Research on the analysis of price impacts in the investigation of domestic industry damage in trade remedies cases

According to the WTO regulations, when considering the impact of imports on the injury of the domestic industry, the investigating authority must consider the impact on prices. Accordingly, the investigating authority will consider whether the imported goods are sold at prices significantly lower than the prices of similar goods in the importing country (price undercutting) or whether the impact of the imports is to significantly depress prices (price depression) or prevent prices from increasing significan

1. Concepts of price undercutting and price underselling

The Panel in the Egypt – Steel Rebar case affirmed that the investigating authority in all cases must analyze the price effects referred to in Articles 3.1 and 3.2 of the ADA. Price effects also form part of the trend assessment and the assessment of time correlation. Failure to consider price effects may violate the ADA and SCMA.

The scope of the SGA is not explicitly addressed. While price effects are a mandatory requirement under the ADA and SCMA, the SGA does not. Importantly, Article XIX of the GATT as well as Article 2 of the SGA both refer to the phrase “and under such conditions”. The Panel in US – Wheat Gluten noted that although price was not mentioned as a relevant factor to be considered, it still has a role to play in the analysis of the causal relationship and the conditions of competition between imported and domestic goods. In US – Wheat Gluten, the Appellate Body also stated that “conditions of competition” refer to “the prevailing conditions of the market”. This approach was supported by the WTO Panel in US – Steel. In short, the role of assessing price effects is not eliminated in safeguard investigations.

In most antidumping and countervailing duty investigations, the investigating authority will investigate whether the dumped or subsidized goods have a price suppression or price-suppressing effect in the importing country’s market. More specifically, the investigating authority should consider whether the imports have the following price effects:

(a) Price differentials or

(b) Price suppression or

(c) Price suppression

The investigating authority will typically consider the relationship between the increase in imports, the selling price of the imported goods and the selling price of the domestically produced goods. The investigating authority may also consider factors such as market share and sales volume declines.

However, the traditional method of research used is “margin analysis”. Margin analysis corresponds to the common understanding of dumping/subsidy and its effects. However, margin analysis is not limited to the dumping/subsidy perspective but can also assess the impact on the price factor of the domestic production, commonly known as “margin of injury” analysis. Price impact/margin of injury analysis is similar to dumping margin analysis; the only difference is that instead of using the domestic selling price of the exporter; the investigating authority uses the pure domestic selling price of the domestic production or, if the selling price is not reliable, constructs its own selling price when there is no injury, and compares this price with the selling price in the importing market of the imported goods. Margin of injury or price impact analysis is carried out in most anti-dumping investigations and some safeguard investigations by different countries. Margin analysis is usually carried out through undercutting and underselling analyses. The Undercutting Margin method (in %) calculates the extent to which the import price of the imported goods is lower than the selling price of the like domestic goods during the injury investigation period. When using the Undercutting Margin method, the investigating authority assumes that under fair competition, the imported goods should be sold at a higher price than the domestic goods. The concept of Undercutting was interpreted by the Panel in the EC – Pipe Fittings case as a situation where the imported goods are sold at a lower price than the domestic goods (See Fig.3 above). Underselling, on the other hand, measures the percentage by which the import price is lower than the non-injury price of the domestic like product or the target price. In other words, the margin analysis calculates the extent to which the imports result in price suppression (in the case of undercutting) or price repression (in the case of underselling).

A clear understanding of the concepts of price suppression and price repression is essential in the analysis of price effects. In Korea – Commercial Vessels, the Panel referred to price suppression and price repression as factors associated with the causality analysis, with the view that price suppression and price repression may reflect the impact of unfair competition by imports on the injury factors. Neither Article 3.2 of the ADA nor Article 15.2 of the SCMA prescribes specific methods of calculation related to price effects. The Panel and the Appellate Body in US – Upland Cotton both explicitly addressed the meaning of these concepts. The Panel defined “price suppression” as a situation where prices are prevented or impeded from rising (i.e., prices do not rise when they should) or do rise, but by less than they should. On the other hand, the Panel defined “price suppression” as a situation where prices are forced to fall. Although these are distinct concepts, the above interpretations may suggest that both price suppression and price suppression may overlap in certain circumstances, especially when prices are forced to fall. In explaining this, the Panel and the Appellate Body appear to have agreed on the interpretation that “price suppression” envisages both a real decline in domestic prices (which would not have fallen in the normal course of events, thus representing price suppression) and a small increase in prices (which would have risen much more in the normal course of events).

Comparing price differentials is often more difficult in the case of safeguard investigations than in antidumping or countervailing investigations because the product scope of safeguards is much broader than that of AD and CVD, and the selling prices of imported goods are more diverse due to the inclusion of many different types of products. Furthermore, detailed product classifications based on producer product classifications (PCN/CONNUMs) are often not performed in safeguard investigations compared to AD and CVD. In general, these calculations are based on import data, which are often inaccurate and non-specific. Furthermore, there may be other factors influencing purchasing decisions. Despite these limitations, price differential trend analysis can provide a comprehensive picture of import price trends and the impact of imported products on domestic prices. Underselling analysis is also one of the useful factors in assessing injury and the existence of a causal relationship. The essence of underselling analysis is the view that the selling price of imported goods is too low, leading to the domestic industry being unable to increase its selling price while increasing costs such as fixed costs, variable costs and other selling costs. The inability to increase selling prices due to increased costs may lead to business losses and thus cause injury. The existence of “cost/selling price” suppression is often evidence of injury related to imported goods.

To estimate the price suppression effect, the investigating authority may have to calculate the ratio of cost of goods sold (“COGS”) to net sales during the investigation period. One of the biggest difficulties that the Investigation Authorities often encounter in analyzing price underselling is that the compilation of cost and sales data over a period of 3-5 years (depending on the type of trade defense case) is often too burdensome for both the Investigation Authorities and the domestic industry. In fact, analyzing Underselling through determining the non-injury selling price or target price is more effective and scientific in the process of assessing the impact of imported goods on the selling price of domestic goods. And the reason for this is also obvious. In some cases, if price suppression has occurred, the calculation of the price difference margin (undercutting) will not fully reflect the extent of injury to the domestic industry. Moreover, the domestic industry may have had to apply a policy of low pricing to deal with other domestic competitors and therefore, it is unreasonable to assume that the injury comes from dumped or subsidized goods. In addition, the price suppression analysis is assessed only on the basis of data on similar domestic goods without any comparison with the price of imported products. Therefore, the investigating authority does not necessarily have to make complex adjustments for the purpose of price comparison.

In summary, it can be concluded that in practice, the price impact assessment or the margin analysis has high evidentiary value in proving injury and causality, but it is not an evidence for making conclusions about injury and causality. After all, a correlation does not necessarily mean a causal relationship. The Appellate Body in the China-GOES case emphasized that the price impact analysis can assist the investigating authority in considering whether the imported goods can cause a sufficiently strong impact on the formation of price suppression or price suppression of domestic goods. As the Appellate Body has pointed out, these analyses can provide “a meaningful basis” for determining injury and causality.

A review of the WTO Trade Remedies Agreements as well as the practice of national investigations shows that price impact analysis or price margin analysis – perhaps the only analytical tool that many WTO members use to assess correlation in the analysis of causality – is the analysis of the price impact or price margin analysis.

2. Trend Analysis and Conceptualization of the “Through the Effects” Requirement

A review of WTO trade remedy dispute settlement cases shows that in most countries, the traditional causality analysis is based on “non-fact-based evidence” of the development of the domestic industry and a simple correlation between the level of imports, domestic output and exports. At its most basic level, this analysis involves looking at trends and correlations.

In trend analysis, if the entry of imported goods occurs while the profits of the domestic industry, domestic prices and output are declining, this will be one of the “evidences” that the imported products are causing adverse effects on the domestic industry. Unless there is convincing quantitative evidence to show that there is no causal relationship, the volume and price of the imports will be presumed to be the cause of the injury to the domestic industry.

Article 3.5 of the ADA and Article 15.5 of the SCMA provide that the dumped/subsidized imports must be the cause of the injury in order for the domestic industry to be “injured by reason of the dumping” or “injured by reason of the subsidization”. One of the outstanding issues related to this concept is whether it is sufficient for the investigating authority to make a finding of injury based solely on the volume and price effects when there are other, perhaps more important, causes of the injury, such as the margin of dumping/countervailing duties, which may have had an injurious effect. In other words, an antidumping or countervailing duty case is only valid if the effects of the dumping or subsidy are sufficiently large. In this sense, a de minimis dumping or subsidy cannot cause injury. As Professor Jackson puts it:

The GATT Safeguards Agreement is very clear, “Subsidized imports must be shown to have, through the subsidy, caused injury within the meaning of the definition of injury established in this Agreement.” This seems to create an international obligation where the proof of causality is tied to the actual elements of the subsidy – such as the margin, etc. A similar provision is found in the ADA. Moreover, this approach is consistent with the object and purpose of the ADA. The ADA was designed to eliminate unfair restrictions on the flow of international trade. Therefore, the Agreement requires a strong justification for the need to prevent injury caused by dumping and for the trade remedy (anti-dumping) to remedy that injury. If the injury is caused by other factors, the anti-dumping measure will not be able to remedy the injury and will result in a restriction of trade without a legitimate purpose.

In the US – Atlantic Salmon dispute, both Norway and the United States made very comprehensive arguments about the meaning of this concept. According to the Norwegian interpretation, the ADA requires each case to analyze whether and what the effects of the imports specified in Articles 3.2 and 3.3 of the Tokyo Round Rules are “dumping effects”. This interpretation requires a focus on “dumping/subsidy margins”. Norway argues that if Article 3.4 of the Tokyo Act requires only an analysis of the effects of imports (i.e., the quantity and price effects) in accordance with Articles 3.2 and 3.3 (of the Toyko Act), there would be no distinction between the determination of the existence of significant injury and the determination of the cause of the injury. Norway argues that the principle of effective treaty interpretation precludes an interpretation that would render the phrase “through the effect of dumping” useless. The United States, on the other hand, argues that for the phrase “through the effect of dumping” to be meaningful, it is not necessary to analyze any factors other than the effects of imports referred to in Articles 3.2 and 3.3 of the [Tokyo AD Code], which do not include the margin of dumping. The United States further argues that the effects of imports referred to in Articles 3.2 and 3.3 are the definition of “the effect of dumping”. The GATT Panel accepted the US interpretation. According to the Panel, what is required to demonstrate under the relevant provision is that “dumped imports are causing injury within the meaning of this Agreement.” The GATT Panel interpreted that the effects referred to in Articles 3.2 and 3.3 of the [Tokyo AD Code] are not merely criteria for determining significant injury, but rather determine precisely what causal relationship must be demonstrated.

The meaning of the phrase “through the effects” is less clearly stated in the context of the Uruguay Round AD and SCM Agreements. There have been moves to reject the US – Atlantic Salmon rulings on the basis that the GATT Panel rulings in the causation disputes were overturned by the Appellate Body in the US – Hot-rolled Steel case. The terms “through the effect of dumpings” and “through the effect of subsidies” are retained in Article 3.5 of the ADA and Article 15.5 of the SCMA, respectively. However, a closer look would demonstrate that the Appellate Body only considered the non-import injury provisions of the ADA in the US – Hot-rolled Steel case and that the scope of the “through the effect of dumping” concept was not a key factor in that case. However, the Panel and the Appellate Body had the opportunity to elaborate on this phrase in the Japan – DRAM case.

In the Japan – DRAM case, the Appellate Body blurred the distinction between “injury caused by the effects of dumping/subsidization” and “injury caused by dumped/subsidized imports”. If examined closely, these two concepts are completely different. The Appellate Body chose to contrast the term “the effect of …. subsidization” in Article VI:6(a) of the GATT with “through the effect of subsidies” in Article 15.5 of the SCMA. By doing so, the Appellate Body chose to interpret the concept “through the effects of subsidies” as “through the effect of subsidies imports” – an approach that shifted the focus of demonstrating a causal link from the margin of dumping or subsidization to the effects of dumped/subsidized imports on the domestic industry.

In summary, the magnitude of the subsidy or dumping margin can be a useful criterion in assessing the effects of dumped or subsidized imports on the domestic industry. An imported product with a low subsidy/dumping margin may have a smaller impact than one with a higher margin. However, the magnitude of the dumping/subsidy is one of the factors in assessing serious injury. It has been criticized that if the concept of “through the effect of dumping/subsidies” only requires an analysis of the effects of imports as provided for in Articles 3.2 and 3.4 of the ADA or 15.2 and 15.4 of the SCMA, there would be no distinction between the determination of serious injury and the determination of the cause of the injury. This approach may seem straightforward, but the determination of the dumping/subsidy margin is included in the trend analysis, which considers the trend in price and quantity movements in conjunction with the assessment of injury to the domestic industry. In other words, the phrase “through the effects of dumping/subsidies” is used to emphasize the role of trend analysis, not only in the analysis of injury but also in the analysis of causality. The magnitude of the subsidy/dumping margin may be an independent factor in the analysis of causality, but to date, the approach of the GATT Panel in the US – Atlantic Salmon case has been accepted as a reasonable interpretation.

Trend analysis is not perfect, however. A prominent weakness of trend analysis is that it does not often take into account the degree of causality required for the imposition of a trade remedy.

Trend analysis or correlation analysis is one of the analytical tools commonly used in determining injury and causation. These analyses can be easily implemented and rely on detailed descriptions and analyses by the investigating authorities. Both the WTO Panel and the Appellate Body have emphasized the importance of trend analysis. The following cases illustrate some of the practical advantages and disadvantages of this approach:

Case 1: The significant injury is entirely caused by factors other than dumping/subsidization (i.e., the dumped/subsidized imports do not cause injury). For example, the injury may have been caused by unfairly competitive imports, or by microeconomic or other industry-specific factors. A trend analysis that examines the correlation between imports and changes in the injury criteria may not be used as evidence of the impact of dumping or subsidies.

Case 2: No factor other than dumped or subsidized imports is determined to be the cause of the injury. In this case, a trend or correlation analysis may be useful in establishing a causal relationship. It is possible that the injury may have been caused by factors that were not identified or not apparent at the time of the investigation; However, in the absence of convincing evidence to the contrary, a causal link may be presumed to be established between the dumping/subsidization or increased imports and the injury.

Case 3: Significant injury is caused in part by factors other than imports. In this case, imports may have contributed to the injury or may have caused injury that was aggravated by other factors. This is a typical case. According to a study by Hansen and Prusa, imports play a very small or statistically insignificant role in prices. Hansen and Prusa also found that other factors play a more important role than imports in pushing down domestic prices. In such a case, trend analysis would not be useful in demonstrating whether the injury was caused by dumped/subsidized imports.

In anti-dumping cases, there is no fixed margin of dumping to determine the injury resulting from other factors. Instead, if the Investigating Authority is not satisfied that a causal relationship exists, it will make a finding of no injury and terminate the investigation.