WORLD TRADE
ORGANIZATIONTN/RL/W/129
20 June 2003
(03-3302)
Negotiating Group on Rules Original:  English
CONCEPT PAPER ON TRADE REMEDY RULES :
EVIDENCE OF TRADE DISTORTING PRACTICES
Communication from Hong Kong, China
The following communication, dated 17 June 2003, has been received from the Hong Kong
Economic and Trade Office.
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Background
1. The Doha Ministerial Declaration highlights " disciplines on trade distorting practices " as one
area which Members may seek to clarify and improve under the existing round of anti-dumpingnegotiations.  It will be useful to examine how effective the Anti-Dumping Agreement is in
identifying situations involving trade distorting pract ices, how best it could address them, and whether
it is necessary to clarify and improve the disciplines in this area.
Concerns Raised/Problems Identified
2. Many Members consider that one of the objectives of anti-dumping measures is to counteract
injurious dumping resulting from trade distorting practices.  For example, the United States, in its
earlier submission to the Negotiating Group on Rules entitled "Basic Concepts and Principles of the
Trade Remedy Rules"1, highlights the problem that " government attempts to create artificial
advantages distort market signals indicating where the most profitable business opportunities are
found ".  The United States further states that " a government's industrial polices or key aspects of the
economic system supported by government inac tion can enable injurious dumping to take place ", and
that " these polices may allow producers to earn high profits in a home 'sanctuary market', which may
in turn allow them to sell abroad at an artificially low price ".  All these points indicate that
"inappropriate government involvement" (which may take on different forms such as government
restrictions on competition, implementation of significantly high tariffs and non-tariff barriers in theexporting country, and government policies that provide unjustified cost advantages to exporters) is a
necessary condition which would allow exporters to enjoy artificial advantages and engage in
injurious price discrimination.
3. The United States' submission has generated discussions and some follow-up questions in the
Negotiating Group on Rules.  We agree with one premise of the submission, that it is useful to clarify
the basic concepts and principles of trade remedies in the process of improving disciplines under the
Anti-Dumping Agreement.  This paper aims at further clarifying the basic concepts and objectives of
anti-dumping measures so that these could be ap propriately reflected in anti-dumping procedures.
                                                     
1 "Basic Concepts and Principles of the Trade Remedy Rules", TN/RL/W/27TN/RL/W/129
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4. The submission of the United States notes that " the anti-dumping rules are triggered in
response to international price discrimination, wher e a foreign producer sells its product at a lower
price in the importing country than it does in its home country, or alternatively, in other primary
markets ".  It is, however, a frequent and accepted business practice that the same product could be
sold under a wide-range of prices across countries in today's globalized economy.  Such pricediscrimination, which may flow from the operat ion of competitive advantages or common and
legitimate commercial practices, represents nothing but the essence of "fair trade".  In addition, under
certain circumstances, making sales below costs could be based on perfectly valid commercial
reasons.  We cite here two obvious examples -
• Differences in brand value can lead to normal price discrimination.  For example, an
electronics producer's product may be well known in its home market and command a
price premium due to brand recognition. However, exports of the same product maynot command a price premium as consumers in export markets do not recognise its
brand.  The export price could therefore be lower than the domestic market price
simply because of a difference in brand value.
• At times of slackening demand, exporters may not be able to sell enough output to
recover all of the costs.  Instead of halting production totally, they may decide to sell
certain products below costs in order to recover a portion of the total costs and reduce
the losses.  Such a decision of selling below costs clearly has nothing to do with
unfair trade.
General Questions for Reflection
5. As we have stated above, the United States ’ submission is a useful starting point for
examining the role of anti-dumping measures in international trade.  To help take forward the
deliberation on some major concepts and issues outlined in this submission, we pose the following
questions for reflection by Members -
(a) In its submission, the United States notes that " effective trade remedy instruments are
important to respond to and discourage trade distorting government polices and the market
imperfections that result ".  Viewed in this light, should the application of anti-dumping
remedies be restricted to situations where trade distorting policies have resulted in marketimperfections that create artificial advantages for foreign producers?  If not, under what other
circumstances should anti-dumping remedies be permitted?
(b) Does the application of anti-dumping remedies in the absence of any trade distorting policies,
or any resulting market imperfections, or any resulting artificial advantages, constitute an
abuse of the basic concepts and principles of the Anti-Dumping Agreement?  If not, under
what circumstances would it not be an abuse to apply anti-dumping remedies in the absenceof trade distorting policies?
(c) Should the anti-dumping rules that result in the application of anti-dumping measures in the
absence of any trade distorting policies, or any resulting market imperfections, or any
resulting artificial advantages be revised, if possible, to prevent the application of anti-dumping measures in such instances?
(d) The United States' paper states that " anti-dumping rules are triggered in response to
international price discrimination ".  Do higher price levels in the domestic market than in an
export market always indicate the presence of trade distorting policies in the domesticmarket?  To quote an example, many United States producers of branded merchandiseTN/RL/W/129
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contend with the issue of “gray market” re-impor ts.  These re-imports respond to, but do not
fully eliminate, higher price levels in the United  States than in the original export market.  Do
the grey market re-imports indicate the presence of trade distorting policies in the United
States?  If not, do these re-imports simply reflect that sometimes international price
discrimination has nothing to do with trade di storting policies?  How do current anti-dumping
rules differentiate between “normal” price discrimination and “unjustified” price
discrimination?
(e) How well do current anti-dumping rules measure international price discrimination, since
frequently significant numbers of comparable home-market sales are excluded from the
calculation of normal value on the ground that they are below the full costs of production (i.e.
fixed and variable costs)?  How does the comparison of all export sales to only the higher (i.e.above-cost) domestic sales yield useful information about relative price levels in the two
markets?
(f) According to the United States' paper, “sanctuary markets” allow foreign producers to earn
artificially high profits at home and charge artificially low prices abroad.  How does theexclusion of below-cost home-market sales pertain to the identification of sanctuary markets?
Elimination of below-cost sales produces hi gher dumping margins (by producing a higher
normal value) in situations where profits, far from being artificially high, are non-existent.
What is the justification for anti-dumping rules that produce higher dumping margins when
there is clearly no sanctuary market?  How does the comparison of all sales in the exportmarket to only above-cost sales in the domestic market demonstrate the existence of trade
distorting barriers in the domestic market?
(g) The United States' paper states that dumping can involve sales below the cost of production
plus a reasonable amount for selling, general, and administrative expenses and profit.  Doinsufficiently profitable export sales always reflect the presence of trade distorting practices
in the domestic market?  Are there other alternative possibilities – for example, slumping
demand in the export market?  How do current anti-dumping rules differentiate between
“unfair” insufficiently profitable export sales  and “fair” insufficiently profitable export sales?
Inadequacy of the Anti-Dumping Agreement
6. The existing Anti-Dumping Agreement, as it now operates, contains no mechanism to
distinguish between " normal price discrimination " and " unjustified price discrimination ".  Nor does
it provide for any clear rules for identifying and rela ting the existence of trade distorting practices to
the application of anti-dumping measures.  Under the Agreement, the finding of dumping is based on
a mechanical methodology under which a product is considered as being dumped if the export price isless than the comparable price, in the ordinary cour se of trade, for the like product when destined for
consumption in the exporting country.  It is true that adjustments from gross price to net price
constitute a limited mechanism for identifying "unjusti fied" price discrimination, in that they quantify
differences due to certain "normal" differences in circumstances of sale, such as transportation costs,
credit terms, and so forth.  However, these adjustments do not take into account a host of legitimatebusiness reasons justifying international price differences in the globalized economy nowadays.  A
finding that normal value exceeds the export price does not, in all cases, prove the existence of
"unjustified price discrimination ".
Ideas for Exploration
7. We float below some possible improvement directions/ideas for exploration and deliberation -TN/RL/W/129
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(1) The existing provisions relating to initiation of investigation (i.e. Article 5 of the
Anti-Dumping Agreement) could be improved with a view to weeding out
unwarranted anti-dumping cases that have nothing to do with unfair trade at an early
stage.  To achieve this, would it be useful to consider adding, in addition to the
current standards for initiation, a requiremen t to the effect that clear and sufficient
evidence of trade distorting practices that have led to a situation of injurious dumping
should be provided to support the relevant anti-dumping petitions before the initiation
of investigations?
(2) Also, would it be useful to consider improving the existing provisions on evidence
(i.e. Article 6) by providing exporters or producers subject to investigation with an
additional opportunity for defence through presenting evidence that:
(a) they are not earning above-market profit margins in their home market;  or
(b) there does not exist any home-market sanctuaries that enable them to enjoy
artificial advantages (e.g. evidence of open markets, like, free entry to domestic
markets, low tariffs, etc.)?
The above evidence would be useful and valid for the investigating authorities to determine whether
there exist home-market sanctuaries that enable the relevant exporters or producers to engage in
dumping.
(3) In addition, should we also consider supplementing a consultation provision to
provide that prior to initiation of any investigation under Article VI, concerned
Members shall consult with a view to (a) considering the evidence of dumping and
injury; (b) identifying any trade distorting practices that may have led to a situation of
injurious dumping; and (c) resolving any situation of injurious dumping and tradedistorting practices through appropriate settlement or undertakings?  Such
consultations may also occur prior to the imposition of any anti-dumping duties.
When compared with Proposals (1) and (2) above, this proposal may not be a direct and effective
means for deterring unjustified petitions or initiations.  Nevertheless, such a consultation mechanism
may be worthwhile in several ways.  First, it would provide a venue for Members concerned to
discuss the allegations of dumping and injury prior to initiation of investigation.  This would at leastprovide an occasion for the importing Member to reflect upon its overall interests.  Second, the parties
concerned would have an early opportunity to settle the investigation.  Although settlement at this
stage might not be achievable, the consultations could help open channels of communication that may
be useful later (e.g. in later discussions on possible undertakings).
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