If the NME exporter adequately demonstrates that its export activities are not controlled by the NME government, the Commerce Department will normally calculate an anti-dumping margin for that exporter. The calculation of the AD margin, however, is quite different from the calculation methodology used for exporters from market economy countries. The Commerce Department has developed a set of specialized methodologies that address the unique issues in NME cases.

 

The special NME methodologies focus on the calculation of normal value. (There is generally little difference in the manner in which the Commerce Department's calculation of United States price in market-economy and NME cases.) In market economy cases, the Commerce Department receives detailed foreign market pricing and production cost data from responding foreign market companies. Because these companies are subject to market forces, the Commerce Department considers the pricing and cost information they provide to be generally reliable and indicative of fair market value.

 

In contrast, the Commerce Department believes that the government controls in NMEs distort the available foreign market pricing and production cost data. As a result, in NME cases the Department does not use a price-to-price or constructed value calculation (discussed in chapter 4) to derive normal value, but rather 'builds' normal value using an entirely different 'factors of production' methodology. This is one of the more complex aspects of the anti-dumping law and involves several separate analytical steps. These steps are as follows:

 

- For each exporter entitled to receive a separate rate, calculate the per unit actual consumption of the factors of production, including material inputs, labour and energy;

- Determine the appropriate surrogate country from which market-economy values will be taken for valuing the material inputs and other cost components;

- Select appropriate data sources in the surrogate country for valuing the material inputs used to produce the subject merchandise;

- Identify appropriate producers of the subject merchandise in the surrogate country whose financial statements can be used for G&A expenses and profit.

 

Each of these steps is discussed briefly below.

 

Step 1: Calculating the consumption for the factors of production

 

`Factors of production' refers to the raw materials, labour, energy, utilities, capital costs, packing materials and labour, and any other inputs used when producing a product. Essentially, the Commerce Department's objective is to calculate the per unit quantities of the exporter's actual consumption of all material inputs, labour and energy used to produce the subject merchandise.

 

The Commerce Department accomplishes this by sending a detailed questionnaire to the NME exporter. The Commerce Department questionnaire requires that the foreign exporter describe every material input used in the production of the subject merchandise, and then report the total quantities of these material inputs that are consumed to produce one unit of the subject merchandise. The Commerce Department also requires the foreign exporter to report the number of labour hours, and the amount of energy (e.g. electricity) to produce one unit of the targeted merchandise.

 

Step 2: Selecting surrogate country

 

Once the Commerce Department has identified all the factors of production, it next sets out to value those factors using cost and pricing information from a market economy country. The market economy country selected is referred to as the 'surrogate' country.

 

On 1 March 2004, the Commerce Department issued a specific policy bulletin that detailed how it determines the appropriate surrogate country in NME anti-dumping proceedings. The policy bulletin stated that the Commerce Department will file an official memorandum on the case record of each NME anti-dumping proceeding that identifies the primary surrogate country and the reasons that this country was selected.

 

In sequential order, the four factors that the policy bulletin stated the Commerce Department considers in selecting the surrogate country are:

 

- A country's economic comparability to the NME country. The Commerce Department normally identifies five or six countries whose per capita gross national incomes, as reported in the most current issue of the World Bank's World Development Report, are most comparable with that of the NME country. The Commerce Department does not rank these countries in terms of which are most economically comparable to the NME; instead, they are all considered equally comparable in economic terms. Consequently, the Department could select any of these countries to be the surrogate country.

- Whether a country produces merchandise that is comparable to the subject merchandise produced by the NME country. The Commerce Department determines which, if any, of the countries identified as economically comparable to the NME produce merchandise that is identical or similar to the subject merchandise. The Commerce Department does not rank the countries in terms of which country produces the most similar merchandise.

- Whether a country is a significant producer of merchandise that is comparable to the subject merchandise. Because more than one country is normally comparable to the surrogate country in terms of economic development and the type of merchandise produced, the Commerce Department also considers the countries' production levels of the subject merchandise. The Commerce Department does not rank the countries according to their production levels. In addition, it does not determine the degree to which a country's production is 'significant' by comparing its production levels to either the production levels of the NME country or the other countries considered economically comparable to the NME. Rather, the Commerce Department has wide discretion in determining whether a country's production is significant in terms of world production and trade in the comparable merchandise.

- Which country has the best data with which to value the factors of production. If more than one country is comparable to the NME in terms of economic development and the type of merchandise produced, as well as similar in terms of how much subject merchandise is produced, the Commerce Department looks at which country has the best pricing information to value the production factors. The availability and quality of the surrogate data is one of the Commerce Department's most important consideration in selecting a surrogate country.

 

It should be noted that the weight placed on each of these four selection criteria varies on a case-by-case basis. This subjectivity, combined with the fact that the choice of a surrogate has a significant impact on the final margin calculation, explains why surrogate country selection is often one of the most hotly debated aspects of NME cases.

 

Step 3: Valuing the factors of production

 

Once the surrogate country has been selected, the Commerce Department then looks for appropriate data sources about production in the surrogate country to determine values for the foreign exporter's factors of production. For example, assume the targeted merchandise is steel pipe for which hot-rolled steel is the primary material input. Assume further that the Commerce Department has chosen India as the appropriate (market economy) surrogate country. To accomplish step 3, the Commerce Department looks for available sources of data from which it can determine the purchase price for hot-rolled steel paid by Indian steel pipe producers.

 

Note that, because the Commerce Department has no ability to force producers in the surrogate country to respond to a questionnaire, it uses publicly available information to determine the purchase price for material inputs (e.g. the hot-rolled steel) paid by producers of the targeted merchandise (steel pipe) in the surrogate country. Over the years, the Commerce Department has developed a very detailed index of all sources used in previous NME investigations and administrative reviews. Available at the Commerce Department website (www.ita.doc.gov), this index details all factors previously valued in all past cases, the surrogate countries used, the source of the value, and the time period of the value. When valuing factors in a new case, the Commerce Department refers to this index as a guide for determining the source of the values to be applied in the current case.

 

This index indicates that for many material inputs the Commerce Department's first data source preference is the import transaction database of the surrogate country's government. Whenever possible, the Commerce Department prefers to use the average unit values of goods exported by other market countries to the surrogate country. To continue our example above, the Commerce Department would examine the official Indian Harmonized Tariff Schedule statistics and calculate the average unit price of hot-rolled steel imported into India from all market economy countries. The Department would then use this average import price to value the hot-rolled steel consumed by the NME foreign exporter to produce steel pipe.

 

Note that, at times, the surrogate country's official import statistics are not usable. For example, assume the steel pipe in the above example required a special type of hot-rolled steel, but the HTS categories in the official import statistics include all types of hot-rolled steel. In such cases, the Commerce Department would have to find some other publicly available source. In past cases, such sources have included industry publications and publicly available financial statements of producers in the surrogate country. This aspect of the NME methodology can be the most difficult for foreign exporters and the Commerce Department.

 

There is one important caveat to note about determining surrogate values for material inputs. If, during the time period examined by the Commerce Department, the foreign exporter actually purchased the material input from a market economy supplier (that is, used imported rather than domestic material), it is possible that the Commerce Department will use the foreign exporter's actual purchase prices rather than determining a value from the surrogate country. The Commerce Department has had a long-standing practice of using the actual prices that NME respondents have paid for imported inputs purchased from market economy suppliers provided that such purchases from market economy suppliers were 'meaningful'.

 

Note, however, that in mid-2005 the Commerce Department announced its intention to change this practice. If the proposed change is adopted, the Commerce Department would limit application of this practice to those situations in which the foreign exporter's purchases from market economy suppliers accounted for more than 50% of the foreign exporter's total purchases of that material input. To continue with the above example, if more than 50% of total hot-rolled steel purchased by the targeted pipe producer is imported from market economy suppliers, then the Commerce Department would use these actual purchase transactions to value the consumption of hot-rolled steel in the anti-dumping margin calculation. However, if the total quantity is less than 50%, the Commerce Department would calculate a weighted-average hot-rolled steel price that would combine the steel producer's actual purchases with the determined surrogate value from the surrogate country. For example, if the steel producer imported 30% of its hot-rolled steel needs from market economy suppliers and purchased 70% from local suppliers (i.e. in the NME country), the Commerce Department would calculate a weighted average price that combined the steel producer's actual purchase prices from market economy suppliers with the surrogate value taken from the surrogate country. At the time of publication, it is uncertain when the Commerce Department will formally change its practice to adopt this new methodology.

 

Typically, all material, energy, packing and utilities are valued in the general mariner described above. The Commerce Department applies a different valuation methodology for labour. In the past, the Commerce Department identified labour wage rates from publicly available sources in the chosen surrogate country and applied those rates accordingly. However, the Commerce Department re-examined this practice after analysis revealed a great variation in wage rates in market economy countries that were economically comparable. The Commerce Department found that the results of an NME normal value calculation could be dramatically different depending on which economically comparable market economy was chosen as a surrogate. Because of the variability of wage rates in countries with similar GDPs, the Commerce Department developed a methodology that values labour in all NME cases using a regression-based wage rate — essentially an average of the wage rates in market economies viewed as being economically comparable to a particular NME. This regression analysis reflects the observed relationship between wages and national income in market economies, is updated yearly, and is publicly available.

 

Upon valuing all inputs and calculating the cost of each input in the production of one unit of subject merchandise, the Commerce Department sums all costs to derive a total cost of manufacturing one unit of the subject merchandise. To this total cost it adds an amount for factory overhead, depreciation, G&A, and profit — step 4 of the 'factors of production' methodology.

 

 Step 4: Valuing overhead, G&A and profit

 

Once the Commerce Department has 'buil t' a cost of manufacturing for one unit of subject merchandise, it adds to that cost an amount for factory overhead, depreciation, and expenses, another amount for selling, general and administrative expenses, and profit. Again, the Commerce Department's general rule when determining these values is to use publicly available information. In the past, it obtained such information from government publications or industry publications in the surrogate country. However, it has generally proven very difficult to obtain public surrogate information for these cost elements.

 

More recently, where available, the Commerce Department has begun using the published financial statements of producers of the subject merchandise or comparable merchandise in the surrogate country. The Commerce Department's regulations also specifically refer to the use of non-proprietary information gathered from producers of the subject merchandise or comparable merchandise in the surrogate country. This rule allows the Commerce Department to use its own records as a source. For example, if the Commerce Department has previously conducted an investigation or review of the same subject merchandise for the surrogate country, as long as the data provided in that proceeding were non-proprietary, it will use those data (e.g. published financial statements) as a source for this information. In fact, the Commerce Department's value index lists several previous investigations of products from Brazil, India and Thailand as value sources.

 

Normally, when valuing these cost elements, the Commerce Department expresses the value as a percentage of the cost of goods sold. For example, for factory overhead, it simply divides the total factory overhead from the surrogate financial statement by the cost of goods sold to derive a surrogate percentage factor. The Department multiplies the factor by the cost of manufacturing described above to derive the per-unit factory overhead to be added to the cost of manufacturing for the subject merchandise. The same methodology is applied to derive the per-unit G&A and profit added to the calculation as well.

 

The end result is a per-unit value very similar to the Department's market economy constructed value. In essence, the Department 'builds' a price to which it will compare to the NME foreign exporter's United States selling prices to calculate a dumping margin.  

   

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