By Edward M. Lebow
Special Contributor to The Texas Lawbook
The recession hit Longview, Texas, steel cylinder manufacturer Norris Cylinder Company like a sledge hammer. In October 2008, orders for its high pressure cylinders ceased. In the words of Norris President Jerry Van Auken, “The phone just stopped ringing.” No calls from the big industrial gas companies like Air Gas, Air Liquide, Air Products or Praxair. And certainly no calls from any of the mom and pop welding companies.
Bad business conditions to be sure, but nothing unfair. Everyone was faced with the same situation. However, as 2009 wore on and 2010 began, Van Auken noticed that Norris’s sales were not picking up with the market. Customers were telling him that he would have to reduce his prices by 10, 20 or even 30 percent to get any business. Why? Because the Chinese producer Beijing Tianhai Industrial Company (“BTIC”) was offering its cylinders at rock bottom prices.
The only other U.S. producer of high pressure steel cylinders, Taylor Wharton International (“TWI”), was already on the rocks. It had entered bankruptcy late in 2009. Norris decided to double down on the U.S. market by purchasing TWI’s Huntsville, Alabama plant, a facility that produces smaller cylinders. This would be a nice complement to Norris’s Longview facility that turns out larger cylinders. But if Norris was to survive, it would have to do something about the Chinese onslaught. Import statistics were showing what Norris already knew from the market: Chinese sales were booming and domestic market share was rapidly shrinking.
It was not Norris that first contacted us at Haynes and Boone; we had in fact previously received a call from TWI about exploring an antidumping and countervailing duty (anti-subsidy) trade complaint against BTIC. Unfortunately, TWI was not able to stay in business long enough to seek relief from the unfair Chinese trade practices. Norris, as the last remaining U.S. producer, would have to go it alone, and Jerry Van Auken asked for our advice on whether he had a viable case.
We explained that a successful antidumping complaint would lead, in about a year’s time, to imposition of penalty duties equal to the amount by which the foreign producer was dumping its products into the United States. In other words, the antidumping law provides a variable levy that offsets the unfair trade practice.
Under internationally agreed norms, companies are not permitted to sell products into foreign markets at lower net ex-factory prices (i.e., at lower profit levels) than in their home market. This prevents companies from benefitting from a protected home market where they cover their fixed overhead while they simultaneously sell goods at less than full cost (often only slightly over variable cost) into other countries. If these sales at less than fair value result in injury to the domestic producers in the target country, under WTO rules, they can be offset with antidumping duties. The result is not protectionist; rather it is designed to maintain fair international pricing and promote free trade.
For a non-market economy (“NME”) country such as China, the fair value for dumping purposes is a bit more difficult to ascertain, since home market prices in an NME country are not considered true indicators of market costs and values. Accordingly, a special methodology is used to calculate NME fair values. This methodology requires the U.S. Department of Commerce (“DOC”) to give each factor that goes into the subject merchandise (e.g., steel, plastic, paint, electricity, labor, etc., as well as overhead) a surrogate value taken from a market economy country at an equivalent level of economic development. For years, India had been the source of surrogate values for Chinese products, but recently DOC has turned to a group of six countries including Colombia, Indonesia, the Philippines, South Africa, Thailand and Ukraine.
The countervailing duty law works on similar principles to the antidumping law, except that instead of dumping, it is designed to offset government subsidies that aid exporters in reducing their prices in foreign markets to the detriment of local producers. Although there has been some dispute under U.S. and international law regarding the simultaneous use of both antidumping and countervailing duty laws against NME country exporters, Congress has recently confirmed the practice, and the WTO has not ruled to the contrary.
Under the U.S. legal system, while the DOC is responsible for calculating the amount of dumping and subsidization, the U.S. International Trade Commission (“ITC”) determines whether the domestic producers of merchandise “like” the imports are being materially injured by the dumped or subsidized merchandise, since without injury to domestic producers, WTO rules do not permit the imposition of penalty duties.
When we met with Norris Cylinder early in 2011, we set out to calculate the fair values for Chinese high pressure steel cylinders of different sizes and to compare those values with what we estimated to be BTIC’s U.S. selling prices. We also investigated the subsidies that had previously been reported as available to Chinese producers of fabricated steel products, including preferential loan rates, lower tax rates, and most important, access to steel at less than adequate remuneration. With this information, we were able to begin to put together antidumping and countervailing duty petitions for Norris.
In addition, to demonstrate material injury to the domestic industry, which by this time was only Norris, we gathered data on sales volumes and values, financial performance, and lost sales and lost revenues, with correspondence showing how in specific instances Norris either lost sales to the Chinese on the basis of price or had to lower its prices in order to retain business.
On May 11, 2011, on behalf of Norris, we filed antidumping and countervailing duty petitions with the DOC and the ITC. In October, DOC made its preliminary determination of subsidization and two months later it made a preliminary finding of dumping. These preliminary determinations required BTIC and other Chinese producers to post cash deposits with each U.S. entry of high pressure steel cylinders, and Norris immediately saw its business improve, as purchasers turned away from the now higher-priced Chinese imports. In May 2012, final antidumping and countervailing duty rates totaling in excess of 22 percent were set by DOC. On May 1, the ITC held a public hearing to consider arguments whether Norris had in fact been injured by the dumped and subsidized imports.
Because the ITC normally uses a three-year period of investigation, the Chinese respondents argued that Norris’s business had improved since 2009, so it was not actually injured. For Norris, we placed the trend since 2009 in the context of the recovery from the recession and the decline in domestic industry performance since the years prior to 2009, with particular emphasis on the history of Chinese underpricing and the declining share of the U.S. market held by Norris.
On May 30, the ITC voted unanimously that Norris had indeed been materially injured by the Chinese imports, and final antidumping duty orders will go into place within a few weeks. These orders are valid for a minimum of five years and can be extended for additional five-year terms if at each fifth anniversary the domestic industry is able to demonstrate a likelihood of recurrence of material injury in the event the orders were to be revoked.
For their part, the Chinese producers are able to see the penalty duties reduced if they cease accepting the identified subsidies and if they discontinue their dumping into the U.S. market. On the other hand, if the Chinese producers continue benefitting from subsidies, or if they increase their dumping, the applicable penalty duties will be increased. The risk of increased duties, which are calculated annually and imposed retroactively, serves as a powerful inducement for the Chinese to price fairly.
Notwithstanding this pressure on the Chinese producers, since U.S. importers of record are responsible for paying duties, the existence of antidumping and countervailing duties exceeding 22 percent, and the potential for even higher duties imposed retroactively, serve as strong deterrents against importing Chinese cylinders. Thus, Norris can expect to see both increased sales volumes and higher prices. It now appears likely that the U.S. industry will survive and high pressure steel cylinder production will continue in Texas and Alabama. Similar support is available for other Texas industries that may find themselves under assault from underpriced Chinese imports.
Edward M. Lebow leads the International Trade Practice Group at Haynes and Boone and is the former assistant General Counsel of the U.S. International Trade Commission. His email is ed.lebow@haynesboone.com.
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