Targeted dumping: An examination

Targeted dumping is dumping that is targeted at a certain purchaser, region or time period. The law permits the use of an alternative methodology for computation of the dumping margin if there is targeted dumping. The legal provisions relating to targeted dumping are set forth in Article 2.4.2 of the Agreement on Implementation of Article VI of GATT 1994 (“Anti-dumping Agreement”). The manner of triggering the provisions for using a different basis for comparison was examined in a recent ruling of the WTO Dispute Settlement Body and provides guidance on the issue.

The WTO Appellate Body in United States – Anti-dumping Measures and Countervailing Measures on Large Residential Washers from Korea [see end note 1] was issued in September and a key issue in the dispute was concerning the United States’ use of alternative methodologies for price comparison based on the fact that there was targeted dumping. The present article analyzes the nature of the examination to be undertaken under Article 2.4.2 of the Anti-dumping Agreement in light of the findings of the WTO Appellate Body in the above dispute.

Legal provisions relating to targeted dumping

Article 2.4.2 of the Anti-dumping Agreement relates to the nature of the fair comparison to be undertaken while computing the dumping margin in investigations. It provides, in relevant part, as under:

“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 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.”

The first sentence of Article 2.4.2 of the Anti-dumping Agreement sets out comparison methodologies that should normally be used in determining the dumping margin in investigations. There is flexibility provided on whether to undertake a weighted average-to-weighted average (“W-W”) comparison or a transaction-transaction (“T-T”) comparison. The second sentence sets out a third comparison methodology, that may be used only in exceptional cases [see end note 2].
The requirements or conditions for use of the third methodology may be segregated into three parts [see end note 3] – the “methodology clause”, the “pattern clause” and the “explanation clause”. The “methodology clause” sets forth that a comparison may be undertaken of the weighted average normal value with prices of individual export transactions (“W-T”). The conditions that are to be met for use of the W-T comparison are provided in the “pattern clause” and the “explanation clause”. The authority must identify a pattern that is present in respect to export prices differing significantly among “purchasers, regions or time periods”. Lastly, an explanation must be provided as to why the differences that are identified in the pattern cannot be taken into account by use of the W-W or T-T methodology. Set forth below is an examination of the key requirements under each clause.

The ‘methodology clause”

The “methodology clause” relates to the transactions on which the W-T comparison methodology may be used. In particular, the W-T methodology can be used only in respect to individual transactions and not all export transactions. In other words, the W-T comparison should be used only for the pattern transactions or the transactions which are considered as being targeted.

The Panel held that the W-T methodology cannot be used for all transactions and must be restricted only to the targeted transactions. The same is also apparent from the intent of Article 2.4.2 of the Anti-dumping Agreement. In particular, Article 2.4.2 of the Anti-dumping Agreement was included with the intent of dealing with “masked, selective dumping”. If the W-T methodology were used for all export transactions, then the very intent of provision would be lost. Therefore, once the requirements relating to the “pattern clause” and “explanation clause” are satisfied, the W-T comparison methodology may be used only in respect to the pattern transactions.

The “pattern clause”

The pattern clause is integral as identification of the pattern is the trigger for resorting to the W-T methodology. The Panel defined a pattern as a “regular and intelligible form or sequence discernible in certain actions or situations.” The Appellate Body agreed with this definition and noted that a pattern would consist of a certain set of transactions, termed as targeted transactions, that differ significantly from the other transactions in respect to their export prices. These pattern transactions would therefore be a sub-set in the primary set of export transactions that have been identified based on differences arising in reference to purchasers, region or time period, pursuant to Article 2.4.2 of the Anti-dumping Agreement.

One of the issues before the DSB in reference to the “pattern clause” was whether the practice of the United States where it identifies a pattern based on an examination of export transactions across all three categories cumulatively is permissible. In particular, the United States identifies a pattern across purchasers, regions and time periods rather than “among purchasers, regions or time periods”. The Panel and Appellate Body held that a pattern can be found only if the prices are found to differ among different purchasers or among different regions or among different time periods. It is not possible for a “regular” and “intelligible” sequence to be present across the three categories. The Appellate Body noted that there is the possibility that a pattern that is found in respect to transactions to a particular purchaser is in a certain region, therefore there would be a pattern of significantly differing prices among different purchasers and among different regions.

Nonetheless, it is fairly clear that a pattern under Article 2.4.2 of the Anti-dumping Agreement will be present only if the exports prices to a particular purchaser are lower than export prices to other purchasers, or export prices to a particular region are lower than export prices to other regions, or export prices during a particular time period are lower than export prices during other time periods. There is the possibility of an overlapping of the sequences or patterns but the same cannot be determined based on an examination of factors cumulatively across the three factors.

Another issue that arose in regard to identification of pattern under the second sentence of Article 2.4.2 of the Anti-dumping Agreement is whether the identification of the “targeted” transactions can be based purely on quantitative criteria or is there also an obligation to undertake a qualitative analysis. The Panel had found that a quantitative analysis is sufficient and that there is nothing in the text of Article 2.4.2 that indicates that the authority should go into the factual aspects surrounding the transactions identified. This was however reversed by the Appellate Body.

The Appellate Body clarified that the legal provision provides that a pattern exists only if prices “differ significantly”. The inclusion of the word significant imposes not only an obligation to undertake a quantitative analysis but also a qualitative analysis. The Appellate Body made it clear that the authority would not need to consider the cause or the reasons for the price differences but would need to consider certain objective market factors. An example provided in the findings provides clarity. A minor numerical difference in cases where the prices are high would not be considered as “significant” but if the prices were low, the same would be “significant”. Therefore, the identification of the pattern should be pursuant to a quantitative and qualitative analysis.

The “explanation clause”

The last requirement under the second sentence of Article 2.4.2 of the Anti-dumping Agreement is to provide an explanation as to why the price differences identified in the pattern transactions cannot be accounted for by using the W-W or the T-T comparison methodology. The issue that arose in regard to the obligation under the “explanation clause” in the dispute was whether the authority must provide an explanation for why both the W-W and T-T comparison methodology cannot be used or whether the W-W or T-T comparison methodology cannot be used.

The Panel held that the authority would satisfy the requirements under the “explanation clause” if it provides an explanation in respect to only one type of comparison and not both. It noted that the provision requires that an explanation be provided for why “a weighted average-to-weighted average or transaction-to-transaction comparison” does not take into account the price differences. The use of “a” and “or” imply that the explanation is to be provided for one of the methodologies and not both.

However, the Appellate Body reversed the Panel’s findings and held that the W-T comparison is an exceptional methodology that is permitted to be used only when the normal comparison methodologies are not suitable. If the explanation provides reasons for the inappropriateness of only one of the normal comparison methodologies and fails to account for the other methodology, although it may have taken into account the price differences, then the rationale for making the W-T methodology permissible only in exceptional circumstances is defeated. Thus, an authority would need to provide an explanation for both the methodologies prior to resorting to the W-T methodology.

The other ambit of the obligation under the “explanation clause” is the nature of the explanation that needs to be provided. The obligation, in essence, is what would be considered as “appropriate” in the context of the second sentence of Article 2.4.2 of the Anti-dumping Agreement. In the facts of the dispute, the explanation that had been provided by the United States was that the W-W comparison conceals differences and further that there was a difference between the margin of dumping using the W-W comparison and the margin of dumping using the W-T methodology.

The Panel held that the above reasons would not be considered as satisfying the requirements of the “explanation clause”. The mere presence of the difference in the dumping margin based on the two methodologies cannot be a reason for using the W-T comparison methodology as the rationale for permitting the use of the W-T methodology is to unmask such individual transactions that are protected under the W-W methodology. Therefore, the explanation would need to examine the factual circumstances surrounding the investigation to satisfy the requirements under Article 2.4.2 of the Anti-dumping Agreement.

[The author is a Senior Associate, International Trade Practice, Lakshmikumaran & Sridharan, Delhi]