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The Reform of the EU Trade Defence Instruments

By Philippe De BaereVan Bael & Bellis

For the arsenal of EU trade defence instruments, 2016 is likely to be crucial. The main issue in debate is whether China should be granted market economy status (MES) after 11 December 2016. Linked to this question is whether the granting of MES to China should be accompanied by a modernisation of the trade defence instruments in order to mitigate the effect of China's new status. Finally, following a number of lost WTO disputes and cases before the European Court of Justice, it is widely felt that the EU should reinforce the transparency of its investigations.

WWL T&C 2016 - Philippe De Baere

Expiry of Section 15(a)(ii) of China’s Accession Protocol to the WTO

Section 15(a)(ii) of China’s Accession Protocol to the WTO allows WTO members to deviate from the general rules of the Anti-Dumping Agreement by determining the normal value of Chinese imports using a methodology that is “not based on a strict comparison with domestic prices or costs in China”. This provision is, however, set to expire on     11 December 2016. After that date, when dealing with imports from China, WTO members will be required to apply the general rules regarding the determination of the normal value, obliging them to resort to Chinese prices and costs.

For the EU, the expiry of Section 15(a)(ii) of China’s Accession Protocol implies the end of its analogue country methodology, whereby normal value is established on the basis of domestic prices or costs in a third-market economy country. This approach almost invariably leads to an inflation of the dumping margin determined for Chinese exporters. After 11 December 2016, the analogue country methodology will become inconsistent with WTO law and, in particular, with articles 2.1 and 2.2 of the Anti-Dumping Agreement.

Pursuant to article 2.1, the normal value should, in principle, be determined as the price charged for the product in the ordinary course of trade in the domestic market of the exporting country. Article 2.2 explains that if the normal value cannot be determined as foreseen in article 2.1, the investigating authority can resort either to the export price of the like product to an appropriate third country or to the constructed normal value, to be determined on the basis of the cost of production in the country of origin plus a reasonable amount for administrative, selling and general costs and for profits. Clearly, none of these provisions allows for the use of prices charged on the domestic market of a country other than the country of origin.

The importance of China’s MES is more than merely symbolic: approximately half of the EU’s anti-dumping investigations concern non-market economies (NMEs), of which about 85 per cent involve imports from China. While over 90 economies – including Russia, New Zealand, Singapore and Australia – have already recognised China’s MES for the purpose of WTO anti-dumping investigations, the EU and other major economies such as Japan and the US have not yet agreed to grant China MES. With the upcoming expiry of Section 15(a)(ii) on 11 December 2016, they urgently need to come to a decision.

Non-binding Resolution of the European Parliament

On 12 May 2016, the European Parliament (EP) adopted a non-binding resolution on China’s MES, advising the European Commission not to grant unilaterally MES to China in trade defence investigations after 11 December 2016. The EP stressed that China is not a market economy, as it has not yet fulfilled the five criteria established by the EU to define market economies. While the resolution is not legally binding, it does put political pressure on the European Commission when drafting its legislative proposal on how to address the expiry of Section 15(a)(ii) of China’s accession protocol to the WTO.

In parallel, the EP stressed the “imminent need” for a general reform of the EU’s trade defence instruments, urging the European Commission to advance its 2013 proposal for trade defence modernisation. Indeed, granting China MES will result in lower duties imposed on Chinese imports, making the need for trade defence modernisation to protect European industry more pressing. It can be argued that the EU would be more inclined to grant MES to China if, prior to that, it manages to modernise its trade defence arsenal.

Options contemplated by the European Commission

Despite consensus among the EU institutions that China is not (yet) a market economy, the EU must still determine how it will address the expiry of Section 15(a)(ii) of China’s accession protocol to the WTO after 11 December 2016. While the EP and the Council have the final word, the legislative initiative belongs to the European Commission.

The Commission has not yet published its official proposal on how to reflect the expiry of Section 15(a)(ii) of China’s Accession Protocol in its anti-dumping legislation, repeatedly pushing forward its announced deadlines. These hesitations in making public its envisaged course of action reflect the strong opposition by a number of southern member states, the EP and traditional industry sectors, such as steel, against any perceived weakening of the EU trade defence instruments. It also means, however, that the EU is very likely to miss the 11 December deadline.

The Commission has suggested three options for the EU:

to make no changes to the EU Basic AD Regulation;

to remove China from the list of NMEs in the Basic AD Regulation and to apply the standard methodology; or

to grant China MES, while changing the anti-dumping methodology with a new approach that would maintain a strong trade defence system while complying with the EU’s WTO obligations.

 The first option, leaving the Basic AD Regulation unchanged, would put the EU in breach of its WTO obligations, entailing the risk of a Chinese complaint to the WTO. More precisely, if the EU were to continue to apply a non-standard methodology for the calculation of the normal value in the context of anti-dumping determinations involving Chinese imports after 11 December 2016, it would be acting inconsistently with article 2.2 of the Anti-Dumping Agreement by disregarding Chinese domestic prices and costs.

Under the second option, by simply removing China from the list of NMEs provided in article 2(7)(b) of its Basic AD Regulation, the EU would be obliged to apply the standard methodology in anti-dumping investigations concerning goods originating in China. However, given the fierce opposition by key member states and the aforementioned EP resolution, the Commission will not realistically table a proposal along these lines.

The European Commission is thus likely to put forward a proposal on the basis of the third option. According to the Commission, by combining the removal of China from the list of NMEs in the Basic AD Regulation with the imposition of “mitigating tools”, the EU would ensure that its anti-dumping legislation is strong enough to protect the EU industry. Throughout the debates, different “mitigating tools” have been proposed. Nevertheless, it remains uncertain whether such tools could provide a sufficient counterbalance to the standard methodology applied to Chinese imports. Furthermore, some of the proposed mitigating tools appear to be prima facie inconsistent with the EU’s obligations under the WTO.

EU “Mitigating Tools”

The first of the proposed mitigating tools consists of resorting to “cost adjustments” when constructing the normal value. In essence, when being of the opinion that the prices of inputs are not adequately reflected in the accounts of the investigated producer or exporter, the European Commission would upwardly adjust the production costs, by taking into account the average world price of the same element or similar information. A complicating factor is, however, that such an approach has recently been found to violate WTO rules by the Appellate Body in EU – Biodiesel. The practice of resorting to information originating outside of the country of production of the goods under investigation in the context of anti-dumping proceedings can hardly be reconciled with the clear meaning of the relevant provision of the Anti-Dumping Agreement.

The second proposed mitigating tool consists of the abolition of the so-called “lesser duty rule” as contained in articles 7(2) and 9(4) of the Basic AD Regulation. On the basis of this rule, the amount of the (provisional) anti-dumping duty shall not exceed the margin of dumping established, but “should be less than the margin if such lesser duty would be adequate to remove the injury to the Community industry”. As the Anti-Dumping Agreement only considers it “desirable” to levy duties in so far as they can offset the injury caused to the domestic industry, the abolition of the lesser duty rule in the Basic AD Regulation would not amount to a breach of the EU’s obligations under the WTO. The lesser duty rule, however, has managed, over the years, to strike a balance between the interests of EU producers exposed to unfair competition from dumped imports, on one side, and the interests of user industries and consumers, on the other side.

A third proposed tool is commonly known as “grandfathering”. In brief, this would imply the revision of the Basic AD Regulation in order to prevent exporters and importers from lodging requests for an interim review before the expiry of the anti-dumping duties imposed on imports from China. The a priori denial of interim reviews would once again expose the EU to the risk of a challenge before the WTO. Indeed, the introduction of a statutory requirement whereby the EU would continue to impose anti-dumping duties as they were determined in the context of an original investigation until the time of the expiry review appears to be inconsistent with article 11.2 of the Anti-Dumping Agreement, stipulating that the authorities “shall review the need for the continued imposition of the duty” – ex officio or upon request of the interested parties.

The fourth suggested mitigating tool requires amendments to the anti-subsidy legislation in order to allow the European Commission to expand the scope of an investigation launched on a particular set of financial contributions to new subsidies discovered in the course of the investigation. Although the European Commission has expanded the scope of anti-subsidies investigations several times in the past, this practice is contrary to the SCM Agreement. Article 22.2(iii) thereof, when describing the necessary content of the notice of initiation, explicitly mentions “a description of the subsidy practice or practices to be investigated”. The use of the word “shall” in article 22.2(iii) indicates an obligation for the investigating authorities not to subsequently include in the scope of the investigation subsidy schemes that were not expressly listed in the notice of initiation.

Finally, it is expected that the Commission proposal will try to overcome the opposition of the more liberal member states to a strengthening of the trade defence instruments by including a number of proposals reinforcing the transparency of trade defence investigations. This may include the introduction of a system whereby the legal representatives of interested parties are granted increased access to the confidential submissions and data of other parties.

Towards a multilateralisation of the analogue country methodology?

On 20 July 2016, EU Trade Commissioner Cecilia Malmström stated that the College had agreed to propose changes to the EU’s anti-dumping legislation with the introduction of a new anti-dumping methodology to capture market distortions linked to state intervention. According to Malmström, the Commission will propose “to delete [the list of NMEs] and stop calling China a non-market economy”, applying its rules in a country-neutral manner to all trade partners. Under the proposed system, EU trade officials, when confronted with market distortions in the exporting country, would reject the domestic price and cost information and compare export prices with international prices. In other words, the use of out-of-country prices and costs would continue and now also be potentially applied to WTO members not previously classified as NMEs. The WTO compatibility of such approach is highly questionable.

Outlook

The strong opposition expressed by the EP and a number of important member states, together with the limited time remaining for the completion of the legislative process, make it safe to assume that the EU will not be able to remove China from the list of NMEs currently included in article 2(7)(b) of its Basic AD Regulation by the 11 December 2016 deadline.

In this scenario, China will in all likelihood challenge the relevant provisions of the Basic AD Regulation before the WTO, claiming that the Basic AD Regulation is “as such” incompatible with the EU’s WTO obligations. An Appellate Body report finding in favour of China would then make it possible for the European Commission to overcome the objections of the EP and the member states. Taking into account the normal duration of WTO dispute settlement proceedings, this means that the EU’s NME treatment of China in anti-dumping proceedings will de facto be extended by three to four years. Nevertheless, in the event a violation is found, the EU will eventually have to amend the Basic AD Regulation in order to avoid retaliatory measures. 

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