Folkert Graafsma and Konstantinos Adamantopoulos of Holman Fenwick Willan assess the legal aspects arising under the WTO Anti-Dumping Agreement (ADA) in connection with the use and existence of the Russian Amendment.
"Both the practice of using a finding of state intervention as the basis to disregard records of a producer or exporter of a market economy country, and the use of the data from third country markets to adjust those records, are highly questionable under WTO rules."
In 2002 the EU amended its basic Anti-dumping Regulation to recognise Russia as a market economy. In the same amendment, the EU modified the basic Anti-dumping Regulation to enable itself to adjust the recorded value of inputs in the cost of production for exporting producers in market economy countries. The producers’ records of certain input costs (gas, energy, etc), which would normally have to be admitted by an investigating authority in the case of market economy countries, could now “legitimately” be adjusted, as if such countries were not market economies after all. This double-edged modification became known as the “Russian amendment”.
In recent years, the use of the cost-adjustment aspect of the Russian amendment has become more pervasive, reaching a climax in the EU biodiesel anti-dumping proceedings against Argentina and Indonesia. Initially, the European Commission (the Commission) commenced simultaneous anti-dumping and anti-subsidy proceedings against Indonesia and Argentina. The main subsidy scheme investigated in the anti-subsidy proceedings was a differentiated export tax regime. Under this differentiated export tax regime, the level of export tax decreased along the processing chain, ie, there was a higher export tax on inputs such as crude palm or soybean oil and a lower tax on end products such as biodiesel. The allegation was that the differentiated export tax resulted in depressed prices for inputs on the domestic market and, hence, constituted a subsidy to biodiesel producers.
Eventually, the EU terminated the anti-subsidy investigation without being able to find that subsidisation had taken place, resulting in the withdrawal of the complaint. That, however, was not the end of the story for the “distortions” allegedly “caused” by the differentiated tax regime. Input costs that could legally not be determined to be “subsidised” were still considered to be “distorted” under the Russian amendment. Indeed, in the anti-dumping proceedings against Argentina and Indonesia the Commission substituted the recorded input costs of exporting producers of biodiesel – who were processing soy bean oil and crude palm oil to produce the biodiesel – with cost data derived from “international markets”. This controversial substitution increased the dumping margins by some 20 to 30 percentage points.
Not surprisingly, all exporting Argentinian and Indonesian producers challenged these massive duties before the General Court in Luxembourg, giving rise to 13 EU court challenges against a single anti-dumping measure: an unprecedented number. Furthermore, in an equally telling move, the respective governments also raised the matter with the WTO (cases DS476 and DS480). Russia also challenged the use and existence of the Russian amendment (DS474), as it is a recurring victim, with the EU typically substituting actual energy, gas and other Russian input costs with other data.
The following summary highlights some legal aspects arising under the WTO Anti-Dumping Agreement (ADA) in connection with the use and existence of the Russian Amendment.
EU’s Cost Adjustment Practice
The legal basis for the Commission’s practice is article 2(5) of the EU’s basic Anti-dumping Regulation. This article stipulates that, whenever the Commission establishes that the costs associated with the production and sale of the product under investigation are not reasonably reflected in the records of the party concerned, it adjusts those costs on the basis of costs of other producers or exporters in the same country. The article also provides that, if such information is not available or cannot be used, the Commission may adjust the costs on any other reasonable basis, including the use of information from other representative markets.
In practice, article 2(5) works as follows. Firstly, the EU will deem a “particular market situation” to exist when it considers that prices are “artificially low” due to government intervention of some kind. Such an intervention is often deemed to exist in situations where the price of an input is regulated by the government – such as energy prices in Russia, Ukraine, Algeria and Libya. The intervention is also deemed to exist where the price of an input is allegedly “low” due to the imposition of export taxes (under the theory that export taxes result in a decrease in prices on the domestic market).
Secondly, in a case where such a “particular market situation” has been established as a result of government intervention, the Commission will then state that such costs do not “reasonably reflect the costs associated with the production and sale of the product under investigation”.
Finally, the Commission will then adjust or replace the costs in the books “on the basis of the costs of other producers or exporters in the same country or, where such information is not available or cannot be used, on any other reasonable basis, including information from other representative markets.” This adjustment typically takes the form of replacing actual recorded costs with a “market price” from outside the country of origin. In the case of energy prices, the price in third countries (eg, Norway) is typically used for the calculation of the costs of production. In the case of Argentinean and Indonesian soy bean and crude palm oil, the EU used “international prices”.
In short, using a simple analogy, it can be said that the Commission uses a non-market economy methodology for the calculation of cost of production in a market-economy country whenever the EU considers that the input costs of certain exporters are too low: it substitutes the actual producers’ costs with costs inferred from another country or from “international markets”.
Compatibility with WTO Rules
Insofar as the WTO rules are concerned, the Commission asserts that its practice is permitted under article 184.108.40.206 of the Anti-Dumping Agreement (ADA). Under article 220.127.116.11 of the ADA:
Costs shall normally be calculated on the basis of records kept by the exporter or producer under investigation, provided that such records are in accordance with the generally accepted accounting principles of the exporting country and reasonably reflect the costs associated with the production and sale of the product under consideration.
The EU considers that the “records” do not “reasonably reflect the costs” under Article 18.104.22.168 of the ADA if the prices of the input costs themselves are low due to some form of alleged government intervention (either direct or indirect). In other words, if the costs reflected in the records are not reasonable in “market conditions”, the records do not reasonably reflect the costs. Hence, the Commission is allowed to disregard such records and substitute them with, in short, whatever it finds appropriate.
In contrast to the Commission’s optimistic view regarding the compatibility of the Russian Amendment with the WTO, the authors believe that both the practice of using a finding of state intervention as the basis to disregard records of a producer or exporter of a market economy country, and the use of the data from third country markets to adjust those records, are highly questionable under WTO rules.
First of all, it is far from clear whether article 22.214.171.124 of the ADA allows for producers’ records to be disregarded because costs are “distorted” or “unreasonable”.
The prudent starting point in analysing a legal provision of the ADA should be to look at its plain language. On the face of it, article 126.96.36.199 cites only two preconditions to the use of a producer’s records by an investigating authority: first, the records should be consistent with Generally Accepted Accounting Principles (GAAP); and second, the records should “reasonably reflect the costs associated with the production and sale of the product under consideration”.
It is self-evident that the two preconditions contained in article 188.8.131.52 of the ADA pertain to the quality of the producer’s records, and have nothing to do with the costs themselves. As soon as the preconditions are met, it does not matter whether the “costs associated with the production and sale of the product under consideration” are artificially low due to state intervention; the costs reflected in the records must be used as the basis for the calculation of the cost of production if the two preconditions are met.
The EU’s creative interpretation of article 184.108.40.206 invokes language that is simply not in the original article. If the EU’s interpretation were correct, article 220.127.116.11 would read:
Costs shall normally be calculated on the basis of records kept by the exporter or producer under investigation, provided that such records [...] reasonably reflect the costs associated with the production and sale of the product under consideration normally incurred under market economy conditions.
This latter language, however, is conspicuously absent. Nor is the EU’s interpretation supported by past WTO jurisprudence. There has been no ruling yet at the WTO level as to whether the EU’s practice of rejecting the producers’ actual recorded costs due to a perceived distortion of the price of an input caused by government intervention is compatible with the ADA. However, the WTO cases that have dealt with article 18.104.22.168 go against the EU’s interpretation. These cases make it clear that the aim of the criterion “reasonably reflect the costs” is to establish whether a particular cost actually incurred by the producer (or producer and its related parties) is a cost associated with the production and sale of the product under consideration.
For example, issues which have been examined in this respect include situations where the producers did not reasonably allocate costs incurred at a particular cost centre (eg, China – Broilers) or where prices paid for raw materials to a related party supplier were not at arm’s length (eg, US – Softwood Lumber V). As long ago as Egypt – Steel Rebar (2002) it was explained that the test for verifying whether “records... reasonably reflect the costs” is that “costs to be included are those that reasonably reflect the costs associated with the production and sale of the product under consideration”; in other words, “whether a particular cost element does or does not pertain, in that investigation, to the production and sale of the product in question in that case.” This test was reiterated in EC – Salmon and recalled in China – Broilers.
Hence, in all these cases, the disputed issue was whether the recorded costs reflected the actual costs associated with the production and sale of the product under investigation. By contrast, the EU’s practice under article 2(5) does not seek to establish the actual costs associated with production, but the costs which, in its view, should have been incurred absent the government intervention. In light of the case law cited above it is highly questionable that an investigating authority is allowed to disregard the records of the producers if those records meet the preconditions of article 22.214.171.124, ie, if they are in accordance with GAAP and reasonably reflect the actual costs associated with the cost of producing and selling of the product in question.
Further, the EU’s approach of inquiring into costs which should have been incurred absent the government intervention, as opposed to inquiring into actual costs incurred, seems to be in conflict with the purpose of the WTO disciplines on dumping. A dumping determination addresses whether a producer is engaged in international price discrimination. Thus, in US – Zeroing (Japan), the Appellate Body explained that “dumping” is the “result of the pricing behaviour of individual exporters or foreign producers”, and that to determine whether there is dumping the investigating authority is obliged to “assess properly the pricing behaviour of an individual exporter or foreign producer.” Contrary to this obligation, the EU’s interpretation of article 126.96.36.199 of the ADA creates a situation whereby dumping is no longer the result of the pricing behaviour of individual exporters or foreign producers, but instead is the result of alleged government intervention in a market. In other words, instead of analysing whether the pricing behaviour of producers/exporters results in dumping, the EU seeks to establish whether government intervention in the market results in lower export prices and injury to domestic industry. This is clearly not the purpose of WTO disciplines on dumping as, in effect, the EU is seeking to establish whether the industry in question is subsidised. Instead, the appropriate means of investigating cases where a perceived distortion is caused by government intervention is through the Agreement on Subsidies and Countervailing Measures (SCM Agreement).
Finally, as a matter of principle, it is unlikely that GATT 1994 or the ADA allow WTO members to discipline low, artificially low, dumped or subsidised costs of inputs at all (unless the sale/purchase of inputs involves affiliated parties). For example, under the predecessors of the WTO and ADA (GATT 1947 and the Anti-Dumping Code) the committee on Anti-Dumping Practices discussed the treatment of the practice known as input dumping – a situation where materials or components that are used in manufacturing an exported product are purchased internationally or domestically at dumped or below cost prices, whether or not the product itself is exported at dumped prices. The Committee stated that “there are no provisions in the [GATT] or in the Anti-Dumping Code which authorize the application by the importing country of the anti-dumping duties by reason of input dumping”. The Committee went on to conclude that:
The normal value of inputs cannot be used as the basis for determining a margin of dumping in the context of an anti-dumping enquiry concerning the end-product; [and] the investigating authorities should not take anti-dumping action on the basis of dumped imports or below cost inputs.
Adjustment on a basis other than data in the country of origin
As mentioned above, whenever the EU finds that a producer’s records do not reasonably reflect its input costs due to an input price distortion caused by government intervention, it is the practice of the EU to use an external (third country or international) benchmark with which it replaces the unreliable price data.
In general, WTO panels have previously held that article 188.8.131.52 of the ADA does not prescribe a particular methodology for determining costs if the records of the exporter/producer are rejected by the investigating authority. In US – Softwood Lumber V, the panel stated, “It agrees [that] article 184.108.40.206 does not prescribe any particular methodology for calculating cost of production.” Nevertheless, the EU’s methodology for the adjustment of input costs is still subject to the disciplines of the ADA. In this regard, we note the following issues.
To begin with, article 2.2 of the ADA (to which article 220.127.116.11 of the ADA refers, ie, “for the purpose of paragraph 2”) explicitly refers to “the cost of production in the country of origin” and obliges the investigating authority to determine constructed normal value “in the country of origin”. Clearly, article 2.2 of the WTO Anti-Dumping Agreement disallows the use of out-of-country benchmarks.
Furthermore, by substituting actual costs with external price information, the EU effectively treats a particular industry or sector as a “non-market economy” (NME) in which prices between unrelated parties are considered unreliable because of government intervention in the sector. This is doubtful, to say the least. WTO members are only allowed to use the NME methodology under para. 1 Ad article VI of GATT 1947 (incorporated into article 2 of the ADA by virtue of article 2.7); or pursuant to the Protocol of Accession of a particular WTO member.
As investigating authorities are only explicitly authorised to resort to the NME methodology in limited circumstances, the absence of such explicit authorisation in article 2.2 implies that no such authorisation was intended in relation to input costs.
It has come as a relief to many that Argentina, Indonesia and Russia have raised the EU’s controversial practice at the highest international judicial level. The panels and the Appellate Body should outlaw this illegal method of calculating costs so that WTO members will no longer be able to use article 18.104.22.168 of the ADA as a “back door” for informally applying a NME methodology towards countries that have been officially recognised as market economies.