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

Report of the Panel

(Continued)

E. THE UNITED STATES PERMISSIBLY CONCLUDED THAT PRICES ESTABLISHED PRIOR TO A SEVERE DEVALUATION OF THE KOREAN WON SHOULD NOT BE AVERAGED WITH PRICES ESTABLISHED AFTER SUCH A DEVALUATION IN ACCORDANCE WITH ARTICLES 2.4, 2.4.1, 2.4.2, 6.1, 6.2, 6.9 AND 12.2

1. Introduction

107. In the cases which are the subject of this dispute, the United States was faced with an unprecedented situation: during the period being examined by the United States in order to determine dumping, the value of the historically reliable and stable Korean won fell over 40 per cent in a two-month period, and entered a prolonged phase of instability.

108. As illustrated by the facts described in the following section, the United States provided all parties t o the two investigations in question, including POSCO, ample opportunity to present in writing all evidence which it considered relevant regarding this situation in accordance with Article 6.1 of the AD Agreement. Moreover, the Korean producers were given access to the complete administrative record and provided extensive opportunities to present arguments and defend their interests in accordance with Articles 6.2 and 6.9 of the AD Agreement. Significantly, with respect to the issue of the devaluation of the won, and the issue of whether the United States should avoid comparison of pre-devaluation prices with post-devaluation prices, POSCO, as well as domestic interested parties, made full use of such opportunities to present evidence and legal arguments both during the information-gathering phase of the investigation, as well as during the argument phase.

109. In light of all of the evidence gathered, and arguments presented, the United States made a reasonable conclusion, which it fully explained to all parties. The United States concluded that it agreed with POSCO that the United States should deviate from its normal practice in light of the serious devaluation, and use daily exchange rates throughout the devaluation period rather than the average exchange rates which would otherwise be called for. However, the United States also reasonably concluded that prices which were set in the home market in Korean won during a period in which the won was experiencing historically extreme devaluation were not comparable to export transactions the prices of which were established prior to such period, and that the two could not be compared without risking serious distortion to the dumping margin being calculated. To prevent such comparisons, the United States created separate averages for each period.

110. In the section below, the United States will first outline the facts surrounding the devaluation of the Korean currency beginning in the last two months of 1997, and the procedures undertaken by the United States in establishing and evaluating the relevant facts, and reaching a reasonable conclusion. The United States will then discuss the consistency of its action with Articles 2.4.1 and 2.4.2 of the AD Agreement. Finally, the United States will address Korea's arguments, demonstrating that they mis-apprehend the actions taken by the United States, and misinterpret the obligations established by the AD Agreement.

2. Statement of Relevant Facts

(a) The Situation of the Korean Won in 1997-1998

111. Throughout the first ten months of 1997, the Korean won, although experiencing a moderate overall decline, remained remarkably stable relative to the US dollar. Throughout this period the won/dollar exchange rate remained at approximately 900 won to the dollar. To be more specific, during this period the won ranged from approximately 850 won to the dollar in January, 1997, gradually decreasing to a low of approximately 918 won to the dollar in mid-October, 1997.⁹⁵ This decrease in value of roughly 8 per cent occurred slowly and steadily over the ten month period. This general stability during 1997 reflected the stability in the relationship between the two currencies which had existed for many years.

112. By contrast, the months of November and December 1997, were, by any measure, a time of dramatic changes in the value of the Korean won. During this period the won/dollar exchange rate fell from a high of 965 won to the dollar on 4 November 1997 to a low of 1960 won to the dollar on 23 December 1997.⁹⁶ Thus, the value of the won, an historically stable currency, dropped by 50 per cent in a period of two months. This dramatic drop was followed by an extended period of currency instability.⁹⁷

(b) The United States' Conduct of the Investigation

113. As noted previously, the United States initiated its investigations of alleged dumping of Stainless Steel Plate in Coils from Korea on 20 April 1998.⁹⁸ This investigation covered sales to the United States during the period 1 January 1997 through 31 December 1997.⁹⁹ The United States initiated its investigation of alleged dumping of Stainless Steel Sheet and Strip from Korea on 30 June 1998.¹⁰⁰ This investigation covered imports during the period 1 April 1997 through 31 March 1998.¹⁰¹ In other words, the collapse in the value of the Korean won happened to coincide with the periods in which the United States was attempting to determine whether dumping had occurred. This situation presented a novel set of issues in the calculation of dumping margins.

114. The circumstances of the collapse of the won were first brought to the United States' attention in the SSPC investigation by POSCO in its response to the United States' questionnaire.¹⁰² In that response, POSCO requested that the United States vary its normal methodology, and apply daily exchange rates throughout the fourth quarter of 1997, i.e. during the period of the won's collapse. In response, the domestic industry argued that the United States should apply the same methodology for a sustained decrease in a currency that it applies in the face of a sustained increase.¹⁰³ As discussed further below, in essence the domestic industry argued that the United States should ignore the daily exchange rates, and use the high exchange rate in effect prior to the collapse of the won for some unspecified period. Such a methodology would increase normal value and the resulting margin of dumping. In response, POSCO argued that the United States' stated policy required it to use daily exchange rates during periods of "precipitous and large" declines in the value of a foreign currency. According to POSCO, the collapse of the won at the end of 1997 met this test.

115. In the preliminary determinations in both cases, the United States agreed with POSCO that the decline in the value of the won was precipitous and large, and thus that the United States should use daily exchange rates during the period of the won's collapse:

Our preliminary analysis of Federal Reserve dollar won exchange rate data shows that the won declined rapidly at the end of 1997, losing over 40% of its value between the beginning of November and the end of December. The decline was, in both speed and magnitude, many times more severe than any change in the dollar won exchange rate during the previous eight years. Had the won rebounded quickly enough to recover all or almost all of the initial loss, the Department might have been inclined to view the won's decline at the end of 1997 as nothing more than a sudden, but only momentary drop, despite the magnitude of that drop. As it was, however, there was no significant rebound. Therefore, we have preliminarily determined that the decline in the won at the end of 1997 was so precipitous and large that the dollar won exchange rate cannot reasonably be viewed as having simply fluctuated during this time, i.e., as having experienced only a momentary drop in value. Therefore, in making this preliminary determination, the Department used daily rates exclusively for currency conversion purposes for HM sales matched to US sales occurring between 1 November and 31 December 1997.¹⁰⁴

116. The United States elaborated on this conclusion in its preliminary determination in the SSSS case:

Our preliminary analysis of Federal Reserve dollar won exchange rate data shows that the won declined rapidly at the end of 1997, losing over 40 per cent of its value between the beginning of November and the end of December. The decline was, in both speed and magnitude, many times more severe than any change in the dollar won exchange rate during the previous eight years. Had the won rebounded quickly enough to recover all or almost all of the initial loss, the Department might have been inclined to view the won's decline at the end of 1997 as nothing more than a sudden, but only momentary drop, despite the magnitude of that drop. As it was, however, there was no significant rebound.

We have preliminarily determined that the decline in the won at the end of 1997 was so precipitous and large that the dollar won exchange rate cannot reasonably be viewed as having simply fluctuated during this time, i.e., as having experienced only a momentary drop in value. Therefore, in making this preliminary determination, the Department used daily rates exclusively for currency conversion purposes for home market sales matched to US sales occurring between 1 November 1997 and 31 December 1997.

For sales occurring after 31 December, but before 1 March 1998, the Department relied on the standard exchange rate model, but used a modified benchmark. In calculating a benchmark rate, the Department's standard practice is to incorporate rates extending back 40 days from the date of sale. However, using such a benchmark rate would incorporate rates during November and December of 1997, when the dollar won exchange rate dropped, and hence would result in apparent significant fluctuations in the dollar won exchange rates used in the Department's margin calculation.

In order to ensure that rates used are more indicative of the exchange rate climate during January and February 1998, the benchmark was modified to include rates extending back only to 1 January 1998. Therefore, we have applied an up-to-date (post-precipitous drop) benchmark, while at the same time we have avoided making sales comparisons using exchange rates with excessive day-to-day fluctuations. By 1 March 1998, the dollar-won exchange rate had stabilized sufficiently so that the Department's standard model could be employed. For sales occurring after 1 March the standard model and benchmark rate were used.

Petitioners have suggested that the Department segregate the current POI into multiple periods to account for the effect of the devaluation of the Korean won during the last portion of the POI. See petitioners' submission of 2 December 1998. Petitioners state that the Department has examined this question in a recent preliminary determination involving the same POI and Korea, namely, Emulsion Styrene Butadiene Rubber from the Republic of Korea. See Notice of Preliminary Determination of Sales at Less Than Fair Value and Postponement of Final Determination: Emulsion Styrene Butadiene Rubber from the Republic of Korea, 63 FR 59514 (4 November 1998). However, the Department used the same currency conversion methodology described above in that case, and for the preliminary determination, did not average margins based on multiple periods within the POI. In the one case cited by petitioners in support of averaging multiple periods, PVA from Taiwan, the Department used multiple periods when there was a significant change in pricing. However, in that case, the decline in pricing was due to a company specific change in selling practices made at a particular point in the POI (i.e., the use of long term contracts versus purchase orders), rather than a devaluation of the local currency. See Notice of Final Determination of Sales at Less Than Fair Value: Polyvinyl Alcohol from Taiwan, 61 FR 14064 (29 March 1996). The Department preliminarily determines that the modification of currency conversion reasonably accounts for the devaluation of the won, and that the use of multiple periods for averaging purposes is unwarranted.¹⁰⁵

117. This last statement notwithstanding, in both cases the United States also recognized that, in addition to the effects on the exchange rates it used, the collapse of the won may also have affected the comparability of sales before and after the collapse. Although it did not take action on this issue in the preliminary determinations, the United States specifically advised all of the parties that it was considering the issue, and asked for comment. In both cases the United States included the following statement inviting comments on this issue:

The Department makes this determination without the benefit of extensive case precedent dealing with this area of our currency conversion policy. The Department therefore welcomes comments from interested parties on all aspects of our analysis and the time period specific exchange rates used. For the purposes of the final determination, the Department will continue to analyze the implications, if any, of the decline in the won during 1997 for price averaging and whether multiple averages are warranted.¹⁰⁶

118. After the preliminary determinations, the United States gave all parties an opportunity to provide arguments regarding any issue they wished the United States to address in the final determinations. Parties also had the opportunity to reply to arguments raised by other parties.¹⁰⁷ The domestic interested parties commented that they believed that multiple averages were warranted. POSCO responded to these comments.

119. The United States also afforded all parties an opportunity for a hearing at which they could make an oral presentation of their arguments to Department officials in charge of making the final determination, and could respond orally to arguments raised by other parties.¹⁰⁸ Although the US domestic industry requested such a hearing in the SSPC investigation, POSCO declined to request a hearing to address the issues. The domestic industry subsequently withdrew its request and the hearing was cancelled.¹⁰⁹ In the SSSS case both parties requested a hearing, and one was held on 26 April 1999.¹¹⁰

120. The United States made its final determination in the SSPC case on 31 March 1999. In its final determination, the United States addressed the arguments made by POSCO and the domestic industry on a point-by-point basis.

121. The United States continued to agree with POSCO that it should use daily exchange rates throughout the period of devaluation as it had in the preliminary determination. However, the United States decided to adopt for the final determination the proposal on which it had asked for comments in the preliminary determination: the United States concluded that the severe devaluation of the won could have a distortive effect on the calculation of dumping margins, and thus that the United States should not consider sales made prior to the devaluation period to be comparable to sales made during that period.

122. In the public notice in the Federal Register announcing its position on the devaluation which was applied in calculating the final dumping margins, the United States stated:

We have continued to use daily exchange rates in this case, for the reasons explained in the preliminary determination. However, we agree with petitioners that separate averaging periods should be used. Under section 777A(d)(1)(A) of the Act, the Department has wide latitude in calculating the average prices used to determine whether sales at less than fair value exist. More specifically, under 19 CFR 351.414(d)(3), the Department may use averaging periods of less than the POI when normal value, export price, or constructed export price varies significantly over the POI. In the instant case, NV (in dollars) in the last two months of the POI differs significantly from NV earlier in the POI due primarily to a significant change in the underlying dollar value of the won. In this case, the change is evidenced by the precipitous drop in the won's value that began in November 1997 and continued through the end of the POI, without a quick, significant rebound. In the span of two months, the won's value decreased by more than 40 per cent in relation to the dollar. Consequently, it is appropriate to use two averaging periods to avoid the possibility of a distortion in the dumping calculation. Moreover, we disagree with respondent's claim that the use of averaging periods is dependent upon a change in a respondent's selling practices. In the final determination of certain preserved mushrooms from Indonesia, the Department stated that "in addition to changes in selling practices, we believe that we should also consider other factors, such as prolonged large changes in exchange rates, in determining whether it is appropriate to use more than one averaging period.'' See Notice of Final Determination of Sales at Less Than Fair Value: Certain Preserved Mushrooms from Indonesia, 63 FR 72268, 72272 (31 December 1998). Therefore, we have used two averaging periods for the final determination: January through October and November through December 1997.¹¹¹

123. In reaching its final determination in the SSSS case, the United States reiterated its conclusion that, while it agreed with POSCO's position that the appropriate methodology for addressing precipitous and large depreciations in a foreign currency relative to the US dollar is to use daily rather than average exchange rates, it agreed with the domestic industry that comparisons of prices established prior to the devaluation prices established during the devaluation period could result in a distorted calculation. The United States explained:

In the preliminary determination, the Department determined that the decline in the won at the end of 1997 was so precipitous and large that the dollar won exchange rate cannot reasonably be viewed as having simply fluctuated during this time, i.e., as having experienced only a momentary drop in value. Therefore, the Department used daily rates exclusively for currency conversion purposes for HM sales matched to US sales occurring between 1 November and 31 December 1997, and the standard exchange rate model with a modified benchmark for sales occurring between 1 January 1999 and 28 February 1999. See Preliminary Determination, 64 FR at 145. As discussed in Comment 2, the Department continues to find that use of daily exchange rates and modified benchmarks are warranted during the periods noted above. In addition, as discussed in Comment 2 and Analysis Memo: POSCO, we have determined that the severe and precipitous drop in the value of the won from November 1997 through February 1998 necessitates the use of two averaging periods, under 19 CFR 351.414(d)(3).

* * * * *

We agree with petitioners. Given the economic situation in Korea during the POI, it is most appropriate to use daily and modified exchange rates in this case, for the reasons explained in the preliminary determination, and to employ two averaging periods in calculating the dumping margin. Under section 777A(d)(1)(A) of the Act, the Department has broad authority to use a number of methodologies in calculating the average prices used to determine whether sales at less than fair value exist. More specifically, under 19 C.F.R. 351.414(d)(3), the Department may use averaging periods of less than the POI when normal value, export price, or constructed export price varies significantly over the POI. In this investigation, in the last five months of the POI, NV (in dollars) differed significantly from NV earlier in the POI, due primarily to a significant change in the underlying dollar value of the won, evidenced by the precipitous drop in the won's value that began in November 1997 and continued through December 1997. In the span of two months, the won's value decreased by more than 40 per cent in relation to the dollar. Consequently, it is appropriate to use two averaging periods to avoid the possibility of a distortion in the dumping calculation. Moreover, we disagree with respondent's claim that the use of averaging periods is dependent upon a change in a respondent's selling practices. In the final determination of Preserved Mushrooms, the Department stated that "in addition to changes in selling practices, we believe that we should also consider other factors, such as prolonged large changes in exchange rates, in determining whether it is appropriate to use more than one averaging period.'' See Notice of Final Determination of Sales at Less Than Fair Value: Certain Preserved Mushrooms from Indonesia, 63 FR 72268, 72272 (31 December 1998). Therefore, for both POSCO and Inchon, we have used two averaging periods for the final determination: January through October 1997 and November 1997 through March 1998.¹¹²

124. In the preceding discussion the United States described the factual background concerning the Korean won during 1997 and 1998 which led to the conclusion with which Korea takes issue, i.e. that prices established prior to a currency devaluation of unprecedented magnitude should not be compared with prices established after such a devaluation. Following, the United States will demonstrate that the United States' action was fully consistent with both the language and purpose of the relevant provisions of the AD Agreement, Articles 2.4.1 and 2.4.2, and that Korea's arguments represent a misunderstanding of the United States' actions and the requirements of the AD Agreement. Finally, the United States will discuss how the procedures used in reaching this decision were consistent with Articles 6.1, 6.2, 6.9 and 12.2 of the AD Agreement, as well as Article X:3 of GATT 1994.

3. The Exchange Rate Policy Applied in This Case Is Consistent With Article 2.4.1 of The AD Agreement

(a) Article 2.4.1 Does Not Address Construction of Averages in Light of Sudden and Precipitous Currency Devaluations

125. Article 2.4.1 is the section of the AD Agreement which provides guidance to Members in selecting the exchange rates for use in antidumping investigations. Importantly, however, the issue addressed by Korea, although precipitated by a currency situation, actually relates to the United States' construction of averages under Article 2.4.2, rather than its selection of exchange rates under Article 2.4.1. In other words, Article 2.4.1 does not address the currency conversion problem faced by the United States in the investigations of SSPC and SSSS, and is not relevant to the issue raised by Korea.

126. Article 2.4.1 is structured in terms of a general rule, with several exceptions, all of which relate to the selection of an exchange rate. The general rule is that investigating authorities should convert currency using the exchange rate in effect on the date of sale. The provision makes exception for three situations in which a different exchange rate should be selected: forward exchange contracts, currency fluctuations, and sustained movements. Article 2.4.1 states:

When the price comparison under this paragraph requires a conversion of currencies, such conversion should be made using the rate of exchange on the date of sale, provided that when a sale of foreign currency on forward markets is directly linked to the export sale involved, the rate of exchange in the forward sale shall be used. Fluctuations in exchange rates shall be ignored and, in an investigation the authorities shall allow exporters at least 60 days to have adjusted their export prices to reflect sustained movements during the period of investigation.

127. Upon completion of the Uruguay Round, the United States adopted the currency conversion rules of Article 2.4.1 into the antidumping statute with little change. Thus 19 USC. � 1677b-1 provides:

(a) In General -- In an antidumping proceeding under this title, the administering authority shall convert foreign currencies into United States dollars using the exchange rate in effect on the date of sale of the subject merchandise, except that if it is established that a currency transaction on forward markets is directly linked to an export sale under consideration, exchange rate specified with respect to such foreign currency in the forward sale agreement shall be used to convert the foreign currency. Fluctuations in exchange rates shall be ignored.

(b) Sustained Movement in Foreign Currency Value. -- In an investigation under subtitle B, if there is a sustained movement in the value of the foreign currency relative to the United States dollar, the administering authority shall allow exporters at least 60 days to adjust their export prices to reflect such sustained movement.

128. In presenting the amendments to the antidumping law to the legislature, the executive branch also presented the "SAA" describing the intent of the changes. Regarding the currency conversion provisions, the SAA states:

Section 225 of the bill adds new section 773A to implement the requirements of the Agreement regarding currency conversions. Typically in antidumping proceedings, the prices or costs used to determine normal value are denominated in a foreign currency. To determine whether dumping exists, these prices or costs must be converted to US dollars. To a large extent, the Agreement tracks existing practice, the goal of which is to ensure that the process of currency conversion does not distort dumping margins. The Administration intends that Commerce will promulgate regulations implementing the requirements of section 773A. To the extent that the requirements of the Agreement apply only to investigations, as opposed to reviews, the regulations will reflect this distinction.

Under new section 773A, the general rule will be to convert foreign currencies based on the dollar exchange rate in effect on the date of sale. Under current practice, Commerce utilizes a quarterly rate, unless the daily rate varies by more than five per cent from the rate in effect on the first day of the quarter. Some firms, including US firms, commonly engage in hedging on forward currency markets to minimize their exposure to exchange rate losses. Therefore, as under existing practice, where a company demonstrates that a sale of foreign currency on forward markets is directly linked to a particular export sale, Commerce will use the rate of exchange in the forward currency sale agreement. Group sales of foreign currency on forward markets will be allowed, provided that sufficient documentation to establish the link between the currency purchase and the particular export sale is provided.

Section 773A also provides that Commerce will ignore fluctuations in exchange rates. In addition, in an investigation, Commerce will allow exporters at least sixty days in which to adjust their prices to reflect a sustained increase in the value of a foreign currency relative to the US dollar.¹¹³

129. In drafting its new regulations, the United States recognized that Article 2.4.1 and the new statutory provision, provided very little concrete guidance in selection of exchange rates. Indeed, the language of Article 2.4.1 raises more questions than it answers. Thus, rather than adopt a regulation which might produce unexpected and unintended consequences, the United States announced a policy which it would apply to cases on an "experimental" basis. This policy was announced in policy bulletin number 96-1 entitled "Import Administration Exchange Rate Methodology."¹¹⁴

130. The fundamental principle of the United States' exchange rate policy is normally to use the daily exchange rate in effect on the date of sale for converting currencies, rather than an average rate. According to the policy bulletin, the United States concluded that the phrase "rate in effect on the date of sale" contained in Article 2.4.1 and the US statute should be interpreted to refer to a daily rate, rather than an average rate, for example a monthly or quarterly rate.¹¹⁵ As noted previously, for South Korea the United States uses the daily exchange rate published by the Board of Governors of the US Federal Reserve System, as it does for many other countries.¹¹⁶ The United States' published policy also reflects the three exceptions to the general requirement to use daily exchange rates which are established by Article 2.4.1 and adopted in the United States antidumping statute: 1) forward currency contracts; 2) fluctuations in exchange rates; and 3) sustained movements in exchange rates. However, as discussed below, the United States concluded that none of these exceptions is relevant to the circumstances surrounding the precipitous decline in the value of the Korean won in 1997.

131. With respect to the first exception, the United States' policy provides that it will use the rate of exchange in a forward exchange rate contract directly linked to the sale, rather than the daily exchange rate in effect on the relevant day. The United States has rarely been asked to apply this exception.¹¹⁷ It has never been argued that this exception is relevant to the present case.

132. With respect to the second exception to the use of daily exchange rate, i.e. that the United States shall ignore fluctuations in such exchange rates, the main difficulty has been to define a "fluctuation." This is because a fluctuation can only be identified by comparison to some baseline. Under the United States' policy, the requirements of Article 2.4.1 and of the US statute with respect to this exception are accomplished as follows:

The model classifies each daily rate as "normal'' or "fluctuating'' based on a "benchmark'' rate. The benchmark is a moving average of the actual daily exchange rates for the eight weeks immediately prior to the date of the actual daily exchange rate to be classified. Whenever the actual daily rate varies from the benchmark rate by more than two-and-a-quarter per cent, the actual daily rate is classified as fluctuating. If within two-and-a-quarter per cent, the actual daily rate is classified as normal.

Actual daily rates classified as normal are the official exchange rate for that day. However, when an actual daily rate is classified as fluctuating, the benchmark rate is the official rate for that day.¹¹⁸

133. As noted, the Korean won was highly stable during the first ten months of 1997, with very few fluctuations.¹¹⁹ By contrast, the devaluation of the Korean won during November and December 1997, which rapidly dropped the actual daily rate more than two-and-a-quarter per cent below the average of the previous eight weeks, met the United States' definition of a "fluctuation," which, under Article 2.4.1, the United States should ignore.¹²⁰ The United States, however, agreed with the Korean producer POSCO that, although the United States' technical definition of a "fluctuation" had been met, i.e. daily rates more than two-and-a-quarter per cent below the average, the size and precipitous nature of the drop, as well as the lack of any significant rebound precluded the possibility that the won was merely "fluctuating.¹²¹ Consequently, the United States concluded, in accord with POSCO, that this exception was simply not relevant.

134. The third exception to use of normal daily exchange rates, under Article 2.4.1 and the US statute, requires the United States in an investigation to give exporters 60 days to adjust their export prices to reflect "sustained movements" in exchange rates. The United States also agreed with POSCO, contrary to arguments by the domestic industry in the United States, that this exception was not relevant in the case of the devaluation of the Korean won.¹²²

135. As demonstrated by the above discussion, none of the exceptions contained in Article 2.4.1, and implemented through the United States' exchange rate policy, apply in the situation presented by the investigations of SSPC and SSSS from Korea. More importantly, however, the above discussion demonstrates that all of the language of Article 2.4.1 deals with selection of exchange rates for converting prices in a foreign currency prior to comparing those prices with export prices. Article 2.4.1 does not deal with the comparison itself, including any averaging of prices. Rather, this topic is addressed under Article 2.4.2.

(b) The United States' Actions in Creating Two Averaging Periods Is in Accordance with the Purpose of Article 2.4.1

136. As discussed above, Article 2.4.1 deals with selection of exchange rates, rather than comparison of prices after currencies have been converted. However the purpose of Article 2.4.1 is to ensure that calculated margins of dumping are not simply a function of exchange rates; this purpose was furthered by the United States' action in avoiding comparison of pre-devaluation prices with prices established during the devaluation.¹²³

137. In its final determinations, the United States made two decisions in light of the devaluation. First, under Article 2.4.1, in accordance with arguments advanced by POSCO, the United States employed daily rates throughout the period of depreciating currency; in essence, it suspended its rule which would have identified the exchange rates during this period as fluctuations. Second, under Article 2.4.2, the United States determined that transactions prior to the depreciation period were not comparable to transactions during that period. In this way, the United States prevented the vagaries of exchange rate movement from completely disguising the fact that POSCO had engaged in substantial dumping throughout most of the period of investigation.¹²⁴

138. The purpose behind Article 2.4.1 is to ensure that the calculation of dumping margins is not driven by currency movements. This purpose can be seen, for example, in the requirement of Article 2.4.1 that investigating authorities ignore fluctuations in exchange rates, to ensure that unpredictable spikes do not generate a dumping margin on a particular day, even though prices have not changed. Similarly, Article 2.4.1 requires investigating authorities to give exporters a period of time to adjust their prices in the face of sustained increases in the value home market currency to avoid creating a dumping margin solely due to currency movements.

139. The United States' action complained of by Korea in this case was not addressed by Article 2.4.1 because the action involved averaging under Article 2.4.2, rather than selection of an exchange rate under Article 2.4.1. Nevertheless, the United States' action was consistent with the purpose of Article 2.4.1. Had the United States compared post-devaluation prices with pre-devaluation prices, POSCO's substantial dumping margin would have been disguised solely due to exchange rate movement. By creating two averages, the United States ensured that exchange rate movements did not dominate the calculation of dumping margins, in accordance with the purpose of Article 2.4.1. Thus, the United States' action, although not governed by the language of Article 2.4.1, was fully consistent with the purpose of 2.4.1. By contrast, had the United States not created separate averages, as now urged by Korea, the resulting margin would largely have been a function of the devaluation of the won rather than a reflection of POSCO's pricing practices.¹²⁵

(c) Korea's Arguments Regarding Article 2.4.1 are Without Merit

140. Korea argues that "departures from normal price comparisons to account for changes in exchange rates are permitted only when the currency of the exporting country was appreciating in relation to the currency of the importing country."¹²⁶ This statement takes a narrow exception to a rule set forth in Article 2.4.1 out of context, and uses it as a general rule prohibiting actions in unrelated parts of the AD Agreement, specifically Article 2.4.2.

141. Article 31 of the Vienna Convention requires that a treaty be interpreted in accordance with "the ordinary meaning to be given to the terms of the treaty in their context" (emphasis supplied). Read in context, the language to which Korea refers in Article 2.4.1 normally requires the use of daily exchange rates, but requires use of a different form of exchange rate when the currency of the exporting country is undergoing a sustained increase. Thus it addresses the exchange rate which must be used prior to the comparison. It has no bearing on how the comparison should be made, and does not prohibit an investigating authority from concluding that prices established prior to a fundamental shift in the value of the currency should not be compared with prices established after such a shift.¹²⁷

142. In effect, Korea is arguing that the phrase "authorities shall allow exporters at least 60 days to have adjusted their export prices to reflect sustained movements during the period of investigation" contained in Article 2.4.1 establishes a limit on which transactions may be considered "comparable" within the meaning of the phrase "the existence of margins of dumping during the investigation phase shall normally be established on the basis of a comparison of a weighted average normal value with a weighted average of prices of all comparable export transactions" contained in Article 2.4.2. However, these two phrases appear in separate provisions of the AD Agreement, and have nothing to do with one another.

143. The fundamental reason Article 2.4.1 has so little bearing on the issue raised by Korea is that 2.4.1 provides guidance on the exchange rate which should be used. However, Korea is not complaining that the United States used the wrong exchange rate. Indeed, the United States used the daily exchange rates urged by POSCO itself. Rather, Korea is arguing about the United States' method of averaging. Such issues are addressed under Article 2.4.2, and not under Article 2.4.1.

144. In light of the above, the antidumping measures against SSPC and SSSS are consistent with Article 2.4.1 of the AD Agreement.

95 The exchange rates cited herein are derived from the United States Federal Reserve Bank weekly statistical release for Foreign Exchange Rates which can be found on the Internet at http://www.bog.frb.fed.us/releases/H10/hist. (ROK Ex. 50). These are the official rates used by the Department of Commerce in its antidumping proceedings.

96 (ROK Ex. 50).

97 (ROK Ex. 50). See also (US Ex. 21), a chart supplied to the Department by POSCO, which dramatically illustrates the fundamental shift in the value of the won during the POI.

98 SSPC Preliminary Determination, 63 Fed. Reg. at 59535 (ROK Ex. 4).

99 Id. at 59536

100 SSSS Preliminary Determination, 64 Fed. Reg. at 137 (ROK Ex. 16).

101 Id. at 139.

102 See, POSCO Response to Section B of Antidumping Questionnaire, dated 21 July 1998 (US Ex. 21).

103 (ROK Ex. 38).

104 SSPC Preliminary Determination, 63 Fed. Reg. at 59539 (ROK Ex. 4).

105 SSSS Preliminary Determination, 64 Fed. Reg at 145 (ROK Ex. 16).

106 SSPC Preliminary Determination, 63 Fed. Reg. at 59539 (ROK Ex. 4) and SSSS Preliminary Determination, 64 Fed. Reg. at 145 (emphasis added) (ROK Ex. 16).

107 The United States is required to provide this opportunity to all parties to anti-dumping investigations under 19 C.F.R. � 351.309 (ROK Ex. 2).

108 Hearings are provided for under the Department�s regulations at 19 C.F.R. � 351.310 (ROK Ex. 2).

109 See SSPC Final Determination ("Case History") 64 Fed. Reg. at 15444 (ROK Ex. 11).

110 See SSSS Final Determination ("Case History ") 64 Fed. Reg. at 30665 (ROK Ex. 24).

111 SSPC Final Determination, 64 Fed. Reg. at 15452 (ROK Ex. 11).

112 SSSS Final Determination , 64 Fed. Reg. at 30670 and 30675-76 (ROK Ex. 24).

113 SAA at 841-42. (US Ex. 14).

114 The policy bulletin was published in Federal Register under the title Notice: Change in Policy Regarding Currency Conversion, 61 Fed. Reg. 9434 (8 March 1996) (ROK Ex. 49).

115 This interpretation is not challenged by Korea. Indeed, during the investigations POSCO argued that daily rates should be used throughout the devaluation period. However, the United States notes that there may be other reasonable interpretations of the phrase "rate in effect on the date of sale."

116 The United States uses the Federal Reserve exchange rates for most countries for which such rates are available.

117 See, e.g., Notice of Final Determination of Sales at Less Than Fair Value: Certain Preserved Mushrooms from India, 63 Fed. Reg. 72246, 72252 (31 December 1998) (US Ex. 22) ("[A]ccording to the Departments' practice, in the final determination we have used the exchange rate specified in the forward sales agreement instead of the actual exchange rate on the date of sale in making all currency conversions.").

118 Notice: Change in Policy Regarding Currency Conversions, 61 Fed. Reg. at 9435 (ROK Ex. 49).

119 See, graph of won/dollar exchange rate supplied by POSCO in its questionnaire response, (US Ex. 21).

120 Id.

121 Note that, had the United States agreed with the US domestic industry that the "fluctuation" exception to the use of daily rates applied in the present cases, the margins of dumping found would have been significantly higher. That is because the rolling average eight week benchmark rate was partially made up rates from before the drop in the value of the won, or from early in the drop. Thus, the benchmark rate was significantly higher than the daily rate on any given day. For example, the daily rate in effect on 23 December 1997 was 1960 won to the dollar, while the eight-week rolling average benchmark rate on that day was 1109 won to the dollar. See, (ROK Ex. 50) and (ROK Ex. 51). Consequently, had the benchmark rate been used, the value in dollars of home market sales denominated in won would have been significantly higher, and thus the margin of dumping found when comparing such sales to exports to the US, would have been significantly greater as well.

122 The United States agrees with that portion of the ROK First Submission, at para. 4.50 - 4.53, and accompanying footnotes, to the extent it asserts that this provision of Article 2.4.1 should be interpreted to apply to appreciating currencies. However, as noted below, Korea is not really arguing that the United States selected the incorrect exchange rate under Article 2.4.1, but rather that it averaged improperly under Article 2.4.2.

123 As observed previously, the Vienna Convention, Article 31, requires that a treaty be interpreted "in light of its object and purpose." However, the United States notes that, while recourse to a treaty's object and purpose is permissible, it may not override the clear meaning of the text. As the Appellate Body in the Japan Taxes case recognized, a "treaty's �object and purpose' is to be referred to in determining the meaning of the �terms of the treaty' and not as an independent basis for interpretation." Japan Taxes, at 12 n. 20.

124 As discussed in more detail below, this action is actually governed by the averaging provision of Article 2.4.2 rather than by the exchange rate selection provision of Article 2.4.1.

125 In the following section, the United States demonstrates by example that in a situation of rapidly devaluing currency, the same comparison of a price in the home market with the price of an export transaction could produce radically different margins depending on the timing of those transactions relative to one another.

126 See, ROK First Submission, para. 4.49.

127 Although not directly relevant, Korea�s argument does not explain why it has singled out the sustained increase provision as the only exception in Article 2.4.1. As discussed above, the language of Article 2.4.1 clearly contains three exceptions to the general rule.

To continue with 4. The Exchange Rate Policy Applied in This Case Is Consistent With Article 2.4.2 of The AD Agreement

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