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World
Trade Organization |
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TN/RL/GEN/9 |
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(04-3029) |
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Negotiating Group on Rules |
Original: English |
DETERMINATION
OF
Communication from Chile; Colombia; Costa Rica; Hong Kong, China; Japan;
Korea;
Kinmen and
The following communication, dated
24 May 2004, is being circulated at the request of the Delegations of Chile; Colombia; Costa Rica; Hong Kong, China; Japan;
Korea; Norway; Singapore;
Switzerland; Separate Customs
Territory of Taiwan, Penghu, Kinmen and Matsu; and Thailand.
The submitting delegations have requested that this paper, which was submitted to the Rules Negotiating Group as an informal document (JOB(04)/58), also be circulated as a formal document.
_______________
I. BASIC
PRINCIPLE
· The calculation of normal value
should reflect business reality in which companies typically do not
determine or manage profitability on a transaction-specific basis but rather on
a product-line basis. The recovery of the full costs shall be measured with
respect to sales of the like product as a whole, and not a part of these sales.
· The calculation should also
reflect business reality that firms sometimes operate at a loss or no profit.
· The finding of dumping should be based
on data within the actual knowledge and control of the exporter or producer and
normal business practice in pricing. The costs used in the calculation
should not depart from the cost accounting known to and relied upon by the
exporter in the normal course of business.
II. PROBLEM
OF THE CURRENT AD AGREEMENT
· The lack of clarity in the
III. AMENDMENT
Issue 1: Definition of “sufficient quantity of sales
of the like product in the domestic market for the determination of normal
value”
1.1 Proposal:
The “sufficient quantity” test
• Amend
footnote 2 to clarify that the sufficient quantity test is conducted for the
volume of sales of each respondent, based on all sales, including sales later
determined to be outside the ordinary course of trade, for the entire period of
the investigation.
• Further clarify the phrase, “sales of
the like product destined for consumption in the domestic market,” by defining
the term “domestic sales” as follows:
Domestic
sales are all sales of the like product as a whole by a respondent to domestic
purchasers in the exporting country, except sales where objective and concrete
evidence demonstrates that the respondent knew at the time of his sale that the
product would be exported to another country.
Explanation
The sufficient quantity test is a
benchmark or litmus test at the very beginning of investigation. The test enables a respondent to know in
advance the kind of data it will be required to submit in the subsequent stages
of the investigation.
The
The fact that home market sales are
“viable” in terms of quantity does not, by itself, constitute a sufficient
condition to use all these sales for the calculation of normal value. The authorities thus should first conduct the
test of sufficient quantity with regard to all sales of the like product; then,
if domestic market sales quantities are found sufficient, the authorities may
examine whether those sales are made in the ordinary course of trade.
Furthermore, the
1.2 Proposal: “Particular market situation”
Delete the clause regarding the
“particular market situation” from Article 2.2.
Explanation
Article 2.2 states in relevant
part: “When there are no sales of the
like product in the ordinary course of trade in the domestic market of the
exporting country or when, because of the particular market situation or the
low volume of the sales in the domestic market of the exporting country. .
.” (emphasis added.) The term “particular market situation” is
undefined, and might be interpreted to apply to almost any set of
circumstances. This creates an uncertain
situation for exporters and for authorities.
It is impossible for exporters to predict how authorities will interpret
and apply this term. Authorities who
invoke the term to justify disregarding home market sales could not be certain
whether their decision would be upheld in the event of a challenge before the
WTO dispute settlement body. Moreover,
the term is unnecessary. Our proposal
regarding sales of the like product in the ordinary course of trade (issue 2
below) provides an exhaustive list of all situations in which domestic sales of
the like product could be disregarded as “outside the ordinary course of
trade.” This list obviates the need for
Article 2.2’s reference to a “particular market situation.” We therefore propose that the clause be
deleted from Article 2.2.
Issue 2: Sales
of the like products in the ordinary course of trade
2.1 Proposal: Definition of
sales of the like product in the ordinary course of trade
• Clarify that sales of the like
product “in the ordinary course of trade” means all sales made by a responding
party in the exporting country or to a third country; provided that sales
falling in any of the following categories shall not be considered to be made
in the ordinary course of trade:
(a) sales of samples;
(b) sales to employees;
(c) barter sales;
(d) sales of the like products to a toller
or subcontractor for further-manufacture, upon the condition that the
further-manufactured product will be returned to the responding party;
(e) all home market sales
of the like product, in the circumstances described in the second proposal
below, “Proposal: Sales below cost”; and
(f) certain sales to affiliated parties.[2]
Explanation
This proposal clarifies that sales
by a responding party of the like product are “in the ordinary course of
trade,” unless these sales fall into any one of several specifically identified
exceptions. These specific exceptions
provide clear guidance to all exporters and the investigating authorities
whether a sale would be excluded from normal value. Our experience tells us that these exceptions
sufficiently cover all sales that in common business understanding would not be
“in the ordinary course of trade.”[3]
2.2 Proposal:
Sales below cost
• To clarify that sales at prices that
are below costs at the time of sales shall still be in the ordinary course of
trade if the aggregate value of sales of the like product, including sales at
such prices, is not less than the aggregate cost of production for the period
of investigation, amend Article 2.2.1 as follows:
“All
sales of the like product for the period of investigation in the domestic
market of the exporting country or sales to a third country may be treated as
not being in the ordinary course of trade and may be disregarded as a whole
from the determination of normal value, only if the aggregate value of all
sales of the like product during the period of investigation is less than the
aggregate costs of production plus selling costs corresponding to these
sales. Otherwise, sales of the like
product in the domestic market of the exporting country or sales to a third country
may not be disregarded by reason of price from the determination of normal
value.”
• Delete footnotes 4 and 5.
• Furthermore, add a provision or
footnote to clarify that the below-cost test must be performed for all sales of
the like product as a whole, and not any sub-group of these sales.
• Further clarify that the authorities
shall be permitted to seek from respondent’s information on costs of production
for purposes of the below-cost test only if sufficient evidence at the time of
initiation of an investigation demonstrates that the respondent made a
substantial portion of its sales below cost.
A “substantial portion” shall mean that more than [Y] per cent of sales
in volume.
Explanation
This proposal clarifies that the
investigating authorities must perform the below-cost test with respect to the
aggregate costs for all sales of the like product in the exporting country or
to a third country. This test reflects
the basic principle of the
We are also proposing that the
current 20 per cent volume test of footnote 5 be repealed. The current Article 2.2.1 provides a
multi-pronged test, the two principle elements of which are (1) whether
prices allow for the recovery of costs within a “reasonable period of time”;
and (2) whether 20 per cent of the volume is sold below cost within
an extended period of time. Our
experience shows that responding parties recover the full costs of production
of all sales even when more than 20 per cent of the total sales in
volume within the period of investigation were below cost. Furthermore, the interaction of these
criteria has created wide variation of Members’ practice in application of the
below-cost test, making the AD regime complicated and less predictable. In addition, a company normally measures its
profitability within a certain period of time by the amount of profit as a
whole, and not by the volume of profitable sales. These facts and our past experience under the
current
Finally, to avoid unnecessary cost
investigations, the
Issues regarding the calculation of
production costs are discussed at issue 3 below.
Issue 3: The
investigating authorities’ discretion to request and use respondent’s data
3.1 Proposal: Period of data collection and period of
investigation
• Clarify that the period for which the
investigating authorities may request production and sales data (i.e. sales,
sales expenses and costs data) shall be the respondent’s fiscal year that most
closely corresponds to the period of investigation for which the authorities
have requested information to determine normal value and export price. Where the fiscal year does not coincide with
the period of investigation for which information to calculate normal value and
export price has been requested, such data may be requested for fiscal periods
(e.g. semi-annual reporting periods) that more closely correspond to the period
for which normal value and export price information has been requested.
• Further clarify that the period of
investigation shall be one year.
• Further clarify that, at the
respondent’s option, the respondent may submit production and sales data
regarding an entire cycle of the product under consideration in case of
cyclical markets. Should the respondent
choose this option, the authorities must use these data to calculate the
aggregate cost of production for the like products under the proposal 2.2 above
and conduct the below-cost test based on such aggregate cost as well as use
such data in case it constructs the normal value.
Explanation
This proposal is intended to reduce
the burden on respondents while also ensuring that the most accurate data are
provided. It is extremely burdensome for
respondents to provide cost information that does not correspond to their
fiscal year or other fiscal periods.
Reporting information that does not correspond to fiscal periods
requires, for example, that the respondents provide adjustments of interim
costs that are not normally adjusted until the end of a fiscal period, and that
would be made only for the purposes of meeting an authority’s request in an
investigation or review. Such
adjustments made outside of the normal accounting system often do not
accurately reflect actual costs.
In order to minimize the burdens on
respondents and ensure that the most reliable data are used for determinations
by authorities, the information requested should correspond to the fiscal year
of the respondent or, in limited instances, with another fiscal period that
coincides most closely with the period of investigation for determining normal
value and export price.
In cases of cyclical markets, it may
be appropriate for the period of data collection to be longer than one
year. The rationale for this proposal is
that companies often make their decisions about the sales price of the like
products in such a way as to recover the total costs over a period that extends
beyond the current fiscal year. We
therefore suggest that respondents be given the option of demonstrating that
they recovered costs over a longer period of time upon the request of the
respondent. This does not mean that the
authorities can request sales information beyond the period of
investigation.
3.2 Proposal:
Acceptance of respondent’s data in accordance with GAAP
• Clarify
that the authorities must accept a respondent’s production and sales
information, including per-unit costs, for the product under consideration, as
maintained in the respondent’s accounting system in accordance with GAAP in the
exporting country. In this case, a
certificate of audit as issued by a certified public accountant or the
auditors’ letter accompanying the financial statement shall be conclusive
evidence that the accounting system is consistent with GAAP in the exporting
country. With respect to unaudited
respondents, their production and sales information shall be treated in the
same manner as audited companies unless it is demonstrated that the unaudited
company’s accounts are not consistent with GAAP in the exporting country.
• Further clarify that the authorities
may not require a respondent to submit per-unit cost information at a level of
specificity for product types different from the level of specificity, which
the respondent maintains in its cost accounting system, and may not penalize
respondents for failure to do so.
However, respondents may, at their option, submit per-unit cost
information at a more specific level.
Explanation
The primary objective of this
proposal is to prevent investigating authorities from substituting their
judgment as to how costs should be maintained, valued or allocated for that of
the exporting country’s GAAP. A
particular concern is the manipulation of a respondent’s costs by
authorities. Authorities sometimes
reject the methods of allocating or valuing certain costs that a respondent
maintains in its cost accounting system, and instead use another method
preferred by the authorities. As a
result, the authorities use calculation methods, which depart from the cost
accounting known to and relied upon by the exporter in the normal course of
business.
This proposal also seeks to prevent
authorities from placing unreasonable burdens on respondents in the guise of
requesting detailed information.
Authorities’ current practice, for example, often requires respondents
to create complex cost allocations for an investigation or review, based on
product distinctions or methodologies dictated by the authorities, which are
not used by the respondent in its normal accounting system. This proposal would put a stop to such
burdensome practices. Even with some
unaudited companies, such as privately held companies, the fact that such
respondents do not have audited financial statements should not permit the
authorities to request special information on a basis that would not be
permitted if the respondents had audited financial statements.
To balance the burdens and the
necessity to conduct a precise investigation, we also propose that it be a
respondent’s option to submit cost information at a level of specificity more
detailed than is maintained in its cost accounting system. A respondent may do so for any purpose –
e.g., in support of requests for due allowance for differences in product
characteristics, for purposes of responding to a below-cost questionnaire, and
for constructed value.
Issue 4: Constructed value
4.1 Proposal:
Use of actual data for determining constructed value and alternative methodologies
• Clarify that the methodology as set
out under the chapeau of Article 2.2.2 (i.e., actual data pertaining to
production and sales of the like product by the exporter or producer under
investigation) should be used for determining the amounts for selling costs and
profits. When such amounts cannot be
determined on this basis, the amounts may be determined only on the basis of
the alternative methodology provided for under Article 2.2.2 (i). In addition, to ensure that only actual data
pertaining to the production and sales of the exporter or producer concerned
will be used, the two alternative methodologies as provided under Articles
2.2.2 (ii) & (iii) should be deleted.
• Further clarify that the term
"same general category of products" in Article 2.2.2(i) refers to the
narrowest category of products for which data can be obtained from the records
kept by the respondent in the ordinary course of business.
• Add a new Article 2.2.2(ii), which
would apply when the respondent has no sales of any product in its domestic
market. In such a case, the authorities
must use the selling costs and profit from the respondent's unconsolidated
financial statement. Where the
respondent maintains in the ordinary course of business internal financial
statements that cover the "same general category of products" as the
like product, the authorities should use those internal financial statements.
Explanation
A finding of dumping should require
knowledge on the part of the exporter or producer. The knowledge criterion is implicit in GATT
Article VI:1, which states that injurious dumping "is to be
condemned." This normative judgment
about "dumping" would be inappropriate if the exporter were merely an
unknowing conduit of market forces.
Thus, a finding of dumping based on anything outside the exporter's
knowledge – i.e., its actual data and experience – is inappropriate. This is also consistent with the principle
that procedural fairness should be enshrined in all WTO agreements, including
the Agreement on Implementation of Article VI of the General Agreement on
Tariffs and Trade 1994. This principle
leads to the conclusion that in determining constructed value, the investigating
authorities, in all circumstances, should use actual data pertaining to the
production and sales of the exporter or producer under investigation. The current
Due to the lack of precise
guidelines, investigating authorities have considerable discretion to define
"same general category of products."
This high degree of discretion makes it possible for the authorities to
define the term in a way that leads to arbitrary constructed values. It is therefore necessary to establish a more
precise definition for "same general category of products."
4.2 Proposal: Inclusion of below-cost sales; and the profit
for constructed value
Add a provision to clarify that in
cases where the aggregate sales value of all sales in the exporting country is
less than the aggregate costs for the corresponding sales, the profit applied
in constructed value shall be zero.
Explanation
Both GATT Article VI and ADA Article
2.2 require a “reasonable” adjustment to cost of production, selling costs and
profits. It is not “reasonable” to add a
profit that is contrary to the exporter’s actual sales experience. Nor is it reasonable to base profit only on a
limited number of sales that are found to be above cost. Although accounting and economic usage
distinguish among many formulations of “profit” (gross profit, net profit,
operating profit and so forth), we are not aware of any definition of profit
that is not based on the aggregate of all sales, both above-cost and below-cost
sales, in the determination of profit.
It follows from the above that the
calculation of constructed value should reflect domestic market
conditions. This includes the business
reality that firms sometimes operate at a loss or no profit. For example, during economic recessions
companies may show losses for a full fiscal year. Companies may introduce products that do not
achieve the market acceptance that the company had predicted, and therefore are
not profitable.
The CV calculation seeks to
construct the price at which the product would have been sold, if the
respondent sold the product in the domestic market. Since the actual profit level, which is a
negative figure in this case, cannot be taken as it is in the calculation of
the constructed value,[4]
the authorities have to determine the “reasonable” profit level as an
approximation using the best source to base such approximation. Unlike in a situation in which there are no
sales in the domestic market of the like product, the authorities still can and
should reflect the current domestic market condition that the respondent faces
regarding for its sales of the like product, which is the best source as a
basis for such approximation. Hence, a
zero profit is the best approximation regarding the profit at which the
respondent would have sold the product – i.e., the closest amount that is not a
“loss.”
This approach is more appropriate as
the best source of approximation than, as discussed in proposal 4.1 above, a
finding of dumping based on anything outside the exporter's knowledge. Companies normally treat their detailed cost
and profit information as highly confidential.
Therefore, a respondent will not normally know the profits of its
competitors in the domestic market. For
this reason, the
4.3 Proposal: General and administrative costs
Clarify that "general" and
"administrative" costs should not be included in determining
constructed value.
Explanation
The
This basic principle is reflected in
GATT Article VI. Article VI provides
that constructed value shall include “a reasonable addition for selling cost
and profit.” However, Article 2.2 of the
__________
[1]
This issue has been referred
to by Members in documents TN/RL/W/6, 7, 10, 26, 28, 29, 34, 45, 47, 54, 56,
59, 66, 72, 79 and 86.
[2] Detailed proposals on “Sales to affiliated parties” are presented in document TN/RL/W/146.
[3] For the same reason as the calculation of normal value, all of the following categories of sales should be excluded from the calculation of export price: (a) Sales of samples, (b) sales of employees, (c) barter sales, and (d) sales of the like products to a toller or subcontractor for further-manufacture, upon the condition that the further-manufactured product will be returned to the responding party.
[4] Some may argue that negative profits should be a “reasonable” profit within the meaning of GATT Article VI. However, this argument is not consistent with the generally accepted definition of “profit,” which does not include negative figures (normally called a “loss.”)