Nexus of Law and Economics: Antidumping and Countervailing Duty Laws

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I Contents I Journal of Fair TradeDecember 2012

~ Study on the Examinaton Criteria in Changecircumstances Review on Dumping margin ... . 1Kang, Jung Su' Lee. Ho

)00- Nexus of Law and Economics: Antidumping andCountervailing Duty Laws ... . .. , .. , .. , .. .. ........ ............... 26Ihn Ho Uhm

> A Study on the Scope of L i k e Products" under theWTQ Antidumping Agreement ... .. .. .. .. .. .. .. ........ ....... ....... 89Lee. Cheon-kee

)00- Research on Development of the wro SafeguardSystem and Policy SuggestionKwon Sanguk' Lee Hyo Jin Choi YOOD mi

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Nex us of Law and Economics:Antidumping and Countervailing Duty Laws

[- l i fI. IntroductionII. International Agreements and Domes tic

Laws on A 0 and (VOm Me th odo logies to Measure Injul)' andEstablish Causal Link

IV. Econom ic A al}"s is of th e A ) and(V O laws

A. Injury Caused by Dumping orSubsidization: Theoretical Exposition11 Methodology 10 Quantify the Magnitude

of Injul)'

t f I

Of 01 * *~ -"'-

V. Case Study: Simulation Results \"S.lujul)' Defennination by NationalInvestigating Authorities

A. US Intcrnatiooal Trade Commission (USITC)B. Canadian Inernational Trade Trioonal (Orf)c. Ko rea Trade Commission (KTC )

Vi Conclus ionsAppendix

'J?OJ : '12. 12. 9, 'llJH! : '12. 12 .23, 71I;


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Nexus 01 law and Economics: Anticlimping and Countervailing Duty Laws

I. Introductio n

Although many economists and legal scholars have studied the relationship betweeneconomics and legal doctrines. 'law and economics' is sti ll a discipline in its infancy.1) Legal scholars use the phrase "economic analysis of law" (also known as lawand economics) to mean the study of the interrelationships between legal andeconomic processes. Economic concepts are used 10 explain the effects of laws. toassess which legal rules are economically efficient. and to predict which legal ruleswill be promulgated. Thus. the economic analysis of law is an interdisciplinarysubject that brings together these two fields of study and many legal scholars takethe view that through this process of bringing them together. legal thinking hastransformed radica lly. That is because the economic approach is different from thetraditional analysis of law in which the effects of legal rules are not usuallysystematically assessed. Law and economics is a school of jurisprudence thinking inwhich the tools of microeconomic analysis are used to study law , including theeffects of legal rules and their social desirability. There are many too ls and framingdevices are available in the economic tool kit; by carefully selecting from this toolkid one can derive socially desirable outcomes of the application of legal rules(Kaplow and Shave1l2); Oppenheime r and Nicholas Mercuro31; Shave I14); Tavares deAraujo Jr.51).

I) Thc origins of law an d economics arc often dated back to the University of Chicagoin the 1950s. Ronald Coase. Richard Posner. Gary Decker and others had broughteconomic thinking to the study of law. Dau-Schmidt stated that empirical work in lawand economics. in particular. often serves as a touchstone for interdisciplinarydiseourse on law. Dau-Schmidt. K . Law and Economics: Empirical DimensiollS. ElsevierLtd.. 200 1.

2) Kaplow. L. and ShaveD. S. "Economic Analysis of Law". Chapter 25. Handbook ofPublic Economics. Vol. 3, (cd.) Alan J. Auerbach and Martin Feldstein. Elsevier I3. V"The Netherlands. 2002.

3) Oppenheimer. M. an d Nicholas Mercuro. Law alld economics. Altematile EconomicApproaches to Legal alld Regulatory Issues. M.E. Sharp. [nc . 2005.

4) Shavel1. S . "Economic Analysis of Law;' The Harvard John M. Olin DiscussionSeries No. 283. Harvard Law School. Cambridge. MA 2000.

5) Tavares de Araujo Jr.. L "Legal and Economic Interface between Antidumping andCompetition Policy:' Caribbean Trade Reference Centre. December 200 1.

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Many legal scholars have written about the usefulness of economic analysis to studylegal issues. Cooter and Ulen, for example. recognized that "economics is generallyquite good at predicting how people respond to changes in prices."6) Malloyadvocated that economics not only presents the legal profession with ways ofidentifying and justify ing plausibly good sets of outcome options, but economics canalso be useful in assisting the legal profession in reducing the indeterminacy of legalreasoning. Economics can direct legal inquiries to measurable and identifiable tradeoffs between conflicting claims by the interested panies of to an investigation. and itcan create a framework for a constrained evaluation of the innumerable choice optionsthat confront the legal profession as public-policy makers))

One of the widely studied subjects of economic analysis of law among economistsand legal scholars is economic analys is of antitrust laws (or competition laws).Antitrust law is the body of laws that prohibits anti-competitive behavior and unfairbusiness practices. Antitrust laws in the United States, for example. prohibit agreementsin restraint of trade. monopolization and attempted monopolization. anticompetitivemergers and tie in schemes". and. in some circumstances. price discrimination in thesale of commodities.S) The goals of antitrust enforcement are to protect and maintaincompetition among firms in markets which, in turn , promotes effi ciency and consumerwelfare.9) In antitrust practice , economists often serve as expen witnesses who submitrelevant economic theories and empirical evidence about the econom ic consequencesof anti-competi tive behavior.

6) Coo ter. R. and T. Ulen. Law and Economic (5th l-dition). Ad dison Wesley Longman. 2oo7.7) Milloy. R. P . "Economics as a Map in Law and Market Economy". Law &- Economics: Toward

Social JlIslice, (cd.) Dana L. Gold. Emerald Group Publi shing Ltd . UK. 2009. pp. 3-20.8) US Antitrust law-Wikipcdia.9) Therc are three categories of efficiency: ullocative efficiency. where goods und se rvices

arc allocated to those who val ue them most: producti ve efficiency. where goods andservices arc produced usi ng the least-cost method of production : and innovativeefficicncy, whcre social wealth is increasing through the inven tion , development. unddiffusion of new products. For details. see Welch. PJ. an d T.L. Greaney. "AlternativeEconomic Ap prouches to Antitrust Enforeemenc. Law and Ecollomics: AllernariwEconomic Approaches /0 Legal and Regulatory Issues. (cd.) Oppenheimer. M. and N.Mercuro. M.E. Sharpe. New York. 2oo5. pp. 7F)8.

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Nexus 01 law and Eonomics: Anticlimping and Countervailing Duty Laws

Unlike the antitrust laws. many mainstream economists have not studied antidumpingor countervailing duty laws.lIJl These laws are intended to counter unfair tradingpractices in international trade such as dumping or subsidization. A standard definitionof dumping is the act of charging a lower price for a good in a foreign market than onecharges for the same good in a domestic market (international price differentiation).Under the World Trade Organization (WTO) Agreement. dumping is not prohibited butcondemned if it causes or threatens to cause material injury to a domestic industry inthe importing country. If evidence demonstrates that dumping has caused material injury.the national authori ties of antidumping enforcement are able to impose antidumping duties.Foreign government subsidization is also condemned and is subject to countervailingduties if the competing domestic industry is materially injured. Therefore, antidumping(A D) and countervailing duty (CV D) laws are trade remedies for indu stries injured byimport competition.

In antidumping (A D) practice , unlike the antitrust practice , the rigorous application ofeconomic theory and empirical analysis!! ) (or presence of econom ists as expert witnessduring public hearings) has been rather limited considering the total number of cases inthe history of adjudication of trade disputes.

One of the sa lient differences between antitrust and antidumping laws is that the antitrustlaw is designed to promote efficiency and consumer interests whi le antidumpin g law isdesigned to remedy material injury caused by foreign competition to the domestic producers.Antidumping laws are simply intended to protect finns and workers engaged in productionactivities in the domestic market of an import ing country. So it shou ld not come as asurprise that the economic benefits of the trade remedies under the antidumping lawsaccrue to producers. and the economic costs accrue to consu mers .!ll Because of these

10) One obvious reason for this is that the subject has not been taught in manycconomics dcpartment.11) The tools of economic analysis are part icularly useful for not only analyzing theeffects of dumping or subsidization but lItso for estimllting the mllgnitude of injuryto the domestic industry by isolating the elTeets of the dumped or subsidized importsfrom any other cause of injury (as is required by the laws).

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peculiar features of AD laws as opposed to antitrust laws, informed trade economistsheavily criticized the WTO's AD Agreement and the domestic laws on antidumping.The thrust of this criticism has to do with the treatment of price different iation (orinternational price discrimination).13 ) In other words, what antitrust statutes punish isbehavior which causes injury to competition, as opposed to inju ry to competitors. TheAD Agreement and the domestic statutes of antidumping. on the other hand. punishbehavior which causes injury to competitors.

The primary objective of this paper, therefore. is to fonnulate the legal - economicsnexus of the AD and CVD laws. given the laws as they are. An in-depth descriptionof the nexus of AD and CVD laws and economic analysis is long overdue because alarge number of WTC signatories 14 ) are using antidumping and countervailing dutylaws to counter so-called unfair trading practices - dumping by foreign exporters andsubsidization by foreign governments - without the proper support of economic theoryand empirical analysis (or presence of economists as expert witness during publichearings) despite the fact that economics has often served as a touchstone for antitrust

12) In other words, AD is the price to be paid for the maintenance of an open tradingsystem among nat ions wherein some industries arc no t prepared to face im portcompetition. 11 can be thought of as a safety valve that ensure s political support totrade liberalizing initiatives.

13) Another reason that economists criticize antidumping law is thaI. contrary to theassumption s of some economists. AD rules arc not intended as a remedy for thepredatory pricing practiccs of firms nor as a remedy for any other private anticompctitive practices typically eondcmned by competition law s. Rather, the AD rulesarc a trade remedy which WTO Members have agreed is necessary for themain tenance of the multilateral trading system. Without this and other trade remedies.there could have been no agreement on broader GATT and later WTO packages ofmarket-opening agrcements. especially given the imperfections which remain in themultilateral trading system.14) In 19805 and 1990s. there were only four major users of the antidumping or countervailingduty laws in the world market (e.g . the United States. EU. Canada and Australia).In today's world, however. 157 countries an: WTO signatories and many of theemerging countries frequently usc AD and CVD laws to counter the dumping andsubs idi zation . The concern is that while the economic analysis of AD and CYO lawsarc neithcr well developed nor institutionalized. most of the investigating authoritiesof the emerging countries arc actively using the laws without having proper supportof cconomic analysis.

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investigation. 15) In section II , this paper reviews briefly the provisions of internationaland domestic laws on AD and CVD. Section 111 describes the methodology currentlyin use to estima te injury , material injury and causal links between dumping orsubsidization and injury by national authorities. In section IV, this paper proposes aframework of the nexus of laws and economics in the context of AD and CVD laws,providing an alternative to the current methodology used by national authorities. Thisproposed framework encompasses three stages. First, an il lustration of the extent towhich economic analysis could provide valuable insights into the potential detrimentaleffects of dumping or subsidization (i.e . injury to the domestic industry) based onmicroeconomic theory; second. the identification of the relevant factors which couldinfluence the magnitude of injury as each inquiry in vo lves different characteristics asto the nature of products and market; and, third , quantification of the magnitude ofinju ry by using a well known generic simulation mode]l 6) developed and used by theUSTIC staff economists (i.e .. COM PASI7) model: computable partial equilibriummodel) . Section V provides a comparison the magnitude of injury estimated by theCOMPAS model and the outcomes of the injury determination by the nationalauthorities (specifically. those of the United States. Canada and Korea ). Finally. thelast section is concluding comments.

15) Although there is a huge economic literature testing the economic factors thatdctcnnine injul)', almost all of the national authorities of AD and CVD laws in theworld (with the exception of the United States) have not institutionali zed an economicanalysis method in their injury determination process. Unlikc antitrust practices.cconomists arc seldom called as expcn witness in the AD an d CVD investigations.

16) A gcncric model is more practical for AD and CVD in ves tigations becausc theinvestigat ing authorities face seve re time constraints imposed by the AD and CV Dlaws. Under normal conditions. the investigating authorities have only 120 days fromthc commencement of an inquiry to the final determination of inju ry . Given thesetight deadline s and a lack of historical data. it is not practical to collect all of therelevant data and construct a workable si mulation modcl based on cconometriestechniques fo r the industry in question, especially considering all other administrati vetasks associated with the injul)' detennination process .

17) US ITC. COMPAS - Commercial Policy AnalySiS Syslem. Documentation Version 1.4:May 1993 (2007). Offiec of Economics Working Papcr No. 2007-12-1.

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II. International Agreements and Domestic Laws on AD and CYOThe domestic AD and CY D laws of the WTO signatories largely reflect internationaltrade agreements. By far the most important of these agreements are WTOagreements concerning antidumping and countervailing duty actions. specifically, theGeneral Agreemen t on Tariffs and Trade (GATT) of 1994. the Agreement on theImplementation of Article VI of GATT (AD Agreement). and the Agreement onSubsidies and Countervailing Measures (SCM Agreement). All of the WTO signatories(including the United States and Canada) supported the AD and SCM Agreements ofthe WTa and have amended their domestic AD and CVD laws to conform to them.In United States, the antidumping law and the countervailing duty law (Subtitles B &A of Title VII of the Tariff Act of 1930 (as amended)) are the two most frequentlyused trade remedy laws to protect domestic producers form unfair trading practices byforeign exporters or foreign governments . In Canada, the Special Imporl Measures Acl(S IMA) is a single statute covering both AD and CV D laws.18)

The domestic trade remedy laws in WTO signatories authorize the creation ofenforcement agencies to administer these laws. For example , the United States has atw01rack trade remed y system with both the US Department of Commerce (US DOC)and the US International Trade Commission (US ITC) playing a role. The US DOC'sprimary mandate is to investigate and determine the existence of dumping orsubsidization; th is involves the calculation of the margin of dumping or subsidy rate.The US Internationa l Trade Commission (USITC) has been given the role of asuperior court of record granted by the trade remedy laws, and determines theexistence of material injury or retardation in the domestic industry caused by thedumped or subsidized imports.19)

18) U.S. House of Representatives Commillee on Ways and Means, 105 '" Cong . Dl-erviewand Compilalion of u.s Trade Slallles 59-60. 67 (comm. Print 1997): and Bowman.G.W . N. Covelli. D. A. Gantz. and LH. Uhm. Trade Remedies in North America.Chapters 3 and 4. Kluwer Law International BY , The Netherlands. 2010.

19) Canada has had a two lrad syslem. The Canada Border Service Agency (CBSA)investigates and detennines the existence of dumping or subsidization. while theCanadian Inlemational Trade Tribunal (CITf) investigales an d delermines the

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The international rules and the domestic AD and CV D laws of WTa signato riesrequire a determination of dumping or subsidization (proof of the existence of dumpingor subsidizat ion) plus a determination of injury, threat of injury or retardation (proofof the ex istence of material injury or threat of material injury) in order to imposeantidumping or countervailing duties. Unlike the proof of the existence of dumping orsubsidiza tion, the proof of the existence of material injury requ ires in-depth analysisof injury based on evidence before the national enforcement agencies such as theUS ITC and the Canadian International Trade Tribunal (C ITT).

With respect to the determination of injury in AD or CV D actions. all WTasignatories are ob ligated to employ the WTa version of the injury-causality test; thisis a test designed to prov ide objective evidence of the ex istence of injury to thedomestic industry caused solely by the presence of dumped or subsidized imports.Article 3.1 of the AD Agreement and Article 15.1 of the SCM Agreement providethat a determination of injury must be based on positive evidence20) and in vo lve anobject ive exam ination of both (a) the volume of the dumped or subsidized importsand the effect of the dumped or subsidized imports on prices in the domestic marketfor like products, and (b) the consequent impact of these imports on domesticproducers of such product.

With regard to the volume of the dumped or subs idized imports, Article 3.2 of theAD Agreement and Article 15 .2 of the SCM Agreement provide that the investigatingauthorities must cons ider whethe r there has been a sign ificant increase in dumped orsubsid ized imports, either in abso lute terms or relative to production or consumptionin the importing country. With regard to the effect of the dumped or subsidized

existence of material injury or retardation in the domestic industry. According to theEconomic Action Plan 2012 in Canada, however, the Government of Canada isplanni ng to introduce legislation to consol idate Canada's trade remedy in vest igationfunction into one organization under the ern. The Plan asserts that this restructuringwill creatc efficiencies that will help the Government maintain and sustain anctTcctivc tradc remedy system.

20) The word positive" means that the evidence must be of an affinnative. objective andvcrifiablc character. and that it must be credible.

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imports on prices , the investigating authorities must consider whether there has beensignificant price undercutting by the dumped or subsidized imports compared with theprice of a like product of the importing country, or whether the effect of suchimports has been to depress prices to a significant degree or to prevent significantprice increases which otherwise would have occurred (price suppression) . Furthermore,Article 3.4 of the AD Agreement and Article 15.4 of the SCM Agreement specifythat the examination of the effects of the dumped or subsidized imports on thedomestic industry concerned must include an evaluation of all relevant economicfactors and indices having a bearing on the state of the industry, including: actualand potential decl ine in sales, profits. output, market share , productivity. return oninvestments. or utilization of capacity ; factors affecting domestic prices ; and themagnitude of margin of dumping ; actual and potential negative effects on cash flow.inventories. employment. wages. growth. ability to raise capital or investments. Thislist is not exhaust ive. nor can only one or even several of these factors necessar ilygive decisive guidance .

In addition. Article 3.5 of the AD Agreement and Art icle 15.5 of the SCMAgreement prov ide that it must be demonstrated that dumped or subsid ized importsare, through the effects of dum ping or subs idies, causing inju ry with in the meaningof the AD Agreement and SCM Agreement. i.e. , material injury. The demonstrationof a causal rela tionsh ip between the dumped or subsidized imports and the materialinju ry to the domestic industry must be based on an examination of all relevantevidence before the authorities. The authorities must also examine any known factorsother than the dumped or subsid ized imports (e.g ., contraction in demand or changesin the patterns of consumption , trade-restrictive practices of and/or competitionbetween the fore ign and domestic producers, developments in techn ology and theexport performance and productivity of the domestic industry) which at the same timeare injuring the domestic industry. The authorities must find that the injuries causedby these other factors must not be attributed 10 the dumped or subsid ized imports.However, it is unclear how much weight must be given to dumping or subs idizationas opposed to other causes of injury or whether the injury attributable to the dumpedor subsidized imports must in and of itself be material.

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Nexus 01 law and Economics: Anticlimping and Countervailing Duly Laws

What is the mean ing of injury? The AD and SCM Agreements define "injury" tomean "material injury" or "threat of material injury" to a domestic industry, However,neither international nor domestic laws provide much guidance on what constitutes"material injury" or how the investigating autho rities ought to measure injury todetermine whether it is material.

Reflecting this ambiguity of AD and SCM Agreements in the definition of materialinjury, most of the \VTC signatories' (including those of the United States. andCanada) do not quantify how much injury constitutes material injury and so the tennmaterial injury has become an elusive concept. Therefore. the determination ofmaterial injury is in essence a fairly subjective evalua tion by the investigatingauthorities. In practice. "material injury" seems to range from some thing more than deminimis but less than the "serious injury" contemplated under the safeguards law.2 1)

III. Methodologies to Measure Inju ry and Establish Causa l LinkAs stated earlier. neither international agreements nor domestic laws provide anyspecific guidelines as 10 how to measure injury. what constitutes material injury andby which method the "injury - causality link" should be tested and determined. Nor dothey outline the method by which the effects of dumping and subs id ization should beisolated from the effecls of the non-dumping (or non-subs idy) factors. Due to thislack of specific guidelines, there is no uniform standard for administering thedetermination of injury in all countries that frequently use AD and CVD laws.

Bohuck (1993) reported that the USITC Commissioners were divided between a

2 1) In addition to the AD and CVO actions. importing Members can also imposc safeguardmeasures on fairly traded (non-dumped or non-subsidized) imports under the certainconditions. Article I of the WTO Agreement on Safeguards (SA). establishes rulesfor the application of safeguard measures. Article 4 of the SA defines serious injuryto mean a significant overall impainnent in the posit ion of a domestic industry:threat of serious injury is understood to mean serious inju ry that is clearly imminent.Serious injury, therefore. is a higher standard than material inj ury , but in practicewhat constitutes "material" or "scrious" injury seems largely SUbjec tive.

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"bifurcated approach" (i.e., trend analysis) and a "unitary 'but for' approach" (i.e.,economic analysis) for the injury assessment.22)The bifurcated approach essentially asks two questions. The first question is whetherthe domestic industry was either financially unhealthy or in declining financial healthduring the period of investigation (i .e., when the dumped or subsidized imports werepresent). The absolute health of the industry is assessed , as required by the statute23 ),"within the context of the business cycle and conditions of competition distinctive tothe industry:' Hence. the industry's financial performance is compared to a level ofperformance that is believed to be normal in the absence of dumped or subsidizedimports. Th is process is known as an injury leSI.

If the industry is found to be unhealthy under the bifurcated approach. the nextquestion is whe ther the subject imports have contributed more than negligibly to thepoor or declining condition of the industry. This stage examines the issue ofcausation and specifically addresses the question of whether the injury was due to thedumped or subsidized imports. The investigating authorities usually consider thefollowing two kinds of evidence as representing causation: (i) underse lli ng and priceleadership by dumped or subsidized imports; and (ii) correlation between the importpenetration rate and the declining condition of the domestic industry . Although thisstep is intended to test causality as demanded by the AD and SCM Agreements, it isa correlalion leSf instead of a proper cal/salify lest.24)

22) Richard D. Bohuck. "The Material Injury Determination ill Unfair Trade Cases: TheU.S. Experience with Competing Analytical Approaches' . paper presented at theIl!Iernational Trade Symposillm sponsored by the Institut e of Legal Research. NationalAutonomous University of Mexico, and the Scerctary of Commerce and Industria lDevelopment. Me ."l:ico. 1993 .

23) An evaluation of all relevant ceonomic factors and indices having a bearing on thestate of the industry. including: actual and potential decline in sales. profits. output.market shares. etc.

24) While correlation refers to only a mutual relation between two or more things.causality refers to the relationship between two variables in terms of cause andefTect. The coe ffi cient of correlation is the measure of the degree of associationbctwccn two variables. and is not a measure of cause and Cffl-c t.

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Nexus of law and Economics: Anticlimping and Countervailing Duty Laws

The unitary 'but for' approach (economic analysis). on the other hand, asks whetherthe domestic industry would have been materially better off 'but for ' the sales ofdumped or subsidized imports. Thus, this 'but fo r' approach compares the conditionof the domestic industry in the presence of dumped or subsidized imports with ananalytic estimate of the condition of the industry would have been without suchimports. The difference between the two equilibrium situations is. de jaclor. anestimate of the effects of dumping or subsidiza tion . In this approach , any observedchanges on the performance indicators of the domestic industry251 are considered tobe evidence of injury caused solely by a specific cause. dumping or subsidization. Asalient feature of this unitary 'but for' approach is that it isolates the effects of thepresence of dumped or subsidized imports from all other causes of injury as requiredby the AD and SCM Agreements.

In practice, there are two serious flaws associated with the bifurcated approach 10 theinjury-causality test. At the injury test stage of the bifurcated approach. theinvestigating authorities usually examine about four years time series data of theperformance indicators (as stipulated by the AD and SCM Agreement).2 6) Theproblem is that all the indicators do not necessarily move to the same direct ionduring those four years. Some indicators may move downwards overtime. while someother indicators may rise, fluctuate. or remain constant. The domestic price level. forexample, often fluc tuates over that period so that it is difficult to assess how muchthe price has actu ally been depressed (or suppressed) in the present of dumped orsubsidized goods)7) In this regard. the magnitude of the margin of dumping (or

25) This approach is labeled as counlcrfaclual analysis by legal profession. Observednegative changes in performance indicators (e.g.. price. output. revenue. marketshares. capacity utilization rate. etc.) in the presence of dumped or subsidized importscompared 10 thc equilibrium situation where such imports arc absent.

26) Including: actual and potential decline in sales. profits. output. market share. productivity .rcturn on invcstments. or ulilization of capacity; factors affecting domestic prices; andthe magnitude of margin of dumping: actual and potential negative effects on cashfiow. inventories. employment. wages. growth. ability to ra ise capilal or inveslments.

27) An example of price fiuelualions over time for the US 1lard Red Spring Wheat farmprice. prior to the petition dale and after petition date is shown in Koo. W.W. and 1.1-1.Uhrn. "Effects of Dumping lIS. Anti-dumping Measures: The US Trade Remedy Laws Appliedto Wheat Imports fonn Canada". Journal 0/ World Trade 41(6). 2007. p. 11 77 .

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during the period of investigation. [f the factual information observed shows an"increased volume of dumped or subsidized imports plus depressed prices of [ikegoods produced by the domestic industry and poor financial performance of thedomestic industry ," ;t could erroneously lead to an injury determination by theinvestigating authorities30) because the bifurcated approach is not capable ofdemonstrating the injury-causality links required by the [all's.31)

Given the international rules and the domestic AD and CYD laws as they stand, the bifurcatedapproach for injury assessment is a fiawed methodology for injury determination.Despite this, almost all investigating authorities are using this fiawed methodology.

N. Eco nomic Analysis of the AD and CYD LawsSince the bifurcated approach for the detennination of injury is fiawed and so isunable to fu[ fiI [ the lega[ requirements. an alternative methodology - nexus of ADand CV D laws and economic analysis - is proposed in this section. The proposedframework of ,nalys;s encomp,sses the follow;ng stages of econom;c ,nalys;s: 0)identify. through theoretical exposition , the magnitude of injury caused solely bydumping or subsidization. (ii) identify various factors which could alter the magnitudeof injury.J2J and (iii) quantify the magnitude of injury based on an economic modelwhich demonstrates the causal relationship between injury and the presence ofdumped or subsidized imports. These stages of analysis are the essential ingredientsof the nexus of the AD and CV D [ali's and economic analys is.

30) Notwithstanding that factors other than dumping or subsidization must be taken intoaccount as part of a non-attribution analysis. it appears that under the bifurcatedapproach " increased dumped or subsidized imports plus lower domestic prices (andpoor financial pcrfonmmce) equal injury" is a sllIndard outcome of injury investigations.

3 1) Article 3.4 of AD Agreement and Article 15.5 of SCM Agreement.32) The magnitude of injury would not be the same for all the AD and CYD cases. [t

would likely be different from one industry to another depending on the degree ofprice undercutting (value of the margin of dumping or subsidy mte). on the one hand.and the ch aracteristics of the product itself and the nature of supply responsivenessto the price change. on the other.

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A. Injury Caused by Dumping or Subsidization : Theoretica l Exposition

[t is generally understood that the presence of dumped or subsidized imports wouldharm the domestic producers of the [ike goods (similar or identical goods) bydisplacing them from the market. That is because the end users of the like goodsswitch demand from the (domestically produced) like goods to the relatively cheaperdumped or subsidized imports. As a result. the demand for the like goods willdecrease wh ich. in turn. will cause the price of the like goods 10 decrease. Thedomestic producers will face decrea sed sales. output, market share, profits, return oninvestments. cash flow , etc. One can explain the detrimental effects of dumping orsubsidization on the domestic producers of like goods based on the microeconomictheory.

For the sake of simplicity. assume that the all imports (fairl y traded, dumped orsubsidized imports) are perfect (or near perfect) substitutes with like goods producedby domestic producers (e.g.. agricultural products such as grains). Prior to thepresence of dumped or subsidized imports in country A, the market in the countrywas in equilibrium at point "e" (at the intersection of the aggregate demand curve"'0" and aggregate supply curve "SI"'P3) as shown in Figure 1. The equilibrium pointat "'e"' represents equilibrium in the absence of dumped or subsidized imports. Theequilibrium marke t price is PI and the quantity supplied by the domestic producers(plus a relati vely sma ll quantity of the goods in question suppl ied by the fairl y tradedimporters-non-dumped/subsidized imports) is QI.34)

When country C exports dumped or subsidized goods into the market of country A,the relatively cheaper dumped or subsidized imports is added to the existing supply

33) Assume that a relatively small quantity of suppl y of fairly traded imports ex istedprior to the entry of dumped or su bsidized imports.

34) The S] is an aggregate supply curve which is a horizon tal summation of thedomestic suppl y curve and that of the fairly traded importcrs. The aggregate demandcurve "D" also a horizontal su mmation of the demand for like goods produced bydomestic producers and that of the fairly traded imports.

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of the like goods in country A. The aggregate supply curve in country A's marketshift from SI to S2 as shown in Fi gure 1 and a nell' equilibrium is established atpoint e' where the new supply curve (S2) intersects the aggrega te demand curve (D)after market adjustments. At the new equilibrium at point e' (equilibrium in thepresence of dumped or subsidized imports), the quantity of the subject goodsincreases in country A which causes the market price to decrease to P2 The totalconsumption in Country A increa ses to Od. Asthe market price decreases. the quantity supplied by domestic producers decreases to0 2 Domestic consumption (Qd) is now made up of domestic supply (0 2 whichincludes fairly traded imports) and dumped or subsidized imports from country C (Od- 0 2. Domestic producers' revenue earned is reduced from area PleOI to areaP2mQ2 The difference between the two areas is the domest ic producers total revenueloss (plus that of the relativel y small quantity of fairly traded importers ) caused bydumping or subsid ization .35)

, Q I Q , Q ' QFigure I: Effects of Dumping or Subsidization on Price , Output and Rennue(Source: Bowman , Covelli, Gantz and Uhm . p. 492)36)

35) Revenue loss which is represented by the difference between the two areas (i .e . arear ieQI minus P2mQ 2 "" area P1em P2 plus area eQIQ2m) includes revenue loss by thefair ly traded imponers . To arrive at the revenue loss by the domestic producers.revenue loss by the fairly traded imponers shoutd be deducted.

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[n Figure I, the domestic producers' revenue loss (area PleQ 1Q2mP2) can be dividedinto three components: area "P 1kmP2", area "mnQIQ2", and area "kenm", The firstcomponent is the reduction in revenue due to the price erosion effect; the secondcomponent represents a reduction in revenue due to the displacement of output fromthe market by the substitution effect; and the third component is the reduction inrevenue due to both price and income erosion effects of dumping or subsidization.For the sake of simplicity. the total revenue loss suffered by domestic producers isdivided into the fo llowing two components: (i) the loss associated with the priceerosion effect (area PlemPl which represents loss in terms of producer' s surplus), and(ii) the loss associated with the displacement of output from the market by thesubstitution effect (area eQIQ2m),m

The sum of the two components of revenue loss (area PleQ IQ2mP2) in Figure 1represents the overa ll injury to domestic producers caused solely by dumping orsubsidization.38) The overall injury in tenns of revenue loss is far greater than awelfare loss measured by the producers ' surplus (Le., PlemP2) in Figure 1.39) Theloss in terms of revenue in Figure 1 represents decline in price, sales. outputforegone. market shares. profits, return on investments, etc. which is caused solely bythe presence of dum ped or subsidized imports. Market share for the dumped or

36) Ikmman. G.w . N. Co velli. I) ,A. Gantz. and 1.1-1. Uhm. Trade Remedies in North America,Chapter II , Kluwer Law International, the Netherlands. 2010.

37) In percentage tenns. the price erosion effect is area I'Jem l'J area Ol'leQI and thedisplacement of output by substitlllion effect is area eQ IQzm/area OPleQ l,

38) The su m of price erosion effect and sub st itution effect is the total effect (revenueloss). The total efTt:ct, in perecntage terms. is represe nted by area PlcQlQzmPJ areaOl' leQI.

39) The welfare gains to the importing country (i.e. , area eme' in Figure I ) arising fromdumping or subs idization is measured by the difference between welfare gains toconsumers (i.c., consumer's surplus rcprcsented by the area Plce'P2) and wclfare lossto domestic producers (i.e., producer's surplus represented by the area Ple mI'2).Howcvcr. this welfarc calculation does not takc into account revenue loss associatedwith the domestic producers' loss of market share resulting from the di splacement ofdomcstic products (arca CQ IQlm duc to subst itution cffcct) and soc ial cost associatedwith retraining the displaced workcrs. Even asidc from this laller social cos\. injuryto the domestic industry is far greater than the producers' we lfare loss as measuredby the reduction in the producer 's surplus.

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subsidized imports has significantly increased from zero prior to dumping orsubsidization to Q2QdOQd, while market share of the domestic producers '40) hasdecreased from 100 percent to OQ 2iOQd.

The theoretical exposition illustrated in this paper shows that the effects of dumpingor subsidization wi ll always be detrimental to the domestic producers of like goods aslong as the dumped or subsidized imports are substitu table for the like goodsproduced by the domestic producers. The only question remaining is whether theharm caused is "material injury". That threshold of material injury, however. isneither defined by the WTO rules nor the anti-dumping or coun tervailing duty lawsof the WTO signatories.

The magnitude of injury in term s of revenue loss illustrated above (Le.. representedby the area PleQ IQ2mP2 in Figure 1) is not the same fo r all antidumping orcountervailing du ty cases. The magnitude of injury varies from one industry to,"oth" dep"ds i"geiy 0 ' the foiiow;'g ,o,d;t;oos of the ;,dustcy ;, quest;" , 0)the magnitude of price undercutting by foreign exporters (represen ted by the marginof dumping or subsidy rate ); and (ii) the characteristics of the products in questionand supply conditions of the industry in que stion-i .e., the market character istics.

The greater the degree of price unde rcutting by foreign exporters (represented by themargin of dum pi ng or subsidy rate). ceteris paribus, the greater will be the volumeof imports penetrating the domestic market and thus eroding the market price andthereby result ing in a greater magnitude of injury. In addition. the marketcharacteristics of the affected industry would make a significant difference in terms ofthe effects of dumping or subsidization. First. the nature of the produc t itself makes adifference. A commodity product such as "grain" is not significantly differentiated bycount ry of origin or among producers in country A or C. There fore, grain produced

40) Volume 002 includes relatively small amount of the fairly traded (non-dumped or non-subsidized) imports in Figure I. Since the focus of the dumping/subsidization inquiryis to assess injury to the domestic producers. any injury to the fairly traded importersis not investigated.

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in country C is highly substitutable with grain produced in country A. The higher thedegree of substitutab ility4t j between the dumped or subsidized goods and the domesticlike goods. celeris pariblls. the greater will be the injury caused by dumping orsubsidization. That is because the end users of the subject goods will quickly switchto dumped or subsidized imports as long as they are cheaper than the domesticproducts assuming the quality is identical or similar (substitution effect}.42 )

Another important aspect of the product itself is the slope of demand curve whichreflects the sensi tivity of demand with respect to price changes. known amongeconomists as the price elasticity of demand.43) The slope of demand curve makes asignificant difference in terms of the overall effect of dumping or subsidization. Forexample , demand for some products is sensitive to price changes (e.g., luxury goodsare price elastic). while the demand for some other products is not sensitive to pricechanges (e.g . daily necessities are price inelastic). Some products fa ll into the derived

4 1) The degree of substitutability is usually measured by the elasticity of substitution whichis defined as the rate at which one commodity will be substituted for another inresponse to a changc in their relative prices. Note that area mnQ IQ2 in Figures 1reprcscnts a situation in which the two competing products (I.e., dumpcd or subsidizedimports and the like goods produced by domestic manufacturers) are perfect or ncarperfcct substitutes each other. If they arc not perfcct or ncar perfect substitutes eachother. the substitution effects represented by area mnQIQ2 will be smaller than thatof shown in Figures I. On the other hand. if the two competing goods arc notsubstitutes each other, thcn the two goods would not be competing and thc clfects ofdumping would be nil or negligibly small.

42) If the dumped or subsidized goods are identical in all aspects to thc likc goods produccdby domestic producers. the two products ar.: perfect substi tutes. Consequently. the enduscrs of these types of goods quickly switch to thc dumpcd or subsidized importsbecause they are relatively cheaper than the like goods supplied by the domesticproducers. Consumer durable goods. however. arc generally differentiated to somedegree by each manufacturer so there is imperfect substitutability between dumped orsubsidized imports and like goods manufactured by domestic producers. In assessingsubstitutability of such differcntiatcd goods, thcre arc two dimcnsions to considcr:functional (or technical) interchangeability. and quality of service interchangeability.All bicycles. for example. arc interChangeable as a means of transportation. but thedifferences in quality make them less interchangeable. as for ex ample. between thehigh-end market and those of the l o \ \ of the market.

43) Price elasticity of demand measures a small relative price change as being accompaniedby a proportionately smaller. equal. or larger relative change in quantity demanded.

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demand category (e.g., intermediary goods). and their demand is also price inelastic.44)The higher the sensitiv ity of demand with respect to price changes (i.e. , means thatthe slope of the demand curve becomes flatter) for the product, celeris paribus, thesmaller the impact of dumping or subsidization becomes because a lower price createsa greater demand for the goods and this mitigates to some extent the negativeimpacts of dumping or subsidization on domestic producers of the like product. Inother words, if the demand curve becomes more elastic. celeris paribus. the total sizeof the market will grow proportionally more than the percentage decrease in price(market expansion effect of price reduction). As a result. total revenue for theindustry as a whole will be increased. Under this situation the detrimental effects onthe domestic producers of dumping or subsidization will be less severe as long asthey are able to capture some of the newly expanded market.

In addition to the charac teristics of product itself. the supply response of the firms inthe industry in question with respect to changes in price (known as the priceelasticity of supp ly4S) among economists) also makes difference to the effects ofdumping or subsidization. If the supply curve is elastic (i.e., price elasticity of supplyis greater than I). celeris paribus. when the price decreases as a result of dumped orsubsid ized imports. the detrimental effects can be greater than othe rwise due to ahigher percentage reduction in supply by domestic producers than the percentagereduction in price . For example , if we replace the two supply curves (S l and S2) inFigure I with the flatter Sl and S2 curves (i .e., more elastic supply curves46)), the44) Demand for hou sing materials such as shingles and bricks. for example. arc derived

from the demand fo r housing. Gcnerally spealing. the demand for housing materialswould be inelastic with respect to the changes in their own price providing that therearc no avai lable price compctitive altematives.

45) Price elasticity of supply measures a sma ll relative price change as being accompaniedby a proportionately smaller. equal. or larger relative change in quantity suppl ied. Finnssupply responsivencss with respect to changes in price depcnds on the followingconditions: production process. capacity utilization rate. inventory policy of the firms.facility investment. etc.)

46) A more elast ic supply curve can be illustrated by a simple supply equation. Sincehow much domestic producers will supply of the product to the market is largcly afunction of price. a supply equation in terms of a log-linear fonn can be: In Q = In(.( + C In P. Where Q and P arc quantity dcmandcd and price. respectively: and In (.(

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Nexus 01 law and Economics: Anticlimping and Countervailing Duty Laws,>

""

"

, ,s,

s,

"

Q

Figure 2: Effects of Dumping or Subsidization with Elastic Suppl y Cun'es(Source : Bowman, Covelli , Gantz and Uhm , p. 493)

Since the mar ket characteristics of the subject indu stry make a substant ial differencein tenns of the magnitude of injury. the US ITC and the CITT have normallyconsidered them in their injury assessment process and routinely publish various aspectsof the market characteristics in their staff repons and /or final determination repons.

B. Methodology to Quantify the Magnitude of Injul)'

[n any anti-dumping or countervailing duty investigation. apan from consumers, thereare three broadly distinct players in the relevant market: domestic producers. imponers ofdumped or subsid ized goods, and imponers of fairly traded goods (non-dumped ornon-subsidized).

As illustrated earlier. econom ic theory suggests that the magnitude of injury to thedomestic producers caused by dumping or subsi dizati on depends largely on the extentof the price undercutting by the foreign exponers on the one hand. and the marketcharacteristics of the affected indu stry. on the other. The exten t of price undercuttingby the foreign exponers (i.e .. margin of dumping or subsidy rate) is assessed and

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determined by the investigating authorities (e.g. , Department of Commerce in the US;CBSA in Canada) once the investigation has commenced. The various aspects ofmarket characteris tics (e.g., price elasticities of supply , demand and substitution),however. are usua lly not known or available at the initial stage of the investigation.Even if the exten t of the margin of dumping and the values of the price elasticitiesare known, a quantitative model (simulation model, in particu lar) is required toquantify the magnitude of injury (specifically in terms of price erosion. outputdisplacement from the market and loss of revenues491. The model should be equippedto capture the interac tion of all relevant market forces in order 10 estimate themagnitude of injury.

For the purpose of illustration in injury estimation based on the use of a simulationmodel. the ideal framework of the economic model shou ld refl ect the followingaspects of the market forces: (i) the process by which equ ilibrium price is determinedthrough the interaction of supply and demand. resulting from consumers' andproducers ' responses to changes in price; and (ii) the process of market competitionthrough the interplay of three distinct group of sellers (domestic producers. fairlytraded importers. and dumped or subsidized importers). Therefore. the simulationmodel should consist of three sets of demand and supply equations for each distinctgroup of se llers , and three sets of market clearing identities covering the interactionof these three players. In addition , the structure of the simulation model should alsobe relatively simple and user friendl y in its operation because the enforcementagencies (e .g . US ITC, C1TT , etc.) face seve re time constraints (due to statutorydeadlines) in arriv ing at a determination of injury .

49) Although the AD and SCM Agreements specify that the examination of the effects ofthe dumped or subsidized imports on the domestic industry concerned mu st ineludean evaluation of all relevant economic factors and indices having a bearing on thestate of the domestic industl)'. mo st of the factors and indices listed in the Agreementsare directly related to price erosion. output displaccmcnt. and loss of revenues.

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B. t. Mag nitud e of Injury Es tim ated by the COM PAS model50 )

For the purpose of a demonstration of how to estimate the magnitude of injurycaused by dumping or subsidization, one can use a widely known generic simulationmodel known as the Commercial Policy Analysis System (COM PAS model SI ))developed by the US ITC. This model is not only capable of capturing the interplayof the three distinct group of sellers (domestic producers. dumped or subs idizedimporters and fairly traded importers). but also capable of capturing the interaction ofall market forces (i .e., forces of supply and demand wh ich determine market price).While this model is made available by the staff at the US lTC and the CITT forpossible use by Commissioners and Panel Members. respectively. as well as byparties to the case. and has been used extensively in the United States. it has beenused only to a lesser extent in Canada.51 ) The COM PAS simulation results have beenreported in the Final Reports of the USlTC even though actual estimates of injurywere treated as confidential in the Final Reports.53) A former Vice Chairman of the

50) It is a spread-sheet based partial equilibrium model: it is widely kn own among legalprofess iona ls and trade economists vis-a-vis enforcement of trade remedy laws inNorth America Sec US ITC, COJlPASCom mercial policy Analysis Syslem. DocumentalionVersion 1.4: May 1993 (2007). Office of Economics Working Paper No-2007-l2-A.

5 1) The design of the COMPAS model is intended to estimate injury caused solely bythe presence of dumped or subsidi zed imports by isolating the effects of dumping orsubsid ization from all other causes or events affecting the domestic industry in thein vestigation period.

52) [n the late 1980s and throughout 1990s. the Commissioners o f the USITC regularlyreceived the simulation results obtained from the COMPAS model from the Office ofEconomics in the USITC. How many Commissioners arc actually using the COMPASresults in their deliberat ion is not known outside of th e walls of the us rrc. Sykesnoted that although the Office of Economics at the US ITC has produced simulationresults based on economic model quite regularly. few Commissioners havc reliedheav ily on them in the analysis. Sykes. A.. Trade Remedy Laws, John M. Olin Law&Economics Working Paper No. 240. April (2005. pp. 4 1-42).

53) In recent yea rs. however, the market characteristics of the subject industry whichineludes various price elasticities (price elasticity of subst itution. oij: price elasticityof supply. cd: and price elasticity of demand. 11) ha ve been continuously reported inthe Final Report of the USITC. but the si mulat ion results obtained from the

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US lTC , Ronald A. Cass, wrote that,. what makes the simulation model most important is its ability to clarify theissues critical to ITC decision making. Specifically the inputs to a simulationmodel require an understanding of the basic interactions the ITC decision makingaddresses. And running simulations with the model highlights the variables that aremost significant to the case before the ITC - the variable s whose magnitudesmost influence the effects analysis. Administrative decision makers then canfocus attention on the evidence respecting those variables. While the model doesnot make the decision. it does narrow the ambit of decis ion possibilities."S4)

In Canada, the COMPAS model was used the first time in 1995 during the RefinedSugar Inquiry (NQ-95-o02 ). Since then. the market characteristics section has beenadded to the StafT Repons which contain the characteristics of the subject goods andthe market. adding specifically. the price elasticities of demand, supply andsubstitution between the like goods manufactured by the domestic producers anddumped or subsidized imports. Some aspects of market characteristics have beenroutinely cited in the CITT ' s SWlemel/l of Reasons for Decision. 55 )

Before introducing the simulat ion results obtainable from the COMPAS model, it isimportant to reca ll that the primary determinants of the injury to the domesticindu stry. illu stra ted by the theoretical exposition based on microeconomic theory.

COMPAS model arc no longer reported in the Final Report to avoid the COMPASmodel being the basis of an appeal.54) See Ronald A. Casso Introduction: Economic s and International Law ' in Jagdee p S.Bhandari and Alan O. Skyes (cds.). Economic Dimensions ill Il/tema/iOl/al Law:

Compara/he and Empirical Perspectives (New York: Cambridge University Press.1997). pp. 1-42.55) In addition to the COM PAS model. the crn has been used simulation models suchas the Food and Agriculture Regional Market (FARM) model. a full fledged econometricmodel of Canadian agricultural sector which covers grains. oil seeds. livestock anddairy sectors. The FARM model was used during the Boneless Manufacturing Beef(both inquiry and review cases). Boneless Beef Safeguards (GC-93-o01) and GrainCorn (NQ-20()(}(H)5) inquiry. Sec 1luang. H.c.. H. 1luff and 1. 1-1. Uhm."'Microcconometric Analysis for Detennination of Injury: Recent Beef Trade DisputesAdjudicated by the crrr. Journal of World Trade. 30. Ap ril 1996. pp. 133-160.

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caused by the dumping or subsidization depends largely on the following conditions:(i) the greater the margin of dumping (mtl) or subsidy rate (sr), ceteris paribus, thegreater the volume of dumped or subsidized imports that cou ld penetrate into thedomestic market, resulting in a greater injury ; (i i) the greater the degree ofsubstitutability (measured by the elasticity of substitution, (f ij )S6 ) between the dumpedor subsidized impo rts and the like goods produced by the domestic producers, ceterisparibus. the greater will be the displacement of like goods produced by the domesticproducers, resulting in a greater injul)'; (iii) the greater the price elasticity ofdomestic supply (Sd). ceteris paribus. the greater the reduction of production by thedomestic producers. resulting in a greater injury; and (i v) the greater the priceelasticity of aggregate demand (1]). ceteris paribus, the greater will be the incrementalrevenue earned for the industry as a whole (as sales increase at a proportionatelyhigher percentage than the percentage reduction in price). resulting in a lesser injuryas long as the domestic producers capture some portion of the expanded market. s7 )The extent of each individual key parameter (md. ct. &J, and 1]) and their interactionswith each other are the primary detenninants of the magnitude of injul)'. Their jointinteraction could either further increase the magnitude of injul)' or alleviate to someextent the overall magnitude of injul)'.

56) Note that area cQI02m in Figure I represents a situation in which the two competingproducts (i.e . dumped or subsidized impons and the like goods produced by domesticmanufacturers) arc perfect substitutes each other. If they arc not perfect or ncarperfect substitutes each other, the substitution em:cls represented by area eQ IOlm willbe smaller than that of shown in Figure I. On the other hand. if the two competinggoods are not substitutes each othcr. then thc two goods would not be competingand the efTee ts of dumping would be nil or negligibly small.

57) When the demand for a product is characterized as elastic with respect to price (i.e .high price el asticity of demand), a small pcrcelllage reduction in price will result ina proportionally larger percentage increase in demand. The refore. the total revenue forthe indust!), will increase as a result of such a price reduction. That is why theimpact of dumping or subsidization will be somewhat mitigated when lhe priceelasticity of demand is relatively high. On the other hand, if the demand for aproduct is characterized as inelastic (i.e . low price elasticity of demand). the efTeetof a price reduct ion caused by dumping or subsidization will be to decrease totalrevenue. In this situation. the domestic indust!), will be worse ofT in the presence ofdumped or subsidized imports.

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The COM PAS model is a spread-sheet based simulation model. 58) To calibrate thesimulation analysis, COM PAS requires input parameters (i.e., md, O,j, .t, and 11) andbenchmark data to be inserted into the model. The value of the margin of dumping(md) is the designated "price shock" (or the extent of the price reduction institutedby the foreign exporters) to the system of equations (supply, demand , and marketclearing mechanism) built into the model. When dumping takes place. the landedprice of the dumped good at the port of entry is expected to be reduced as much asthe margin of dumping. By definition. the margin of dumping is the percentagedifference between the normal value and export price expressed by the export price(%). Therefore , the magnitude of injury , in essence. determ ined by the effects of theextent of price undercutting (measured by the md or sr), plus the values of three keyparameters (o ij. S,j, and 11) and a handful of the benchmark data (represented bymarket shares of three competing market participants in the relevant market and thecapacity utilization rate of the domestic producers). The model then calculates themagnitude of injury (including the degree of price erosion. output displacement.revenue loss. market share loss. and deterioration of capacity uti lization. etc.) causedsolely by the presence of dumped or subsidized imports. 59) The specification andstructure of the COM PAS model is briefly summarized in Appendix I.To illustrate holl' the spread-sheet based COM PAS model works, the required inputs(key parameters and benchmark data) for a hypothetical industry in Country A arearbitrarily chosen and compile d in Table I. The benchmark data for this hypotheticalindustry are assumed such that in the base period the domestic producers' marketshares (ad) and capacity utilization rates (cur) are 80 percent and 7S percent.respectively. The market share of the dumped or subsidized imports (a u) in the base

58) While it is generally understood that the COM PAS model was primarily designed toapply to industrial goods, it can be usefully applied to a wide range of other productsand markets including agricultural commodity products and indu stries.

59) The model. in essence, compares two equilibrium situations: market equilibrium in theprese nce of dumped or subsidized imports compares with the estimated situation wheredumped or subsid ized imports are absent. The differenec between the two equilibriumsituations shows solely the effects of dumping or subs idization. This analysis isknown as a eounterfaClual analysis among the legal professionals.

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period is 10 percent, while the market share of the fairly traded imports (S f) is theremaining 10 percen t. In addition, it is assumed that the subject product and marketcharacteristics of the hypothetical domestic industry are as follows : a relatively "low"price elasticity of agg regate demand (1'] = -


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Table l. COM PAS mod el Inputs: Benchmarli. Data and Key Param eters for aHypoth etical Indu stry in Country A

NumericalBenchmark Data for a p o t h t i c a l Indust!)' (I I Values(%)

Market sharesDomestic like goods (eJ 80Dumped or subsidized imports (e,J 10Fair imports (6,) 10

Capacity utili=ation rate (cur) 75Required Parameters for Simulation .Margin of dumping (II/d ) 20Elasticity of substitution (0;) between: Ranges for

Domestic like goods and dumped or subsidized imports (ooJ 2. 4. 6. 10Domestic like goods and fair imports (O'df) 2, 4. 6. 10Dumped or subsidized imports and fair imports (auf) 2, 4. 6. 10

Price elasticity of aggregate demand ('lJ ".6Price elasticity of domestic supply (e-v OJPrice elasticity of fair import supply (ep 10Notes:m. Uenchmark data anJ parameters shown in this table arc arb itraril y chosen for the purpose of

illustration.(2). Non-dumped or non-subsidized impons.Source: Compiled by the author.

The greater the elasticity of substitution , ceteris paribus. the greater will be thedetrimental effects of dumping or subs idiza tion because the end users of the goods inquestion qu ickly switch their demand from the domestic sources to the dumped orsubsidi zed imports. To illustrate the subst itu tion effects of dumping or subsidizat ion.the elasticity of subst ituti on (crij) is set. initially. at 2 (see Table 2) . The presence ofdumped or subsid ized imports (with the margin of dumping of 20%) woul d cause thedomestic producers ' price to decrease by 2.2 percent (see column 2. Table 2).62) The

62) It may seem contrary to intuition that a 20% price reduc tion of grain (which is acommodity with a high elasticity of substitution) by foreign exporters would lead toonly a 2.2% reduction in domestic price. In rea lity. when dumpin g (or subsidization)takes place and there is a 2()OIo of dumping margin. the landed price of dumped (or

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domestic producers' output, on the other(displacement of domestic products through

hand, would decrease by 0.7 percentsubstitution

(i.e., sum of the two effects631) would decrease byeffect). whi le their revenue2.8 percent. The domestic

producers ' market shares and capacity utilization rates would decrease by 1.1 percentand 0.5 percent, respec tively.

Table 2. Estimated lnju!) ' (%) Caused by Dumping or Subsidization on the KeyEconomic Variables for a Hypothetical Indnst!)' in Count!)' A

Ranges for the degree ofIIljllry to domestic ill/ltlstry (%) : subslilulabilily (O" ;j):

(J ij = 2 (Jij = 4 (Jij = 6 (Jij = 10Price (erosion) -2.2 -4. 1 -5.4 -7.2Output (displacement) -0.7 -1.3 -1.7 -2.2Industry revenue (loss)(I) -2.8 -5.3 -7.0 -9.2Capacity utilization rate (deterioration) -OJ -1.0 -1.3 -1.7Market Shares (loss/2) -1.1 -2. 1 -2.3 -1.9

Notes:(I ). The estimated loss of revenue by the domestic producers com:slJOnds to the sum of the two

components (i.e .. price erosion lind displacement by substitution effects) of the detrimentalelTects of dumping or subsidization. Howc\er. due to rounding and logarithmic transfomlation.the sum of the price erosion and output displacement figures may not always be equal to theestimated revenue loss.

subsidized) grain al the port of entry would be reduced by approximately 20% incomparison wi lh what it would otherwise be. When the transportation costs to finaldestination and importers' mark-up and handling charges are added to the landed costsat the pon of entry. the street price of the dumped grain at the final destinationcould raisc cnough to bc close to thc prevailing markct priec in thc local markct. APrice erosion effect of 2.2% at the final destination is therefore quite plausible giventhc benchmark data (e.g . markct sharcs of domcstieally manufactured goods andimports). supply - demand conditions (r.o, '1 and 0,) and their interactions. However.in general. if the supply and demand conditions arc such that the price elastieit)' ofsupply (d) is high (clastic supply) and the elasticity of substitution (o,!) between thedumped or subsidized goods and the like goods produced by the domestic producersis also high. the pricc crosion cffect on the domestic products could bc much higherthan 2.2%.

63) By definition. revenuc (R) is cqual to price (P) times quantity (Q). Whcn thc revenueequation is transformed into logarithm. it will become In (R) = In (P) + In (Q)

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(2). Market shares for the domestic products will be negatively affected in the presence ofdumped or subsidized imports. The market share loss of domestic producers resulted fromthe trade creation (displacement of domestic like products) effect of dumping or subsidizationwhile the market share loss by fairly traded imports resul ted from trade diversion effect ofdumping or subsidization (displacement of fai rl y tmded imports).

Source: Scenario simulation by the author.

This example (column 2. Table 2) may be a typical case for an interaction of ';4low numerical value of parameters" (Le .. md = 20%; Oij = 2; S


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Nexus 01 law and Economics: Anticlimping and Countervailing Duly Laws

guidance on what constitutes "material injury" or how the investigating authoritiesought to measure injury to determine whether it is material. Reflecting this ambiguity ,the American and Canadian domestic AD and CYD laws do not quantify how muchinjury constitutes "material injury". Therefore, the term material injury has become anelusive concept such that the determination of material injury is in essence a fairlysubjective evaluation by the investigating authorities. If 5 percent reduction in revenueis chosen as the threshold of "material injury"'. any subject goods under investigationwith relati ve ly moderate or higher degree of substitutability (crij :::: 4)65) would likelymeet the "material injury" threshold even if the magnitude of the two other keyparameters are relati ve ly low (e.g .. Ed = 0.3 and /lid = 20%). providing that theprice elasticity of aggregate demand is also relatively low (11 = -0.6).

Table 3. Magnitude of Injul)' Inmases as the Margin of Dumping Increases(successin ly r.tising the margin of dumping (nlll)

Rallges fo r the margin of d/lmpillg (md) gil'elllujllry 10 domestic illfJllslry (%) , bellchmark data. other /Xlr(/melers alld Oij I I):

It I{P 20 mtp 40 11I(P 80 nup 160Price (erosion) ....1 -7.5 -12.7 -19.8Output (displacement) ' 1.3 -2.3 ....0Indust')' revenue (loss) S.3 -16.1 -24.9Capacity utilizat ion rate (dete rioration) ' 1.0 -1.8 '3 .1 '5.1Market Shares (loss) -2.1 -),0 -3.5 -2.6

No tes:(1 . Benchmark data ,he paramete rs "" the same '" Table L "d 'he clast icily ,rsubstilmion was chosen at oj = 4.Source: Scenario simulation by the author.

Korea Univers ity, Seoul. Korea, 1998. p. 57.65) Commodity products such as grains.. oilsecds. mineral s.. etc. are not much diffe rentiatedby the so urce of origins; they tend to have high elasticity of subst itution rega rdlessof the country of origin.

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Similarly , the greater the price undercutting (expressed by the margin of dumping(md) or subsidy rate (sr). celeris paribus, the greater the magnitude of injuryexpected. To illustrate this point, the magnitudes of marg in of dumping have beenincreased successively (md = 40, 80, 160% . respectively) given the benchmark dataand the values of other parameters shown in Table I except that crij = 4. As shownin Table 3, when the margin of dumping (md) increases from 20% successively to40%. 80%. and 160%, respectively. the magnitude of injury in terms of revenue lossincreases from 5.3 percent successively to 9.6 percent, 16.1 percent. and 24.9 percent.respectively. It is important to note that when the elasticity of substitution ismoderate level ( c r ~ = 4), celeris paribus. the margin of dumping of 20% would causethe magnitude of injury to reach the "material injury" thresho ld if revenue loss of5% is the chosen level of threshold. Given the numerical values of key parameters(e.g., aij = 4. &.I = 0.3 and n = -0 .6) and the benchmark data. it is estimated thatthe margin of dumping of 40% would cause injury to the domestic industry about9.6 percent in terms of revenue loss.

Similarly. given successively increased magnitudes of the price elasticity of domesticsupply (&1 = 0.6, ScI = 1.2, &1 = 2.4, respec tively). celeris paribus, it is to beexpected that the magnitude of injury in terms of revenue loss to the domesticindustry will be successively increased (-5.5%, -5.6%. -5 .8%. respectivel y, see TableA2 in the Appendix 2) .66) On the other hand , if the price elasticity of aggregatedemand is successively increased (e.g ., 'l = -1.2. 'l = -2 .4. 'l = -3.0. respectively) ,celeris paribus. it is expected that the revenue loss will be successively reduced (e.g .-3.3%, -1.3%, -0.7% , respectively) . That is because , with price decreases caused bydumping or subsidization, the demand for the subject goods would be increased

66) In order to find no ticeable changes in revenue loss caused by dumping or subsidization.the numerical value of elasticity of substitution should be at least moderate (e.g . a 'jshould be equal to or higher than 4). If the elasticity of substitution is low (e.g . a ,!:0 2). the end users of the subject goods would 110t switch a diseemab1c quantity oftheir demand from the like goods produced by the domest ic producers to the dumpedor subsidized goods. As a result. the substitution effects of dumping or subsidizationwould be so small that Ihe effects of raising the value of cd on ch anges in re venueloss would be negligibly small (Sec Table A2 in the Appcndix2).

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proportionately more than the percentage reduction in price (see Table A3 in theAppendix 2).

Now , to explore the joint effects of high values of key parameters, start with highelasticity of substitution (O ij = 10, column 2, Table 4). Increasing the price elasticityof domestic supp ly (E.:I) from 0.3 to 1.5 given Gij = 10. and all other parametersremaining constant, it can be seen that the magnitude of injury in terms of revenueloss increases from 9.2 percent to 11.7 percent as shown in column 3. Table 4. Inaddition to the high value of Ed = 1.5. raising the margin of dumping from 20 to60 percent (given Gi j = 10). and all other parameters remaining constant. theestimated revenue loss further increases from 11.7 percent to 27.5 percent (column 4,Table 4). Instead of increasing one parameter at a time, when the values of two ormore parameters increase thei r magnitude simultaneously. the estimated injury in tennsof revenue loss increases is compounded .

These experiments. shown in Table 4. confirm the notion of the combination of ..)high & 1 low (3 H&l L)'" parameters ' rule of thumb. 67 j Therefore. whenever the casebefore the enforcement agency is characterized as having a ") H&1L"' (or "4 high")combination of the key parameters, it is to be expected that the degree of injury willbe significant (as show n in column 4, Table 4; column 4. Tab le 5) and would likelyto be a candidate for a "material injury" determination . On the contrary , if the casebefore the enforcement agency is characterized as a combination of the "3L& IH"' (or"4 low") of these same parameters, the estimated injury is expected to be relativelysmall (columns 2 or 3. Table 5) and would likely be a candidate for a negativeinju ry determination.

67) High value of the three pammeters (a,j = 10. E.l = 1. 5. md = 60%) and a lower valueof T] = -D.6.

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Tab le 4. Mag nitud e of Injur), inm ases - Interaction among Key Parameters(s imultaneous ly increased td and mil in addition to the hi gh ,'alue of O" ij)

II/jilT)' 10 tile DoIIFStic IlItillslr), (%) : Assigned nllmerical mlttes 0/ key parameters forthe "3 high & I low " (311& /L ) parameters (' !:(l ij '" 10(1 ) &, '" I.S{l) mt! '" 60{J)

Price (erosion) -7.2 -4.9 -12.1Output (displacement) -2.2 -7.2 -17.5Industry revenue (loss) -9.2 -11.7 -27.5Capacity utilization rate(deterioration) -1.7 -5.8 -15.9Market Shares (loss) -1.9 -4.1 -2.6Notes:

(' ). To illustratc the combination of the "3 high & 1 low (3H&ILf parameters , set 0 ij '" 10.and then, let t.I and mti be raised snccessively at a time. while all other parameters andbenchmark data are kept constant (sec Tablc I).

U). In the second column , 0 ,) '" 10 was chosen white atl other parameters wcre kept loll' (c.g .t] '" -0.6; t.I '" 0.3; and /lid '" 20%).

(1). t.I lI'as raist-d to 1.5. while all other parameters wcre kept constant (the same as footnote ( I)).(3). md was raised to 60%, while atl other parameters were kept co nstant (the same as footnote

(2. Th is is an wunple of ")H& IL" parameters combination.Sou rce: Scenario simulat ion by the author.

Table 5. Magnitude of Injul)': 4 Parameters Co mbination Sce narios(4 low ) 3L&IH ) 3H&IL, and 4 high)

II/jllry 10 the Domestic IlIdllstry (%) : Assiglled Ilumerical \"(Ifill'S 0/ liey parameters gi\"ellbenchmark tiata in Table 3:4 1.011' (1) 3l& 11-(2) 3H&le3)


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o Pri ce r,Q Output (0,Q Revenue r,Q

Figure J: Four ParAmeters Combination Scenarios (JL&lH, 4L , 4H , and JH&IL)

The simulation resu lts shown on Table 5 are depicted in Figure 3 to clearly illustratethe difference between each "4 parameters combination" scena rio. The magnitude ofinjury In terms of revenue loss is the lowest assuming the "3 L&IH"", and highestassuming the "3 H&IL" combination of parameters. These are extreme polar cases.Under the "3L&IH"" parameters combination scenario, the magnitude of injury wouldbe lower than tha t of the "4 low" parameters combination . That is because wheneverthe price elasticity of aggregate demand is high (e .g., '1 = -1.2), the market demandfor the subject goods would be expanded whenever price decreases. As a result. themagnitude of injury caused by dumping or subsidization would be somewhatmitigated in comparison with the case when the price elasticity of aggregate demandis low (e.g., 11 = -0.6). Among the 4 parameters combination scenarios, the hierarchyfor the degree of injury is established in increasing order as follows: 3L&IH < 4low < 4 high < 3H&IL.68)

68) Even if the COMPAS model is not used in the injul)' dctennination process by theenforcement agency. thc dccision makcrs and the parties of dumping or subsidizationinvestigation could be aware of the fact that whenever th e ease before theenforcement agency is eit her characterized as 3L.& lI-1"' or "4 l o \ \ parameters combination.thc level of injury would not rise to the level of "material injury"' threshold. On thecontral)', if it is observed either "4 high" or "3H&tL"" parameters combination. it iscxpected that the level of injury would likely exceed the "material injury" threshold.Therefore. the knowledge of the magnitude of key parameters would provideimportant insights of the outcome of the investigation.

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[n some cases, it is mo re appropriate 10 assign key input parameters of the COMPASmodel in terms of ranges rather than a single number. The reason is that the keyparameters (Oij. E.\. and '1) are more often available in terms of ranges rather than asingle number as different values can be obtained from different sources (academicliterature, industry or government studies, questionnaire responses , etc.). [f the priceelasticity of aggregate demand available from such sources, ranges from -0.3 to -0.6for example, instead of a single number (i.e .. '1 = -o.3). these ranges can input intothe COM PAS model to estimate the magnitude of injury (see Table 6). [n thissituation. the estimated injury will also be in terms of ranges (minimum. mid-ranges ,maximum) instead of a single numerical value.

Table 6. Estimated Magnitude of Injury (with the Ranges of Ke)' Parameters)Assigned ranges of numerical !'allles of key

II/jury to tile Domestic Illdustry (%) : fX,ralllelers gilwf belfchmarl.: data (lIfd /hemargin af dumpilfg showlf in Tabie 3:(l ij = G:J = 0.5--0.7; I] = (-OJ) - (-0.6)

Minimumm Mooium rnngc(2) MaximumO)Price (erosion) -2.5 -3.8 -5.3Output (displacement) -1.4 -1.9 -3.1Industry revenue (loss) -4.2 -5.7 -7.9Capacity utilization rate (deterioration) -1. I -1.5 -2.6Market Shares (loss) -1.6 -1.6 -2.7

Notes:m. Combination of the assigned ranges of numerical values of key parameters which resulted ;,the lowest estimate of injury (minimum) given the benchmark data and specified parameters.'" Combination of the key parameters which resulted in one of tile midranges of the estimatedinju!).m Combination of parameters II'hich resulted in tile highest estimated va lue of iIUu!)' (maximum).

Source: Scenario simulation by the author.

As shown in Table 6, the simulation results present the minimum , medium-ranges andmaximum values of the estimated injury as shown by key variables such as price,output , industry revenue, etc. When the elasticity of substitution is moderate (e.g . Oij= 3 - 5), it is shown that the estimated injury in terms of revenue loss ranges from4.2 percent to 7.9 percent (medium range is 5.7%) even if all other parameters range

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lower in magnitude (e.g. , E.! = 0.5 - 0.7; 11 = -03 - -0.6; and md = 20%). [n thissituation, a question wou ld arise as to which one of the min-max ranges of estimatedinjury should be used by the decision makers to measure against the chosen thresholdsuch as if 5% revenue loss is chosen for the "materia[ injury" threshold. Although itis a decision maker's prerogative to choose which (min. mid-range, max.) to gaugeagainst the threshold. prudence postulates that the minimum value of the estimatedinjury measure shou ld be greater than the chosen standard to qualify for materialinjury detennination. That is because the numerical values of the key parameters areneither absolutely accurate (regardless of the source of these parameters - empiricalevidence or expert's opinion) nor always agreed upon by the parties involved.

As illustrated above, the use of the CO MPAS model has sign ificant advantages overtrend analysis: (i) the model provides invaluable information as to the magnitude ofinjury and injury-causality links stipulated by the AD and CYD laws; (ii) the modelrequires only a handful of input parameters and benchmark data to estimate themagnitude of injury (in terms of the domestic producers ' prices , volume of sales.revenues. capacity utilization rates and market shares) such that the nationalenforcement agencies are able to quickly prepare for injury assessment within tightstatutory deadlines; and (iii) the simulation model approach enhances transparency ofthe injury determina tion process .

The users of the COMPAS model are forced to go through a thoughtful process ofdetermining the app ropr iate magnitude of the various price elast icities which representthe nature of the product itself and the market characteristics of the commodity underinvestigation . In add ition. the simulation results can also be used to validate nationalauthorities ' decisions arrived from their qualitative judgments. The magnitude of inputparameters such as the margin of dumping and the key outputs derived from theCOMPAS model (e.g., price erosion, output displacements. revenue loss, loss ofmarket shares. deterioration of capacity utilization rate. etc.) are the key economicvariables frequently cited in injury detenninations in Canada and the United States.69)

69) While there are a large number of material injury indicators stipula ted by the WTO

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B.2 . Critics of the Use of COMPA S mod el

Two fundamental assumptions underlie the COM PAS model. First. the price elasticitiesof demand (own- and cross-price), supply and substitution are all constant (i.e.,modeled by log-linear forms of the equations). Second, it is assumed that the relevantdomestic market perfectly competitive and that the domestic products and the dumpedor subsidized goods are imperfect substitutes.

There are two criticisms of the use of the COM PAS model. One is that it assumes aperfectly competitive domestic market. Some critics argue that the model is notappropriate to use where market structure is not perfectly competitive (e.g., duopoly,oligopoly, etc.). These critics argue that the assumption of perfect competitive marketstructure built into the COMPAS model would lead to either over- or underestimationof the effects of dumping or subsidization when it is applied to a non-competitivemarket structure.

On the issue of market competitiveness. COM PAS has been defended by staffeconomists at the US ITC by pointing out that the existence of imperfectly competitivemarkets do not necessarily preclude the use of the COM PAS model. In most casesthe quantity response of firms to changes in prices can still be reflected in themodel, yielding inferences about revenue changes that are generally valid. Whenever

Agreements and im plemented by trade remedy laws in Canada and the United States.certain economic variables arc cited more frequently in injury determination. In Canada..price depression (and suppression) and their consequent effects on an industry 'sfinancial performance arc the indicators most fn:quently cited in the c rrr ' s materialinjury findin gs be tween 1993 and 1999. For details, sec D. Featherstone and I.H. Uhm.'Trade Di sputes: The Anti-dumping and Countervailing Dut y Law s and the Role ofQuantitative Economic Analysis ' in Won W. Koo and William W. Wil son (cds.).Agricul/ural Trade under CUSTA (Nova Science. New York 2002). In the UnitedStates. on the other hand. economic variables such as import penetration ratio (anindicator of loss of market shares), capacity utilization ratio, percentage change indemand. and the margin of dumping arc statistically significant in explaining theoutcome of the petitions. For details. sec F. Sabry. 'A n Analysis of the Decision toFile, the Dumping Estimates. and the Outcome of Antidumping Petitions' (2000) 14Imerna/iollal ]i'ode Journal.

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the COMPAS model is applied to a non-compet itive market situation, the supplyelastic ities should be appropriately chosen and interpreted.7 0) That is because firms,under a perfect ly competitive market structure . tend to adjust supp ly by moving alongthe domestic supply curve when the market price changes. In oligopolist ic marketstructure. however, supply response by individual firms to price changes would bedifferent from that

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Nexus of Law and Economics: Antidumping and Countervailing Duty Laws