US Zeroing Methodology Applied In Antidumping Investigations

Introduction

It is seldom that US antidumping law is not under public glare. Few trade policies engender more bitterness and international ill will than the US Antidumping law. For many years the law has been a weapon in the hands of the domestic producers seeking to control import competition. Principally, the purpose of antidumping law is to ensure competition by punishing the foreign firms that sell their products at unfair price in other markets. In practice, the administration of antidumping law is entirely separate from the theoretical justification of means to redress the unfair competition. Time and again there have been several cases before WTO in respect of antidumping duties. One such case is US zeroing methodology in antidumping duties investigation. On 18th April 2006, the Appellate Body at WTO released its decision on the Zeroing antidumping case initiated by EU against US. The Appellate body uphold the finding of panel that the zeroing methodology adopted in antidumping investigations is inconsistent with the provision of fair comparison under Article 2.4.2 of WTO Antidumping Agreement. It also reverse the panels finding that application of the methodology in certain cases of administrative review process is inconsistent with Article 9.3 of Antidumping Agreement.

What is Zeroing?

The zeroing methodology, generally speaking, involves treating specific price comparisons, which do not show dumping as zero values in the calculation of a weighted average dumping margin. To appreciate the impact of zeroing, it is important to understand how the U.S. Department of Commerce calculates dumping margins. In a typical antidumping investigation, DOC calculates weighted-average net prices for each product sold in the United States. It then compares each of those U.S. prices to the product's normal value, which can be calculated a number of different ways but is ideally the weighted-average net price of the most similar product sold in the home market. Zeroing is introduced after the comparison of the U.S. price and normal value. When normal value is higher than the U.S. price, the difference is treated as the dumping amount for that sale or that comparison. When, however, the U.S. price is higher, the dumping amount is set to zero rather than its calculated negative value. All dumping amounts are then added and divided by the aggregate export sales amount to yield the company's overall dumping margin. Zeroing thus eliminates "negative dumping margins" from the dumping calculation. In so doing, it can create dumping margins out of thin air.

The amount of antidumping duties corresponds to the magnitude of dumping (dumping margin) which is a difference between export price and domestic price (or normal value). Dumping margins are calculated in two different stages. First, in the original investigation, an antidumping authority, such as the Department of Commerce (DOC) in the U.S., determines a general dumping margin over a particular product in question by summing up each individual dumping margin (normal value minus export price) computed in a group (an averaging group) of identical products. In doing so, the DOC disregards any negative dumping margin (any excess of export price over normal value) in the group by simply zeroing it. Consequently, a general dumping margin, which is a total sum of these individual dumping margins, tends to be inflated because the zeroing methodology precludes any offsetting effect of negative individual dumping margins. The DOC employs the same methodology when it finally assesses a company-specific dumping margin to impose actual antidumping duties in the annual administrative review process.

The zeroing methodology has been contested several times under the GATT/WTO. An unadopted panel report under the GATT (Committee on Antidumping Practices) once upheld the European Unions (EU) zeroing methodology. However, the WTO Appellate Body struck down certain applications of such methodology both by the EU and the U.S. A recent NAFTA Chapter 19 panel (NAFTA Softwood Lumber) condemned this practice, invoking the celebrated Charming Betsy doctrine (a U.S. Supreme Court decision holding that U.S. statutes should be interpreted, if possible, in such a way as to avoid placing the United States in violation of international law), and expressing the view that the U.S. should follow the AB decision against it in WTO Softwood Lumber V. It may be no coincidence that the EU challenged the U.S. zeroing methodology after the EUs own applications of the same methodology were invalidated by the WTO.

Facts of the Case

The United States and European Communities each appealed on certain issues of law and legal interpretations in the panel report before the Appellate Body at WTO. The panel was established to consider the complaint by European Communities in respect of methodology used by US, among others, in calculating dumping margins called zeroing. Before the Panel the European Communities challenged, under the Articles 1, 2.4, 3, 5.8, 9.3, 9.5, 11, 18.3 and 18.4 of Antidumping Agreement, Articles VI:1 and VI:2 of the General Agreement on Tariffs and Trade, 1994 (GATT 1994);Article XVI:4 of the WTO Agreement. On 31st October 2005, the panel made following findings:

1.The Panel unanimously upheld the claims of the European Communities as they relate to the specific determinations of dumping made by the United States Department of Commerce in the 15 original investigations at issue. The Panel also unanimously upheld the claims of the European Communities in respect of what was described by the Panel as the United States methodology of zeroing in original investigations. In doing so, the Panel found that the United States methodology of zeroing was a norm capable of being challenged in WTO dispute settlement proceedings.

2.The Panel unanimously rejected the claims of the European Communities with respect to United States law, finding that the provisions in question did not speak to the issue of zeroing.

3.The Panel rejected all of the claims of the European Communities in the context of reviews of existing measures. However, one member of the Panel dissented from this aspect of the Panels findings. The dissenting member of the Panel would have upheld the claims of the European Communities as they relate to the 16 specific determinations of dumping in reviews as well as the United States methodology of zeroing in the context of reviews. The dissenting member of the Panel would also have found one provision of a United States regulation to be WTO-inconsistent in respect of reviews.

4.The Panel recommended that the DSB request the United States to bring its measures into conformity with its obligations under the AD Agreement

Arguments and Counter Arguments

The European Communities requested the Appellate Body to reverse the findings of the panel that the United States did not act consistently with article 9.4 of the Anti Dumping Agreement and article VI(2) of the GATT 1994. The European Communities argued that a per Article 9.3 and Article 2.4.2, the United States did not correctly establish the anti-dumping duty amount or the margin of dumping, as United States did not comply with its obligation to ensure that the amount of antidumping duty collected did not exceed the margin of dumping. For the European Communities, the disagreement lies in the way the terms dumping and margin of dumping is interpreted and whether these terms apply to the level of product as whole or at the level of a comparison between a weighted average normal value and an individual export transaction. According to the European Communities the terms are defined to be applied to the product as whole. Further the EC argued that there is no basis, which can justify the taking into account the results of some multiple comparisons, in the process of calculating margins of dumping, while disregarding the others.

The European Community contended that the methodology employed by the USDOC in the administrative review at the issue is inconsistent with Article 2.4 as it inflates the margin of dumping and therefore, is intrinsically biased. The European Community further alleged that Article 2.4 does not only impose obligation on the member to adjust the differences that affect price comparability, but also entail not to make an adjustment where there is no such difference. On more technical ground European Community argued that there is no basis on which it can be justified that zeroing, which is prohibited in the original investigation, could somehow become permissible in the administrative review. Aforesaid mentioned claims are the few important arguments put forward by the European Communities among other claims, before the Appellate Body.

The United States on the other hand called for dismissal of the appeal of European Communities on the following main grounds that, the Anti Dumping agreement and Article 9.3 does not require the offset of prices when assessing the antidumping duties in respect of particular exporter. The U.S. argued that a dumping margin could be computed on a transaction-specific basis so that a certain comparison in a certain averaging group might produce a zeroed margin. In other words, for the purpose of calculating dumping margins the DOC might rely selectively on a comparison between an averaged normal value (average domestic price) and a particular export price (which is less than the normal value), not an averaged export price. Further US argued that in either case, i.e. in comparison methodology and in the average to average methodology, the price is the price of the individual export transaction and hence as per Article 2.4.2, it is not required that results of those multiple comparisons be aggregated to represent what EC would consider as product as a whole. US further in wake of US-Softwood Lumber V case argued that the obligation of calculating the margin of dumping for the product as a whole is limited to use of average to average comparison method during the investigation stage.

US also argued that by virtue of its text Article 2.4.2 applies only to investigations and that the panel rightly concluded that the reference to Article 2 in Article 9.3 does not override any limitation contended in Article 2.4.2. US also appealed before the Appellate Body mainly on arguing that the panel erred in finding that zeroing methodology is a measure that can be challenged, as such, in the dispute settlement proceedings. Further United States was of the view that Panel erred in finding that the zeroing methodology is a norm and thus a measure although it did not identify any Act or instrument creating or containing this norm The U.S., in its appeal, had challenged the panels aforementioned finding under Article 11 of Dispute Settlement Understanding (DSU). The U.S. contended that the zeroing methodology itself could not be challenged as such because it did not mandate a WTO violation or preclude a WTO-consistent action. Thus, the U.S. argued that the panel failed to make an objective assessment required under DSU Article 11.Lastly the United States in its appeal alleged that the panel erred in allocating the burden of proof and in finding that the European Communities had established the prima facie case.

Article 9.3 of Anti Dumping Agreement: The amount of the anti-dumping duty shall not exceed the margin of dumping as established under Article 2.Article 9.3 establishes that anti-dumping duties may not exceed the dumping margin calculated during the investigation. In order to ensure that anti-dumping duties in excess of the margin of dumping are not collected, Article 9.3 requires procedures for determination of the actual amount of duty owed, or refund of excess duties paid, depending on the duty assessment system of a Member, normally within 12 months of a request, and in no case more than 18 months.

Article 2.4.2 of Anti Dumping Agreement: Subject to the provisions governing fair comparison in paragraph 4, the existence of margins of dumping during the investigation phase shall normally be established on the basis of a comparison of a weighted average normal value with a weighted average of prices of all comparable export transactions or by a comparison of normal value and export prices on a transaction to transaction basis. A normal value established on a weighted average basis may be compared to prices of individual export transactions if the authorities find a pattern of export prices which differ significantly among different purchasers, regions or time periods, and if an explanation is provided as to why such differences cannot be taken into account appropriately by the use of a weighted average to weighted average or transaction to transaction comparison.

Appellate Bodys Verdict

On 18 April 2006, the Appellate Body report was circulated to Members. The panel had in its report originally slayed as such the U.S. zeroing methodology contained in the Standard Zeroing Procedures in the original investigation under Article 5 of the Anti Dumping Agreement. The panel held that the methodology ignored negative margins and thus violated the fair comparison requirement under Article 2.4.2 of Anti Dumping Agreement. The Appellate Body rejected the argument under Article 11 of DSU and upheld the panels ruling as it refused to make any general mandatory/discretionary distinction in deciding the admissibility of a measure as such.

In addition, the Appellate Body reversed the panels original finding on the EUs as applied claims as to the DOCs applications of the zeroing methodology in the administrative review. The panel had ruled in favour of the U.S. that the zeroing applications in the administrative review were not inconsistent with the AD Agreement.

The Appellate Body focused on the violative structure of the zeroing methodology itself. The uncompromising ruling leaves the DOC nearly no alternative but to repeal the zeroing methodology on the whole in the administrative review also, even though the EUs claim here was as applied to the facts of the particular case. The Appellate Body ruled on each of the point, brought in by the parties to dispute. Following are the important findings in the present case amongst other:
The Appellate Body
1.Reversed the finding that the United States did not act inconsistently with Article 9.3 of the anti Dumping Agreement and Article VI 2 of the GATT, 1994 and found United States to be acting consistently with those provisions of law.
2. Found it is not necessary to rule on whether the United States acted inconsistently with the obligation contained in the first sentence of Article 2.4 of the Anti Dumping Agreement to make a fair comparison between export value and normal value.
3.Upholds the Panel's finding that the zeroing methodology, as it relates to original investigations, is inconsistent, as such, with Article 2.4.2 of the Anti-Dumping Agreement.

Ramification of the Ruling

The prohibition of zeroing now applies to original investigations (leading to the imposition of the anti-dumping duty) as well as to investigations conducted after the imposition of the duty to revise its level, the so-called administrative reviews. As a consequence of this ruling, US will have to abandon its methodology of calculating dumping margins in initial antidumping investigations. In view of Appellate Bodys emphasis on the systematic flaws of the methodology, US will further find it hard to justify such methodology in other stages of antidumping proceeding.

This ruling would prove beneficial to all the member countries, particularly the developing countries and consumers and consuming industries, which have been forced, to pay higher prices for imported products due to antidumping duties generated by the zeroing methodology

From the international trade law viewpoint and legally speaking, the ruling has attracted most diverse views in the sense that few term the decision as judicial activism while others criticise it for exceeding the limits of law. One may argue it as judicial activism that goes beyond the limited standard of review under Article 17.6 of Anti Dumping Agreement. The Appellate Body in this case foresaw such potential criticism when it noted that its interpretation was still consistent with Article 17.6 (ii) because the U.S. zeroing methodology clearly violated the text of Article 9.3 of Anti Dumping Agreement. Yet those who regard WTO more of a contract among its member, the Appellate Body ruling threatens to undermine the member states original terms of bargain under Uruguay round, and that the bargain resembles very much to the doctrine of Chevron (doctrine of U.S. law that gives considerable reverence to decisions by administrative agencies).

On the other hand, the ruling attracts clear criticism highlighting the systematic problems with the Appellate Body decision-making process and its failure to abide by the negotiated procedural norms reviewing Member State action. This ruling is unprecedented in the sense that the Appellate Body particularised the standard of review by going into undesirable job of appellate fact-finding. In short, the ruling defies the notion that WTO dispute resolution embraces an approach of judicial restraint. However, one thing is certain that such a ruling will have significant impact on the member countries and that such judicial activism could precipitate political backlashes from some (developed) Members and might deter them from making further concessions in future trade talks

Conclusion

This decision appears to benefit the hitherto main targets of antidumping investigations, in particular developing countries, as well as consumers and consuming industries which have been forced to pay higher prices for imported products due to antidumping duties generated by the zeroing methodology. The Appellate Bodys report in US-Zeroing crystallizes some of the vital issues like the administration of antidumping law is entirely different from the presumed theoretical justification put forward by its defenders. However, it is possibly the most egregious distortion is the practice known as "zeroing." Its application is a significant cause of the systemic overestimation of dumping margins and subsequent application of inflated antidumping duties. The US should bring its law in conformity with its obligation under WTO. Interestingly, the growing list of adverse WTO rulings with which US has failed to comply, is serving to undermine the integrity of the WTO dispute settlement system. Congressional resistance to repeal or revise the Continued Dumping and Subsidy Offset Act (or Byrd Amendment), which was ruled a violation of both the Antidumping Agreement and the Agreement on Subsidies and Countervailing Measures by a panel and the Appellate Body, is fostering doubts among U.S. trade partners about U.S. commitment to the WTO.

Ironically, it is the United States who pushed hard for the creation of dispute settlement system whose decisions would be respected by all member states, it is the United States which has been dismissive of dispute settlement body;s findings. To quote the U.S. Trade Representative Robert Zoellick explanation to a congressional subcommittee "Our ability to demand that others follow the trade rules is strengthened when the United States addresses cases we lose" goes on to show that US is required to respect the dispute settlement system at WTO and bring in conformity its laws with its WTO obligation.

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