Keep it Simple #1: What is Dumping?
This section of the series is divided into two parts: (i) Dumping and (ii) Injury. The first post will address dumping and the calculation of dumping margin. The second post will go on to explain the injury analysis.
Q. What is ‘Dumping’? Why is it even a problem?
Dumping is said to occur when a product is exported at a price lower than the fair price. Cheap imported products are a problem for the host-country/importing country for the following reasons:
Consumers prefer buying cheaper products. If the producers of the home country (domestic industry) decreases their prices as much as the ‘dumped’ imports, they’ll suffer losses. If they continue selling at higher prices, consumers will not buy their products because of high price.
Many times the goods being ‘dumped’ are cheaper because they are not of high quality. Low quality products flood the market of the home country.
Q. What is fair price or ‘Normal Value’?
Simply put, fair price or ‘Normal Value’ is the price at which an exporter would sell the product in their own domestic market.
For example, if the price for a certain pair of shoes is USD 10 in Country X, the fair price or Normal Value to export the same pair of shoes to another country is also USD 10.
Q. Can there be a situation where the domestic sales in Country X are not ‘fair’ in themselves?
Continuing from the same example, there can be situations when there is:
i. too much government interference in the shoes’ industry, i.e. a ‘particular market situation’;
ii. the domestic prices of shoes are so low that the costs incurred in producing and selling them cannot be recovered, i.e. ‘not in ordinary course of trade’(80% of domestic sales must be above cost); or
iii. there is a very low volume of domestic sales of shoes. Most of the shoes produced are exported to other markets (5% of the exports made).
In such situations, the ‘fair price’ cannot be determined on the basis of the domestic sales. The domestic prices will not reflect the free market price of the shoes.
Q. What can one do when the domestic prices are not fair? How can the Normal Value be calculated?
Method 1: In such a situation, the normal value can be calculated on the basis of the price at which exporters from Country X export to other countries. For example, Country X exports shoes to Country A, Country B, and Country C, and makes negligible domestic sales. Country A is investigating for dumping. Assuming that the market conditions of Country X and Country B are comparable, the price at which Country X exports its shoes to Country B can be used for determining normal value.
Method 2: The normal value can be ‘constructed’ in the following manner:
Constructed Normal Value= Cost of production of shoes+ Reasonable selling, general and administrative costs+ reasonable profit
Q. How does one determine the costs involved for constructing normal value (Method 2)?
Costs are taken from the records maintained by the exporter. However, there is a catch. These records must be for sales made in the ordinary course of trade, i.e. sales made at a price above the cost of production. This might be confusing since one might think that the reason we are constructing the normal value, is because the domestic prices were below the cost of production. However, we must remember that insufficiency of volumes of domestic sales is also a criteria for not basing the normal value on domestic prices.
What do we do if no sales are made in the ordinary course of trade, you ask? There are three options:
i. If the product in question is leather shoes, one can look at the sales made for a wider category of shoes. Leather shoes might be being sold at low prices, but the average price for shoes in general (leather, canvas, etc.) in the country could be high enough.
ii. Maybe Exporter 1 from Country X is selling at a low price for some reason, but there is a possibility that Exporter 2 from Country X could be selling at a higher price. Records from Exporter 2 can be taken for Exporter 1 as well.
iii. Any other manner which the investigating authority finds suitable.
SNAPSHOT OF NORMAL VALUE CALCULATION
Q. Once the normal value (fair price) has been determined, how does one determine dumping?
It’s simple. Scroll back to the very first question. Dumping occurs when the price at which exports are coming in are lower than the normal value (fair price). Therefore:
Dumping Margin= Normal Value – Export Price
Note: The comparison of Normal Value and Export Price should be 'fair'
Q. How does one ensure a 'fair comparison' between Normal Value and Export Price?
The most common answer to this is 'comparing apples to apples'. If the normal value has been calculated at the ex-factory level (selling price as at the seller's factory, no addition of extra cost of transportation), the export price must also be at ex-factory level. The normal value and export price should be of the same kind of product, in terms of physical characteristics, quantities, etc. For example, You cannot compare the normal value for 1 pair of shoes with the export price of 1 kg shoes.
Q. Can one always take the price at which goods have been exported as is for determining the export price?
No, there can be situations in which the export price cannot be used for the purposes of dumping determinations:
i. The exporter and importer are related parties, and the export price is lower/higher than usual;
ii. The export has been made on barter;
iii. Other reasons where the export price is not ‘fair’.
In such a situation, exports made at a ‘fair’ price to independent buyers have to be taken.
Q. The export price is lower than the normal value. Can an anti-dumping duty be imposed now?
Existence of dumping is not sufficient to impose an anti-dumping duty. It must be checked if the dumping is harming the producers of the host country/importing country (domestic industry) in any manner. If it is found that the domestic industry is suffering injury, it must be checked that the injury is being caused because of the dumped imports. An anti-dumping duty cannot be imposed on imports if the domestic industry is suffering from injury due to other reasons.