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New EU Anti-dumping Methodology Enters into Force, Together with Publication of Commission’s Report on Mainland China

The EU’s new anti-dumping methodology, set out in Regulation (EU) 2017/2321, was published in the Official Journal on 19 December 2017. The legislation, which entered into force on 20 December 2017, sets out new rules for establishing normal value in case of “significant distortions” in the market of the exporting country.

The new EU rules are formulated in a country-neutral manner, abolishing the previous distinction between market and non-market economies. Instead, the law introduces a new methodology for establishing normal value in case of “significant distortions” in the market of the exporting country, which render the use of domestic prices and costs in that country “inappropriate”. In such a scenario, the normal value “shall be constructed exclusively on the basis of costs of production and sale reflecting undistorted prices or benchmarks”.

In determining such “undistorted prices or benchmarks”, the Commission may use: (i) corresponding costs of production and sales in an appropriate representative country with a similar level of economic development as the exporting country; (ii) if it considers it appropriate, undistorted international prices, costs, or benchmarks; or (iii) domestic costs, but only to the extent that they are positively established not to be distorted, on the basis of accurate and appropriate evidence.

The new Regulation defines “significant distortions” as “distortions which occur when reported prices or costs, including the costs of raw materials and energy, are not the result of free market forces because they are affected by substantial government intervention”. Factors that are considered when determining whether significant distortions exist include state ownership on the market of the exporting country, state presence in companies allowing for interference in prices or costs, and bankruptcy legislation in the exporting country.

In addition, Regulation 2017/2321 authorises EU trade officials to take into account international labour and environmental standards under the new methodology. Notably, where the Commission has a choice between a number of appropriate representative countries with a similar level of economic development as the exporting country under investigation, the level of social and environmental protection in the representative source country will be taken into account in the selection.

Due to the fact that the rules are drafted in a country-neutral manner, EU officials claim that the new methodology is meant to equally apply to all of the EU’s trading partners and does not discriminate against mainland China. In practice, however, it can be estimated that mainland China is the main target of the new legal regime. This follows from the raison d’être of the new methodology, which was adopted in order to bring the EU’s Basic Anti-Dumping Regulation into line with the changes resulting from the WTO Accession Protocol of mainland China and, more precisely, the expiry of the alternative methodologies contained in Section 15(a)(ii) of that Accession Protocol on 11 December 2016.

Moreover, while Regulation 2017/2321 grants the Commission the authority to publish reports describing the market circumstances in a certain country or sector for which the Commission has well-founded indications of the possible existence of significant distortions, the Commission has – until today – only done so for mainland China. As stated by the Commission, the report on mainland China “simply reflects the fact that this is the country on which the majority of the EU's trade defence activity occurs”. The next country report published by the Commission will most-likely concern Russia.

The Commission’s 466-page report on mainland China, which was published on 20 December 2017, is divided into three parts: (i) a macro-economic description of the Chinese economy; (ii) a description of the main production factors used in all manufacturing processes (e.g. labour and energy); and (iii) a description of the steel, aluminium, chemical and ceramic sector in mainland China. The report, along with any other information regarding distortions, will become part of any anti-dumping investigation against mainland China. According to EU Trade Commissioner Cecilia Malmström, “the publication of the country reports will help us put the new methodology into practice”.

While the text of Regulation 2017/2321 clearly points to the fact that the EU industry will be able to “rely” on the report on mainland China and the evidence contained therein when requesting the initiation of an anti-dumping investigation, the legal and practical value of the Commission’s report remains unclear. On the one hand, the Regulation provides that “[i]n assessing the existence of significant distortions, the Commission shall take into account all the relevant evidence that is on the investigation file”, thus including but not limited to the country report. This appears to be in line with the Commission’s statement that the report on mainland China will not lead to an automatic application of the alternative methodology, and that “whether the new methodology will be applied in any given case will depend on the specifics of the case at hand”. On the other hand, by referring to “the need to avoid any additional burdens for the Union industry in using the anti-dumping instrument”, the Regulation seems to indicate that a mere reference to the Commission’s report by the EU industry would be sufficient to apply the new EU methodology. If this were to be the case, the report will quasi-automatically entail the rejection of Chinese domestic costs.

It is, in this respect, important to note that the Commission will, according to Regulation 2017/2321, “provide guidance to interested parties on the use of those reports”. Such guidance is expected to clarify the legal and practical value of the Commission’s report on mainland China. It should also be mentioned that Chinese exporters have the possibility to contradict the Commission’s report and to prove, “on the basis of accurate and appropriate evidence”, that in the specific situation at hand the domestic costs are not distorted. This is, however, a heavy burden to fulfil.

Hong Kong traders should be aware that the new EU anti-dumping methodology will only apply to investigations which are initiated after 20 December 2017. Any ongoing anti-dumping investigations will remain governed by the old rules. In reviews of existing trade defence measures, the new methodology will only be applied as from the time of the next scheduled expiry review of those measures.

It is considered likely that the new EU anti-dumping methodology will face legal challenges at the WTO, as the rules may be seen to violate several provisions of the WTO Anti-Dumping Agreement. It thus remains to be seen how long the new rules will survive.

In a related development, following the Commission’s 2013 proposal on the modernisation of the EU’s trade defence instruments and subsequent struggles amongst the EU Member States to arrive at a joint position, the Commission, the Council and the European Parliament managed to reach a political agreement on the modernisation of the EU's anti-dumping rules on 5 December 2017.

The “modernisation” amendments predominantly relate to the partial waiver of the lesser-duty rule (LDR), the relevance of social and environmental standards in anti-dumping investigations, the issue of “pre-disclosure”, and the closing of the so-called “maritime loophole”. In addition, the amendments purport to shorten the time before duties can be imposed, enhance the transparency of the system and facilitate the participation of smaller companies by providing them with assistance from a specific help desk.

The political agreement on the modernisation of the EU’s trade defence instruments will enter into force once the Council and the European Parliament have formally approved the amendments. EU ambassadors endorsed the agreement on 20 December 2017, and the vote at the European Parliament’s trade committee is likely to take place on 23 January 2018. However, due to the complex EU approvals process, the new regime will not enter into force until at least June 2018, and possibly later if any of the intermediate deadlines are missed. According to EU officials, June is indeed a very “optimistic” timeframe.

Content provided by Picture: HKTDC Research
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