THE World Trade Organization (WTO) stands for competition in the realm of international trade. Therefore, any trade practice that distorts competition is regarded as unfair, and member countries are authorized to take action against such practices.
Under the WTO, the two principal unfair trade practices are dumping and subsidies. Dumping takes place if the export price of a product is below its domestic price.
The ‘agreement on anti-dumping practices’ (ADP) provides that the importing country can impose an additional duty or tariff on the imported product to offset injury to its domestic industry caused by dumped imports.
Subsidies are dealt with by the ‘agreement on subsidies and countervailing measures’ (SCM), which authorizes a WTO member to levy an additional duty or tariff—called the countervailing duty—to offset the injury caused to the domestic industry by subsidized imports.
The three main issues covered by the two agreements are: criteria for determining dumping or subsidy, the procedure for investigation, and the method of calculating anti-dumping and countervailing duties. The ensuing paragraphs give a brief account of each of these issues.
Since both dumping and subsidization provide cheaper products to consumers as well as industrial customers than they will have otherwise, the agreement on ADP and the agreement on SCM do not condemn dumping and subsidies per se. These practices are condemned only if they cause material injury to the domestic industry of the importing country.
In all, the importing country has to consider three criteria for clamping anti-dumping or countervailing duty: One, there has been a significant increase in dumped or subsidized imports.
The increase may be in absolute terms or relative to the domestic production of the importing country. Two, the import price is below the domestic price of the like domestic products, and has depressed them or prevented them from going up. Three, as a result of the above two factors, injury is caused to the domestic industry or there is threat of injury.
In other words, for anti-dumping or countervailing duties to be imposed, there must be a causal link between dumped or subsidized imports and injury to the domestic industry of the importing country.
The causal link condition is logical. There may be a surge in imports of subsidized or dumped products. And there may also be injury (actual or potential) to the domestic industry. But the two may not be causally connected, as domestic sales may suffer because of other factors, such as fall in demand, problems in domestic supply chain, or changing consumption patterns.
Anti-dumping or countervailing duty investigations are generally initiated by the importing country on the request of the affected industries, which must account for at least 25 per cent of the total production of the concerned product in the importing country. Normally imports from each country are separately investigated.
But in certain cases, imports from differently countries may be jointly investigated. This is called cumulation of imports and is permitted in three conditions: One, margin of dumping or amount of subsidization of each individual country exceeds a ‘particular’ level. Two, imports from no country are negligible. Three, the conditions of competition between imported products and between imported and like domestic products are such as to warrant making cumulation of imports.
To ensure that anti-dumping or countervailing duty investigations are fair and transparent, both the ADP and SCM agreements require the importing country to give public notice of investigations, which, inter alia, must include the name of the exporting country (countries) or firms and the basis on which the allegations of dumping or subsidization have been made.
In case of alleged subsidization, the SCM Agreement also requires the investigating authorities to enter into consultations with the exporting country government before investigations kick off. This requirement does not exist in case of anti-dumping investigations ostensibly because, as opposed to dumping, subsidization is a government action.
The countries or the firms being investigated have the right to give evidence and to seek relevant information with the exception of “confidential information.” However, the exporting firms or countries are also required to give all relevant information to the investigating authorities. In case the exporters do not cooperate, both the ADP and SCM agreements provide that the investigators can make use of “the best available information”, which is the information provided by their domestic trade or industry.
The two agreements also provide for on-the-spot investigations, that is investigations on the premises of the exporting firms, to verify the information submitted by them. Again, in case of non-cooperation, the investigators are allowed to make use of the best information available.
The third important issue dealt with by the ADP and SCM agreements is the method by which the dumping margin or per unit subsidy received by the dumped or subsidized product is to be calculated. This is important because the level of anti-dumping or countervailing duty depends upon the amount of dumping margin or the amount of subsidization.
Dumping margin is generally calculated by comparing the export price of the product concerned with its domestic price. Such a comparison needs to be made at the same level of trade and in respect of sales made during as nearly a period as possible. Since different currencies are used in domestic and export sales and price comparison requires currency conversion, the exchange rate at the date of export sale is used for currency conversion.
In some transactions, exchange rate is stated in a forward contract. In that event, the future exchange rate should be used. In addition, the agreement on ADP requires the investigators to take into account various other factors that have a bearing on price comparability, such as difference in terms and conditions of sales, taxes, and quantities and physical characteristics of the product.
For determining the dumping margin, as mentioned in a preceding paragraph, the export price of the product concerned is generally compared with its domestic price. Such comparison however cannot be made in case the product is not sold in the domestic market of the exporting country or sold at a very low level.
In such a situation, the investigators have two options: One, they can compare the export price of the product in their market to the export price of a like product in a third country. Two, they can construct a price on the basis of the cost of producing the product in the exporting country and then compare it with its export price in their own country.
After calculating the dumping margin if the authorities find that the injury to the domestic industry is negligible; or the dumping margin is less than two per cent of the export price; or the volume of import from a country is less than three per cent of the total imports of the product into the investigating country, then anti-dumping duty cannot be imposed.
Anti-dumping or countervailing duty is applied after investigations have established a causal link between the dumped or subsidized imports and material injury to the domestic industry. However, to prevent injury to the domestic industry during investigations, provisional duties can be imposed subject to the availability of some preliminary evidence.
If subsequently, it is found that the provisional duty was higher than the dumping margin or the amount of subsidization, then the exporting firms have to be compensated.
Both anti-dumping and countervailing duty investigations have to be completed in 18 months, and the maximum period for which such measures can be applied is five years unless a review of the case has established that in case the measures are withdrawn, the injury to the domestic industry will continue or recur.
