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Debate on Removal of Tariff Cap Gains Momentum in Light of China’s MES Deliberation

Hong Kong traders may be interested in a topic that is gaining popularity among some of the major EU Member States, including France, Germany and the UK, over renewed calls for stricter trade defence rules.

In addition, it came to light on 14 June 2016 that a Commission proposal, over whether and under what conditions to grant Market Economy Status (MES) to mainland China – which had been expected in July – may be delayed until August at the earliest. 

On 6 June 2016, it was reported that the UK wishes to reconsider a proposal to remove the cap on the level of tariffs that the EU can impose, so as to counteract unfairly priced products imported from third countries, such as mainland China.

The UK government has sent a letter to the EU Trade Commissioner, Cecilia Malmström, questioning the “lesser duty rule”, i.e., the practice of the EU institutions to limit the imposition of anti-dumping duties. The UK is apparently asking for evidence which shows that eliminating the rule would be essential for the protection of the EU industry.

Similarly, Germany and France have jointly called for trade investigators to disregard the lesser duty rule in cases of “massive” overcapacity of the product being targeted.
These increasingly controversial debates are being held in the framework of the larger Market Economy Status (MES) deliberations currently surrounding the EU’s trade relations with mainland China.

The European Commission has been attempting ever since 2013 to pass legislation to modernise Europe’s trade defence instruments, with a view to increasing efficiency and transparency of investigations into imports sold below market cost, or those produced with the help of government subsidies.

The lesser duty rule requires the EU to maintain the additional tariff (namely, the anti-dumping measure) within the limit of what is strictly necessary to prevent injury to the EU industry. The rule currently acts as a cap for anti-dumping tariffs, which are used to ensure that levies on imported goods, for example those hailing from mainland China, are not excessively high. In light of the ongoing steel crisis, the European Commission is pushing for the introduction of a modernised EU trade defence framework, by suggesting the removal of this tariff cap.

However, discussions reached a standstill due to the fact that EU Member States disagree on whether the lesser duty should be removed in cases where irregularities relating to raw materials are discovered. A group of 13 countries, amongst them the UK, the Netherlands, Austria, Sweden and Ireland, have been against the removal of the lesser duty rule. Belgium used to be part of this group, but has since reversed its position. It now appears that the UK may also be reconsidering its position on this issue.

In a letter dated 26 May 2016, the British government agreed to reconsider its position if the Commission brought evidence in support of scrapping the rule, such as illustrating that the rule has prevented the EU from imposing adequate tariffs to protect the EU industry. The UK was adamant on its refusal to relax trade defence rules if that would lead to unfair or protectionist measures. If the UK and others agree to lift the restriction in some cases, the above-mentioned legislative framework to modernise EU trade rules, which has been blocked for the past two years, could have a chance of advancing.

Hong Kong traders with export interests in the Chinese mainland should also know that the British government’s letter comes in the wake of a Position Paper issued by the French and German governments on 13 May 2016. The Paper calls for higher tariffs at the EU’s borders when there are distortions in foreign markets. The paper’s authors agreed with the Commission’s proposals to shorten the length of trade investigations as also for the Commission to be able to start investigations “ex officio” (i.e. of its own accord). These points are also supported by the British government in its letter.

Two years ago, Germany had unsuccessfully tried to reach a compromise position with EU trade ministers by setting out exactly what trade distortions the elimination of the lesser duty rule would generate. In its Position Paper, it now jointly states with France that the lesser duty rule should be eliminated in trade defence cases “where structural distortions to competition in the field of raw materials, including energy would be caused”. Germany further states that in the case of “massive overcapacities” the EU “must identify those sectors where adequate responses are needed”.

This controversial debate is unfolding in the context of the European Commission’s soon-to-be-taken official position on mainland China’s demand for MES, pursuant to WTO provisions scheduled to be triggered on 11 December this year. If mainland China were to be granted MES, there is a fear among EU politicians and industry that the imposition of counter-measures against such trade would become well-nigh impossible, especially as far as dumped mainland Chinese products are concerned. The United States has, for one, been a particularly vocal opponent to granting MES to mainland China, and in May 2016 imposed import duties of more than 500% on certain types of Chinese-origin steel.

Ahead of the G7 summit in Japan on 26–27 May 2016, European Commission President Jean-Claude Juncker weighed in on the controversy, saying that although Europe was eager to do business with mainland China, the EU “could not be defenceless” against market distortions. Others, such as Daniel Caspary of the European People’s Party (EPP) within the European Parliament’s Trade Committee, have voiced similar concerns. According to Mr. Caspary, “[a] lot of countries have realised that the current instruments the EU has are just not sufficient against Chinese dumping and the Council and Commission can’t ignore them any longer”.

The Commission was expected to release its official position on the MES debate in July this year, before the summer recess. However, on 14 June it was reported that Ms. Malmström’s proposal – on whether and how – to grant MES will probably only be presented internally to her co-commissioners at the end of August. This delay is troubling, due to the impending WTO deadline of 11 December 2016. The Trade Commissioner apparently wants to debate her proposal with the 27 other EU commissioners just before the summer recess, and thereafter present a reworked version of it to them for adoption on 31 August.

Why the delay is problematic is that, once a proposal is made, it has to be agreed as a normal legislative document by the Council and the European Parliament. Such a process generally lasts over a year, a period that can easily be lengthened on the more contentious proposals – which this one is certainly expected to be.

Content provided by Picture: HKTDC Research
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