Import Substitution Subsidy

LDC Members will be exempted from the prohibition of import substitution subsidies for 8 years from 1 January 1995. For other developing country Members, the prohibition will not apply for five years from 1 January 1995.

Absence of presumption of serious prejudice

For developed country Members, there is a presumption of the existence of serious prejudice if any of the following four situations exists:

- the subsidy on a product exceeds 5% of the value of production;

- the subsidy is given to cover the operating losses of an industry

- repeating subsidy is given to cover the operating losses of an enterprise;

- direct forgiveness of debt, including grants to cover debt repayment.

The burden of proof lies on the subsidizing Member to demonstrate that in spite of the existence of these situations, the elements of serious prejudice do not exist. In the case of developing country Members, however, there is no presumption of serious prejudice in these circumstances. Thus, there is a shift of the burden of proof, i.e., the burden of proof is on the complaining Member to demonstrate that serious prejudice exists. Furthermore, adverse effect in a third country market caused by the subsidized exports from developing countries will be exempted from any countermeasures.

Besides, subsidies linked to and granted within a privatization program of a developing country Member will be free from any remedial action.

Special provisions for Member countries in transition.

For Member countries in transition from a centrally planned economy to a market, free-enterprise economy, the following flexibilities have been laid down in the Agreement:

- such Members have seven years to phase out the prohibited subsidies, i.e., export subsidies and import-substitution subsidies;

- remedies through the dispute settlement process cannot be taken against direct forgiveness of debt for seven years;

- regarding remedies through the dispute settlement process against other actionable subsidies, such Members have the same seven-year flexibility as the developing country Members in general.

 

Dumping and Anti-dumping

 

Definition: Dumping is a situation of international price discrimination, where the price of a product, when sold in the importing country, i.e., the export price, is less than the price of that product in the market of the exporting country, i.e., the normal value.

Dumping vs Subsidy.

Dumping is adopted by firms and enterprises, whereas subsidy by Member governments;

The remedial action in respect of subsidies is targeted at the subsidizing Member, i.e., is taken against the subsidized product exported by the various enterprises of the subsidizing country, whereas the action in respect of dumping is taken only against the enterprises that resort to the practice. Those enterprises which do not dump the product are not covered by the anti-dumping action.

Effects of Dumping.

The low prices of the imported products may harm the domestic industry which is producing like products;

The consumers and industrial users of the product in the importing country may benefit from such low prices.

Impact on trade.

Generally, the very initiation of an investigation on dumping gives rise to uncertainty in the exports from the country under investigation to the investigating importing country. Importers may start shifting their sources of supply. Usually, the investigation takes a long time, and even if finally there is a negative determination of injury of dumping, some damage would already have been done, with some loss of market for the exporting country.

Developing countries are exposed to a considerable degree of uncertainty about their export prospects as they have been facing a large number of anti-dumping investigations.

Classification.

Persistent dumping or international price discrimination, is the continuous tendency of a domestic monopolist to maximize total profits by selling the commodity at a higher price in the domestic market than internationally.

Predatory dumping is the temporary sale of a commodity at below cost or at a lower price abroad in order to drive foreign producers out of business, after which prices are raised to take advantage of the newly acquired monopoly power abroad.

Sporadic dumping is the occasional sale of a commodity at below cost or at a lower price abroad than domestically in order to unload an unforeseen and temporary surplus of the commodity without having to reduce domestic prices.

Cases in history

In the late twentieth century, Japan was accused of dumping steel and television sets in the US, and European nations of dumping cars, steel, and agricultural products. With the development of international trade, however, more and more developing countries are exposed to charges of dumping by developed countries.

Disciplines regarding anti-dumping measures.

Existence of dumping

- Existence of material injury or threat of material injury to domestic industry producing like products

- Causal link between dumping and injury

- Margin of dumping

If an enterprise is found to be dumping its products and if such dumping is causing injury to the domestic industry in the importing country, the importing Members can impose a countervailing duty on the imports up to the maximum extent of the margin of dumping, i.e., the quantum of dumping.

Three steps in determining the existence of dumping

1. determination of the export price

2. determination of the normal value

3. comparison of the export price and the normal value

The major importing countries have enacted very complex procedures to adjust the available data for the export price and the normal value so as to make them reasonably comparable.

Export Price

Generally, the export price will be based on the transaction price at which the foreign producers sells the product to an importer in the importing country. In some cases, however, this price may not be available or reliable:

- the export transaction is an internal transfer

- the product is exchanged in a barter transaction

- the exporter and the importer may be associated

- the exporter and the importer may have some mutual compensatory arrangement between them or a third party.

In such cases, an alternative method of determining an appropriate export price or calculating a constructed export price for comparison is needed.

Constructed export price: The basis for calculating the constructed export price is the price at which the imported product is first sold to an independent buyer. If the product is not resold to an independent buyer or is not resold in its original imported condition, the authorities in the importing country may determine the constructed export price on some reasonable alternative basis.

Normal Value.

General rule for the determination of normal value:

The normal value is generally the price of the product at issue or the price of the like product, in the ordinary course of trade, when destined for consumption in the exporting country market.

Sometimes, it may not be possible to consider the sale price in the exporting country because:

- there is no sale of the like product in the exporting country

- the sale is made in a particular market situation

- sales volume in the domestic market of the exporting country is less than 5% of the sale of the product to the importing country

- sales in the domestic market of the exporter are made below cost

Ordinary course of trade

This concept has been clarified by citing negative situations:

- the exporters and importers are related

- the sale price is consistently below the cost price

- the product is made for a single and specific purpose according to exclusive specifications

Particular market situation:

- there may be strict government control on prices and prices may not be determined based on market conditions, but on several other social and political considerations

- there may be different patterns of demand for the product in the exporting and importing countries

Sales below cost.

Prices consist of fixed costs, variable costs, plus the amounts for administrative, selling and general costs/expenses and amounts for profits. This issue has particular significance as it has a bearing on the calculation of the dumping margin. If prices below cost in the exporting countries are left out while calculating the normal value, there will be a bias towards arriving at a higher normal value and therefore a higher dumping margin. Generally, prices below cost will be included in calculating the normal value. When there is evidence of persistent sales at lower prices and when large quantities are involved, sales below cost will be excluded from the calculation of normal value.

Conditions for exclusion of sales below cost from calculation

- such sales are made within one year, and in no case less than six months

- the volume of such sales is 20% or more of the volume under consideration in determining normal value

- the weighted average selling price of the transaction under consideration is below the weighted average per unit cost, and therefore cannot provide for the recovery of all costs within a reasonable period of time

Cost of production

Normally, the cost will be calculated based on the records kept by the exporter or producers under investigation if:

- such records have been kept in accordance with the generally accepted accounting principles of the exporting country, and

- the records reflect reasonably the costs associated with the production and sale of the product.

Some adjustments in the cost will be required as there may be some items of cost which are spread over products beyond those which have been exported, such as R&D costs, costs relating to start-up operations.