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Market economy status for Chinese exporters

By Manoj Gupta

Recently the European Court of Justice gave a landmark ruling laying down certain parameters for granting market economy treatment to the individual exporters from non-market economy (NME) countries. The issue as the one before the court, being more factual, needs to be dealt with on case-to-case basis. However, looking at the trend, particularly during the last one year, it is becoming obvious that the approach towards the subject is not clear. The issue is increasingly getting relevant as the provision permitting non-market economy treatment to the exporters from China will expire after 11 December 2016 [see end note 1].      

Market economy status, or the lack of it, traces its origin from Second Ad-note to paragraph 1 of Article VI of GATT, 1994 wherein it is provided that in case of imports from a country having complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the State, strict comparison of export price with domestic prices may not be appropriate. This provision, which provides discretion to the authorities to avoid use of domestic prices of the exporting country, has also been incorporated in the WTO’s Anti-dumping Agreement through Article 2.7. As  the condition that all domestic prices are being fixed by the State is  not a reality in the case of transitional economies, in respect of China, Article 15 allow exporters to establish  that  market economy conditions prevail for the firm(s) concerned, if not for the entire industry or the country as a whole.        

If the market economy condition is not established then the authorities of the importing country may take the help of prices prevailing in another market economy country (surrogate country) for determination of normal value or choose to construct the normal value.  Normal value based on surrogate country prices or constructed normal value invariably leads to higher anti-dumping duty on Chinese exports.        

State interference or influence?        

Reverting to the ruling of the European Court of Justice, the Court in its order has clarified the meaning of ‘significant State interference’ in Article 2(7)(C) as it appears in the EC’s anti-dumping Regulation. The same phrase i.e. “significant State interference” appears in Clause 8(3) of the first Annexure to the Indian Anti-dumping Rules also. In its order, the Court has held that firstly the provision is not directed at all types of State interference in producer undertakings, but only those that concern their decisions regarding prices, costs and inputs [see end note 2]. It was noted secondly, that use of the word ‘interference’ implies actual interference in the decisions and that it is not sufficient that a State has a certain amount of influence over those decisions. The court further added that the interference in such decisions must be ‘significant’ i.e. State interference which is, neither by its nature nor effect, capable of rendering a producer’s decisions regarding prices, costs and inputs incompatible with market economy conditions cannot be considered ‘significant’.
 
The ECJ acknowledged the fact that the State, even though held minority shares in the company, due to wide diversification of other shares, de-facto controlled shareholder meetings and appointment of board of directors, which gave the State a certain influence. The order, however, held that such ‘influence’ did not mean that there was significant State interference. Even the fact that some of the directors of the company were connected to it by employment contract or by contract for supply of services, was not found to be a determinative factor to conclude existence of State interference.
 
On the other front, the European Union has recently amended Article 9(5) of its Basic Regulations in order to comply with the WTO’s DSB Appellate Body report in EU-Fasteners from China. The Panel as well as Appellate Body of the WTO had held that the European Union’s provision [Article 9(5) of the EU’s Basic Regulation] was inconsistent with Articles 6.10 and 9.2 of the Anti-dumping Agreement (ADA) [see end note 3] as it presumed that a country-wide duty be imposed on producers/exporters in investigations involving non-market economies, unless they satisfy the conditions for individual treatment in that provision. Regulation (EU) No. 765/2012, dated 13th June 2012 issued for the purpose, came into force from 16th June 2012 and substitutes earlier para which read as,      
“The Regulation imposing the duty shall specify the duty for each supplier or, if that is impracticable, and in general where Article 2(7)(a) applies, the supplying country concerned.”        
with new para which reads as,        
“The Regulation imposing anti-dumping measures shall specify the duty for each supplier or, if that is impracticable, the supplying country concerned. Suppliers which are legally distinct from other suppliers or which are legally distinct from the State may nevertheless be considered as a single entity for the purpose of specifying the duty. For the application of this subparagraph, account may be taken of factors such as the existence of structural or corporate links between the suppliers and the State or between suppliers, control or material influence by the State in respect of pricing and output, or the economic structure of the supplying country.”          

So, the anomaly of any presumption has been removed. Now the provision itself provides that even distinct suppliers may be considered as single entity and be imposed a single anti-dumping duty. EC, in order to ensure conformity with the obligations under the Anti-dumping Agreement, has adopted the wordings of the Appellate Body as an amendment to its regulation.        

It is seen that the phrase used in the EC-Fasteners dispute and in the new provision is ‘material influence by the State in respect of pricing and output’. Thus, while in terms of the latest ECJ judgement, ‘State influence’ is not enough, and ‘State interference’ is required for refusing individual treatment to reject the actual cost of the exporter for the purpose of determining normal value in case of imports from non-market economies, ‘State influence’ is enough for the purpose of treating exporter and country as ‘a single entity’, as per the latest amendment. ‘State influence’ may have different connotations and may result in a different interpretation from the word ‘state interference’. It will be interesting to see how EC will reconcile the two sets of provisions. So, one has to be careful and see when influence becomes interference.
 
One may argue that both the provisions are for different purposes as the ECJ judgement relates to determination of normal value by way of grant of individual treatment to exporters from NMEs whereas the latest amendment is in relation to imposition of individual anti-dumping duty rate for each exporter. It is therefore possible, atleast theoretically, for EC, in case of non-market economy country, in a particular fact situation, to first determine individual normal value for the exporter because of ‘inadequate state interference’, but reject  individual treatment because of ‘material state influence’. Word ‘material influence’ indicates a lower threshold of evidence compared to ‘State interference’. In short, different interpretation adopted by the ECJ and the Appellate Body may give rise to contradiction while applying the EC law against the exporter from non-market economy country.      

Sampling, how far effective            

In EU-Footwear from China, the Panel has held that in a case involving non-market economy, anti-dumping duties can be imposed on non-sampled exporters based on a finding of dumping involving an MET analysis on information provided by a limited number of examined producers [see end note 4].  It was noted that China failed to demonstrate that sampling was prohibited for the purpose of making market economy treatment determination.        

However, the European Union’s Court of Justice [see end note 5] has observed that provisions regarding sampling of exporters, when their number is huge, would not be applicable in cases involving normal value determination in imports from NME countries. The court noted that Article 2(7) of the basic (EU) Regulation, concerned solely with the determination of normal value and Article 17 thereof relating to provisions for sampling i.e. to methods for determining dumping margin, are different in content and purpose. Indian provisions pari materia with European provisions on NME and sampling are present in Clauses 7, 8 in Annexure-I, and , in Rule 17(3) of the Anti-dumping Rules, 1995 respectively.          

The European Court observed that obligation for recognition of the economic conditions under which each producer operates i.e. grant of individual market economy treatment, in respect of concerned product, is not affected by the manner in which the dumping margin is to be calculated.        

Present situation          

Interpretation by various authorities being divergent, there is no clarity on the issues identified herein. The amendments carried out to make the law more transparent are also leading to more questions than answers. The disputes between the two (EU and China) are on the rise, latest being the initiation of anti-dumping duty investigation by EU on import of solar panels from China [see end note 6]. There is also fear of Chinese retaliation to start similar investigation on the raw material from EU for the same solar panels. The German Chancellor, however, had stated that the said trade case targeting Chinese solar panel companies should be resolved through negotiations/dialogue rather than investigation, though it may be noted that the investigation itself was due to the efforts of a German company [see end note 7]. 

The problem, it seems, may end after December 2016 when the provision permitting non-market economy treatment in the Chinese Accession Protocol will expire. However, it may of interest to note that Australia has granted market economy status to China but  allows for rejection of domestic selling prices of the exporter as the basis for normal value when there is a ‘market situation’ making  sales not suitable for use in determining a price [see end note 8].          

The next few years would be very important to watch how the disputes develop between EU and China and also the stand taken by the other countries in relation to Non-market economy country, particularly China.          

End notes:

  1.   See para 15(d) of the China’s Accession Protocol. It provides that the provision permitting non-market economy treatment to the exporters from China will expire after 15 years from the date of accession.
2.    Council of the European Union v. Zhejiang Xinan Chemical Industrial Group Co. Ltd., C‑337/09 P, ECJ, 19 July 2012.
3.    Also see EC-Footwear from China,WT/DS405, Para 7.92 and 7.147.
4.    Paras 7.194-7.199 of DS405 - European Union-Antidumping duties on footwear from China.
5.    P - Brosmann Footwear (HK) Ltd v. Council of the European Union, ECJ Order in Case C‑249/10, 2nd Feb., 2012.
6.     Notice of initiation of an anti-dumping proceeding concerning imports of crystalline silicon photovoltaic modules and key components (i.e. cells and wafers) originating in the People's Republic of China, Official Journal C 269, 06/09/2012 p. 5.
7.    Financial Times – www.ft.com, dated 30-8-2012 and 2-9-2012.
8.    Australian Customs & Border Protection’s Dumping and Subsidy Manual.

[The author is an Assistant Manager, Knowledge Management Team, Lakshmikumaran & Sridharan, New Delhi]
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