On 4th September 2019, amendments to Canada’s Special Import Measures Regulations (SIMR) were published in the Canada Gazette. The SIMR implements Canada’s anti-dumping and countervailing (i.e., trade remedy) regime. The amendments address concerns raised by the Canadian steel industry regarding the effectiveness of the trade remedy regime in addressing related company input dumping and input cost distortions.

The changes modify how the Canada Border Services Agency (CBSA) may calculate the cost of production for the purpose of determining a constructed normal value in anti-dumping investigations. These changes have been made to address situations where (i) production inputs (i.e., materials used in the production of the subject goods) are acquired from associated parties at prices below cost or below a representative benchmark, and (ii) to provide further scope to address cost distortions created by a “particular market situation” in the exporting country (e.g., where government intervention results in price distortions or when factors such as significant macroeconomic volatility affect the prices and input costs in the market). In such cases, the CBSA may calculate an alternative price for the goods through a constructed cost methodology, where the price of the goods is determined as the cost of production in the country of origin, plus a reasonable amount for administrative, selling and general costs, as well as profits. The amendments to the SIMR provide a methodology for the CBSA to determine an appropriate amount for the cost of production in relation to two categories of input costs.

The first category targets “input dumping” between related parties. Where inputs are acquired from an associated person, it may no longer be sufficient to demonstrate that the cost is based on an arms-length price (i.e., a price between unrelated parties).  Instead, if an input used in the production of the subject goods is acquired by the exporter or producer from an associated person and is a significant factor in the production of the goods, the cost of that input in the country of export is considered to be the greater of the following amounts:

• (a) the price paid in respect of that input by the exporter or producer to the associated person;
• (b) the cost incurred by the associated person in the production of that input, including the administrative, selling and all other costs with respect to that input; and
• (c) the price in the country of export of the same or substantially the same inputs, if sufficient information is available to enable the price to be determined on the basis of
  • (i) the selling prices of those inputs in the country of export, in the same or substantially the same quantities, between parties who are not associated persons, or
  • (ii) the published prices of those inputs in the country of export.

Items (a) and (c) (i) reflect a traditional approach to determine an arms-length price. Item (b) will result in higher dumping margins in certain situations, such as where the price of the input is reduced below its full cost because of market forces in the exporting country. Whether item (c)(ii) affects the margin of dumping calculation compared to a traditionally-determined arms-length price will depend on how accurately the published prices of an input reflect actual arms-length prices.

The second category of amendments targets input cost distortions. The common example is where a government distorts the price of inputs by implementing export restrictions or taxes on inputs that have the effect of lowering their price in the national market below freely-traded world market prices.

Specifically, the amendments clarify how the CBSA will implement the “particular market situation” provision in Article 2.2 of the WTO Anti-Dumping Agreement. That provision permits anti-dumping authorities to use one of two alternative methods to determine normal value in the anti-dumping calculation where domestic selling prices in the exporter’s market are affected by a “particular market situation” such that they do not “permit a proper comparison” with the export price (in which the difference between the export price and the normal value provides the margin of dumping). The Anti-Dumping Agreement neither elaborates on the meaning of the term “particular market situation” nor provides guidance on how this provision should be implemented.

The SIMR amendments provide that “if a particular market situation exists which does not permit a proper comparison of the sale of like goods with the sale of the goods to the importer in Canada, such that the acquisition cost of an input used in the production of the goods does not reasonably reflect the actual cost of that input, the cost of that input in the country of export shall be considered to be the first of the following amounts that reasonably reflects the actual cost of the input so as to permit a proper comparison:

• (a) the price of the same or substantially the same inputs that are produced in the country of export and sold to the exporter or to other producers in the country of export;
• (b) the price of the same or substantially the same inputs that are produced in the country of export and sold from the country of export to a third country;
• (c) the price of the same or substantially the same inputs determined on the basis of the published prices of those inputs in the country of export;
• (d) the price of the same or substantially the same inputs that are produced in a third country and sold to the exporter or to other producers in the country of export, adjusted to reflect the differences relating to price comparability between the third country and the country of export; or
• (e) the price of the same or substantially the same inputs determined on the basis of the published prices outside the country of export, adjusted to reflect the differences relating to price comparability with the country of export.”

The meaning of the term “actual cost” is important. The use of the phrase “does not reasonably reflect the actual cost of that input” in conjunction with the phrase “the first of the following amounts that reasonably reflects the actual cost of the input” indicates that “actual cost” means the cost that would exist in the absence of the distortion that creates the “particular market situation … which does not permit a proper comparison”. Using the common example of export restrictions or taxes on inputs, this would mean that the price depressing effect of such actions would have to be removed to determine to the “actual cost”.

In this light, items (b), (d) and (e) are significant. Where a “particular market situation” exists in the exporting country, all three of these items allow the use of prices in markets outside the exporting country, where the “particular market situation” and its effects are absent.

In addition, items (d) and (e) are qualified with the language “adjusted to reflect the differences relating to price comparability with the country of export”.  This language mirrors the reasoning of the WTO Appellate Body in EU – Biodiesel (Argentina) (DS473). In that dispute, the Appellate Body determined that when an investigating authority uses out-of-country information (e.g., international prices) to calculate the cost production, such information must be “adapted” to represent the cost of production in the exporting country.  The Appellate Body rejected the use of out-of-country prices because they were specifically used to remove the distorting effect of export taxes in the exporting country, and the removal of the distorting effect meant that the prices did not represent the cost of production in the exporting country.  While that reasoning may seem at odds with the use of the term “actual cost” in the SIMR amendments, it should be noted that the EU – Biodiesel decision did not address the interpretation and application of the “particular market situation” provision in Article 2.2.  Whether or not that provision will permit the removal of such distortions is the subject of another WTO dispute, Australia – Anti-Dumping Measures on A4 Copy Paper (DS529). The panel in that dispute is expected to issue its decision at the end of this year.

Tereposky & DeRose regularly provides advice on Canadian trade remedy matters, including anti-dumping and countervailing duty investigations and safeguard actions. Should you have any questions regarding these amendments, we are at your disposal.