Whenever possible, the Commerce Department compares identical merchandise in the United States market and comparison markets. When the Commerce Department must compare similar merchandise - because either identical merchandise does not exist or it was not sold in sufficient quantities -the Commerce Department makes an adjustment for any differences in the physical characteristics of the merchandise. Such an adjustment is usually called a 'difference in merchandise' or `difmer' adjustment. The adjustment, either positive or negative, is made to normal value so that the foreign merchandise becomes comparable to the United States merchandise.

Difference-in-merchandise adjustments are based on differences in the cost of producing the two items that are being compared. Although United States law allows the Commerce Department to consider differences in the value of the merchandise, the Commerce Department generally does not do so. The Commerce Department's practice has been to consider only the material costs, direct labour costs, and variable overhead costs. These are the elements that, in the Commerce Department's view, contribute directly to the physical differences. Other elements of cost, such as indirect labour, fixed overhead, R&D expenses and administrative expenses, do not contribute directly to the physical differences between the merchandise.

Although difference-in-merchandise adjustments are routinely granted by Commerce Department, the issues can become more complex. For example, the foreign company must be able to show actual physical differences in the merchandise; it is not sufficient to show a quality difference between otherwise physically identical items. The differences cannot be too great, however, otherwise the Commerce Department may decide that the merchandise no longer qualifies as similar. As a general matter, the Commerce Department considers cost differences of more than 20% to divide the merchandise into two dissimilar categories that cannot be compared.

The adjustment is the amount of the difference between the variable costs of the two products. Under Commerce Department practice, the adjustment is always applied against the home market price. If the United States product has higher variable costs, then the difference is added to the home market price. If the United States product has smaller direct costs, then the difference is subtracted from the home market price.

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