US Paper Industry Fights Unfair Imports

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US Paper Industry Fights Unfair Imports
Law360, New York (May 22, 2015, 10:26 AM ET) --

Trade relief from imports that are dumped (illegally priced) or benefit
from illegal subsidies requires an affirmative determination of
material injury or threat of material injury from the U.S. International
Trade Commission.[1] This proceeding is entirely distinct from
the U.S. Department of Commerce’s determinations respecting
dumping or countervailing duty margins.[2] A fundamental principle
of the commission’s consideration of material injury issues is that
such determinations are sui generis, meaning that each investigation
is unique and particular to the totality of factual findings made by the
commission. Nevertheless, the statute provides specific guidance on
consideration of volume and price effects. Moreover, the statutory
threshold of injury necessary to establish material injury is, at least
on its face, a low one. Material injury means “harm which is not
inconsequential, immaterial or unimportant.”[3] The U.S. Court of
Appeals for the Federal Circuit confirmed that an affirmative                        Brian McGill
determination is warranted when the effects of subject imports are
“not merely incidental, tangential or trivial.”[4] Whether the
commission, in fact, applies a stricter standard is a matter of considerable discussion.[5] But it is
apparent that commission factual findings will continue to receive a high level of deference from the
commission’s reviewing courts.[6]

The differing natures among U.S. manufacturing industries is a key reason for both the commission's sui
generis approach and the high level of deference granted the commission’s decisions. Consideration of
capacity utilization data illustrates this issue. The majority of anti-dumping and countervailing duty cases
involve metal products, predominately steel products. In those industries, producers often operate
below full capacity utilization. Producers can sometimes be profitable operating only one shift, even
though the equipment has the capability of operating three shifts. But for some industries, the
production equipment is intended to be run 24/7 throughout the year. Examples include production of
organic products such as citric acid or paper. Thus, with respect to citric acid production the commission
found that it was a “high-fixed cost, capital intensive industry” that is “dependent on continuous

production of an organic product” made in “a tightly controlled and sanitary fermentation process that
cannot easily be slowed or stopped.”[7] In fact, equipment can be damaged beyond restarting with
prolonged shutdowns. In such industries, the imperative to fill the production capacity dominates
producer decisions in sales negotiations.

The commission has confronted the nature of the paper industry in several recent cases. Due to
abundant resource availability and high demand for printed materials, the paper industry has long been
an important part of the manufacturing sector in the United States.[8] But unfair imports from a number
of countries have negatively impacted production in key segments of the paper industry, particularly for
products experiencing declining demand due to the growth of e-commerce.

Most recently, the commission made a unanimous affirmative preliminary injury determination with
respect to supercalendared paper imported from Canada.[9] This paper product is typically used for
magazines and advertising circulars. The case was brought by the two largest U.S. mills still producing
supercalendared paper, Verso Corporation and Madison Paper Industries. In making its preliminary
determination, the commission noted that production is capital intensive, with petitioners estimating
that a new greenfield pulp and paper facility would cost $500 to $700 million. In this industry,
“producers seek to run their paper machines on a near continuous basis to maximize efficiency.”[10]
The commission stated that “because domestic producers need to run their mills at high capacity
utilization, domestic mills have priced their product competitively and often below the level of subject
imports to maintain their sales volume.”[11] The commission’s recognition of this characteristic of the
industry was important because it explained how negative price effects could be present even when
subject import prices were often higher than domestic industry prices. The commission stated that the
subject imports “were good substitutes” for U.S. production and that “to maintain sales and capacity
utilization, the domestic industry was required to price its products competitively.”[12] The commission
stated that “the record indicates that the domestic industry was increasingly unable to price its
[supercalendared] paper at levels that permitted it to cover its costs.”[13] The industry’s “lower
revenues, in turn, caused poor and declining operating performance.”[14] Notwithstanding the absence
of significant capacity utilization impacts, the commission acknowledged that petitioner had “provided
additional detailed information on price competition at several purchaser accounts.”[15] The
commission indicated it would “examine carefully” the information to be received from purchasers in
the final phase of the investigation.[16] The supercalendared paper case will move relatively quickly
because it is limited to illegal subsidies, primarily to Port Hawkesbury Paper LP in Nova Scotia. Thus
commerce’s preliminary and final countervailing duty determinations will be issued this year and the
case will return to the commission for a final injury determination in early fall 2015.

The commission’s supercalendared paper decision followed by only one month the commission’s
preliminary determination in another paper case, that involving uncoated paper in sheets. The U.S.
producers of sheeted uncoated paper, typically used as copy paper, obtained an unanimous affirmative
preliminary injury determination from the commission with respect to alleged unfair imports from
Australia, Brazil, China, Indonesia and Portugal.[17] Petitioners in the uncoated case are Domtar
Corporation, Finch Paper, P.H. Glatfelter, Packaging Corporation of America and the United Steel
Workers.[18] Foreshadowing the analysis performed in the supercalendared case, the commission

recognized the importance of maintaining high capacity utilization and reasonable prices due to the
highly capital intensive nature of the industry. The commission stated that that a new paper machine for
uncoated paper was estimated to cost over $600 million and a new greenfield pulp mill would cost over
$1 billion.[19] The commission noted that purchasers had shifted purchases of uncoated paper from U.S.
producers to subject imports since 2011 and stated that price was the reason for the shift.[20] The
commission rejected arguments that imports from certain of the subject countries did not compete with
the U.S. producers.[21] This case is now before the Department of Commerce for determination of the
margins of dumping and illegal subsidies and will return to the commission for a final injury
investigation, which is likely to occur in early 2016. Thus, even though the supercalendared case began
after the uncoated case, the longer statutory timeline for completion of anti-dumping investigations will
mean that the supercalendared case will move almost a half-year ahead of the uncoated case.

Finally, the earlier case on sheeted coated paper suitable for high-quality print graphics is back in the
news. In late 2010, U.S. producers of paper, including Appleton Coated, NewPage Corporation and Sappi
Fine Paper North America, obtained relief from dumped and subsidized imports from China and
Indonesia.[22] That case will be undergoing a five-year “sunset” review later in 2015. Moreover, on
March 13, 2015, Indonesia belatedly requested World Trade Organization consultations with the United
States with respect to the anti-dumping and countervailing duty measures imposed.[23] Indonesia also
claims that the International Trade Commission’s threat of material injury determination was based on
speculation and that the determination did not establish a causal nexus between the unfair acts and
injury to the domestic industry. Such consultations typically fail to resolve the dispute and are a simply a
required precursor to a formal WTO challenge.

In conclusion, the coming year will be an important one for these key paper industries. More than in any
time in the past, the commission will be examining in detail the conditions of competition in the paper
sector and the impact of unfair imports on the ability of U.S. producers to successfully navigate a
declining demand environment.

—By Brian E. McGill, King & Spalding LLP

Brian McGill is counsel in King & Spalding's Washington, D.C., office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its
clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general
information purposes and is not intended to be and should not be taken as legal advice.

[1] 19 U.S.C. 1673d(b)(1).

[2] See 19 U.S.C. 1673d(a).

[3] 19 U.S.C. 1677(7)(A).

[4] Nippon Steel v. United States International Trade Commission, 345 F.3d. 1379, 1384 (Fed. Cir. 2003).

[5] At the time of this writing, legislation providing guidance to the commission respecting material
injury determinations is linked to efforts to pass “fast-track” Trade Promotion Authority to the
President. See H.R. 1314.

[6] Factual findings are reviewed under the substantial evidence standard. The first level of review is the
Court of International Trade, which is akin to a U.S. District Court and its decisions are in turn
reviewable de novo on appeal to U.S. Court of Appeals for the Federal Circuit. The courts have
recognized that a high level of deference to agency expertise is often appropriate.

[7] Citric Acid and Certain Citrate Salts from Canada and China, Inv. Nos. 731-TA-456 and 731-TA-1151-
1152 (Final), Pub. 4076 (May 2009) at 22. In addition, the nature of production design “makes it difficult
to engage in incremental capacity expansion.” Id.

[8] The wood-based paper industry began in the United States as a response to the combination of a rag
shortage in the 1850s and a coincident increase in demand for paper. Although the Chinese long
produced paper from wood pulp, Europeans used rags for pulp, a practice that was transferred to North
American colonies.

[9] See Supercalendared Paper from Canada, Inv. No. 7012-TA-530 (Preliminary), Pub. 4529 (April 2015).
In anti-dumping or countervailing duty investigations, the commission first makes a preliminary
determination as to whether there is a reasonable indication of material injury. The case then moves to
the Department of Commerce which makes preliminary and then final determinations of dumping or
illegal subsidization. The action then returns to the commission for the final injury investigation.

[10] Id. at 20.

[11] Id. at 23.

[12] Id. at 25.

[13] Id. at 23.

[14] Id. at 25.

[15] Id. at 24 n.159. The commission noted that the domestic industry’s capacity utilization actually
increased from 2012 to 2013 and from 2013 to 2014. Id. at 24-25 n.161.

[16] Id. In preliminary investigations, the commission issues questionnaires to the U.S. producers, U.S.
importers, and the foreign producers, but not to purchasers. In the final phase, the commission does
issue a questionnaire to purchasers as well as the other parties.

[17] Certain Uncoated Paper from Australia, Brazil, China, Indonesia, and Portugal, Inv. Nos. 701-TA-528-
529 and 731-TA-1264-1268 (Preliminary), Pub. 4522 (March 2015).

[18] Id. at 1.

[19] Id. at 20.

[20] Id. at 24; see id. at 23 (the loss of market share correlated with underselling by subject imports).

[21] Purchasers also reported that U.S. producers had reduced prices to compete with subject imports
since 2011. The industry’s production of uncoated paper, its shipments, its market share, and its
employment levels all declined between 2011 and 2013, and continued to decline in 2014. The
industry’s profitability fell sharply between 2011 and 2013, and, although operating profits were
somewhat higher in interim 2014 as compared to interim 2013, the ratio of income to net sales in
interim 2014 remained below the 2011 level.

[22] Certain Coated Paper Suitable for High-Quality Print Graphics Using Sheet-Fed Presses from China
and Indonesia, Inv. Nos. 701-TA-470-471 and 731-1169-1170 (Final), Pub. 4192 (November 2010).

[23] See WTO News,” Indonesia files dispute against US over anti-dumping duties on paper products”
(March 13, 2015).

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