• Ashwin Vardarajan

A Textbook for the Investigating Authority: Morocco — Definitive AD Measures on Exercise Books

On 27 July 2021, a Panel Report titled ‘Morocco — Definitive Anti-Dumping Measures on School Exercise Books from Tunisia’ (DS578) was circulated.


The complaint in this case was filed against Morocco, by Tunisia, for imposing a definitive anti-dumping duty on Tunisian school exercise books (‘SEBs’). This duty was imposed on the basis of a report of the Ministry of Industry, Investment, Trade and the Digital Economy of Morocco, the investigating authority of Morocco. Tunisia alleged that by imposing the definitive anti-dumping duty on SEBs, Morocco had acted inconsistent with various provisions of the Anti-Dumping Agreement (‘ADA’).


This blog post attempts to summarize and simplify the position taken by the Panel concerning dumping and injury.


I. NORMAL VALUE AND DUMPING

Article 2 of the ADA is concerned with the calculation of ‘normal value’. The ‘normal value’ is understood as the ‘fair price’ of the product which is allegedly dumped. This is ordinarily the price at which the goods are sold in the domestic market of the exporting country in the ordinary course of trade. In the event that the sales in the domestic market of the exporting country are not in the ordinary course of trade or if a particular market situation exists in the exporting country, the normal value of a good, among other ways, can be constructed by an investigating authority by adding the cost of production of the said good in the exporting country, with other administrative, general and selling costs, and profits to such cost of production, as provided under Article 2.2 of the ADA. For more on the calculation of dumping, see here.


Tunisia claimed that the method adopted by the investigating authority for calculating the normal value was in violation of the ADA for the following reasons:

  1. The investigating authority’s calculation of “reasonable amounts of profit” in the normal value was inflated by including certain unrelated expenditures.

  2. The investigating authority, in the course of its investigation, had excluded certain SEB models while calculating the normal value based on the sales price and the cost of production, since their exports were banned.

  3. The investigating authority had included domestic transportation and ports costs collectively as ‘distribution costs’ while calculating the normal value.

Tunisia claimed that all these calculations led to the normal value being calculated incorrectly by the investigating authority, and was in violation of Articles 2.1, 2.2 and 2.2.2 of the ADA.


Question: Can Article 2.1 be said to have been violated automatically by a violation of Articles 2.2 and/or 2.2.2 of the ADA?

Answer: Simply put, Article 2.1 states that if a good is sold at a lesser price in the importing country, when compared to the price of the same good in the domestic market of the exporting country, then ‘dumping’ is said to have occurred. Articles 2.2 and 2.2.2 are concerned with the construction of normal value, in the event that the domestic sales in the exporting country do not permit a proper comparison with the export sales, which are allegedly dumped.

It was held that just because there was an error in calculating the ‘normal value’ in violation of Articles 2.2 and 2.2.2, one cannot conclude that the investigating authority could not ‘consider’ that the subject goods are being dumped. Article 2.1 is an independent provision and, simply, a definitional provision. It does not confer any obligations on the parties, as such. Therefore, Article 2.1 could not be said to have been violated automatically by a violation of Articles 2.2 and/or 2.2.2 of the ADA.


Question: Is the inability of the exporter to provide data in the format prescribed by the authority reason enough to not calculate the actual profits of the exporter under Article 2.2 of the ADA?

Answer: It may be difficult for a company to extract the data required by an investigating authority in the required format. In the same breath, it may also be difficult for the investigating authority to interpret such formats. However, ambiguity in the manner in which a company responds to the investigating authority’s questions does not exempt the investigating authority from its obligation to calculate the normal value of the exporter based on its actual data.


Question: In the present instance, the export of certain types of school exercise books was banned by the exporting country. Accordingly, the investigating authority excluded the sales of such products while calculating the normal value. Is this a violation of Article 2.2 of the ADA?

Answer: It is acknowledged that sales which are not “in the course of ordinary trade” should be excluded while computing a normal value under Article 2.2 to allow a ‘proper comparison’. However, an investigating authority must show how including the sales proceeds of the excluded product types (in this case, the banned SEBs)–while determining the ‘reasonable amounts of profits’–could distort the normal value, and not permit a “proper comparison” between the normal value and export price.

In the present instance, the Panel concluded that by excluding the sales of the banned SEBs, the investigating authority had not based its reasonable amounts of profits on “actual data pertaining to production and sales in the ordinary course of trade of the like product by the exporter…under investigation”, as required under Article 2.2.2 of the ADA. As has been the position of various Panels in other disputes as well, before deviating from the ‘actual data’, an investigating authority must establish how reliance on the actual data does not permit proper comparison with the export sales.


Question: Can Domestic transportation and port costs constitute ex-factory level prices for the purposes of calculating normal value?

Answer: Domestic transportation and ports costs cannot constitute ex-factory level prices–that is, the cost at which the subject good is sold at the seller’s factory. Under Article 2.2.1 of the ADA, the phrase ‘per unit … costs of production’ refers to 'fixed and variable' costs’, which must normally be at an ex-factory level. Thus, the ‘administrative, selling and general costs’ used for calculating the normal value under Article 2.2. should be at ex-factory prices levels too. In the present instance, since the distribution costs included by the investigating authority were not at ex-factory levels, its computation of ‘normal value’ was found to be in violation of Article 2.2 of the ADA.


II. FAIR COMPARISON

As per Article 2.4.2 of the ADA, dumping margins are derived by comparing the normal value and export prices of the subject good in two possible ways: (1) by representing them in their ‘weighted average’ format and then comparing them for all ‘comparable export transactions’; or (2) by comparing them on a transaction-to-transaction basis. Tunisia contended that the method adopted by the investigating authority of calculating the dumping margin for SEBs was in violation of Article 2.4 of the ADA.


Question: What are the principles surrounding Article 2.4 of the ADA?

Answer: Article 2.4 states that the investigating authority must make a fair comparison between the normal value and export prices of the subject good. This comparison must be made on the merits of each case, after considering a number of factors like the conditions and terms of sale, taxation, levels of trade, quantities, physical characteristics, “and any other differences which are also demonstrated to affect price comparability”.

Therefore, Article 2.4 simply lays down the principle of fair comparison, without actually indicating how an investigating authority is supposed to do so. It would, thus, depend on the facts and circumstances of each case, and the factors which affect ‘price comparability’ of the normal value and export price. An investigating authority is free to a mathematical formula convenient to it, as long as it results in a ‘fair comparison’.

Here, Article 2.4 houses two burdens: the burden of carrying out a ‘fair comparison’ is on the investigating authority, and the burden of ‘demonstrating’ that certain factors “affect price comparability” is on the “party seeking the adjustment” [as held by the Appellate Body Report in ‘EC – Fasteners (China)’ (DS 397), at paragraph 488]. Thus, there must be a ‘dialogue’ between the investigating authority and the party seeking adjustments, which must continue throughout the course of the investigation :

  1. Did the investigating authority indicate to the ‘party seeking adjustments’ what information was necessary to ensure a fair comparison?

  2. For its part, did the ‘party seeking adjustments’ “demonstrate” that any factors affected price comparability?


Question: Can an erroneous dumping margin formula result in a violation of Article 2.4 of the ADA?

Answer: The aggregation of individual dumping margins, derived through a mathematical formula, was integral to the term ‘comparison’ envisaged under Article 2.4. Furthermore, Article VI of the General Agreement on Tariffs and Trade – from which the ADA is derived – speaks of ‘price difference’ between the normal value and export price of the subject good. If the mathematical formula is incapable of representing the ‘dumping margin’, then the comparison it attempts to make (between the normal value and export prices) cannot be said to be ‘fair’. Thus, an erroneous dumping margin formula can result in a violation of Article 2.4 of the ADA. However, it must be noted that Article 2.4 is not concerned with the ‘results of the comparison’ between the normal value and export price, but only with whether the ‘comparison’ was ‘fair’.

In the present instance, the formula adopted by the investigating authority to calculate the dumping margin was as follows:


This dumping margin formula was found to be incorrect by the Panel for two reasons: (1) the formula could not correctly express dumping (i.e., whether Tunisian SEB’s were introduced into Morocco at less than their normal value); and (2) the formula did not yield a result which reflected the margin of dumping. Rather, the formula simply represented a portion of the total volume of exports of SEBs into Morocco, because of how the numerator of the formula was designed.


III. INJURY

Tunisia argued that several aspects of the investigating authority’s injury analysis were not objective, or based on positive evidence showcasing injury. Among other things, Tunisia broadly advanced the following reasons:


  1. The investigating authority had reconstructed the domestic prices (i.e., the prices prevailing in the domestic market) to a hypothetical value. Tunisia argued that Article 3.2 required an examination of price undercutting based on two “actual prices”, although it did not explicitly state so.

  2. The investigating authority’s analysis of the effect of Tunisian SEB imports prices on the domestic market prices (i.e., the ‘price effect’) was based on a flawed analysis, whereby the period for assessing the price effect was just one year (1 May 2016–31 April 2017) whereas the entire period of investigation (‘POI’) spanned across four years and four months (2013 to 2017).

  3. The investigating authority’s analysis of the price effect on an ‘end-to-end point’ basis–which is a comparison of the price effect from 2013 with the end of the POI in 2017–was deceptive, as it failed to consider the dynamicity of the market and the true picture of how the prices of domestic SEBs fluctuated during the entire POI.

  4. In fact, an ‘opposite trend’ was visible in the prices of Tunisian SEBs, when compared to Moroccan SEBs. The record showed that the prices of the Moroccan SEBs were lower than those of Tunisian SEBs. This trajectory indicated that blame for low prices of domestic SEBs could not have been pushed on the import of Tunisian SEBs.

All these discrepancies, according to Tunisia, resulted in the investigating authority’s price effect analysis being in violation of Articles 3.1 and 3.2 of the ADA.


Question: Does price undercutting have to be determined basis actual import prices?

Answer: A price effect examination is supposed to be based on an ‘objective assessment’–as provided under Article 3.1 of the ADA–of “the effect of the dumped imports on prices in the domestic market for like products”. The prices in the domestic market conditions (i.e., the actual prices) must be taken into account and not hypothetical prices. Furthermore, Article 3.2 explicitly grants investigating authorities the right to conduct a “counterfactual analysis”–to check if the price effect has prevented domestic prices from increasing “which otherwise would have occurred”. Since the right to a counterfactual analysis was explicitly provided in Article 3.2, an investigating authority cannot be permitted to manufacture a hypothetical price at the price comparison level.


Question: Can an investigating authority conduct a price effect analysis for only one year?

Answer: The price effect analysis is meant to be conducted for the entire injury period for determining the injury caused by the dumping of the subject goods in the domestic market.

A simple “mathematical difference” between import prices and domestic prices for a single year, without taking into account the dynamic nature of prices throughout the investigation period, does not meet the requirements of an ‘objective assessment’ under Article 3.2. Further, the price effect analysis is just one of the elements of showing dumping, “leading to an investigating authority's ultimate injury and causation determination”. Therefore, a holistic examination of the economic situation in the country must be taken into account. The analysis of price effects for one of the years in the entirety of the investigation period, a holistic analysis cannot be conducted.


Question: Can an ‘end-to-end point’ comparison result in a holistic price effect analysis?

Answer: An ‘end-to-end point’ comparison could not result in a holistic price effect analysis. Such a comparison fails to consider the gradual changes which the prices of the subject good undergoes through the POI. A holistic examination of the economic situation in the country must be taken into account while determining the injury caused by the alleged dumping of the subject good. The price effect analysis is just one element of it. A simplistic ‘end-to-end’ point comparison is structurally oblivious to the changing nature of a market, and assumes many economic indicators (such as the price fluctuations of the subject good every successive and consecutive year) to be the same throughout the time periods chosen for the analysis.


IV. Summary of Claims


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