Threat to Korean Exporters
South Korean exporters to USA face a looming threat from recent amendments to US trade laws, i.e. Trade Preferences Extension Act of June 2015 and Trade Facilitation and Trade Enforcement Act of February 2016, which arm the Department of Commerce (“Commerce”), International Trade Commission (“ITC”) and Customs and Border Protection (“Customs”) with a set of new tools to counter alleged dumping and subsidies. There is a concern that US domestic manufacturing industry shall be using these tools to unfairly impede the free and fair exports from South Korea, which would harm the South Korean manufacturing industry and US consumers.
As per 2015 US Census data, US had an overall trade deficit of 28.33 billion dollars with South Korea. It is feared that this fact could be exploited by interested parties to file unsubstantiated dumping and subsidy allegations against South Korean exporters. Currently, US Anti-dumping (“AD”) and Countervailing duty (“CVD”) proceedings against South Korea include steel products, such as Hot-Rolled and Cold-rolled Steel Flat Products, Steel Plate, Welded Carbon and Stainless Steel Pipes, Corrosion-Resistant Steel Products, Steel Nails, OCTG pipes, and equipment like Power Transformers, Washers, and industrial inputs like Polyester Staple Fiber, PET film etc.
It is, therefore, imperative to sensitize the relevant stakeholders in South Korea and US to the amendments in US trade remedy laws.
DUMPING AND SUBSIDIZATION
In US AD proceedings, exporters are alleged to be selling goods at a price lower than its fair market value (or, “normal value”), thereby causing material injuries to the US domestic industries. The normal value of goods is typically the price at which the comparable goods are sold by the exporter in South Korean market. Alternatively, normal value is based on the exporter’s sale price to a third country or the constructed value of the merchandise. The difference between a company’s U.S. sales price and the normal value is the dumping margin.
The CVD proceedings are aimed to counter the benefits received by exporters when foreign governments unfairly subsidize their export industries and such subsidies result in material injuries to the US industry.
TRADE PREFERENCES EXTENSION ACT
The Trade Preferences Extension Act of 2015 (“Trade Remedies Act”), enacted on June 29, 2015, is a product of vigorous lobbying efforts by US industries and it facilitates demonstration of material injury and also affords Commerce more discretion over key issues in AD/CVD cases.
Some of the key provisions are briefly summarized below.
Mischief of Particular Market Situation Widened
Prior to the amendment, an exporter’s home market sales price could be disregarded only absent a “viable” home market (i.e., home market sales that constitute five percent or more of its US sales), or in case a “particular market situation” prevailed in the home market.
The US law does not identify these “particular market situations,” but several are set forth in the Statement of Administrative Action (“SAA”) accompanying the Uruguay Round Agreement Act (“URAA”) of 1994. As per SAA, “particular market situations” include: (1) where a single sale in a foreign market constitutes five percent of sales to the United States; (2) extensive government controls over pricing in a foreign market; and (3) differing patterns of demand in the United States and a foreign market. As such, Commerce has enough discretion to further expand the contours of “particular market situation”, so as to even encompass situations of general subsidies provided by the South Korean government.
The amendment to the definition of a “particular market situation” shall affect South Korean exporters, as follows.
First, Commerce retains the ability to reject home market sale prices, by invoking a “particular market situation”.
Second, Commerce can reject a normal value based on the third country price, if the agency simply determines that a “particular market situation” in the home country. Prior to this amendment, a third country price could be rejected on this ground only if a “particular market situation” existed in such third country.
Third, the amendment expands the role of “particular market situation”, enabling Commerce to disregard not only sales prices of finished goods, but also costs of production in a country if a particular market situation exists.
As such, the mischief of a “particular market situation” in the home country enables Commerce to reject not only the home market sale price of merchandise under consideration but also the third country price and constructed value of such merchandise.
At this point, Commerce is yet to make a determination invoking the amended law regarding “particular market situation”. Even so, it can be fairly assumed that Commerce may use this provision more often on grounds of subsidy considerations. On this score, South Korea’s position is precarious because South Korea is among the only four countries that are categorized as “generally subsidized” countries by Commerce. In other words, there is a rebuttable presumption that the cost and prices of goods in South Korea are subsidized by South Korean government. As such, US domestic industries could be counted upon to argue that based on “particular market situation” allegedly prevailing in South Korea, Commerce reject the home market sale prices of merchandise as well as the cost of inputs.
Consequently, once the agency makes a determination of a “particular market situation” in South Korea, the agency could then determine the normal value of goods by resorting to the familiar “factors of production” (“FOP”) methodology, hitherto limited to a non-market economy (“NME”) country like China. Under FOP methodology, normal value is unpredictable because it is based on the price data from a surrogate country, i.e. a different market economy country, with a fundamentally different set of market constraints.
It is feared that the widened ambit of “particular market situation” could exacerbate uncertainties regarding the final outcome of US AD proceedings on goods exported from South Korea.
Submission of Cost of Production Data made Mandatory
Under US law, Commerce can reject normal value based on home market or third country sale prices, if such prices are below the cost of production of goods. However, a cost investigation inquiry was discretionary and rarely invoked in actual practice. Prior to the amendments, in order to initiate a cost investigation, Commerce required petitioners to submit allegations, with supporting evidence.
Now, Commerce is mandated to ask for this information in order to determine whether there are reasonable grounds to believe that the product was being sold at prices below the cost of production.
As such, South Korean exporters ensnared in US AD proceedings would need to allocate additional resources in order to compile vast amount of price and cost data.
Consequences of Alleged Failure to Cooperate in AD or CVD Proceedings
The US AD/CVD law allows Commerce to draw an adverse inference when selecting among facts otherwise available against parties who fail to respond to requests for information. In the past, Commerce has assigned high adverse facts available (“AFA”) AD/CVD rates to unresponsive companies in order to deter noncompliance.
However, Commerce’s broad discretion in selecting AFA rates was circumscribed by its legal obligation to “corroborate” the AFA rates with the commercial reality of the respondent. The amendment nearly obliterates the corroboration requirement and grants Commerce greater discretion in selecting AFA rates.
First, Commerce is not required to make adjustments to AD/CVD rates based on assumptions about information that the interested party would have provided had it complied with requests for information.
Second, once Commerce has applied an AD/CVD rate in one segment of the proceeding, there is no corroboration requirement in a separate segment of the same proceeding.
Third, for CVD cases, Commerce is authorized to use rates applied for the same or similar subsidy program in the same country, or if there is no same or similar program, Commerce can use a rate for a subsidy program from any proceeding that is reasonable to use. For AD cases, Commerce may use any dumping margin from any segment of the proceeding under the ADD Order. Commerce may use the highest rate available under these circumstances.
Instances of alleged failure to cooperate are endemic in the AD/CVD proceedings, not always a product of exporter’s willful action. For instance, a toller who does jobwork for the exporter and who is not an interested party before Commerce may have little incentive to provide the necessary information to Commerce. Even in such a situation, Commerce could invoke the mischief of AFA to its fullest extent and slap a punitive rate of duty on the exporter. As such, the exporters would need to exercise a much higher degree of control on their manufacturing operations, supply chain and accounting with respect to goods produced and exported to the US market.
Definition of Material Injury
The first step in a US AD or CVD investigation is a determination by the ITC as to whether the US industry has been materially injured, or faces a threat of material injury, or its development has been materially retarded on account of the dumped or subsidized imports at issue. The new law amends the definition of “material injury” and the set of factors the ITC examines.
ITC is prohibited from concluding that there has been no injury “merely because that industry is profitable or because the performance of that industry has recently improved.”
In recent years, the Court of International Trade had often been critical of ITC’s injury decisions for reasonableness and had also revoked the AD/CVD Order in few cases. These amendments will make it increasingly difficult for the Court to reverse ITC’s injury findings.
TRADE FACILITATION AND TRADE ENFORCEMENT ACT
Up until now, the AD/CVD inquiry was almost solely within the province of Commerce, with Customs playing the role of ministerially implementing Commerce’s instructions.
The Trade Facilitation and Trade Enforcement Act (“Customs Enforcement Act”) was brought up at the request of US domestic industries who claimed that Customs was not taking seriously their allegations of fraud, circumvention, etc. and who wanted to play a role in the Customs enforcement process.
Customs Enforcement Act fortifies enforcement of US AD/CVD laws. It includes several provisions that are intended to help Customs effectively enforce US trade laws, with the sole aim of preventing alleged evasion of AD/CVD duties and creating a new enforcement division.
The new law, to be effective in August, 2016, creates an entirely new procedural and substantive mechanism for dealing with alleged evasion of duties on merchandise subject to an AD and/or CVD Order, imported into USA by means of a “material and false” statement or “material” omission. The new provisions do not require that an importer failed to act with reasonable care, i.e., if Customs decides that the correct amount of AD/CVD was not deposited (except perhaps by non-recurring clerical error), the concerned importer could be held guilty of “evasion” of duties.
Pursuant to the new law, upon receipt of an allegation from the US domestic industries, Customs would initiate an investigation if the allegation “reasonably suggests” that evasion of AD/CVD duties is occurring. Following initiation, if Customs has a “reasonable suspicion” that evasion is taking place, the agency can suspend liquidation of entries or may require single entry bonds, or additional security or posting of cash deposits. Besides consulting Commerce, Customs can send out its own questionnaires, conduct on-site verifications as well as apply adverse inferences for alleged failure to cooperate.
The new procedure does not address several areas of possible intersections and concurrent jurisdictions of Commerce and Customs. From the perspective of South Korean exporters, the new law not only adds yet another agency they have to reckon with in AD/CVD matters, but also that any conflict of jurisdictions between the two agencies could further exacerbate their miseries.