As US poultry producers try to fight off a Mexican antidumping finding that used the same controversial methodology employed by China, America's fight against China's antidumping duties on US chicken exports in the World Trade Organisation is taking on new significance.

 

The US is fighting the so-called "average cost of production" methodology as part of its challenge of Chinese antidumping duties. That methodology essentially determines the overall cost per pound to produce a processed whole chicken, and then apportions that cost per pound to all parts of the chicken to obtain their cost of production.

 

In its first submission to the WTO panel dated June 27, the Office of the US Trade Representative (USTR) charged that this methodology employed by China's Ministry of Commerce (MOFCOM) violates Article 2.2.1.1 of the Antidumping Agreement by failing to rely on the costs of production as reflected by US producers in their accounting books.

 

Article 2.2.1.1 states that for the purposes of an antidumping (AD) investigation, the costs of production "shall normally be calculated" on the basis of records kept by the exporter or producer under investigation under two conditions. The first is that such records are in accordance with the generally accepted accounting principles of the exporting country, and the second is that they reasonably reflect the costs associated with the production and sale of the product under consideration.

 

USTR said MOFCOM acted inconsistently with this article because it declined to accept US producers' recorded costs of production even though those costs were based on generally accepted accounting principles (GAAP) and reasonably reflected the costs of production.

 

US poultry producers in their records allocate higher production costs to more valuable chicken products -- for instance, attributing higher costs of production for a chicken breast than a chicken leg. But critics of this approach contend that the market price is a function of cost rather than the other way around.

 

In its submission, USTR reiterated arguments that the US producers had made before MOFCOM in the AD proceedings that this "relative sales value method" is consistent with GAAP, endorsed by both US and Chinese accounting textbooks, and used by Chinese poultry producers.

 

MOFCOM ultimately determined that the production costs as calculated by US producers did not meet the second requirement of Article 2.2.1.1 -- they did not "reasonably reflect" costs of production. But USTR emphasised that MOFCOM did not give an explanation for why this was the case, and stressed that the AD Agreement places the burden on the investigating authority do so.

 

Finally, USTR said MOFCOM violated a subsequent sentence of Article 2.2.1.1 stating that authorities "shall consider all available evidence on the proper allocation of costs." It did so by failing to respond to any of the arguments presented by the US producers and US government regarding the defects of MOFCOM's "average cost of production" methodology.

 

China's use of this methodology preceded its application by the Mexican government in AD duties on US chicken leg quarters announced earlier this month, and followed its use by South Africa against US poultry exports in 2000. Mexico decided not to apply the duties it assessed in an effort to avoid driving up food prices, but reserved the right to impose them in the future.

 

South Africa has maintained AD duties on US poultry since 2000 and in February slapped duties on Brazilian poultry products using the same methodology. Brazil in June requested consultations over those duties in the WTO, and the US poultry industry then urged US trade representative Ron Kirk in a July 5 letter to back that Brazilian challenge and launch a separate case against South Africa over the AD duties on US poultry products.

 

In the China case, the US claims regarding Article 2.2.1.1 of the Antidumping Agreement are just one of a slew of alleged violations fleshed out in the US's 148-page legal submission to the panel. Others include numerous procedural failings by MOFCOM in its AD and countervailing duties (CVD) investigations of US poultry imports, as well its "flawed" CVD and injury determinations.

 

The WTO established a panel to hear the US challenge of the Chinese AD duties in January after consultations requested by the US in September failed to resolve the matter.