Some analysis of the method of calculating dumping margin of the Korean investigation agency

1. Overview of anti-dumping investigations in Korea

In Korea, the Korea Trade Commission (KTC) was established in 1987 and is the agency that conducts anti-dumping investigations. Currently, the KTC consists of 01 chairman and 08 members, including 01 permanent member. Supporting the KTC are 04 departments: the Professional Department, the Damage Investigation Department, the Dumping Investigation Department and the Unfair Trade Practices Investigation Department. In anti-dumping investigations (AD), the calculation of dumping margins and damage investigations are conducted by the KTC, but the imposition of anti-dumping duties is carried out by the Ministry of Economy and Finance (MOTE).

Anti-dumping investigations initiated by Korea are regulated by the Korean Customs Act and the WTO Anti-Dumping Agreement (ADA). According to statistics from the World Trade Organization (WTO), as of December 31, 2013, Korea is one of the countries that frequently uses anti-dumping tools, ranking 15th out of 160 members of the WTO with 121 initiated investigations, imposing taxes on 77 cases. Although Vietnam's exports have not been investigated by Korea for anti-dumping measures, studying Korea's investigation experience provides some useful lessons for investigating agencies. Below are 10 issues that are mainly analyzed in calculating anti-dumping margins in Korea by Mr. Keon Ho Lee, a former investigator of KTC, currently the head of the anti-dumping practice group of Bae Kim & Lee PC law firm in Korea.

The method of calculating anti-dumping margins is mainly based on considering and adjusting two main factors: Normal value and export price. The use of data and the way to adjust these two factors often bring about many controversies in an investigation. The analysis below shows that currently, the Korean investigation agency still has some problems in calculating the dumping margin.

2. Some issues in calculating the dumping margin

2.1. Normal value

a. How to calculate reasonable profit in case the investigating agency has to determine the normal value (CNV) itself

According to the current regulations of Korea, in case there is no domestic sale of similar goods in the export country market under normal trade conditions or when the normal value cannot be applied due to special market conditions, the dumping margin will be determined by comparing with the comparable price of similar goods exported to a suitable third country, provided that such price is representative or suitable for self-constructing the normal value. However, the practice of anti-dumping investigations shows that in this case, the KTC often uses the method of self-constructing the normal value rather than using the comparable price of similar goods exported to a third country.

In Korean anti-dumping investigations, information for the construction of the CNV is submitted in the questionnaires of exporters. Information on production costs, selling costs, administrative costs, financial costs, research and development (R&D) costs, and profits must be provided in the questionnaires.

For information on profits, the KTC requires exporters to provide (i) the normal profit rates for domestic sales, exports to Korea, and exports to third countries; (ii) the profit rates for sales of goods not subject to investigation, for sales transactions recorded at the respondent's company, and the average profit rates for that industry in the respondent's country. In the cases that occurred in the late 1990s, KTC used the company wide profit ratio to calculate the reasonable profit ratio when calculating CNV. However, in recent cases, the reasonable profit ratio that KTC used to calculate CNV is the profit ratio from profitable domestic sales transactions. In Vietnam's first anti-dumping investigation case, the investigating agency also used this same method of Korea to calculate profits.

Currently, the ADA Agreement gives investigating agencies of countries considerable discretion in calculating CNV. Therefore, as a member of the anti-dumping negotiating group, Korea has requested the WTO to provide clear guidance on calculating CNV in the Doha Development Agenda (DDA)[1].

b. Korea automatically excludes sales below cost

Normal value is defined as the selling price of the like goods in the ordinary course of trade in the exporting country. However, the KTC considers that domestic sales of the like goods in the exporting country market at a price below the cost of production may be considered not to be made in the ordinary course of trade in the following two cases:

(i) The weighted average selling price of all transactions considered for determining normal value is lower than the weighted average cost of production;

(ii) The volume of sales below unit cost of production accounts for more than 20% of the volume of sales considered for determining normal value and such transactions are sold at prices that do not cover costs within a reasonable period of time.

Technically, the KTC has conducted two steps to examine sales below cost. First, if the weighted average selling price is lower than the weighted average cost, the KTC will construct its own normal value or use the export price to a third country to determine the normal value. Second, if the weighted average selling price is higher than the weighted average cost, the step of checking below-cost sales transactions is performed for each product management code (PCN), specifically:

- If the volume of above-cost sales transactions accounts for more than 80% of the total volume of all domestic transactions, the normal value will be calculated based on all domestic transactions.

- If the volume of above-cost sales transactions accounts for more than 20% but less than 80% of the total volume of domestic transactions, the investigating agency will only use above-cost sales transactions to calculate the normal value.

- If the volume of sales above cost accounts for less than 20% of the total volume of domestic transactions, the investigating agency will construct its own calculated normal value or use export prices to third countries instead of domestic sales to determine normal value.

This approach is similar to the approach of other countries, including Vietnam in the first anti-dumping investigation case.

c. Domestic Sales to Affiliated or Affiliated Companies

To determine the parties involved in an anti-dumping investigation, the Korean Customs Act defines an affiliated party as follows:

An officer or director of an organization or the organization itself;

A legal associate

A business owner or employee of such an enterprise;

Any individual or organization that directly or indirectly owns, controls, or holds the voting power of at least 5% of the shares or voting stock of an organization or the organization itself;

Any individual that controls another individual or the individual itself;

At least 2 individuals that are controlled by or under common control with any individual;

At least 2 individuals that directly control or have common control over any individual; and

Members of a family.

Thus, when a domestic transaction is conducted between the defendant enterprise and unrelated parties through an affiliated company, the KTC usually treats the related parties as a single economic entity and the selling price to the first independent purchaser will be used as the basis for calculating normal value. However, if the transactions conducted through affiliated companies account for a small proportion of the total domestic transactions, such transactions may not be considered in the calculation due to materiality. However, the current Korean regulations do not have clear criteria for excluding such transactions from the calculation, nor do they have specific principles or regulations on determining whether the selling price of goods is affected by an affiliated relationship.

In cases where transactions are made with related companies, if there is no evidence that the selling price is affected by the special relationship, such transactions can still be used as a basis for calculating normal value[2]. However, if the selling price of transactions with related companies is between 98% and 102% of the selling price (+/- 2%) for independent companies, then the selling price can be considered not to be affected by the related relationship and can therefore be used for calculating normal value.

Currently, the ADA does not provide a complete and clear set of criteria for determining when parties are considered to be related, nor does it provide sufficient guidance on the circumstances in which the existence of a related relationship affects the calculation of the dumping margin. Therefore, it is necessary to reconsider the issue of related parties and ensure that the ADA provides clear and appropriate definitions of these issues. In this regard, Korea has submitted a request to the WTO to add a provision defining related parties to apply to anti-dumping investigations when sales to related parties are made at unreliable prices.

d. Non-market economy (NME)

Regarding the market economy issue, when conducting an anti-dumping investigation, the KTC will check whether the manufacturing industry exporting goods from the above countries meets the criteria set by the KTC or not, thereby recognizing the market economy status for the investigated product. At that time, the KTC will use the domestic selling price as the basis for calculating the normal value.

Currently, legally, Korea does not consider a specific country as a non-market economy, but only evaluates each exporting country in each specific case. Regarding the criteria for considering a country as a non-market economy, the Korean Customs Act does not provide specific criteria, but the KTC considers the following criteria (these criteria are also referenced from the United States and the European Union - EU). Specifically as follows:

The corporate structure of the respondent enterprise and the government's participation in the board of directors and management of the enterprise;

The convertibility of the currency of the country under consideration into foreign currency;

Whether the wages of that country are determined based on free agreement between workers and management, and whether the dismissal or hiring of workers is decided based on market factors;

Whether joint ventures or investments by foreign enterprises are recognized by the relevant country and whether the distribution of profits or the recovery of investments by foreign investors is guaranteed.

The extent to which the government owns or controls the means of production;

The extent to which the government controls the allocation of resources and determines the prices and output of the enterprise

Whether electricity and water are provided in accordance with the terms and conditions of the contract;

Whether the leasing of land and the borrowing of funds were carried out in accordance with the terms and conditions of the contract as applied in a market economy; and

Other factors that the KTC considers appropriate.

In previous cases, the KTC assessed the transitional economy status of the above countries in each investigation and assessed each product on the basis of market economy status. Therefore, in some cases, such as the Choline Chloride case of China in 1996, the KTC decided that the product subject to the investigation was a non-market economy. As a result, the KTC used the price in the surrogate country as the basis for calculating the normal value and the dumping margin was therefore inflated. However, since 2000, a significant proportion of cases in which Chinese products were considered to be market-oriented and used the domestic selling price in China as the basis for calculating the normal value. This has significantly reduced the dumping margin for Chinese producers/exporters compared to cases before 2000.

In December 2005, the KTC officially recognized China and Russia as market economies. In 2009, South Korea also recognized Vietnam as a market economy.

2.2. Export Price

Constructed Export Price (CEP) Issue

The KTC will construct the CEP export price in cases where there are transactions involving affiliated importers[3]. Exporters with affiliated importers must provide information on the costs and profits of their import and resale operations by their affiliates as required by the KTC Questionnaire. Although there is no provision in the Korean Customs Act on calculating profits, the KTC usually calculates profits based on the costs incurred in the Korean market and the import market. Since there are only a few cases using the constructed export price method, the calculation principle is not regulated by law. However, in some recent cases, profits from sales by affiliates are calculated on the basis of cost assignment. This method is similar to the method used in the United States. In the absence of profit from sales through a Korean branch, the issue that arises is how to calculate the export price. The KTC does not have any specific regulations on this issue.

Regarding the deductions for CEP adjustments, the KTC also allows corresponding adjustments to the domestic selling price including indirect sales costs related to domestic sales. This adjustment is made in special cases where the level of trade is different between domestic sales and export sales and the difference in the level of trade affects the price comparability. The burden of proof in such cases seems to be very high. However, the KTC is usually quite flexible in allowing corresponding adjustments to the normal value called “CEP offset”.

2.3. Adjustment method between normal value and export price

a) Adjustment to the same level of trade

The KTC adjusts the difference in the level of trade between the normal value and the export price to ensure fairness by adjusting the price difference in the levels of trade. According to WTO regulations, the comparison between normal value and export price must be made at the same level of trade. In some cases where there is no same level of trade, the difference in the level of trade is reflected as an adjustment factor and quantified.

In practice, the investigation agency often finds it difficult to prove the price impact caused by the trade difference. And in most cases, the KTC analyzes the difference in the level of trade and considers whether that difference is an adjustment factor or not. However, because this issue is difficult to explain, most of the time, the difference in the level of trade is not considered as an adjustment factor. In some cases, instead of the difference in the level of trade, “CEP offset” is considered as an adjustment factor, for example, in the case of Alkaline Filters imported from Singapore, China and Japan in 2003, KTC reflected the difference in the level of trade as an adjustment factor in the form of “CEP offset”.

Similarly, when comparing prices in cases where the difference in the level of trade is difficult to explain, the defendants argued that the difference in the volume of transactions (i.e., the volume discount) should be considered. In practice in Korea, there is only one case where the volume discount was considered.

b) Adjustment for credit expenses and duty drawbacks

Credit expenses are considered an opportunity cost when a transaction is not settled immediately and because the selling price may differ due to different credit periods, credit expenses are not considered actual financial expenses, but are still considered an adjustment factor. KTC calculated credit expenses using the short-term lending rate of the respondent enterprise and the credit period is from the date of sale to the date of payment. In case the calculation of credit period and short-term lending rate is appropriate, credit expenses will be easily accepted.

For domestic tax refunds, KTC also conducted an adjustment for comparison. A respondent enterprise that wishes to request an adjustment to the amount of tax refunded must:

(i) provide the original and an English or Korean translation of the regulations allowing tax refunds for exports and the method used to calculate the tax refund;

(ii) report the total tax refunds received by the respondent enterprise for sales to Korea and to third countries; and

(iii) report on a transaction-by-transaction basis the tax refunds received by the respondent enterprise for each export transaction to Korea.

2.4. Issues when using the comparison method between normal value and export price

a) Establishing a Commodity Control Code (PCN)

Previously, the KTC often required investigated enterprises to provide commodity codes (in sales and production) used in the enterprise's product coding system. However, the KTC has now begun to use the PCN commodity control code established by the investigating agency[4]. Although the application of this PCN is not new, there are still some exceptions such as the KTC's discretion in deciding the level of price comparison. In the alkaline battery case, in the middle of the investigation, the KTC established a special PCN for the purpose of price comparison and was the subject of great debate between the defendant and the plaintiff enterprises. The factors used to build the PCN include production costs, product features, price, product structure, and consumer awareness.

b) Zeroing Method

Article 10(8) of the Korean Customs Enforcement Regulations stipulates that when comparing normal value and dumping price, the investigating authority shall compare the weighted average of prices and sales volume. The KTC compares normal value and export price on a weighted average basis with the weighted average and does not apply the zeroing method for each PCN[5]. In Korea, there are no cases where the price comparison is made on a transaction-to-transaction or transaction-to-weighted average basis when calculating the dumping margin, and there are no cases where the zeroing method is used.

Regarding the zeroing method, Korea affirms that it prohibits the use of this method and has amended Article 2.4.2 of the ADA to clearly stipulate that regardless of whether the basis for comparing normal value and export price is based on a weighted average-weighted average, transaction-transaction or weighted average-transaction basis, all positive and negative margins for imports from the exporting country or the producer of the subject drug product must be added in accordance with the DDA.

2.5. Application of anti-dumping duties

Implementation of the lesser duty rule

The KTC applies the lesser duty rule by applying a duty rate lower than the dumping margin if that duty rate is sufficient to compensate for the injury to the domestic industry in each specific case. The lesser duty rule is implemented by calculating the injury margin and the calculation of the injury margin is not published. Only in cases where the margin of injury is lower than the dumping margin, the lower duty rate principle is applied and the margin of injury is declared.

The calculation of the margin of injury considers each case including price suppression or price depression. This means that there are different formulas for different cases and the KTC has wide discretion in calculating the target profit when determining the domestic selling price. The margin of injury is calculated for all imports from all countries under investigation. This means that there is only one margin of injury, expressed as a percentage of the CIF price to all exporting countries. Therefore, in some cases, the respondent enterprise benefits because it is suffering from a high dumping margin but is applied a lower margin of injury.

The KTC also does not differentiate the margin of injury according to the level of cooperation. This is different from the practice in the European Commission EC.