The cost information can be used in two ways. First, the Commerce Department uses the cost information to determine whether foreign market prices are above the cost of producing the merchandise. If a sufficient number of sales are above cost, the Commerce Department can use the prices of those sales as the basis for normal value. Second, if few or none of the sales are above cost then the Commerce Department excludes the below-cost sales and, if no sufficiently similar products remain, uses the cost information to calculate constructed value. Use of constructed value also often has the effect of increasing Idumping margins. Each of these two possible uses is discussed below.

Cost of production versus home market price

When comparing cost of production to prices, the goal is to determine whether the home market or third country prices can serve as the basis of normal value. in making this determination, the Commerce Department follows several established policies.

The cost of production test - 'substantial quantities'

The anti-dumping law requires the Commerce Department to determine whether a sufficient number of sales are above cost to justify using those sales as the basis for normal value. The statute, however, does not specify how the Commerce Department should make that determination. As a matter of administrative practice, the Commerce Department has created what has become known as the 420% rule'.

The '20% rule' specifies how the Commerce Department applies the cost of production test. First, if more than 809 of the individual sales of a particular model are above cost. (usually measured by volume), the Commerce Department uses all of the sales to determine normal value. In such a situation, the number of below-cost sales is deemed so small that the Commerce Department is not concerned about the minor distortion that results from including them in its analysis. Application of the cost test has no effect on the dumping margins in this case.

Second, when the proportion of below-cost sales of a particular model is 20% or more, the Commerce Department excludes those individual sales that are below cost. By excluding the lower-priced (below-cost) sales from the weighted-average price, the Commerce Department raises the average foreign market price that will be compared to the United States price, and thus raises the dumping margins.

Basis for applying the cost of production test

The Commerce Department applies the cost of production test and its '20% rule' to individual categories of products. As discussed earlier (see 'Establishing the model-match methodology' in chapter 3), the Commerce Department creates specific categories called 'control numbers' or `CONNUMs' for each investigation, which represent what the Commerce Department believes are meaningful categories for comparison in a dumping case. The cost test is applied to each of these CONNUMs. The practice means that a foreign company may be selling most of its products above cost, but may find that certain products are below cost and are rejected as the basis for normal value.

This practice is not mandated by the statute, and in some prior cases the Commerce Department has looked at broader categories when applying the cost test. The current practice is quite mechanical, and often leads to rather strange results. But this practice now seems to be quite well established, and is unlikely to alter unless some new WTO rules force a change.

Constructed value versus United States price The role of constructed value

When the Commerce Department finds that home market prices or third country prices cannot be used to establish normal value — either because these prices do not exist or because the prices are below the cost of production — the anti-dumping law requires the Commerce Department to use constructed value as the basis of normal value. Constructed value thus serves as a surrogate for the home market price that does not exist. Once this cost-based surrogate for the price is created, it is compared to the prices offered in the United States to determine if there is any 'dumping'.

Differences between constructed value and cost of production

Constructed value is basically very similar to cost of production. The basic elements are:

- Cost of materials

- Cost of labour

- Overhead

- General and administrative (G&A) expenses

- Selling expenses

- Financial/interest expenses

- Profit

- Packing
 

The various items of cost of _manufacturing. (cost of materials, labour, and overhead) should be the average cost of manufacturing of the partictcular merchandise sold in the United States (including in this calculation the cost for identical merchandise sold to other countries). However, the G&A expenses should be based on a company-wide average. Selling expenses are treated differently again, and should be based on the identical or similar merchandise sold in the home market (or third country market), not the expenses from the United States market. If there are no identical or similar sales in the home market, the Commerce Department may use the expenses associated with United States sales as a ‘facts available’ surrogate for the non-existent foreign market expenses. Profit should also be based on the home market, but parking costs should be those for packing merchandise destined. for the United States.

There are several important differences between cost of production and constructed value. First, constructed value must include an amount for profit. Cost of production. involves- no calculation of Profit Constructed value requires the. use of either actual profits for the residentical mechandise sold in the home market, or some other appropriate surrogate. United States law once imposed a statutory minimum profit of 8%, but that requirement was eliminated as part of the Uruguay Round Anti-Dumping Agreement. The new practice is to use the prices and costs submitted by the foreign respondent to calculate an actual average profit on the sales actually being made by the company. When making this caculation, however, the Commerce Department Uses only sales above cost, and not all sales. For example, the foreign company May have an overall average profit margin –of 5% on its home Market sales, but a 20% - profit margin on those sales that are above Cost. The Commerce Department would use the 20% profit margin.

While the WTO Appellate Body previously ruled in a European Communities case that in some instances the authorities must include all sales in determining the profit rate, the United States continues to use only above-cost sales.

Second, constructed value requires the inclusion of an amount for packing. This item should be the cost of paCking the United States merchandise. for Shipment to the United States, not the cost of packing merchandise for sale in the home market or third country markets.

Third, if any duties or taxes on the materials are rebated when the merchandise is exported, those duties or taxes must be excluded from the cost of materials used to calculate constructed value. As a practical matter, many foreign. companies usually do not need to make this adjustment because they have already found a way to avoid paying the import duties when the materials are imported. However, if taxes on the materials are not rebated, they must be included in the cost of production.

Fourth, selling expenses are based on the foreign market, not on the United States market. As with other G&A expenses, the Commerce Department may use selling expenses from. the United States Market if there are no comparable sales in the foreign market. The selling expenses used for constructed. value. are -usually taken from the price response, so it is important to ensure that an necessary currency conversions are made.

Adjustments to constructed value

Although there was initially some uncertainty, the Commerce Department has established a settled policy of making circumstance-of-sale adjustments to constructed value. The most common such adjustment is for differences in imputed credit costs and commissions. Imputed credit costs reflect the 'opportunity cost' of outstanding accounts receivable, Domestic petitioners argued that the statutory provisions on circumstance-of-sale adjustments should apply only to home market or third country prices, not constructed value. The Commerce Department rejected this argument. Since constructed value is based on the selling expenses of foreign market sales, which may be significantly different from the selling expenses for United States sales, some adjustment is necessary to ensure comparability. The courts have upheld this Commerce Department position, so the issue should remain settled.

Source: Business Guide to Trade Remedies in the United States: Anti-dumping, countervailing and safeguards legislation practices and procedures