A  series of new rules proposed and implemented by the U.S. Department of Commerce (DOC) makes it tougher for Chinese companies to navigate antidumping (AD) and countervailing duty (CVD) cases in the United States.  In particular, two of the most recent rules are likely to result in substantially higher AD rates in Chinese cases.

1.  Market Economy Input Price Less Likely To Be Used.

A new proposed rule makes it more likely that the dumping margin in Chinese and other non-market economy cases is calculated based on a surrogate value rather than on the actual price paid by the producer.

Under its longstanding practice, the DOC calculates dumping margins in Chinese and other non-market economy (NME) cases by comparing the exporter’s U.S. selling price with the cost of production based on surrogate values.  As an exception to this general rule, the actual price of a given input may be used in place of a surrogate value if the producer sourced at least 33% of the given input from a market economy country during the period examined.  The proposed rule would increase this percentage to 85% and would also require exporters to show that the inputs were produced in — not just sourced from market economy countries.

The proposed rule is expected to make it less likely for exporters to meet the market economy input exception.  And given that the use of surrogate values generally results in higher input prices, the proposed rule is expected to lead to higher dumping margins.

This rule is not yet in effect.  The DOC has collected public comments regarding the proposed rule and is expected to announce the final rule in the near future.

2.  Unrefunded VAT May Be Deducted from U.S. Price

Under a final rule announced in June 2012, the DOC may reduce an exporter’s U.S. price by the amount of unrefunded value-added tax (VAT) in calculating the exporter’s dumping margin in cases involving China and Vietnam.  The new rule is likely to result in higher dumping margins

As noted above, dumping margins in cases involving China and other NMEs are based on a surrogate value methodology.  Due to certain limitations with the use of surrogate values, the DOC, in the past, has not adjusted the dumping calculations to account for internal taxes such as VAT imposed on inputs.

In China and many other countries, VAT (of 17% in China) is imposed on almost all transactions of goods and services.  Generally, a company pays VAT on its purchase of inputs and collects VAT from its customer when the finished good is sold.  Where the amount of VAT collected from the finished good sales exceeds VAT paid by the company for the purchase of inputs, the difference is remitted to the government.  Because no VAT is imposed on export sales, a company with more export sales than domestic sales would end up paying VAT on inputs that are not offset through its sales.  To prevent this disparity, China, like many other countries, provide a refund of VAT paid for inputs upon exportation of the finished good.  For many goods, China provides for a refund of 13% out of the 17% VAT paid (the refund rate varies for certain goods).

While it is still unclear how the new final rule will be applied, the DOC implies that “VAT that is not fully refunded upon exportation” will be treated as an export tax that will deducted from export price when determining the dumping margin.  If the DOC indeed treats the unrefunded VAT on inputs as an export tax, this will result in increased dumping margins in virtually all Chinese cases.

In such case, we believe that the DOC’s new rule may be at odds with the U.S. and international law because VAT is not an export tax.  It remains to be seen how the rule will be applied in actual calculations.