Research and analysis

Economic research into the circumvention of trade remedies - accessible summary

Published 16 November 2022

This document summarises and introduces the full report prepared by Frontier Economics for the Trade Remedies Authority.

The Trade Remedies Authority (TRA) commissioned Frontier Economics to undertake research into the circumvention of trade remedies and, specifically, methods that are used to determine the existence, form and extent of circumvention. Circumvention refers to actions taken to avoid duties imposed as a consequence of anti-dumping or countervailing measures. There is no common international definition of what actions count as circumvention. Indeed, many jurisdictions do not identify circumvention specifically within their legal frameworks for trade remedies. Those that do tend to identify circumvention in terms of activities by parties to modify product, producer or origin characteristics in a bid to avoid duties.

Disclaimer: This report has been prepared by Frontier Economics. All views and analysis are the sole responsibility of Frontier Economics and should not necessarily be attributed to the UK Trade Remedies Authority (TRA) or to any of the authorities in the countries reviewed.

What do we mean by the circumvention of trade remedies?

Global trade rules permit, but do not require, countries to undertake trade remedy measures. These include the imposition of temporary duties through anti-dumping or countervailing action. Because such duties are product- and firm-specific, they create incentives for businesses to exploit the ‘wedge’ between world and protected prices by circumventing the duties.

There is no internationally settled definition of circumvention in the context of trade remedies. The United Kingdom (UK) follows the approach of the European Union (EU) and defines circumvention as arising when there is a change in the pattern of trade that results from specific activities undertaken by businesses for the specific purpose of avoiding the payment of duties resulting from the imposition of duties. Most other jurisdictions that recognise the concept of circumvention in their legislation follow a similar approach, i.e. they attempt to link a change in the pattern of trade to certain identified activities. Jurisdictions vary in terms of the activities that are considered, the methodologies for assessing that these activities are taking place and evidentiary requirements. Various attempts at developing multilateral rules on anti-circumvention action have thus far failed because of divergences in views regarding the definition and indeed materiality of circumvention.

Why do we need an economic analysis of approaches to circumvention?

Most jurisdictions require an analysis of changes to trade patterns as a starting point of circumvention investigations. This is a legal stipulation that requires empirical analysis. The analysis will need to take into account the fact that a range of economic factors can drive changes in trade patterns. In particular, duties, including trade remedy duties, can lead businesses to relocate investment and production for reasons that are consistent with economic efficiency. Indeed, empirical analysis shows that trade remedy duties are associated with trade diversion and trade deflection in a manner analogous to the effects of tariff preferences.

Such changes are not a form of circumvention. Mistakenly extending trade remedy duties on the imports of new products and/or countries could lead jurisdictions to violate their World Trade Organization commitments and is likely to amplify the economic harms generally attributed to trade remedies and other forms of contingent protection. It is therefore in the UK’s interest to develop a methodological toolkit that allows it to ascertain when genuine circumstances of circumvention arise. Moreover, this concern dovetails with the rationale underpinning the economic interest test that the Trade Remedies Authority is required to follow. A flawed decision on circumvention may undermine the calculus of interests underpinning the original duty.

What we know about products that are subject to anti-circumvention duties

We considered anti-circumvention action in a range of jurisdictions, with a particular focus on the EU, the United States, Canada and Australia. Each of these jurisdictions has specific frameworks for circumvention. One common feature that emerges is the relative degree of concentration of product categories that are subject to anti-circumvention duties.

The distribution can already help to identify risks in relation to particular products. The experience of the EU is particularly relevant for the UK given commonalities in trade structure and routes with the EU, and that it has adopted a similar trade remedy regime. This experience also suggests that the most common form of circumvention the UK will likely encounter is through third-party assembly operations and transhipment.

What countries are involved in circumvention?

The country most frequently engaged in circumvention in the United States, EU, and Australia is the People’s Republic of China (PRC). In the EU, the PRC was involved in 29 of the 32 cases in the period 2009-2021 in which the EU imposed duties, while for the United States the figure is 22 out of 32 and Australia it is 5 out of 8. The result is unsurprising since the PRC is also the most frequent target of circumvention inquires. Its non-market economy status also means that it is usually exposed to higher anti-dumping duties. Empirical evidence based on existing cases suggests that circumvention is positively related to duties.

A number of cases in which the PRC was the circumventor involved third countries as points of assembly operations, or (in the case of the EU) transhipment. For such cases in the United States and the EU, countries from the ASEAN region were the preferred location for third party assembly operations or transhipment. In cases in the United States, Vietnam featured in around a third of the cases. In EU cases, Malaysia featured in a third of the cases and other ASEAN countries (notably Cambodia and Vietnam) were involved in around 40%. These trends point to the existence of a regional circumvention “hub” for cases involving the PRC as the circumventor.

How can findings regarding circumvention be made more robust?

Authorities in the jurisdictions studied in this report typically base their decisions on a range of evidence. This includes trade data, data retrieved from written question-response processes and site visits, and different types of qualitative information, e.g. on market demand and end-use patterns or the organisation of production. The types of information and methodologies are dependent on the specifics of the case. This points to the value of a toolkit approach.

The key challenge is to ensure that the implementation of such an approach is robust. The use of trade data is a necessary starting point, given legal requirements to attribute changes in the pattern of trade to circumvention activities. Several steps can be taken to increase the robustness of analyses based on trade data. These include the analysis of trade between countries that are the object of investigations as well as trade with other countries that might serve as comparators. This enables us to establish whether there are broader trends associated with observed changes which are supposedly attributable to trade remedies, and it may provide alternative sources of explanation for observed changes to the pattern of trade.

Widening the use of trade data in the manner suggested above increases the robustness of the analysis. That in turn can provide a richer context for subsequent stages of the inquiry, notably the question- response process. For example, in a third-party assembly or transhipment case, if trade patterns between the country under investigation and a range of countries are considered, producers in the country under investigation can be asked to describe the export pathway to these markets and how these relate to production and investment decisions. These responses can then be assessed against wider trade trends to see if normal commercial drivers explain observed trade patterns.

Given constraints surrounding the availability of official data on these matters, the bulk of evidence on industrial organisation and production is derived from commercial information, specifically financial accounts of the businesses under investigation. This information is retrieved through requests for information, typically accompanied by site visits.

The analysis of financial information requires significant capacity, notably in forensic accounting and auditing. For the UK and EU, there are also specific requirements in relation to assembly operations, namely the requirement to establish that the value of parts from the circumventing jurisdiction exceeds 60% of the total value of parts, and that the cost of parts is not greater than 25% of manufacturing costs. Increasing the robustness of findings is partly a question of capacity building, and partly a question of access to external data sources that can help to verify the reliability of data, particularly cost data, that are presented to the authorities.

There are substantial challenges that need to be met, most notably in making judgements on cost-allocation practices in multi-product operations; a challenge not unique to trade remedies and that has indeed been widely documented in the context of regulated industries.

Possible elements of a toolkit for circumvention cases

The two steps that are specific to a circumvention inquiry and that place the heaviest demands on analytical capacity are, respectively, ascertaining that there has been a change in the pattern of trade as a result of trade remedies, and to attribute these to particular circumvention activities.

We propose a toolkit describing the evidence needed to generate robust conclusions under each of these steps and assess the overall strength of evidence through a ‘traffic light’ system (Red, Amber, Green, or RAG). Green in this case means that the evidence is sufficiently robust to make a determination, either negative or positive, regarding a change in the pattern of trade.

We note that for third-party assembly cases, production and cost data is non-optional given the threshold set by the legislation. Information retrieved from written requests or site visits is clearly of fundamental importance in these cases and cannot be substituted for by qualitative evidence. Written responses and site visits are likely to be important in channelling cases as it is difficult to see how findings under this category can be established in the absence of firm-level data.

Considerations for the UK TRA

A review of practices and approaches to anti-circumvention suggests that decision-making requires considerable judgement in weighing multiple types of evidence. The capacity to do this develops over time through experience. The main challenge for a newly established institution such as the TRA is therefore to rapidly put in place a process that ensures judgements are made on a robust basis.

Several steps can be taken to supplement what the TRA may be already doing in this space:

• Actively monitor trade patterns in products and jurisdictions that are known areas of risk. The distribution in Figure 1 provides some guidance as to the products that feature frequently in circumvention cases. An analysis of the three deep dive countries suggests PRC dominates anti-circumvention cases that lead to the imposition of measures. PRC is the also the most frequent target of trade remedies, in these countries and globally (it accounted for a third of all anti-dumping measures imposed globally in the period 2009-21, according to the WTO’s anti-dumping database). That in part explains why it features prominently in anti-circumvention cases. But the numbers suggest that the PRC’s share of circumvention cases is higher than its share of anti-dumping cases in all of the three deep dive jurisdictions, suggesting that businesses in the PRC targeted by trade remedies have a greater propensity to engaged in circumvention. The analysis of EU anti-circumvention cases involving the PRC highlights the role played by South and South-East Asia as a ‘hub’ for circumvention. Recognising products and jurisdictions that present a more material risk of circumvention can help to increase preparedness and can inform engagement with industry.
• Recognise that building expertise in circumvention processes is a complex task. It is necessary to invest in developing in-house expertise regarding products and jurisdictions or to identify ways of accessing such expertise, but capacity building also involves learning-by-doing. In addition to reviewing relevant cases involving the products and jurisdictions, it is useful to complete ex-post reviews of cases (as had been done in this report) to consider the robustness of conclusions reached as further data, notably on trade patterns, emerge.
• Ensure that there is sufficient and substantial expertise in the forensic analysis of company accounts, and processes for making judgements on matters such as cost allocation, that can be deployed in the context of a circumvention inquiry.
• Liaise with authorities in other jurisdictions to understand approaches, share ‘best practice’ and build capacity. Authorities interviewed in the four jurisdictions of interest – Australia, Canada, the EU and the United States – all expressed a willingness to collaborate with other authorities on circumvention matters. Specifically explore collaboration with the European Commission given overlaps in trade remedy concerns and commonalities in legislation.