Anti-dumping and countervailing orders should only have effects on specific merchandise manufactured in a specific country which is identified in the orders. For instance, if a product manufactured in Country A is subject to Country B's anti-dumping order, the same type of product manufactured by Country X's company that is affiliated with Country A's producer/exporter is not covered by the order. It is however true that the aforementioned cross-border production arrangements already exist in all types of industries and merchandise for the purpose of reducing production costs and maximizing operational efficiency. Therefore, it becomes more impossible for anti-dumping and countervailing measures to achieve the expected level of remedy to the domestic industry and effectively eliminate the material injury suffered by the domestic industry owing to dumped or subsidized imports.
In response to the situation mentioned above, the anti-circumvention issue has been a hot topic discussed among WTO members. Some members have begun to engage in the legislation and investigation of circumvention, among which the United States' circumvention legislation is one of the most comprehensive and frequently-used ones. Especially, as of 2016, the United States imposed anti-dumping and countervailing duties on imports of certain Corrosion-Resistant Steel ("CORE") manufactured in Taiwan and the Republic of Korea. Subsequently on December 26, 2019, the United States Department of Commerce ("USDOC") determined to extend these duties to the CORE exported from Vietnam to the United States which is manufactured from hot-rolled steel and/or cold-rolled steel (collectively "Input Substrate") manufactured in Taiwan and the Republic of Korea because the Vietnamese exporters are considered to have circumvented the anti-dumping and countervailing duties payable for the CORE entered into the United States from Taiwan and the Republic of Korea ("Investigation").
Exporters have believed that the processing of merchandise conforming to the extent of substantial transformation under the Rules of Origin should not give rise to a circumvention concern. Taking this Investigation as an example, the physical characteristics of the Input Substrate have changed during the processing into CORE, and the first six digits of the tariff codes of the Input Substrate and the CORE are different. Therefore, the processing activities from the Input Substrate to the CORE have met the "substantial transformation" requirement and the country performing such processing activities is the origin of the CORE. In fact, USDOC had previously also recognized that the substantial transformation of a substrate happens through galvanizing or cold-rolling process. Therefore, in the Investigation, it seems reasonable for Vietnam to be the origin of the CORE since the processing in Vietnam should meet the substantial transformation requirement under the origin rules.
As discussed above, the United States' anti-dumping and countervailing orders cover only the CORE manufactured in Taiwan and the Republic of Korea. The CORE produced in Vietnam has Vietnam as its origin is in line with the origin rules of the United States, and there should be no circumvention of anti-dumping and countervailing duties applicable to Taiwan and the Republic of Korea. Unfortunately, such understanding and interpretation may comply with the United States' origin rules, but overlook the circumvention issue coming along the supply chain of the input material.
1.Factors for Determination of Circumvention in the United States
In 1988, the United States introduced Article 781 into the Tariff Act of 1930 ("Anti-circumvention Provisions") to define four types of circumvention as well as their determining factors. In the Investigation, the CORE was completed in Vietnam, a foreign country other than Taiwan, the Republic of Korea and the United States, and may be the type of circumvention "merchandise completed or assembled in other foreign countries" under the Anti-circumvention Provisions. To determine whether an arrangement is circumvention "merchandise completed or assembled in other foreign countries," all the factors below must be examined:
(1)Merchandise imported into the United States is of the same class or kind as any merchandise produced in a foreign country that is the subject of issued anti-dumping or countervailing duty orders;
(2)before importation into the United States, such imported merchandise is completed or assembled in another foreign country from merchandise which is subject to issued anti-dumping or countervailing duty orders;
(3)the process of assembly or completion of the merchandise in the foreign country is minor or insignificant;
(4)the value of the merchandise produced in the foreign country to which the antidumping duty order applies is a significant portion of the total value of the merchandise exported to the United States; and
(5)the administering authority determines that action is appropriate under this paragraph to prevent evasion of such order or finding.
The "a significant portion of the total value" referred to in Factor (4) above is not clearly defined in the Anti-circumvention Provisions, and has to be determined by the DOC according to the facts collected on a case-by-case basis. On the other hand, the Anti-circumvention Provisions require that the USDOC take into account the facts below in determining "the process of assembly or completion of the merchandise in the foreign country is minor or insignificant," i.e., the factor (3) above:
A.the level of investment in the foreign country;
B.the level of research and development in the foreign country;
C.the nature of the production process in the foreign country;
D.the extent of production facilities in the foreign country; and
E.whether the value of the processing performed in the foreign country represents a small proportion of the value of the merchandise imported into the United States.
In addition, the USDOC is also required by the Anti-circumvention Provisions to consider the following facts:
i.the pattern of trade, including sourcing patterns;
ii.whether the manufacturer or exporter of the merchandise is affiliated with the person who uses the merchandise to assemble or complete in the foreign country the merchandise that is subsequently imported into the United States; and
iii.whether imports into the foreign country of the merchandise have increased after the initiation of the investigation which resulted in the issuance of such order or finding.
2.Compliance with Rules of Origin May Still Trigger Circumvention
Although the United States' origin rules also share the concept of "substantial transformation," no law in the United States provides clear standards or criteria that meet the term "substantial transformation". In practice, the origin of merchandise is usually determined by whether the "name", "characteristics" and "use" of the merchandise are substantially transformed. In other words, in the United States, even if the first four or six digits of the tariff codes of the merchandise and its material are different, or if the value added from the processing activities has reached a certain percentage of the total value of the merchandise, it does not necessarily conclude that the substantial transformation requirement has been met under the United States' origin rules.
More importantly, after the introduction of the Anti-circumvention Provisions in 1988, the USDOC is statutorily required to examine each of the factors stipulated therein for determining whether a particular act constitutes circumvention, and is no longer bounded by the "substantial transformation" standards commonly accepted by most countries including the United States. This means that regardless of whether the processing activities in a foreign country are considered substantial transformation, these activities are circumventing an existing anti-dumping or countervailing order and should be included in the scope of the order if they meet the five factors identified above.
3.Taiwanese Exporters Should Include Anti-circumvention Investigation Risk into Global Production Arrangements
The number of anti-circumvention investigations has been increasing in recent years. Particularly, the United States has been more active in investigating steel products since it imposed the Section 232 duties on imported steel and aluminum products. The USDOC, for instance, had determined to take anti-circumvention measures against the CORE produced in Vietnam from the Chinese Input Substrate before the Investigation. The USDOC also initiated an anti-circumvention investigation on the CORE produced in Malaysia from the Taiwanese Input Substrate. Both investigations indicate that the United States is less tolerant of circumventing anti-dumping and countervailing duties.
In sum, Taiwanese exporters should include the risk of circumvention in their assessments in arranging cross-border production, including the timing of making investments in a foreign country, the capital invested in equipment and R&D, and the role and importance of the processing activities in a foreign country. Such assessment will gain benefits of avoiding unnecessary anti-circumvention investigations that may incur considerable amount of anti-dumping or countervailing duties, and even worse, lead to loss of important exporting markets.