UNITED STATES � ANTI-DUMPING MEASURES ON
STAINLESS STEEL PLATE IN COILS AND STAINLESS
STEEL SHEET AND STRIP
FROM KOREA

Report of the Panel

(Continued)

II. THE FLAWS IN THE US ANTI-DUMPING DETERMINATIONS AND IN THE RESULTING ANTI-DUMPING MEASURES

A. UNPAID SALES

19. As explained in Korea's First Submission, the "ABC Company," which was one of the customers of POSCO's US affiliate POSAM, failed to pay POSAM for certain purchases of SSPC and SSSS. In its preliminary determinations, the United States excluded the sales to the ABC Company from its analysis on the grounds that they were "atypical," and it made no adjustment for the costs arising from the ABC Company's failure to pay. In its final determination, however, the United States reversed course: It included the sales to the ABC Company in its analysis, and it made an adjustment to the price comparisons for all of POSCO's US sales (including sales through POSAM and direct sales from POSCO to other customers) based on the allocated "cost" of non-payment. The adjustment for the non-payment costs substantially increased the dumping margins found on POSCO's sales.¹¹

20. Korea has challenged the revised US methodology on two basic grounds: First, Korea contends that the adjustment made to the price comparisons is not permissible under Article 2.4 of the Anti-Dumping Agreement - which permits only adjustments for differences between the export and home-market sales that are demonstrated to affect price comparability, and which also requires that any adjustments be consistent with a "fair comparison." Second, Korea contends that the inclusion of these atypical sales in the dumping calculations constitutes a separate violation of the "fair comparison" requirement of Article 2.4.

21. In its responses, the United States has essentially conceded Korea's case. The United States contends, in essence, that it was appropriate to make adjustments for differences in the risk of non-payment in the two markets, and that the inclusion of these sales did not distort the results because their terms and conditions (when judged before the non-payment) were not atypical. But these defences do not relate to the methodology actually employed by the United States.

22. Contrary to the US suggestions before this Panel, the United States did not make an adjustment for differences in the risk of non-payment, and it did not include the sales in its analysis based solely on the terms and conditions set before the non-payment. Instead, the United States made an adjustment for the actual event of non-payment - even though it has admitted that POSCO had no reason to know the ABC Company would not pay at the time the sales were made - and it included the sales in its analysis as unpaid sales. The United States has not offered any defense for that methodology. Its determinations must, therefore, be overturned.

1. The US Adjustment for the Actual Costs of Non-Payment Violated the Requirements of Article 2.4

(a) The Post-Sale Costs of Non-Payment Do Not Affect Price Comparability and, As a Result, They Cannot Form the Basis for an Adjustment Under Article 2.4

23. As described in Korea's First Submission, Article 2.4 permits adjustments only for certain specified items. In particular, Article 2.4 allows adjustments only for "differences in conditions and terms of sale, taxation, levels of trade, quantities [and] physical characteristics," and for "other differences which are also demonstrated to affect price comparability." No other adjustments are permitted under Article 2.4 for comparisons of the export price to normal value.

24. The adjustment for the actual costs of non-payment does not fall within any of the adjustments specified in Article 2.4. The actual non-payment by the ABC Company on some sales did not reflect a difference in the "conditions and terms of sale," because sales with identical conditions and terms clearly can have different actual payment experience. (Indeed, the ABC Company itself paid in full for some purchases that had the same conditions and terms as the sales for which it did not pay.)¹² Actual non-payment also clearly does not reflect a difference in "taxation, levels of trade, quantities [and] physical characteristics."

25. Finally, actual non-payment cannot be considered a reflection of an "other difference[] ... demonstrated to affect price comparability" for both procedural and substantive grounds. As a procedural matter, there was no "demonstration" in either the DOC determinations or the underlying administrative record that the difference in actual non-payment experience affected price comparability. As a substantive matter, the actual non-payment could not have affected price comparability, because the prices were fixed well before it was known that the ABC Company would not pay. Thus, the actual cost of non-payment is not a permissible adjustment under Article 2.4.

(b) The US Adjustment for the Costs of Non-Payment Was Based on the Unreasonable Assumption that Those Costs Affected the Price Comparability of US Sales that Were Paid in Full, But Not of Sales in Other Markets that Were Also Made on Credit

26. As a separate matter, Korea's First Submission also explained that the method used by the United States to adjust for the costs of non-payment was inconsistent with the requirements of Article 2.4, because it made an adjustment to the comparisons for all US sales (including US sales for which POSCO was paid in full). As Korea noted in its First Submission, it was unreasonable to assume that the costs of non-payment affected the prices of all US sales (including sales that were paid in full) but not the prices of sales made on credit in other markets.¹³ If an adjustment was to be made, it should have been made either only to the unpaid sales or to all sales in all markets on which POSCO extended credit.

27. The United States apparently agrees that, if an adjustment for the costs of non-payment is made, it should be made to all sales on which POSCO extended credit. Thus, the US First Submission contended that:

[W]hile bad debt is a normal, anticipated expense, specifically what transactions, or even what customer, will generate a bad debt is not known in advance. All transactions and customers sold on credit are a potential source of bad debt. Therefore, it is reasonable to reflect an allocated portion of that expense in all prices.¹⁴

This statement provides a succinct explanation why, if an adjustment for the cost of non-payment was to be made to sales that were paid in full, it should have been made to all sales that were made on credit, and not just to the sales in the US market.

(c) The Adjustment for the Actual Costs of Non-Payment Violates the Fair Comparison Requirement of Article 2.4

28. As Korea has explained previously, the first sentence of Article 2.4 provides that "A fair comparison shall be made between the export price and the normal value." This "fair comparison" requirement by its terms is not conditioned on any other provision of the Agreement; it is not tied to particular adjustments; and it is not limited to specific situations. Instead, it is a free-standing obligation that requires that any comparisons between export price and normal value be "fair."

29. A "fair comparison" requires, at a minimum, that the exporter be held accountable only for events that are within its control. As the domestic judicial decisions of the United States have held, it is "unreal, unreasonable and unfair" for a finding of dumping to be based on "a factor beyond the control of the exporter."¹⁵

30. The adjustment made in the SSPC and SSSS cases for the actual cost of non-payment increased POSCO's dumping margins by either reducing the export price or increasing the normal value (depending on the channel through which the sale was made and the adjustments made by the DOC). The factor that gave rise to that adjustment - that is, the failure of the customer to pay - was plainly beyond POSCO's control, as the United States has itself conceded.¹⁶ Consequently, the adjustment effectively penalized POSCO for an event beyond its control, in violation of the "fair comparison" requirement of Article 2.4.

31. The consequences of the US methodology on this issue are particularly troubling. In effect, the US methodology will subject any exporter to the risk of substantial anti-dumping duties, no matter how carefully the exporter monitors its sales to ensure that its export prices are above its home-market prices. Even in such cases, if one of the exporter's customers happens not to pay, the United States would find dumping and impose substantial duties. Such a result cannot be reconciled with any of the purposes of the Anti-Dumping Agreement, and it is patently unfair.

(d) The Defences Offered by the United States Do Not Justify the Adjustment It Made

32. The United States has offered five defences to justify the adjustment it made. First, it contends that the adjustment for the actual costs of non-payment was authorized by Article 2.3 of the Anti-Dumping Agreement as an adjustment to "construct" the export price for a sale through an affiliated importer. Second, it asserts that the adjustment was proper under Article 2.4, because the "risk" of non-payment is a "condition" of sale. Third, it claims that its adjustment for the unpredictable after-sale costs of non-payment is consistent with its treatment of warranty expenses, which, it claims, are similarly unpredictable. Fourth, it argues that the adjustment was required by a past decision by a US domestic court (in the Daewoo case) - which, the United States claims, held that bad debt expenses must be treated as "direct" expenses. And, fifth, it claims that the "fair comparison" requirement of Article 2.4 does not impose an independent constraint on anti-dumping methodologies. These arguments are, in the end, unpersuasive.

33. As described more fully below, the defense offered by the United States under Article 2.3 is both irrelevant and wrong: It is now undisputed that the United States made the adjustment not only to sales through an affiliated importer, but also to direct sales to unaffiliated importers (for which the United States could not have been "constructing" an export price under Article 2.3). Moreover, even if the adjustment had been made only to sales through an affiliated importer, the adjustment was not consistent with the "object and purpose" of Article 2.3 and thus cannot be justified under Article 2.3.

34. The defense offered by the United States under Article 2.4 - that an adjustment must be made for differences in the risk of non-payment in the two markets - is inconsistent with the adjustment actually made by the United States. It might indeed have been appropriate to make an adjustment for differences in the risk of non-payment. But, as described more fully below, the United States did not make such an adjustment. Instead, the United States ignored the evidence regarding the risks of non-payment in the two markets, and made an adjustment for the actual amount of non-payment that happened to have occurred. Because the actual non-payment experience is not an appropriate measure of the risk of non-payment, the US methodology cannot be reconciled with the arguments the United States has made before this Panel.

35. The US analogy to the treatment of warranty expenses is also unpersuasive, because the United States did not treat the costs of non-payment in the same manner as it treats warranty expenses. As discussed more fully below, the DOC's normal practice is to estimate the warranty expenses on the sales under investigation based on historical experience for a longer period (as much as four or five years). Where the current experience departs from the historical norm, the DOC will base its adjustment on the historical experience. By contrast, the DOC did not request data on POSCO's historical bad debt experience, and it made no effort to determine whether the non-payment by the ABC Company was consistent with that experience. In short, its approach to non-payment was not consistent with its normal treatment of warranty expenses.

36. The US reliance on the US judicial decision in the Daewoo case is also misplaced. To begin with, the Daewoo decision only addressed the treatment of "bad debt" under US law: It did not purport to resolve the issue whether an adjustment for bad debt is consistent with the Anti-Dumping Agreement. Moreover, even if Daewoo were relevant, it would not support the US claims. Both the US courts and the DOC have held consistently that the Daewoo decision does not require that bad debt expenses be treated as "direct" selling expenses in all cases. And, significantly, the DOC has steadfastly refused to treat bad debt expenses as "direct" selling expenses in numerous cases after the Daewoo decision.

37. Finally, the US interpretation of the "fair comparison" requirement of Article 2.4 cannot be correct. The "fair comparison" requirement of Article 2.4 is set forth in a separate, and mandatory sentence - which stands in stark contrast to the more conditional "fair comparison" language of the prior Tokyo Round Anti-Dumping Code. Thus, the US interpretation of the "fair comparison" language of Article 2.4 would not only render the entire first sentence of Article 2.4 "inutile," it would also frustrate the clear intent of the Anti-Dumping Agreement.

(i) The US Arguments under Article 2.3 of the Anti-Dumping Agreement Are Irrelevant

(a) The Panel Must Consider Korea's Responses to the Article 2.3 Defense Offered by the United States under the Terms of Reference for this Proceeding

38. As mentioned, Korea's First Submission demonstrated that the US adjustment for the costs of non-payment was inconsistent with the requirements of Article 2.4. Korea focused its arguments on Article 2.4 for two reasons: First, the adjustment could not be justified under any other provision of the Anti-Dumping Agreement, because it was made to both direct "export price" and indirect "constructed export price" sales. And, second, the US determinations had referred to this adjustment as an adjustment for a "direct selling expense," which, under US law, signified that the DOC had determined that a "circumstance of sale adjustment" (the US law equivalent of an adjustment under Article 2.4) was appropriate.

39. In its First Submission, the United States responded that Korea's arguments under Article 2.4 were irrelevant, because the adjustment for the cost of non-payment was made under Article 2.3, and not under Article 2.4.¹⁷ In its Oral Statement, the United States also suggested that any responses to that argument cannot be considered by the Panel, because "Korea has not made a claim under Article 2.3."¹⁸ Before turning to the merits of the US arguments under Article 2.3, it may be useful first to touch briefly on the US assertion that responses to its arguments are irrelevant.

40. As a logical matter, it simply is not possible for the Panel to consider the merits of Korea's arguments under Article 2.4 without first deciding whether the US defense under Article 2.3 has merit. If the US is correct that its adjustment was properly made solely under Article 2.3, then Korea's claims under Article 2.4 are flawed, because the adjustment was not made under Article 2.4. On the other hand, if the US assertion is not correct, then the adjustment must (as Korea has claimed) be considered under the provisions of Article 2.4. Thus, the Panel must decide whether the US defense under Article 2.3 has merit before it can decide Korea's claims under Article 2.4. The responses to the US arguments under Article 2.3 are, therefore, plainly relevant to a determination of whether the adjustments were properly made under Article 2.4.

41. Indeed, the US suggestion to the contrary is patently absurd. If adopted, the US suggestion would mean that any defending party in a dispute could avoid meaningful Panel review simply by claiming that its methodology was justified under some entirely separate provision of the Agreement. In such cases, the US interpretation would prevent a Panel from even considering whether the separate provision invoked by the defense actually applied.

42. In short, the effective functioning of the dispute settlement system requires that Panels be permitted to consider not only the defences offered by the defending party, but also the responses by the complaining party that demonstrate the inapplicability of those defences. For that purpose, consideration of Article 2.3 is plainly within the Panel's terms of reference.

(b) Because the Adjustment for Non-Payment Was Made to Direct "Export Price" Sales, It Cannot Also Have Been Made to "Construct" an Export Price under Article 2.3

43. As mentioned, the United States has argued that the requirements of Article 2.4 do not govern its adjustment for the cost of non-payment, because, it claims, the adjustment was actually made under Article 2.3.¹⁹

44. Article 2.3 provides that, when merchandise is sold by the exporter to an affiliated importer, the investigating authority is permitted to "construct" an export price based on the resale price from the affiliated importer to its unaffiliated customer.²⁰ Article 2.3 does not provide concrete guidance regarding the adjustments that can be made to construct an export price in such situations. Instead, that guidance is provided by the fourth sentence of Article 2.4, which provides the following clarification:

In the case referred to in paragraph 3 of Article 2, allowances for costs, including duties and taxes, incurred between importation and resale, and for profits accruing, should also be made.

45. In its prepared statement for the Panel's first meeting, the United States initially suggested that it had made the adjustment for the costs of non-payment only to construct an export price for the sales that POSCO made through its affiliated importer POSAM.²¹ After some prompting, however, the United States finally conceded that this suggestion was erroneous. In fact, the United States made the same adjustment both to the indirect "constructed export price" sales and to the direct "export price" sales.

46. In these circumstances, the adjustment made to comparisons involving direct "export price" sales for the cost of non-payment cannot be justified under Article 2.3, because Article 2.3 only applies to indirect "constructed export price" sales through an affiliated importer. Consequently, the adjustment to the comparisons involving direct "export price" sales must be justified, if at all, under Article 2.4.

47. The most charitable interpretation, then, is that the United States now intends to argue that the adjustment to the indirect "constructed export price" sales was made under Article 2.3, while the adjustment to the comparisons involving direct "export price" sales (which was calculated in the same manner based on the same factual situation as the adjustment to indirect sales) was made under Article 2.4. Such an argument is, however, untenable.

48. The language of Article 2.4 addressing the normal adjustments for "differences affecting price comparability" does not make any distinction between direct "export price" sales and indirect "constructed export price" sales. The adjustment are, in both circumstances, the same. Consequently, the special adjustments required to "construct" the export price do not replace the normal adjustments. Instead, they are made in addition to the normal adjustments.

49. This conclusion is reinforced by a close analysis of the language of the third and fourth sentences of Article 2.4. The adjustments for "differences affecting price comparability" are described in the third sentence of Article 2.4. The fourth sentence of Article 2.4 then describes additional adjustments that are made only when constructing an export price (i.e., for comparisons involving the indirect "constructed export price" sales). Significantly, the fourth sentence does not state that the special constructed export-price adjustments are to be made in lieu of the normal adjustments described in the third sentence. Instead, the fourth sentence states that, for comparisons involving the indirect "constructed export price" sales, the special adjustments are "also" to be made.²² In other words, the normal adjustments described in the third sentence of Article 2.4 are made for all comparisons (including both direct "export price" sales and indirect "constructed export price" sales), and then, for the indirect "constructed export price" sales, the special adjustments described in the fourth sentence are "also" made. Consequently, the adjustments made to construct the export price are in addition to, and not a replacement for, the adjustments made for "differences affecting price comparability."

50. Because the United States made the adjustment for the actual costs of non-payment to the direct sales by POSCO, it has effectively taken the position that this adjustment was intended as a normal adjustment under the third sentence of Article 2.4 for "differences affecting price comparability." It cannot, therefore, also assert that the same costs are an appropriate adjustment to construct the export price, because the fourth sentence of Article 2.4 explicitly states that the adjustments to construct the export price are made in addition to, and not in lieu of, the normal adjustments under the third sentence of Article 2.4 for "differences affecting price comparability."

51. The United States must, therefore, defend its adjustment under the third sentence of Article 2.4. Its arguments concerning the permissible adjustments to construct an export price under Article 2.3 are, therefore, irrelevant.

(c) Article 2.3 Does Not Permit an Adjustment for the Actual Costs of Non-Payment

52. The US argument that it made the adjustment for the actual costs of non-payment under Article 2.3 suffers from a further flaw: Such an adjustment is not authorized by Article 2.3, and it is not consistent with the object and purpose of Article 2.3.

53 As mentioned, the concrete guidance regarding the adjustments permitted to construct an export price under Article 2.3 is set forth in the fourth sentence of Article 2.4, which provides that:

In the case referred to in paragraph 3 of Article 2, allowances for costs, including duties and taxes, incurred between importation and resale, and for profits accruing, should also be made.

54. The failure of the final customer to pay for its purchases does not fall within the adjustments described in this provision. The non-payment cannot occur in either the chain of events or the functions performed until after the resale transaction has been made. In other words, non-payment does not occur between importation and resale. Instead, payment (or non-payment) by the final customer occurs only after the resale.

55. In this regard, it should be noted that the additional argument advanced by the European Communities - which attempts to define the limitations inherent in the word "between" in a functional rather than temporal sense - does not alter the analysis.²³ Costs that are incurred as a result of resale are not "between" importation and resale in either a "functional" or "temporal" sense. Instead, the customer's failure to pay can occur, as a functional matter, only after the resale transaction has been made. Thus, an adjustment for non-payment by the final customer is not a permissible adjustment (as defined by the fourth sentence of Article 2.4) for purposes of constructing an export price under Article 2.3.

56. More generally, an adjustment for the non-payment by the final customer is not consistent with the object and purpose of Article 2.3. The purpose of the adjustments under Article 2.3 is, of course, to "construct" an export price for sales made through an affiliated importer based on the re-sale price charged by the affiliated importer to its unaffiliated customer. In other words, the goal is to calculate what the exporter would have charged an unaffiliated importer acting at the same level of trade as the affiliated importer, by deducting an appropriate "mark-up" from the price the affiliated importer charges its customers.

57. The basic purpose of the calculation may be illustrated as follows: Suppose that an exporter (POSCO) sells to an affiliated importer (POSAM), which re-sells to an unaffiliated customer (ABC Company) at a price of B. The idea of the adjustments under Article 2.3 is to determine what the exporter (POSCO) would have charged a hypothetical unaffiliated importer (Hypothetical Importer) that re-sold the merchandise to the same unaffiliated customer (ABC Company) at a price of B. The following diagram depicts what is supposed to happen:

The purpose of the adjustments under Article 2.3 is to calculate A in this diagram - that is, the price from the exporter to a hypothetical unaffiliated company operating at the same level of trade as the actual affiliated importer. In other words, Article 2.3 assumes that the price to the final, unaffiliated customer (price B in the diagram) will be the same whether the sale is made through an affiliated or unaffiliated importer. It then instructs the investigating authorities to construct the price (A) that the hypothetical unaffiliated importer would have paid to the exporter by deducting a reasonable mark-up from the actual resale price.

58. To determine whether an item may properly be included in the adjustments under Article 2.3, therefore, it is necessary to determine whether it is the type of item that might reasonably be included in an unaffiliated importer's mark-up. It is clear that an unaffiliated importer would try to include in its mark-up any duties, freight costs, salesmen salaries and overhead expenses that it incurred in connection with the re-sales. It is also clear that the importer would try to include a reasonable profit in its mark-up. However, an importer would not be able to include the actual costs of any non-payment by its customers in the mark-up, because the price for the sale from the exporter to the importer (A) and the price for the sale from the importer to its customer (B) would have been fixed before the importer could know that the customer would fail to pay.

59. To put this another way, if the final customer failed to pay, there is no question that the hypothetical unaffiliated importer would incur a loss. But, it is equally clear that the unaffiliated importer would not be able to pass this loss on to the exporter, because the importer's sale to its customer is a distinct transaction from the exporter's sale to the importer. Consequently, it is not appropriate to deduct the actual costs of non-payment on the importer's re-sales from the re-sale price (B) for purposes of calculating the hypothetical price (A) from the exporter to an unaffiliated importer. An adjustment for actual costs of non-payment is, therefore, inconsistent with the object and purpose of Article 2.3.

11 See Korea�s First Submission, paras. 3.30 - 3.39.

12 See Korea�s First Submission, para. 3.30.

13 See Korea�s First Submission, paras. 4.20 - 4.23.

14 US First Submission, para. 89 (emphasis added).

15 Melamine Chemicals v. United States, 732 F.2d 924, 933 (Fed. Cir. 1984) (emphasis added) (ROK Ex. 56).

16 See US First Submission, para. 86 ("Many selling expenses, in addition to bad debt, are not within the exporter�s control and the amount of the associated expense is not known at the time of sale.").

17 See US First Submission, paras. 74 - 80.

18 US Oral Statement, para. 20.

19 See US First Submission, paras. 74 - 80.

20 Article 2.3 provides that:

where it appears to the authorities concerned that the export price is unreliable because of association or a compensatory arrangement between the exporter and the importer or a third party, the export price may be constructed on the basis of the price at which the imported products are first resold to an independent buyer.

21 In summary, the description provided by the United States indicated that it had adjusted export price and normal value as follows:

� For indirect sales through POSAM, the United States "deducted all expenses associated with that sale, including an allocated portion of the US bad debt expense.

� For the direct sales (not made through POSAM), "there was no deduction from that export price for any selling expenses, including bad debt.

� For the comparisons to the indirect sales through POSAM, "there was no upward adjustment to normal value.

EC Oral Statement, para. 10. In short, the EC contends that the word "between" in the fourth sentence of Article 2.4 must be understood in a "functional," and not "temporal," sense.

To continue with (ii) The US Has Effectively Conceded that an Adjustment for the Actual Cost of Non-Payment Is Not Consistent with Article 2.4

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