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Canadian pork industry faces long and costly litigation battle over U.S. countervailing and dumping challenge

by 5m Editor
1 August 2004, at 12:00am

By Randy Duffy - Better Pork Magazine - On April 8, the U.S. Department of Commerce announced its decision to initiate antidumping and countervailing duty investigations on imports of live swine from Canada. If the case goes against Canada, the export market for Canadian pigs could take a hit and a new and far-reaching precedent could be set in U.S. relations with its trading partners.

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On March 5, 2004, the U.S. National Pork Producers Council (NPPC) filed a petition with the U.S. Department of Commerce (DOC) and the U.S. International Trade Commission (ITC) requesting countervailing and antidumping duties against live swine from Canada. The petition alleges that live swine from Canada are being, or are likely to be, sold in the United States at less than fair value and that the federal and provincial governments in Canada are providing countervailable subsidies with respect to the manufacture, production and export of live swine. Furthermore, the petition alleges the U.S. swine industry is being materially injured by these imports from Canada. Duties cannot be imposed until after a series of determinations on subsidization and dumping are made by the DOC.

The ITC investigates and determines whether injury to the U.S. domestic market has occurred because of the imports from Canada. The period of investigation is Jan. 1 to Dec. 31, 2003.

There are several key issues in this petition:

1. Countervail. Countervail is not new to the Canadian swine industry. Canada fought a battle from 1985-1999 over countervailing duties imposed by the United States on live pig imports from Canada.

Countervailing duties are imposed to protect U.S. domestic industries from injury caused by imports that have benefited from foreign government subsidies. Subsidies that provide a benefit and are specific to an enterprise or industry are countervailable. Subsidies that are generally available and not specific to an enterprise or industry are not.

Past experience with countervail has made the Canadian industry determined not to have any government programs unless they were acceptable under international trade rules. And, with the exception of a couple of isolated provincial programs, government programs available to the swine industry are for the most part whole-farm income programs viewed as falling within international trade rules.

However, the U.S. petition alleges the federal and provincial governments in Canada have provided subsidies to the Canadian swine industry, including substantial income protection and stabilization payments, investment incentives and preferential financing programs.

An interesting item in U.S. trade law is that the petitioner (in this case the U.S. swine industry) only has to allege that countervailable subsidies may exist or may have been used in order for a petition to be filed requesting an investigation by the U.S. Department of Commerce.

2. Dumping. This is a new issue for Canadian producers. Dumping is selling a product in the U.S. market at prices below those charged for a comparable product in the producer's home market (Canada), or at prices below the cost of producing that product (cost of production in Canada). The concept of dumping specifically is selling a product in the U.S. at a price below "normal value." Normal value is defined as:

  • the price in the country of origin or "home market" (Canada)

  • the price in a third market

  • based on a constructed value (cost of production plus selling, general & administrative plus profit).

The dumping margin is the difference between the normal value and the price in the U.S. market. The dumping investigation will look at several calculations. One will be the comparison of prices received for Canadian imports in the United States (U.S. market net price) with the price received by Canadian producers in the Canadian domestic market (home market sales price, also referred to as the normal value). If the price received by Canadian imports in the U.S. market is less than the price received in the Canadian domestic market, this may meet one of the definitions for dumping. Table 1 shows some calculations included in the petition for this test, comparing the Canadian domestic price with the price received by Canadian imports in the U.S. market. The petition alleges that Canadian finish pigs are being sold in the United States at prices nine per cent below the market price in Canada. Feeder pigs are alleged to be sold at prices 25.33 per cent lower.

A second test compares the home market sales price in Canada with the estimated cost of production in Canada to see if pigs are being sold below their cost of production. Table 2 shows calculations included in the petition for this test. If the home market sales price is below the cost of production, this also may meet one of the definitions for dumping. Table 2 alleges that Canadian producers are selling their finish pigs and feeder pigs below their cost of production by 17.92 per cent and 24.24 per cent respectively. The home market sales price and cost of production information comes from the Swine Enterprise Budgets reported by the Ontario Ministry of Agriculture and Food, since the budgets are one of the few public sources of data available and the petition states that "petitioners do not have access to information concerning Canadian producers' actual live swine COP data."

Table 1. Estimated Price-To-Price Margin Calculations, 2003
Finish Pig Feeder Pig
1. Home market sales price (C$) $137.19 $51.35
2. Exchange rate (US$/C$) 0.727047 0.727047
3. Normal value (US$) (1 x 2) $99.74 $37.33
4. U.S. market net price (US$) $91.50 $29.79
5. Estimated unit margin (US$) (3 - 4) $8.24 $7.54
6. Estimated unit percentage (5 / 4) 9.00% 25.33%
Source: Live Swine from Canada Antidumping and Countervailing Duty Petition, Canada AD Exhibit 1. Notes: Home Market Sales Price: Canadian domestic price (source: OMAF Swine Enterprise Budgets) Normal Value: Canadian domestic price in US$ (home market sales price x exchange rate) U.S. Market Net Price: price of imports in U.S. market (source: ITC) Estimated Unit Margin: Normal value - U.S. Net Market Price Estimated Unit Percentage: Estimated Unit Margin/U.S. Market Net Price.

Table 2. Home Market Below Cost Test, 2003
Finish Pig Feeder Pig
1. Home market sales price (C$) $137.19 $51.35
2. Cost of production (C$) $167.13 $67.78
3. Amount price is below COP (C$) (2 - 1) $29.94 $16.43
4. Percent price is below COP (3 / 2) 17.92% 24.24%
Source: Source: Live Swine from Canada Antidumping and Countervailing Duty Petition, Canada AD Exhibit 6 Notes: Home Market Sales Price: Canadian domestic price (source: OMAF Swine Enterprise Budgets) Cost of Production: Canadian cost of production (source: OMAF Swine Enterprise Budgets) Amount Price is Below COP: Cost of Production - Home Market Sales Price Percent Price is Below COP: Amount Price is Below COP / Cost of Production.

3. Material injury. The U.S. swine industry claims that material injury is occurring as a result of the increased Canadian imports. The U.S. industry has decreased its production in order to try and cause U.S. domestic prices to increase, but the increased imports have allegedly caused the anticipated price increase not to happen. The United States alleges that the Canadian industry has grown, despite two years of low prices, because of substantial government subsidies.

Material injury occurs if the investigation shows that the U.S. industry has suffered decreased prices and loss of domestic market share due to unfairly traded imports.

Once the investigation is complete, and if countervailable subsidies are found to exist, to benefit the Canadian industry and to materially injure the U.S. industry, then a countervail duty will be implemented. Also, based on the findings of the dumping investigation, an anti-dumping duty could be implemented if dumping was found to have occurred and the U.S. industry was materially injured as a result.

Increasing Canadian exports a factor

The main reason this petition has been filed is because Canadian pig exports to the United States have increased during the last few years. In 2003, 7.4 million head at a value of US$389.3 million ($554 million Cdn) were imported by the United States from Canada. These imports represented 6.9 per cent of the U.S. total pork consumption.

However, it would appear that the increase in imports from Canada has allowed the U.S. pork industry to move into an export position itself.

The 2001-2003 average for percentage exported is 5.7 per cent per cent while the percentage represented by Canadian live imports is 5.8 per cent.

In 2003, U.S. pork prices were $23 per head higher than they would have been in the absence of exports (NPPC Press Release, February 27, 2004). If this is the case, then how have the Canadian imports harmed the U.S. industry? If there were fewer or no Canadian imports, the United States would not be able to export as much or any of its own production and wouldn't have benefited from the high prices received from its own exports.

U.S. also provides producer support

The U.S. petition alleges that Canadian pig production benefits from government subsidization. The United States, however, appears not to be innocent of providing government subsidies to its own pig producers. According to the Organization for Economic Co-operation and Development (OECD), both the U.S. and Canadian governments have provided support to their domestic pig industries. The OECD uses the Producer Support Estimate (PSE) as a way to compare the level of government support for various countries and various commodities. The PSE measures government support and calculates it as a percentage of total value of production (at farm gate).

For example, the PSE for Canadian pigmeat production in 1998 was seven per cent. This was calculated as $169 million in producer support divided by $2.392 billion ($2.223 billion in farm gate value of production plus $169 million in producer support). The PSE for U.S. pigmeat production in 1998 was five per cent. This was calculated as $442 million US in producer support divided by $9.116 billion US ($8.674 billion in farm gate value of production plus $442 million in producer support).

Graph 2 shows the PSE percentage for Canada and the United States for the 1998-2002 period. Canada's PSE averaged approximately 7.6 per cent during the period while the U.S. PSE averaged about 4.4 per cent. However, on a total dollar basis, Canada provided an average of $242 million Cdn in producer support annually in PSE while the United States provided an average of $437 million US. The U.S. producer support is equivalent to about $662 million Cdn annually or 2.7 times Canada's annual average PSE.

Even if, according to the OECD and its PSE calculations, the Canadian government provides support to its swine industry, the support is mostly through whole-farm income programs available to all agricultural producers. These programs are not specific to the swine industry and, therefore, are acceptable under World Trade Organization (WTO) rules.

Timing of events

On April 8, the U.S. Department of Commerce announced its decision to initiate antidumping and countervailing duty investigations on imports of live swine from Canada. The alleged antidumping margin ranges from 0 to 66.48 per cent, depending on the swine category. For the countervail investigation, 22 Canadian subsidy programs will be investigated. Two important dates are June 11 and Aug. 25, 2004. June 11 is the earliest date when preliminary countervailing duties could be collected, while Aug. 25 is the earliest date when preliminary anti-dumping duties could be collected. Both of these depend on the results of the investigation initiated on April 8.

What are the implications for the Canadian industry? If a countervailing duty and/or anti-dumping duty is imposed on live Canadian exports to the United States, this will decrease the price in Canada for all pigs. The duty, combined with the impact of a stronger Canadian dollar, will likely result in fewer exports and more pigs staying in Canada. Live pig exports to the United States are going to be very vulnerable and a lot less profitable. More pigs staying in Canada results in more supply for Canadian processors, which means a lower price for Canadian producers.

After suffering through the recent, lengthy period of low prices and reduced profitability, as well as the impact of BSE, a strong Canadian dollar and current high feed prices, how much more can the Canadian industry handle? The possibility of a countervailing or anti-dumping duty being imposed on live exports will not help the situation. The investigation has only just begun. It will be a long and expensive litigation battle.

What happens if the United States wins this challenge against its largest trading partner? A new precedent could be set in the trade world. Because of past experiences with countervail, Canada has worked hard to develop an agricultural policy with programs that are supposed to be WTO-compliant. Now that the United States has filed a petition against Canada, directed at supposedly WTO-compliant programs, a successful challenge by the United States may have far-reaching effects on other countries and commodities.

Many of the United States' trading partners, who think they have WTO-compliant programs, may face a similar situation to Canada. What country will be next on the U.S. hit list to be punished for creating an export-driven, world-class industry supported by WTO compliant agricultural policies?

Table 1. Estimated Price-To-Price Margin Calculations, 2003
Event Countervailing Duty Investigation Antidumping Investigation
Petitions filed March 5, 2004 March 5, 2004
Initiation date April 7, 2004 April 7, 2004
ITC preliminary May 3, 2004 May 3, 2004
DOC preliminary* June 11, 2004 Aug. 25, 2004
DOC final* Aug. 25, 2004 Nov. 8 , 2004
ITC FINAL* Oct. 12, 2004 Dec. 23, 2004
Issue Order** Oct. 19, 2004 Dec. 30, 2004
* These dates may be extended under U.S. law.
** This will take place only in the event of final affirmative determination by DOC and ITC.

Randy Duffy is a research associate at Ridgetown College, University of Guelph.

Source: Better Farming: Better Pork Magazine - June 2004