1992 Report of the Auditor General of Canada
Chapter 19—Department of National Revenue—Customs and Excise—Special Import Measures Act
Assistant Auditor General: Shahid Minto
Responsible Auditor: Nancy Cheng
19.2 The Department has taken reasonable steps in initiating investigations and determining dumping. We observed some areas where the Department should maintain a broader perspective in considering injury during its investigation before making a preliminary determination. Further, there is a technical limitation arising from the legislation that precludes the Department from considering further evidence of injury when a case is referred to the Tribunal for advice at an early stage of the process.
19.3 Undertakings offered by foreign exporters or governments can serve as a less costly alternative to a full-length proceeding. However, they can easily be vetoed and terminated by any interested party, thereby rendering previous negotiations and efforts futile. Moreover, the Department needs to monitor undertakings closely to ensure that violations of their terms and conditions are detected promptly.
19.4 The Department conducted an evaluation study in 1988 and has used the results to improve its administration of the program. The Department of Finance, the department responsible for policy and legislation, has conducted ongoing monitoring of anti-dumping and countervailing cases, but it has not completed a formal evaluation of the program since the Act came into force in 1984. In our view, such evaluation effort is needed to determine if the balance of rights and obligations established in 1984 continues to be appropriate in the present trade environment, particularly in light of the ongoing Uruguay Round of Multilateral Trade Negotiations and the Canada-United States Free Trade Agreement.
19.6 The Special Import Measures Act provides a legislative framework to offer remedy to domestic producers against material injury caused by dumped goods by imposing anti-dumping duties or, in the case of subsidized goods, countervailing duties. "Dumping" refers to the selling of foreign goods to Canadian importers at prices lower than their home market prices or their production costs. Injury is often evidenced by a decline in sales, market share or profits; price erosion or suppression; a drop in employment levels; negative growth; and decreased utilization of production capacity. A causal link must be established between dumping or subsidizing and injury before Canadian producers can obtain redress. Canada is one of the major users of anti-dumping measures among GATT signatories; it accounts for only a small percentage of the countervail actions.
19.7 The Department of Finance is responsible for the SIMA policy and legislation. The Department of National Revenue - Customs and Excise and the Canadian International Trade Tribunal (CITT) are jointly responsible for administering the SIMA program.
19.8 The stages in the SIMA process and the related time limits are defined in the Act and summarized in Exhibit 19.1 . With few exceptions, the process starts when a domestic producer files a complaint with the Department of National Revenue - Customs and Excise. The Department decides whether to initiate a case and is primarily responsible for investigating and determining whether dumping has occurred and the margin of dumping. The Tribunal is an independent quasi-judicial body acting as an administrative court in findings of injury.
Audit Scope and Objective19.9 The audit focussed on the administration of the SIMA program by the Department and the Canadian International Trade Tribunal. We also examined the evaluation of the SIMA program.
19.10 Our audit examined whether appropriate procedures and standards are in place to administer SIMA; and if the program had been evaluated and the results reported. We expected to find departmental systems and procedures to ensure timely and objective administration at the least possible cost to all parties involved.
19.11 We carried out our work mainly at the Assessment Programs Division of the Department's Customs Programs Branch in Ottawa. We also interviewed representatives from the Tribunal and the International Economic Relations Division of the International Trade and Finance Branch in the Department of Finance.
Findings and Observations19.12 Our major findings are reported in this chapter. Other findings were brought directly to the attention of the Department's senior management. We made observations in three areas - consideration of injury during investigations; undertakings; and program evaluation.
Consideration of Injury during Investigations19.13 On the basis of a complaint filed by domestic producers, the Department initiates an investigation only if its preliminary review reveals a reasonable indication of injury resulting from dumping or subsidizing. The Department has up to 90 days to make a preliminary determination or to terminate the investigation due to lack of evidence on injury, dumping or subsidization. Under SIMA, the 90-day period can be extended to 135 days.
19.14 The SIMA legislation represents a legislative framework of Canada's international rights and obligations as negotiated under the Subsidies and Anti-dumping Codes of GATT. In the view of the Department of Finance, the objective of the program is to balance these rights and obligations among all parties involved. The legislation provides a right of recourse for domestic producers against foreign trade practices causing injury, while affording a safeguard to importers and foreign exporters against undue trade harassment.
19.15 Exhibit 19.2 shows a summary of SIMA cases from December 1984 to March 1992. The Department of National Revenue - Customs and Excise received 86 properly documented complaints and initiated 77 investigations. Approximately 70 percent of all cases went through the full-length proceeding, including an inquiry by the Tribunal. About a third of the cases heard by the Tribunal ended in a finding of no injury.
There was limited consideration of injury during investigation leading to preliminary determination19.16 The GATT codes require the evidence of dumping and injury to be considered simultaneously during the investigation phase. Similarly, under SIMA, the Department continues to be responsible for ensuring that there is a reasonable indication of injury before it makes a preliminary determination, unless the case has been referred to the Tribunal for advice.
19.17 We found that the Department has consistently met the legislated time limits in administering SIMA. Although dumping and injury have both been considered during its investigations, the Department has been largely preoccupied with the determination of dumping and the related margins. It has sought evidence almost exclusively on the volume, normal values and export prices of the alleged dumped goods, and done little investigation work on injury. In the case files we reviewed, the Department's consideration of injury was limited to confirming with complainants the information they had supplied.
19.18 The existing GATT codes provide for interested parties to offer opposing views concerning injury throughout the investigation. National Revenue - Customs and Excise and the Department of Finance acknowledge that importers, exporters and foreign governments are not precluded from making representations disputing the claim of material injury. However, we observed that procedures for making representations or submissions have not been established by National Revenue - Customs and Excise.
19.19 While the Department's primary role is the determination of dumping and the related margins, we are of the opinion that the interests of all parties would be better served if the Department maintained a broader perspective in considering injury during investigations.
Referral for Tribunal advice precludes the Department from considering further evidence of injury19.20 The question of injury can be referred to the Canadian International Trade Tribunal for advice at several early stages of the SIMA process. Sections 33(2) and 34(b) of the Act provide for two of these referrals. Essentially, within specified time limits, interested parties have the right to refer a case to the CITT to determine whether an investigation is warranted on grounds of injury.
19.21 The Tribunal examines the evidence of injury and renders its advice within 30 days of the referral. The evidence available to the Tribunal for this examination is the information filed with the Department by the complainant before the start of the investigation. If CITT advises that the evidence of injury is insufficient, the case is terminated. If it advises that there is a reasonable indication of injury, the Department proceeds with the investigation but is precluded from considering the question of injury further.
19.22 Prior to initiating the investigation, the Department receives information from one party, the complainant. It is in the investigation stage that the Department starts to contact the importers and foreign exporters - the opposing parties. Additional information obtained during this stage could render the previous evidence of injury insufficient. Nevertheless, by virtue of the Tribunal's advice, the Department is still obliged to carry the case through the full proceeding unless it can be terminated on grounds not related to the question of injury.
19.23 Exhibit 19.3 describes a case where, subsequent to the Tribunal's advice, the Department became aware of additional information that could have had a bearing on the complainant's claim of injury, but which it could not pursue. The case ended in a finding of no injury.
19.24 We found that, since December 1984, the Tribunal has disagreed with the Department in only two of the 32 cases on which it has rendered advice under these provisions. We believe that the high incidence of the Tribunal's upholding the Department's decisions could be due in part to the fact that its examination is restricted to the same evidence the Department has before the start of an investigation. Of the 22 cases where the Tribunal advised that there was a reasonable indication of injury and that were subsequently heard by the CITT, eight resulted in findings of no injury or partial injury.
19.25 Proceeding to a full hearing involves additional time, effort and costs to all parties. In our view, all parties would benefit if the advice resulting from CITT referrals did not preclude the Department from considering any further evidence of injury before making its preliminary determination.
19.27 Undertakings demand considerable time and effort from the Department as they must satisfy a number of conditions. For example, the undertakings must cover all or substantially all of the allegedly dumped or subsidized goods. They can be accepted only after an investigation is initiated but before the Department makes a preliminary determination. Undertakings have been accepted in approximately 12 percent of all investigations initiated since December 1984.
Undertakings can easily be vetoed and terminated19.28 Under the Act, the Department is required to terminate an undertaking without cause if requested by a complainant, importer, foreign exporter or government within 30 days after its acceptance. Such termination renders previous negotiations and efforts futile. If an undertaking is terminated, the investigation process resumes and the Department continues to be bound by the legislative time limit to make its preliminary determination.
19.29 We noted that the existing provisions permit any party to become an importer of record and to then veto an undertaking that has been negotiated between the Department and the foreign exporters. Exhibit 19.4 illustrates a case where this was used by a manufacturer to exclude a certain product from the list of subject goods covered by an undertaking. The Department had to change its position and accept the exclusion at the last minute to secure the undertaking. The Department noted that any importer, including small-volume importers, could request that an undertaking be terminated.
19.30 In a case involving subsidized foreign goods, the Department extended the 90-day limit on negotiations and took 131 days to secure an undertaking. After the undertaking had been accepted, the complainant demanded that the quantity of the subject goods be further reduced. The demand was not accepted by the foreign delegation and the undertaking had to be terminated at the complainant's request.
The Department needs to monitor undertakings closely19.31 Undertakings require monitoring to ensure that their terms and conditions are respected. Violations of the terms and conditions can cause the undertakings to be terminated. The SIMA provisions permit the Department to apply duties retroactively, but only to 90 days before the notification terminating the undertakings. Consequently, violations can escape duties if not detected promptly.
19.32 In the case shown in Exhibit 19.5 , undertakings originally accepted in January 1988 were renewed in January 1991. Between January and June 1991, there were shipments of the subject goods at prices below those negotiated in the undertakings. The violation was not detected until September 1991. At that time, the Department terminated the undertakings and had to make its preliminary determination on the same day, using 1987 data. Although anti-dumping duties could be applied retroactively for 90 days, the shipments before 25 June 1991 that had violated the undertakings escaped the duties.
19.33 By its nature, the monitoring of undertakings takes place after the subject goods arrive in Canada. We noted that this monitoring is done only at Headquarters; regional staff are not involved. The enforcement staff at Headquarters scan the Customs commercial database periodically for shipments of goods subject to undertakings, and request the related documents for review. This results in a delay in detecting violations. The Department has begun to address this concern, and indicated in a draft regional handbook that it would introduce monitoring of undertakings by regional officers. As we concluded our audit in March 1992, departmental policy and procedures had yet to be developed.
Program Evaluation19.34 As the department responsible for SIMA policy and legislation, Finance is responsible for evaluating the overall effects of the program. We would expect Finance to monitor the program on an ongoing basis and conduct periodic evaluations to determine to what extent the program objectives and Canada's international obligations are being met. In its capacity as administrator of the program, we would expect the Department of National Revenue - Customs and Excise to review and report on the operational effectiveness of SIMA.
The Department has reviewed and reported on the operational effectiveness of SIMA19.35 The Department undertook an evaluation study in 1988 on the administration of SIMA. The scope of the study included the accessibility to SIMA actions by potential complainants, and the Department's investigation and enforcement activities. In particular, it addressed:
- the disincentives to use SIMA;
- the documentation of complaints and investigations;
- the related departmental policy and procedures;
- the organizational structure and human resources; and
- the level of voluntary compliance by importers.
19.36 On the basis of our examination of the report and the supporting files, we concluded that the quality of the study is satisfactory.
19.37 We noted that management has used the results of the 1988 study to improve program administration. The Assessment Programs Division prepared an action plan to implement the recommendations in the study and completed quarterly progress reports between November 1988 and February 1990. The Department has, among other actions, implemented a public information strategy and streamlined enforcement efforts between Headquarters and the regions.
The impact and effects of the SIMA program have not been measured19.38 The 1988 departmental study addressed operational issues. The Department of Finance has been conducting ongoing monitoring of anti-dumping and countervailing cases. However, since 1984, when the SIMA legislation came into force, Finance has not completed a formal evaluation of the potential positive and negative effects of the program.
19.39 Finance informed Parliament, in its Part III of the 1991-92 Estimates, that it planned to review and assess the impact of import legislation on the competitiveness of domestic firms. It indicated to us that work on the review had commenced in the spring of 1991 but was suspended due to the uncertainty of the timetable for completing the current Uruguay Round of the GATT Multilateral Trade Negotiations.
19.40 We conducted a search of related literature to ascertain if it would be reasonable and appropriate to examine the effects of the SIMA program. We identified a number of potential effects - both positive and negative - of SIMA-type programs. Some of the more important potential negative effects that need to be considered in an evaluation include the following:
- Protection afforded may shield domestic producers from competition, thereby possibly diminishing their efficiency and capacity to compete in the long term.
- Protection may harm Canada's relationship with trading partners, possibly by creating a perception that foreign exporters are being harassed.
- Protection may be detrimental to consumers, possibly increasing production costs and the ultimate prices of consumer goods.
Conclusion and Recommendation19.42 We found that, in general, the Department has taken reasonable steps in its handling of complaints, initiation of investigations and conduct of dumping determination. Our examination revealed a number of areas where SIMA administration needs to or could be improved. Some of these are administrative procedures of the Department; others are limitations resulting from certain technical aspects of the legislation.
19.43 In addition to the time and effort spent by corporate executives, a full-length proceeding under the SIMA process costs each party no less than an estimated $40,000. In some cases, the estimated costs have escalated to over $1 million. We have offered our views in this chapter on certain technical limitations where possible legislative changes would facilitate termination of an investigation when it is not warranted and would better secure undertakings as a less costly alternative to a full proceeding. We consider our views to be consistent with the current policy intent.
19.44 We have also commented on the lack of formal evaluation of the program by the Department of Finance. Such evaluation effort is needed to determine if the balance of rights and obligations established in 1984 continues to be appropriate in the present trade environment and in the foreseeable future.
19.45 The Department of National Revenue - Customs and Excise should maintain a broader perspective to give greater consideration to injury during the investigation stage leading to preliminary determination, and should implement its plan to monitor undertakings closely in its administration of the Special Import Measures Act.
Department's response: We are pleased with the overall results of the comprehensive audit and that it demonstrates that we have taken reasonable steps in administering the Special Import Measures Act. We undertake to keep our administrative procedures under review in order to continue to improve, wherever possible, service to all parties affected by the legislation. We will also more actively pursue the possibility of using mutually agreeable undertakings to provide all those affected by an investigation with an option to the costs of the full legislative anti-dumping/countervailing duty process under SIMA. When the outcome of the conclusion of the Uruguay Round of negotiations under the GATT is clear, consideration will be given to ways in which the administrative process can be altered to provide for further examination of the question of injury prior to the preliminary determination. Our regional offices are now actively monitoring undertakings so that any potential violations can be identified in a more timely manner.
19.46 The Department of Finance should resume and complete its formal evaluation of the import policy framework. It should also consider, if appropriate, proposing amendments to provisions of the Act concerning the limitations on investigation by the Department of National Revenue - Customs and Excise in cases referred to the Canadian International Trade Tribunal for advice on injury, and to the provisions for veto of undertakings.
Department's response: We agree with the recommendation. It is our intention that as the outcome of the Uruguay Round of Multilateral Trade Negotiations becomes clear, we will intensify our work toward this end. This review will, inter alia, investigate, in consultation with the Department of National Revenue - Customs and Excise, some of the administrative issues raised in the report and will consider whether legislative changes to SIMA are appropriate. Obviously, we will have to examine the recently negotiated North American Free Trade Agreement as well.