Sunday, May 29, 2011

AD Scope Decisions

This is not the trade law blog, but when push comes to shove it is usually Customs that enforces the trade laws. That means that trade issued often come up for importers who were never directly involved in an antidumping or countervailing duty case. Take, for example, the large number of companies that have discovered that the aluminum extrusions they purchase from China are three times as expensive as they had planned. Whether the commodity is an aluminum extrusion or anything else, importers are often caught off guard by dumping or CVD orders.

First, some background. An antidumping case results when a domestic producer petitions the U.S. government for trade relief. The petition has to provide some basis for believing two things. First, that the product is being sold in the United States at a price (properly adjusted) that is below the cost that similar goods (properly adjusted) are being sold in the home market. Second, that the "below normal value" sales are causing (or are likely to cause) material harm to the petitioning industry. If the Commerce Department find dumping and the International Trade Commission finds injury, a dumping order will require that Customs collect additional duties to offset the difference between the home market and the U.S. prices.

The dumping law is inherently problematic for consumers and consuming industries and beneficial to producers. This always creates tension. For example, a dumping order on sheet steel helps the steel industry compete against cheap imports. That protects jobs, might encourage more investment in modernization, and is generally good for that slice of the economy. But, a dumping order on steel is bad for car manufacturers, appliance makers, builders, the aircraft industry, and any other consumers of steel. Ultimately, the additional cost of steel is passed on to the consumers. So, is it a dumping order good or bad for the economy? That is something economist can sort out (most say it is not). As I tell my students, we just have to deal with the law in a way that works best for our clients.

Another, more technical aspect of the dumping law is based on the economic theory on which it is based. The theory is that the only reason the producer can dump in the U.S. market is because the U.S. producer cannot turn around and dump in the producer's home market. Usually, this is because the producer's country has high tariffs or some other non-tariff barrier to entry. The result is that the consumers in the home market pay a higher price for goods to subsidies the lower prices charged in the U.S. Under this theory, the dumping is unfair to both the U.S. domestic producers and to the foreign market consumers. Again, the economists can sort out whether that is true.

A countervailing duty case is similar excepted that the alleged injury is caused by the home market government subsidizing the production or export of the product.

All of which is background for Mid Continent Nail Corp. v. United States. A dumping order is defined by the "scope of the order." This is the section telling Customs what products are covered and what are not covered. In some cases, the scope is not very clear. In Mid Continent, the scope covered numerous kinds of nails and excluded numerous kinds of nails. What the scope did not say was how to handle nails imported with other non-nail products. In particular, the imported merchandise in this case was household tool kits sold at Target.

Target requests a scope clarification ruling from Commerce, which decided that the tool kits contain subject nails but that the kits as a whole were excluded from the scope of the order. Target had argued that nothing in the scope section of the order stated that kits were to be included in the scope. Target probably also argued that the small number of nails in these kits were not really competing with U.S.-based nail producers and, therefore, not causing injury. But, none of that really matters. What matters is what the scope section of the order says. And, the petitioner argued that nothing in the scope section of the order excludes kits or nails contained in kits as long as the nails clearly are scope merchandise.

Enter the Court of International Trade, which was not happy with Commerce. There are specific regulations for how a scope determination is to be made. Under 19 CFR sec. 351.225(k), Commerce is first supposed to look at the description of the subject merchandise in the petition, the investigation, and the determination. Only if that does not resolve the question, Commerce should then look at a number of factors including:

  • The physical characteristics of the product
  • The expectations of the the ultimate purchasers
  • The ultimate use of the product
  • The channels of trade in which the product is sold
  • The manner in which the product is advertised
In this case, the Commerce Department, apparently following the importer's suggested analysis, jumped right to the second part of the analysis. The problem with this is that whether you start with the first or the second step is likely to be determinative. A kit will rarely have physical characteristics and end uses similar to a single product in the kit. 

Because Commerce skipped the first step, it did not consider whether the petition or some subsequent investigation document clearly addressed the question of kits including nails. Nor did Commerce state whether the nails within the kits might be subject to the scope of the order. Consequently, the Court of International Trade held that the scope determination was not supported by substantial evidence in the record. The CIT remanded the case to Commerce for a new consideration of the first step of the scope analysis.

This is a useful decision for importers to understand. When dealing with dumping orders, the first question is often whether the product is within the scope of the order. Understanding the legal process Commerce is supposed to employ in making that determination will help importers decide whether it makes sense to pursue a Commerce Department scope clarification.

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