(Whitney Rolig/Picard Kentz & Rowe LLP)
On September 16, 2019, the United States International Trade Commission found in a vote of 3-0 that the U.S. stainless steel keg industry was materially retarded by imports of kegs from Mexico, resulting in an 18.48% duty on Mexican kegs. This vote is the first of two which will conclude a year-long investigation into unfair trading practices by keg producers in Mexico, China, and Germany. The Commission’s vote with respect to China and Germany will occur later this year. Its September decision marks the first time since 1991 that the Commission has made a final affirmative finding of material retardation and has important implications for new domestic industries seeking to gain a foothold in the U.S. market against unfairly traded imports.
Material Retardation
In typical import injury cases, the Commission considers whether unfairly traded imports materially injure a U.S. industry or threaten a U.S. industry with material injury. However, the law also offers a rarely-used alternative to those provisions that allows the Commission to consider whether “the establishment of an industry in the United States is materially retarded by reason of” unfairly traded imports. The statute is largely ambiguous with respect to how the Commission should analyze material retardation, and the issue has been considered in fewer than two dozen cases since the early 1980s.The Commission will only consider material retardation if a domestic industry is not yet established, which it evaluates using five factors:
When domestic producers began their U.S. production of the product in question;
Whether domestic production has been modest, continuous, or “start and stop”;
The scale and magnitude of domestic operations;
Whether the domestic industry has reached a reasonable “break-even” point; and
Whether the start-up production is more in the nature of introducing a new product line by an already-established business.
Additionally, if the domestic industry has not yet begun production, the Commission requires an indication that the industry has made a “substantial commitment” to doing so.
Once the Commission determines that an industry is not established, it will turn to its substantive evaluation of material retardation. The Commission has recognized that material retardation requires a case-by-case analysis but has also stated that it will rely on the same statutory criteria and factors that it uses for material injury. Accordingly, the Commission considers the volume, price effects, and impact of subject imports with respect to the domestic industry’s production, shipments, capacity utilization, inventories, financial condition, employment, projected versus actual performance, and other market conditions.
These factors mirror those used for material injury, but the Commission has explained that they are not “viewed in the same light” as in an injury investigation given the unique nature of a material retardation case. Consequently, an improvement in certain indicators such as increased domestic production and market share that might detract from an affirmative injury finding may be “discounted” in a material retardation investigation, where such improvements are to be expected of a nascent industry. The Commission will therefore consider whether a domestic industry’s performance “reflects merely the normal start-up condition of a company entering an admittedly difficult market, or, is the performance worse than what could reasonably be expected.”
A material retardation analysis can offer advantages to new industries that might otherwise struggle to build a traditional injury case given their limited production history and early expansion efforts, but the analysis has been rarely used. The main barriers to an affirmative material retardation finding have been the questions of whether the industry was established or whether the domestic producers had made a substantial commitment to production. Even when the industry cleared those threshold issues, however, the Commission voted affirmatively in only three out of five cases, with the most recent attempt in 2015 failing because the Commission found that the domestic industry repeatedly failed to meet customers’ requirements and was not performing “worse than could reasonably have been expected.” The Commission’s decision in Kegs from Mexico therefore provides valuable guidance for other new industries considering action against unfair imports.
Refillable Stainless Steel Kegs
The U.S. keg industry has been dominated by foreign imports for the last decade. After several years without any U.S. keg production, domestic commercial operations began in late 2015, and American Keg Company became the sole U.S. producer of refillable stainless steel kegs when it took over that production in May 2016. Despite a promising start and burgeoning customer base, however, the company faced increasingly unfair competition. By 2018, that unfair competition took a serious toll, with American Keg facing imminent closure as it lost sales to unfair imports, operated well below capacity, and had mounting financial losses.
These investigations began in June of last year when American Keg, represented by Picard Kentz & Rowe LLP, began finalizing petitions for relief against subsidized and dumped kegs from China, Germany, and Mexico. Although the Commission preliminarily determined that the record was “mixed” with regard to whether the domestic industry was established, the Commission found that each of the five criteria for establishment indicated that the U.S. industry was not established in its final determination. This allowed the Commission to evaluate certain industry trends and indicators in a different context.
For example, despite sustaining losses over the course of the period of investigation, American Keg’s production and sales grew, and the company’s financial indicators generally (albeit marginally) improved. Such improvements would normally weigh against an affirmative injury finding, but, because the U.S. keg industry was not yet established, the Commission found that “American Keg’s performance was poorer than that which could reasonably be expected” even with those improvements. This stemmed from the Commission’s finding that American-made and imported kegs were largely substitutable, that price was an “important” factor in customers’ purchasing decisions, and that unfair imports were responsible for the U.S. industry’s inability to establish itself:
The low-priced subject imports captured a large volume of sales from American Keg and prevented it from further increasing its output and approaching the estimated level of production and sales . . . that would have permitted it to break even…
In short, the cumulated subject imports materially retarded the establishment of the domestic industry during the period by preventing it from expanding its production and sales. The domestic industry’s output, revenues, and financial losses were materially worse than they would have been otherwise because of the subject imports.
Notably, the Commission was unpersuaded by arguments that American Keg misread the market when it took over production operations, that it was too small to compete effectively with entrenched foreign producers who could fulfill large purchase volumes, or that it failed to satisfy customer requirements. Instead, the Commission found that American Keg would have been able to operate profitably even as a new, relatively small producer if it had not lost sales to unfairly-traded foreign imports.
The Commission also confirmed, for the first time, that the statute’s “cumulation” provision applies to material retardation cases. That provision allows the Commission, under certain circumstances, to evaluate the cumulative “hammering effect” of unfairly-traded imports from multiple countries of origin rather than attempting to evaluate the individual impact of each country’s exports. Previous material retardation cases implicated only one country at a time and therefore did not raise the issue. Because the Kegs investigation involved three different countries, however, the Commission provided a thorough explanation for its authority to analyze the impact of imports from all three countries together.
Opportunities for U.S. Industries
Trade remedy cases are a lengthy and onerous process for any domestic industry, and those challenges can be magnified for newer and smaller operations. However, the Commission’s decision in Kegs from Mexico offers a clear roadmap for successfully pursuing such remedies even when the domestic industry is still establishing itself and is relatively small compared to its global competitors. This is good news for American industries that are otherwise poised to succeed but run into headwinds from unfair import competition.