U.S. Trade With China: Navigating The Complexities Of Antidumping And Countervailing Duties - Part I

Friday, December 1, 2006 - 00:00

Editor: Please tell our readers about your background and the focus of your practice.

Sailer: I am a Midwesterner who came to the East Coast to pursue a career in international law. After earning my B.A. and J.D. at Marquette University, I earned an LL.M. degree in international law at Georgetown University Law Center. That led to my first job in the Justice Department.

In terms of my overall background, I have gained a breadth of perspectives from all sides of a legal practice. I started in the Justice Department defending the International Trade Commission and Commerce Department. I then went into private practice with a large California firm. Later I served the Commerce Department as Deputy Assistant Secretary in charge of the antidumping and countervailing duties investigations unit. After leaving the Commerce Department, I returned to private practice for several years and then started my own firm largely premised on a growing and thriving China practice. About six months ago, I joined forces with Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt to put our China practices together to create the premier China trade practice.

Editor: What attracted you to the firm?

Sailer: I've known two of the firm's partners, Bruce Mitchell and Max Schutzman, for many years. They are first-rate international trade lawyers. The firm well deserves its excellent reputation and is widely recognized as the leading international trade and customs firm.

Another big draw is that Grunfeld has one of the most successful China practices in the antidumping area. I am very pleased and honored to be melding my China practice together with Grunfeld's excellent team.

Editor: Your partner Andrew Schroth noted in his interview with us several months ago that he was opening an office in Hong Kong.* How has your firm's physical presence in China grown?

Sailer: In addition to our office in Hong Kong, we have an affiliation with the Jincheng law firm, a fairly large Chinese firm. In addition, we continue to work closely with a trade consultant in Shanghai who has been collaborating with me for several years.

Historically, Grunfeld has maintained an excellent in-China accounting capability. Antidumping cases related to trade with China have become more and more complicated and accounting intensive, which was not the case 15 years ago. This makes our firm's expertise and Chinese accounting capabilities more and more invaluable.

Editor: In which industries are you seeing the greatest growth in U.S. trade with China?

Sailer: Trade with China is mushrooming in the high tech area. Every year, China is more and more focused on value-added production that requires skilled labor. That is not to say that the unskilled or labor intensive industries that are not high tech are not still very major factors in trade.

In spite of the huge growth in high tech, among the largest cases and those creating the most friction between the U.S. and China are those involving basic agricultural products such as shrimp, honey, crawfish, garlic and apple concentrate, all of which we have been involved in. The explosion in these agricultural cases results from the very high dollar value of those exports to the U.S.

Editor: Why does friction arise?

Sailer: In the first instance, friction arises from the simple increase in trade. Not surprisingly, friction increases when allegations of fraud or flagrant disregard of U.S. customs regulations are alleged. For example, there have been reports that some importers of Chinese products have attempted to take advantage of certain special rules for new shippers that have allowed them to evade the payment of antidumping duties. This has resulted in a restriction in some of the rights that the government was affording to all foreign exporters involved in trade with the U.S. - not just China, but Japan, Europe and others.

Editor: What are the benefits of a new shipper review and what recent developments have resulted in the limitation of these benefits?

Sailer: In the WTO and GATT agreements of 1995, the U.S. for the first time implemented a new shipper regime. If a shipper had no shipment to the U.S. at the time of an antidumping investigation, it could ask the Commerce Department within a short period of time after making its first sale to the U.S. for an expedited review of its transaction to have a dumping margin calculated as to it specifically. More importantly, after such a review was initiated, the new law provided that the new shipper's importer-customers could avoid the payment of cash deposits of dumping duties, instead covering the potential liability with a bond.

Unlike how things work in a dumping case involving a market economy, where a weighted average of the calculated margins is determined and applied to all other companies from the target country including new shippers (referred to as the "All Others" rate), in a non-market case a new shipper is automatically subjected to what is called the "China-Wide" rate. This usually highly punitive rate is typically derived from the petitioner's allegations in the original complaint.

Naturally, allegations of dumping are made with an eye to limiting the foreign competition, so alleged margins are often in the range of 200 to 300 percent. Thus, a non-market new shipper that wants to get its own individual rate is required to make sales to a U.S. customer who must pay the cash deposit at the "China-Wide" rate in order to qualify for a new shipper review. Only subsequently can the importer avoid cash deposits and take advantage of the bonding privilege. However, because of a perception that certain importers - largely of agricultural products - were posting bonds and then skipping out and evading the eventual payment of dumping duties, this privilege was recently suspended.

Editor: Does the applicability of the China-Wide rate foreclose Chinese exporters from avoiding this punitive rate, or is there a mechanism akin to the market-based economy "All Others" rate?

Sailer: First, because China has a non-market, or state-controlled, economy, the Commerce Department disregards prices and costs in China as skewed by government intervention in various sectors of the economy. Thus, the method of calculating the dumping margin in China's non-market based economy is different from a market-based economy case involving a country such as Japan. Rather than use costs and prices, the Commerce Department determines Chinese producers' factors of production and then values them based on public data from an economically comparable market economy - typically India. There is also a special rule for determination of the rate applicable to those companies that do not participate in the antidumping investigation.

In a Japanese case, if there are three exporters of the same product and two of them are required by the Commerce Department to provide information for the investigation, each of them expects to receive a calculated rate; the two rates would then be weight averaged to derive the "All Others" rate that would apply to the third and all other exporters of the product.

In a Chinese case, on the other hand, the "China-Wide" rate is presumed to apply to any company that the Commerce Department does not require to participate in the investigation. There is, however, a mechanism for a Chinese exporter who had exports to the U.S. during the period of the investigation to avoid the "China-Wide" rate and to be assigned a weighted average of the rates calculated for the participating companies.

If an exporter can prove that it is not controlled by the Chinese government through the submission of proof of its independence in production and sales activities, the Commerce Department has developed a process whereby such a company may be assigned an "All Others" rate calculated like that applicable in a market economy case - the weighted average of the participating companies. A new shipper, however, may not take advantage of this mechanism since it had no exports during the period of the investigation.

Editor: How do you help your clients to benefit from the new shipper rules?

Sailer: As a result of the new shipper regulations, the Commerce Department has begun taking a closer look at patterns of trade. Historically, if a U.S. importer wanted to establish a long-term relationship with a supplier, it could arrange transactions and structure them in an effort to avoid dumping, much like companies engage in tax-planning. The Commerce Department, however, has begun scrutinizing these new shipper transactions to determine whether a bona fide sale was made. Although the legal approach is similar to tax planning, tax law is much more black and white: if a taxpayer follows certain accounting practices, it is able to legitimately avoid the imposition of certain tax liability.

In contrast, an analysis to determine whether a transaction is bona fide for purposes of an antidumping action must be done on a case-by-case basis within the context of the statutory scheme of the dumping law. If the transaction appears to be overly structured, the Commerce Department may determine that it is not a bona fide sale. We bring our expertise to bear on this and related questions.

A careful approach to these issues can open the way for long-standing and highly advantageous supply arrangements, enhancing a company's competitive position.

* Our readers can access Mr. Schroth's two-part interview at www.metrocorpcounsel.com/pdf/2005/December/51.pdf and www.metrocorpcounsel.com/pdf/2006/January/26.pdf.