China, Disputes & TDI

China MES: EU moves to develop new antidumping methodology could fall afoul of WTO rules

2016-10-10-stephanie-noel

 

The EU Commission is misusing antidumping investigations to tackle foreign government interventions. It is also going down that path in its current move to develop a new antidumping calculation methodology as part of plans to grant China market economy treatment. But it is at risk of running afoul of WTO rules, and should rather consider other WTO instruments to tackle distortive policies, argues Stéphanie Noël.

On 11 December 2016, section 15(a)(ii) of China’s Protocol of Accession to the WTO will expire. This paragraph allows countries importing from China to use a methodology for dumping determination that is not based on a strict comparison between the export price of the product concerned and the domestic price or costs of the like product in China.

 

The Protocol sets the following conditions: “if the producers under investigation cannot clearly show that market economy conditions prevail in the industry producing the like product with respect to manufacture, production and sale of that product”. This concession made by China to its trading partners constitutes a considerable – but temporary – derogation to the WTO rules on antidumping.

 

Towards a new dumping calculation method

 

Contrary to what has been implied by many commentators, the Protocol does not confer a ‘non-market economy’ – NME – status upon China. The European Union (EU) does. The EU anti-dumping regulation – the ‘Basic Regulation’ – classifies China as a NME. It does not however define the market economy or non-market economy concept. The EU’s criteria to qualify as a market economy are merely formulations made by the Commission: they are not enshrined in the EU legislation.

 

The Basic regulation mandates the application of an alternative methodology with respect to imports from NMEs. In such cases, the EU resorts to the so-called ‘analogue country’ methodology – unless the exporters or producers concerned show during the investigation procedure that they operate under market economy conditions.

 

In order to give effect to the expiry of the Protocol’s provision in question, and comply with its WTO obligations, the EU is obliged stop resorting to special methodologies towards China after 11 December 2016. The EU will have to apply the ordinary WTO rules on antidumping.

 

In practical terms, the EU will have to remove the NMEs list from the Basic Regulation or only remove China from the list. Whether China has become a market economy or not is absolutely irrelevant in this respect.

 

The debate on the treatment of imports from China after 11 December 2016 has revolved around this question, and on the necessity to tackle the effects of ‘unfair’ trade practices and state policies in the context of a crisis in the steel and other industrial sectors from overcapacities – at least partly – caused by Beijing’s government interventions.

 

The European Parliament adopted a resolution in May stating that the EU should continue to apply a non-standard methodology in investigations on Chinese imports until China meets “all five EU criteria required to qualify as a market economy”.

 

In July, after having conducted public consultations and an impact assessment the European Commission finally seemed to have acknowledged that leaving the current situation unchanged would be WTO-inconsistent.

 

It announced that it would table a legislative proposal to remove the NME list from the Basic Regulation, and include a new country-neutral methodology aimed at capturing market distortions caused by state intervention. This new methodology, Cecilia Malström said, “would lead to approximately the same level of anti-dumping duties as we have today”. In other words, according to the Commission, the EU can continue implementing its policy towards countries that it considers as NMEs by resorting to the standard WTO anti-dumping rules.

 

The precise nature of the EU’s proposed new country-neutral methodology is yet unknown. There are indications the EU will seek a new ‘cost adjustment’ methodology, inspired from an earlier methodology developed after it recognised Russia as a market economy in 2004, which constructs a hypothetical normal value by replacing the costs of inputs incurred by an investigated producer, and which the Commission consider ‘distorted’, with benchmark values, such as world market prices.

 

Antidumping and government policies

 

The Commission’s stance is based on the false premise that the WTO antidumping rules aim at sanctioning “unfair” commercial practices and state interventions in order to level the playing field. They don’t. And that is precisely why WTO Members requested the derogation contained in section 15 of China’s Accession Protocol.

 

WTO antidumping rules are intended to sanction individual exporters’ pricing behaviours. They are concerned only with price differentiation, all kinds of price-differentiation, whether anti-competitive or not. This in turn implies that antidumping measures are protectionist when they counteract dumping resulting from normal competitive behaviours.

 

Article VI of the GATT, which allows WTO Members to counteract injurious dumping, is an exception to basic WTO principles. This exception was a pre-condition for WTO Members to agree to the maintenance of the multilateral trading system and further liberalization.

 

Because it is an exception, strict rules apply on anti-dumping investigations, notably rules on price comparability. Given that anti-dumping is all about individual companies’ price differentiation policies, investigating authorities shall assess properly pricing behaviours of exporters in their home market and make sure that the ‘normal value’ to which the export price of the product under consideration is to be compared is indeed the ‘normal value’ of the like product in the market of the exporting country, and that it is fit for comparison.

 

In future investigations against Chinese imports, the EU could resort to two circumstances set forth in the WTO anti-dumping agreement which justify disregarding the price of the like product in the domestic market of the exporting country and constructing ‘normal value’: when there are no sales of the like product in the ordinary course of trade in the domestic market of the exporting country, or when – because of the particular market situation – such sales do not permit a proper comparison.

 

As antidumping is all about individual companies’ price differentiation policies, those rules shall only serve to make sure that normal value reflects the normal pricing behaviour of the exporter under investigation on its home market, and that it is fit for comparison with the export price.

 

In no way are these rules meant to sanction a competitive advantage resulting from government intervention.

 

A case now sealed?

 

There are no sales of a product in the ordinary course of trade when the terms and conditions of the sales transaction of this product are not consistent with normal commercial principles in the market in question, as this may prevent a proper assessment a producer’s pricing behaviour. This is certainly the case when the state fixes the price for that product, but not in the case of subsidisation or price regulation of inputs.

 

As for the ‘particular market situation’, it logically refers to the market for the product concerned by the investigation, not the market for inputs. Moreover, a ‘particular market situation’ resulting from government intervention can be relied upon only insofar as it affects price comparability. Assuming that subsidisation has led to a particular market situation for the product concerned, the investigating authority would have to determine its price effect on both the export and the domestic price, and establish that it has been differential.

 

Quite logically, when normal value construction is justified, it shall be established on the basis of the costs of production actually incurred by the investigated exporter: that was as confirmed by the Appellate Body in the Argentina Biodiesel case on 6 October 2016. It follows that the EU would not be entitled to disregard the costs incurred by producers and replace them by benchmark costs.

 

The fate of the current EU’s cost-adjustment practice now seems sealed. The EU better refrain from making further attempts to artificially inflate normal value to neutralize the effects of State intervention on export prices. It should rather address price distortions resulting from State intervention through the WTO Agreement on Subsidies and Countervailing Measures.

 

The EU’s credibility as a reliable, law-abiding trading partner could otherwise be undermined, and the way to a more balanced relationship with China more challenging.

 

Stéphanie Noël is Attorney-at-law in Paris & Geneva

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