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Financial Management Digest.

CURRENCY CONVERSION IN THE ANTI-DUMPING AGREEMENT

(Contributed by Dr. Jong Bum Kim (*), Ministry of Foreign Affairs and Trade: Korea) (*)

The Anti-dumping Agreement provides that a product is considered as being dumped if it is exported to another country it less than its normal value, the comparable price of like product when destined for consumption in the exporting country. In order to calculate the dumping margin, an investigating authority compares the export price with the normal value. This price comparison usually involves the conversion of currency of either the export price or the normal value. Although the Agreement permits the conversion of currency when it is necessary for the price comparison, it does not provide sufficient guidelines to guard against potential distortion in the dumping margin calculation resulting from conversion. Unless the conversion is done with an appropriate exchange rate, an investigating authority's price comparison potentially results in a spurious estimate of dumping margin, in violation of the fair comparison requirement of Article 24 of the Agreement- - Agreement on Implementation of Article VI of the General Agreement on 'Tariffs and Trade: 1994 (Anti-Dumping Agreement).

* The proposal, however, was not adopted in two respects. First the proposal specified that the official exchange rate in the exporting rate in the exporting country should be used. This specification, however, was not included in the Agreement because countries, including the U.S.A. would need to change their practice of using their own country's official exchange rate for currency conversion purposes,

* Second the proposal-specified that the official exchange rate on the date of sales contract for export sales should be used for currency conversion. The official exchange rate in the exporting country may be significantly different from the rate actually used by the exporter. However, this possibility is not-considered by the proposal. The proposal is implicitly in support of the notion that exporters actually use the official exchange rate that is closely identical to the market exchange rate.

The dumping margin will be calculated based on the difference between the export price and the normal value that are denominated in the exporting country's currency. In contrast, if the dumping margin is calculated in the importing country's currency, the investigating authority needs to convert export prices to its own currency using the exporting country's official exchange rate.

Article 2.4.1. of the Agreement provides that the investigating authority shall allow exporters at least 60 days to have adjusted export prices to reflect sustained movements in exchange rates during the period of investigation. Thus, the exporters are given a grace period of 60 days to adjust the export prices in response to either a sustained depreciation or a sustained appreciation of the exporting country's currency. When an exporting country's currency appreciates, the-normal value rises and the dumping margin increases. Therefore, the exporter needs to adjust the export or domestic sales price in order to reduce the dumping margin arising from the exchange rate condition. In contrast, in a sustained depreciation of exporting country's currency, the normal value falls relative to the export price, thus reducing the dumping margin. Since the exporter benefits from the currency depreciation, he has no reason to make any adjustment. In sum, although the "sustained movement" in Article 2.4.1 does not explicitly rule out the case of exchange rate depreciation, it can be best interpreted as dealing only with the sustained appreciation of the exporting country's currency.

More important, Article 2.4.1 is not addressing me issue of choosing the correct exchange rule that reflects the true relative value of the currency.

Exchange Rate Conversion in the U.S.A.

The U.S. Amended Title VII of the Tariff Act of 1930 ("Act") in order to implement the provisions of the Anti-dumping agreement. The amendment included provisions on currency conversion that are largely identical to Article 2.4.2 of the Agreement. According to the amendment.

* the U.S. administering authority shall convert foreign currency into U.S. dollars using the exchange rate in effect on the date of sale of the subject merchandise.

* It also stipulates that when a currency transaction in the forward markets is directly linked to an export sale, the exchange rate specified with respect to such currency in the forward sale shall be used to convert the foreign currency.

The U.S. implementation law differs from the Agreement in clearly providing that a price level denominated in the exporting country's currency should be converted to U.S. dollars.

The Tariff Act of 1930, as amended, and the regulations of the Department of Commerce ("commerce") as set forth in Title 19 of the Code of Federal Regulations ("CFR") do not provide the details necessary to define fluctuations instead the Department's policy guidelines describe the exchange rate model that defines fluctuations. The guidelines introduce the concept of a benchmark exchange rate to distinguish the "normal" exchange rate from the "fluctuating" exchange rate. The benchmark is a moving average of the actual daily exchange rates for the eight weeks immediately prior to the date of actual daily exchange rate to be classified. It the actual exchange rate falls out of the two-and-a-quarter per cent band of the benchmark exchange rate, the actual daily rate is classified as fluctuating. If the actual exchange rate falls within the band, the actual daily rate is classified as normal. If an actual daily exchange rate is classified as normal, the daily exchange rate is the official exchange rate for that day. However, if an actual daily rate is classified as fluctuating, he benchmark rate is the official rate for that day.

Exchange Rate Conversion in European Union (EO)

The EU amended its anti-dumping legislation codified in Council Regulation 2423/88 in order to conform to the Agreement. The previous Regulation contained both anti-dumping, and countervailing duty provisions. However, the amendment separated the two, and the anti-dumping regulation has been replaced by Council Regulation 384/96 (EU anti-dumping regulation) of 22 December 1995. Article2 (10)(i) of the EU anti-dumping regulation adopted verbatim Article 2.4.1 of the Agreement dealing with currency conversion does not exist. The EU practice since the Uruguay Round implementation has not departed significantly from the past practice that adopts the average monthly exchange rate as the official exchange rate.

Article 2(10)(i) of the EU anti-dumping regulation also additionally defines the date of sale as: the date of invoice but the date of contract, purchase order or order confirmation may be used if these more appropriately establish the material terms of sale.

In contrast to the Agreement, the EU anti-dumping regulation puts priority on the use of the date of invoice as the date of sale over three other choices: the date of contract, purchase order or order confirmation. By taking the average monthly change rates as the official rate, the EU's practice smooths the exchange rate fluctuation that occurs over a month period. Under this method, the determination of the official exchange rate would critically depend on the month of which the exchange rate is based, thus resulting in a discrete jump from a month to another month. In particular, when there exist sustained exchange rate movements, the discrete jumps will be magnified.

The EU's method of determining the official exchange rate over not allow exporters 60 days to adjust export prices to reflect sustained movement in exchange rates during the period of the investigation as required by Article 2.4.4. of the Agreement. An exporter who exports in the beginning of a month when there exists a sustained appreciation of the exporting country currency later in the month would be unfairly penalized for the exchange rate appreciation later in the month. In fact, the exporter will be subject to the average of daily exchange rates during the month without the benefit of a grace period. Compared to the US method which adopts the smoothed daily exchange Tate prior to the existence movement as the official rate, the EU's method greatly enlarges the dumping margin when there exists a sustained appreciation of the exporting country's currency.

Distortion from Exchange Rate Conversion

Theoretically, as long as the exchange rate used reflects the true relative value of the currencies, it should not matter whether the normal value in the exporting country currency is converted to the importing country's currency, or whether the export price in the importing country's currency is converted to the exporting country's currency. Nevertheless, it has been argued that the domestic sales price should be compared with the export price after converting the proceeds from exports into the currency of the exporting country. On the face of it, since the purpose of the anti-dumping investigation is to determine whether an exporter receives more or less for its export sales than for its domestic sales, it may seem appropriate to look at what the exporter receives. However, the argument would be valid if the dumping determination involves only the calculation of dumping margin.

Since the anti-dumping investigation also determines whether the dumped imports cause material injury to the producers of like products in the importing country, it would also be responsible to convert the normal value in the exporting country currency into the currency of an investigating country. Pursuant to Article 3.2 of the Agreement, the investigating authorities shall consider whether there has been a significant price undercutting by the dumped imports as compared with the price of the like product of the importing member. To determine whether there has been price undercutting by the dumped imports, it is arguably better to keep the price of imports in the importing country's currency and compare it with the price of a like domestic product of the importing country so that the determination of price-undercutting is done in the importing country's currency, To preserve the consistency in the price comparison, the comparison for dumping margin should also be donein the importing country's currency. Therefore, following this line of argument, the normal value in the exporting country's currency should be converted to the importing country's currency.

A serious distortion arises, not from the direction of the conversion of currency but from the appropriate choice of the exchange rate on the date of sale. An investigating authoritymay easily fail to choose the exchange rate on the date other than the appropriate date of sale. Although the Agreement requires that investigating authorities should compare sales made as nearly as possible at the same time and at the same volume, the volume of export sales on a given period may differ from home market sales to export sales. When the dates of sales do not coincide and when exchange rates are varying rapidly, the two exchange rates could be substantially different. As a result, the investigating authority is faced with the choice of the exchange rate either on the date of sale of like products in the home market or the exchange rate on the date of sale in the export market.

The above example illustrates the distortion arising from using an inappropriate exchange rate for conversion. In the above table, only one unit is sold in each of the sales A, B, C and D. Between B (October) and D (November), there was a significant appreciation of the exchange rate. The exchange rate on the date of sale in the home market is applied to calculate the normal value in US dollars.

NV = 112 (mil. Won + 2 mil. Won) / (1/2* (1,000 Won/$ + 2,000 Won/$0) = $ 1,000.

Since the averate export price is $ 1,0000, the estimated dumping margin is zero.

Alternatively the normal value is calculated using the exchange-rate on the date of export market sale;

NV = 1/2 (mil. Won + 2 mil. Won) / (1/2* (1,000 Won/$ + 1,500 Won/$0) = $ 1,200.

Therefore, the dumping margin is 200 dollars.

The analysis therefore shows that an estimated dumping margin varies significantly depending on whether the exchange rate on the date of sale in the home market or on the date of sale of the dumped goods in the importing country is used. Under an exceptional circumstance where the dates and volumes of export sales arid the dates and volumes of home market sales match or exchange rates do not change during the investigating period, the above discrepancy does not arise. However; in reality exchange rates do not match and an inappropriate choice of the exchange rate for conversion results in a spurious dumping margin,

With regard to the choice of the exchange rate for conversion, the Agreement requires that when conversion of currency is needed.
such conversions should be made using the rate of exchange on the date
of sale, provided that when a sale of foreign currency on forward
market is directly linked to the export sale involved, the rate of
exchange in the forward sale shall be used.


The date of sale should be understood as the date of sale of the product in the market- If the price of a home market product denominated in the exporting country currency is converted into the currency of the importing country, the exchange rate on the date of sale in the home country should be used. Conversely, if the price of an export product on the importing country currency is converted into the exporting country currency; the exchange rate on the date of sale in the importing country should be used. The exchange rate used for converting the price of a product should be chosen to reflect the true relative value of the currencies at the time of the sale of the product, because the price, which is the subject of the conversion, is the value of the product in a currency at the time of the sale of a product. The exchange rate at the time of the sale of the subject merchandise is the appropriate exchange rate. As a result of using inappropriate exchange rates a distortion in fair comparison occurs. The distortion is especially large under a rapidly changing exchange rate condition where the exchange rates on the date of home country sale, and those on the date of the comparable export sale of the subject merchandise, are different. The problem, however, does not arise if the exchange rate at the time of the home market sale of the merchandise is used to convert the normal value in the home market currency, to the importing country's currency.
TABLE

Sale       Export Price   Exchange Rates on the        Sale
           (US$)          Date of Sale in the Export
                          Market Won/Dollar

A (Jan.)   $1000          1,000                        C (Jan.)
B (Oct.)   $1000          1,500                        D (Nov.).

Sale       Exchange Rates on the      Home Market
           Date of Sale in the Home   Korean Won
           Market (WonnDollar)        Prices

A (Jan.)   1,000                      1 mil.
B (Oct.)   2,000                      2 mil
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Publication:Journal of Financial Management & Analysis
Article Type:Report
Date:Jan 1, 2018
Words:2462
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