Keon Ho Lee1

Introduction

In Korea, anti-dumping investigations are conducted by the Korea Trade Commission (KTC), which was founded in July 1987. The KTC is currently composed of one chairperson and eight commissioners, including one designated as a standing commissioner. The KTC is supported in its administrative work by the Office of Investigation, which consists of four divisions: the Operations Division, the Injury Investigation Division, the Dumping Investigation Division, and the Unfair Trade Investigation Division. While the investigation of dumping and injury is conducted by the KTC, the imposition of the anti-dumping duty is under the charge of the Ministry of Finance and Economy (MOFE). Anti-dumping investigations are governed by the Customs Act of Korea, which stipulates the anti-dumping rules and regulations in Korea. The World Trade Organization (WTO) Anti-Dumping Agreement (ADA) also provides a legal basis for the implementation of this system.

I. Normal Value

A. First Problem: Reasonable Profit Calculation in the CNV

In Korean anti-dumping practice, when there are no sales of a like product in the ordinary course of trade in the domestic market of the exporting country or when the ordinary transaction price cannot be applied because of the particular market situation, etc., the margin of dumping may be determined by comparison with a comparable price of the like product exported to an appropriate third country, provided that this price is representative of, or in line with the constructed normal value (CNV).

The KTC has used the CNVs rather than the comparable prices of the like product exported to a third country when there are no sales of a like product in the domestic market of the exporting country.

In Korea’s anti-dumping investigations, the CNV information is submitted in the questionnaire for exporters. Costs of manufacturing, selling expenses, management expenses, financial expenses, research and development (R&D) costs and profits defined by the KTC are required to be reported.

As regards to the profit information, the KTC asks for the ordinary profit ratio by domestic sales, sales to Korea, sales to third country, non-subject merchandise of investigation, all sales recorded in the respondent’s company, and the average of the same industry in the respondent’s country. It seems that the KTC has complete discretion in the selection of ‘reasonable profit’ under current practice. In the cases during the late 1990s, the KTC used the company wide profit ratio as the ‘reasonable profit’ in the calculation of the CNV, however, in recent cases, the KTC has used the profit rates from the profitable domestic sales as the CNV profit.

Currently, the ADA gives the authorities substantial discretion to calculate the CNV. Thus, Korea, which is a member of the ‘Friends of Anti-Dumping Negotiations’, requested to the WTO for a clear guideline on the calculation of the CNV in the Doha Development Agenda (DDA).2

B. Second Problem: Systematic Exclusion of Sales Below Cost

Normal value is defined as the ordinary transaction price of the like products consumed in the exporting country. However, sales of the like product in the domestic market of the exporting country at prices below the per unit costs of manufacturing plus selling, general and administrative costs, i.e., cost of production (‘COP’) may be treated as not being in the ordinary course of trade in the following two cases: (i) when the weighted average selling price of the transactions under consideration for the determination of the normal value is below the weighted average per unit costs; or (ii) when the volume of sales below the per unit costs represents more than 20 per cent of the volume sold in the transactions under consideration for the determination of the normal value and such sales are at prices which do not provide for the recovery of all costs within a reasonable period of time.

Technically, the below-cost test of the KTC is conducted in two steps.

First, if the weighted average sale price is below the weighted average cost, the CNV or the export price to third countries is used as the normal value. Second, if the weighted average sale price is higher than the weighted average cost, the sales below-cost test is conducted for each PCN.

  1. If the sales above cost (i.e., COP) represent more than 80 per cent of the sales, all sales in the domestic market can be used for normal value calculation.
  2. If the sales above COP represent more than 20 per cent but less than 80 per cent. only the domestic sales above COP can be used for the normal value calculation.
  3. If the sales above COP represent less than 20 per cent, the CNV or the export price to third countries can be used for the normal value calculation instead of domestic sales.

This approach, which is quite conservative, is very similar to the approach used by other countries.

C. Third Problem: Domestic Sales to or Through Related Parties

To determine the affiliation in an anti-dumping investigation, the Korea Customs Act defines related parties as follows:

  1. an officer or director of an organization and that organization;
  2. legal partners;
  3. employers and their employees;
  4. any person or organization directly or indirectly owning, controlling, or holding with the power to vote, 5 per cent or more of the outstanding voting stock or shares of any organization and that organization;
  5. any person who controls any other person and that other person;
  6. any two or more persons who are controlled by, or are under common control with, any person;
  7. any two or more persons who directly control or have common control on any person; and
  8. members of a family.

When a sale is made in the domestic market by the respondent to an unrelated party through a related party, the KTC basically deems the related parties as a single economic entity, and the price charged to the first independent customer is used as the basis for the normal value. However, if the transactions through the affiliates represent a small portion of the total domestic sales, then such sales may be disregarded in the calculation by reason of materiality. There are, however, no explicit criteria for the disregarding of such sales in the calculation.

In the sales made to related parties, as long as there is no evidence that the price was affected by a special relationship, the sales price may be used as the basis for the normal value.3 There are no specific rules for determining whether the sales price was affected by the affiliation. However, if the price of the transaction between related parties is within a certain range, for example, 98–102 per cent of the prices charged to unrelated parties, the price may be regarded as not being affected by the affiliation and thus can be used as the normal value.

Currently, the ADA does not provide a clear and concrete set of criteria for determining when parties should be considered affiliated, and does not adequately address those situations in which the existence of possibly affiliated parties affects the calculation of the dumping margin. Given the importance of these issues, it is crucial to rethink the issue of affiliation and ensure that the ADA clearly and appropriately defines these various issues. In this regard, Korea has made a request the WTO to add a provision to the ADA, defining ‘affiliated parties’ to be applied in all cases of dumping where the parties are related, associated or affiliated, and where the prices in the transactions between such parties could be unreliable. A request was also made to clarify the situations in which transactions between affiliated parties are involved.4

D. Fourth Problem: Non-market Economy (NME)

With regard to the non-market economy (NME) issue, the People’s Republic of China, Russia and Vietnam have been the countries at issue in Korea. While other countries deemed these countries as non-market economy countries, Korea had deemed these countries as countries in transition to a market economy in conducting anti-dumping investigation. This means that in the course of investigation, the industry where the exporting goods belong will be subject to investigation. Once the examination shows that the industry in question passes the criteria set by the KTC, then, the product in question is granted market economy status. This means the KTC will use the domestic sales price as the basis for normal value.

At present, Korea does not specifically designate certain countries as NMEs in legal terms, but evaluates each exporting country on a case-by-case basis. The Customs Act does not provide concrete criteria for NMEs. The KTC has certain criteria in determining NMEs.

The KTC considers the following as criteria for NMEs. The cases of the United States and the EU have been used as reference.

  1. The ownership structure of the respondent and the government’s participation in the board of directors and management of the respondent;
  2. Convertibility of the country’s currency into foreign currencies;
  3. Whether wage rates in the foreign country are determined by free bargaining between labour and management, and whether dismissal or employment of employees is determined by market-based factors;
  4. Whether joint ventures or other investments by firms of other foreign countries are permitted in the relevant country, and whether distribution of profits or recovery of investment by foreign investors are guaranteed;
  5. The extent of government ownership or control of the means of production;
  6. The extent of government control over the allocation of resources and over the price and output decisions of enterprises;
  7. Whether electricity and water are supplied in accordance with appropriate terms and conditions of contract;
  8. Whether land lease and borrowing of capital are conducted upon appropriate terms and conditions of contract as applied in a market economy; and
  9. Such other factors as the KTC considers appropriate.

In past cases, the KTC assessed the transition status of those three countries in every investigation and evaluated each product based on a market economy status basis. Thus, in some cases, such as Choline Chloride from China in 1996, the KTC determined that the product in question is maintained under a non-market economy situation. Accordingly, the surrogate country price was used as the basis for the normal value and the dumping margin was inflated. However, after 2000, a substantial portion of cases for Chinese products has been determined as being in a market economy oriented situation. It means that the KTC used the Chinese domestic prices as the basis for the normal value. This brought a substantial decrease of the dumping margins of the Chinese exporters compared to the cases before 2000.

In December 2005, the KTC officially recognized the People’s Republic of China and Russia as market economy countries.

II. Export Price

A. Fifth Problem: Constructed Export Price (CEP)

In the case of related importers in Korea, the KTC has used the constructed export price (CEP) as the basis for export value.5 The exporters that have related importers in Korea must submit Appendix I of the anti-dumping questionnaire to the KTC, which requires information on costs and profits between the importation and the resale by the subsidiaries in Korea. Although there are no relevant provisions in the Korean Customs Act on how the profit is calculated, it is understood that on a working level, the profit is calculated on the basis of the expenses incurred from the Korean market and the domestic market. Since there have been only several cases where the CEP was used, the calculation rule has not been regulated by law. In recent cases, however, the profit from the sales by the subsidiary was calculated on the basis of cost attribution. This method is similar to the method used in the United States.

Where there is no profit from the sales by the subsidiary in Korea, there may be disputes over what amount is to be considered in the calculation of CEP, even though it has not been addressed by the KTC. In my personal view, I would say in the absence of actual profit from the sales by the subsidiary in Korea, no deduction should be made in the CEP calculation.

With regard to the deduction to the CEP adjustment, the KTC also allows a corresponding adjustment to the domestic sales, which is capped by the indirect selling expenses incurred in connection with the domestic sales. This adjustment is granted in special situations where the levels of trade are different between the domestic sales and the CEP sales, and the different levels of trade affect the price comparability. The burden of proof seems to be very high in demonstrating such situation. The KTC, however, has been quite generous in granting the corresponding adjustment on the normal value side. This is called the ‘CEP offset’.

III. Adjustments

A. Sixth Problem: Level of Trade

The KTC adjusts the level of trade difference for fair comparison by reflecting the price differences in the different levels of trade. Comparison has to be made at the same level of trade, but in cases where the same level of trade does not exist, the difference in the level of trade should be reflected as an adjustment factor under the condition that the amount of difference can be explained. It has always been very difficult to demonstrate the price effects caused from the different levels of trade. In almost all cases, the KTC analyses the level of trade difference and review whether to reflect it as an adjustment factor. However, because of difficulty in the explanation, most of the level of trade difference was not allowed as an adjustment factor.6 In some cases, instead of the level of trade difference, the CEP offset was allowed as an adjustment factor. With regard to the Alkaline Batteries from Singapore, China and Japan case (2003), the KTC reflected the level of trade difference as an adjustment factor in the form of CEP offset.

Alternatively, when the explanation for the price comparability of the different levels of trades is very tough or difficult, often times, the respondents argue that a consideration for different quantities in the transaction (i.e., quantity discount) should be granted. In the Korean practice, there has been only one case7 where the quantity discount was considered. Obviously, this adjustment is seldom granted.

B. Seventh Problem: Credit Expense and Duty Drawback

Price varies between the different credit periods of each sale, and as credit expenses hold the characteristic of an opportunity cost for the period until the payment is collected after the sale, it is irrelevant to financial expenses that have actually been incurred. After calculating the credit period from the date of sale to the date of payment, the KTC calculates the credit expenses by using the short-term borrowing interest rate of respondent. In cases where the calculation of the credit period and the short-term borrowing interest rate is appropriate, the credit expenses are more easily accepted. When the term charge is incurred because of early deposit, the term charge is regarded as other expenses and not credit expenses.

The KTC adjusts duty drawback in domestic sales. A respondent who wishes to argue duty drawback must: (i) provide an original and an English or Korean translation of the statutes and regulations authorizing duty drawback on the exported goods and governing the methods used to calculate duty drawback; (ii) report the total amount of duty drawback the respondent received for sales to Korea and to third countries; and (iii) report in the transaction-by-transaction listing the amount of duty drawback the respondent received for each sale to Korea.

IV. The Comparison

A. Eighth Problem: Product Control Number (PCN)

The KTC did not use product control number (PCN) in the past. The KTC asked the companies to provide the product codes (during sales and production) used in the companies’ product coding system. Recently, the KTC started to use the application of PCN. For the investigation of Ceramic Tiles from China, which was initiated in June 2005, five categories of PCN, including size, were introduced for the first time during the investigation. Therefore, it is expected that the application of the CNV will increase in the future. Introduction of PCN is not new, though. In exceptional cases, the KTC had the discretion to determine the level of price comparison. In the Alkaline Batteries case, the KTC, in the midst of the investigation, established a special PCN for the purpose of price comparison, and the PCN was under hot debate between the respondents and the petitioners. The factors used for establishing the PCN included manufacturing cost, performance of the product, price, construction of the product, consumer perception, etc.

B. Ninth Problem: Zeroing

Article 10(8) of the Enforcement Rule of the Customs Act states that, in principle, when comparing the normal value and dumping price, the weighted average of the trade volume and the price must be compared.

The KTC compares the normal value and the export price on an average-to-average basis, and does not resort to zeroing for each PCN.8 In Korea, there has been no case of comparing prices on a transaction-to-transaction nor transaction-to-average basis when calculating the dumping margin, and it might as well be that there is no issue related to zeroing as there has been no case of resorting to zeroing either.

In terms of zeroing, Korea insisted on prohibiting resorting to it, and has amended ADA Article 2.4.2 to explicitly provide that regardless of the basis of the comparison of export prices to normal value (i.e., weighted average-to-weighted average, transaction-to-transaction, or weighted average-to-transaction), all positive margins of dumping and negative margins of dumping found on imports from an exporter or producer of the product under investigation or review must be added up in accordance with the DDA.9

V. Imposition of Anti-dumping Duty

A. Tenth Problem: Lesser Duty

The KTC applies the ‘lesser duty’ rule by imposing a duty that is less than the dumping margin where such lesser duty would be adequate to remove the injury to the domestic industry in that particular case. The lesser duty rule is implemented by the calculation of the injury margin. The calculation of the injury margin is not released to the public. Only in the event that the injury margin is less than the dumping margin, and thus the lesser duty rule is applied, then the injury margin is released.

The calculation of injury margin considers every situation including price suppression, depression, etc. It is understood that the there are several calculation formulae to cover various situations. It is also understood that the KTC has vast range of discretion in the application of the reasonable profit in establishing the target profit.

The injury margins have been calculated uniquely to all of the imports from all of the countries investigated. It means that there is only one single injury margin, expressed as a percentage of the CIF price to all exporters. Therefore, in some cases, the respondents with high dumping margin benefited by the introduction of the injury margin.

The KTC did not differentiate the injury margins by the level of cooperation. This is also different with EC practice.

Recently, the KTC applied the injury margin to the respondents who had a higher anti-dumping margin than an injury margin in the Industrial Robots from Japan case (2005).

VI. Conclusions

I have introduced the ten major issues with dumping margin calculations in Korea. The procedure for antidumping investigation is specified in the Customs Act but, because most of the Customs Act is based on the ADA, it depends greatly on the KTC’s practice when it comes to specific application. In making its decision, the KTC takes into consideration the opinions of the interested parties to make a rational decision. Therefore, active participation and cooperation is important in engaging in anti-dumping case within Korea.

I believe that the ten issues mentioned above are not unique to Korea, and it is expected that other countries may also have similar issues.

In addition to the above ten issues, I wish to talk about the language of communication. The official language in the Korean anti-dumping system is Korean. However, the respondents may use English in the response and in other communications with the KTC. However, in public hearings, Korean interpretation is necessary for the official, legal presentation. The documents from the KTC are normally in English or an English translation copy is available, with some exceptions (the petition copy is normally in Korean).

I hope the introduction above will provide some guidance to the Korean anti-dumping practice. I look forward to your comments and advice.

Footnotes

1 The author heads the anti-dumping practice group at the law firm, Bae, Kim & Lee , in the Republic of Korea. He was formerly an investigator with the Korea Trade Commission and has been involved in over 20 Korean anti-dumping investigations as an investigator and over 100 cases as a counsel.

2 TN/RL/W/6, 26 April 2002.

3Industrial Robots from Japan (2005).

4 TR/RL/W/146, 11 March 2004, etc.

5 Electric Shavers from the Netherlands (1997); Alkaline Batteries from Singapore, China and Japan (2003), etc.

6 Uncoated Woodfree Paper from Indonesia and China (2003); PVC Plate from Japan (2005); Industrial Robots from Japan (2005), etc.

7 Ethanolamine from the United States (1996).

8 In the Uncoated Woodfree Paper from Indonesia and China case in 2003, the KTC denied the request of the petitioner that intra-modal zeroing must be applied in order to prevent the target dumping.

9 TR/RL/W/113, 6 June 2003, etc.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.