Particular market situation and costs adjustments

How the TRA determines a particular market situation and cost adjustments when costs or profits are not substantially determined by market forces.

Businesses wanting to understand trade remedies should read trade remedies: investigating dumped or subsidised goods for information on the investigations process and the actions they need to take.

Background

This guidance sets out how the TRA determines if there is a particular market situation. It provides guidance on situations where it is not possible to use the domestic prices in the exporting country or territory to calculate the normal value, because government intervention results in prices of the like product being artificially low.

It also provides guidance on how to construct the normal value in a dumping investigation when it may not be possible to use some elements of an exporter’s records because they do not reasonably reflect the overseas exporter’s costs or profits in a market that is substantially determined by market forces.

Records this might apply to include production, administrative, sales and general (SG&A) costs or profits.

Legislative background

This guidance uses shortened names when referring to legislation:

  • ‘dumping and subsidisation regulations’ refers to the Trade Remedies (Dumping and Subsidisation) (EU Exit) Regulations 2019
  • TCBT Act’ refers to the Taxation (Cross-Border Trade) Act 2018

This legislation has been amended, including by

  • schedule 19 of the Finance (No.2) Act 2023

Dumping margins are calculated by comparing the export price of the good concerned and the normal value.

The default measure of normal value is the price at which the goods are sold domestically in the exporting country or territory.

Article 2.2 of the WTO Anti-Dumping Agreement (ADA) sets out that in the following situations, the normal value is to be based on the prices of exports to third countries or on the costs of production in the country of origin plus reasonable amounts for administrative, selling and general costs and for profits.

  • there are no sales in the ordinary course of trade
  • there are low volumes of sales
  • there is a particular market situation in the domestic market of the exporting country or territory, so that sales in that market do not permit a proper comparison

There is no explicit definition of particular market situation in the ADA.

According to regulation 7(1) and (2) of the dumping and subsidisation regulations, the TRA should determine the normal value on the basis of comparable prices of sales of like goods in the exporter’s domestic market unless:

  • there are no sales of the like goods in the ordinary course of trade in the domestic market of the exporting country or territory
  • because of a particular market situation or the low volume of sales in the domestic market of the exporting country or territory, such sales do not permit a proper comparison between the like goods destined for consumption in the exporting country or territory and the goods concerned
  • the overseas exporter in the exporting country or territory does not sell the like goods on the domestic market of the exporting country or territory

Regulation 8 sets out alternative means of determining normal value, which includes constructing a normal value on the basis of costs of production plus a reasonable amount for selling, general and administrative (SG&A) costs and for profits.

Regulation 9 sets out how to determine whether or not sales are in the ordinary course of trade.

Regulation 10 sets out how to determine whether prices of exports to a third country are suitable to use as an alternative to domestic prices as a basis for calculating normal value.

Regulation 11 sets out how the TRA should determine costs of production of the like goods in the exporting country or territory when constructing the normal value.

Costs of production must normally be calculated on the basis of records kept by the overseas exporter of the goods concerned as long as these records:

  • are in accordance with generally accepted accounting principles of the exporting country or territory, and
  • reasonably reflect the costs associated with the production and sale of the like goods in the exporting country or territory

Where these conditions are not met, the TRA may calculate costs of production on any reasonable basis.

Regulation 12 sets out the conditions for determining SG&A costs and profits. The default approach should be to determine reasonable amounts for SG&A costs and for profits on the basis of the actual data pertaining to the production and sales by the overseas exporter of the like goods, in the ordinary course of trade, in the domestic market of the exporting country or territory. Where this is not possible, the dumping and subsidisation regulations set out alternative methods by which the TRA may calculate SG&A costs and profits.

Costs calculated in accordance with regulations 11 and 12 may be subject to adjustment under regulation 13 in cases where the TRA considers that the amounts calculated are unrepresentative because they do not reasonably reflect what the exporter’s costs or profits would be if those costs or profits were incurred or made in a market where they are substantially determined by market forces. As set out in regulation 13(6), this includes situations where prices or costs are artificially low due to substantial government intervention.

The purpose of the adjustments made in accordance with regulation 13 is to determine what the costs and profits would be in the market of the exporting country or territory if costs, prices and profits in that market were substantially determined by market forces.

In order to calculate what an exporter’s costs and profits would be in the market of the exporting country or territory if they were substantially determined by free market forces, regulation 13(4) allows the TRA to use:

  • corresponding costs of production, administrative, selling, general costs and profits in an appropriate representative third country or territory
  • international prices, costs or benchmarks
  • any other factors it considers relevant

Determining a particular market situation

The TRA should assess claims that a particular market situation exists on a case-by-case basis.

There are several possible circumstances which could give rise to a particular market situation. Regulation 7(4) of the dumping and subsidisation regulations sets out a non-exhaustive list of circumstances which might constitute a particular market situation:

  • where prices are artificially low
  • where there is significant barter trade
  • where prices reflect non-commercial factors

A particular market situation could arise as a result of relationships between private sector parties. For example, in the case of barter trade between private companies where this covers a significant part of the domestic market, or where a significant part of domestic sales involves transactions between private companies engaged in non-commercial arrangements.

There may also be cases where the source of a particular market situation is government intervention in any of the following:

  • the domestic market for the like goods
  • an upstream market that inputs into the like goods
  • a market indirectly providing inputs into the like goods, which results in artificially low sales prices in the domestic market of the like goods

Adjustments when constructing a normal value

The TRA may construct normal value in particular circumstances. When doing this, the TRA must use data from the exporter’s own records unless there are clear reasons for not doing so. The TRA may make adjustments to the normal value where the appropriate conditions apply. This is in accordance with regulations 7, 11, 12 and 13 of the dumping and subsidisation regulations.

Regulation 13 sets out a non-exhaustive list of factors that could justify cost adjustments. It makes clear that substantial government intervention can affect costs or profits outside of typical market forces.

The TRA should only make adjustments to those elements of cost or profit that are not substantially determined by market forces. Otherwise, cost elements or profits that are substantially determined by market forces should be based on the exporter’s records where conditions set out in regulation 11 of the dumping and subsidisation regulations are satisfied.

The TRA should only make adjustments in relation to significant cost or profit elements. The TRA should use its judgement on what constitutes a significant cost or profit element in light of the circumstances of the case.

The assessment of whether adjustments are justified should be made on an exporter-by-exporter basis. For example, where government intervention affects a production input in the domestic market, the purchasing behaviour of a particular exporter should be examined to determine whether the input has been supplied at a price substantially determined by market forces. If the exporter buys “on-the-spot” from an external unrelated supplier in another country, adjustments may not be appropriate.

The TRA should therefore identify, based on evidence reasonably available to it as part of the investigation, which specific data should be taken from the exporter’s records and which should be adjusted based on information from alternative sources.

In utilising information from alternative sources, the objective is to derive the cost of production and/or profits that would prevail in the exporting country or territory for the relevant exporter, were they substantially determined by market forces.

To achieve this, the TRA should adjust data from third countries or international benchmarks where necessary to reflect the specific circumstances in the exporting country or territory. For example, the TRA should take account of any differences in international and internal transport costs between the benchmark country and the exporting country or territory in order to replicate representative costs in the exporter’s home market.

In order of preference, alternative data on prices or costs which should be used include:

  1. prices from the private sector in the exporting country or territory – for example prices supplied by privately owned enterprises to the exporter or to other exporters to the UK in that country (where confidentiality issues do not prevent this), or to exporters to an appropriate third country
  2. import prices into the exporting country or territory
  3. prices of like inputs in a representative country or other international benchmarks. The TRA should take into account whether the country is at a similar level of development to the exporting country or territory, is open to competition and has significant production of the goods under investigation and recent, and whether public data specific to relevant inputs is available
  4. prices of identical or like inputs in the UK

In all cases, the TRA should ensure that alternative data used reflects market conditions that are substantially determined by market forces.

The TRA should justify its choice of alternative data, including reasons why it rejected alternatives which would otherwise have been deemed preferable according to the above hierarchy.

In choosing information, the TRA should give preference to the following where reasonable:

  • independent data which is verifiable
  • data based on actual transactions rather than estimates
  • survey data which is based on a large sample, is systematically collected and free from bias and distortion as far as possible
  • data which is used by the industry in commercial decision making
  • data which can be cross-checked against data from records of any exporters whose input prices are determined by market forces

Any data used should, where appropriate and possible, be adjusted to take account of differences in the terms and conditions of sales, product specification and quality, and other factors affecting price comparability.

Government interventions

Substantial government interventions can be a relevant consideration both in assessing whether a particular market situation exists and whether there is a case for cost adjustments. This is in accordance with regulations 7 and 13 of the dumping and subsidisation regulations.

Where claims are made that government intervention results in a particular market situation by causing domestic sales prices to be artificially low, the TRA should consider whether there is sufficient evidence that substantial government intervention exists, which has had a material impact on domestic sales prices such that they would not permit a proper comparison with export prices. The aims and the objectives of the government intervention are not relevant - only the effects on prices are.

Where the allegation is that a particular market situation results from government intervention that affects upstream inputs into the like goods, for example where the investigation concerns steel, but the interventions directly affect the market for iron ore, the TRA will need to be satisfied that the artificially low price of the inputs has fed through to prices of the like goods in the domestic market of the exporter. This implies that the relevant input is sufficiently important to have a material impact on domestic sales prices of the downstream product.

Similar considerations apply where a claim is made that adjustments under regulation 13 should be applied due to substantial government intervention. The TRA should consider whether there is sufficient evidence that substantial government intervention exists which has had a material impact on costs or profits such that they are unrepresentative. Again, the aims and the objectives of the government intervention are not relevant – only the effects on prices and costs are.

A determination by the TRA that there is a particular market situation does not automatically imply that adjustments should be made according to regulation 13 when constructing normal value.

An example of a clear link between a particular market situation finding and a basis to make adjustments under regulation 13 is where the TRA’s finding is based on a conclusion that sales prices of the like goods are artificially low because substantial government intervention is artificially lowering the prices of inputs.

A range of government interventions that might be relevant to the assessment of whether a particular market situation exists and/or cost adjustments include:

  • price controls set by government
  • presence in the market of government-owned or controlled firms that set prices according to criteria other than profit maximisation, including selling inputs at less than adequate remuneration
  • government control of imports or exports of the goods or of key inputs through licensing, quotas or duties
  • government subsidisation of the goods or of key inputs, including subsidies which are non- specific within the meaning of the WTO Agreement on Subsidies and Countervailing Measures
  • government purchasing or selling of stocks of the goods or inputs into the manufacturing of the goods which can influence prices
  • government control of production
  • government practices reported in the OECD database on restrictions on exports of raw materials
  • any other government intervention that might have a demonstrably material effect on prices and costs in the market

The presence of any of the above interventions alone is not enough to justify a determination that prices are artificially low. The TRA should be satisfied that the interventions have caused a material impact.

TRA process for costs adjustments

The TRA should in every case, consider whether it would be appropriate to construct normal value because one of the exceptions in regulation 7(2) of the dumping and subsidisation regulations exists, including a particular market situation. In cases where normal value is being constructed, the TRA should consider whether adjustments in regulation 13 are appropriate.

Where the applicant requesting investigation or another interested party has made a specific and evidenced claim that a particular market situation exists based on artificially low prices and/or that there is a need to make adjustments under regulation 13, or where the TRA has other evidence available to it that either or both is applicable, the TRA should take the steps set out below:

  • insert additional questions into the exporter questionnaire relating to the allegation(s) and requesting any available evidence
  • prepare a questionnaire for the government of the exporting country or territory relating to those allegation(s) and requesting any available evidence
  • allow sufficient time for the government of the exporting country or territory to consider and rebut claims and, where appropriate, to make suggestions for alternative information to be used by the TRA

This is to ensure interested parties have an opportunity to consider the claims or the TRA’s proposed approach and present evidence.

In the case of transition reviews, the TRA should allow an initial period for comment from interested parties following the initiation of the review, during which interested parties can make claims and provide evidence on the existence of a particular market situation and/or of the applicability of regulation 13.

Based on responses to questionnaires and any other information obtained as part of the review, the TRA should decide whether normal value will be based on third-country export prices or constructed normal value. If normal value is being constructed, the TRA should decide whether there is a case for applying cost adjustments under regulation 13 to specified input costs and, if so, which ones.

In all cases where the TRA decides to use constructed normal values and make cost adjustments under regulation 13, it should set out its rationale for doing so in its provisional and final determinations.