EU trade defence instruments at a deadlock?

The recent developments in the global steel crisis and the distinct features of the European Union (hereinafter the ‘EU’) have underlined the challenges currently faced by the EU trade policy. The EU is an economic and political union of 28 Member States with a specific institutional and decision-making framework. The entire trade policy has been delegated by the Member States to the European Commission and Member States can no longer impose trade defence on their own. However, any modification of the trade defence instruments necessarily involves the three institutions responsible for the decision-making. The European Commission which represents the general interest has the power to make legislative proposals. The European Council, which represents the interest of the Member States, and the European Parliament, which represents the interest of the European people, both act as co-legislators and can amend the Commission’s proposal.

The recent market disturbances caused by the overcapacity, low prices and the surge in imports of steel products originating in China has resulted in escalating tensions between trading partners. EU steel producers and Member States’ governments have requested the European Commission to protect the EU industry. However, the imposition of trade remedies has brought up two challenges facing the EU trade defence instruments: the market-economy status for China and the modernization of the trade defence instruments.

To grant or not to grant market economy status to China

China joined the World Trade Organization in 2001. However, the full benefit of the WTO membership has been differed to the end of 2016 for anti-dumping investigations. As a general rule, the dumping margin is computed by comparing the export price of a product with the domestic price or costs of the product in the exporting country. However, the specific market conditions prevailing in non-market economy, characterized by massive state intervention, usually lead to artificially low prices. These prices do not reflect the normal market conditions and hence cannot be taken into account for determining the dumping margin. WTO rules allow investigating authorities to resort to data from another market (the so-called analogue country) or the data of the domestic industry dully adjusted to determine the normal value.

China’s Protocol of Accession to the WTO (hereinafter the ‘Protocol’) contains a specific provision on the market economy treatment. According to Article 15(a)(ii) of the Protocol, WTO members may use a methodology that is not based in a strict comparison between the export price and the domestic price. However, this provision is set to expire on 11 December 2016 [see end note 1].

It is broadly accepted by scholars and practitioners that Article 15 of China’s Protocol of Accession to the WTO was poorly drafted. As a result, the outcome of the expiry of Article 15(a)(ii) is not clear and contradicting views exist. The effects of Article 15 of the Protocol will not be analyzed here. Rather, the options available to the EU to treat China as a market economy will be explored.

Unlike the Indian legislation, the EU anti-dumping Basic Regulation specifically mentions China as being a non-market economy [see end note 2]. Therefore, any decision to grant market economy status to China will require an amendment of the Basic Regulation to withdraw China from the list of non-market economies. Due to the distinct process of the EU decision-making, treating China as a market economy in anti-dumping investigations appears very difficult for the following reasons. First, the European Commission is still considering whether to grant market-economy status to China. Second, the European Parliament, one of the co-legislators, voted a non-binding resolution on 12 May 2016 urging the European Commission to deny market economy status to Beijing [ see end note 3]. This resolution was voted by an overwhelming majority and clearly indicates the European Parliament’s position against any favorable treatment for China. Last, but not least, Member States are divided on how to treat China. This question is currently very high on the EU agenda and lobbying efforts from various industries are expected to increase.

However, one should not exclude a compromise in the form of a ‘yes, but’ option. The European Parliament and the Member States could agree on the market-economy status for Beijing in exchange of the introduction of new rules for determining the dumping margin in order to address the specific market conditions (without specifically targeting China). Back in 2003, and before Russia joined the WTO, the EU modified the Basic Regulation by adding a new paragraph to Article 2(5) of the Basic Regulation to allow the European Commission to disregard the costs associated with the production and sale of the product under investigation if they are not reasonably reflected in the records [see end note 4]. The objective was to offer the European Commission with the possibility to reject the low prices of raw materials (e.g. natural gas and electricity) paid by Russian companies due to the market distortions and government intervention in Russia [ see end note 5].

This provision has been applied in numerous investigations against Russia, Argentina and Indonesia. However, in EU – Anti-dumping measures on biodiesel from Argentina, a WTO panel recently ruled that the European Commission acted inconsistently with Article 2.2.1.1 of the WTO Anti-Dumping Agreement by failing to calculate the cost of production of biodiesel on the basis of the records kept by the producers [ see end note 6].This ruling gave a serious blow to the use of Article 2(5), second paragraph, of the Basic Regulation and could lead the EU to refrain from introducing any new provision. Another possibility would be negotiate with China the grant of full market economy treatment for certain Chinese sectors in exchange for limited protection for specific EU industry. However, the option seems unrealistic given the tough stand of China vis-à-vis the automatic grant of market economy status.

The long and difficult overhaul of EU trade defence

In addition to the uncertainty regarding the treatment of China, the EU also appears to be mired in the modernization of its trade defence instruments. In April 2013, the European Commission published a proposal to reform the trade defence instruments. The objective was to adapt the instruments to economic environment changes and to improve the transparency, effectiveness and enforcement. The European Commission made groundbreaking proposals. For instance, it proposed to provide interested parties with a pre-disclosure, limited in scope, two weeks before the imposition of provisional measures. The underlying idea was to avoid factual errors or calculation mistakes and to provide information to interested parties as to whether their business will be affected by provisional measures. Besides, the European Commission suggested not to levy duty on the subject goods shipped within the two-week period. The main proposal concerned the so-called lesser duty rule according to which investigating authorities may impose duties below the dumping margin if such lesser duty is sufficient to remove the injury caused to the domestic industry. The lesser duty is a ‘WTO-plus’ requirement that goes beyond the WTO rules and is currently used by several WTO members including the EU and India. The European Commission’s proposal was to refuse the application of the lesser duty rule in anti-subsidy investigations and where structural raw material distortions is found to exist in anti-dumping investigations.

The proposal was extensively modified by the European Parliament and new restrictions to the lesser duty rule were added. The European Parliament proposed not to apply the lesser duty rule in three additional instances: when the exporting country has an insufficient level of social and environmental standards (no ratification of core International Labor Organization conventions or/and Multilateral Environmental Agreements to which the EU is party), when the complainants are largely SMEs and when subsidies are found to exist in anti-dumping cases. Despite several round of discussions, the Member States have not been able to reach an agreement at the European Council. Again, the fate of the trade defence modernization is affected by the competing interests of the EU institutions and the Members States.

Conclusion

The question of granting market economy status to China and the ongoing modernization of the trade defence instruments have both been affected by the steel crisis that has divided the Member States into two camps. A group of Member States headed by the Scandinavian countries and the UK is opposed to any restriction to the lesser duty rule and supports free trade with China. Another group under the leadership of France, Italy and Spain claims that granting China full membership in the WTO could have disastrous consequences for the EU’s economy. The EU appears to be mired in a long-running standoff that reflects its north-south split on trade. However, the deadline for deciding on China’s market economy status is looming and this could force the EU to take a position that is, anyway, likely to be challenged before the WTO by China.

 [The author is a Principal Associate, International Trade Practice,  Lakshmikumaran & Sridharan, Delhi]