WTO Panel Issues Mixed Ruling in US-Korea Trade Remedy Case

17 March 2016

A WTO panel (DS464) issued a mixed ruling last Friday in a dispute concerning anti-dumping and countervailing duties imposed by the US on Korean-made washing machines. Notably, this dispute draws attention to the issue of “targeted” dumping and the methodologies used in such cases for calculating dumping margins, including the controversial “zeroing” practice.

In December 2011, the US-based Whirlpool Corporation petitioned the US Department of Commerce, claiming that Korean-made washers were being sold at prices below their fair value – a practice known as “dumping” – and that the Asian economy’s producers and exporters were receiving unfair state aid. US imports of large residential washing machines from Korea that same year were valued at about US$569 million.

The General Agreement on Tariffs and Trade (GATT)’s Article VI and the related Anti-Dumping (AD) Agreement allow a WTO member to apply import duties on another member when “dumping” is proven to injure a domestic industry. “Countervailing” relates to those duties a WTO member may apply if another member’s subsidised imports are hurting domestic producers, with such measures governed by the Agreement on Subsidies and Countervailing Measures (SCM).

The US Commerce Department conducted investigations into the claims, announcing affirmative determinations in December 2012. These were then followed in February 2013 with findings from the US International Trade Commission which deemed that those imports were materially injuring a US industry and that duties should therefore be imposed.

Korea filed the initial consultations request to the WTO in August 2013, citing concerns over the investigations, determinations, and subsequent reviews, among other issues. A panel was established in January 2014 to hear the case.

Dumping margins

The difference between the export price and normal value is referred as a dumping margin, usually expressed as a percentage of the export price. WTO rules requires investigative authorities to make a fair comparison between the export price and normal value in determining dumping.

Article 2.4.2 of the AD Agreement provides that the importing country can use in exceptional cases an alternative method of calculating dumping margins – specifically by comparing weighted average normal value with the prices of individual export transactions – rather than the conventional "average-to-average" or "transaction-to-transaction" comparison.

To enable this calculation method, investigating authorities must find a pattern of export prices which differ significantly among different purchasers, regions, or time periods – an indication of “targeted dumping – and must explain why such differences cannot be properly accounted for under conventional comparison methods.

Questions on methodology

Korea challenged the methodologies used by Washington to trigger the application of “average to transaction” calculation in its anti-dumping probe, claiming these are inconsistent with the AD Agreement’s Article 2.4.2.

Under the original methodology, if “targeted” dumping was deemed to exist, US investigative authorities evaluated the difference between the dumping margin calculated with the “average-average” method and the one calculated with “average-transaction” method. When there was a “meaningful difference,” the Commerce Department applied the “average-transaction” method to all export sales.

For the panel, at the outset, the US measure goes against WTO rules, given that the “average-transaction” method will only involve those export transactions identified to fit the “targeted” dumping pattern, rather than all export sales.

Furthermore, that provision requires that, prior to using the “average-transaction” method, investigating authorities examine the factual circumstances to see whether something besides targeted dumping is behind those price differences. The panel argued that the US failed to do so, thus violating Article 2.4.2.

According to Korea, the US later replaced this practice with “differential pricing methodology” in March 2013. The new practice uses tests to see whether the price differences between purchasers, regions, or time periods are significant; the extent of those significant differences, and whether using only the “average-average” methodology can appropriately account for them.

Korea challenged the new methodology for its general application as a rule or norm, with the panel agreeing – among other findings – that it is attributable to the US and may therefore be challenged. The panel also deemed that aspects of this differential pricing methodology violate AD Article 2.4.2.

The panel supported Korea’s claim that the methodology does not effectively identify or analyse a “pattern” of prices to any purchaser, or in any region or time period, by aggregating six different types of price variation pertaining to different parameters.

However, it rejected Korea’s argument that, after finding “targeted” dumping, the investigating authority is required to “re-mask” such dumping in calculating the dumping margin by providing offsets for negative dumping for those transactions that do not fit the pattern of “targeted” dumping.

Zeroing methodology

Under the practice of zeroing, the US ignores certain data when calculating antidumping duties. In other words, it “zeroes out,” or ignores, cases where the good under scrutiny is being sold at a higher price in the US than domestically.

The practice has long been a source of controversy for Washington, with the US taking steps in the past to limit the use of zeroing in its trade remedy probes after various WTO losses on the subject, specifically relating to original investigations and reviews. (See Bridges Weekly, 19 January 2011 and 8 February 2012)

Whether this would be the case for “targeted dumping” – given that this is the first WTO dispute ruling to address specifically this type of dumping – was one area expected to draw close scrutiny from trade watchers.

In its ruling, the panel said that under Article 2.4.2, it is the entirety of the pricing behaviour which form the pattern of “targeted” dumping that must be accounted for – and that nothing in the text entitles the investigating authority to ignore, or “zero,” individual pattern transactions that may be priced above normal value.

Therefore, the panel found US’ zeroing methodology inconsistent with Article 2.4.2.

The panel also considered that the use of zeroing would artificially inflate dumping margins, meaning that any duties collected would be excessive. Given the evidence, the panel concluded that the zeroing methodology used by the US Commerce Department in these administrative reviews violates WTO rules on the imposition and collection of anti-dumping duties.

Subsidy claims

Korea’s subsidy-related claims concerned the US authorities’ determinations that two tax credit subsidy programmes are “specific” – in other words, that they have specifically been provided to an enterprise/industry or group of these, which is key to being considered countervailable as a subsidy under WTO rules.

Korea also challenged the manner in which the Commerce Department calculated the amount of the subsidy given to Samsung under those programmes.

In its countervailing duty determinations, the US Commerce Department found one programme providing tax credits for certain research and development (R&D) expenditures was subsidising Samsung in disproportionately large amounts, and was in effect “specific.”

According to the panel, WTO subsidy rules require that a finding of disproportionality be based on analysis regarding how the amount received relates to a benchmark – in quantitative or qualitative terms – that is indicative of the amount that the recipient would have been expected to receive were the distribution proportionate, which the US Commerce Department failed to do.

The panel also found the US Commerce Department failed to undertake any active and meaningful consideration of two mandatory factors required by WTO subsidy rules in determining de facto specificity: the duration of the subsidy programme and extent of economic diversification within Korea.

However, the panel rejected some of Korea’s other claims relating to WTO subsidy rules.

Next steps

Both sides have 60 days from when the report was circulated to appeal the panel's findings. Under WTO rules, the Appellate Body can review aspects of law – such as legal interpretation – but generally will not interfere with the factual findings of the original panel.

ICTSD reporting.

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