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Member States Reach Breakthrough on Reform of EU Trade Defence Instruments

After three years of desperately striving to reform the trade defence instruments (TDIs) of the European Union, EU Member States finally managed to agree on the Council's negotiating position regarding modernisation of the EU’s TDIs. This major breakthrough was reached on 13 December 2016 and will, once adopted, alter the current TDI rules.

A first important step in this legislative process was made on 9 November 2016, when the European Commission published its long-awaited proposal on the reform of the EU’s TDIs. The proposal sought to adequately protect EU industry against issues of market distortion and overcapacity in third countries, while ensuring compliance with the EU’s WTO obligations.

Concretely, the proposal erases the distinction between market and non-market economies, stepping away from the analogue country methodology in EU investigations and resorting to anti-dumping calculations based on the concept of “market distortions”.

However, subsequent to the Commission’s proposal, the EU Member States were unable to agree on all aspects of the TDI reform. At a recent meeting of ambassadors called for by the Slovak EU presidency on 9 December 2016, the EU Members – for the umpteenth time – were unable to end the negotiations successfully.

The removal of the so-called lesser duty rule (LDR), which could lead to the imposition of significantly higher EU anti-dumping duties, was the crucial element of disagreement. While liberal nations objected to the abolishment of the LDR by arguing that higher tariffs would impede trade, more conservative European governments claimed that higher tariffs were necessary to protect the EU industry against an increasing flux of dumped products originating in mainland China. Italy was the most reluctant EU country, fiercely resisting agreement on a compromise and pushing for a tougher position against the perceived dumping practices of mainland China.

While the EU Member States had already managed to agree that the LDR could be waived in certain narrowly defined circumstances – if there were clear evidence of “significant” distortions linked to raw materials used in the production of the dumped goods – the interpretation of such “significant” market distortions remained undetermined.

On 13 December 2016, the EU Member States reached a compromise on a number of important issues. First, they agreed that the LDR can be abolished in cases where a “distorted” raw material individually represents 7% or more of the cost of production of a dumped good and the sum of all distorted raw materials exceeds 27% of the total cost of production of the product concerned.

Second, the EU Members introduced a “Union interest test” that must be conducted before waiving the LDR in a particular case, agreeing that an LDR waiver must broadly be in the EU’s strategic interest. Such a test implies an examination of all pertinent information such as spare capacities in the exporting country, competition for raw materials and the effect on supply chains for European companies. The “Union interest test” thus addresses one of the major concerns of EU industry, being the Chinese mainland’s overcapacity in the steel sector in particular.

Third, the EU Member States agreed on the issue of “pre-disclosure”, imposing a guaranteed timeframe which ensures that importers are informed about impending higher tariffs before a decision on such provisional tariffs comes into force. The Slovaks proposed three weeks as a timeframe, but the final proposal is likely to impose a period of four weeks.

In addition, EU Member States agreed to shorten the investigation period and to enable investigations to be initiated without an official request from the industry when a threat of retaliation by third countries exists. Moreover, EU Member States agreed to enable importers to have the duties collected during an expiry review reimbursed if the measures are eventually not maintained.

Despite the tangible relief amongst EU countries subsequent to the breakthrough, EU industry does not seem satisfied with the Council’s negotiating position. Eurofer, the lobby representing EU steel, stated that “[t]he new provision on the LDR is neither efficient or robust, nor effective or balanced, nor is it adequate to address situations in which market conditions do not prevail”.

The Council compromise will now proceed to the European Parliament, where lawmakers are expected to propose amendments. Once a compromise text is found within the European Parliament, the new trade rules can become law.

It goes without saying that the EU TDI reform is closely related to the debate on the market economy status of mainland China within the framework of the WTO.

On Sunday 11 December 2016, the deadline after which mainland China claims it has the right to be treated as a market economy in the WTO framework, expired. Beijing had clearly stated that it expected the EU (and the US) to drop their current anti-dumping methodology as of 12 December 2016.

Consistent with its promise to attack trade partners that have failed to amend their anti-dumping methodology by the deadline of 11 December 2016, mainland China launched a WTO case against the EU and US on 12 December 2016, one day after the expiry of the deadline. In turn, the EU’s visible compromise move on the reform of its TDI legislation came one day after mainland China’s challenge at the WTO. The filing of the requests for consultations by mainland China kicks off an extensive legal battle on how to interpret its accession protocol to the WTO. In addition, there are rumours that Beijing plans to launch a WTO case against Canada as well.

To date, the US has flatly refused to treat mainland China as a market economy, publicly stating that it sees no need to change its legislation with regard to the treatment of mainland China in its anti-dumping investigations. Indeed, there are those that argue that the terms of accession of mainland China to the WTO do not entitle it to automatic market economy status as of 12 December 2016. Convinced that the interpretation by mainland China is not correct, its critics argue that mainland China cannot become a market economy due to the fact that is does not yet abide by market principles.

The EU has taken a more nuanced approach. While abolishing the distinction between market and non-market economies, the EU is trying to amend its TDI legislation to keep tariffs on dumped goods at a similar level as today. However, the fact that the EU has been in the process of changing its TDI legislation was clearly not sufficient for mainland China to refrain from challenging the current situation. As stated by a European Commission spokesperson, the EU regrets that mainland China is launching this dispute despite the fact that the Commission has already made a proposal to amend the legislation in question.

Mainland China’s challenge of the EU and the US anti-dumping methodology at the WTO could take years, even up to 2021, during which the EU and the US would be able to continue to treat mainland China as a non-market economy. Moreover, it has been argued that the European Commission could continue to apply its existing methodology to mainland China during the next 10 years, due to the fact that expiry reviews can only confirm previous findings. Indeed, Article 11(9) of the Basic Anti-Dumping Regulation provides that in all expiry reviews, “the Commission shall, provided that circumstances have not changed, apply the same methodology as in the investigation which led to the duty”.

Thus, while mainland China’s challenge at the WTO is a strong signal of political determination, its demand to be treated as all other market economies by its trading partners is not likely to be granted anytime soon.

Content provided by Picture: HKTDC Research
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