Need for an Antidumping Market Structure Test in the Context of Free Trade Agreements, The


THE NEED FOR AN ANTIDUMPING MARKET STRUCTURE
TEST IN THE CONTEXT OF FREE TRADE AGREEMENTS

Charles M. Gastle and James Leach*

In October, 1999, the Standing Committee on Foreign Affairs and
International Trade of the Canadian House of Commons issued a report
entitled: The Free Trade Area of the Americas: Towards a Hemispheric
Agreement in the Canadian Interest ("Standing Committee Report").'
Surprisingly, the Standing Committee Report contains a recommendation that
Canada should resist the merging of antidumping provisions with antitrust
predatory pricing provisions.

The Committee's understanding of the issue is that predatory pricing
and antidumping were born out of different necessities and intentions. The
former provisions were conceived to protect the interests of consumers, with
the objective of securing a competitive process for the longer term. The
latter provisions were conceived to protect domestic producers from a
specific foreign rival with special circumstances enabling it to discriminate
between markets. Often these circumstances are protected domestic markets.

In the case of antidumping, the interests of consumers are being
subordinated to those of domestic producers. When viewed in this light, the
Committee is of the opinion that competition policy and its administrative
authority should never be put in the position of subordinating the interests of
consumers to those of producers. However, without the permanent
disappearance of the ability to discriminate between domestic and foreign
markets, there are indeed circumstances in which the interests of domestic
producers should prevail over those of consumers, but not in all instances.
Provided that proper administrative discretion is exercised in the application
of antidumping provisions, the Committee concludes that there is no valid
reason, or political appetite for that matter, for folding antidumping into
antitrust. Competition and antidumping policies should, for the time being,
remain separate.'

* Charles Gastle, B. Comm., LL.B., LL.M., D.Jur. obtained a Doctor of Jurisprudence
Degree in international trade from Osgoode Hall Law School, Toronto, and is a member of the
Ontario Bar and partner at Shibley Righton, Toronto. James Leach is the former Canadian
Ambassador to Peru and Bolivia and is now the Executive Director of the Estey Centre for Law
and Economics in International Trade. The authors wish to acknowledge the research assistance
provided by Thomas Humbert, a graduate law student from Aix-Marseille University in France.

1: STANDING COMM. ON FOREIGN AFFAIRS AND INT'L TRADE OFTHE CANADIAN HouSE
OF COMMONS, THE FREE TRADE AREA OF THE AMERICAS: TOWARDS A HEMISPHERIC
AGREEMENT IN THE CANADIAN INTEREST (1999), at http://www.parl.gc.calinfocomdoc/36/2/
fait/studies/reports/faitrpOl/30-chl 5-e.html.

2. Id. at Ch.15: Competition Policy and Law.



IND. INT'L & COMP. L. REV.

The Government of Canada's response report ("Government
Response")3 adopted this surprising position:

The Government supports the recommendation of the
Committee to resist merging anti-dumping provisions with
predatory pricing provisions in competition policy and law.
Rather, the Government will continue its efforts to seek
improvements to the application and operation of anti-
dumping systems in the hemisphere in the context of a
separate Negotiating Group on Subsidies, Antidumping and
Countervailing Duties. 4

Canadian international trade policy now appears to embrace
antidumping practices, albeit with some modifications to the underlying
antidumping rules. This marks a rejection of at least fifteen years of
Canadian trade policy seeking the elimination of antidumping practices.
Canada's reversal in trade policy is unprincipled and seems to suggest that
its trading interests are better served by maintaining protectionist mechanisms
which it can use against its trading partners. This change in trade policy
suggests that Canada has begun to view itself differently in terms of world
trade and not with the same sense of vulnerability to perceived misuse by the
United States of its contingent trade regime. In the context of the Free Trade
Agreement of the Americas ("FTAA") initiative - where this change in trade
policy occurred - it appears that Canada wants to retain this trade weapon
with respect to imports from the emerging nations in Central and South
America.

In this article, it is respectfully submitted that Canadian trade policy has
become muddled, at a time when American abandonment of a position of
leadership in trade liberalization gives an opportunity to eliminate
antidumping practices, at least on an interim basis in negotiations to broaden
hemispheric free trade. Canadian trade policy had the correct focus when
negotiating its free trade agreement with Chile5 in 1997 that provided for the
elimination of antidumping practices no later than 2003. This precedent
should be followed in the free trade agreement with Costa Rica that was
under consideration at the time of writing.

3. See DEPT. OF FOREIGN AFFAIRS AND INT'L TRADE (CANADA), GOv'T RESPONSE TO
THE REPORTOFTHE STANDING COMMrIrEE ON FOREIGN AFFAIRS AND INT'LTRADE- "THE FREE
TRADE AREA OF THE AMERICAS: TOWARDS A HEMISPHERIC AGREEMENT IN THE CANADIAN

INTEREST," at http://www.dfait-maeci.gc.ca/tna-nac/FrAAreport-full-e.asp (last visited Mar.
15, 2000).

4. Id.
5. See Canada-Chile Free Trade Agreement, Dec. 5, 1996, Canada-Chile, 36 I.L.M. 1067

(1997), available at http://www.dfait-maeci.gc.catna-naccda-chile/chap-n26.asp [hereinafter
CCFTA].

6. Id. art. M-03.

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FTA ANTIDUMPING MARKET STRUCTURE TEST

In the alternative to the elimination of antidumping practices, the
commitment to open markets represented by free trade agreements, such as
the North American Free Trade Agreement (NAFTA), 7 justifies, at
minimum, a qualification or limitation upon the traditional antidumping duty
practices. It is submitted that, at the very least, a market structure test
should be imposed requiring complainants in proceedings involving a free
trade agreement party to establish that some specific market impediment
exists which gives rise to an ability to differentiate between the exporter's
home market and the complainant's import market, resulting from a lack of
efficiency.8 Some artificial impediment (such as a border restriction) or anti-
competitive conduct would have to be shown, which keeps the home market
price high.

This article starts with a review of antidumping practices and then
provides an analysis indicating the nature of the presumption made by
antidumping practices that a market impediment exists where there is a
difference between the home and target market price. The concept of a
market structure test is then discussed, as it was developed during the
evolution of American antitrust principles over the past thirty years. The
article then makes a proposal regarding the manner in which a market
structure test might be used to qualify antidumping practices in the context
of free trade agreements such as NAFTA, thus resulting in a somewhat more
economically rational international trade law remedy. Of course, this article
should not be seen as an endorsement of this alternative as the principle route
of reform. The "first-best" reform is to eliminate antidumping practices
entirely.

In the context of bilateral trade between the United States and Canada,
the complainant-import jurisdiction might utilize its own competition law in
determining whether a private practice constitutes an actionable market
impediment. If the United States is taken as an example, the American
administrative tribunals would be required to use the recoupment test in the
context of discriminatory and predatory pricing doctrine, established by the
Brooke Group9 precedent. In the context of the FTAA, however, it is not
possible to allow each jurisdiction to utilize its own competition law. This
is due to the early stage of development of competition law institutions in the
Central American and South American jurisdictions or relative lack of
experience with competition law concepts. We recommend that the Brooke

7. See North American Free Trade Agreement, Dec. 17, 1992, United States, Mexico,
Canada, 32 I.L.M 605 (1993), available at http://www-tech.mit.edu/Bulletins/nafta.htrnl
[hereinafter NAFTA].

8. Throughout this paper we will use the terms "export-home market" and "complainant-
import market." In a proceeding in the United States to impose antidumping duties on
Canadian products, Canada would be the export-home market and the United States would be
the complainant-import market.

9. Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 113 S.Ct. 2578 (U.S.
1993).

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IND. INT'L & COMP. L. REV.

Group recoupment test be integrated directly into the free trade agreement
with respect to antidumping disputes between free trade members.
Antidumping practices have been subject to rigorous international trade law
rules established by international agreements. Therefore, the addition of a
market structure test at the international level follows a well-established
precedent. More importantly, inclusion of basic antitrust concepts within an
international agreement will provide valuable experience to jurisdictions with
newly established competition law institutions.

With respect to public practices, we recommend that a traditional
market barrier, such' as a tariff, would automatically meet the market
structure test, and antidumping duties would be available if the traditional
requirements can be established. The difficult question is how more subtle
public practices should be treated, and a mere difference in the regulatory
environments should not be sufficient. We recommend that the complainant
should have the burden of proof to establish that the particular public practice
acts as an artificial barrier to entry that permits the respondent to
discriminate between the export-home market and the complainant-import
market. The complainant should also have the obligation to show that the
discrimination in question has allowed the respondent to realize supra-
competitive profits in the export-home jurisdiction.

We conclude with a discussion of the appropriate remedy. We
recommend that in the case of private practices, bi-national panels be given
the authority to enjoin the impugned private practice, if they are given the
ability to review the findings of administrative tribunals on a de novo basis.
With respect to public practices, it is recommended that the bi-national panels
have the authority to order the removal of the practice in question. Again,
this would require the bi-national panels to have the ability to review the final
determinations of administrative tribunals on a de novo basis. In the
alternative, the bi-national panels should have the authority to vacate the
antidumping duty order if the respondent government eliminates the
impugned public practice.

I. CANADA'S EPIPHANY AND ABANDONMENT OF ITS TRADITIONAL
POLICY OBJECTIVE

The Standing Committee Report is correct in its statement that
predatory pricing and antidumping principles pursue different objectives; the
former promotes consumer welfare and the latter promote producer welfare.
The Committee suggests that there are circumstances in which antidumping
principles are justifiable and the one example cited involves protected
domestic markets. No' explanation is given as to when the ability to
discriminate should allow an abandonment of the competition law objective
of promoting lower prices, which is what "consumer welfare" actually
means. Of course, one might point out that the objective of a "free trade
agreement" is to eliminate the ability to discriminate between markets based

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FTA ANTIDUMPING MARKET STRUCTURE TEST

on the fortuitous existence of a border interposed between the two markets.
The question goes unanswered as to why the antidumping mechanism should
be maintained in circumstances where the free trade negotiations have been
successful in eliminating tariffs and other barriers between the markets. The
Committee also fails to explain what other factors allow discrimination
between markets and why they should justify the maintenance of the
antidumping mechanism when competition law provisions address
discriminatory pricing domestically, while maintaining its objective of
promoting consumer welfare.

The passage in the Standing Committee Report (quoted above) is
remarkable because it suggests that the merging of predatory pricing and
antidumping principles would put the competition tribunal in the position of
"subordinating the interests of consumers to producers." This is simply
incorrect, as the merging of the two disciplines would result in one set of
predatory or discriminatory pricing principles that would promote consumer
welfare. The role of the competition tribunal and the courts would not
change at all.

At what point in the establishment of free trade does the antidumping
mechanism become redundant? In the past, the Canadian government took
the position that the establishment of free trade should be sufficient to justify
the elimination of the mechanism. At the time of the Canada-United States
Free Trade Agreement (CUSFTA)' ° negotiations in 1987, the negotiating
objective was to eliminate the antidumping mechanism in favor of
competition law principles.

Dumping was a less intractable problem. At the suspension
of negotiations, Canada had rejected a U.S. proposal to set
up a working group to examine the feasibility of relying on
competition laws after the transition period as a substitute
for antidumping law. In Canada's view, such a technical
group had concluded its work over the course of the
summer. It had considered all aspects of the problem and
prepared a number of technical papers. Canadian experts
were satisfied that it would be feasible to rely on competition
policy at the end of the transition period and to implement a
special regime based on competition principles during that
transition. The 22 September U.S. proposal was its first
formal response. The United States was not prepared to
commit itself to the development of a regime based on
domestic competition law, it was only ready to explore the
issue. The U.S. proposal also did not address the possibility

10. Canada-United States Free Trade Agreement, Jan. 2, 1988, Can.-U.S., 27 I.L.M. 281
(1988)[hereinafter CUSFTA].

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IND. INT'L & COMP. L. REV.

of changes in the existing antidumping regime for the
duration of the transition period."1

And further,

We had tried for months to find some basis for meeting
legitimate American concerns while protecting our interests.
... As far as the Americans were concerned, the status quo
was just fine. American firms were generally not
bankrupted by Canadian anti-dumping duties that covered
only a small percentage of their total sales ...

For many Canadian exporters, this was literally a matter of
economic life or death. Many of our firms shipped half or
more of their production to the United States. They had
structured their operations around that market as the best
way to achieve the volumes needed to increase their
revenues and lower their costs. This would be all the more
true after a free trade agreement eliminated the tariffs at the
border. If, the moment they were successful in exporting to
the United States, their American competitors could haul
them before a kangaroo court, tie them up in interminable,
prohibitively expensive litigation, and very possibly get
penalties applied to all imported shipments, these companies
would be wiped out. Or they would be forced to move their
investment, with the production and jobs, south of the
border to escape these penalties.

Obviously, our first choice would be to get rid of the unfair
trade laws entirely. Alternatively, we would want Canada
to be "exempted" from these laws, to use the prime
minister's phrase. Neither of these options was in the
cards. 12

The theory supporting the elimination of the antidumping mechanism
was that once tariffs and other barriers were removed there would be no
ability to use pricing strategies that could take advantage of protected
markets. Thus, firms would be expected to follow pricing strategies falling

11. MICHAEL HART, DECISION AT MIDNIGHT: INSIDE THE CANADA-US FREE-TRADE
NEGOTIATIONS 300 (1994). See also Michael Hart, Dumping and Free Trade Areas, in

ANTIDUMPING LAW AND PRACTICE 326 (Jackson and Vermulst eds. 1989); Debra Steger,
Dispute Settlement, inTRADE-OFFS ON FREE TRADE: THE CANADA-US FREE TRADE AGREEMENT
182 (Marc Gold and D. Leyton-Brown eds. 1988).

12. GORDON RITCHIE, WRESTLING WITH THE ELEPHANT, THE INSIDE STORY OF THE
CANADA-US TRADE WARS 100-01 (1997).

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FrA ANTIDUMPING MARKET STRUCTURE TEST

within the "ambit of domestic law regulating restrictive business practices.""
The importance of this objective was reflected in the Canada-United States
Free Trade Agreement (CUSFTA), Article 1906:

The provisions of this Chapter shall be in effect for five
years pending the development of a substitute system of
rules in both countries for antidumping and countervailing
duties as applied to their bilateral trade. If no such system
of rules is agreed and implemented at the end of five years,
the provisions of this Chapter shall be extended for a further
two years. Failure to agree to implement a new regime at
the end of the two-year extension shall allow either party to
terminate the Agreement on six-months notice. 4

While the threat to terminate the agreement was an empty inducement,
the provision underscored the importance of the elimination of the
antidumping duty mechanism at that time, at least as a political issue within
Canada.

The traditional Canadian position that the antidumping mechanism
should be eliminated was the basis for the trade negotiations with Chile. The
Canada-Chile Free Trade Agreement (CCFTA) included the following
provision:

Article M-01: Reciprocal Exemption from the
Application of Antidumping Duty Laws

1. Subject to Article M-03, as of the date of entry into
force of this Agreement each Party agrees not to apply
its domestic antidumping law to goods of the other
Party. Specifically:
(a) neither Party shall initiate any antidumping

investigations or review with respect to goods of
the other Party;

(b) each Party shall terminate any ongoing anti-
dumping investigations or inquiries in respect of.
such goods;

(c) neither Party shall impose new antidumping
duties or other measures in respect of such
goods; and

(d) each Party shall revoke all existing orders
levying antidumping duties in respect of such
goods. 1

13. Michael Hart, Dumping and Free TradeAreas, inANTIDUMPING LAWANDPRACrICE
326 (Jackson and Vermulst eds. 1989).

14. See CUSFTA, supra note 10
15. CCFTA, supra note 5 art. M-01.

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IND. INT'L & COMP. L. REV.

Article M-03 is a phase-in provision requiring the elimination of
antidumping provisions on the date when the tariff of both Parties is
eliminated for the particular good in question, or by January 1, 2003,
whichever comes first. 6 We submit that these provisions are consistent with
the traditional Canadian trade position and with one that is principled.

In light of this history, the acceptance of the antidumping mechanism
in the Standing Committee Report and the Government Response, must be
seen as a significant change in Canadian trade policy. Given the treatment of
the issue by the Standing Committee, the question arises whether the
elimination of antidumping and' countervailing duty practices are justified
only in cases where "perfect" economic integration exists in the form of a
fully developed customs union. Alternatively, one might question whether
these remedies should be qualified at some mid-point between separately
evolving economies and a fully integrated customs union.

NAFTA1 7 is not a customs union, and there are a number of remaining
impediments to full economic integration. One example of such an
impediment is the lack of freedom of cross-border labor movement, but
American trade negotiators would also point to a number of factors such as
restrictions in Canada intended to protect its culture.'8 Both Canada and the
United States now appear to agree that these impediments justify the
continuing existence of the traditional World Trade Organization (WTO)
trade remedies in all international trade disputes. At the same time, the
objective of NAFTA was to eliminate trade barriers by January 1, 1998.19

The degree of economic integration of the United States and Canada is quite
remarkable, and the degree of openness of the Canadian economy contrasts
sharply to that of a number of other economies, such as Japan.

16. See id. art.M-03.
17. NAFTA, supra note 7.
18. See United States Trade Representative, 2000 National Trade Estimate Report on

Foreign Trade Barriers, available at www.ustr.gov/reports/nteI2000/contents.html. This report
provides a list of alleged barriers to trade. They include: supply management in dairy products;
eggs and poultry; restrictions on horticultural imports and non-agricultural goods; barriers to
film exports; certain reciprocity rates in its Copyright Act; restrictions pursuant to the
Broadcasting Act imposing Canadian content performance standards; Canadian ownership
requirements in basic telecommunications services; and certain investment restrictions. See id.
at 30-36.

19. See NAFTA, supra note 7.

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FTA ANTIDUMPING MARKET STRUCTURE TEST

CANADIAN EXPOSURE TO FOREIGN COMPETITION
(Percentage basisf

Manufacturing Food, beverages Textiles, Wood & Paper and Chemicals Ha*m s
and tobacco footwear Wood Printing

leather Products

1985 1994 1985 1994 1985 1994 1985 1994 1985 1994 1985 1994 1985 1994.

United States 18.8 27.7 8.9 11.1 22.9 36.5 11.1 14.7 6.6 9.1 15.5 21.7 13.3 12.5
Canada 58.5 73.8 19.8 28.4 33.5 51.2 47.8 80.1 47.2 60.2 37.8 60.4 21.7 39.8
Japan 18.5 17.4 7.1 8.6 18.0 22.7 7,8 14.4 4.2 3.3 14.9 14.2 8.6 8.2
Total OECD 32.6 38.0 28.5 21.7 38.7 49.3 20.7 25.2 16.9 19.7 32.8 36.8 25.5 30.0

While "perfect" economic integration in the form of a customs union
does not exist, the question arises why Canada is subject to the same trade
remedies as Japan, when it has made a much more profound commitment to
an open market which can be easily confirmed across a broad range of
market segments. Does this commitment only warrant a different form of
judicial review (prescribed by the bi-national panel established by Chapter 19
of NAFTA) of final antidumping and countervailing duty determinations?2

It is respectfully submitted that NAFTA's commitment to open markets
justifies the elimination of or, at a minimum, a limitation upon the traditional
antidumping duty mechanism. It appears to be based upon a presumption
that if the requisite difference in the home and target prices is demonstrated,
some artificial market impediment exists that is not based upon efficiency.
Alternatively, using the wording of the Standing Committee Report, there
must be some factor based on the existence of an international border
permitting the foreign producer to discriminate between the export-home
market and the complainant-import market which, once again, is not based
on efficiency. Where no such factor can be identified, the fundamental
justification for imposing duties is lacking because an open, competitive, and
efficient market apparently exists. The higher home market price - if not
resulting from the byzantine methods by which costs are constructed
according to antidumping principles - must be due to some factor related to
efficiency. If not, a competitive opportunity likely exists, which the
complainant's manufacturers have not exploited in the exporter's home
market. Higher prices in the home market should attract entry and the
remedy is a pro-competitive one - the complainant should compete and
attempt to penetrate the exporter's home market - instead of wasting

20. OECD, SCIENCE, TECHNOLOGY, AND INDUSTRY, SCOREBOARD OF INDICATORS, 173

(1997). This comparison is based on the export share of production within a sector, combined
with a weighted average of the import share of domestic consumption.

21. See NAFTA, supra note 7, ch. 19.

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IND. INT'L& COMP. L. REv.

resources on litigation or seeking the imposition by government of
deadweight consumer welfare losses through antidumping duties.

With respect, the reversal of Canadian policy is in error, and the
elimination of the mechanism contained in the CCFTA is the proper policy
position; this requires the abandonment of the antidumping mechanism. In
the absence of an artificial impediment, the Standing Committee's logic, and
that of the government, requires that no antidumping duty be imposed.
There is no policy justification for imposing higher prices upon consumers
and deadweight losses upon the Canadian economy.

II. THE PRESUMPTION BY ANTIDUMPING PRACTICES OF A
MARKET IMPEDIMENT

The Agreement on Implementation of Article VI of the General
Agreement on Tariffs and Trade, 1994 (Antidumping Agreement)2 provides
that a product is to be considered as dumped (i.e., introduced into the
commerce of another country at less than its normal value) if the export price
from one country to another is less than the comparable price for the like
product when destined for consumption in the exporting (home) country.2

The Antidumping Agreement provides for a bifurcated tribunal mechanism.
Separate administrative agencies decide whether dumping has occurred and
whether injury has been sustained. In the United States, the Department of
Commerce determines the margin of dumping, and the International Trade
Commission determines injury.24

The Antidumping Agreement provides that provisional duties (usually
in the form of a security by way of cash deposit or bond) may be demanded
within sixty days of the commencement of the investigation where a
preliminary affirmative determination of dumping and consequent injury has
been made.' The standard for imposing provisional duties is low and
effectively places a reverse onus upon the foreign exporter. The United
States' implementing legislation requires the International Trade Commission
to determine if "there is a reasonable indication that the requisite injury
exists.""

22. See Agreement on Implementation of Article VI of the General Agreement on Tariffs
and Trade, annex IA, H.R. Doc. No. 316, 103d Cong. (1994) reprinted in LEGAL
INSTRUMENTS-RESULTS OF THE URUGUAY ROUND, available at

http://www/wto.org/english/docselegal_elfinae.htrnl [hereinafter Antidumping Agreement].
23. See id. art. 2.1.
24. In Canada, the corresponding agencies are the Deputy Minister of National Revenue

for Customs and Excise, and the Canadian Import Trade Tribunal (CITT'). See NAFTA, supra
note 7, at annex 1911.

25. See Antidumping Agreement, supra note 22, arts. 7.1, 7.2, 7.3.
26. JOSEPH E. PATrISON, ANTIDUMPING AND COUNTERVAiLiNG DUTYLAWS 3-13 (1984);

see also Tariff Act of 1930, § 4, 19 U.S.C.A § 1677 (2000).

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The Commission held that the- test requires a negative determination
only when: (1) the record of a proceeding contains clear and convincing
evidence of no material injury or threat thereof; and (2) no likelihood exists
that evidence demonstrating material injury for threat thereof will surface in
the final investigation.

After provisional duties have been imposed, the investigating authority
must verify all information upon reaching a final determination with respect
to its finding of dumping. 28 The comparison between the export price and
the normal value is to be made at the ex-factory level, and due allowance is
to be made for differences which affect price comparability, including
differences in conditions and terms of sale, taxation, levels of trade,
quantities, and physical characteristics." Using American practice as an
example, the Department of Commerce obtains substantial information
regarding the foreign and domestic markets through sales questionnaires.
Initially, information regarding the corporate structure is obtained, including
the description of the units involved in the development, manufacture, sale,
and distribution of merchandise under investigation." The Department
requests lists of the ten largest shareholders and the percentage of ownership
each controls.' Commerce also demands a flow chart and description of
each method or channel of distribution for the American and export-home
markets. For each, the functions performed and services offered32 in each
distribution channel to each customer or class of customer in the United
States and export-home markets. With respect to the sales process, the
Department of Commerce seeks detailed information on each sale in the
United States and export-home markets during the period of investigation,
including sales agreements and price lists, along with discount or rebate
schedules. 3  The Department of Commerce also obtains information
regarding accounting and financial practices, including a chart of accounts,
audited consolidated and unconsolidated financial statements, and internal
financial statements or profit and loss reports.3

In short, the Department of Commerce obtains a complete description
of the export-home and United States markets, including the pricing and the
profitability thereof. The power given to the investigating agencies is
significant, notwithstanding the fact that they lack subpoena power in the
foreign jurisdiction. Foreign exporters are encouraged to cooperate and

27. See PATTISON, supra note 26, at 3-14.
28. See id. at 8-1 (citing 19 U.S.C.A. § 1677m(i) (2000)).
29. See id. art. 2.4.
30. See id. at appendix M, § A.2.a.
31. See id. at appendix M, § A.2.d.
32. See id. at appendix M, § A.3.b. These lists include inventory maintenance, technical

advice, warranty and other after sales service, freight and delivery arrangements, after-sale
warehousing, and advertising or other sales support facilities. See id.

33. See id. at appendix M, § A.3.4.
34. See id. at appendix M, § A.6.

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IND. INT'L & COMP. L. REV.

provide the required information. If they refuse access to or otherwise do
not provide necessary information within a reasonable period of time or
significantly impede the investigation, the determination can be made on the
basis of the "best information available." 35  When the investigating
authorities resort to best information available, it often means the facts
contained in the originating complaint.

Where the export price is non-existent or unreliable, the export price
may be constructed on the basis of the price at which the imported products
are first sold to an independent buyer, or if the products are not resold to an
independent buyer or not resold in the condition as imported, then on such
reasonable basis as the authorities may determine. 6 The investigating
authorities conduct a constructed cost analysis, in which they build the so-
called "normal value" by analyzing all of its constituent components,
including an allocation for profit.3 Allowances are to be made on the basis
of a fully-allocated cost standard, with due allowance for costs and profits. 3

A finding of dumping alone is not sufficient to impose duties; the
investigators must also determine that the dumping has caused injury. The
injury determination must be based "on positive evidence and involve an
objective examination of both: (a) the volume of the dumped imports and the
effect of the dumped imports on prices in the domestic market for like
products, and (b) the consequent impact of these imports on domestic
producers of such products." 39 The Department of Commerce must
determine whether there has been significant price undercutting by the
dumped imports as compared with the price of a like product, "or whether
the effect of such imports is otherwise to depress prices to a significant
degree or to prevent price increases, which otherwise would have occurred,
to a significant degree."40 The Antidumping Agreement provides that the
investigating authority is to consider various factors concerning the domestic
industry:

The examination of the impact of the dumped imports on the
domestic industry concerned shall include an evaluation of
all relevant economic factors and indices having a bearing on

35. Antidumping Agreement, supra note 22, art. 6(8), annex II.
36. See id. art. 2.3
37. Past practice was to estimate an eight percent margin but this was changed in the 1994

WTO Agreements to check pattern in the industry. See RICHARD BOLTUCK AND ROBERT E.
LITAN, DOWN IN THE DuMPs, ADMINISTRATION OF THE UNFAIR TRADE LAWS 213 (1991).

38. Antidumping Agreement, supra note 22, art. 2.4. As indicated below, lawmakers
debated the appropriate cost standard in the context of predatory pricing provisions in antitrust
law. The debate has been bracketed by a marginal cost standard versus a fully-allocated cost
standard. The antidumping price standard is beyond a fully-allocated cost standard because the
home market "normal value" includes not only an allocation of all costs but also provide for a
reasonable profit in the circumstances. See infra pp. 53-68.

39. Id. art. 3.1.
40. id. art. 3.2.

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FTA ANTIDUMPING MARKET STRUCTURE TEST

the state of the industry, including actual and potential
decline in sales, profits, output, market share, productivity,
return on investment, or utilization of capacity; factors
affecting domestic prices; the magnitude of the margin of
dumping; actual and potential negative effects on cash flow,
inventories, employment, wages, growth, ability to raise
capital or investments. This list is not exhaustive, nor can
one or several of these factors necessarily give decisive
guidance."'

Investigators must find a causal relationship between-the dumping and
the domestic injury. This is based on the examination of all relevant
evidence, before the authorities, who are required to examine "any known
factors other than the dumped imports which at the same time are injuring the
domestic industry, and the injuries caused by these other factors must not be
attributed to the dumped imports." 42 These factors might include contraction
in demand or changes in the patterns of consumption, trade restrictive
practices and/or competition between the foreign and domestic producers,
developments in technology, and the export performance and productivity of
the domestic industry. 3

In the United States, the International Trade Commission obtains
detailed information relevant to the determination of injury or a material
threat thereof, through the issuance of detailed questionnaires, including
information related to export shipments of the merchandise by the producer."
The Tariff Act requires the Commission to consider the following factors
when making its injury determination: volume of imports, the effect of
imports on the subject merchandise on prices in the United States for the like
product, and the impact of imports of the subject merchandise on domestic
producers of like products.4 5 The Tariff Act defines material injury as "harm

41. Id. art. 3.4.
42. Id. art. 3.5.
43. See id.
44. See PATTISON, supra note 26, at 4-4. The questionnaire focuses upon injury to the

domestic industry regarding production, sales, pricing, employment, capacity and
utilization issues from both the importers and U.S. producers of the subject merchandise.
It requests information related to the following issues, among others: (1) total production
broken down by producing plant location and product type; (2) quantity and value of
imports; (3) export shipments of the merchandise by the producer; (4) hours worked by
production and production related employees in producing all products; (5) total wages
paid to production and production related employees; (6) comparison of price and
quantities; (7) changes in ability to raise capital and investment; (8) increases or decreases
in working capital; and (9) average selling prices and production costs; among a wide
variety of other information sought. See id. at 4-6 - 4-8.

45. See Tariff Act, 19 U.S.C. § 1677(7)(B). The commission is directed to evaluate five
factors including: (1) actual and potential decline in output, sales, market share, profits,
productivity return on investments and utilization of capacity; (2) factors affecting domestic

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IND. INT'L & COMP. L. REV.

which is not inconsequential, immaterial or unimportant. "46 Injury
determinations in the United States indicate that certain evidence in particular
contributes to a positive finding. Pricing trends are important, and the
Commission is required to weigh the two basic aspects of pricing referred to
above, whether there has been significant price undercutting and/or price
depression or suppression.4" "Import sales at prices substantially below those
of domestic producers often substantially sway the Commission in its injury
findings. "48 It is irrelevant whether the price underselling or undercutting is
of a "predatory" nature. 49 Another key factor is market share, but the
Commission is more interested in the dynamics of the market share and an
increase therein than by the magnitude of market penetration by imports.5)
Of somewhat lesser importance are issues of profitability and domestic
employment factors, along with capacity utilization.5 1

There are a number of presumptions in antidumping practices that
highlight the difference between competition and international trade law. For
instance, antidumping practices appear to prohibit cross-subsidization
between markets if the requisite degree of injury can be found. From the
standpoint of international trade law, a foreign exporter should not be
allowed to earn profits in the export-home market to subsidize sales in the
complainant-import market. It does not matter whether pricing in the
complainant-import market exceeds its marginal costs, thus indicating that
the foreign exporter is acting in an economically rational manner.

Another identifiable presumption is that there is price inelasticity in the
relevant pricing range in the export-home market. Prices are maintained at
artificially high levels in the exporter's home market, and this is possible
because the market segment in question is not unduly price sensitive. In
other words, the demand for the product remains relatively constant
notwithstanding the higher prices in the export-home market, or at least the
increase in price exceeds the decrease in sales caused by the higher prices.
If the home market exhibited price elasticity (i.e., if any price increase would
cause a correspondingly greater decrease in sales volume due, for instance,

prices; (3) actual and potential negative effects on cash flow, inventories, employment, wages,
growth, ability to rise capital, and investment; (4) actual and potential negative effects on the
existing development and production efforts of the domestic industry, including efforts to
develop a derivative or more advanced version of the like product; and (5) the magnitude of the
dumping margin. See 19 U.S.C. § 1677(7)(C). No one factor is determinative and the
Commission is not restricted to these factors. See PATrISON, supra note 26, at 4-9 (citing 19
U.S.C. § 1677(7)(F)(ii)).

46. PAT7SON, supra note 26, at 4-7.
47. See id. at 4-8.
48. Id. at 4-15; see also BIC Corp. v. United States, 19 I.T.R.D. 1560 (Ct.Int'l Trade

1997); Companhia Paulista de Ferro Ligas v. United States, 18 I.T.R.D. 1542 (Ct.Int'l.Trade
1996).

49. See PATrISON, supra note 26, at 4-14.
50. See id. at 4-12.

.51. See id. at 4-15 - 4-19.

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FTA ANTIDUMPING MARKET STRUCTURE TEST

to readily available substitutes) the maintenance of higher prices would not
be economically rational. Profits would decrease in the home market.

This leads into the most important presumption for the standpoint of this
article - the presumption that antidumping practices of a market impediment
allow the foreign exporter to exploit the export-home market in a manner not
available to the domestic industry in the complainant-import market. In the
Canadian context, this means that the Canadian exporter can exploit the
Canadian market in a manner not available to its American competitors.
Such a presumption must exist because, if no such impediment is present,
why has the American manufacturer simply not supplied the Canadian
market? The higher prices in the Canadian market should attract market
entry if they are not a result of manipulation sanctioned by constructed price
analyses and other nuances of antidumping practices.

The presumption of a market impediment is evident in certain aspects
of the antidumping practices that were reviewed above. It is seen in the
insular focus of the investigation of injury in the domestic market on such
factors as domestic market share, profitability, production capacity, and
utilization of technology, among others. There is no explicit requirement to
give consideration to the export performance of the domestic industry,
particularly from the standpoint as to what efforts, if any, have been made
in attempting to penetrate the export-home market to take advantage of the
higher prices. There is no inquiry into the reasons for the difference in price
evident in the export-home and the complainant-import market. The
existence of the price difference itself becomes the market structure analysis.
Nothing more is needed as the injury requirement appears to provide the
element of causation.

Ill. COMPETITION LAW AND ITS EVOLUTION TO A MARKET
STRUCTURE TEST

The importance of the presumption of a market impediment when a
difference in pricing exists between the export-home and the complainant-
import market becomes apparent when one considers the manner in which
similar issues are treated in the context of antitrust law. The possibility of
subsidization between markets is considered irrelevant, absent anti-
competitive conduct. The issue of a market structure that is conducive to the
exploitation of the impugned pricing practice, becomes the focal point of the
analysis.

Traditionally, competition law regulated competition within a market,
and trade policy regulated trade between markets.. Ostensibly, both are
concerned with the conditions of trade within a particular jurisdiction, but
they start from fundamentally different premises. Antitrust has shifted to a
predominantly efficiency and consumer welfare orientation, but
countervailing duty and antidumping laws embrace a producer-welfare
orientation. This difference in orientation begins to break down once

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IND. INT'L & COMP. L. REv.

markets integrate. The question becomes what degree of integration is
necessary such that the difference in orientation is no longer justified?

Antidumping principles find their counterpart in the predatory pricing
and price discrimination (provisions of the American antitrust statutes.
Section 2 of the Sherman Act52 deals with predatory pricing in the context of
attempts at monopolization and provides:

Every person who shall monopolize, or attempt to
monopolize, or combine or conspire with any other person
or persons, to monopolize any part of the trade or commerce
among the several States, or with foreign nations, shall be

53deemed guilty of a felony ....

In the context of predatory behavior, the complainant must prove that
the alleged monopolist has the market power or the prospect of acquiring
market power sufficient to drive competitors out of the market, with the
ability to then raise prices through a restriction of output allowing
recoupment of the losses. The circumstances in which these factors can be
established are considered to be relatively rare.

Section 2(a) of the Clayton Act, 4 as amended by the Robinson-Patman
Act, s is concerned with discriminatory pricing and provides:

It shall be unlawful for any person engaged in commerce, in
the course of such commerce, either directly or indirectly,
to discriminate in price between different purchasers of com-
modities of like grade and quality . . . where the effect of
such discrimination may be substantially to lessen
competition or tend to create a monopoly in any line of
commerce, or to injure, destroy, or prevent competition with
any person who either grants or knowingly receives the
benefit of such discrimination, or with customers of either
of them.... .'

The Supreme Court has held that a price difference is suffi-
cient to qualify as price discrimination within the terms of this
section.57 The statute does not ban all price differences and is qualified in a
number of important ways. For example, the price difference must threaten

52. 15 U.S.C.A § 2 (1997).
53. Id.
54. See 15 U.S.C. § 12 (2000).
55. See 15 U.S.C. § 13(a) (2000).
56. id.
57. Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 113 S.Ct. 2578, 2586

(U.S. 1993).

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to injure competition.58 This has been a problematic statutory provision from
the standpoint of asserting consumer welfare as the central goal of antitrust.
It has been described as a small business statute and as one that protects
competitors and not competition. 9 One important problem in American
antitrust jurisprudence is whether Section 2 of the Sherman Act and Section
2(a) of the Clayton Act, as amended, involve similar standards of proof, or
whether the latter involves a lesser standard such that findings of antitrust
violation will become more readily available.

The American antitrust law applies internationally in certain circum-
stances pursuant to the terms of the Wilson Tariff Act,6° which provides:

Every combination, conspiracy, trust, agreement, or
contract is declared to be contrary to public policy, illegal,
and void when the same is made by or between two or more
persons or corporations, either of whom, as agent or
principal, is engaged in importing any article from any
foreign country into the United States, and when such
combination, conspiracy, trust, agreement, or contract is
intended to operate in restraint of lawful trade, or free
competition in lawful trade or commerce, or to increase the
market price in any part of the United States of any article
or articles imported or intended to be imported into the
United States, or of any manufacture into which such
imported article enters or is intended to enter.6 '

Apparently, few cases have interpreted the scope of this section. 62 The
leading case is Matsushita Electric Indus. Co., Ltd. v. Zenith Radio Corp.63

in which the lower court held that this statute was co-extensive with Section
1 of the Sherman Act.(' The court rejected the argument that the statute was

58. There are a number of relevant statutory defenses. One such defense is that the price
discrimination is based on differences in costs "changing conditions affecting the market for
or the marketability of the goods concerned," or conduct undertaken "in good faith to meet an
equally low price of a competitor." Id. (citing 15 U.S.C. § 13(b)).

59. See i.F. Feeser Inc. v. Serv-A-Portion Inc., 909 F.2d 1524-48 (1990). See also
SPENCER WALLER, ANTITRUST LAW LIBRARY: INTERNATIONAL TRADE AND U.S.

ANTITRUST LAW 2:28 (1996).
60. 15 U.S.C. § 8. (2000).
61. Id.
62. See WALLER, supra note 59, at 1:24-25.
63. Matsushita Electric Indus. Co. v. Zenith Radio Corp., 513 F. Supp. 1100, 1162-64

(E.D. Pa. 1981), aff'd in part and rev'd in part, 723 F.2d 238 (3d Cir. 1983), rev'd on other
grounds, 475 U.S. 574 (1986).

64. Matsushita, 475 U.S. at 583. Section 1 of the Sherman Act provides: "Every contract,
combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce
among the several States, or with foreign nations, is hereby declared to be illegal .... " 15
U.S.C. § 1 (2000).

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IND. INT'L & COMP. L. REv.

protectionist in nature and provided relief from foreign competition beyond
the requirements of the other antitrust laws. The court also rejected the
defendants' argument that the statute was more limited than the Sherman
Act. 65

Predatory and discriminatory pricing principles within American
antitrust law have evolved during the past thirty years. Initially they shared
the same producer-welfare orientation as current antidumping principles.
Utah Pie Co. v. Continental Baking Co.'6 reflects this orientation. It has
since been described as one of the most anti-competitive antitrust decisions
ever made within the United States. It was the first time the Supreme Court
actually imposed and required a restraint of trade.67 The next section reviews
the evolution of predatory and discriminatory pricing principles from Utah
Pie through the Brooke Group case. The adoption of a consumer welfare
orientation and market structure test is highlighted, as it identifies the kind
of condition precedent that should be incorporated into NAFTA antidumping
practices.

A. Utah Pie and its Illusion of Price Discrimination

Utah Pie Co. v. Continental Baking Co. involved allegations of
discriminatory pricing between 1958 and 1961 by a local pie company in the
Utah market against three national pie companies. The Court found that the
major competitive weapon in the Utah market was price. 68 The location of
the Utah Pie plant gave it a natural advantage. It entered the market at a
price below the national companies, sparking the price competition it later
complained about. The remarkable feature of this case is that the complaint
was brought even though Utah Pie was expanding its volume and maintaining
its profitability during the period of the complaint.' Notwithstanding Utah
Pie's performance during the period, the jury awarded treble damages on the
allegation of price discrimination, although allegations of conspiracy under
the Sherman Act were dismissed. The court of appeals reversed, finding the
evidence against the respondents insufficient to support a finding of probable
injury to competition.7'

The Supreme Court reversed and remanded, disagreeing with the court
of appeal's view that there is no reasonable injury to competition possible as
long as the volume of sales in a particular market is expanding and at least

65. See Matsushita, 513 F. Supp. at 1162-64. This finding was upheld by the court of
appeals, but not referred to in the Supreme Court decision.

66. Utah Pie Co. v. Continental Baking Co., 386 U.S. 685 (1967).
67. See Ward S. Bowman, Restraint of Trade by the Supreme Court: The Utah Pie Case,

77 YALE L.J. 70, at 84-85 (1967-68).
68. Utah Pie, 386 U.S. at 690.
69. See id. at 691-92.
70. See id. at 686-87.

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FA ANTIDUMPING MARKET STRUCTURE TEST

some of the competitors in the market continue to operate at a profit. 71 The
Supreme Court held that:

there was ample evidence to show that each of the respon-
dents contributed to what proved to be a deteriorating price
structure over the period covered by this suit and each of the
respondents in the course of the ongoing price competition
sold frozen pies in the Salt Lake market at prices lower than
it sold pies of like grade and quality in other markets
considerably closer to its plants.7

The Supreme Court also held that the Clayton Act, 73 as amended by the
Robinson-Patman Act, 74 is not limited to those instances when price
discriminators consistently undercut other competitors. The Court acknowl-
edged that many "primary line cases" involve "blatant predatory price
discriminations employed with the hope of immediate destruction of a
particular competitor."'5 The Court found that there was some evidence of
predatory intent, although acknowledging that "[i]t might be argued that the
respondents' conduct displayed only fierce competitive instincts." 76 The
Court further stated that:

There was also other evidence upon which the jury could
rationally find the requisite injury to competition. The
frozen pie market in Salt Lake City was highly competitive.
At times Utah Pie was a leader in moving the general level
of prices down, and at other times each of the respondents
also bore responsibility for the downward pressure on the
price structure. We believe that the Act reaches price
discrimination that erodes competition as much as it does
price discrimination that is intended to have immediate
destructive impact. In this case, the evidence shows a
drastically declining price structure which the jury could
rationally attribute to continued or sporadic price discrimina-
tion.'

71. Id. at 702. Of course, the other competitors of the national brands were not
complainants. The only complainant, and the company to which damages would be paid, was
the very company who had remained profitable through the period in question. See id.

72. Id. Utah Pie entered the market at a price of $4.15 per dozen and was selling at a price
at $2.75 forty-four months later when the complaint was filed. Id.

73. 15 U.S.C. § 12(2000).
74. Id. § 13(a).
75. Utah Pie, 386 U.S. at 702.
76. Id. at 702, n. 14.
77. Id. at 702-03.

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IND. INT'L & COMP. L. REV.

It has been argued that in Utah Pie the Supreme Court was showing a
determination to change antitrust laws "designed to promote competition into
laws that regulate or hamper the competitive process," and it used the
Robinson-Patman Act "to strike directly at price competition itself.", 78 The
court of appeals finding of no probable effect on competition was overcome
by the decline in the share of the market held by Utah Pie.

Thus, an adverse effect on a competitor, even on one in a
quasi-monopoly position, whose sales and profits continue
to expand, and whose only injury is the loss of market
dominance as a result of price competition which he himself
engenders, is enough for the Supreme Court.79

Bowman states "but that is not all," as Justice White "used the very
evidence of competition which convinced the court of appeals that no
violation existed to decide that there was an antitrust violation. "80

Outlawing price discrimination because it might transfer funds to
kill or harass competitors deserves about as much support as
outlawing income itself because it might be spent on burglars'
tools. The pro-competitive aspects of price discrimination, in
contrast, are manifest."'

The Utah Pie decision can be seen as supporting principles found within
antidumping practice. A decreasing price structure alone can be found to be
inimical to the competition within a particular market, without regard to a
consideration of an appropriate pricing standard, whether based upon
marginal costs, a fully-allocated cost standard or the antidumping standard
covering all costs and allowing for a reasonable profit. One might infer that
the antidumping standard was indeed used, due to the fact that liability was
imposed, even though the Utah Pie company was enjoying an increase in
profits. The erosion in price structure alone provides liability, and there is
no apparent analysis of market structure included in the decision. Similar to
antidumping practices, this case reflects a concern for producer welfare at the
expense of consumer welfare.

78. Bowman, supra note 67, at 70. This article is the seminal economic analysis of the
Utah Pie decision.

79. Id. at 73.
80. Id.
81. Id. at 83-84.

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B. Areeda and Turner: an Average Variable Cost-based Test of Preda-
tion

The Utah Pie decision, along with at least two other decisions in the
1960s, 2 reflect a high water mark in establishing a producer welfare
orientation for antitrust law. The first major step in the evolution of
predatory pricing theory to a consumer welfare orientation was the publica-
tion of Areeda and Turner's article, Predatory Pricing and Related Practices
Under Section 2 of the Sherman Act, published in 1975. This article
became a focal point for academic scrutiny and had a significant influence on
the courts thereafter.

Areeda and Turner start their analysis by indicating that the then
existing treatment of predatory pricing in the courts and legal analysis
suffered from two defects: (1) "failure to delineate clearly and correctly what
practices should constitute the offense," and (2) "exaggerated fears that large
firms will be inclined to engage in it. "I Vague formulations of the offense
overlook the fact that predation "cannot exist unless there is a temporary
sacrifice of net revenues in the expectation of greater future gains"' after
rivals have been driven out of the market. Predatory pricing makes little
economic sense unless the predator has: "(1) greater financial staying power
than his rivals, and (2) a very substantial prospect that the losses incurred
will be exceeded by the profits made after the predation has succeeded.""6

If monopoly power is achieved, the firm has, by definition, captured enough
of the market to determine market price by varying its output and thus raising
its price to supra-competitive levels." The second prerequisite is less likely
to occur, unless "very high barriers to entry" exist.8 In many markets,
entry barriers may be nonexistent or too low to prevent entry. Even though

82. See, e.g., United States v. Von's Grocery Co., 384 U.S. 270 (1966); Brown Shoe Co.
v. United States, 370 U.S. 294 (1962).

83. Phillip Areeda and Donald F. Turner, Predatory Pricing andRelated Practices Under
Section 2 of the Sherman Act, 88 HARV. L. REV. 697 (1975).

84. Id. at 698.
85. Id.
86. Id.
87. See id. at 702-03. Under circumstances of perfect competition, price will equal

marginal cost, as the competitive firm has no power over market price. Any additional unit of
output is equal to the price itself. This produces an efficient allocation of resources: the social
optimum. However, when monopoly power exists, the selling of additional product will reduce
price and so the monopolist faces a downward sloping demand curve. The incremental revenue
to a monopolist is the lower price received for that unit as well as the lower revenue received
from the sale of all its other production as a result of the lower price. Marginal revenue,
therefore, is always below the price that generates it. The monopolist will only produce to the
point where marginal cost equals marginal revenue and so marginal cost will be below the
associated price. The monopolist's price is thus higher, and its output lower, than the social
optimum; any higher output and lower price would be an improvement in resource use up to
the point where, as in a competitive market, price equals marginal cost. See id.

88. Id. at 699.

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IND. INT'L & COMP. L. REV.

predatory pricing "seems highly unlikely does not necessarily mean that there
should be no antitrust rules against it. "89

But' it does suggest that extreme care be taken in formulating such
rules, lest the threat of litigation, particularly by private parties,
materially deter legitimate, competitive pricing. Courts in
predatory pricing cases have generally turned to such empty
formulae as "below cost" pricing, ruinous competition, or
predatory intent in adjudicating liability. These standards provide
little, if any, basis for analyzing the predatory pricing offense. 90

Areeda and Turner submit that prices below marginal cost should be the
point at which an inference of predatory intent can be made. By definition,
a firm selling goods within this range is selling at least part of its output at
an out-of-pocket loss. It could restrict either its output or cease production
in the extreme case if the highest price the firm could obtain is below average
variable cost at all levels of production. When above marginal cost, pricing
should be tolerated because it leads to a proper resource allocation9' and is
consistent with competition on the merits. When price is below marginal
cost, the monopolist is incurring private losses and wasting social resources
because marginal cost exceeds the value of what is produced. "[Pricing
below marginal cost greatly increases the possibility that rivalry will be
extinguished or prevented for reasons unrelated to the efficiency of the
monopolist . . . [a]ccordingly, a monopolist pricing below marginal cost
should be presumed to have engaged in a predatory or exclusionary
practice. "92

The final step in the Areeda and Turner predatory pricing analysis is the
selection of average variable cost as a surrogate for marginal cost, due to the
difficulty in measuring marginal cost. Few, if any, corporations actually
track and engage in financial reporting based upon marginal cost. Areeda
and Turner focus upon average variable costs to provide an inference that,
when pricing falls below this level, predatory pricing intent exists. The

89. Id.
90. Id.
91. Areeda and Turner use the economic concept of perfect competition to establish this

point. When this condition exists, marginal cost equals the market price. This solution in the
perfectly competitive world also produces an efficient allocation of resources: market price
reflects what consumers are willing to pay for the last unit of output; marginal cost reflects the
full current cost of resources needed to produce it; a higher price would result in a reduction in
output and thus deprive some buyers of a commodity for which they were willing to pay the
cost of production.
See id. at 702.

92. Id. at 712. The only exception to this rule is in circumstances where price is below
marginal cost but above average cost. It only occurs when demand exceeds what the firm can
produce at minimum average cost. Equally efficient rivals will be making above-normal profits
at this level because the firm in question is acting near capacity.

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2000] FTA ANTIDUMPING MARKET STRUCTURE TEST

importance of the test is that it abandons a fully allocated price standard on
the basis that an economically rational agent can engage in pricing above
marginal cost. It has proven to be a highly influential test, but note that the
inference is based upon pricing practices alone without regard to the market
structure that exists. For our purposes, antidumping and antitrust practices
begin to diverge, but in a sense the difference between antidumping practices
and the Areeda-Turner test is simply the price point at which the appropriate
inference is drawn. There are other differences. The Areeda & Turner test
focuses exclusively upon the accused's pricing patterns and does not consider
the financial circumstances of, or injury to, the complainant.

C. Brooke Group Ltd. v. Brown & Williamson Tobacco Corporation'

The issues that the Supreme Court dealt with were: (1) the correct cost
standard for determining predatory intent; (2) the role of a structural market
analysis in respect of recoupment; and (3) the nature of the relationship

93. Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 113 S.Ct. 2578 (U.S.
1993). The case involved cigarette manufacturing, a concentrated industry dominated by six
firms. The plaintiff and applicant, Brooke Group, held a 2% market share while Brown &
Williamson held an 11.4% market share. id. at 2582-83. In 1980, the plaintiff and applicant,
the Brooke Group, developed a line of generic cigarettes offered at a list price roughly 30%
lower than that of branded cigarettes. Id. By 1984, the generics had captured 4% of the market.
Brown & Williamson was hardest hit by the introduction of generics as its brands were cost-
sensitive; 20% of the converts to Brooke Group generics came from Brown & Williamson. Id.
at 2583. Brown & Williamson entered the generic segment at a lower net price. The Brooke
Group responded precipitating a price war that they alleged ended with Brown & Williamson
selling its generics at a loss. See id. at 2584. The Brooke Group commenced the action
alleging, inter alia, that volume rebates by Brown & Williamson to wholesalers amounted to
price discrimination that had a reasonable possibility of injuring competition contravening
Section 2 of the Clayton Act as amended by the Robinson-Patman Act. The Brooke Group
alleged further that the rebates were designed to force it to raise its prices thus restraining the
growth of the generic segment and preserving Brown & Williamson's supra-competitive profits
on branded cigarettes. The jury foind for the Brooke Group, but the verdict was overturned by
the district court as a matter of law on three grounds: lack of injury to competition, lack of
antitrust injury to Liggett, and lack of a causal link between the discriminatory rebates and
Liggett's alleged injury. Id. at 2585. The trial court's "lack of injury to competition" finding
was based on a conclusion that there was no tacit coordination of prices in the generic segment
among the various manufacturers, and so Brown & Williamson had no reasonable possibility
of limiting the growth of the segment. Id. The court of appeals affirmed, holding that the
dynamic of conscious parallelism among oligopolists could not produce competitive injury in
a predatory pricing setting, which necessarily involves a price cut by one of the oligopolists.
Id. "In the Court of Appeals' view, [t]o rely on the characteristics of an oligopoly to assure
recoupment of losses from a predatory pricing scheme after one oligopolist has made a
competitive move is ... economically irrational." Id. at 2586. The syllabus was also used in
describing the facts. See id. at 2580.



IND. INT'L & COMP. L. REV.

between the Sherman Act94 and the Robinson-Patman Act95 regarding
predatory and discriminatory pricing. 6

The Supreme Court held that price discrimination under the Clayton
Act, as amended, "is merely a price difference," but "the statute as a
practical matter could not, and does not, ban all price differences .... "97

Congress did not intend to outlaw price differences that result from or further
the forces of competition. Thus, "the Robinson-Patman Act should be
construed consistently with broader policies of the antitrust laws."98 The
Supreme Court then distinguished Utah Pie on the ground that "[a]s the law
has been explored since Utah Pie, it has become evident that primary-line
competitive injury under the Robinson-Patman Act is of the same general
character as the injury inflicted by predatory pricing schemes actionable
under § 2 of the Sherman Act."99 The Court confirmed that there are
differences between the two statutes, but that they share the same general
characteristics:

For example, we interpret § 2 of the Sherman Act to
condemn predatory pricing when it poses 'a dangerous probability
of actual monopolization,' .. . whereas the Robinson-Patman Act
requires only that there be 'a reasonable possibility' of substantial
injury to competition before its protections are triggered ....
But whatever additional flexibility the Robinson-Patman Act
standard may imply, the essence of the claim under either statute
is the same: A business rival has priced its products in an unfair
manner with an object to eliminate or retard competition and
thereby gain and exercise control over prices in the relevant
market.

Accordingly, whether the claim alleges predatory pricing
under § 2 of the Sherman Act or primary-line price discrimination
under the Robinson-Patman Act, the two prerequisites to recovery
remain the same."0

When predatory pricing or price discrimination is at issue, the first
requirement is that "a plaintiff seeking to establish competitive injury
resulting from a rival's low prices must prove that the prices complained of

94. 15 U.S.C.A § 2.
95. 15 U.S.C.A.§ 13(a).
96. The argument in respect of these issues was given added piquancy because Phillip

Areeda and Robert Bork (the "titans of antitrust") argued the case for the plaintiff-appellant and
defendant-respondent respectively, before the Supreme Court.

97. Brooke Group Ltd., 113 S.Ct. at 2586.
98. Id. (citing Great Atlantic & Pacific Tea Co., Inc. v. FTC, 440 U.S. 69, 80, n. 13

(1979); Automatic Canteen Co. Of America v. FTC, 346 U.S. 61, 63, 74 (1953)).
99. Id. at 2587.

100. Id.

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FTA ANTIDUMPING MARKET STRUCTURE TEST

are below an appropriate measure of its rival's costs."' 0' The Supreme Court
declined to determine what constitutes an "appropriate measure" of costs
because the parties agreed that the relevant measure of cost is average
variable cost. "2

The Supreme Court rejected the notion that "above-cost prices that are
below general market levels or the costs of a firm's competitors inflict injury
to competition cognizable under the antitrust laws." 03 The protection of
price competition was an important aspect of the decision.

Low prices benefit consumers regardless of how those prices are
set, and so long as they are above predatory levels, they do not
threaten competition . . . We have adhered to this principle
regardless of the type of antitrust claim involved. As a general
rule, the exclusionary effect of prices above a relevant measure of
cost either reflects the lower cost structure of the alleged predator,
and so represents competition on the merits, or is beyond the
practical ability of a judicial tribunal to control without courting
intolerable risks of chilling legitimate price-cutting. To hold that
the antitrust laws protect competitors from the loss of profits due
to such price competition would, in effect, render illegal any
decision by a firm to cut prices in order to increase market share.
The antitrust laws require no such perverse result."' 4

With respect to Brown & Williamson's pricing of generics evident in
the case, the Supreme Court found that there was sufficient evidence "from
which a reasonable jury could conclude that for a period of approximately 18
months, Brown & Williamson's prices of its generic cigarettes were below
its costs . . . and that this below-cost pricing imposed losses on [Brooke
Group] that it was unwilling to sustain, given its corporate parent's effort to
locate a buyer for the company. "'05 With the agreement between counsel in
place accepting the average cost rule, Brown & Williamson's prices were
below average variable costs for a significant period of time, yet the court
still did not impose liability, reflecting the importance the court attributed to
the protection of price competition. The court also did not impose liability
even though there was sufficient evidence that a reasonable jury "could
conclude that Brown & Williamson envisioned or intended this anti-

101. Id. (citing Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104 (1986); and
Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574 (1986)).

102. Id. at n.1. It is not surprising that Areeda and Bork would agree to this standard.
Areeda co-authored the average variable cost standard, while Bork, by inclination and as
counsel for the defendant, would want the most permissive cost-based test possible.

103. Id. at 2588 (citing Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 340
(1990)).

104. Id. (quoting Cargill, 479 U.S. at 1 16)(citations ommitted).
105. Id. at 2592.

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IND. INT'L & COMP. L. REV.

competitive course of events", and thus subjective predatory intent could be
established. "06

The reason why the below-cost pricing in this case was not actionable
is due to Brown & Williamson's failure to meet the second requirement,
which is "a demonstration that the competitor had a reasonable prospect, or,
under § 2 of the Sherman Act, a dangerous probability, of recouping its
investment in below-cost prices."107 After having relied upon below-cost
pricing, Areeda appears to have attempted to minimize the role of the
recoupment approach by stating that "recoupment is simply the payoff for
below-cost pricing.""~ His position in this regard is consistent with the
absence of such a requirement in his formulation of the average variable cost
test. The Supreme Court held:

Recoupment is the ultimate object of an unlawful predatory
pricing scheme; it is the means by which a predator profits
from predation. Without it, predatory pricing produces
lower aggregate prices in the market, and consumer welfare
is enhanced. Although unsuccessful predatory pricing may
encourage some inefficient substitution toward the product
being sold at less than its cost, unsuccessful predation is in
general a boon to consumers. 9

Here, the Court has indicated that inefficient substitution toward the
product being sold at less than cost is not actionable. As a result of the
pricing practices evident in the case, the result holds even if the pricing
involved is below average variable cost for a period of twelve to eighteen
months.

The Supreme Court gave pre-eminent importance to price competition,
holding that the painful losses below-cost pricing may impose on target

106. Elzinga and Mills, Trumping the Areeda-Turner Test: The Recoupment Standard in
Brooke Group, 62 ANTrrRUSTL.J. 559, 579-91 (1994):

The third is that the Court now places so much confidence in a recoupment
approach to predation that it will ignore the kind of evidence that, in Utah Pie,
figured prominently: documents about the defendant's intentions ....

There were so many such documents that the district court distinguished
Brooke Group from other predation cases by claiming that the number of Brown
& Williamson documents indicating anticompetitive intent are more voluminous
and detailed than any other reported case.

Id.
107. Brooke Group, 113 S.Ct., at 2588 (citing Matsushita Electric Industrial Co., Ltd. v.

Zenith Radio Corp., 475 U.S. 574 (1986) and Cargill, Inc. v. Monfort of Colorado, Inc., 479
U.S. 104 (1986)).

108. Elzinga and Mills, supra note 107, at 583 (quoting from Brief of Appellant at 4,
Brooke Group v. Brown & Williamson Tobacco Corp., 113 S.Ct. 2578 (U.S. 1992)(written by
Phillip Areeda)).

109. Brooke Group, 113 S.Ct. at 2588.

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companies are irrelevant to the antitrust laws if competition is not injured,
quoting the principle expressed in an earlier case that the antitrust laws were
passed for "the protection of competition, not competitors."" 0  The
importance of price competition is reflected in the statement that "[e]ven an
act of pure malice by one business competitor against another does not,
without more, state a claim under the federal antitrust laws; those laws do
not create a federal law of unfair competition or 'purport to afford remedies
for all torts committed by or against persons engaged in interstate com-
merce'. "' The required evidence regarding market structure also reflects
that recoupment is possible. As a threshold matter, below cost pricing must
be capable of driving competitors from the market or, as alleged in Brooke
Group, causing them to raise their prices to supra-competitive levels within
a disciplined oligopoly. This requires a market analysis of the relative
financial strength of the predator and its intended victim and a consideration
as to whether the target will likely succumb given the aggregate losses caused
by the below-cost pricing. 2 If the below-cost pricing might produce its
intended effect on the target, there is still the further question whether it
would likely injure competition in the relevant market. The plaintiff must
demonstrate the likelihood that the alleged predatory scheme would cause a
rise in prices above a competitive level that would be sufficient to compen-
sate for the amounts expended on the predation, including the time value of
the money invested in it. The Supreme Court held that, "[i] n order to recoup
their losses, [predators] must obtain enough market power to set higher than
competitive prices, and then must sustain those prices long enough to earn
in excess profits what they earlier gave up in below-cost prices."13 The
finding of recoupment requires a structural analysis:

Evidence of below-cost pricing is not alone sufficient to
permit an inference of probable recoupment and injury to
competition. Determining whether recoupment of predatory
losses is likely requires an estimate of the cost of the alleged
predation and a close analysis of both the scheme alleged by
the plaintiff and the structure and conditions of the relevant
market . . . . If market circumstances or deficiencies in
proof would bar a reasonable jury from finding that the
scheme alleged would likely result in sustained supra-
competitive pricing, the plaintiff's case has failed. In certain

110. Id. at 2588-89 (quoting Brown Shoe Co. v. United States, 370 U.S. 294,320 (1962)).
It is interesting to note that the court relies upon the first branch of the Brown Shoe quote
without rationalizing the second branch "fb]ut we cannot fail to recognize Congress' desire to
promote competition through the protection of viable, small, locally-owned businesses." Id.

111. Id. at 2589 (quoting Hunt v. Crumboch, 325 U.S. 821, 826 (1945)).
112. Id. at 2589 (citing Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corp., 475

U.S. 574 (1986)).
113. Id.

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IND. INT'L & COMP. L. REV.

situations - for example, where the market is highly diffuse
and competitive, or where new entry is easy, or the defen-
dant lacks adequate excess capacity to absorb the market
shares of his rivals and cannot quickly create or purchase
new capacity - summary disposition of the case is appropri-
ate. 

114

The Court notes that the two prerequisites, below cost pricing and
recoupment, "are not easy to establish, but they are not artificial obstacles
to recovery; rather, they are essential components for real market injury. ""5

The Court refers to its dictum in Matsushita that "predatory pricing schemes
are rarely tried, and even more rarely successful" and notes that "the costs
of an erroneous finding of liabilities are high."" 6 Price competition is the
same mechanism by which a firm engages in predatory pricing or stimulates
competition. As "cutting prices in order to increase business often is the
very essence of competition . . . mistaken inferences . . . are especially
costly, because they chill the very conduct that the antitrust laws are designed
to protect. "" 7 The Court further notes, "[iut would be ironic indeed if the
standards for predatory pricing liability were so low that antitrust suits
themselves became a tool for keeping prices high." IS

The Supreme Court affirmed the decision of the Court of Appeals,
upholding the dismissal of the case." 9  The Brooke Group failed to
demonstrate competitive injury because it could not show that "Brown &
Williamson had a reasonable prospect of recovering its losses from below-
cost pricing through slowing the growth of generics." 2 ' No evidence
indicated that Brown & Williamson "was likely to obtain the power to raise
the prices for generic cigarettes above a competitive level."12

The implications of this case are many. Elzinga and Mills argue that
the cost-based tests have now receded in importance, and that the structural
test is the dominant or threshold requirement." This analysis appears to be
correct. The importance of the structural test is evident in the fact that no
finding of predatory or discriminatory pricing existed even though Brown &
Williamson had priced its goods below average variable costs and that
evidence of subjective predatory intent was replete in Brown & Williamson's
records. The cost-based rules generally allowed drawing an inference of
predatory intent when pricing was evident in this range. After Brooke

114. Id. (citing Cargill, Inc. v. Monfort of Colorado, Inc., 479 U.S. 104 (1986)).
115. Id.
116. Id. (quoting Matsushita, 475 U.S. at 589).
117. id. at 2589-90 (quoting Cargill, 479 U.S. at 122).
118. Id. at 2590.
119. Id. at 2578.
120. Id. at 2592.
121. Id.
122. See Elzinga and Mills, supra note 106, at 578-80, 582-84.

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FTA ANTIDUMPING MARKET STRUCTURE TEST

Group, such inferences are not permissible without the appropriate finding
of a market structure allowing recoupment. The interests of consumers are
now of such pre-eminent importance that they are entitled to the benefit of
low pricing introduced with the subjective intent of driving competitors from
the market, as long as the market structure indicates that the attempt to
monopolize has little chance to succeed.

The case is also notable due to Posner's analysis that predatory pricing
includes two different forms of inefficient substitution; toward the product
during the period of low pricing, and away from the product during the
period of subsequent monopolization.123 Cost-based rules permitting a
finding of liability without a structural market analysis would target either
form of inefficient substitution. The Supreme Court has expressly held that
the first kind of inefficient substitution cannot sustain an antitrust cause of
action.

The Brooke Group determination marks the evolution of antitrust
predatory pricing principles from the shared perspective of producer welfare
to a consumer welfare orientation. In addition, an analysis of pricing
practices alone cannot provide the inference of anti-competitive conduct. A
detailed structural analysis must be undertaken, and a market structure found,
that allows an inference that recoupment is possible. If not, consumers
benefit from lower prices notwithstanding the possibility of anti-competitive
intent providing the motivation for price competition.

IV. A MARKET STRUCTURE TEST FOR NAFTA/FTAA
ANTIDUMPING PRACTICES

There are a number of profound differences between antidumping and
antitrust principles with respect to what constitutes actionable pricing. A
geographical difference in pricing is sufficient for antidumping practices,
even if the prices charged are above marginal price and at levels marking an
unacceptably low de minimus threshold for the imposition of duties. No
analysis of price in relation to cost is necessary, unless a constructed cost
analysis is undertaken which is based upon a fully allocated cost standard
versus the marginal cost standard proposed by the Areeda-Turner test. No
consideration is given to the fact that if the prices in the export-home market
truly are higher, an opportunity should exist for market entry. If antidumping
duties are imposed when such an opportunity exists, they achieve a
suppression of price competition in the complainant-import market and
dampen the incentive placed upon domestic producers to aggressively seek
an expansion of sales in at least the export-home market.

Actionable pricing pursuant to antitrust standards has evolved from a
simple pricing trigger point provided by the Areeda-Turner test (below
average variable cost, a standard intended as a surrogate for marginal cost)

123. RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 310 (4th ed. 1992).

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IND. INT'L & COMP. L. REV.

to an assessment of market structure. Although not yet endorsed by the U.S.
Supreme Court, the marginal cost standard highlights the unfairness of the
antidumping standard requiring prices above a fully-allocated cost standard,
as antidumping duties can be imposed even when the respondent company
has acted rationally in its pricing policy. In the antitrust context, the addition
of a market structure analysis in the form of a recoupment test results in
pricing below marginal cost being actionable only in rare circumstances
where a market structure exists which allows recoupment of profits lost
during the predatory campaign. Antitrust protects consumer welfare by
promoting price competition even if it is below cost, in certain
circumstances.

Antidumping law has no concept of a recoupment test and, indeed, no
market structure analysis is undertaken, except in the context of the
determination of injury. The problem is that the threshold of injury, or the
threat thereof, is relatively low and concentrates solely upon the economic
condition of the complainants in the import market. It tends to ignore the
conditions of entry in the exporter's home market, which would allow a
determination whether there is some structural impediment or whether a
competitive opportunity exists which the complainants have failed to exploit.
Similarly, there is no analysis as to whether there is any danger of
recoupment through an escalation of prices in the complainant-import
market, assuming for the moment that the low pricing did signify a predatory
campaign intended to drive the complainant-import market producers out of
business.

The contrast between antidumping practices making actionable pricing
above a fully-allocated cost standard and antitrust principles, in which pricing
below marginal cost is often protected, highlights the important difference in
orientation between the two systems of law. As indicated above,
antidumping law protects producer welfare while antitrust law protects
consumer welfare. The question arises whether this difference in orientation
is justified in the circumstances of a regional free trade agreement intended
to remove most, if not all, barriers to trade across a large variety of market
segments. Under the terms of a free trade agreement where barriers have
been dismantled in a particular sector, there appears to be no justification for
maintaining antidumping practices.

Canada has already established the precedent for the elimination of
antidumping practices in the Canada-Chile Free Trade Agreement and should
follow it in future negotiations. In the alternative to complete elimination of
the mechanism, a market structure test should be established requiring the
complainant to identify particular market impediments that insulate the home
market, thereby allowing a higher price to be maintained. Antidumping
duties should be imposed only if the complainant can establish that a
particular public or private impediment exists which allows the exporter to
discriminate between its home market and the complainant-import market.

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0rA ANTIDUMPING MARKET STRUCTURE TEST

The impediment cannot be one based upon efficiency, and causation must be
established.

A. Actionable Private Practices in the Context of
Canadian-American Trade

Apart from a government regulatory restriction, the question arisesas
to what private practices might be cited by a complainant as a market
impediment. In the context of bilateral trade between the United States and
Canada, a complainant might utilize its own competition law in determining
whether anti-competitive conduct has resulted in the erection of an actionable
market impediment. Both Canada and the United States have mature
competition law regimes and regulatory infrastructuresat an advanced stage
of development, when compared to the significant number of new
competition codes that have been adopted by developing and emerging
economies throughout the world.

To illustrate the manner in which the mechanism could work between
fully-developed economies, if the United States was seeking to impose
antidumping duties on Canadian products, the American administrative
tribunal would apply domestic competition law to the market structure of the
industry in question in the export-home market to see if American or other
foreign goods are being excluded by anti-competitive conduct. If such
conduct is occurring, the United States would be permitted to impose
antidumping duties determined according to existing practices. In the
absence of such conduct, no antidumping duties could be imposed.

The competition law of the complainant's jurisdiction has been chosen
because the duties are only being imposed in that market. The test is
intended to be a filter making antidumping duties hard to obtain, and the
administrative tribunals asked to make such a finding will be most familiar
with domestic legal standards. If the administrative tribunal asked to make
the determination is the competition law authority, the interpretation of the
law should be consistent with other determinations made in the domestic
context. This would prevent selective interpretation of competition law in
a manner freed from concern for the orderly development of competition law
within the domestic context.

The Brooke Group24 case established that the same principles underlie
predatory pricing or discriminatory pricing allegations under either the
Sherman Act' 2 or the Robinson Patman Act. 26 If the market structure test
was to be adopted in the circumstances of NAFTA,'27 complainants within
the United States would be required to meet the Brooke Group thresholds,

124. Brooke Group v. Brown & Williamson Tobacco Corp., 113 S.Ct. 257 (U.S. 1993).
125. 15 U.S.C.A § 2 (1997).
126. 15 U.S.C.A § 13 (1997).
127. See NAFTA, supra note 7.

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IND. INT'L & COMP. L. REv.

involving: (1) pricing below a reasonable standard and (2) a market structure
exists that permits recoupment. The pricing standard appears to be the
average variable cost standard surrogate for marginal costs established by the
Areeda-Turner .test, although the Supreme Court has not determined that this
is indeed the correct standard. The acceptance of an average variable cost
standard would have the benefit of substituting a rational pricing standard for
the fully-allocated cost standard accepted in antidumping practices."

We readily admit that the imposition of such a market structure test
would result in a severe curtailment of antidumping complaints or, even
more happily, the effective elimination of antidumping practices. In fact,
this is the objective of the imposition of such a requirement. The difficulty
of succeeding in circumstances of international price discrimination
allegations should such a market structure test be imposed is underscored by
the Supreme Court decision in Zenith v. Matsushita.'29 This case involved
allegations that twenty-one Japanese corporations dumped televisions into the
American market as part of a conspiracy to drive American firms from the
market, while maintaining artificially high prices for television sets sold in
Japan. 30 The Supreme Court dismissed predatory pricing allegations made
pursuant to the Sherman Act' and the Robinson Patman Act'32 on the basis
that predatory pricing conspiracies by their very nature are speculative, and
there must exist the possibility of recoupment of lost profits after the
American competitors were driven from the market. 33 The Court found that
the proffered objective of the alleged twenty-year-old conspiracy was yet far
distant.' 4 The Court also found that the casual connection between higher
pricing decisions in one market and lower pricing decisions in a different
more competitive market is questionable.'35

Nor does the possibility that petitioners have obtained supra-
competitive profits in the Japanese market change this calculation.
Whether or not petitioners have the means to sustain substantial
losses in this country over a long period of time, they have no
motive to sustain such losses absent some strong likelihood that
the alleged conspiracy in this country will eventually pay off. The
courts below found no evidence of any such success, and-as
indicated above-the facts actually are to the contrary: RCA and

128. Of course, trade negotiators might be forgiven for maintaining the fully-allocated cost
standard as a quid pro quo for imposing the second or market structure threshold of the Brooke
Group test.

129. Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574 (1986).
130. See id. at 577-8.
131. 15 U.S.C. art. 2.
132. 15 U.S.C. art. 13(a).
133. Matsushita, 475 U.S. at 588-93.
134. Id. at 591.
135. Id. at 593.

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Zenith... continue to hold the largest share of the American
retail market in color televisions sets. More important, there is
nothing to suggest any relationship between petitioners' profits in
Japan and the amount petitioners could expect to gain from a
conspiracy to monopolize the American market. In the absence
of any such evidence, the possible existence of supra-competitive
profits in Japan simply cannot overcome the economic obstacles
to the ultimate success of this alleged predatory conspiracy.136

The point is that there must be a market structure permitting
recoupment of profits lost during the period of predatory conduct in the U.S.
market. If no such market structure exists, the fact of profits in a foreign
jurisdiction is irrelevant, and allegations of cross-subsidization are not
actionable. Price competition should be protected.

The Zenith v. Matsushita'37 case provides another bridge between
competition law and antidumping practices. The American complainants
included antidumping allegations in the complaint pursuant to the 1916
Antidumping Act. 38  This statute creates a private cause of action and
prohibits an importer from selling substantially below the actual market value
or wholesale price prevailing in either the country of production or another
foreign market when the dumping is undertaken with the intent of injuring
a U.S. industry.'39 The statute penalizes dumping undertaken with the
specific intent of "destroying or injuring an industry in the United States, or
of preventing the establishment of an industry in the United States, or of
restraining or monopolizing any part of trade and commerce in such articles
in the United States.""4 The district court granted summary judgment and
dismissed both the competition law and antidumping allegations. The Third
Circuit Court of Appeals heard an appeal concerning the antidumping
allegations and held that there was sufficient direct and circumstantial
evidence of, among other things: (1) high barriers of entry to the Japanese
market; (2) the Japanese manufacturers "created higher plant capacities than
could reasonably be absorbed by the Japanese home market, thereby creating
an incentive to dispose of the excess capacity in markets outside Japan"; and
(3) "an agreement to stabilize Japanese home market prices to realize the
profits needed to support sales at low prices in the United States" which

136. Id. at 593.
137. Id.
138. 15 U.S.C. § 72 (1994). In WTO complaints commenced by the European Community

and Japan, the 1916 Antidumping Act was found inconsistent with United States' obligations
under the WTO Agreements. See Appellate Body Report, United States-Antidumping Act of
1916, WT/DS136/AB/R;WTIDS162/ABIR, AB-2000-5, AB-2000-6, available at
http:/www.wto.org/english/tratop_e./dispu_e/distab_e.html.

139. Rethinking the 1916 Antidumping Act, 110 HARv. L. REV. 1555 (1997).
140. 15 U.S.C. § 72; see also Rethinking the 1916 Antidumping Act, supra note

140, at 1557 (quoting 15 U.S.C. § 72).

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IND. INT'L & COMP. L. REV.

produced losses often as high as twenty-five percent on sales.' 4 ' The
Supreme Court found that there was no motive to continue the predatory
campaign in the United States and refused to deal with the antidumping
issues. 42 On remand regarding the antitrust issues, the court of appeals
dismissed the entire case, holding that it was bound to do so by the Supreme
Court's finding that the Japanese defendants had no motive to sustain
substantial losses over a sustained period of time. 143

It might be suggested that if a market structure test is imposed with
respect to antidumping practices, any complainant should proceed under the
competition laws and ignore the antidumping practices entirely. One of the
most important aspects of American antitrust law is the entitlement to treble
damages available through the private right of action by those injured by the
improper conduct. 14 If a market structure can be proven such that the court
accepts that recoupment is possible, there is an incentive to proceed under the
antitrust statutes, at least in the United States, to take advantage of the treble
damages provision. Diverting antidumping disputes to determination under
antitrust law is an acceptable result because it achieves the effective
elimination of antidumping practices in favor of a competition law
mechanism.

B. Actionable Private Practices in the Context of Developing Economies
with New Competition Codes/authorities

The problem with using the provisions of domestic competition law to
establish whether an actionable private practice exists is that those trade
agreements, such as the FTAA 145 initiative, include developing economies in
Central and South America as well as the Caribbean. Some of these potential
free trade partners have newly enacted competition codes and institutions that
do not enjoy the traditions, policy infrastructures, and resources that are
evident in Canada and the United States. Professor William Kovacic reports
that more than forty emerging economies have enacted new antitrust laws
since 1975, and as many as twenty more are likely to do so within the next

141. In Re Japanese Electronic Products Antitrust Litigation, Zenith Radio Corp. and
National Union Electric Corp., 807 F.2d 44, 47 (3d Cir. 1986).

142. Matsushita, 475 U.S. 574 n.3.
143. In re Japanese Electronic Products, 807 F.2d at 47.
144. Section 4 of the Clayton Act provides:

Except as provided in subsection (b) of this section, any person who shall be
injured in his business or property by reason of anything forbidden in the
antitrust laws may sue therefor in any district court of the United States in the
district in which the defendant resides or is found or has an agent, without
respect to the amount in controversy, and shall recover threefold the damages by
him sustained, and the cost of suit, including a reasonable attorney's fee ....

15 U.S.C. § 15(a) (2000).
145. FTAA, supra note 3.

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0rA ANTIDUMPING MARKET STRUCTURE TEST

decade. 46 He points to a number of concerns with the development of these
new institutions, including that they are often given a number of functions, 4

they often have political and social objectives imposed upon them with
economic efficiency playing a role of lesser importance,' and they are often
poorly funded and staffed. '49 He also indicates that the new competition law
institutions exist on fragile political foundations and often "begin operating
without the political ties and power base that [their] adversaries inside and
outside the government will enjoy. 150 In addition, there is a relative absence
of competition policy expertise and experience which can result in a
relatively difficult environment for the requisite traditions to take root.'
The situation is further complicated by what Kovacic terms "dysfunctional
courts" and because "[flew judges have even a rudimentary understanding
of market processes, let alone comprehension of the basic rationale for and
elements of an antitrust system."' 52 Why then are there so many new
competition laws being introduced? Kovacic indicates that one of the
primary motivating factors is Western donors and institutions, such as the
World Bank and the International Monetary Fund, tying the provision of aid
in part to the development of competition law institutions. He indicates that
these well-meaning donors may not have the long-term commitment to
funding these institutions."'

Kovacic recommends a gradualist approach to the implementation of
competition laws and institutions instead of a "big bang" introduction of the
entire panoply of antitrust rules and remedies.'5 We suggest that the
objective of introducing competition law traditions might be facilitated by
including a competition law-based market structure test directly into the free
trade agreement itself. As reviewed above, antidumping practices are based
upon detailed rules contained in a fully developed code within the WTO
Agreements. It should be possible to modify the code in the context of the
free trade agreement. The inclusion of the rules in the supra-national
agreement would provide guidance to the newly established competition law
and trade authorities in the developing nations. It might provide them with
valuable experience in dealing with the competition law concepts that are

146. William E. Kovacic. Competition Policy for Transition Economies 1 (May 14,
1999)(unpublished manuscript on file with authors).

147. On occasion, they include antitrust, consumer protection, and trade law
responsibilities. In Peru, the administrative tribunal, Indecopi, has responsibility for antitrust,
bankruptcy, consumer protection, intellectual property, and trade policy functions. See id. at
16.

148. See id. at 13-15.
149. See id. at 16-17.
150. Id. at 19.
151. Id. at 19-20.
152. Id. at 20.
153. William E. Kovacic, Getting Started: Creating New Competition Policy Institutions

in Transition Economies, 23 BROOK. J. INT'L L. 403, at 407, 422, and 428 (1997).
154. Kovacic, supra note 146, at 28.

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IND. INT'L & COMP. L. REv.

established thereby, such as the importance of consumer welfare as a
competition law objective. The mechanism would also benefit from the
analysis of the mechanism available through competition law authorities in
Canada and the United States, as well as the scrutiny of the mechanism by
the well-established academic and professional association commentators who
will subject it to extensive critical analysis. Each decision would be subject
to criticism, especially in the early stages. Contacts will also be fostered
between such competition law institutions and those in the developing nations
and transitional economies. As Kovacic indicated, this is an important
element in establishing competition law traditions.

The development of competition law traditions in the developing nations
that have only recently adopted them or otherwise do not have much
experience with them will also be fostered by the institutions that would be
established in support of the free trade agreement. At the very least, the
secretariats that have been established in the jurisdiction of each free trade
partner, although relatively meager, would help coordinate the resources
provided in support of the mechanism. The decisions emanating from the
various jurisdictions, especially from Canada and the United States, would
also provide an impetus for uniform interpretation of the market structure test
principles included in the free trade agreement. This uniformity of
interpretation would be promoted even if the decisions from the various
jurisdictions did not have the binding authority of legal precedents. 155 A
more important authority for developing uniform interpretation would be the
oversight of domestic decisions through the establishment of a bi-national or
multi-national panel mechanism and an Extraordinary Challenge Committee,
each having become commonplace in the CUSFTA and the NAFTA. The
bi-national panel process, although exhibiting some weaknesses, receives
credit for forcing domestic administrative tribunals to document and clarify
their reasoning in a more rigorous fashion than had been evident before such
international oversight was established. One of the weaknesses of the
NAFTA bi-national panel mechanism is the shackling of the panels to a
judicial standard of review. The bi-national panel process, in the context of
a market structure impediment, would be improved if the panels were
permitted to undertake de novo review of the final decisions of domestic
administrative tribunals.

The question arises as to what principles should be included in the free
trade agreement regarding a market structure mechanism. Antidumping
involves allegations of predatory pricing or regional price discrimination. It
is submitted that the appropriate principles would be those established by the
Brooke Group precedent because they were developed in the context of such
allegations. The principles include, that the complainant must demonstrate:

155. Chapter 19 of NAFrA specifically provides that the decisions of the bi-national
panels do not have binding authority as precedents. Notwithstanding this, the decisions do
appear to have persuasive power. See NAFTA, supra note 7, ch. 19.

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(1) pricing below a reasonable standard and (2) a market structure exists that
permits recoupment.'56 The appropriate pricing standard should be the
average variable cost standard surrogate for marginal costs, established by
the Areeda-Turner test. This would have the benefit of substituting a more
rational pricing standard for the fully-allocated cost standard accepted in
antidumping practices. However, the objective is to implement a market
structure test that will make the imposition of antidumping duties difficult if
not impossible to achieve. It would be an acceptable compromise if the price
is the continuance of a fully-allocated cost standard.

The benefit of including the Brooke Group standard is that it firmly
establishes consumer welfare as the appropriate objective for the mechanism,
and it sets a high threshold. Basing the mechanism on American law should
make it more palatable to American trade negotiators and Congress. The
chance to establish a competition law precedent in the free trade agreement
and promote the development of competition law traditions within developing
nations without such traditions should also be of interest to the United States.
This is not to underestimate the difficulty, if not impossibility, of
substantially reforming antidumping practices through the imposition of a
market structure test. If protectionism is on the rise in the United States, and
since Canada has begun negotiations with Costa Rica and eventually other
Central and South American nations in a quasi-FTAA, why not experiment
with such a reform? Of course, it is unknown at this point whether
President-elect George W. Bush will have greater success obtaining fast-track
authority from Congress to recommence the full FTAA negotiations.

C. Actionable Public Provisions Subject to Review

The logic of the argument set forth in the Standing Committee Report
would suggest that the complainant should be required to show that a
particular public practice acts as a barrier to entry and allows the respondent
to undertake international price discrimination. If the particular public
practice in question does not impede market access, then the case to impose
duties appears to be lacking because higher prices in the export-home market
should attract market entry. A market impediment could be the continuing
existence of a tariff or some other regulatory restriction which insulates the
domestic market. If the only restriction between the markets is a tariff, the
antidumping duty that could be imposed should be limited to the amount of
the tariff. For instance, if a tariff of 2.5% ad valorem exists, an antidumping
duty might be limited to the same figure. It would seem somewhat absurd
if a market impediment could only impose a 2.5 % difference in price, as this
could result in antidumping duties in double digit figures. In our view, if
antidumping practices are to be maintained with the addition of a market
structure test, blatant impediments such as the continuing existence of a

156. See supra pp. 60-68.

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IND. INT'L & COMP. L. REV.

tariff, should be sufficient to trigger the application of antidumping duties,
assuming that the other requirements can be met.

The more difficult issue is what public practices or non-tariff barriers
should be sufficient to justify the imposition of antidumping duties, which
may have a much more subtle effect than a blatant tariff barrier. A mere
difference in regulatory environments should not be sufficient. Labor laws,
environmental laws, or the income tax structure might be different, but mere
differences in the regulatory environment should not be actionable when they
are general in nature, such that all firms are subject to compliance on a
national treatment basis. These differences may not give rise to an ability to
discriminate between markets in a manner that permits supra-competitive
profits to be realized. In the case of more subtle market impediments, the
complainant should have the obligation to prove that the particular public
practice complained of permits the respondent to discriminate between the
home or export market and the complainant-import market and realize supra-
competitive profits in the export-home market. This requires that the
complainant show that the public practice has acted as an "artificial" barrier
to entry, preventing the respondent from selling into the export-home market.

The concept of a "barrier to entry" introduces a potentially difficult
analytical issue to the market structure test."' Professor Bork rejects a large
number of conditions which some argue constitute barriers to entry and
which he views as advantages obtained as a result of greater efficiency."5 8

Professors Bork and Posner appear to agree as to what might constitute an
artificial barrier, with Bork suggesting that they are barriers not based upon
efficiency which prevent market entry or "the growth of smaller firms
already within the industry from operating to erode market positions not
based on efficiency." 5 9 Posner extends this concept by stating that an
artificial barrier "must be something that makes the small firm's marginal
costs as high as the monopoly price charged by the leading firms so that the
small firm cannot make money by shading that price. " '6° Both appear to

157. There are at least two definitions of a barrier to entry. The "Bainian" definition states
that entry barriers measure the extent to which, in the long run, established firms can elevate
their selling prices above the minimal average costs of production and distribution without
inducing potential entrants to enter the industry. See HERBERT HOVENKAMP, FEDERAL
ANTITRUST POLICY, THE LAW OFCOMPETrrlON AND ITS PRACTICE 39 (1994). The "Stiglerian"
definition provides that "entry barriers are costs that a prospective entrant must incur at or after
entry, that those already in the market did not have to incur when they entered." Id. at 39-40.

158. These include economies of scale, physical product differentiation, advertising and
promotion, capital requirements, dealerships, leases and deferred rebates. See ROBERTH. BORK,
THE ANTITRUST PARADOX. A POLICY AT WAR WITH ITSELF 310-29 (1978).

159. Id. at 311. Posner accepts this definition: "a barrier to entry is a condition that
imposes higher long-run costs of production on a new entrant than are borne by the firms
already in the market." RICHARD A. POSNER, ANTITRUSTLAW, AN ECONOMIC PERSPECTIVE 59
(1976)(citing George J. Stigler, Barriers to Entry, Economies of Scale, and Firm Size, in
ORGANIZATION OF INDUSTRY 67 (1968)).

160. RICHARD A. POSNER, AN ECONOMIC PERspEcnvE 92 (1992).

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2000] FTA ANTIDUMPING MARKET STRUCTURE TEST 75

suggest that an artificial barrier to entry is in reality an exclusionary practice
that would otherwise be actionable and so the concept of an artificial barrier
adds little if anything to antitrust analysis. By concentrating upon
exclusionary and collusive practices, artificial barriers are sorted out from
efficient barriers, 16 and this is why we based the antidumping market
structure test on the Brooke Group standard.

While the concept of a barrier to entry is somewhat difficult in the
context of a private practice, it is generally recognized that public practices
can represent an important source of barriers to entry. Hovenkamp states
that "[vlirtually all sides agree that government regulation, licensing and
entry restrictions collectively create among the greatest and most effective
entry barriers." 62 Bork argues that "[piredation by abuse of governmental
procedures, including administrative and judicial processes, presents an
increasingly dangerous threat to competition. "163

In the early years of antitrust policy there were fewer
opportunities for monopolization through misuse of government
because governmental regulation was not so pervasive as it is
today. The last several decades have witnessed an enormous
proliferation of regulatory and licensing authorities at every level
of government, federal, state, and local. In order to enter the
market and vie for consumers' favor, businesses of all types must
gain various types of approval from governmental agencies,
departments, and officials. Licensing authorities, planning
boards, zoning commissions, health departments, building
inspectors, public utilities commissions, and many other bodies
and officials control and qualify the would-be competitor's access
to the marketplace. . . . The modern profusion of such
governmental authorities offers almost limitless possibilities for
abuse. 6

While artificial barriers to entry arising from private practices are
considered rare, restrictions upon market access imposed by government
action can be effective barriers, particularly if government restrictions are

161. See id. "In short, it takes a good deal of strained and ad hoc argumentation to explain
persistent monopoly or concentration without assuming unlawful exclusionary practices, lawful
patent protection, economies of scale, superior management, competitive pricing, or other
factors that would not normally justify dissolution proceedings." Id. at 93. See also BORK,
supra note 158. "An artificial barrier to entry is, of course, an exclusionary practice .... Every
barrier will be either a form of efficiency deliberately created or an instance of deliberate
predation. There is no 'intermediate case' of non-efficient and unintended exclusion. Failure
to bear that in mind leads to serious policy mistakes."

162. HOVENKAMP, supra note 157, at 473.
163. BORK, supra note 158, at 347.
164. Id.



IND. INT'L& COMP. L. REv.

coordinated with private practices through administrative guidance. Such
barriers to trade represent a difficult challenge for competition law which
generally does not extend to public practices as a result of "state action"
doctrines which are reportedly found in most if not all competition law
regimes.' 65

Before antidumping duties can be imposed, the complainant should be
required to show that a public practice is a barrier to entry and a proximate
cause of price discrimination between the export-home market and the
complainant-import market. The price discrimination in question must
produce greater profit margins in the export-home market such that the price
discrimination is not simply a reflection of a difference in cost structure
between the two jurisdictions." s  The evidence that a public practice
represents a barrier to entry could best be provided by an attempt to actually
sell into the export-home market by the complainant itself, but the
complainant should have the opportunity to establish that other international
competitors in the particular market segment have similarly been unable to
sell into the export-home market.

D. The Appropriate Remedy

Thus far, the market structure test has been discussed in the context of
a remedy involving the imposition of antidumping duties if an actionable
private or public practice is identified and the traditional antidumping
requirements have been met.' 67 A more principled remedy would be to
enjoin the conduct complained of with respect to the private actions, but we
recognize that such a remedy is unlikely to be instituted, particularly when
the investigation is undertaken by a domestic administrative tribunal in the
complainant-import market. Of course, the provision of such a remedy at the
bi-national panel level might be somewhat more attractive, if the bi-national
panels were allowed to undertake a de novo review of any final determination
undertaken by the administrative tribunal.

If a public practice is identified which is found actionable such that
antidumping duties could be imposed, the remedy should promote the
elimination of the public barrier to entry in the export-home market within
a reasonably short period of time. Once again, a remedy allowing the bi-
national panels to order the removal of the public barrier would be justified

165. "Every nation has some form of a state action doctrine and an act of state doctrine,
exempting certain government acts from antitrust." Eleanor M. Fox, Competition Law and the
Agenda for the WTO: Forging the Links of Competition and Trade, 4 PAC. RIM L. & POL'Y J.
1, 21(1995).

166. Once price discrimination is shown, the burden of proof could shift so that the
respondent would have a chance to resist the finding of price discrimination on the basis that
it represents a difference in cost structure.

167. We did suggest above that an "average variable cost" test would be more principled
than the current "fully allocated cost" standard.

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FTA ANTIDUMPING MARKET STRUCTURE TEST

if the bi-national panels were permitted to undertake a de novo review of the
administrative panel determination. In any event, the respondent jurisdiction
should have the option of eliminating the public, barrier to entry within a
reasonably short period of time. The bi-national panels might be given the
authority to an order rescinding the antidumping duty award, if the
respondent government can establish that the impugned public practice has
been eliminated.

V. CONCLUSION

The reversal of Canada's traditional trade policy position is unfortunate,
and the objective of the elimination of antidumping practices should once
again be pursued. The Canada-Chile Free Trade Agreement achieved this
objective, and the negotiations underway between Canada and Costa Rica
represent an opportunity to extend the precedent. In the alternative, the
introduction of a market structure test would go a long way to reduce, if not
eliminate, antidumping duties. This is due to the fact that findings of anti-
competitive conduct are not easy to obtain. The inclusion of a market
structure test based on the principles of the Brooke Group precedent has the
collateral value of helping to establish competition law traditions and
institutions in developing nations in Central and South America, and in the
Caribbean, that likely could benefit from them.

In the leadership vacuum created by the growth of protectionist
sentiment which appears to have existed in the United States over the past
few years, the question arises whether Canada should be pursuing a much
broader trade initiative. It appears that the FTAA initiative has fractured into
a number of different trade initiatives in Central and South America. Using
Costa Rica as an example of the kind of initiatives now underway, Costa
Rica reached a free trade agreement with Mexico in 1994, the Dominican
Republic in 1998, and Chile in December 1999. It is also involved in trade
negotiations with El Salvador, Guatemala, Honduras, Nicaragua, and
Panama, among other trade initiatives. 16

8

There appears to be an opportunity to coordinate these trade initiatives
into a "framework agreement" that could then form the basis of the
negotiation with the United States for a Free Trade Agreement of the
Americas, once the trade policy climate has improved. There clearly is a
need to coordinate the various bilateral free trade agreements now existing
between Canada, Chile, Costa Rica, and Mexico. The framework agreement
could then be extended to include the various negotiating initiatives with
other Central and South American trading partners.

168. See James D. Leach and Charles M. Gastle, Canada-Costa Rica Free Trade Initiative,
Apr. 14, 2000 (submission to Canadian Dept. of Foreign Affairs and International Trade),
available at http://www.esteycentre.ca/library.html.

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78 IND. INT'L & COMP. L. REV. [Vol. 11:1

A significant precedent would be established if the framework
agreement adopted the Canada-Chile Free Trade Agreement's approach to
the elimination of antidumping practices. It is extremely unlikely that the
United States would subsequently agree to an FTAA eliminating antidumping
practices, but, at the same time, a principled approach to the elimination of
antidumping practices should be taken when the opportunity presents itself.
Alternatively, there may exist an opportunity to introduce a market structure
test into a framework free trade agreement. This would be virtually
impossible to achieve if the United States was a participant in the
negotiations.