Treatment of China in Anti-dumping investigation after 11 December 2016 – The EU proposal

On 11 December 2016, specific provisions of Section 15 of the Protocol of Accession of China to the WTO will expire. Under the specific provisions, WTO members are allowed to deviate from the general rules laid down in the WTO Anti-dumping Agreement when dealing with investigations against China. The specific provisions allow WTO members to disregard the domestic prices and costs of Chinese exporters for the determination of the normal value in anti-dumping investigations and resort to an alternative methodology not based on a strict comparison with domestic prices or costs in China. The consequences of the expiry of the specific provisions have been subject to intense debate in Europe. In January and July 2016, the European Commission held discussions to determine whether, and if so how, the EU should change the treatment of China in anti-dumping investigations. On 9 November 2016, the European Commission released a long-awaited proposal to reform the trade defence instruments (anti-dumping and anti-subsidy) by introducing targeted amendments to the existing Basic Regulations [see end note 1]. The main feature of the proposal is the introduction of a new methodology to determine the normal value in case of significant market distortions prevailing in the exporting country.

Normal value for non-market economy countries under the current EU legislation

Under the current provisions, a specific methodology, known as the analogue country methodology, is applied to calculate the dumping margin of non-market economy countries such as China. To that effect, the normal value is constructed on the basis of prices prevailing in a market economy third country as set forth in Article 2(7) of the Basic Anti-Dumping Regulation [see end note 2].Chinese exporters may reverse the presumption and prove that they operate under the so-called market economy conditions, however, this has been seldom granted by the European Commission. The analogue country methodology almost invariably leads to an increase of the dumping margin determined for Chinese exporters.

A new methodology based on cost adjustments

The European Commission proposes to abandon the specific methodology applicable to non-market economy countries and to replace it with a new methodology applicable to all countries (with the exception of specific non-WTO countries). According to the new Article 2(6)(a), the European Commission will be able to disregard the domestic prices and costs of production prevailing in the exporting country in the presence of so-called “significant distortions”. In such circumstances, the European Commission will construct the normal value on the basis of “undistorted prices and benchmarks”, including undistorted international prices or costs of production in an appropriate representative country with a similar level of economic development as compared to the exporting country.

The European Commission considers that significant distortions are deemed to exist when the prices or costs, including the costs of raw materials, are not the result of free market forces as they are affected by government intervention. A non-exhaustive list of situations amounting to government intervention is provided in the proposal and includes the following situations: (i) when the market is served to a significant extent by enterprises operating under the control of state authorities, (ii) the state presence in firms allowing the state to interfere with prices and costs, (iii) the existence of public policies or measures discriminating in favour of domestic suppliers and (iv) the access to finance granted by institutions implementing public policy objectives.

The new methodology shifts the burden of proving the existence of significant market distortions in the exporting country to the complainant. Aware of the difficulty to adduce evidence of market distortions, the proposal provides that the European Commission may prepare reports describing the market distortions prevailing in specific sectors or countries. Such reports may be relied upon by the EU industry to claim that prices and costs in the exporting country are unsuitable to determine the normal value.

Specific methodology for certain non-WTO members

The European Commission also proposes to amend Article 2(7) in order to introduce a specific methodology to determine the normal value in investigations concerning non-WTO Members specifically listed (i.e Azerbaijan, Belarus, North Korea, Turkmenistan and Uzbekistan). For those countries, the normal value will be determined on the basis of the prices or constructed normal value in a market-economy third country, or the prices from such third country to other countries or on any other reasonable basis, including EU domestic prices for the like product.

Transitional application of the new methodology

The proposal introduces specific disciplines ensuring that the entry into force of the new methodologies does not create legal uncertainty for ongoing investigations and for existing anti-dumping measures. Accordingly, the new rules will only apply to investigations which have been initiated upon entry into force of the amended provisions.

As far as existing anti-dumping duties are concerned, the European Commission considers that the mere introduction of a new methodology to determine the normal value in the presence of market distortions does not constitute sufficient grounds to review the existing measures. Therefore, producers or exporters will not be able to request an interim review until the initiation of an expiry review. Furthermore, new shipper reviews will also be deferred to the first expiry review.

Conclusion

The timing and the features contained in the proposal make it clear that the European Commission intends to mitigate the consequences of China’s new status following the expiry of certain provisions of its WTO Accession Protocol on 11 December 2016. However, the new methodology is neutral and may also be applied in investigations against other countries having state intervention in specific sectors.

The new methodology for the normal value determination in the presence of market distortions clearly enhances the power of the European Commission to make cost adjustments. However, the new methodology might be found WTO-inconsistent in the light of the recent findings of the Appellate Body in EU – Biodisel [see end note 3]. In addition, the transitional rules and the denial of review might also expose the EU to a legal challenge before the WTO.

Finally, it is important to bear in mind that the proposal still needs to be approved by the European Parliament and the European Council (both co-legislators in the EU). Certain Member States h4ly oppose the recognition of China as a market economy. In addition, the European Parliament voted a non-binding resolution on 12 May 2016 urging the European Commission not to grant unilaterally market economy status to China in trade defence investigations after 11 December 2016, The proposal therefore seems to be stuck between a likely legal challenge before the WTO or a political dismissal.

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

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