Introduction

When producers or exporters export goods to other countries, they most likely would have come across a trade barrier of some form or the other. While tariff walls have as such declined and non-tariff barriers have increased, importing countries continue to use trade remedial measures as a defense against imports.[1] In fact, India and the United States are the leading users of trade remedial measures while imports from China are the major target of these trade remedial measures.

While some producers and exporters would be familiar with trade remedial investigations, a majority remain unaware, and hence, are unprepared to deal with the same when investigations are initiated. This article is intended to bridge this awareness gap and sensitize producers/exporters on certain aspects which will help prepare them for any potential trade remedial investigation.

Enterprise Resource Planning

The key raw material in any trade remedial investigation is the data of the participating producer and exporter. If the data is presented to the investigating authority properly and diligently, the data can be beneficial to the participants. However, if there is any carelessness in extracting and reporting the data, the same data can be fatal and the investigating authority may reject the response of the participating producer/exporter.

For the above reasons, participation in a trade-remedial investigation requires the participating entity to have a robust Enterprise Resource Planning (‘ERP’) by which it records costing and sales data in their systems. Ideally, the records of cost and sales can be maintained at the product level from which the data for a given time-period, and country of destination can be readily extracted. In cases where such product level data is absent, this challenge is resolved by allocating costs from a broader segment or division which involves the product concerned. In the experience of the authors, the absence of a strong ERP with a participating entity can be a nightmare in preparing the questionnaire response and subsequent verification. This makes it important for producers/exporters to invest in a robust ERP such as SAP (System Analysis Program Development), Kingdi, etc.

Since the dumping margin (and injury margin, where applicable) is determined for the period of investigation (‘POI’) (which may be defined to range anywhere from six months to eighteen months), the data regarding export price and cost of production is required to be presented for the POI. In most cases, particularly in India, the POI is generally defined as a period of 12 months that corresponds to the conventional financial year of April to March.

However, where the producer/exporter is based outside India, it most often happens that the accounting period followed by such entity is different from that of the POI. In such a scenario, it is important that the ERP be capable of generating the required data on a monthly / quarterly / biannual basis so that the data can be extracted and reported for a given POI.

ERP becomes important not just for preparation of questionnaire response but also for its verification by the investigating authority. In order to verify the accuracy of the data reported in the questionnaire response, the investigating authority may wish to examine the sales and cost accounting records of the respondent. Further, as part of the verification process, the investigating authority may also wish to ascertain the method by which the data is recorded by the company from source and extracted by the company personnel at the time of preparation of the questionnaire response.

Successful verification is key to ensuring the participating producer/exporter is treated as cooperative in the investigation. This further emphasizes the importance of investing in a robust ERP that maintains records of all transactions and is capable of ready verification.

Price monitoring

In simplistic terms, dumping is a situation where the price at which a particular good is exported by a producer is less than the normal value at which the like article is sold in the domestic market of the country of export[2]. Dumping margin is thus calculated as the difference between the export price and the normal value of the good at the ex-factory level. To protect the domestic industry from the dumped imports, the investigating authority imposes anti-dumping duty (‘ADD’) on imports from the exporting/originating country.

Countervailing investigations examine whether there is any subsidy being provided by the government or public body in the exporting country in respect of goods exported to another country. To countervail the same, the investigating authority imposes countervailing duty (‘CVD’) on imports from the exporting/originating country.

When ADD or CVD is imposed, it is usually imposed for a period of five years. In case of the United States, the Department of Commerce reviews the ADD/CVD rates on an annual basis based upon requests from interested parties. In such a scenario, it becomes important for the producer/exporter to ensure that its export prices are such that they would attract the least rates of ADD/CVD.

On the anti-dumping front, this can be ensured by regular cost and price monitoring for the goods sold in the export and domestic markets. Since the calculations are undertaken on ex-factory basis for all comparable products sold in export and domestic market, it is imperative to identify such products which can be compared and monitor their prices monthly after adjusting for expenses (like freight and other direct selling expenses) which affect their comparison.

Further, participating producers/exporters also need to meet the sufficiency test and ordinary course of trade test, which does not make things any easier. While the sufficiency test requires that the domestic sales volumes must be at least 5% of the export volumes to be considered sufficient for analysis. The ordinary course of trade test requires that substantial domestic sales are made above the cost of sales. All these require diligent effort on the part of the producers / exporters on a regular basis to ensure the export markets are not only captured but maintained in the long run.

Ensuring support from dependable traders/exporters

Modern supply chains are structured in such a way that some producers prefer to export their goods through a trader/exporter. This trader/exporter may be a party related or unrelated to the producer. Further, this trader/exporter may not necessarily be located in the country under investigation.

Another aspect is that each producer may adopt a different model for the export of the goods. One model may be where the producer raises the invoice on the exporter but ships the goods directly to the customer in the importing country. This is called the bill-to-ship-to model. Another model is where the producer ships the goods to the exporter’s destination and the exporter ships the goods onward to the country of destination/import.

In either case, since the exports are routed through another trader/exporter, anti-dumping and countervailing duty investigations require the participation of the exporter to ensure that the data arising out of the whole supply chain of the producer is complete and before the investigating authority for determining the landed value, export price and the subsidies. This is particularly so when substantial volumes are sold through the exporter and / or the trader is a related group entity.

However, a major challenge which some producers come across is the refusal of their traders to participate in and support them in an investigation. While it may be easy for the producer to get a related trader to participate along-with it in a given investigation, as they would be part of the same management and ownership, it can be a challenge sometimes to convince unrelated traders to cooperate in the investigation. Issues such as the complexity of the investigation procedures, etc. or a sheer lack of interest have been known to discourage unrelated traders from lending support to the producer in a trade remedial investigation.

As a result of such refusal, the participating producer’s questionnaire response can be rejected by the investigating authority and such refusal can prove costly to the participating producer in the event of the investigating authority imposing high rates of residual ADD or CVD.

For the above reasons, it is important for a producer to ensure that its traders are willing to support it and participate in a trade remedial investigation.

Conclusion

This article has examined certain practical aspects that concern a producer/exporter’s participation in a trade remedy investigation. While imposition of ADD/CVD may cause uncertainty in a given market, producers/exporters must aim to secure their position in the market by participating in the investigation and getting the best results/best rate of ADD/CVD for themselves. Further, as exports continue to remain an important source of revenue, it becomes important for the producers and exporters to keep themselves ready for participating in any potential trade remedial investigation to secure their interests.

[The authors are Partner and Principal Associate, respectively, in WTO and International Trade Division in Lakshmikumaran & Sridharan Attorneys, New Delhi.]

1. [1] The two main forms of trade remedial actions are anti-dumping investigations and anti-subsidy (also known as countervailing duty) investigations, of which the former is heavily used in comparison to the latter.
2. [2] We assume that country of production is same as country of export