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UNITED
STATES � ANTI-DUMPING MEASURES ON
Report of the Panel (Continued)
60. In its First Submission, the United States has asserted that the adjustment it made for the failure of the ABC Company to pay was an appropriate adjustment under Article 2.4 of the Anti-Dumping Agreement, because non-payment is part of the "conditions and terms of sale" for which an adjustment is explicitly permitted.24 In support of this argument, the United States relied on one possible dictionary definition of the word "condition" as meaning "mode or state of being."25 It therefore contended that the "conditions of sale" include "the mode or circumstances under which the sales are made in each market."26
61. As explained more fully in its response to the questions posed by the United States, Korea does not believe that the US interpretation of the phrase "conditions and terms of sale" is correct.27 However, even under the definition proposed by the United States, the actual non-payment by the customer is not a "condition" of sale.
62. As mentioned, the United States has proposed that the phrase "conditions and terms of sale" be interpreted to include "the mode or circumstances under which the sales are made in each market." Under this interpretation, it may be appropriate to include market conditions under which "the sales are made." But the actual non-payment by a customer is not a market condition when "the sales are made," because the seller does not know at that time that the customer actually will not pay. The seller can only find out that the customer will not pay after the sale has been made. Thus, even under the US interpretation, it is not proper to make an adjustment for actual non-payment.
63. In its prepared statement during the Panel's first meeting, the United States modified its position with respect to the permissible adjustments for non-payment. The United States did not contend that an adjustment for actual non-payment was appropriate. Instead, it argued only that an adjustment was permissible for "the risk of non-payment as a condition of sale."28 64. This revised interpretation does not, however, provide a basis for affirming the adjustment the United States made for the unpaid sales. Quite simply, the United States did not make an adjustment for the risk of non-payment. It made an adjustment for the actual costs of the actual non-payment - which is a very different thing.
65. In the SSPC and SSSS cases, the United States did not identify any evidence indicating that sales to US customers were inherently more risky than sales to home-market customers. The United States did not request or examine data concerning POSCO's historical bad debt experience in the two markets, from which an analysis of the risk of non-payment might be discerned.29 Instead, the United States simply made an adjustment for the "actual" costs of non-payment by the ABC Company.
66. The evidence on the record of these investigations indicated that prior to the unpaid sales to the ABC Company, POSAM had never experienced any non-payments on any sales in the United States.30 The record evidence also showed that POSCO did not have any non-payments on subject merchandise during the investigation periods for sales through channels other than POSAM. Nor was there any evidence that POSCO had ever experienced any non-payments in the United States through any channel.31
67. The United States apparently assumed that the mere fact that the ABC Company's failure to pay imposed large costs on POSCO demonstrated that the risk of non-payment was higher in the United States than in Korea.32 Such an assumption is, however, plainly absurd. In simple terms, the adjustment made by the United States confused the small risk of being hit with lightning with the large damage that is caused if one happens to be one of the few people so hit. As a statistical matter, risk cannot be measured by a single occurrence - because there is no way to tell whether a single occurrence is part of a common pattern or is a one-in-a-million long-shot that just happens to come in.33
68. In any event, it is clear that the DOC's determinations made no effort to quantify the risk of non-payment in the United States or Korea prior to the sale to the ABC Company. Those determinations are, therefore, plainly inadequate to support the adjustment that the United States now claims to have made for the risk of non-payment.
69. As mentioned, the United States has argued to this Panel that the risk of non-payment is analogous to the risk of warranty expenses - since a seller clearly can predict that there is a risk of incurring such expenses in the future, but cannot accurately predict the amounts that will be incurred on individual sales at the time the sales terms are fixed. But this analogy to warranty illustrates the precise flaw in the US approach to the costs of non-payment in this case.
70. Under its normal practice, the DOC does not simply allocate current warranty expenses over current sales to determine the amount of the warranty adjustment for the sales under investigation. Instead, the DOC has explained that:
The DOC has also explained that, if the warranty expenses incurred during the investigation period do not correspond to historical experience, the DOC will rely on historical experience to calculate the warranty adjustment.35
71. In short, the DOC's methodology for calculating the warranty adjustment includes safeguards to ensure that the adjustment reflects the exporter's historical experience, and not just the aberrant data for a single year. Such safeguards are essential to the calculation of an adjustment for the risk of warranty expenses that the seller accepted when it agreed to the warranty terms of the sale.
72. The DOC failed to employ such safeguards, however, when calculating the adjustment for non-payment costs in the SSPC and SSSS cases. As a result, the United States cannot argue that those adjustments provided a proper measure of the risk of non-payment in the US and Korean markets.
73. In its final determinations in the SSPC and SSSS cases, and in its Submission and Oral Statement to this Panel, the United States has asserted that its treatment of "bad debt" as a direct selling expense was required by US domestic judicial decisions - in particular, the decision by the US Court of International Trade in Daewoo v. United States.36 That decision is, however, irrelevant to the proceedings before this Panel - and, if it were relevant, it does not support the US position.
74. To begin with, Daewoo is an interpretation of US domestic law made by a US domestic judicial authority. It did not purport to decide whether an adjustment for bad debt was permissible under Article 2.4 of the Anti-Dumping Agreement. And, even if it had, its decision would not be binding on this Panel.
75. Moreover, contrary to the US suggestion, the issue in Daewoo was not whether bad debt must always be treated as a direct expense. Instead, the issue in Daewoo concerned the DOC's practice of treating the estimated future bad debt relating to the sales during the review period differently than the actual bad debt already experienced on those sales. The Court of International Trade held in Daewoo that it was unlawful for the DOC to refuse to treat the estimated future bad debt and the actual bad debt on current sales in the same manner.37 Daewoo did not hold that bad debt was a direct selling expense in all cases - because that issue was never before the Court in Daewoo. This conclusion is confirmed by several subsequent decisions by the US courts, which have observed that "Daewoo does not completely foreclose the ITA from treating bad debt expenses as indirect."38
76. Finally, a review of the DOC's practice since Daewoo reveals that the DOC has continued to classify bad debt expenses as indirect expenses in numerous cases - including a case decided as recently as November of last year.39 At a minimum, then, one must question the accuracy of the US statement to this Panel that "it is now standard practice to include US and home market bad debt in the circumstance of sale adjustment."40
77. As discussed above, Korea has contended throughout this proceeding that the adjustment for the costs of non-payment was inconsistent with the "fair comparison" requirement of Article 2.4, because the adjustment would result in a finding of dumping based on an event beyond POSCO's control.
78. In its First Submission, the United States conceded that the actual non-payment by the ABC Company was beyond POSCO's control.41 In its Oral Statement, however, the United States suggested that the risk of non-payment was actually within POSCO's control, because POSCO could have avoided that risk by refusing to sell on credit. 79. This revised argument misses the point. As discussed above, the United States did not make an adjustment for the risk of non-payment that POSCO assumed when it made its sales on credit. Instead, it made an adjustment for POSCO's bad luck in having one major US customer fail to pay during the relevant period. Because the United States tied the adjustment not to the risk of non-payment, but to the fortuity that one customer failed to pay, it unfairly penalized POSCO for a factor beyond POSCO's control. The US adjustment cannot, therefore, be reconciled with the "fair comparison" requirement of Article 2.4.
80. Faced with this difficulty, the United States has attempted to read the "fair comparison" requirement out of the Anti-Dumping Agreement altogether. Thus, it accuses Korea of attempting to use the "fair comparison" requirement to "add to or diminish the rights and obligations provided in the [Anti-Dumping] agreement[]."42 In other words, the United States apparently objects to any interpretation of the "fair comparison" requirement that would impose additional disciplines on investigating authorities beyond those elsewhere specified in the Anti-Dumping Agreement.
81. This argument is absurd on its face. Korea is not attempting to "add to or diminish" the rights and obligations created by the Anti-Dumping Agreement. Instead, it is seeking to enforce the rights and obligations that are expressly created by the first sentence of Article 2.4, which states unequivocally that "[a] fair comparison shall be made between the export price and the normal value."
82. In this regard, a comparison of the current "fair comparison" language with the predecessor provision in the Tokyo Round Anti-Dumping Code is striking. The Tokyo Round Code did not contain a separate sentence commanding that "[a] fair comparison shall be made between the export price and the normal value," as the current Anti-Dumping Agreement provides. Instead, the Tokyo Round Code explicitly tied the "fair comparison" requirement to the requirements that the comparison be made between sales at the same level of trade and at the same time.43 The conditional language of the Tokyo Round Code led to the conclusion that, prior to the Uruguay Round negotiations, a comparison that complied with the other aspects of the predecessor provision of Article 2.4 was deemed to be "fair."44
83. As a result of the Uruguay Round negotiations, however, the "fair comparison" requirement of the current Anti-Dumping has been elevated to a separate sentence that is independent of the other requirements of Article 2.4. It follows, then, that the "fair comparison" requirement of the first sentence of Article 2.4 must be construed as imposing disciplines other than those required by the other provisions of Article 2.4. Any other interpretation would render the first sentence of Article 2.4 "inutile," and would frustrate the purpose inherent in the Uruguay Round's modification of the conditional language found in the Tokyo Round Code.
84. As a general matter, Article 2.4.2 of the Anti-Dumping Agreement provides that "all comparable export transactions" must be included in the calculation of the dumping margins. However, that provision is expressly subject to the fair comparison requirement - which is set forth in the introductory clause to the first sentence of Article 2.4.2 and in the first sentence of the chapeau of Article 2.4 as well. Thus, the Anti-Dumping Agreement does not permit atypical export sales to be included when inclusion would distort the results and lead to an unfair comparison.
85. The United States does not dispute that it has the authority to disregard "atypical" US sales. However, it contends that the unpaid sales were not "atypical" - because non-payment is a common fact of life in everyday business, and because the prices and other terms for the unpaid sales did not differ from the prices and terms of paid sales.45 In addition, the United States also argues that these sales did not meet the criteria for exclusion under US law, because its normal practice is to exclude "atypical" sales from its analysis only when those sales are so small that their inclusion would have an insignificant effect on the margin.46
86. Korea concedes that, if the unpaid sales had been paid, their prices and other terms would not have been atypical. The fundamental point, however, is that the unpaid sales were not paid. The failure of the customer to pay was clearly not "typical" of POSCO's business practices - as the DOC itself conceded in its preliminary determinations. To the extent that the non-payment affected the DOC's calculations (through the bad-debt adjustment or through other means), then the inclusion of the unpaid sales did distort the results, and the sales should have been excluded.
87. Finally, the description offered by the United States of its normal practice concerning atypical sales is misleading. There is no question that US law permits atypical US sales to be included in the analysis if the inclusion of the sales would not distort the results. But it is equally clear that the DOC is not permitted to include atypical US sales when inclusion would distort the results. In such cases, the DOC must either make an adjustment to eliminate the distortion or exclude the sales.47
88. In the SSPC and SSSS cases, the DOC did precisely the opposite of what both US law and the "fair comparison" provision of Article 2.4 require: The DOC did not make an adjustment to eliminate the distortion caused by the atypical unpaid sales, and it did not exclude those sales from its analysis. Instead, it included the sales in its analysis, and it made an adjustment that created precisely the distortion it was supposed to try to avoid. Its methodology was, therefore, unfair and inconsistent with the "fair comparison" requirement of Article 2.4.
89. As explained in Korea's First Submission, Article 2.4.2 of the Anti-Dumping Agreement requires that dumping margins be calculated "on the basis of a comparison of a weighted average normal value with a weighted average of prices of all comparable export transactions or by a comparison of normal value and export prices on a transaction-by-transaction basis." Article 2.4.2 repeatedly uses the distinctly singular phrase "a weighted average." Moreover, it also refers to "a weighted average of all comparable export transactions." Consequently, the text of Article 2.4.2 clearly requires that the dumping margins be calculated by comparing a single average including all comparable transactions.48
90. It is undisputed that the United States did not compare a single average of all comparable transactions, as Article 2.4.2 requires. Instead, the United States divided the investigation periods in both the SSPC and SSSS cases into separate sub-periods, and calculated separate dumping margins for each sub-period (based on the average normal values and export prices for the sub-period). It then determined the overall dumping margin by combining the separate dumping margins for each sub-period.
91. As a practical matter, this multiple-averaging methodology would not have had a significant effect on the dumping margins if the United States had combined the separate dumping margins for each sub-period in a manner that fully offset any negative margins for one sub-period against positive dumping margins for the other. However, the United States did not permit such offsets. Instead, employing the process known as "zeroing," the United States treated any negative dumping margins as if they were zero margins, and then calculated the overall dumping margin by averaging these "zero" margins with any positive margins found. As a result, the US methodology resulted in significantly higher dumping margins than the methodology prescribed by Article 2.4.2. The US methodology cannot, therefore, be reconciled with the requirements of Article 2.4.2.
92. The United States claimed that its departure from the requirements of Article 2.4.2 was necessary to account for the depreciation of the Korean won during the investigation periods. However, as explained in Korea's First Submission, this modification of the comparison methodology to account for an exchange rate movement was inconsistent with Article 2.4.1 of the Anti-Dumping Agreement.49
93. Article 2.4.1 is the only provision of the Anti-Dumping Agreement that addresses exchange rates or the permissible modifications to the dumping calculation methodology to account for exchange rate movements. Significantly, Article 2.4.1 sets forth special rules that apply to situations in which the exporting country's currency has been appreciating. However, Article 2.4.1 does not permit any adjustment to the dumping calculations to account for a depreciation of the exporting country's currency.
94. Consequently, because the multiple-averaging methodology was adopted to account for the depreciation of the Korean won, it was inconsistent with the requirement of Article 2.4.1 that the price comparisons not be modified to account for depreciation in the exporting country's currency.
95. Because the multiple-averaging methodology does not comply with the requirements of Articles 2.4.1 and 2.4.2, it is always inappropriate. In the circumstances of the SSPC and SSSS cases, however, it was particularly unfair.
96. As explained in Korea's First Submission, the US industry's claims for relief in the SSPC and SSSS cases were predicated on the claim that anti-dumping orders were needed to protect the US industry from an increase in imports after the devaluation of the Korean won.50 Because these cases were predicated on the effects of the devaluation, a fair analysis of whether POSCO was truly engaged in dumping necessarily should have focused on pricing data after the devaluation. Yet, it was precisely that data that the multiple-averaging methodology effectively "walled off" from the DOC's price comparisons.
97. The result was a dumping determination based solely on pre-devaluation data in a case that was predicated on post-devaluation imports. Such a result is plainly unfair. Consequently, the US multiple-averaging methodology cannot be reconciled with the "fair comparison" requirement of Article 2.4.
98. The United States does not deny that it created the multiple-averaging methodology specifically to increase the dumping margins found. Rather, it contends that this results-oriented methodology not only was permitted under Articles 2.4.2 and 2.4.1, but also was necessary to prevent dumping margins from being "disguised" by the won's depreciation.51
99. As discussed more fully below, the arguments presented by the United States under Articles 2.4.2 and 2.4.1 do not comport with the actual provisions or the purpose of the Anti-Dumping Agreement. To the contrary, the US arguments are inherently circular: Having decided unilaterally that the multiple-averaging methodology was appropriate to prevent "disguised" dumping, the United States now argues that the methodology prescribed by the Anti-Dumping Agreement had to be modified simply because it would have resulted in lower dumping margins.
100. The United States appears to concede Korea's argument that Article 2.4.2 requires the calculation and comparison of a single average normal value and a single average export price for comparable transactions. It argues, however, that its multiple-averaging methodology is consistent with this interpretation, because the prices before the devaluation of the Korean won were not "comparable" with the prices after the devaluation of the Korean won.52
101. As discussed more fully below, this interpretation does not withstand scrutiny. Because a currency depreciation does not preclude the comparison of home-market and export sales under the rules established by the Anti-Dumping Agreement, there is no basis for considering the pre-depreciation sales to be non-comparable to the post devaluation sales. Article 2.4.2 therefore required that the pre- and post-depreciation sales be included in the calculation of the single weighted-average normal value and export price.
102. The word "comparable" means, in essence, "capable of being compared."53 Under this definition, sales are "comparable" if they can be compared, and non-comparable if they cannot.
103. Ordinarily, of course, any two prices can be "compared" - in the sense that one can examine the two prices and determine whether one is higher than the other. However, such a comparison does not provide a basis for a determination of dumping, unless the comparison complies with the requirements of the Anti-Dumping Agreement. To give a simple example, one can compare the prices of apples and oranges. If the price of apples is $1 per fruit and the price of oranges is $1.50 per fruit, one can examine the prices and determine that the price of apples per fruit is lower than the price of oranges. But one cannot use that comparison to determine that apples have been "dumped" unless the comparison conforms to the Anti-Dumping Agreement's requirements. Transactions that can be compared under the provisions of the Anti-Dumping Agreement are "comparable" transactions. Transactions that cannot be compared under the provisions of the Anti-Dumping Agreement are not "comparable" transactions.
104. There are, of course, a number of substantive limitations on the transactions that may be compared under the Anti-Dumping Agreement:
These substantive limitations define the transactions that are "comparable" within the meaning of the Anti-Dumping Agreement. If transactions may be included in the comparisons under these rules, then they are "comparable" (i.e., "capable of being compared") under the Agreement.
105. Under the Anti-Dumping Agreement, then, the sales prior to the depreciation of the Korean won would not be "comparable transactions" to sales after the won's depreciation only if there were some provision of the Agreement that would prohibit the comparison of such transactions. In the absence of a prohibition on comparison, the transactions are "comparable" within the meaning of the Agreement, and it would be plain error to exclude the transactions from the calculations of the weighted-average normal value and export price that must be compared.
106. In this regard, there are no provisions in the Anti-Dumping Agreement that limit the transactions that may be included in comparisons due to movements in exchange rates. Article 2.4.1 is the only provision of the Anti-Dumping Agreement addressing exchange rates. The first sentence of Article 2.4.1 sets forth the basic rule - which is that the exchange rate on the date of sale should normally be used. The second sentence of Article 2.4.1 then addresses situations in which exchange rates have "fluctuated" or have been the subject of a "sustained movement."
107. Significantly, these provisions do not in any way limit the ability of the investigating authority to compare transactions before and after the currency fluctuation or sustained movement. They do not indicate that sales before the fluctuation or sustained movement cannot be compared to sales during or after the fluctuation or sustained movement. As the Cotton Yarn panel observed, "The exchange rate in itself is not a difference affecting price comparability."55 Indeed, the United States has specifically recognized this fact. In its First Submission, it specifically rejected the argument that Article 2.4.1 "establishes a limit on which transactions may be considered 'comparable' within the meaning of ... Article 2.4.2."56 Consequently, the United States cannot now contend that the provisions of Article 2.4.1 make "non-comparable" any transactions made when different exchange rates were in effect.
108. In the absence of any provision that explicitly authorizes the use of a multiple-averaging methodology to account for currency movements, the United States has suggested that such a methodology might be justified under the second sentence of the chapeau of Article 2.4, which requires, inter alia, that comparisons be made "in respect of sales at as nearly as possibly the same time."57 This argument is, however, without merit.
109. The timing requirement of the second sentence of Article 2.4 applies equally to all cases, whether or not there has been a currency depreciation. And, in all cases, a single period average necessarily includes sales that are made at opposite ends of the period and thus are not "at as nearly as possibly the same time." Consequently, a comparison of an average normal value with an average export price in all cases necessarily encompasses individual home-market and export sales transactions that were not made at the same time.
110. Nevertheless, the timing requirement of the second sentence of Article 2.4 does not prevent a single period average. The reason derives from the nature of an average: When a series of sales spread throughout the investigation period is combined to make an average, the result is an average sale that was made, on average, at the mid-point of the investigation period. Consequently, when the average export price is compared to the average normal value, the comparison is between average sales made, on average, at the mid-point of the investigation period. The comparison is, therefore, made in respect to average sales that are made, on average, at the same time, in accordance with the requirements of the second sentence of Article 2.4.
111. Significantly, this effect is precisely the same whether or not there has been a currency depreciation. As long as the sales are spread evenly throughout the period, the averaging process results in an average sale that was made, on average, at the mid-point of the investigation period. Thus, currency depreciation does not provide a basis for finding that the single period averages are failing to compare sales at as near as possible the same time.
112. As mentioned, Korea's First Submission argued that the multiple-averaging methodology is inconsistent with Article 2.4.1, because Article 2.4.1 does not permit modifications to the dumping calculations to account for a depreciation in the exporting country's currency, while the multiple-averaging methodology was explicitly intended to account for the depreciation of the Korean won.
113. In response, the United States argues that the scope of Article 2.4.1 is extremely narrow. According to the United States, Article 2.4.1 simply describes the methods that are to be used to select exchange rates in investigations. In the US view, Article 2.4.1 does not otherwise describe permissible modifications to the normal dumping calculation methodology.
114. The US argument cannot, however, be reconciled with the actual language of Article 2.4.1. It is true that the first sentence of Article 2.4.1 specifically describes the methods that are to be used to select exchange rates in investigations. However, the second sentence of Article 2.4.1 - which addresses situations in which exchange rates have "fluctuated" or been the subject of a "sustained movement" - does not describe any method for selecting exchange rates in such situations. Instead, it prescribes specific results that the investigating authorities must achieve: When there has been a currency "fluctuation," Article 2.4.1 directs the investigating authority to ignore the fluctuation. When there has been a "sustained movement," Article 2.4.1 directs the investigating authority to "allow exporters at least 60 days to have adjusted their export prices to reflect [the] sustained movements."
115. The United States has apparently confused its own implementation of Article 2.4.1 with the actual requirements of that provision. It is undeniable that the United States has implemented the requirements of the second sentence of Article 2.4.1 by adopting a convoluted mechanism for selecting exchange rates.58 However, the fact that the United States has implemented the requirements of the second sentence of Article 2.4.1 with a mechanism for selecting exchange rates does not mean that the second sentence of Article 2.4.1 only addresses the selection of exchange rates. 116. In short, the US attempt to reduce Article 2.4.1 to a set of rules for choosing exchange rates reflects only the US implementation of that provision, and not the actual language of the Agreement. The language of Article 2.4.1 is broader than the US admits. And, contrary to the US arguments, Article 2.4.1 does specifically require modifications to the normal dumping calculation methodologies when there has been an appreciation in the exporting country's currency, but it does not permit such modifications when the exporting country's currency has depreciated. The adoption of a special methodology by the United States to account for the Korean won's depreciation was, therefore, inconsistent with the provisions of Article 2.4.1.
117. In the end, the arguments put forth by the United States boil down to a simple proposition: The United States believes that the use of a single-averaging methodology would have "disguised" dumping margins, because it would offset the positive dumping margins before the depreciation with the negative dumping margins after the depreciation. This notion does not, however, withstand scrutiny.
24 In its First Submission and Oral Statement, the United States
did not dispute Korea�s arguments that the cost of non-payment could not be an
"other difference[] ... demonstrated to affect price comparability." Nor could
it. For the reasons set forth in paragraphs 4.17 to 4.23 of Korea�s First
Submission, there simply is no basis for any claim that the actual cost of
non-payment was an "other difference[] ... demonstrated to affect price
comparability."
25 US First Submission, para. 83.
26 Id.
27 As noted in Korea�s response to the US questions, the phrase
"conditions and terms of sale" must be interpreted as a single phrase, and not
through a tortured construction of the individual words. Moreover, if a separate
definition of the word "condition" is required, that word should be interpreted
in accordance with its normal meaning in the context of sales agreements. In
such contexts, the word "condition" is generally understood to refer to a
prerequisite that must be met before a contingent contractual provision comes
into force.
28 As the United States explained,
It is equally true, however, that payment terms are part
of the contract and can influence the purchaser�s decision. Therefore, a
seller�s agreement to sell on credit is no different from an agreement to
provide a warranty. In one case, the seller agrees to provide a warranty and
accepts the risk of having to repair or replace the merchandise under
that warranty. In the other case, rather than demanding payment on delivery,
the seller agrees to sell on credit - for example, agreeing to accept
payment in 30 days - and the seller accepts a credit expense, including the
risk of non-payment. In the case of both selling under warranty and
selling on credit, the seller accepts the risk of incurring the
expense as part of the bargain.
Also, Korea makes a point of saying that bad debt is
outside the exporter�s control and, therefore, is not a proper adjustment
under Article 2.4. Bad debt expense is not entirely outside the seller�s
control. The seller can decline to sell on credit and establish sound credit
practices. This is analogous to the seller�s control over what, if any,
warranty is offered and establishing sound quality control measures to
minimize warranty claims. In both cases - selling on credit and selling
under warranty - there is some control, and some inherent risk. This
type of contingency expense is routinely accounted for in company books and
records - including bad debt expense.
* * *
POSCO agreed to sell to its US customer on credit and in
doing so accepted the risk of non-payment as a condition of sale. As
I stated previously, that in itself is sufficient to warrant including bad
debt in an Article 2.4 adjustment.
US Oral Statement, paras. 16-19 (emphasis added).
29 If the United States had intended to make an adjustment for
the differences in the costs of credit insurance (or for some other measure of
the differences in risk of non-payment) in the two markets, it was required by
the last sentence of Article 2.4 of the Anti-Dumping Agreement to "indicate to
the parties in question what information [was] required." The record of the SSPC
and SSS cases does not contain any request from the DOC for information
regarding either the differences in the costs of credit insurance or any other
measures of the differences in the risks of non-payment in the two markets.
30 See POSAM Verification Report (SSSS), at 7 (ROK Ex. 61) ("We
also examined the accounts where other such negative invoices would have been
recorded for both 1997 and 1998, and found no indication that POSAM had negated
other sales invoices or recorded bad debt in these accounts. We also spoke with
the accounting staff and reviewed the accounts on POSAM�s computer system. We
found no indication of the existence of a bad debt account, and no discrepancies
with POSAM�s response."). Korea provides as ROK Ex. 62 (SSPC) and ROK Ex. 63
(SSSS) copies of the exhibits to POSCO�s responses and supplemental responses to
Section B of the DOC�s questionnaire in which POSCO provided information about
the Korean-market bad debt expenses for POSCO and POSTEEL.
31 During the Panel�s first meeting, the United States asserted
that POSCO�s affiliate POSTEEL had recorded bad debt expenses on US sales prior
to the sale to the ABC Company. See US Oral Statement, para. 17. That
assertion is, however, flatly incorrect. It is true that POSTEEL had reported
general bad debt expenses in its questionnaire responses as "common" indirect
selling expenses which could not be segregated by market. However, there was no
indication that these reported POSTEEL bad debt expenses reflected actual or
expected US expenses (rather than expenses on other export sales to other
markets, or a "reserve" determined based on the overall level of POSTEEL�s sales
in all markets).
Finally, it is important to note that the US determinations
did not rely on, or even mention, the existence of prior bad debt on US sales to
justify its adjustment. The US suggestion that POSTEEL actually had bad debt
expenses is therefore, a post-hoc rationalization that cannot provide a
basis for upholding the US determinations.
32 This assumption is implicit in the fact that the United
States made the "bad debt" adjustment by allocating the actual "bad debt"
expenses to all US sales during the period.
33 It is fundamental to the field of statistics that one cannot
accurately judge probabilities without a sufficiently large sample. See,
e.g., David Freedman, et al., Statistics at 355; Robert E. Megill,
An Introduction to Risk Analysis, at (2d ed.) (ROK Ex. 64).
34 Large Newspaper Printing Presses from Germany, 61 Fed.
Reg. 38166, 38185 (July 23, 1996) (ROK Ex. 65). See also Koenig &
Bauer-Albert AG v. United States, 15 F. Supp. 2d 834, 855 (Ct. Int�l Trade
1998) ("Commerce�s normal practice in computing warranty expenses is to use
historical data from a four- or five-year period preceding the filing of the
petition to estimate the probable warranty expenses on POI sales.") (ROK Ex.
66).
35 See Bicycles from the People�s Republic of China, 61
Fed. Reg. 19026, 19042 (Apr. 30, 1996) ("Our examination of Motiv�s historical
warranty costs indicate that the reported POI warranty costs may not be
reflective of what Motiv�s true warranty expenses will be on its POI sales.
Accordingly, we have used the historical warranty expenses.") (ROK Ex. 67);
Television Receivers from Japan, 56 Fed. Reg. 38417, 38421 (Aug. 13, 1991)
("Although we generally use warranty expenses incurred during the period of the
review, the Department will consider longer historical periods to provide a more
accurate estimate of the eventual warranty expenses for the merchandise under
review.") (ROK Ex. 68).
36 See SSPC Final Determination at 15448-49 (ROK Ex. 11);
SSSS Final Determination at 30674 (ROK Ex. 24); US First Submission, para. 58 n.
58; US Oral Statement, para. 25.
37 Prior to Daewoo, the DOC would classify bad debt
expenses as direct or indirect selling expenses depending on the timing of the
bad debt write-off. If the bad debt written off during the relevant period
related to sales during the relevant period, the DOC would treat the bad debt
expense as a direct expense. If the bad debt written off during the period
related to prior sales, the DOC would classify the bad debt expense as an
indirect selling expense. The DOC at that time made no attempt to estimate the
bad debt that might be written off in the future on the sales during the review
period. Daewoo Electronics Co., Ltd. v. United States, 712 F. Supp. 931,
938-40 (Ct. Int�l Trade 1989) (US Ex. 11).
The Court of International Trade held in Daewoo that
it was improper for the DOC to refuse to treat the future bad debt on current
sales as a direct expense, when it had conceded that the current bad debt on
current sales was direct. In this regard, the Court explained that:
Commerce does not dispute that bad debt losses do qualify as
selling expenses, arguing only that bad debt losses, as opposed to warranty
expenses, are not direct selling expenses, unless they are incurred with
regard to the sales under review. Absent any reasonable indication as to why the
estimation of bad debt expenses based on past experience is any less reliable
than the use of past experience for warranty expenses, this distinction between
them is not proper.
The Court finds that the ITA administrative practice
disregarding the selling expenses for bad debt losses, while granting
adjustments for warranty expenses which are not incurred with regard to the
sales under review, is arbitrary and is likely to result in distorted
calculations of FMV.
Id. at 940.
38 See Zenith Electronics Corp. v. United States, 18 C.I.T. 882,
888 (1994) (ROK Ex. 69); Samsung Electronics Co., Ltd. v. United States, 18
C.I.T. 891, 894 (1994) (ROK Ex. 70).
39 See, e.g., Porcelain-on-Steel Cookware from Mexico, 64
Fed. Reg. 60417, 60419 (Nov. 5, 1999) ("We recalculated CIC�s indirect selling
expenses to include bad debt and depreciation expenses.") (ROK Ex. 71);
Stainless Steel Wire Rod from Korea, 63 Fed. Reg. 40404, 40406 (July 29,
1998) ("We increased Changwon�s reported indirect selling expense by the
unreported recognized bad debt expenses.") (ROK Ex. 72); Extruded Rubber
Thread from Malaysia, 61 Fed. Reg. 54767, 54767 (Oct. 22, 1996) ("We
disregarded sales to the United States and third countries which were written
off as bad debt because bad debt was accounted for in respondent�s reported
indirect selling expenses.") (ROK Ex. 73); Bicycles from the People�s
Republic of China, at 19041 ("We have classified bad debt as an indirect
selling expense and have treated it as such for purposes of the final
determination.") (ROK Ex. 67); Cut to Length Carbon Steel Plate from Germany,
61 Fed. Reg. 13834, 13836 (Mar. 28, 1996) ("Write-off�s of receivables are bad
debt expenses. The Department considers these to be ordinary operating expenses
because they are by their very nature indirect selling expenses, since under
Generally Accepted Accounting Principles bad debt is recovered by future price
increases.") (ROK Ex. 74); Certain Corrosion-Resistant Carbon Steel Flat
Products and Certain Cut-to-Length Carbon Steel Plate from Canada, 60 Fed.
Reg. 42511, 42513 (Aug. 16, 1995) ("We made deductions from ESP for... US
indirect selling expenses such as technical services, inventory carrying costs,
warehousing expenses, and bad debt.") (ROK Ex. 75); Fresh Cut Roses from
Columbia, at 7014 ("We consider bad debt, by its very nature, to be an
indirect selling expense since under Generally Accepted Accounting Principles,
bad debt is recovered over time by future price increases. ") (ROK Ex. 52);
Gray Portland Cement and Clinker from Japan, 59 Fed. Reg. 6614, 6614 (Feb.
11, 1994) ("We also deducted indirect selling expenses, where
appropriate, which included Onada�s reported indirect selling expenses plus
technical services, advertising, bad debt..." (ROK Ex. 76).
40 See US Oral Statement, para. 25.
41 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.").
42 See US First Submission, para. 62.
43 The Tokyo Round Code provided that,
In order to effect a fair comparison ... the two prices shall
be compared at the same level of trade ... and in respect of sales made at as
nearly as possible the same time.
Tokyo Round Anti-Dumping Code, Article 2:6.
44 See EC - Imposition of Anti-Dumping Duties on Imports of
Cotton Yarn from Brazil, Report of the Panel, ADP/137, adopted on 30 Oct.
1995, para. 492 ("the wording of Article 2:6 [of the Tokyo Round Code] "in order
to effect a fair comparison" made clear that if the requirements of that Article
were met, any comparison thus undertaken was deemed to be �fair.�").
45 US First Submission, para. 71.
46 US First Submission, para. 71.
47 As one of the cases cited by the United States explains:
... whether sales are in or out of the ordinary course of
trade is not the determinative factor on the US sales side of the equation.
Fairness, distortion representativeness are the issues to be examined.
The goal is to include the sales but to utilize whatever methodology is
needed to ensure a fair comparison.
American Permac, Inc. v. United States, 783 F. Supp.
1421, 1423-24 (Ct. Int�l Trade 1992) (emphasis added) (US Ex. 15).
48 Korea�s First Submission, paras. 4.45 - 4.48.
49 Korea�s First Submission, paras. 4.49 - 4.53.
50 See Korea�s First Submission, para. 3.48 and 4.61.
51 See, e.g., US First Submission, para. 137.
52 See, e.g., US First Submission, para. 145.
53 The dictionary defines "comparable" as:
1: Webster�s Third New International Dictionary, 461.
54 Article 2.1 provides that "a product is to be considered as
being dumped . . . if the export price of the product exported from one country
to another is less than the comparable price, in the ordinary course of trade,
for the like product when destined for consumption in the exporting
country." As the United States has recognized in its implementation of this
provision, the phrase "like product when destined for consumption in the
exporting country" means the product that is identical (or, in the absence of an
identical product, most similar) in physical characteristics to the exported
product. See Tariff Act of 1930, as amended, � 771(16), 19 USC. �
1677(16) (definition of "foreign like product.") (ROK Ex. 1).
55 Cotton Yarn, para. 494 (construing the Tokyo Round
Code�s predecessor provision of Article 2.4).
56 US First Submission, para. 142.
57 See US Oral Statement, para. 29.
58 See 19 USC. � 1677b-1 (ROK Ex. 1); DOC Notice: Change in
Policy regarding Currency Conversions (ROK Ex. 49).
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