Under the antidumping law, dumping is defined as the sale of a commodity by a foreign company in the United States at a price that is less than “normal value.” For antidumping duties to be imposed, two major legal requirements must be satisfied: Commerce must find that imports are being dumped, and the International Trade Commission must find that dumped imports are causing or threatening injury to a domestic industry.
Typically, normal value is based on the price of the same or a similar product in a comparison market (normally the foreign producer’s “home” market). The magnitude of dumping (or the “dumping margin”) is calculated by subtracting the export price from normal value and dividing the difference by the export price.
Accordingly, if a foreign producer sells ball bearings for $10 per pound at home and for $8 per pound in the United States, its dumping margin is (10−8)/8, or 25 percent. If there are insufficient sales of the comparison product in the ordinary course of trade in the producer’s home market, then, typically, the producer’s sales in a third‐country market are used to calculate normal value. If no such sales are available, then Commerce typically bases normal value on “constructed value,” which is calculated as the cost to produce the product sold in the United States plus allowances for expenses and profit.
But that straightforward‐sounding exercise of comparing prices and calculating dumping margins is rife with subjective interference and methodological sleights of hand. Commerce maintains considerable discretion over various decisions that directly affect how the existence and magnitude of dumping is determined. These include which sales should be included in calculating average prices, what product models should be collapsed together and treated as a single product for purposes of calculating average prices, what expenses should be subtracted from gross prices before net prices are compared between markets, and how company‐wide costs should be allocated to the subject merchandise. Commerce’s decisions about these questions, and many others, impact the outcomes.
Whether the foreign producer’s export price is compared to his home market price, his price in a third‐country market, or constructed value, higher normal values translate into larger margins of dumping. This fact drives nearly all the arguments in an antidumping proceeding. Petitioners submit arguments to support the case for higher normal values and lower export prices, respondents argue the opposite, and Commerce usually agrees with the petitioners. Moreover, the methodologies and procedures adopted by the department have led many observers to question the agency’s impartiality. Some of those techniques and their margin‐inflating effects have been documented in previous studies.12
One of the most egregious methodological distortions among Commerce’s antidumping protocols is what became known as the cost test. Introduced in the Trade Act of 1974 at the behest of the steel industry, the cost test was designed to eliminate from the calculation of the average home market price those sales made at prices lower than the full cost of production.13 Of course, when below‐cost sales are eliminated, the result is that U.S. sales are compared with only the higher‐priced (i.e., above‐cost) home market sales.
What possible purpose—other than to generate higher dumping margins—could be served by excluding below‐cost home market sales from normal value? In fact, the existence of below‐cost sales in the home market demonstrates an absence of a sanctuary home market, which is supposed to be an island of artificially high prices and profits from which a foreign producer’s dumped export sales are subsidized. If home market sales at a loss are found in significant quantities, there must be no sanctuary market and thus no cash cow from which to cross‐subsidize cheap export sales. But because of the cost test, it is precisely under these conditions that dumping margins become significantly higher than they otherwise would be.
The effect of the cost test on the dumping calculation can be dramatic. Consider a foreign widget producer who makes five sales of widgets in his home market (at prices of $1, $2, $3, $4, and $5) and fives sales of widgets in the U.S. market (at prices of $1, $2, $3, $4, and $5). Assuming one widget is sold in each transaction, the weighted‐average price for a widget is $3 in both markets. The dumping margin for this comparison is zero. There is no price discrimination whatsoever.
But the cost test requires that the foreign producer’s home market sales made at prices below the full cost of production be eliminated before calculating the average home market price. The cost test has no impact on the eligibility of the foreign producer’s U.S. sales in calculating the average U.S. price, however.
Assuming that the unit cost of producing the widgets is $2.50, the home market sales made at prices of $1 and $2 would be eliminated, and the average home market price would then be calculated as $4. This generates a dumping margin of 33 percent despite the absence of price differences between markets. Empirically, the cost test is among the most significant causes of inflated dumping margins.
Of course, the cost test often eliminates from eligibility all home market sales of a given product. Under those circumstances, Commerce uses a constructed value to serve as normal value for comparison purposes. Constructed value is supposed to approximate the price that the product being sold in the U.S. market would have sold for in the home market, and it is calculated by adding an estimated amount for the selling expenses and profit made in the home market to the cost of producing the U.S. product. This process opens the door to more administrative mischief, which is reflected in the fact that constructed value comparisons almost always produce higher dumping margins than do comparisons based on prices.
In addition to the cost test, the use of constructed value, and many other methodological distortions, the practice known as zeroing is particularly onerous. Zeroing is a results‐oriented method that serves to inflate dumping margins and has been the source of considerable controversy and legal dispute. It has been found to violate the World Trade Organization’s antidumping agreement on numerous occasions, but the United States has remained determined to carve out exceptions where it believes it is still entitled to zero. For example, Commerce continues to zero in situations where it finds evidence of targeted dumping (where there are patterns of price differences that would—allegedly—conceal dumping but for the practice of zeroing). It is worth noting that Commerce finds evidence of targeted dumping with greater frequency now that the condition must be found for it to zero.
Antidumping calculations typically involve dozens, hundreds, or thousands of price comparisons, which are used to generate a single margin of dumping for the subject merchandise. When individual sales are made at dumped prices (i.e., when the U.S. price is less than normal value), the magnitude of the difference between prices is given full weight. But when sales are made at nondumped prices (i.e., when the U.S. price is greater than normal value), the magnitude of the difference between prices is entirely disregarded. It is set to a value of zero. Accordingly, when calculating the overall weighted‐average margin of dumping (the duty rate that will apply to imports) from the multitude of price comparisons, the ability of the value of the nondumped sales to offset the value of the dumped sales is foreclosed, resulting in an average dumping margin that is much greater than mathematics and logic permit.14