Under Canadian law and the WTO’s Anti-dumping Agreement, imported goods are “dumped” if they are sold into an export market at below their “normal value”. Much therefore depends on how those normal values are calculated. On July 15, 2019, the Government of Canada announced amendments to the Special Import Measures Regulations (the SIMR) that will give the Canada Border Services Agency (CBSA) greater latitude to calculate normal values in ways that are intended to produce more instances of dumping and additional obstacles for exporters and Canadian importers.
The Legal Context
The CBSA primarily determines normal values on the basis of actual and contemporaneous sales prices of certain “like goods” (i.e., goods like those exported to Canada) in the country of export, which it then compares to sales prices for the exports to Canada. For the purposes of that comparison, the Special Import Measures Act (SIMA) requires the CBSA to disregard certain domestic sales, including below-cost sales or where it finds a “particular market situation” that does not permit a proper comparison between domestic sales and export sales. In circumstances where there are insufficient suitable domestic sales to permit a proper comparison to export sales, the CBSA can instead “construct” normal values based on the cost of production, selling costs and profits in the country of origin.
The Proposed Amendments
The recently announced SIMR amendments will enable the CBSA, when determining normal values, to additionally disregard actual input costs in two situations.
(i) Transactions between associated parties
Where a production input is a significant factor in the production of the good and is acquired from an associated entity like a subsidiary or affiliate company, under a new sub-section 11.2(1) of the SIMR, the CBSA will be able to disregard actual input costs for the purposes of identifying below-cost domestic sales or constructing normal values. The cost of the input will be the highest of: the actual transfer price paid; the production and selling costs to the supplier; or a benchmark price in the country of export.
The amendments place no onus on the CBSA or the complainant to establish that the foreign producer’s input costs are unreasonable. They provide no guidance as to when an input will be considered a “significant factor” in the production of the goods at issue. Instead, the SIMR amendments appear to give the CBSA full discretion to determine which inputs from associated entities are significant. Nor do the amendments provide any criteria or a framework to ascertain an appropriate benchmark price in the country of export.
For foreign manufactures and exporters that purchase inputs from corporate affiliates, the outcome will be inflated margins in Canadian dumping proceedings.
(ii) Particular Market Situation
Currently, when the CBSA constructs a normal value based on the producer’s costs of production it must use the (verified) cost of inputs as recorded by the producer. A new sub-section 11.2(2) of the SIMR will enable the CBSA, when it has found that a “particular market situation” exists such that the acquisition cost of an input does not reasonably reflect its actual cost, to determine the input cost based on a hierarchy of five alternative prices “that reasonably reflect the actual cost of the input” as though that cost was not distorted by the particular market situation.
The amendments provide no guidance as to how the CBSA is to assess which of the five price alternatives reasonably reflects the “actual cost” of the input. The five alternatives move progressively further from prices actually paid by the exporter or other producers in the country of export for inputs produced in the country of export, culminating in the use of published prices for the same or substantially the same inputs outside the country of export, “adjusted to reflect the differences relating to price comparability with the country of export”. This will leave the CBSA with broad discretion both to choose from among the five alternatives and to make adjustments to the resulting input prices where the alternatives so provide.
More generally, the increased latitude the CBSA will have to construct normal values when it finds a ”particular market situation” will further incentivize complainants to make particular market situation allegations. Because the CBSA already has near complete discretion under the Special Import Measures Act to determine that a particular market situation exists, this is a recipe for greater arbitrariness in dumping determinations.
Impact
The proposed amendments are among a series of actions the Government of Canada has recently taken at the behest of steel producers. They are targeted at imported steel products, although they can apply to any goods subject to a Canadian anti-dumping investigation. Whether the amendments would withstand a WTO challenge is an open question. In the meantime, if the U.S. experience with similar provisions is any indication, we expect that Canadian producers in their submissions to the CBSA will begin invoking the amendments as soon as they take effect and that their impact will be felt quickly by foreign producers and importers of any product currently subject to dumping measures as well as in anti-dumping investigations yet to come.
Notably, the new provisions are not limited to new investigations; they will be available to the CBSA in other proceedings, including re-investigations, exporter-specific normal value reviews, and presumably, any normal value determination resulting from a SIMA appeal. The ability of the CBSA to arbitrarily disregard actual input costs in calculating normal values will make it even more difficult for foreign producers to know the price at which they must sell in Canada to avoid anti-dumping duties. They pose yet another risk to companies that are currently importing goods into Canada under anti-dumping enforcement, and follow recent changes to CBSA policy on re-investigations and normal value reviews, which greatly increase the risk of retroactive duty assessments.
If you have questions about the proposed amendments or want to better understand the risks they may pose for your company, please contact a Partner in our International Trade and Investment Group.