Zeroing In: Antidumping’s Flawed Methodology under Fire

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Few trade policies engender more bitterness and internationalill will than the U.S. antidumping law. For many years, that lawhas been the weapon of choice among domestic producers seeking toquell import competition. While defenders of the antidumping regimepoint to its use as a means for redress of unfair trade, scrutinyof the law in practice exposes the fallacy--even irony--of thatjustification.

In reality, administration of the antidumping law is entirelydivorced from the supposed theoretical justifications articulatedby its defenders. Furthermore, it is fraught with methodologicaldistortions that routinely exaggerate and even fabricate dumpingmargins. The result is to cripple normal, healthy importcompetition and injure downstream U.S. industries andconsumers.[1]

Possibly the most egregious distortion is the practice known as"zeroing." Its application is a significant cause of the systemicoverestimation of dumping margins and subsequent application ofinflated antidumping duties.

To appreciate the impact of zeroing, it is important tounderstand how the U.S. Department of Commerce calculates dumpingmargins.[2]In a typical antidumping investigation, DOC calculatesweighted-average net prices for each product sold in the UnitedStates. It then compares each of those U.S. prices to the product'snormal value, which can be calculated a number of different waysbut is ideally the weighted-average net price of the most similarproduct sold in the home market.[3] Zeroing is introduced after the comparisonof the U.S. price and normal value.

When normal value is higher than the U.S. price, the differenceis treated as the dumping amount for that sale or that comparison.When, however, the U.S. price is higher, the dumping amount is setto zero rather than its calculated negative value. All dumpingamounts are then added and divided by the aggregate export salesamount to yield the company's overall dumping margin. Zeroing thuseliminates "negative dumping margins" from the dumping calculation.In so doing, it can create dumping margins out of thin air.

In Table 1 comparisons of the average prices of five products inboth markets are presented. Each product is sold at identical netprices in both markets with the exception of Product 1 and Product5. Product 1 is sold for $0.50 less in the home market than in theU.S. market, and Product 5 is sold for $0.50 more. The unit marginis equal to the amount of dumping calculated for each uniquecomparison. The arithmetic sum of the individual dumping margins(total margin) is zero because the price differences for products 1and 5 cancel each other out. But surprise: This is not how dumpingis calculated by DOC.

Rather, the negative dumping margin on Product 1 is set equal tozero and is thus denied any impact on the overall margin. Thus, byengaging in zeroing in this example, the DOC would find a dumpingmargin of 10 percent (the sum of the total PUDD[4] divided by the sum of thetotal value) despite the lack of any difference in overall pricelevels between the two markets.

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Consider the results of 18 actual U.S. dumping determinations inTable 2. Using actual case data and the DOC's dumping calculationcomputer programs, it was possible to calculate the actual effectsof zeroing in these particular cases. In 17 of the 18determinations, the dumping margin was inflated by zeroing. In 5 ofthe cases, the overall dumping margin would have been negative. Onaverage, the dumping margins in the 17 cases would have been 86.41percent lower if zeroing had not been employed.

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Certainly, the impact of zeroing varies from case to case. Ifevery comparison generates a positive dumping margin, then theprohibition of zeroing will have no impact. But if there are manycomparisons generating negative margins, or if there are only a fewgenerating large negative margins, the prohibition of zeroing canhave a very substantial impact on the amount of antidumping dutiesultimately applied.

On April 13, 2004, a WTO dispute panel ruled against the U.S.practice of zeroing in a case brought by Canada involving softwoodlumber. The panel found that "the United States has violatedArticle 2.4.2 of the AD Agreement by not taking intoaccount all comparable export transactions when DOC calculated theoverall margin of dumping as Article 2.4.2 requires that theexistence of margins of dumping has to be established for softwoodlumber on the basis of a comparison of the weighted-average-normalvalue with the weighted average of prices of all comparable exporttransactions, that is, for all transactions involving all types ofproducts under investigation."[5] By setting equal to zero the dumpingmargins of those comparisons where the average export priceexceeded the average normal value, the DOC failed to take intoaccount all comparable export transactions.

The WTO's ruling in the lumber case is not surprising since thepractice of zeroing had already been found to violate the WTOAntidumping Agreement in a previous case brought by India againstthe European Union involving bed linen. In that case, the WTOAppellate Body ruled in March 2001 that the EU's practice wasWTO-inconsistent for the same reason.[6] The European Union has sincechanged its practice as a consequence of the Appellate Body'sruling, but loopholes remain.[7]

The U.S. zeroing methodology is also under WTO attack fromanother quarter. In February 2004 the European Union requested theformation of a WTO panel to hear its complaint about 31 differentU.S. antidumping cases in which zeroing had been used. The EU seemsto be approaching this complaint particularly fastidiously,apparently--and rightly--concerned that the United States willexercise every contingency available to retard antidumping reform.Presumably, the inclusion of 31 different cases in the complaint isdesigned to nip in the bud any attempts by the United States torespond to WTO indictments about zeroing on a case-by-casebasis.

Importantly, the 31 cases include antidumping investigations aswell as administrative reviews of existing antidumping orders. Themethodologies for calculating dumping are slightly different foreach type of proceeding, presenting a potential loophole if the WTOwere to rule on only one type or the other. It is important thatthe WTO issue an unambiguous decision that the practice of zeroingviolates the Antidumping Agreement regardless of whetherindividual-to-individual, individual-to-average, oraverage-to-average comparisons are used to calculate dumping.

While the United States is likely to appeal the panel's decisionin the Canadian lumber case, it is likely that the Appellate Bodywill come to the same conclusion that the panel did, just as theAppellate Body did in the case involving Indian bed linens. When itdoes--or if there is no appeal--the United States should seek tobring its antidumping calculation methodology into conformity withthe Antidumping Agreement in an expeditious manner.

The growing list of adverse WTO rulings with which the UnitedStates has failed to comply is serving to undermine the integrityof the dispute settlement system. Congressional resistance torepealing or revising the Continued Dumping and Subsidy Offset Act(or Byrd Amendment), which was ruled a violation of both theAntidumping Agreement and the Agreement on Subsidies andCountervailing Measures by a panel and the Appellate Body, isfostering doubts among U.S. trade partners about U.S. commitment tothe WTO.[8]Congress's failure to act on the Foreign SalesCorporation/Extraterritorial Income (FSC/ETI) issue, which wasdetermined to constitute illegal export subsidies by two panels andupheld twice by the Appellate Body, has led to the European Union'simposing retaliatory tariffs on U.S. exporters. Failure to repealthe Antidumping Act of 1916--and the decision of a U.S. court toaward damages under that statute even after it was deemed aviolation of the Antidumping Agreement--threatens further damage tothe integrity of the dispute settlement process.

Although the United States pushed hard in the Uruguay Round forthe creation of a dispute settlement body that would renderdeterminations that would be respected, ironically it is the UnitedStates that has been especially dismissive of its findings. Theunfortunate implications of this obstructionism are clear. As U.S.Trade Representative Robert Zoellick explained to a congressionalsubcommittee last month, "Our ability to demand that others followthe trade rules is strengthened when the United States addressescases we lose."[9]

[1] For acomprehensive review of many of the glaring flaws of antidumpingmethodology and a set of related reform proposals, see BrinkLindsey and Dan Ikenson, "Reforming theAntidumping Agreement: A Road Map for WTO Negotiations," CatoTrade Policy Analysis no. 21, December 11, 2002. Much of thediscussion in this bulletin was culled from that report. See alsoBrink Lindsey and Daniel J. Ikenson, Antidumping Exposed: The Devilish Details of Unfair TradeLaw (Washington, D.C.: Cato Institute, 2003).

[2] For an in-depth explanation of how antidumpingcalculations are performed, see Brink Lindsey and Dan Ikenson,"Antidumping 101: The Devilish Details of'Unfair Trade' Law," Cato Trade Policy Analysis no. 20,November 26, 2002. See also Lindsey and Ikenson, AntidumpingExposed.

[3] The average normal value is often based on asubset of home market sales: those sold at prices above the averagecost of production. Alternatively, it can be based on the cost ofproduction plus allowances for expenses and profit, or on prices ina third-country market.

[4] PUDD is a DOC acronym for Potentially UncollectedDumping Duties.

[5] Report of the Panel on United States--FinalDumping Determination on Softwood Lumber from Canada,WT/DS264, April 13, 2004, p. 128.

[6] Report of the Appellate Body on EuropeanCommunities--Antidumping Duties on Imports of Cotton-Type Bed Linenfrom India, WT/DS141/AB/R, March 1, 2001.

[7] In the EU-Bed Linen case, the AppellateBody concluded that zeroing is WTO-inconsistent because it preventstrue average-to-average comparisons as called for by Article 2.4.2of the Antidumping Agreement. This reasoning leaves open thepossibility that zeroing may be permissible when dumping iscalculated another way. Indeed, since the agreement explicitlyallows individual-to-average comparisons under certaincircumstances, and since those comparisons would yield exactly thesame results as average-to-average comparisons unless zeroing isemployed for the former, there is a plausible argument that zeroingis implicitly permitted under current WTO rules wheneverindividual-to-average comparisons are allowed. Thus, zeroing may beconsistent with Article 2.4.2 as currently worded in targeteddumping cases. That is the EU's position at present.

[8] See Dan Ikenson, "Byrdening'Relations: U.S. Trade Policies Continue to Flout the Rules,"Cato Free Trade Bulletin no. 5, January 13, 2004.

[9] Statement of Robert B. Zoellick, U.S. Trade Representative, beforethe Committee on Appropriations Subcommittee on Commerce, Justice,and State, the Judiciary, and Related Agencies of the United StatesHouse of Representatives, March 25, 2004.