WTO has dim view on “Zeroing” methodology

The application of ‘zeroing’ is a contentious practice with anti-dumping authorities around the world. This is because using this tool artificially boosts the quantum of the dumping margin and is thus an extremely protectionist orientated practice. Some practitioners have even referred to it as ‘blatantly naughty’.

On the 4th of February 2009, the World Trade Organisation’s Appellate Body circulated its report on the usage of zeroing methodology in anti-dumping investigations. This dispute arose as the European Communities complained of the United States of America’s use of the zeroing methodology in anti-dumping disputes. As in the panel phase the Appellate Body ruling was a resounding condemnation of the use of ‘zeroing’.

The essence of the practice operates as follows:
Dumping occurs if a foreign exporter sells goods in another country at a price (the “export price”) lower than what the exporter sells that same product for in its domestic market (the “normal value”). The difference between the normal value and the export price would constitute the margin of dumping and typically this percentage difference would be the same as the anti-dumping duty imposed on the dumped goods.

In terms of the WTO’s Agreement on the Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (or commonly referred to as the Anti-dumping Agreement), the existence of margins of dumping during the investigation phase into alleged dumping is normally established on the basis of a comparison of a weighted average normal value with a weighted average of prices of all comparable export transactions or by a comparison of normal value and export prices on a transaction-to-transaction basis.

In other words according to the WTO’s Anti-dumping Agreement when investigating alleged dumping one would compare the weighted average normal value with the weighted average export price. In practice this will mean that in some sales the normal value will be lower than the export price meaning that dumping has indeed occurred. However some sales will reflect that the normal value is higher than the export price, which implies a negative dumping margin or stated differently, that no dumping has occurred. The WTO’s Anti-dumping Agreement calls for the weighted average of the normal value and export price to be used. In other words the weighted average of all the positive and negative dumping margins found in the investigation phase.

The United States of America uses the zeroing methodology whereby the overestimate the final dumping margins, as it sets negative dump¬ing margins to zero when averaging rather than allowing negative and positive dump¬ing margins to cancel. The WTO’s Appellate Body found that this practice is in contravention of the WTO’s Anti-dumping Agreement and recommended that the USA brings its dumping calculation into conformity with its obligations under the WTO’s Anti-dumping Agreement. There is a real possibility that the US will not comply with this decision as they consider the Appellate Body to have exceeded their authority in making this ruling.

South Africa’s International Trade Administration Commission (“ITAC”) does not follow the practice of zeroing when conducting investigations and compares the weighted average normal value with the weighted average export price. In the cases where ITAC finds a pattern of export prices which differ significantly among different purchasers, regions or time periods, ITAC does compare the weighted normal value with individual export transactions as allowed by the WTO’s Agreement on Anti-dumping.

If the US does not change its approach as the WTO has required, the possibility exists that other WTO Members may recalculate their own existing and future antidumping duties against the US so that the US also faces the brunt of their own practice in export markets. This would be a logical but systemically perverse outcome which we hope will not arise. Will sanity prevail?