Newsletter
Moving Production to Third Countries May Give Rise to Anti-Circumvention Investigations
The United States Department of Commerce ("USDOC") released on December 1, 2022 its preliminary determinations over the ongoing investigation into whether solar cells and modules imported from Vietnam, Malaysia, Thailand and Cambodia were circumventing antidumping and countervailing duty orders on solar cells and modules manufactured in the People's Republic of China ("China AD/CVD Order")[1]. In the event that USDOC upholds its preliminary determinations after completing its final investigation, and after taking into account the comments provided by the United States International Trade Commission ("USITC"), USDOC may extend the China AD/CVD Order to the merchandise imported from the above-mentioned countries into the United States. Given that USDOC has imposed an antidumping measure on solar cells and modules manufactured in Taiwan[2] and some Taiwanese manufacturers have also established manufacturing plants in third countries such as Southeast Asia, the future production and distribution of solar products would be impacted by how USDOC determines in this investigation whether products imported to the United States from third countries may be deemed as circumvention.
Antidumping or countervailing measures are trade remedies available to member countries under the World Trade Organization (WTO). If through antidumping or countervailing investigations, exporters of the investigated country are found to have dumped or been subsidized, resulting in injury to the domestic industry of the investigating country, the government of the investigating country could impose antidumping or countervailing duties on the products imported from the investigated countries. Nonetheless, the products covered by the antidumping or countervailing duties are limited to those manufactured in the investigated country. Therefore, it could be a way to avoid the antidumping or countervailing duties if the manufacturers relocate their production plants to a third country that is not covered by the antidumping or countervailing duties after the investigating country's implementation of such duties. In other words, relocation of production plants becomes one of the solutions for manufacturers subject to these duties to continue selling their products to the investigating country, and thus likely give rise to concern of circumvention of these duties.
However, there are no regulations under WTO agreements to provide definitions on what constitutes circumvention; therefore, there is no consistent standard on circumvention regulations or how to determine circumvention in each WTO member. Among all members, the United States' circumvention regulations are relatively comprehensive and clear which give great reference value to all members.
1. Types of Circumvention under the United States Regulations
According to Section 781 of the Tariff Act of 1930[3], there are four types of circumvention:
(1) Merchandise Completed or Assembled in the United States;
(2) Merchandise Completed or Assembled in Other Foreign Countries;
(3) Minor Alterations of Merchandise; and
(4) Later-Developed Merchandise.
Among the above, Type (2) circumvention is most common. Taking the above-mentioned anti-circumvention investigation as an example, it is a typical arrangement for Chinese manufacturers to avoid the antidumping and countervailing duties imposed by the United States through moving the production to a third country that is not covered by the China AD/CVD Order and exporting the products to the United States. This arrangement however would easily result in the United States' industry's and government's fighting back by launching anti-circumvention investigations.
2. Elements of Merchandise Completed or Assembled in Other Foreign Countries
According to Section 781(b) of the Tariff Act of 1930, when determining whether imported products fall within the scope of "Merchandise Completed or Assembled in Other Foreign Countries", USDOC shall examine the following five elements and may determine to extend the current antidumping and/or countervailing duties to these imported products after taking into account the comments provided by USITC:
(1) merchandise imported into the United States is of the same class or kind as any merchandise produced in a foreign country that is subject of an antidumping or countervailing duty order;
(2) before importation into the United States, such imported merchandise is completed or assembled in another foreign country from merchandise which (i) is subject to such order or finding, or (ii) is produced in the foreign country with respect to which such order or finding applies;
(3) the process of assembly or completion in the foreign country is minor or insignificant;
in determining whether the process of assembly or completion is minor or insignificant, the USDCO shall take into account the following five elements:
(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.
(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.
In the preliminary determination of the anti-circumvention investigation on solar cells and modules imported from Vietnam, Malaysia, Thailand and Cambodia, USDOC found that the following actions by the four countries should constitute circumvention: (1) the solar cells and modules manufactured in the four countries and imported to United States, and those products subject to the China AD/CVD Order are of the same kind; (2) manufacturers use wafers or other raw materials from China to assemble or process solar cells or modules in the four countries and then sell the products to the United States; (3) the amount of investment in the factories in China is much higher than the amount of investment in the factories in these four countries; (4) the value of Chinese components used by manufacturers in these four countries represents a significant portion of the total value of the merchandise exported to the United States; and (5) the trade patterns of manufacturers in these four countries, including sourcing patterns, are heavily influenced by manufacturers in China; the manufacturer or exporter of the components used is affiliated with the manufacturer of such components in China or the seller of such products to the United States; and the volume of components exported from China to these four countries has increased significantly after the United States' implementation of the China AD/CVD Order.
3. Compliance with the Rules of Origin may still be Considered as Circumvention
Currently, although the rule of origin for determining products varies from country to country, it is generally accepted that when goods are processed or manufactured in a country to a degree of substantial transformation, the country would be considered as the country of origin of the goods. In this regard, if a manufacturer from China establishes a factory in the above four countries and the production process there has reached the level of substantial transformation, the country of origin of the product should be that country, not China, and thus the products shall not fall within the scope of the China AD/CVD Order.
However, it is obvious from the United States circumvention regulations that USDOC does not consider the country of origin of products when it determines whether a manufacturer's production or processing in a third country for sale to the United States is circumvention. In other words, the fact that a product is substantially transformed in terms of its physical characteristics and uses does not affect the fact that such production or process is still minor. In light of the above, after the imposition of antidumping and countervailing duties, if a manufacturer relocates its factory to a third country, and then the factory in the third country produces or processes the product and sells it to the country that imposes antidumping and countervailing duties, even though the production or processing in the third country has reached the degree of substantial transformation, the risk of such arrangements being deemed circumvention and being added to the scope of the original antidumping and/or countervailing duties cannot be completely excluded. Hence, manufacturers should no longer consider relocating factories to third countries the best or long-term solution when dealing with antidumping or countervailing duties.
[1] I.e., Antidumping and Countervailing Duty Orders on Crystalline Silicon Photovoltaic Cells, Whether or Not Assembled Into Modules, From the People's Republic of China since 2012.
[2] I.e., Antidumping Duty Order on Certain Crystalline Silicon Photovoltaic Products From Taiwan since 2014.
[3] Section 781 of the Tariff Act of 1930.