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European Commission Scrambles to Reform Trade Defence Instruments Before China MES Deadline

In yet another attempt to strengthen EU trade defence instruments, and prepare for the WTO deadline of 11 December 2016 for the granting of market economy status (MES) to mainland China, the European Commission issued a Communication to the European Parliament and Member States on 19 October 2016, entitled “Towards a robust trade policy for the EU in the interest of jobs and growth”.

In its Communication, the Commission stresses that “the 2013 Commission proposal to modernise trade defence instruments must be adopted as a matter of urgency”, referring to what is widely believed to be the acute unfair trade practices by third countries and the massive overcapacities which are flooding the EU market and, in particular, the steel sector.

The Commission states that it is “imperative for the EU's trade defence instruments to be updated, strengthened and made legally more robust”. Nevertheless, despite numerous calls to take swift action in this regard, the Council of Member States’ ministers has – up until today – not been able to agree on the proposal for modernisation.

The paramount issue of disagreement among EU leaders relates to the modification of the existing ‘lesser duty rule’, which is the rule routinely applied by the EU in anti-dumping proceedings against MES third countries. It provides that the EU is limited to imposing tariffs that are calculated to offset any actual harm to European business, rather than the amount by which dumped imports undercut production prices.
 
However, as this rule significantly caps the level of duties that the EU can impose on dumped or subsidised products from third countries, the Commission has proposed exceptions whereby the rule would be adapted to allow higher duties to be imposed in certain carefully and narrowly defined cases (e.g. where there are massive overcapacities and/or raw material distortions). The limited nature of those exceptions reflects an attempt by the Commission to find a compromise with certain Member States who oppose any possibility of higher duties. In the Communication, the Commission has urged the European Council (i.e., heads of state and government) “to ensure a political agreement on the 2013 Commission proposal at the Council meeting of 11 November, including the adaptation of the lesser duty rule”.

The Commission, in its Communication, also elaborated upon its forthcoming proposal regarding the new set of anti-dumping measures to safeguard EU industry. The official proposal is now expected to be published by mid-November, having already missed an October deadline, which had previously been mentioned by Jean-Claude Juncker, President of the European Commission.

Taking into account the expiry of Section 15(a)(ii) of the WTO Accession Protocol of mainland China on 11 December 2016, together with the time-consuming legislative process in the EU, the Commission’s official proposal has become increasingly urgent.

In its Communication, the Commission has declared that its proposed amendments to the EU trade defence legislation “will not grant [MES] to any country”. Rather, the new anti-dumping methodology will focus on capturing market distortions linked to state intervention in third countries in a “country neutral” manner, applied equally to all WTO Members. In addition, the Commission has stated that its new methodology will involve the removal of the list of non-market economy countries in its anti-dumping legislation, bringing the EU’s legislation and practice closer to that of the US and Canada. Importantly, the Commission has mentioned that where distortions are found, “prices and cost will be disregarded for calculating dumping and the Commission will use other available benchmarks, including costs and prices in other economies”.

Due to the major consequences that the reform of the EU trade defence instruments will entail, both for the conduct of future EU anti-dumping investigations and for the possibility of mainland China to challenge the EU before the WTO after 11 December 2016, Hong Kong traders may need to take note of the new anti-dumping methodology. Nevertheless, despite the important indications that the Communication provides, it remains uncertain to what extent the Commission’s official proposal will follow the approach taken in the Communication.

Subsequent to the Commission’s Communication, the modernisation of the EU’s trade defence instruments and the new anti-dumping methodology were discussed during the summit of the Foreign Affairs Council on 20 and 21 October 2016. At the meeting, EU leaders stated that “unfair trade practices need to be tackled efficiently and robustly”, and called for “an urgent and balanced agreement on the Council position on the comprehensive modernisation of all trade defence instruments by the end of 2016”. Despite a consensus that progress should swiftly be made, the EU leaders failed to break an impasse on how to protect EU industry.

Indeed, the Council meeting was not able to break the deadlock over the application of the lesser duty rule, over which EU Member States remain divided. While the Commission’s push for adoption is supported by powerful EU Member States such as France, Germany, Italy and Poland, a blocking minority of EU leaders – led by the UK and including the Netherlands, Sweden, the Czech Republic, Finland and Estonia – continues to oppose the reform of the lesser duty rule, rejecting pleas for tougher trade defence. One of their concerns is that applying astronomical tariffs on imported products would only hurt the consumer.

While the EU leaders agreed on the need to swiftly modernise their trade defence instruments in order to defend the EU against unfair practices, the specifics of how to achieve this aim were left for the next Council meeting, scheduled for 11 November 2016.

Content provided by Picture: HKTDC Research
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