ARTICLE 1904

BI-NATIONAL PANEL REVIEW PURSUANT TO THE

NORTH AMERICAN FREE TRADE AGREEMENT

Secretariat File No.

CDA-97-1904-01

August 26, 1998

Issue (a)

The Complainant submitted that:

In concluding that Custom Canada’s sales to CanWel and to other customers were at weighted average margins of dumping of 36 per cent, the Tribunal made a conclusion unsupported by any evidence on the record and therefore committed a reviewable error of fact. ³⁹

In its decision, the CITT stated as follows:

In late 1995, Custom Canada approached CanWel and, in the spring of 1996, successfully concluded an agreement with CanWel to act as its distributor for concrete panels. As the Deputy Minister’s final determination makes clear, these sales to CanWel, as well as Custom Canada sales to other customers, were made at weighted average margins of dumping of 36 percent.

The Deputy Minister’s May 27, 1997 final determination finds the following:

As Custom Building Products of Canada is a wholly-owned subsidiary of the exporter, the Department conducted a reliability test on the declared selling prices prior to the preliminary determination. A comparison of the export prices calculated under section 24 and paragraph 25(1)(c) of SIMA revealed that the declared selling prices were acceptable for purposes of determining export prices. Consequently, export prices were determined under section 24 of SIMA. ⁴⁰

The Complainant submits that there was no evidence upon which the CITT could find a weighted average margin of dumping of 36 per cent because such dumping margin was found to exist only on the intra-corporate sales by the Complainant to its wholly-owned Canadian subsidiary, Custom Canada. ⁴¹ The Complainant argues that because export prices were not based on resales by Custom Canada, the Deputy Minister’s final determination of dumping provides no useful analysis of prices charged by Custom Canada to CanWel or any other customers, and says little about any margin of dumping that Bed-Roc may have faced in the marketplace. ⁴² The Complainant submits that this is an evidentiary gap, as there is no evidence that the dumping margin was passed on to customers in the Canadian market. ⁴³ The Complainant argues that there must be a remand because the CITT cannot simply assume that the margin has been passed on and the error filters through the CITT’s entire causation analysis. ⁴⁴

In its submissions, the CITT states that the passage identified by the Complainant should be interpreted as a finding that all sales by Custom Canada to its customers benefitted from the dumped prices at which subject goods were sold by the Complainant.⁴⁵ The CITT further argues that it is not required to determine whether the dumping margin was passed through to purchasers and that the causal link between the dumping and injury is supported by the evidence before the CITT.

Under SIMA, the Deputy Minister is fixed with the duty to determine whether dumping exists and, if so, to determine the margin of dumping. The determination of the CITT in respect of its jurisdiction is not the margin of dumping but rather the question of material injury. In this regard, at issue for the CITT is not the margin of dumping, but the causal nexus between the dumping and the material injury, if any. ⁴⁶

SIMA section 24 is the primary method of determining a product’s export price, with section 25 representing an alternate method of determining such export price under certain circumstances in which section 24 is not appropriate. SIMA section 25 may be used to determine a product’s export price when it is determined that an export price under section 24 is unreliable because the sale of subject goods was between associated persons. This comes about as a result of SIMA paragraph 25(1)(b), which allows section 25 to be used to determine export price instead of section 24 if “the Deputy Minister is of the opinion that the export price, as determined under section 24, is unreliable.”

The CITT noted that the Deputy Minister had based export prices on the Complainant’s transfer prices to Custom Canada. ⁴⁷ However, in the portion of the Decision referred to by the Complainant above, the CITT applied the average dumping margin to resales by Custom Canada to its customers. The Panel agrees with the Complainant that this statement, that resales were made at a 36 percent margin of dumping, is an error of fact since it is not supported by material before the CITT.

In addition, the Panel further finds that the CITT’s assumption that the 36 per cent weighted average margin applied to Custom Canada’s resales constitutes an interpretation of SIMA that cannot be sustained on any reasonable interpretation of the statute and thus is an error of law. The reliability test in section 25(1)(b)(i) of SIMA prevents related parties from practising hidden dumping by importing product at inflated transfer prices and then reselling in Canada at dumped prices. If the reliability test had produced higher margins of dumping using Custom Canada’s resale prices, the Deputy Minister could have used those resale prices for the calculation of export prices. The fact that the Deputy Minister found the transfer prices in this investigation reliable does not indicate that Custom Canada’s resale prices would have produced the same 36 per cent average margin.

Because the Panel agrees with counsel for the CITT that the CITT is not required to trace the dumping margin through each level in the distribution system to the ultimate end user, the Panel does not order a remand on this issue. Once it has been found that imports were dumped, there is no requirement that margins be calculated at each intervening level by either the Deputy Minister or the CITT. The CITT’s inquiry involves determining the presence or absence of evidence supporting a price based effect such as price erosion, price suppression, undercutting or lost sales, not necessarily direct comparisons of any prices with normal values as determined under SIMA or the tracing of dumping margins. This is not a situation in which the errors taint the whole decision or in which the matter must be referred back to the CITT for expert re-weighing of evidence. ⁴⁸ As explained elsewhere in this decision, there was material before the CITT that supports its finding of causation; therefore, the Panel declines to remand on this issue.

Issue (b)

The Complainant submitted that:

In concluding that the establishment of new pricing arrangements between the Complainant and Custom Canada was an element establishing causation, the Tribunal failed to undertake any specific analysis as to how these new arrangements, in and of themselves, had any specific effect on the prices of like goods in Canada, and therefore committed a reviewable error of law and fact. ⁴⁹

The CITT concluded that the Complainant’s September 1995 transfer pricing arrangement with Custom Canada was a factor that led to Bed-Roc’s injury. According to the CITT, this arrangement allowed the Complainant to sell its concrete panels directly to Custom Canada at cost plus 5 percent, which was 25 percent below prices previously paid to the Complainant. With the benefit of these low prices, Custom Canada aggressively priced its sales in Canada. ⁵⁰

The CITT also determined that, in addition to the September 1995 pricing agreement, the Complainant and Custom Canada eliminated the freight cost advantage enjoyed by Bed-Roc in the Canadian market, further increasing the price advantage enjoyed by Custom Canada over Bed-Roc. ⁵¹ In this regard, the CITT explained that because concrete panel is a relatively bulky product, the cost of shipping imported panels from the United States to Canada is a significant element in the ultimate price paid by Canadian consumers. The CITT concluded that, to reduce this price element, Custom Canada paid the freight costs on a considerable portion of the shipments purchased from the Complainant and delivered to its customers in British Columbia and Alberta, goods which already benefitted from the September 1995 pricing agreement. ⁵²

The CITT determined that these complementary pricing strategies allowed Custom Canada to offer price reductions to attract customers. Without the advantage of the dumped prices offered by the Complainant, the CITT reasoned, Custom Canada would not have been in a position to price its products as aggressively as it did. ⁵³ Considering this evidence, the CITT concluded that the dumping of merchandise by the Complainant was a cause of Bed-Roc’s injury. ⁵⁴

The CITT did not commit an error of law or fact by concluding that the change in the transfer pricing arrangement between Custom Canada and the Complainant was a major factor that led to Bed-Roc’s injury. A definite logical nexus exists between the evidence cited by the CITT and its finding. Accepting, as we must, the Deputy Minister’s determination of dumping by the Complainant, and given the evidence of the existence and impact of the new transfer pricing agreement referred to above, it is reasonable to conclude that dumped merchandise from the Complainant played a significant part in Custom Canada’s aggressive pricing after September 1995. Indeed, the CITT cited evidence to support its conclusion: a Custom Canada employee testified that Custom Canada needed low prices from the Complainant in order to lower its own prices. ⁵⁵ The CITT also noted that Custom Canada experienced strong sales growth at a time when prices were in a general decline. ⁵⁶ Given this evidence, it is reasonable to conclude, as the CITT did, that dumping by the Complainant to Custom Canada was a cause of Bed-Roc’s injury. ⁵⁷

The Complainant argues that the CITT erroneously based its conclusion in this respect on a statement that, “sales to CanWel, as well as Custom Canada sales to other customers, were made at weighted average margins of dumping of 36 percent.” ⁵⁸ The Complainant maintains that the Deputy Minister made no determination of whether sales from Custom Canada to CanWel were at dumped prices. ⁵⁹ However, pursuant to SIMA sections 24 and 25, which govern the Deputy Minister’s determination, the Deputy Minister is not required to determine whether sales made from one Canadian entity to another were at dumped prices.

As discussed above, because the Deputy Minister did not determine whether sales from Custom Canada to CanWel were at dumped prices, the CITT’s statement that “sales to CanWel…were made at weighted average margins of dumping of 36 percent” is incorrect. Nevertheless, the CITT is certainly permitted to draw reasonable inferences as to matters within its expertise, including as to whether sales by Custom Canada to CanWel reflected the benefits of dumping on sales to Custom Canada.

As summarized above, the record reflects ample evidence to support the conclusion reached by the CITT, i.e. that Custom Canada’s pricing to its customers reflected some or all of the dumped pricing on sales by the Complainant to Custom Canada. In particular, the CITT found that Custom Canada began to offer lower prices to its customers soon after the Complainant lowered its prices to Custom Canada. ⁶⁰

The Complainant contends that the CITT did not complete the third step of the causation analysis - a consideration of other factors to ensure that injury caused by those factors is not attributed to dumping. Before the CITT, the Complainant argued that Bed-Roc’s failure to sell on a national basis, its lack of a dedicated marketing staff, and sales by CGC were the real causes of Bed-Roc’s injury. ⁶¹ However, the CITT did consider these factors and concluded that, despite these potential disadvantages, Bed-Roc had been able to establish a strong market position before the Complainant lowered its prices. The CITT reasoned that because Bed-Roc’s injury followed a drop in the Complainant’s prices, while these other factors remained relatively constant, the injury was caused, at least in part, by the change in prices. ⁶² The Panel, therefore, finds that the CITT’s conclusion was supported by an adequate consideration of other factors.

Similarly, the Complainant contends that the CITT should have taken into account a difference between the products sold by Custom Canada and Bed-Roc. Custom Canada sold ½ inch thick panels which were claimed to be more attractive to consumers than Bed-Roc’s 7/16 inch thick panels, because they are the same thickness as drywall and, therefore, easier to use. The implication is that consumers chose Custom Canada’s product because of ease of use, not because of low price. ⁶³ The CITT’s survey of consumer preferences found, however, that consumers place a high priority on price. ⁶⁴ The CITT could reasonably conclude, therefore, that while ½ inch thick panels may have been preferred, price was a more important factor in the purchase decision. Moreover, Custom Canada’s employees told the CITT that they were aware that to gain customers, they would have to lower prices. ⁶⁵ This testimony supports the CITT’s conclusion that there was a causal connection between dumping and injury.

The Complainant also contends that Bed-Roc’s injury was caused not by low market prices, but by Bed-Roc’s failure to produce ½ inch panels, which the Complainant claims are cheaper to produce than 7/16 inch panels. ⁶⁶ However, notwithstanding the cost of producing 7/16 inch thick panels, the CITT compared the cost differential to the reduction in the Complainant’s prices and could reasonably infer, therefore, that the price reduction was a factor in Bed-Roc’s injury.

Issue (c)

The Complainant submitted that:

In concluding that Bed-Roc’s allegations of price erosion and lost sales at specific accounts were largely borne out, the Tribunal applied a legally incorrect standard of causation and thereby exceeded its jurisdiction. In the alternative, in applying an incorrect causation test the Tribunal committed a reviewable error of law. ⁶⁷

The CITT stated that it examined Bed-Roc’s price erosion and lost sale allegations and determined that those allegations were “largely borne out”. The CITT concluded that Bed -Roc’s “total sales losses” occasioned by price erosion and lost sales “contributed significantly” to Bed-Roc’s injury even though the total sales losses were not large. The CITT next stated that the more important point was that Custom Canada’s sales of dumped merchandise to a distributor, CanWel, allowed CanWel to lower its prices to certain accounts that it was able to acquire from Bed-Roc, and that this had an adverse impact on Bed-Roc’s overall prices and caused Bed-Roc to lower its prices to other customers. ⁶⁸ At the May 28, 1997 hearing before the CITT, a witness from CanWel acknowledged that CanWel needed pricing assistance to compete with Bed-Roc. ⁶⁹

The Complainant argues that the CITT’s conclusions were deficient in two respects. First, the Complainant repeats its previous argument that the CITT improperly concluded that Custom Canada made sales to CanWel at dumped prices. ⁷⁰ Second, the Complainant argues that the CITT’s conclusion constituted a jurisdictional error because the CITT failed to explain how Bed-Roc lost certain customers identified in its lost sales allegations. ⁷¹ According to the Complainant, Bed-Roc lost certain accounts notwithstanding its pricing. ⁷² In light of this allegation, the Complainant argues that the CITT committed an error in jurisdiction by ignoring pricing of these accounts in making its causation determination, because the CITT allegedly analyzed the effects of dumped imports, rather than the effects of “dumping” by Custom Canada. ⁷³ The Complainant also asserts, in the alternative, that the CITT’s conclusion constituted an error in law. ⁷⁴

Counsel for the CITT responded by first pointing out that the Complainant’s pricing analysis as to one customer is not accurate.⁷⁵ Counsel then argues that, regardless of the relationship between CanWel’s and Bed-Roc’s prices at certain accounts, CanWel significantly reduced its prices to these accounts in response to Bed-Roc’s attempt to regain them. ⁷⁶ Counsel asserts that the CITT properly concluded that the resulting price erosion and suppression caused by sales of the dumped merchandise materially injured Bed-Roc because it was forced to further lower prices in an attempt to maintain and regain market share. ⁷⁷

The Panel finds that the CITT reasonably inferred that Custom Canada’s sales to CanWel reflected the benefit of dumping for the reasons explained earlier in this decision. Regarding the Complainant’s second argument concerning Bed-Roc’s lost sales and price erosion allegations, whether the CITT’s allegedly erroneous analysis raises an issue of jurisdiction, law, or fact must first be determined, because the result will establish the applicable standard of review. If the CITT’s action raises a question of jurisdiction, then the applicable standard of review is correctness. If the CITT’s action raises a question of law, then the standard is considerable deference. If the CITT’s action raises a question of fact, then the standard is patent unreasonableness.

As discussed above, a question involving an issue of interpretation central to the purpose for the creation of the agency and requiring the exercise of the specialized expertise of the agency members, is likely to be found within the agency’s jurisdiction. The issue here is the CITT’s analysis of Bed-Roc’s lost sales and price erosion allegations and the CITT’s subsequent conclusion that Bed-Roc’s “total sales losses” (which, read in context, covers its losses due both to lost sales and price erosion) contributed to the material injury which it suffered.

SIMA section 42(1)(a)(i) grants the CITT the authority to inquire:

(a) in the case of any goods to which the preliminary determination applies, as to whether the dumping ... of the goods

(i) has caused injury or retardation or is threatening to cause injury...

The CITT’s authority to conduct such an analysis and to make a determination of causation based on its analysis is central to the authority granted under SIMA. The CITT exercised its specialized expertise by applying the requirements established in SIMA section 42 to the facts obtained in its investigation. This is the very purpose for which the CITT was created. For these reasons, we find no issue of jurisdiction. We also find that the CITT’s interpretation was one reasonably open to it and thus does not present an issue of law. Rather, the question presented is one of fact.

The Complainant’s reliance on Deputy M.N.R., Customs and Excise v. General Electric Canada Inc. ⁷⁸ is misplaced. In that case, the Federal Court of Appeal held that the CITT exceeded its jurisdiction when it made a determination that was within the jurisdiction of the Deputy Minister of National Revenue for Customs and Excise as expressly provided by SIMA section 38(1)(a)(ii). ⁷⁹ Conversely, in this case, the CITT interpreted and applied SIMA section 42 which specifically identifies the CITT as the appropriate agency to apply that prov ision.

In summary, the CITT did not exceed its jurisdiction or commit an error of law in determining that Bed-Roc’s lost sales and price erosion allegations supported its claim that it suffered material injury as a result of imports of the dumped merchandise. Accordingly, the Panel will apply the standard of review for a question of fact, patent unreasonableness, in reviewing the CITT’s determination.

With respect to errors of fact, the patent unreasonableness standard requires the Panel to affirm the CITT’s decision if it can be sustained on any reasonable interpretation of the facts. Based upon this standard, the Panel finds that the CITT’s analysis of Bed-Roc’s lost sales and price erosion allegations and its resulting conclusion that Bed-Roc’s total sales losses contributed to the material injury which it suffered as a result of the dumped imports is not patently unreasonable.

First, contrary to the Complainant’s position, the CITT’s finding that Bed-Roc’s lost sales and price erosion allegations were “largely borne out” was not predicated solely upon the CITT finding that all of Bed-Roc’s lost sales allegations were correct. Second, the Complainant failed to sustain its allegations with respect to the seven selected accounts. CanWel’s pricing was not consistently greater than Bed-Roc’s and, in addition, CanWel lowered its prices for a significant number of the examined accounts. ⁸⁰ Custom Canada’s sale to CanWel of merchandise that was imported from the Complainant at dumped prices certainly contributed to CanWel’s ability to lower its prices to those accounts.

Third, the Complainant has no rebuttal to the evidence showing that Bed-Roc’s prices were eroded over time. ⁸¹ Bed-Roc’s hearing testimony amply linked this erosion to price competition from Custom Canada and its distributor, CanWel. Fourth, the Complainant’s focus on specific lost sales allegations overlooks all of the other price erosion evidence in the record. ⁸² Although the CITT’s decision could have been clearer regarding whether the CITT considered Bed-Roc’s lost sales alone or these lost sales together with allegations of erosion of Bed-Roc’s prices, the CITT’s use of the term “total sales losses” ⁸³ shows that the CITT’s analysis considered both indicia of injury. It was not patently unreasonable for the CITT, therefore, to rely on all of this evidence to conclude that Bed-Roc’s lost sales and price erosion allegations were “largely borne out.”

The Complainant nevertheless asserts that the CITT’s determination that Bed-Roc was materially injured as a result of the low priced imports failed to properl y consider the price comparisons between Bed-Roc and CanWel with respect to specific accounts. ⁸⁴ As noted above, however, this was not uniformly the case, and more importantly the historic spread between Custom Canada’s price and Bed-Roc’s price declined dramatically over time, making CanWel that much more competitive with Bed-Roc. Thus, the CITT did not solely rely upon the price differences between CanWel and Bed-Roc as an indication of causation. Instead, the CITT regarded Bed-Roc’s “total sales losses” as examples of CanWel’s ability to lower its prices to other customers as a result of Custom Canada’s sales of subject merchandise to CanWel at dumped prices. ⁸⁵ Regardless of whether Bed-Roc was willing to undersell CanWel in these particular instances to maintain market share, the lost sales constituted compelling evidence that CanWel’s sales of dumped merchandise purchased from Custom Canada suppressed prices, which in turn materially contributed to the injury suffered by Bed-Roc. Therefore, the CITT’s reliance, in part, on evidence of Bed-Roc’s lost sales in making its causation determination is based upon a reasonable interpretation of the facts on record. ⁸⁶

Issue (d)

The Complainant submitted that:

In concluding that the establishment of a new distribution arrangement between Custom Canada and CanWel was the “straw that broke the camel’s back,” and in taking into account in its causation analysis the CanWel sales lost by Bed-Roc that resulted from this new distribution arrangement, the Tribunal committed a reviewable error of law or a conclusion unsupported by any evidence on the record. ⁸⁷

The CITT held that CanWel’s distribution agreement with Custom Canada ultimately “broke the…back” of Bed-Roc. ⁸⁸ The CITT explained that the new distribution agreement allowed Custom Canada to sell concrete panel to CanWel at lower prices benefitting from the dumping.

Consequently, the agreement and its concomitant pricing structure allowed CanWel to compete with Bed-Roc in terms o f price. Bed-Roc, in turn, announced price decreases and extended free freight to certain customers. Custom Canada responded to Bed-Roc’s price decreases by lowering its prices and offering special short term pricing and inventory credit to CanWel. ⁸⁹

The Complainant argues that the CITT’s decision constitutes an error of law or a conclusion unsupported by any evidence on the record. As noted above in the discussion of Issue (b), however, the record is replete with evidence that reasonably supports the CITT’s decision. Moreover, the CITT’s decision in this matter is entitled to deference because it falls squarely within the CITT’s expertise. In other words, the CITT could reasonably conclude, from the evidence on the record, that the lower prices offered by the Complainant to Custom Canada were a substantial factor in the injury ultimately suffered by Bed-Roc.

The CITT explained that Custom Canada was able to entice CanWel to enter into a distribution agreement because Custom Canada could offer CanWel low prices from dumped imports. ⁹⁰ The CITT was justified in giving lesser weight to evidence suggesting that CanWel ceased purchasing from Bed-Roc for non-price reasons. ⁹¹ The CITT instead found that Custom Canada’s short-term special pricing agreement with CanWel, which allowed CanWel to purchase panels from Custom Canada at low prices, contributed to Bed-Roc’s price erosion and lost sales. ⁹² The Panel cannot say that this conclusion is an error of law or a conclusion that is not reasonably supported by evidence on the record.

Issue (e)

The Complainant submitted that:

In concluding that the sales of “contractor board” by Custom Canada not only gained sales for Custom Canada but also served to restrain prices, the Tribunal made a conclusion unsupported by any evidence on the record and therefore committed a reviewable error of fact. ⁹³

Contractor board has been described by the CITT as concrete panels that “were not prime quality,” but that had “very low prices” that “were appealing to a number of purchasers.” ⁹⁴

The Complainant submits that the CITT did not refer to any evidence that prices charged by Custom Canada for contractor board had any identifiable price effects on Bed-Roc or in the market generally, and that no such evidence was before the CITT in any event. There being no evidence on which to substantiate the CITT’s conclusions, the Complainant submits that the CITT’s finding is a patently unreasonable error of fact. ⁹⁵

In its submissions, the CITT states that its finding with respect to the issue of contractor board was based on evidence before it. Furthermore, the CITT submits that any finding on contractor board was intended to be a general conclusion about the effects of its sale or offering in the market and not that such product was being sold to any of Bed-Roc’s customers. ⁹⁶

In its finding, the CITT stated the following:

[i]n addition, shortly after the new pricing arrangements were in place, Custom Canada began to import contractor board. Although these concrete panels were not prime quality, it is clear from the evidence that Custom Canada’s very low prices for this product were appealing to a number of purchasers. In fact the evidence reveals that 9 percent of Custom Canada’s imports of panels in the first nine months of 1996 consisted of this low-priced product. Given the small size of the regional market, there can be no doubt that the contractor board prices not only gained sales for Custom Canada but also, to some extent, served to restrain prices in the market as a whole. ⁹⁷

The evidence relied upon by the CITT takes the form of the viva voce evidence from Custom Canada’s employees given at the CITT’s public hearings. This evidence explicitly states that “about ... nine per cent” of Custom U.S.’s total sales to Custom Canada consisted of contractor board, ⁹⁸ and that such contractor board was offered for sale by Custom Canada to distributors who “account for a large percentage of [its] sales.” ⁹⁹

While the CITT’s conclusion that sales of contractor board restrained prices of the subject goods in the market as a whole is generally poorly supported, the Panel does not consider the conclusion to be patently unreasonable as such an inference could reasonably be drawn from the evidence on the record. However, the Panel finds the determination of gained sales to be unsupported by any evidence on the record and, as such, an error of fact. The Panel, however, declines to remand on this issue because the decision of the CITT in respect of material injury is supported by other material before it.

Disposition

For the reasons set forth above, the Panel hereby affirms the decision of the CITT.

SIGNED in the original by:

ISSUED on the 26^th day of August 1998.