market means that dumping is not occurring. This assumption is true only under a purely cost-based approach. As the preceding discussion shows, the assumption might be true of the business world but it is not true of United States anti-dumping law, which in many instances denies adjustment for costs on the theoretical ground that they are not reflected in the price.

 

 Burden of proof

 

The United States anti-dumping law imposes on the foreign exporter almost all of the burden of proof associated with adjustments to price. The exporter has both positive and negative burdens of proof.

 

With respect to normal value, the exporter has a positive burden of proving entitlement to every adjustment. The exporter not only must provide information necessary to satisfy all of the criteria for the adjustment, but also must show that the information can be verified from the exporter's records. This double burden is often very difficult to meet in the case of adjustments that are granted only if the cost is reflected in the price.

 

With respect to United States price, the exporter has both positive and negative burdens. The exporter has the positive burden of proving the amount of a particular expense known by the Commerce Department to exist. If the exporter cannot prove that the expense is X dollars, then Commerce Department has the discretion to increase the expense to X multiplied by two or three or whatever amounts Commerce Department deems 'reasonable'. Commerce Department, naturally, is not inclined to decrease the amount of an unverified United States selling expense.

 

Commerce Department also sometimes places on the exporter the burden of `proving the negative'. If the exporter claims that it did not incur a particular expense alleged by the petitioner, Commerce Department might ask the exporter to demonstrate the non-existence of the expense. There is no standard by which to prove the non-existence of something that truly does not exist. Whether the exporter succeeds in such an exercise usually depends on (1 ) whether the exporter's records are organized well enough to permit a systematic search for the alleged expense; (2) whether the exporter expends a sufficient amount of time and effort to please the Commerce Department's verifiers; and (3) whether the verifiers believe that the exporter is telling the truth.

 

This exercise does not occur just with United States selling expenses. Whenever the petitioner alleges the existence of some damaging fact relating to any aspect of the exporter's operations, the exporter must be prepared to 'prove the negative'.

 

Averaging

 

As a general matter, the Commerce Department prefers adjustments to be calculated on a transaction-specific basis. If a sale-by-sale calculation is not possible, the Commerce Department will usually accept a weighted average calculation of the adjustment. A single average for the entire period of investigation is usually acceptable, unless there is significant variation in the average from month to month. The average also may not be acceptable if there is a significant time lag between when the expense is incurred and when the company pays.

 

Sometimes the Commerce Department unreasonably attempts to force a respondent to calculate expenses customer-by-customer or sale-by-sale, even when the normal records of the Company do not permit such a calculation. Not only can this be impossibly burdensome, but reporting expenses on a sale-by-sale basis in the home market would not enhance the accuracy of the calculations. In the case of home market sales, given that normal value is calculated as a weighted average of net home market prices, such reporting would amount to breaking down average figures into sale-specific amounts only to average them again in the final anti-dumping calculation.

 

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