China, EU and Anti-dumping – It’s showtime

[At Game of Trade, we are very happy to kick-start New Year 2017 with a guest post by Garima Prakash who is currently an LL.M. candidate at IELPO, University of Barcelona. In this post, Garima questions the WTO consistency of the recently proposed amendment to EU’s anti-dumping regulation. The post is both timely and relevant in the context of the controversy surrounding the expiry of paragraph 15 (a) (ii) of China’s Accession Protocol]

China recently filed a complaint in the WTO against the EU & the US over use of analogue country method in anti-dumping investigations. China’s complaint has come right after the expiry of paragraph 15 (a) (ii) in China’s Accession Protocol (hereinafter ‘Accession Protocol’) that allows China to be treated as a Non-Market Economy for antidumping investigations. While the implication which the expiry of paragraph 15 (a) (ii) would have on China’s market economy status is itself debatable, in another recent development the EU has proposed an amendment to its anti-dumping regulations which would allow Europe to continue using analogue country method to assess dumping irrespective of the market economy status of exporting countries. In this post, I argue that the proposed EU amendment regulation is inconsistent with WTO law.

The existing anti-dumping laws of EU in particular paragraph 7 (a) of Regulation (EU) 2016/1036 (hereinafter ‘basic EU AD law’) features China in the list of countries subject to analogous country method for calculating normal value in antidumping investigations. Meaning, China is treated as a non-market economy (hereinafter ‘NME’). The consequence of treating a particular country as an NME is that in conducting dumping investigations against NME countries, EU can disregard domestic prices in NMEs and use alternate methodologies such as analogue country method to construct the normal value of goods. Use of analogue country method leads to a higher constructed normal value (and consequently a higher dumping margin) which is why countries like China are disadvantaged in dumping investigations. In November 2016, the European Commission proposed an amendment to its anti-dumping law in response to over-capacity in industrial sectors due to NME practices and state intervention. EU’s proposed law, which amends inter alia paragraph 7 of the basic EU AD law and inserts a new paragraph 6a, is agnostic with respect to the market economy status of any country; in other words, EU’s proposed amendment regulation could potentially be applied to a country like China where significant distortions in domestic prices exist irrespective of the country’s market economy status. The proposed amendment will come into effect if and when it is passed by the European Council and European Parliament. However, the consistency of this proposed law (hereinafter ‘proposed amendment regulation’) with WTO law is questionable for the following reasons:

  1. Article 6a (a)

Article 6a (a) provides for the mechanism to construct normal value when it is not appropriate to use domestic costs and prices in the exporting country due to the existence of significant distortions. It says that, “the sources that may be used include undistorted international prices, costs, or benchmarks, or corresponding costs of production and sale in an appropriate representative country with a similar level of economic development as the exporting country, provided the relevant cost data are readily available” (emphasis supplied).

Article 6a (a) is inconsistent with WTO obligations arising under Article VI:1 (b) GATT 1994 and Article 2.2 Agreement on Implementation of Article VI of the GATT 1994 (Anti-Dumping Agreement or ADA), to the extent that it allows for use of ‘undistorted international price’ and ‘costs of production and sale in an appropriate representative country’ for the construction of normal value.

Article VI:1 (b) GATT 1994 read with Article 2.2 ADA allow for two methods that can be employed if domestic price in the exporting country is not appropriate or available to use in determining normal value: firstly, comparable price of a like product when exported to an appropriate third country, secondly, cost of production in the country of origin plus reasonable selling, governance and administrative costs. It does not allow for cost of production in a third country or the international prices of the product.

As noted by the Panel in EU – Biodiesel (paras 7.255-7.260), it is established that the use of international price instead of the domestic price of the exporting country in order to remove perceived price distortion is inconsistent with the aforementioned WTO provisions. The Appellate Body further clarified,

“When relying on any out-of-country information to determine the “cost of production in the country of origin” under Article 2.2, an investigating authority has to ensure that such information is used to arrive at the “cost of production in the country of origin”” (paragraph 6.82 of the Appellate Body report, EC-Biodiesel).

It is hard (almost impossible) to comprehend how the use of international price as the basis for constructing normal value will amount to a ‘cost prevailing in the country of origin in the construction of the normal value’; this makes Article 6a (a) of the proposed amendment regulation  inconsistent with the relevant GATT and ADA provisions. Also, using cost of production in an appropriate third country (as opposed to export prices to a third country), does not amount to arriving at ‘cost of production in the country of origin’.

  1. Article 6a (b)

Article 6a (b) provides the criteria for determining when ‘significant distortions’ will be said to exist. It says, “In considering whether or not significant distortions exist regard may be had, inter alia, to the potential impact of the following: the market in question is to a significant extent served by enterprises which operate under the ownership, control or policy supervision or guidance of the authorities of the exporting country; state presence in firms allowing the state to interfere with respect to prices or costs; public policies or measures discriminating in favour of domestic suppliers or otherwise influencing free market forces; and access to finance granted by institutions implementing public policy objectives” (emphasis supplied).

Second Ad note to GATT Article VI: 1 provides that a comparison with domestic prices for construction of normal value may not be appropriate in cases of imports from countries which have a complete or substantially complete monopoly over its trade and where all domestic prices are fixed by the state. The situation of distortions to the extent that domestic costs and prices cannot be considered in determining normal value, has been stipulated by this second supplementary provision to Article VI:1.

It is clear that a very high threshold has been set by the drafters in allowing any derogation to be made from using domestic prices for determination of normal value. The standard laid down in the proposed EU AD law for derogation (from using domestic prices) seems to be fairly lower than that laid down in second Ad Note to GATT Article VI: 1. ‘Interference with respect to prices and costs’ and ‘policy supervision or guidance of state’ do not confer the same level of government involvement as in ‘all domestic prices are fixed by the state’. Therefore, it is inconsistent with the relevant WTO provisions.

At best, the criterion for significant distortions may be relied upon to establish that a particular market situation (as envisaged in Article 2.2. ADA and Article 2 (3) of the basic EU AD law) exists and thus domestic sales prices cannot be considered as normal value. However, even in such a case, either a constructed normal value based on domestic cost of production or prices of export to appropriate third country should be used to determine the normal value. Establishing a particular market situation will still not give legal basis to construct normal value based on international prices or cost of production in third country.

EU’s proposed amendment regulation & Article 15 of the Accession Protocol:

Article 15 of the Accession Protocol, as it currently stands, allows for WTO members to presume NME status for China. Under Article 15 (a), it is for the producers of the Chinese goods under investigation to show that market economy conditions prevail, in order to make it mandatory for a WTO member to use Chinese costs or prices for determining normal value. Under the basic EU AD law, EU treats China as a Non-Market Economy. With the repealing of Article 2 (7) (b) of the basic EU AD law (as per the proposed amendment regulation), it has been made clear that EU will no longer presume China to be an NME.

The proposed EU AD laws will bring EU’s anti-dumping laws in line with what is expected to be the law regarding treatment of China in anti-dumping cases after the expiration of Article 15 (a) (ii) of the Accession Protocol for the following reasons:

  1. Expiry of Article 15 (a) (ii) does not imply granting of an automatic Market Economy Status to China. Article 15(d) only sets an expiry date for paragraph (a) (ii). This means that paragraph (a) (i) and the chapeau to (a) will still continue to apply. Chapeau to Article 15(a) states that, “…the importing WTO Member shall use…a methodology that is not based on a strict comparison with domestic prices or costs in China if…” This clearly establishes the possibility of not using Chinese domestic prices in some situations (even after the expiry of paragraph (a) (ii)).
  2. It may also be argued that the expiry of (a) (ii) will change the burden of proof. Before expiry, the burden was on the Chinese producers to prove that market economy conditions prevailed in China. After expiry, it is the importing country which must prove the Chinese firms still operate under non-market economy conditions. However, it is my submission that the burden of proof will not shift after expiry because of the presence of paragraph (a) (i), which puts the burden on the Chinese producers to prove that market conditions prevail, by stating, “If the producers under investigation can clearly show that market economy conditions prevail in the industry producing the like product…”
  3. According to O’Connor, the expiry of paragraph a (ii) does not automatically confer on China a market economy status and should only be interpreted to mean that the specific comparison methodology listed in paragraph a (ii) would no longer apply. As noted by Laura Puccio, due to the presence of the phrase, ‘under the national law of the importing WTO Member’, in the first and third sentence of article 15(d), market conditions in China will need to be proved according to the domestic law of the importing country, i.e., article 6a (b) of the proposed EU amendment regulation to determine whether China should be treated as an NME in dumping investigations.

What remains to be seen is what will come out of the complaint by China (DS516) regarding the calculation methods used in anti-dumping proceedings. China had been waiting for just this moment to bring up this dispute, everything was prepared and thought of. Paragraph 15 (a) (ii) of the Accession Protocol expired on December 11, 2016. Notification for request for consultations with EU and US was sent right the next day. Some say that China had on many occasions signalled this upcoming dispute, and that the ‘consultations’ are a mere formality. This is going to be a landmark in the history of WTO dispute settlement as it involves the three most trade intensive countries of the world. Law, politics and tactics would each play their part. Is the WTO system designed to handle such intensity of pressure and politics?

[The author can be contacted at garima.prakash93@gmail.com]