Konstantinos Adamantopoulos and Folkert Graafsma from Holman Fenwick Willan LLP explain the possible effects of recent EU anti-dumping procedures against suppliers from non-market economies.
On 15 July 2011 the Appellate Body Report concerning European Communities – Definitive Anti-Dumping Measures on Certain Iron or Steel Fasteners from China (WT/DS397/AB/R) was circulated, and adopted shortly after. The following comments deal with the inconsistencies that were found with respect to Article 9(5) of the basic EU anti-dumping Regulation. Because of the systemic nature of the violations it seems that the EU will have to make rectifications with respect to the specific measure in question (the anti-dumping duties on fasteners), as well as with respect to other anti-dumping proceedings, both retroactively as well as prospectively. Out of the various rectifications that are required, one burning question for many Chinese exporters of other products is how the EU has changed, or will change, its practice, going forward.
Article 9(5) of the EU’s basic anti-dumping Regulation determines whether a supplier from a Non-Market Economy (in practice: mostly China), will receive an individual or a country-wide anti-dumping duty. The question of receiving such individual duty is relevant for exporting producers that did not pass the Market Economy Treatment (‘MET’) requirements; those that passed MET will not need to separately pass the requirements of Article 9(5). So, in other words, exporting producers that qualify for MET will receive their dumping margin based on their own normal value and their own export price. Exporters that flunk MET but pass the requirements for Individual Treatment (IT) will get their dumping margin based on their own export price compared with a surrogate normal value. And exporters that pass neither MET nor IT will receive a dumping margin based on a surrogate normal value, compared with a compilation of export prices from various sources – needless to say this latter permutation is frequently a ‘creative’ number, devoid from reality.
Now, since 15 July 2011, the EU has initiated a couple of new anti-dumping proceedings against China. In some initial proceedings (e.g. Lever Arch Mechanisms, Glass Fibre Fabrics, and Tartaric Acid) the EU still issued its standard MET/IT-claim form. However, since Aluminium Radiators (12 August 2011), the EU no longer issued its standard MET/IT-claim-form but instead issues separately a claim form for MET purposes and a separate ‘Annex’ for IT purposes. It seems therefore that with respect to its IT-practice the EU does try to pay heed to the Appellate Body Report in a generic fashion, going forward. But the question has arisen whether, and to what extent, this Annex actually does (or tries to do) what the Appellate Body had in mind. In this regard we will first briefly recap the relevant part of the Appellate Body Report.
In DS397 the question arose as to whether the EU’s IT-test is in fact compatible with the Anti-Dumping Agreement. More specifically the question was whether Article 9(5) was consistent with Articles 6.10 and 9.2 of the Anti-Dumping Agreement, ‘as such’ and ‘as applied’. Under the IT-test, the EU presumes that in China (and other non-market economies ‘NMEs’), all exporting producers are automatically related to ‘China Inc.’ (and therefore subject to a country-wide dumping margin and anti-dumping duty), unless the exporting producer can demonstrate that the state does not interfere and thus qualifies for IT. In response, the Appellate Body considered that placing the burden on NME exporters to rebut a presumption that they are related to the state and to demonstrate that they are entitled to IT runs counter to Article 6.10, which ‘as a rule’ requires that individual dumping margins be determined for each known exporter or producer, and is also inconsistent with Article 9.2 that requires that individual duties be specified by the supplier.
Indeed, while the Appellate Body accepted the principle that there may be circumstances where exporters and producers from NMEs may be considered as a single entity for the purposes of Articles 6.10 and 9.2, such singularity cannot be presumed; it has to be determined by the investigating authorities on the basis of facts and evidence submitted or gathered during the investigation. By contrast, the function of the EU’s IT-test is typically to determine whether exporters or producers are sufficiently distinct from the state to overcome the presumption of singularity, such that they should be entitled to individual treatment pursuant to Article 9(5). Hence, held the Appellate Body, the EU’s IT-test cannot be used to determine whether distinct exporters are sufficiently integrated with each other or with the state to constitute a single exporter. Notably only one of the five criteria of the IT-test directly relates to the structural relationship of the company with the state, while only one other criterion relates to state interference with prices and output. All the other three criteria (1, 4, and 5) may lead to the denial of IT with respect to exporters that have little or no commercial relationship with the state, and whose pricing and output decisions are not interfered with by the state.
Therefore, the Appellate Body was of the view that while in principle there could be situations where nominally distinct exporters may be considered as a single entity, due to state control or material influence in and coordination of these exporters’ pricing and output, the IT-test in Article 9(5) is not directed at such an inquiry. Even where particular related exporters constitute a single supplier, the EU does not determine such a single dumping margin for the state and non-IT suppliers, but rather calculates a country-wide dumping margin and duty. Yet only a dumping margin based on the weighted average of all export prices of each individual exporter forming part of the single entity would be consistent with the obligation under Article 6.10 to determine an individual dumping margin for the single entity composed of several legally distinct producers.
The test was also found incompatible with Article 9.2, because a country-wide duty imposed on a group of exporters could not be considered as being ‘collected in the appropriate amounts in each case’. Accordingly, the Appellate Body ruled 9(5) BR inconsistent ‘as such’ with 6.10 and 9.2 ADA, because it conditions the determination of individual dumping margins for, and the imposition of, individual dumping duties on NME exporters or producers to the fulfilment of the IT-test.
Further, as a consequence, the Appellate Body also ruled that the IT-test ‘as applied’ was inconsistent with the ADA, since any instance of an application of a measure that is ‘as such’ inconsistent with a covered agreement will produce an inconsistent result, even in a situation where suppliers succeed in demonstrating the conditions of the IT-test and ultimately qualify for IT. In this case for instance, the very existence of the IT-test adversely affected Chinese exporters who were targeted by the fasteners investigation. For example, it has a potential impact on those exporters who may be discouraged by the administrative burden from co-operating with the investigating authority and from requesting IT. Under the ADA no such demonstration is required, and for this reason alone it is possible that some exporters may not even have requested IT.
Back to the substance of the newly designed Annex: the exact identical IT-questions as in the past have surfaced. Hence, while, the burden of proof may possibly have changed (this is not clear from the Annex itself), one has to appraise whether the same historical IT-questions could somehow fit, or be compatible with, IT-criterion 3 or 2. Because these are the only two criterions which the Appellate Body held, respectively address the question of a possible structural relationship of the company with the state and a possible state interference with prices and output. The questions in the Annex are segmented into Sections A through G, and are further subdivided into bullet points.
Section A poses a number of general questions. With some imagination the first three questions under this section could belong to IT-criterion 3. The fourth question under A however requests copies of the proof of registration of the company with the competent Authorities, from the date of establishment of the company until the present, which seems rather unrelated to any IT-criterion.
Section B deals with raw materials and other cost components for the production of the product. It seems unclear what bearing, if any, the cost and product questions under this Section have with any IT-criterion under 9(5). Possibly the second sub-question under B.1, as to how prices are set, could relate to criterion 2, but since the question is not restricted to export prices, the request seems overly burdensome. Overall, however, Section B seems by and large irrelevant for any IT related aspects.
Section C deals with setting prices and conditions of sales. With some goodwill this section could be classified to belong to IT-criterion 2, although again the questions on sales should have been restricted to export prices, which is not the case.
A large part of Section D, titled ‘Decision-making’, could be considered to relate to IT-criterion 3, although for some questions the actual relevance seems questionable. For example, the yearly evaluation of the business licence of the company issued by the relevant authority, from the date of establishment to the present day, seems rather far-fetched. The same goes for the file submitted to the authorities for the creation of the company.
Section E deals entirely with financial statements and accounting. While these questions may serve a purpose in the context of MET-criterion 2 (whether ‘firms have one clear set of basic accounting records, which are independently audited in line with international accounting standards and are applied for all purposes’), the five questions and eight sub-questions appear entirely irrelevant for IT. At best, in case the information is necessary for checking the sales, then these questions belong in the main questionnaire, not in the Annex.
Section F includes one page with nine questions and 22 sub-questions on profit-distribution and repatriation. Out of this long list, two questions could be considered to relate to sales, while at best two others could be considered to relate to IT-criterion 1. The remaining five questions appear outside the scope of relevance for any IT-criterion whatsoever.
Last, the two questions under Section G deal with exchange rate conversions, in other words, IT-criterion 4. Needless to say, this criterion was already disposed of by the Appellate Body, and hence any questions in this regard are immaterial for IT.
These facts can only lead to some unfortunate observations:
First, the high-profile and necessary reparation of the ‘as such’ inconsistency going forward (ie, changing Article 9(5) of the basic Regulation) still seems quite far from being realised – at the time of writing, exploratory discussions are ongoing concerning the reasonable period of time that the EU may, or should have, for this aspect of implementation.
Second, as for retroactive implementation ‘as applied’, nothing seems to have happened thus far, neither with respect to the specific measure, nor with respect to any other existing measures. In this regard we recall that under Regulation 1515/2001 the specific measure could (and probably should) have been suspended, while other existing measures should have been put up for the possibility of a ‘special review’, as was done in the aftermath of EU – Bed Linen.
Third, and finally, even the ‘as applied’ attempt for prospective reparation has not yet led to desired results: the Annex has changed nothing but the title. While the title-change hopefully signifies a change in burden of proof, the content of the questions do not bode well for the type and amount of information that may be used to assess whether an exporter can qualify for IT; such content especially leaves unchanged the ‘deterring effect’. In this regard, until the new IT-claim-form really changes substance, or is abolished altogether, the ‘new’ Annex seems to signify an unfortunate situation of putting a new label on an old bottle.