THE BED LINEN CASE1-THE ECONOMIC AND

LEGAL PERSPECTIVE

SUBMITTED BY:

1
WT/DS/141/R Report of the panel adopted on 30 October 2000.

1
 INTRODUCTION

It is abundantly clear that India is playing an increasingly prominent role in WTO affairs.
India is one of the founding members of the WTO (World Trade Organization) formerly
known as GATT. The WTO like the GATT is nothing but a contractual framework between
the members countries by virtue of which each one of them have to follow certain rules and
also enshrines with it their rights in the International Trade. This agreement also underlines
certain guidelines that are to be followed in case of rise of any disputes between the member
countries and their subsequent settlement. The disputes are generally settled under Article 1
of the GATT agreement which provides for the rules and procedures for the same.
Dumping is defined in Oxford Dictionary as sale of goods in foreign market at low price.
But this simple definition has a very deep and complicated impact on the global economy.
According to the exponents of anti dumping, the anti dumping is justified on the fact that it
would facilitate the importing countries to safeguard their domestic market whereas on the
other hand certain other exponents who are against this duty believe that these are against the
principle of fair competition and in today’s globalized economy this type of economy may
dampen the trade relations as this may lead to the stagnation in the economy of any
developing country. The economists in favour of argue that a certain scale of production and
consequent cost reduction which, without the ability to dump, could not have achieved.2
To a lay man dumping is a vague term. According to the GATT dumping is often defined
as the sale of products for export at a price less than ‘normal value’ where normal value
means roughly the price for which those same products are sold on the ‘home’ or exporting
market. (Home market price – export sales price = margin of dumping).3 When this margin is
greater than 0 then the product is said to be dumped.
But the question arises that why do firms dump at all? After all when it is selling a
product in another country at a lower price there must be loss it must be suffering, and if that

2
Robinson, John; Economics of Imperfect Competition, Macmillan,2nd Edn., 1969, pp. 204-205, per infra 3
3
Jackson, John; The World Trading System - Law and Policy of International Economic Relations, The MIT
Press, 2nd Edn., 2000, pp. 251

2
be the matter then what is the reason that there so fuss about this matter. Actually the reason
behind this is not as easy it seems. Garten had advised four major reasons for dumping:4
• Closed home market for exporters
• Anti-competitive practices in the exporting country market which permit export
sales below cost
• Government subsidization
• Non-market conditions
The researcher would be discussing these factors in more details while answering the
research questions.
The present case5 is concerned with the imposition of definitive anti dumping duties by
European Communities on ‘Cotton Type BED LINEN’ from India. The case became
debatable in the field of international trade because there was an attempt on the part of India
to apply the principle of zeroing in determining the margins of dumping. Moreover this is
significant on the part of the developing countries as it is among those few instances where
the interests of a developing country were safeguarded against a powerful nation.
This case can be seen from two points of origins of the less attractive dimensions of the
international trade regime:
• the special rules governing trade in ‘low-cost’ textiles and clothing ,
• and the rules governing procedures and penalties to offset injurious ‘dumping’, i.e.,
the sale of goods in the export market at lower prices than they are offered for sale in
the home market .
Dumping: In imperfectly competitive markets, firms sometimes charge one price when it
exported but when sold in the domestic market a higher price is charged. In reality one can
surely say this to be imperfect competition. The practice by which the producer charges its
customers different prices based upon the different market demands is known as price
discrimination. One can thus easily observe that dumping involves the practice of price
discrimination. According to Krugman, dumping if the following two conditions are met:
• The industry has to be perfectly competitive only if there is an imperfect competition,
and the prices are set by the firms itself and not taking into account the market prices.

4
Rai, Sheela; ( 2004),Anti-Dumping Measures under GATT/WTO, Eastern Book Company, 1st edn, , pp. 2
5
WT/DS/141/R Report of the panel adopted on 30 October 2000.

3
 • The markets must be segmented so that the domestic residents cannot easily purchase
goods intended for export.
To prevent this dumping by a firm in a foreign country the foreign country generally imposes
a duty on the firm, equal to the difference between the actual and the ‘fair’ price of imports.
In the present scenario the ‘fair’ price is generally determined based on estimates of foreign
production costs. The very fact that price discrimination when practiced by airlines and
railways in case of charging different prices to students and senior citizens is promoted but
when the same strategy is followed by a firm to enter into a market and is willing to incur
losses, anti-dumping duties are imposed.
Zeroing: A critical element in realizing the margins of dumping was the EU practice of
‘zeroing.’ US law professor Joel Trachtman describes the issue as follows:
The practice of zeroing involves establishing a set of categories of the product under
investigation. Within each category, a weighted average normal value is calculated by
reference to home-country sales, third-country sales or a constructed value. This normal
value is then compared with a weighted-average export price for that category. Then the
normal value is compared with the export price. If the normal value is higher, the difference
is a positive dumping margin: the goods are being exported at less than their normal value. If
the normal value is lower than the export price, a negative dumping margin would exist.
Under EC practice, in calculating a total weighted average for all categories of the product
under investigation, the negative dumping margins are changed to zero. This is “zeroing.”6
Both sets of rules have proven very attractive to mature textile and clothing industries in the
industrialized world competing against low-cost imports from developing countries
exploiting their comparative advantage of low labour costs. If seen from the side of the
domestic country, i.e. India, exports of textile and clothing products are an important part of
the benefits to be derived from participation in the international trading system. With a
population of a billion people, many of them poor and unskilled, the production of standard-
technology, labour-intensive products such as textiles and clothing is a natural and important
contributor to employment and economic development. Given the high volumes and wide
range of qualities of cotton grown in India, it is little wonder that Cotton textiles constitute

6
Trachtman Joel , ‘Decisions of the Appellate Body of the World Trade Organization: EU Antidumping duties
on imports of cotton-type bed linen from India,’ European Journal of International Law, vol. 13:3, accessed
at http://www.ejil.org/journal/curdevs/sr15-01.html. last visited on 11.11.05

4
the largest part of the Indian textile industry. As a result, India has become one of the world’s
major exporters of these products and, together with Pakistan and Egypt, major suppliers of
lower-end bed linen to the markets of EU members.7
From the perspective of the EU, on the other hand, low-cost textile imports raise some
sensitive political issues. EU consumers may welcome these products, but well-organized
lobbies of textile manufacturers and workers have mounted powerful campaigns to slow
down the inroads of these products, arguing that such imports amount to unfair competition,
driving EU firms out of business, and leading to unemployment for some of Europe’s most
vulnerable workers. EU firms have made some adjustments, restructuring and modernizing to
remain competitive, but in the 1990s, firms were still closing, each time throwing hundreds
of workers on the streets. The special rules governing textiles and clothing, first introduced in
the GATT in 1961, have been one response, arguably providing industries in developed
countries more time to adjust to the new competition from developing countries. Resort to
anti-dumping procedures is a second, and one that began to be used more frequently
following the implementation of the WTO Agreement on Textiles and Clothing, which
provides for the phased elimination of the special regime for textiles and clothing by the end
of 2004. By the end of 2001, for example, EU industries had successfully launched 26
complaints about dumping from India, many of them in the textiles sector. 8
This case focuses on India’s complaint to the WTO, pursuant to the procedures of the
WTO’s Dispute Settlement Understanding that a series of antidumping orders affecting its
exports of cotton-type bed linen to the EU relied on procedures and methods that were
inconsistent with the EU’s obligations under the WTO’s Agreement on Antidumping (the
‘ADA’).9
The researcher’s aim is to address the major issues that were raised in this case. He wishes
to discuss mainly the principles of zeroing and calculation of margins of dumping. The
researcher not only wants to discuss this case but also wants to provide a in depth analysis of

7
Michael Hart, Reisman et. al, Defending Market Access- Bed Linen from India, Carleton University, accessed
at http://www.worldtrade.org/case-studies/bed+linen/india/2.html, last visited on 07.11.05.
8
Anderson, J. (1993) “Domino dumping II: Antidumping,” Journal of International
Economics, 35, p. 133.
9
Anonymous, Zeroing- Antidumping’s Flawed Methodology under fire,
http://www.freetrade.org/pubs/FTBs/FTB-011.html, last visited on 11.11.05

5
the matter and thus he would give a comparative analysis of other cases which involved
similar issues as the case in discussion.
The researcher due to time and space restraints is not able to discuss all the issues in
contention. He would cut down his discussions on the principles involved anti-dumping
which formed a part of the first research questions. The researcher wishes to cover these
concepts while discussing the arguments from both the EC and India. The researcher
apologizes for any unintentional error committed by him during the course of the project. His
sole aim would be to at least analyze the major areas of concern in details.

ANTI-DUMPING- BRIEF OVERVIEW

Anti-dumping measures are a reaction to the alleged “dumping” of goods into a foreign
market. An exporting country is said to be dumping when it sells its goods abroad for a price
lower than it sells domestically, or if it sells these goods abroad at a price lower than its per
unit cost 2 . An anti-dumping investigation against a specific country can have three possible
outcomes: definitive measures, termination, or price undertaking.
It would be unnecessary to discuss what anti-dumping as that thing has been dealt in
considerable details in the introduction. So the researcher moves on directly to the concept of
the determination of dumping margins. Dumping is said to have occurred if the export price
to an importing country is less than its normal value in the domestic market of the exporting
country. The difference between the normal value and the export price is referred to as the
“margin of dumping”.10 While this concept seems simple, there are several areas of
discretion and anomalies that need to be addressed carefully in the context of normal value,
export price and the comparison between the two. In terms of the Agreement, normal value is
defined as follows:

2.1 For the purpose of this Agreement a product is to be considered as being dumped,
i.e., introduced into the commerce of another country at less than its normal value, if
the export price of the product exported from one country to another is less than the

10
Bhala, Raj,(2003), Interntional Trade Law: Theory and Practice, Lexis Nexis, pp.15

6
 comparable price, in the ordinary course of trade, for the like product when destined
for consumption in the exporting country.
2.2 When there are no sales of the like product in the ordinary course of trade in the
domestic market of the exporting country or when, because of the particular market
situation or the low volume of the sales in the domestic market of the exporting country,
such sales do not permit a proper comparison, the margin of dumping shall be
determined by comparison with a comparable price of the like product when exported
to an appropriate third country provided that this price is representative, or with the
cost of production in the country of origin plus a reasonable amount for administrative,
selling and any other costs and for profits.

Article 2.2, provides two alternatives for determining dumping margin, when sales in the
domestic market of the exporting country cannot be used for the purpose. However, it does
not prescribe any hierarchy between the two. While in some countries, a hierarchical order
has been established, most other countries have chosen to use the cost of production-based
method for determination of normal value. Deliberation on the appropriateness of prescribing
a hierarchy between the two alternative methods of determination of normal value would be
valuable. Prima facie, it would appear that the third country export price should be a
preferred method as it emanates out of price considerations as opposed to costs and, hence,
takes into account the market realities. The cost of production based calculation of normal
value, on the other hand, is retrograde as it fails to take account of the market forces. While
calculating normal value, it has to be seen that the transactions are in the ordinary course of
trade. 11 Transactions made between related or affiliated parties need to be treated differently
from transactions between unrelated and independent parties. However, there are no specific
provisions in the ADA to explain the concept in the context of normal value. For example, if
the sales are made by an exporter/producer to his related party in the domestic market, it
would be considered a tainted sale and adjustments will be made to arrive at the independent
normal value in the domestic market.12 However, there are no specific provisions, which
throw light on the concept of “related person” nor are there any guidelines to deal with such

11
Human, Johann, (2003) A Handbook on Anti-Dumping Investigation, WTO and Cambridge Publishers, pp.99
12
Dwyer, Andy, et.al.,(2001) Handbook on WTO Trade Remedy Disputes, Transnational Publications, pp.134

7
transactions. In the process, the present provisions of the Agreement leave considerable
scope for discretion. This needs to be discussed and formalized in the proposed negotiations.
Determination of a fair and untainted normal value in the domestic market of the exporter
can only form an appropriate basis for comparison for the purpose of arriving at dumping
margins. While making comparisons between normal value and the export price, the
investigating authorities are required to make adjustments for all the factors that affect the
price comparability. In practice, most of the authorities allow only those adjustments that are
covered by the specifically mentioned factors under Article 2.4 of the ADA.13 One such
example of incorrect implementation of the system is that no adjustment is allowed if there is
a difference between the raw material cost of the domestically sold product and the exported
product. One of the reasons for the difference in raw material costs can be on account of the
fact that raw materials are made available to exporters at international prices while the raw
material cost for domestic production is governed by the incidence of protective customs
duties on the said raw material.14 Considering that in AD investigations, the exporter’s
behavior is under scrutiny, it is imperative that those factors that are not a part of the Net
Sales Realization of the exporter, should be allowed as adjustments.15 This would be a fair
and unbiased way of judging whether dumping is actually taking place or not. Subsequent to
the decision of the WTO Panel in the Bed Linen case, it is clear that for all the transactions
where the dumping margin is negative, the same must be accounted for in calculating the
weighted average dumping margin. The same principle is to be applied for the individual
models/types or grades of the product under consideration. It was the practice of the EC that
all transactions which resulted in negative dumping margin were considered as zero margin
for the purpose of calculating the weighted average dumping margin. It would be useful for
the proposed negotiations to come out with specific methodology for calculating the dumping
margins and to specifically prohibit the practice of zeroing in.16
The ADA defines the ‘domestic industry’ as follows:

13
WTO Secretariat, A Handbook on the WTO Dispute Settlement System, Cambridge Publications, 2004.
14
supra 11, pp.112
15
supra 11, pp.113
16
Anderson, J. (1993) “Domino Dumping II: Antidumping,” Journal of International
Economics 35, p. 137 accessed on

8
 4.1 For the purposes of this Agreement, the term “domestic industry” shall be
interpreted as referring to the domestic producers as a whole of the like products or to
those of them whose collective output of the products constitutes a major proportion of
the total domestic production of those products, except that (i) when producers are
related to the exporters or importers or are themselves importers of the allegedly
dumped product, the term “domestic industry” may be interpreted as referring to the
rest of the producers;...

The injury analysis is primarily based on the performance of the domestic industry, as
defined by the investigating authorities. For instance, even if the complaining domestic
industry accounts for 40 percent of the production during the investigation period, the injury
analysis may be based on the performance of the complaining industry alone. This current
understanding of the law can lead to vastly different results depending upon the selection of
the complainant domestic industry. Thus, this issue needs deeper examination. One of the
ways to examine this issue more closely could be to make it imperative for the investigating
authorities to examine the status of the non-complaining domestic industry with a view to
ascertaining the real cause of injury and whether any anti-dumping action is warranted or not.
While there have been Panel decisions to the effect that even 53 percent was not considered
sufficient for the injury analysis in respect of certain factors, the provisions in the Agreement
require more clarity and precision. 17
The researcher till now has discussed the various provisions that he would put in use in the
discussion of the case. The researcher has not discussed the various sub paragraphs of Article
2 in this chapter as he aims to do so while discussing the various chapters.

THE CASE- DETAILED STUDY

The Material Facts

17
Human, Johann, (2003) A Handbook on Anti-Dumping Investigation, WTO and Cambridge Publishers,
pp.112

9
In September 1996, the EC initiated an antidumping ("AD") case against imports from India
of cotton--type bed linen. Interestingly, the member states of the European Union ("EU")
were split about the case. In 1997, the EU'
s AD committee recorded a tie vote, seven--seven,
with respect to the case, with Germany initially postponing and ultimately casting the tie--
breaking vote. The reason for support for the action was clear: to protect the EU'
s fabric
weaving sector from low priced import competition. Equally obvious was the reason for
opposition to the action: job loss in companies that consumed the imports, like Britain'
s
Coats Viyella, Lonrho, and the Leeds Group all of which incurred or faced redundancies as a
result of the protective remedy. The EC'
s case was brought at the request of "Eurocoton," a
federation of associations of European producers of cotton textile products. After excluding
certain companies, there were 35 remaining petitioner producers, and they represented a
major proportion of total EC production of bed linen. The period of investigation was July 1,
1995 to June30, 1996, with the injury determination based on data from 1992 to June 30,
1996. Because there were so many Indian producers and exporters of the subject
merchandise, cotton type bed linen, the EC elected to conduct its analysis of dumping on the
basis of a sample of Indian companies. In determining the home (i.e., Indian) market price
for bed linen sold by the investigated respondents, the EC used Constructed Value ("CV") as
a substitute for Normal Value.18

Margin of Dumping: The Methodology of Zeroing and Like Products

Under this case India argued that according to the Article 2.4.2 of the ADA, there was a
violation on the part of the EC in applying the method of zeroing to “negative dumping”
amounts in order to calculate the overall weighted average dumping margin for the like
product bed linen.19 India submitted as a part of evidence that all the types of bed-linen were
not actually dumped. The point of view that the Indian companies put forward was that the
phrase “weighted average of prices of all comparable export transactions” in Article 2.4.2

18
Anonymous, “Defending Market Access- Bed Linen from India”, accessed on
http://www.commercialdiplomacy.org/case_study/indianbedlinen2.htm, last visited on 17.12.05
19
Panel Report, para 6.103

10
precluded excluding certain amounts from the calculation simply because they showed
negative dumping.20
Article 2.4.2 which was included in the Agreement underlies:

“Subject to the provisions governing fair comparison in paragraph 4, the existence of

margins of dumping during the investigation phase shall normally be established on the
basis of a comparison of a weighted average normal value with a weighted average of
prices of all comparable export transactions or by a comparison of normal value and
export prices on a transaction--to--transaction basis.”

Generally, when a specific export sale was at a price below the weighted average foreign
market price, the resulting dumping margin was calculated. If, on the other hand, a specific
export price was above the average foreign market price, the margin was counted as "zero."
Consequently, when all the margins of the specific sales (adjusted for the quantities sold at
those prices) were totaled up and averaged, the instances of higher export prices were not
permitted to offset instances of lower export prices. It was thus possible to have an
affirmative dumping finding in a case where the weighted average of export prices was
higher than the weighted average foreign market value.21
But countering India’s argument that the practice of zeroing is applied to even non-dumped
products, the EC maintained just the opposite. According to the AB, EC had conducted the
investigation of the product in contention and clubbed them into ‘models’ or ‘types’. Then, a
weighted average normal value and a weighted average export price for each of these models
were calculated and compared respectively. For some models, normal value was higher than
export price; by subtracting export price from normal value for these models, the EC
established a "positive dumping margin" for each model. For others, normal value was lower
than export price; by subtracting export price from normal value for these other models a
‘negative dumping margin’ was established for each model of the product. In other words,
there is a "positive dumping margin" where there is dumping, and a "negative dumping
20
Pratap, Ravindra; (2004), India at the WTO Dispute Settlement System, Manak Publications, New Delhi., pp.
283
21
Busch, Marc L, Reinhardt, Eric, ‘Developing Countries and General Agreement on Tariffs and Trade/World
Trade Organization Dispute Settlement’, Journal of World Trade, 38(4), 2003, 719 accessed on
http://www.worldtradelaw.net/uragreements/dsu.pdf (last visited, 11.11.05)

11
margin" where there is not. Now as while imposing dumping duties one cannot charge each
of the margins separately, EC added up the dumping margins on a whole, but didn’t take into
account the ‘negative margins’, as it zeroed all the ‘negative margins’.22 Then, finally, having
added up the "positive dumping margins" and the zeroes, the EC divided this sum by the
cumulative total value of all the export transactions involving all types and models of that
product to obtain an overall dumping margin for the product under investigation.
The EC argued that Article 2.4.2 does not address the question whether an importing country
may "zero" out a "negative" margin for one model while combining the margins for each of
the different models to determine if there is dumping of the product. Both the panel and the
AB, noted that the existence of the margins of dumping is to established on the basis of a
comparison of weighted average normal value with a “weighted average of prices of all
comparable export transactions” or on the basis individual transactions. EC also put forward
the argument that this “subsequent stage” of the calculation does not fall within the scope of
Article 2.4.2, and pointed out that it was up to the discretion of the member conducting the
calculations to apply this methodology to come to the final margins. But the AB stated that
"Article 2.4.2 must be understood to apply to the entire process of determining the existence
of margins of dumping for the product, and that there is no '
subsequent stage'which escapes
entirely from the strictures of Article 2.4.2. They interpreted "all comparable export
transactions" be included in the comparison, emphasizing the adjective "all" and thus by
'
zeroing'the '
negative dumping margins'
, the EC, therefore, did not take fully into account the
entirety of the prices of some export transactions, namely, those export transactions involving
models of cotton type bed linen where '
negative dumping margins'were found. In specifying
the ordinary meaning of comparable, the AB then cited to the dictionary definition "able to
be compared. From this definition and a strained reference to the "context" of other parts of
Article 2.4, the AB concluded that the EC'
s methodology impermissibly excluded some
export transactions by zeroing negative margins for discrete models: "All types or models
falling within the scope of a '
like'product must necessarily be ' ." 23
comparable'
The AB also put forward the following hypothetical example by which they aimed at
explaining the application of the ‘zeroing’ methodology that was applied by the EC where it

22
Panel Report, para 6, 114-5
23
Bhala, Raj, (2001), International Trade Law Handbook, Lexis Nexis, pp. 394.

12
had averaged only within product types i.e., calculating Normal Value and Export Price
within a product type.

Suppose queen size bed sheets (one product type or model) had an average dumping
margin of ECU 50, while twin size bed sheets (a second type or model) had an average
dumping margin of ECU 25. If these were the only two types of bed linen in the subject
merchandise, and they were imported in equal volumes, then the weighted average
dumping margin would be ECU 12.5. Yet, because of the EC'
s zeroing methodology,
the weighted average dumping margin would be ECU 25 since the EC would count the
margin corresponding to twin size sheets as zero. The EC would not permit the negative
dumping of these sheets to offset partly the positive dumping of the queen size sheets24.

India argued that the term ‘average’ did not mean the ‘average’ of certain selected products
and leaving out i.e. ‘zeroing’ the others and also stressed upon the word ‘all’ as done by the
AB. The AB also pointed out that in no part of the Agreement had suggested that targeted
dumping can be done to specific ‘models’. The AB also referred to Article 2.1, which deals
with dumping of a product, thus the margins of dumping of which Article 2.4.2 refers to are
the margins of a product and thus the EC was bound undertake the investigations on this very
basis and even during two stages of investigations it had to take into account the same
product. Thus, this claim of India was established successfully.

The Calculation of Constructed Value and SG&A Costs

Under this point, the major points of contention was regarding Article 2:2 which says that
"the cost of production in the country of origin plus a reasonable amount for administrative,
selling and general costs and for profits" known as ‘Constructed Value’ (CV) as an
24
Breuss, Fritz, (2004), WTO Dispute Settlement: An Economic Analysis of four EU-US Mini Trade Wars,
Austrian Institute of Economic Research , Vienna
Another hypothetical illustration was provided in one of the media accounts of the case: In a simplified
example, an investigating authority using zeroing would apply a zero value for a transaction where a good is
sold for $100 on the home market and $130 in the export market, but would apply a 20 value for another
transaction in which the good was sold for $100 at home but for $80 abroad. Thus, in aggregating the
transactions, the authority using zeroing would find a dumping margin of 20 percent rather than the negative
dumping result if the true value of the first transaction were used.

13
acceptable substitute for Normal Value if the home market of the exporter or producer is not
viable. The issue that was raised was raised was whether the results of calculation under
Article 2.2.2(ii) was subject to a separate test of ‘reasonability’ under Article 2.2 before they
may be used in constructing Normal Value for the other producers. EC in order to increase
the dumping margin tried to increase the CV by including more things under the SG&A
costs. On the other hand India wanted to minimize these costs in order to decrease the
positive dumping margin. Article 2:2:2, states that the amounts for SG&A expenses and
profits "shall be based on actual data pertaining to production and sales in the ordinary
course of trade of the like product by the exporter or producer under investigation." The
actual SG&A expenses incurred and profits earned by each party in the case are calculated
with respect to the like product sold in the home market, and to include these amounts in the
CV calculated for each party separately. But EC applied statistics from Bombay Dyeing to
the other Indian exporters and producers as well. India argued that the SG&A was
determined faultily by the EC under Article 2.2.2(i) even though they were not ‘reasonable’.
According to India, the word reasonable in Article 2.225 has a separate function, and the
reasonableness test of Article 2.2 is an independent, overreaching requirements in addition to
the requirements of Article 2.2.2.26
Article 2.2.2 sub paragraphs (i), (ii), and (iii), as follows:

• the actual amounts incurred and realized by the exporter or producer in question in
respect of production and sales in the domestic market of the country of origin of the
same general category of products [i.e., in effect, a restatement of the first choice set
forth in the chapeau, though with respect not to the like product, but the same general
category of products];
• the weighted average of the actual amounts incurred and realized by other exporters
or producers subject
• to investigation in respect of production and sales of the like product in the domestic
market of the country of origin; any other reasonable method, provided that the
amount for profit so established shall not exceed the profit normally realized by other

25
“….or with the cost of production in the country of origin plus a reasonable amount for administrative, selling
and general costs and for profits”
26
supra 4, pp.30

14
 exporters or producers on sales of products of the same general category in the
domestic market of the country of origin.

The EC contended that, the methodology applied by EC in calculating the SG&A costs and
profits were in accordance with Articles 2.2.2 (i)-(iii). The EC chose the alternative set forth
in sub paragraph (ii). India pointed out that as EC had applied the SG&A costs and profits of
Bombay Dyeing to other companies it had committed two errors27.

• The EC had not calculated a weighted average of SG&A costs and of profits with the
like product sold by other exporters or producers which it should have done had it
followed sub paragraph (ii). Rather it had applied the statistics of Bombay Dyeing to
all other companies. In so doing, it acted inconsistently to the terms "weighted
average," "amounts," and "other exporters or producers."
• The EC resorted to sub paragraph (ii) whereas it could have used the method in sub
paragraph (i), because the actual amounts of SG&A expenses incurred and profits
realized by other Indian company (at least one in particular) were available.
India raised the question that if another company'
s SG&A expenses and profits were used to
compute CV for a respondent and thereby the dumping margin (the difference between CV
and Export Price), then how could that respondent double check the margin against its own
data? They supplemented their argument stating that whatever margin a company has
calculated for itself, based on its own SG&A expenses and profits, would not matter because
another company'
s SG&A expenses and profits were what mattered. As for Bombay Dyeing,
India called it "a wholly atypical company in India," and thus "the SG&A [expenses] and
28
profit from one peculiar and extraordinary company cannot be considered '
reasonable.'
The EC argued that the provisions containing the words ‘weighted average’ will not become
inconsistent if the classes of data that is to be ‘averaged’ contains one item. To further

27
European Commission, General Overview of Active WTO Dispute Settlement Cases Involving
The EC as Complainant or Defendant, Brussels, 30 June 2004. accessed on
http://www.sice.oas.org/Dispute/wto/ds99/99r.asp. last visited on 17.11.05
28
Busch, Marc L, Reinhardt, Eric, “Developing Countries and General Agreement on Tariffs
and Trade/World Trade Organization Dispute Settlement”, Journal of World Trade, 38(4),
2003, 719 accessed on http://www.worldtradelaw.net/uragreements/dsu.pdf
(last visited 11.12.05).

15
explain their point of contention EC referred to Article 2.4.2, which states “weighted average
normal value of all comparable export transactions”, thus the comparison could be made if
either side of the comparison contained the similar one scale. They went on to argue that the
word “amounts” was to be interpreted as ‘amount’ as the first sentence of the chapeau of
Article 2.2.2 refers to an individual ‘exporter and producer’ and thus the SG&A costs and
profits would be taken as one amount respectively, the word ‘amounts’ reflects one amount
of the each type for each producer or exporter. 29 The plain meaning of the word "average"
admitted the possibility of an average comprised of one item. The Panel agreed to the
arguments of the EC regarding the “weighted average” and said:

The whole point of calculating a ‘weighted average’ was to ensure that if data from
more than one exporter or producer were available, then the data from all these
companies were included in the calculation, or that no discriminatory exclusions were
made. But, when only one exporter or producer is available, the prospect of
discrimination does not arise. The existence of data from more than one respondent
was not a necessary prerequisite for the use of sub paragraph (ii).

But the AB defied the logic given by Panel and said that, the phrase ‘weighted average’ in
Article 2.2.2(ii) permits ‘exporters and producers” to be interpreted as ‘one exporter or
producer’, but an ‘average’ of amounts for SG&A expenses and profits cannot be calculated
on the basis of data calculated on the basis of SG&A expenses of a single exporter or
producer because the ‘average’ which results from combining the data of different producers
must reflect the relative importance of these exporters in the overall mean. The AB went on
to say that the use of the phrase ‘weighted average’ combined along with the words of
‘amounts’ and ‘exporters and producers’ in Article 2.2.2(ii) indicates that the SG&A
calculations can only be carried out only when more than one producer or exporter is
present.30
On the other hand rebutting India’s claim about the hierarchy of the three sub paragraphs EC
contended, nothing in the language of Article 2:2:2, especially in sub--paragraphs (i) and (ii),

29
Panel Report, P6.49.
30
AB Report, para. 75

16
indicated an order of preference. At best, the word "any other" in sub paragraph (iii)
suggested that it was an alternative to the first two sub paragraphs. But, as between sub--
paragraph (i) and (ii), it was not clear from the text whether any preference was to be
accorded to the first of these. Thus, it is up to each WTO Member to decide whether, or how,
to prioritize between (i) and (ii). Indeed, said the EC, there is good reason to believe that no a
priori preference should be given to sub paragraph (i) over (ii). The key difference between
the two paragraphs was the identity of the company from which SG&A expense and profit
data were taken. In sub--paragraph (i), it was data specific to a particular producer. In sub--
paragraph (ii), it was data from other producers. But, what is as important as the identity of
the respondents is the particular product being investigated. Indeed, it is critical that data
from the same type of products are used. Sub--paragraphs (i) and (ii) speak of the same
subject merchandise, and as long as data pertains to that, then the exact producer is less
significant.31 Commenting on India’s argument that there were certain disadvantages to the
exporter regarding the sub paragraphs (ii) and (iii) as it would derive the exporter to not only
to the possibility of preventing dumping margin, but also of the possibility of preventing
dumping. The EC pointed out that the use of sub paragraph (i) compared to (ii), would lead
to much greater investigative efforts with consequent inconvenience and delays for all
concerned.32
The Panel held that there is nothing in the text of Article 2.2.2 which would indicate that
there is any hierarchy among the options because a sequence is an inherent characteristic of
any list.33 Had the drafters wanted to express a preference, they would have done so
expressly, as they did in other parts of the AD Agreement and Uruguay Round agreements.
The simple fact, said the Panel, is that the alternatives for ascertaining SG&A expenses and
profits in sub paragraphs (i), (ii), and (iii) are imperfect substitutes for the aim set forth in the
chapeau of getting producer specific data on the like product. Sub--paragraph (i) relaxes the
reference to the like product (allowing for data from the same general class of products).
Sub--paragraph (ii) relaxes the reference to the particular producer (allowing for data from

31
Busch, Marc L, Reinhardt, Eric, “Developing Countries and General Agreement on Tariffs and Trade/World
Trade Organization Dispute Settlement”, Journal of World Trade, 38(4), 2003, 735 accessed on
http://www.worldtradelaw.net/uragreements/dsu.pdf (Last visited, 11.12.05).
32
supra 4, pp. 33
33
ibid, pp. 34

17
other producers). Sub--paragraph (iii) relaxes both needs, product--specific and producer--
specific data34.
India though was proved wrong by the Panel in both the contention that it raised under this
issue, but the AB dismissed the Panel’s decision and gave the decision in favour of India thus
making this claim another successful one.

CONCLUSION

This case had underlined many debatable issues in international trade such as that of
dumping. But it case also brought forward the use of technicality by a less developed country
(India) to its benefit and lack of technical knowledge on the part of EC. For example, on the
question of excluding sales not in the ordinary course from the weighted average of SG&A
expenses and profits under Article 2:2:2(ii), the Appellate Body refers to what a “Member”
may or may not do.35 Indian trade lawyers understood the impact of the ruling and hailed it as
a “precedent that would affect the EU’s use of anti-dumping measures in the future.”36 If we
look further EC should have inquired into the product characteristics of cotton type bed linen
sold in India and compared and contrasted them carefully with those sold in the EC. Had the
EC found physical distinctions that affected the comparability of prices in the Indian and
European markets, then it would have done a DIFMER adjustment to Normal Value. Though
it should be noticed that the Panel was at certain points like the calculation of SG&A costs
and profits favored the EC but these rulings were overruled by the AB and thus proving the
impartiality in the International Trade done by the WTO. But still remains to be seen if this
decision was completely unbiased. USA was a third party and regarding the interpretation
Article 2.2.2 set forth the argument the requirement of calculating profit when normal value
is based on constructed value instead of prices. The US contended that there is no limitation
in the agreement on the amount of constructed value profit and thus arguing in favour of
India. Though this decision would serve as a detriment many of the US companies as they

34
Besson, Fabien, Mehdi, Racem, Is the WTO Dispute Settlement System Biased Against
Developing Countries? An Empirical Analysis, Paper presented at the 2nd International
Conference On: “European and International Political & Economic Affairs”, Athens, May
27-29, 2004 accessed on http://www.wkap.nl/journalhome.htm/1566-1679, last visited on 01.12.05
35
AB Report, pp. 85
36
Guy de Jonquieres, “Europe Breaks WTO Rules on Anti-dumping”, Financial Times, Mar. 2,
2001, pp. 4.

18
are the one who tend to apply this method of zeroing while calculating the dumping margins,
still US supported India in another point indirectly though. This case is also important from
the point of view that India was successful; in claiming the Special and Differential
Treatment guaranteed under Article 15 of the Agreement, though this point has not been
dealt in great details by the researcher.
This case though was over argued and the proceedings went on for a considerable amount of
time causing considerable losses to both the parties, it remains to be seen that how much
would this decision help the position of the developing countries, who are said to be given
safeguards in the International Trade market as they are not expected to be coherent with the
technicalities of the DSU. But undoubtedly this case has opened newer horizons for the
developing countries to safeguard their interests.

19
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