Philippe De Baere of Van Bael & Bellis in Brussels considers the recent legal developments at WTO and EU level relating to Chinese exporting producers and similar non-market economy countries and how they will impact individual treatment, market economy treatment and definition of the domestic industry.
The EU’s anti-dumping policy has traditionally been characterised by a bias in favour of the complaining domestic producers. This is particularly the case in investigations against so-called non-market economy (NME) countries, such as China. For many years, Chinese exporting producers have been treated considerably worse than exporters from other countries. They had to demonstrate that they qualified for market economy status and/or individual treatment by meeting a number of very strict conditions that were not imposed on exporters from other WTO members. Moreover, they enjoyed fewer procedural rights than other exporters because of the limited access granted to the data used for the determination of the dumping and injury margin. A similar bias in favour of the EU producers could be found also in the way the European Commission determined the existence of material injury to the EU industry. Instead of examining a representative portion of the industry as a whole, the EU invariably based itself on a small share of the total industry consisting exclusively of companies supporting the imposition of anti-dumping measures.
Recent legal developments at both the WTO and EU level are now forcing the European Commission to amend its practices. This article will consider three recent developments that are likely to have a significant impact on European trade practice, specifically in relation to crucial concepts such as individual treatment, market economy treatment and the definition of the domestic industry.
EC – Fasteners
The report of the WTO’s Appellate Body in EC – Fasteners (DS397), delivered on 15 July 2011, was a veritable rock thrown into the pool of the EU’s anti-dumping practice, the ripples of which are sure to be felt for a long time yet.
This dispute, which marked not only China’s first WTO appeal against an EU anti-dumping measure but also one of its most significant victories since accession, challenged article 9(5) of Regulation 1225/2009 on protection against dumped imports from countries not members of the European Community (Basic Regulation). This provision crucially provides that, in principle, an individual anti-dumping duty rate be determined for each producer. However, an exception to this rule is made in the case of producers from NME countries. Unless an NME producer obtains market economy treatment (MET), its normal value will not be determined on the basis of its own figures, but rather on the basis of data provided by a producer in an analogue market economy third country. In this scenario, the EU anti-dumping measure will specify a country-wide duty, which will apply to all producers from that country. Article 9(5), however, provides an exemption from the country-wide duty rate for those NME producers that qualify for individual treatment (IT), and are thus granted an individual duty rate. In practice, the above EU legal framework means that article 9(5) conditions the granting of an individual duty rate to NME producers on their ability to fulfil the IT test.
The Appellate Body found that article 9(5) is inconsistent as such with WTO law, and more specifically that it violates articles 6.10 and 9.2 of the Anti-Dumping Agreement (ADA). Indeed, article 6.10 expresses an obligation, rather than a preference, for authorities to determine individual margins of dumping. While this obligation is subject to certain exceptions, there is no provision in the covered agreements that would allow a departure from the obligation to determine individual dumping margins in respect of imports from NMEs only. Section 15 of China’s Protocol of Accession, the Appellate Body noted in particular, provides no such legal basis. Similarly, article 9.2 requires investigating authorities to specify individual anti-dumping duties and to name exporters. While there is an exception to these obligations which permits naming the supplying country where naming individual suppliers is “impracticable”, this exception does not permit the EU to impose country-wide duties on NME exporters as a matter of course.
The Appellate Body specifically considered whether the EU is entitled to presume that producers in an NME constitute a single entity because of their relationship with the state. While it accepted in principle that there may be circumstances where NME exporters may be considered as a single entity for the purposes of articles 6.10 and 9.2, it made clear that such singularity cannot be presumed. Instead, it must be determined by the investigating authority on the basis of facts and evidence submitted or gathered in the investigation.
In this regard, the Appellate Body confirmed and elaborated on the findings of the Panel in Korea – Certain Paper (DS312). However, the Appellate Body also crucially stated that the single entity test which was approved in that case cannot provide a justification for the IT regime applied by the EU. Indeed, the single entity test in Korea – Certain Paper is aimed at determining whether several distinct exporters in fact constitute a single exporter because of structural and commercial integration. The IT test, on the other hand, assesses whether exporters or producers are sufficiently distinct from the state to be entitled to individual treatment pursuant to article 9(5).
The report in EC – Fasteners also condemned the Commission’s practice in defining the domestic industry. Under article 4.1 ADA, the domestic industry is defined as either the domestic producers as a whole of the like product, or those domestic producers whose collective output of the product constitutes a “major proportion” of the total domestic production. Contrary to article 4(1) of the EU’s Basic Regulation, the ADA does not stipulate any specific percentage for evaluating what constitutes a major proportion. As the Appellate Body noted, the 25 per cent benchmark in article 5.4 ADA and incorporated in article 4(1) of the Basic Regulation concerns the separate issue of standing.
In its investigation, the Commission had considered that 27 per cent of total domestic production constitutes a major proportion within the meaning of the ADA. The Appellate Body noted that the Commission had applied a minimum benchmark of 25 per cent in defining the domestic industry, which it disagreed with, noting that such a proportion cannot be presumed to meet the legal requirement in article 4.1 ADA. Furthermore, the Appellate Body criticised the fact that by limiting the domestic industry definition to those producers willing to be part of the sample, the Commission had excluded producers that provided relevant information and had thus created a material risk of distorting the injury determination. Also, the Appellate Body left no doubt about the fact that a domestic industry definition which would a priori exclude producers that did not support the imposition of measures would constitute a violation of article 4.1 ADA.
The Council of the EU adopted amendments to the Basic Regulation on 30 May 2012, purportedly to bring EU legislation in line with the Appellate Body’s ruling in Fasteners. It remains to be seen whether the changes, expected to come into effect in October 2012, will in practice be applied in a WTO-consistent manner.
Further to the Fasteners dispute, two recent judgments from the Court of Justice of the EU have condemned the Commission’s anti-dumping practice, this time specifically in connection with MET. This is a crucial concept in EU anti-dumping procedure due to the fact that, as explained above, an NME producer needs to obtain MET in order to obtain an individual anti-dumping margin based on its own price and cost data. If not, he will be made subject to a country-wide duty rate based on confidential figures from an analogue country producer. As a rule of thumb, the latter results in a higher anti-dumping duty.
The practice of the Commission is to examine only those MET claims submitted by exporting producers who have been included in the sample of companies used as a basis for calculating anti-dumping duties. The Commission particularly relies on sampling to limit its investigation to a representative number of parties where the number of exporting producers is large. In the Brosmann case, the Commission argued that it had been entitled not to assess MET claims from non-sampled producers in its investigation on certain footwear with leather uppers on account of the high number of producers involved.
The Court of Justice, in its ruling of 2 February 2012, which set aside the judgment of the General Court of 4 March 2010, in Brosmann Footwear (HK) and Others v Council (Brosmann, C-249/10 P), found this practice to be in breach of the Basic Regulation and held that once an exporting producer has supplied evidence that it qualifies for MET, the Commission is required to assess whether the MET test has been fulfilled, regardless of whether the exporting producer has been included in the sample of producers or not. Furthermore, this determination must be made within three months of the initiation of the investigation, as required under the Basic Regulation but frequently ignored in practice.
Following the Brosmann judgment, the Commission published a legislative proposal aimed at amending the Basic Regulation. Disappointingly, the Commission has in effect proposed to amend the existing legislation in order to avoid changing its practice. Indeed, it states in its legislative proposal that examining MET claims from all cooperating producers would impose a disproportionate burden upon it. As such, it suggests amending the Basic Regulation so that only sampled producers are entitled to have their MET claims assessed, and furthermore abolishes the three-month deadline set out in the current legislation. The proposal is expected to come before the European Parliament at the end of October 2012.
In another judgment issued on 19 July 2012, the Court of Justice of the EU censured the Commission’s practice in assessing MET in Council v Zhejiang Xinan Chemical Industrial Group Co. Ltd (Xinanchem, C-337/09 P). Crucially, the Court held that state control of an undertaking through a financial shareholding is an insufficient basis for concluding that “significant state interference” exists and for consequently denying an applicant MET.
The first and most central criterion of the five-pronged MET test requires that the decisions of the applicant regarding prices, costs and inputs (including, for instance, raw materials, cost of technology and labour, output, sales and investment) be made in response to market signals reflecting supply and demand, and that there be no significant state interference in that regard.
During its investigation into Chinese imports of glyphosate, a chemical herbicide, the Commission denied Zhejiang Xinan Chemical (Xinanchem) MET on the grounds that the state interfered in Xinanchem’s decisions because the Chinese state was a significant shareholder in the company and could thus influence the appointment and composition of its board of directors.
The Court annulled this decision, stating that Xinanchem’s type of state control was not necessarily incompatible with market economy conditions. Indeed, the Court found that a priori denying state-owned or state-controlled companies MET solely because of the existence of state shareholding is inconsistent with economic reality. State control cannot be equated, as a matter of principle, to “significant state interference” and cannot thereby relieve the Commission of its obligation to take into account the evidence of the real factual, legal and economic context in which a producer operates.
Furthermore, the Court specified that the first requirement of the MET test is not directed at all types of state interference, but only at the state’s power to influence decisions on prices, costs and inputs. Furthermore, interference indicates that it is not sufficient that a state may have a certain amount of influence over these types of decisions, but implies actual interference in them. Furthermore, such interference must be “significant”, meaning that the MET test allows a certain degree of state interference.
In summary, the Commission’s practice in carrying out anti-dumping investigations in relation to NMEs, has recently come under fire at both the WTO and EU level. In Fasteners, the AB made it clear that in order to comply with the ADA, the Commission must start from the premise that an individual anti-dumping duty must be determined for each single producer. Furthermore, the European Commission was forced to change its approach in defining the domestic industry. In Brosmann and Xinanchem, the Court of Justice adopted a more strict interpretation of the rules governing MET determinations. It remains to be seen whether these findings will be sufficient to guarantee that exporters from NME countries will benefit from a more equitable treatment when confronted with future EU anti-dumping investigations.