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As EU and China Wrangle over MES, Concerns Abound over European Commission’s Trade Defence Proposal

The EU and mainland China are currently in the throes of preparing for their first WTO dispute on the latter’s market economy treatment since 11 December 2016. That date heralded the expiry of certain provisions of mainland China’s WTO Accession Protocol, with a view to affording it more favourable treatment in anti-dumping investigations.

As previously reported, mainland China launched a WTO case against the EU on 12 December 2016, one day after such expiry, over the EU’s perceived intransigence concerning its market economy rules.

It appears that this dispute, however, only marks the beginning of the legal battle between the two trading giants. Mainland China insists that it should be treated as a market economy, and is determined to force the EU to use the actual costs and prices of Chinese companies in all instances when calculating dumping levels.

Mainland China’s current complaint essentially challenges the EU’s failure to modify its domestic legislation so as to incorporate the crucial change in mainland China’s market economy status in a timely manner.

The fact that the EU is in the process of enacting new anti-dumping legislation was clearly not sufficient for mainland China to refrain from challenging the current situation.
Mainland China, in its WTO complaint, notes that it is aware of the EU’s legislative processes, and mentions that its complaint “also concerns any modification, replacement or amendment to [EU trade law], and any closely connected, subsequent measures”. By doing so, mainland China signals that it is not satisfied with the European Commission’s current proposal on the reform of the EU’s trade defence instruments (TDIs), and that the EU can expect subsequent WTO challenges at the hands of mainland China against the revised EU law and practices in the coming year.

Thus, unless the EU implements trade rules ensuring that its dumping calculations concerning imports from mainland China are, in all instances, based on domestic costs and prices – a scenario which is still very unlikely – the EU should be wary of additional trade-related challenges.

First, mainland China could, as soon as the new EU legislation enters into force, challenge the new legislation as such, claiming that the EU rules still permit the use of third-country costs and prices in the calculation of normal value, which goes against the EU’s WTO commitments.

Second, mainland China could challenge the anti-dumping investigations initiated by the EU after 11 December 2016 (but before the entry into force of its new legislation), arguing that the bases for such regulations are illegal due to the fact that the EU failed to incorporate mainland China’s change in its market economy status in the EU’s domestic legislation in a timely manner.

Third, mainland China could challenge all anti-dumping investigations initiated by the EU after 11 December 2016 (even the ones initiated after the entry into force of the new legislation) which use data other than the domestic costs and prices of the Chinese companies themselves.

In addition, it is foreseen that Chinese exporters will request the European Commission to carry out interim reviews of existing anti-dumping duties. The exporters are likely to argue that such a review is justified by the change in the market economy status of mainland China, which constitutes a change in circumstances. If the EU were to refuse such requests for review, mainland China could challenge the EU both at the WTO in Geneva and before the EU courts in Luxemburg.

The additional challenges mentioned above are supported by concerns, emerging from multiple sources, that the current European Commission proposal is not in line with international trade rules.

On the one hand, mainland China argues that the draft rules would breach the EU’s WTO obligations, because they still allow investigators to ignore Chinese companies’ costs and prices in certain situations. Indeed, the proposal states that investigators must use producers’ data to calculate dumping, unless they find “significant market distortions” linked to the probed product, in which case they can use “undistorted prices or benchmarks” (including, therefore, undistorted international costs and prices).

According to mainland China – as domestic Chinese costs and prices are not always taken into account when determining normal value in anti-dumping proceedings – the EU denies Chinese imports an advantage that is enjoyed by imports from other WTO Members, applying less favourable rules to imports from mainland China instead.

On the other hand – and more importantly – the consistency of the European Commission’s proposal with global trade rules has also been questioned by lawyers within the Commission’s Legal Service itself.

Before the publication of the European Commission’s proposal, EU lawyers warned the Director-General of the Commission’s Trade Directorate that the proposal would only be consistent with global trade rules if EU investigators would, in individual cases, sufficiently support their findings with strong facts and evidence. According to the EU lawyers, the consistency of the proposal would thus depend on its implementation by the Commission.

By providing EU investigators with the possibility to reject domestic costs and prices in the ambiguous case of “significant market distortions”, the EU lawyers had argued that the Commission’s proposal grants EU investigators an overly large margin of discretion in trade defence cases.

As a result, the lawyers within the Commission’s Legal Service stressed that every inquiry in which the costs and prices of the investigated companies are rejected should be based on fact-based findings and data, clearly demonstrating that the companies’ costs and prices are distorted and supporting the investigators’ decision to replace these data with other cost and price information. Gathering such data would, however, create an additional administrative burden on trade investigators.

EU governments and members of the European Parliament are currently in the process of discussing the European Commission’s proposal, and are expected to propose amendments to it. Once they manage to reach a compromise text, the new trade rules can enter into force. This is, however, unlikely to happen for several months.

In the meanwhile, it remains to be seen how the EU-China dispute at the WTO pans out, and, indeed, how other countries (including the US) will respond to mainland China’s legal battle to be treated as a market economy.

Content provided by Picture: HKTDC Research
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