On March 25, 2024, the Department of Commerce ("Department") published its final regulation for evaluating particular market situation ("PMS") allegations in the context of antidumping duty ("AD") proceedings.1 The bulk of these new rules cover the application and analysis of cost-based PMS, and provide much anticipated regulatory guidance on the Department's application of this provision for the first time since 2015, when Congress added the cost-based PMS provision into the Tariff Act of 1930 ("Act"). This regulation also responds to judicial decisions that struck down the Department's use of the PMS provision in prior cases. As a result, this regulation is likely to make the Department's use of the PMS provision more frequent and less susceptible to judicial challenge, all of which means that respondent companies are at greater risk of adjustment to their manufacturing costs.
Background
As part of the Trade Preferences Extension Act of 2015 ("TPEA"), Pub. Law. No. 114-27, Congress created the cost-based PMS provision under Section 773(e) of the Act as a means to adjust a respondent's cost of producing the subject merchandise if "a particular market situation exists such that the cost of materials and fabrication or other processing of any kind does not accurately reflect the cost of production in the ordinary course of trade," by using "another calculation methodology."2 Congress, however, did not provide a definition of cost-based PMS, the types of information to consider in determining the existence of PMS, or what factors are relevant when determining the particularity of a market situation. In the absence of statutory guidance, the development of PMS rules and principles was largely left up to the Department's discretion, which was then frequently subject to (often successful) judicial challenge.
While the new rules provide some clarification to the Department's analysis in determining cost-based PMS under the statute, they also provide the Department with expansive authority to determine an existence of a cost-based PMS, including provisions that allow a cost-based PMS finding without specifically quantifying the cost distortion. The rules also provide that a cost-based PMS can be made if a subject country's property, human rights, and labor protections to determine are weak and/or ineffective in a manner that distort costs, which could substantially expand the basis for these allegations. As a result of these regulations, respondents should anticipate an increase of cost-based PMS allegations in future AD proceedings, likely with a reduced chance of successfully challenging the results on appeal.
Below, we provide an overview of the new rules, including the definition of PMS, the types of information that can be included in PMS allegations, as well as the Department's new analytical framework for determining the existence of a cost-based PMS and the application of adjustments to cost of production, upon an affirmative determination of a cost-based PMS by the Department. This blog post also covers the provisions related to sales-based PMS allegations contained in the new rules. Finally, we discuss the implications of these new rules on PMS, and how the new rules might impact respondent companies in future antidumping duty proceedings.
Definition of a Particular Market Situation
Even prior to the TPEA, the phrase "particular market situation" existed in the Act as a basis for the Department to determine whether there were circumstances that prevented a proper comparison between prices in the foreign market and U.S. prices, referred to as a "sales-based" PMS allegation. The Final Rule now defines a sales-based PMS to be "circumstances or a set of circumstances that prevents or does not permit a proper comparison of sales prices in the home market or third country market with export prices and constructed export prices." If a sales-based PMS is found, the statute permits the use of constructed value to calculate the normal value of subject merchandise.3
As noted above, the TPEA used the same phrase to give the Department the authority to make an adjustment to a respondent's cost of production – a so-called "cost-based" PMS allegation. The Final Rule defines a cost-based PMS to be "circumstances or set of circumstances that contributes to the distortion of the cost of materials and fabrication or other processing of any kind, such that the cost of production of merchandise subject to an investigation, suspension agreement, or antidumping order does not accurately reflect the cost of production in the ordinary course of trade." If the Department concludes that a cost-based PMS exists such that the Department determines the calculation of the costs associated with producing subject merchandise has been distorted, the Department can use any "reasonable methodology" to calculate constructed value.
PMS Allegations
To allege that a PMS exists, an interested party need only include "relevant information reasonably available" to support the claim of a PMS. 19 C.F.R. § 351.416(b). For parties to allege a PMS that is similar to an allegation made in the previous or ongoing segment of the same or another proceeding, the alleging party must "identify the facts and arguments . . . which are distinguishable from those provided in the other segment or proceeding."
Neither the statute nor the regulations specify a deadline for filing PMS allegations. In a recent Federal Register notice, however, the Department set the deadline for PMS allegations as 20 days after the submission of the initial Section D questionnaire response.4 It is likely that the Department will continue to apply this deadline in future PMS proceedings, or at the very least, continue to announce specific deadlines for filing PMS allegations in future Federal Register notices.
Evaluating the Existence of a Cost-based PMS
For cost-based PMS allegations, the Department's analysis is two-fold: first, the Department must determine whether a "market situation" existed during the period that distorted the cost of production of subject merchandise, and second, the Department must determine whether that market situation was "particular." Below, we provide additional details on how the Department will apply this analytical framework to determine the existence of a cost-based PMS.
Determining the Existence of a Market Situation
Under § 351.416(d), the Department provides a three-part analysis to determine whether a market situation existed during the period of investigation ("POI") or review ("POR"), such that the cost of materials and fabrication or other processing of any kind does not accurately reflect the cost of production in the ordinary course of trade. Based on record information, the Department will analyze (i) whether a circumstance or set of circumstances exists that may have impacted the cost of production; (ii) whether the cost of production is distorted; and (iii) whether these circumstances more likely than not contributed to the distortion of the cost of production.
The regulation provides examples of the information that might it might consider relevant when conducting this three-part analysis. This information includes:
- A comparison of prices paid for significant inputs used to produce subject merchandise against prices paid for these inputs under normal market circumstances (§ 351.416(d)(3)(i));
- Reports or other documentation by governmental or independent international, analytical, or academic organizations indicating that lower prices for a significant input would likely result from governmental or nongovernmental actions or inactions taken in the subject countries or other countries and such reports or documentations that indicate prices for a significant input are not based on fair market values within the subject country due to governmental or nongovernmental actions or inactions (§ 351.416(d)(3)(ii) – (iii));
- Previous determinations where the Department found that record information did or did not support an existence of PMS for the same or similar merchandise in the subject country (§ 351.416(d)(3)(iv)); and
- Information that a country's "weak, ineffective, or nonexistent" protections of human rights, property, labor, or environmental rights or protections may contribute to distortions in the cost of production or costs of significant inputs of subject merchandise in the subject country, by reference to prices in "in economically comparable countries." (§ 351.416(d)(3)(v)).
Section 351.416(d)(4) provides the Department broad discretion to find a market situation to exist. Under this provision, the Department is not precluded from finding a PMS to exist, even where there are no precise quantifiable data to calculate the distortion on the record, or the same or similar actions that contributed to the PMS preceded the POI or POR.
Examples of a Cost-based Market Situation
In § 351.416(g), the Department provides a non-exhaustive list of examples that could be considered a cost-based market situation. These examples can be divided into three categories:
- Macroeconomic factors, such as overcapacity, that contribute to distortions to cost during the POI/POR.
- Actions by the government and/or government-controlled entities (e.g., government intervention into the market, export restrictions or taxes, exemptions from duties, rebates, financial assistance, use of certain domestic inputs or sharing of IP or production processes, creation of certain business relationships, weak or ineffective protections or enforcement of property, human rights, labor or environmental protections) in the subject country that contributes to a cost distortion during the POI/POR.
- Actions by non-governmental entities (e.g., strategic alliances between one or more producers, sales by third country exporters of significant inputs for less than fair value) that contribute to a cost distortion during the POI/POR.
As noted below, for the cost-based PMS provision to apply, these distortions would need to be found "particular".
Determining Whether a Market Situation Is "Particular"
Once the Department has determined that a "market situation" exists, the Department must then determine whether the market situation is "particular." Under § 351.416(e), a market situation will be found "particular" if it "impacts prices or costs for only certain parties or products in the subject country," including "producers, importers, exporters, purchasers, users, industries, or enterprises, individually or in combination" in the subject country. In determining the particularity of a market situation, the Department will consider relevant information related to the: (i) size and nature of the market situation; (ii) volume of merchandise potentially impacted by the market situation; and (iii) the number and nature of the entities affected by the market situation. However, it is important to note that the Department's particularity analysis "does not concern the number of parties or products," but instead "whether the market situation impacts only certain parties or products, as opposed to the general population of parties or products in the subject country." (§ 351.416(e)(1)(i)).
Moreover, § 351.416(e)(1)(ii) explicitly states that the Department can find particularity even if the market situation exists in multiple countries or markets, as long as the Department determines that particularity exists in the subject country. This provision seems to directly conflict with previous CIT and CAFC decisions, where the court had determined that a market situation was not particular because it affected countries and markets other than just the subject country. For example, in NEXTEEL v. U.S, the CIT rejected the Department's finding that Chinese overcapacity and influx of HRC imports contributed to a cost-based PMS of Korean steel prices, as the effects of excess supply was not particular to Korea, but also affected the EU and ASEAN countries (i.e. market situation was not particular).5 Given these previous decisions, it seems likely that this regulatory provision will again be subject to challenge as being contrary to the Act.
Adjustments for Cost-based PMS Determinations
If the Department finds that a PMS exists, § 351.416(f)(1) provides that the Department can make adjustments to correct these distortions in its cost of production calculation. Section 351.416(f)(2) further provides that the Department may rely on "any reasonable methodology based on record information to adjust its calculations," even if it is unable to "precisely quantify the distortion to the cost of production."
Generally speaking, a cost-based PMS adjustment will tend to increase a respondent's dumping margin. If the Department finds a cost-based PMS to exist, the Department will typically adjust the cost of production upwards, which in turn can increase normal value when based on constructed value. All other things being equal, a higher constructed value will result in a higher dumping margin.
Additionally, companies should note that even if the Department determines that a cost-based PMS exists, the regulations allow the Department to decline making a PMS adjustment if it is not appropriate, necessary, or warranted. Section 351.416(f)(3) sets out a three-factor analysis in determining whether an adjustment is "appropriate": (1) whether the cost distortion is sufficiently addressed through another statutory provision, e.g., transactions disregarded or major input rule; (2) whether a reasonable method to quantify an adjustment is not on the record; and (3) whether record information suggests that an adjustment would be unreasonable.
The inclusion of the phrase "another statutory provision" might at first suggest that any cost-based PMS that is the subject of a parallel countervailing duty proceeding should be excluded. Such is not the case. The Department explicitly recognized in its Final Rule that the countervailing of a subsidy in a parallel CVD proceeding does not necessarily constitute a double remedy, meaning that the Department might choose to apply a PMS adjustment even if the Department had already applied a CVD remedy for the cost distortion.
Other Important Takeaways for Cost-based PMS Analysis
While not explicitly provided for in the new rules, the Department confirmed in the Final Rule Notice that it would not apply a cost-based PMS to adjust cost of production for purposes of the sales-below cost test. This aligns with the Federal Circuit's determination in NEXTEEL6 and Hyundai Steel, which affirmed the Court of International Trade's finding that "when normal value is based on home market sales, 19 U.S.C. § 1677b does not permit Commerce to make a particular market situation adjustment to the costs of production for purposes of the sales-below-cost test of 19 U.S.C. § 1677b(b)." Hyundai Steel v. U.S., 19 F.4th 1346, 1352 (Fed. Cir. 2021). However, in the event Congress enacts new legislation permitting such an adjustment, nothing in the new regulation would prevent the Department from applying an adjustment for sales-below-cost test purposes.
Another important takeaway to note is that under § 351.4156(h), the Department may determine that the circumstances that contributed to a finding of a cost-based PMS may also contribute to finding of a sales-based PMS (i.e. prevented a proper comparison of home market/third country sales prices with export or constructed export prices).
Evaluating the Existence of a Sales-based PMS
In addition to the cost-based PMS provisions detailed above, § 351.416 also contains provisions relevant to the sales-based PMS. A sales-based PMS exists when the circumstances in the comparison market prevent sales in that market from being used as a basis for normal value. If the Department determines that a sales-based PMS exists, the Department may rely on constructed value as normal value, as provided under section 773(e) of the Act.
Unlike cost-based PMS, the new regulation does not provide any new analytical framework in determining a sales-based PMS. Instead, § 351.416(c)(1) provides only a non-exhaustive list of examples of conditions that would be considered to a sales-based PMS, such as: (i) an export tax on subject merchandise; (ii) export restrictions of subject merchandise in home market country; (iii) existence and enforcement of regulations that are anticompetitive, and confer special status on certain producers and create barriers to new entrants; and (iv) direct government control over pricing of subject merchandise that is not competitively set.
Similar to the cost-based PMS analysis, a finding of a sales-based PMS is limited to circumstances that occurred during the POI or POR. As noted above, the Department can find a sales-based PMS on the basis of the same facts used to make a cost-based PMS.
Implications of New PMS Regulations on Respondent Companies
While the new regulations provide companies with additional guidance on what to expect in the Department's analysis of a PMS allegation, the various caveats in the new regulations provide the Department with ample discretion to make a PMS determination. In particular, the Department can now make this adjustment even if the Department cannot precisely quantify the distortions caused by the PMS, even if the PMS affects producers in other countries, and even if the practice in question is also subject to a countervailing duty proceeding.
In light of these expansive new rules, we recommend that companies subject to antidumping duty proceedings – or likely to be subject to such proceedings – review their input purchases, and consider the following risk factors for an affirmative cost-based PMS determination. We specifically suggest that companies consider their heightened risk in the following situations:
- Countries and inputs that have previously been subject to PMS allegations
The existence of an affirmative PMS finding in a prior case is strongly predictive of a similar finding in a future case. The Department has found a cost-based PMS to exist in antidumping duty proceedings for the following inputs in the following countries, including:
i. Korea – hot-rolled coil
ii. Argentina – soybeans
iii. Canada – logs
iv. Turkey – hot-rolled coil
v. Indonesia – crude palm oil
vi. Trinidad & Tobago – natural gas
vii. Thailand – hot-rolled coil
viii. India – hot-rolled coil
ix. Germany – electricity
Several of these findings were based on government involvement in the input market in question (i.e., crude palm oil in Indonesia, natural gas in Trinidad & Tobago, electricity in Germany); if these policies have continued, an affirmative PMS determination is even more likely.
While many of these determinations were criticized (and in some cases overturned) by the CIT on appeal due to the Department's use of cost-based PMS for the purposes of conducting the sales-below-cost test, it would take little effort for petitioners to raise similar allegations in future proceedings, and to bolster these allegations based on the guidance provided in the new regulations.
- Whether the domestic market for the input in question contains substantial quantities of imports from China
As noted above, the Department has made affirmative cost-based PMS determinations in several AD cases involving steel inputs. In several of these cases, the Department determined that an influx of imports of Chinese steel products, the substantial market share of Chinese imports in the domestic market, and Chinese government's subsidization of the product in question, had all contributed to cost distortions of the cost of the input in the subject country. Although the CIT eventually rejected this conclusion due to particularity issues (i.e. the market situation affected other countries in addition to the subject country), that consideration has now been removed by the Department's regulations.
- Previous countervailing duty ("CVD") cases where the Department affirmatively determined a program benefitted the respondent and/or the input was provided at less than adequate remuneration
In numerous CVD proceedings, the Department has concluded that a government has provided an input at less than adequate remuneration. In a few instances, in the parallel AD proceeding, the Department has found a PMS with respect to that input. Now that the Department has amended its regulations to specifically eliminate any basis to claim that PMS in those circumstances cannot be raised, we would expect to see more PMS allegations under these circumstances.
Footnotes
1 Regulations Improving and Strengthening the Enforcement of Trade Remedies Through the Administration of the Antidumping and Countervailing Duty Laws, 89 Fed. Reg. 20,766 (Mar. 25, 2024) ("Final Rule Notice").
2 19 U.S.C. § 1677b(e).
3 19 U.S.C. § 1677b(a)(4).
4 Antidumping or Countervailing Duty Order, Finding, or Suspended Investigation; Opportunity to Request Administrative Review and Join Annual Inquiry Service List, 89 Fed. Reg. 35,778 (May 2, 2024).
5 See NEXTEEL Co. v. U.S., 450 F. Supp. 3d 1333, 1341 (Ct. Int'l Trade 2020).
6 NEXTEEL v. U.S., 28 F.4th1226 (Fed. Cir. 2022).
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