x

January 2017

EU-Biodiesel: “Input Costs” in Constructed Normal Value

by Greetika Francis


The WTO Appellate Body (AB) has recently delivered the final word on construction of normal value. In European Union - Anti-Dumping Measures on Biodiesel from Argentina (DS 473) [see end note 1], the Appellate Body rendered its decision in the matter in October, 2016 and the key issue in the dispute was with respect to EU’s use of reference benchmark prices for calculation of “costs” in the construction of normal value of Biodiesel originating in Argentina. The present article examines the nature of the examination in terms of Article 2.2 and 2.2.1.1 of the Anti-Dumping Agreement in the light of findings of the Panel and Appellate Body Reports in EU-Biodiesel.

 

Factual Background

The present dispute arose due to technical and substantive issues raised by Argentina against EU’s conduct of anti-dumping proceedings against imports of biodiesel from Argentina. In the investigation, the EU investigating authorities used ‘reference prices’ published by the Argentine Ministry of Agriculture to establish the costs of soybeans and soybean oil, the main raw materials, used in the production of biodiesel, in the calculation of a constructed normal value (CNV). The EU authority disregarded the domestic sales prices, as provided by the Argentinean producers, since the “domestic sales of biodiesel in Argentina were not made in the ordinary course of trade due to government intervention”.

The “government intervention” which led to the price distortion was a Differential Export Taxation (DET) system maintained by Argentina, as per EU claims. The DET applied to the export of soybean and soybean oil at a higher level and to the export of biodiesel at a lower level, causing the price of soybean and soybean oil to remain suppressed and artificially low in the domestic market. Before the panel, Argentina claimed that both the EU Basic Regulation [see end note 2] authorizing the use of reference prices for input costs (i.e. “as such” claims) and the EU’s application of the regulations in this investigation (i.e. “as applied” claims) were in breach of the AD Agreement.

 

Legal provisions

AD Agreement Articles 2.2 and 2.2.1.1 provide:

2.2 When there are no sales of the like product in the ordinary course of trade in the domestic market of the exporting country or when, because of the particular market situation or the low volume of the sales in the domestic market of the exporting country, such sales do not permit a proper comparison, the margin of dumping shall be determined by comparison with a comparable price of the like product when exported to an appropriate third country, provided that this price is representative, or with the cost of production in the country of origin plus a reasonable amount for administrative, selling and general costs and for profits.
2.2.1.1 For the purpose of paragraph 2, costs shall normally be calculated on the basis of records kept by the exporter or producer under investigation, provided that such records are in accordance with the generally accepted accounting principles of the exporting country and reasonably reflect the costs associated with the production and sale of the product under consideration. Authorities shall consider all available evidence on the proper allocation of costs, including that which is made available by the exporter or producer in the course of the investigation provided that such allocations have been historically utilized by the exporter or producer, in particular in relation to establishing appropriate amortization and depreciation periods and allowances for capital expenditures and other development costs. Unless already reflected in the cost allocations under this sub-paragraph, costs shall be adjusted appropriately for those non-recurring items of cost which benefit future and/or current production, or for circumstances in which costs during the period of investigation are affected by start-up operations.

 

Issues

The primary issues raised in this dispute concern the calculation of the CNV, and questions:

  1. The investigating authority’s replacement of actual input costs incurred by exporters with a benchmark/reference input cost in the calculation of the CNV, on the ground that the actual input costs are distorted or artificially lowered;
  2. Whether the use of a benchmark/reference input cost in the calculation of a CNV would result in the imposition of anti-dumping duties in excess of the dumping margins that should have been established in accordance with the WTO AD Agreement?
  3. Where a reference price is used, whether “fair comparison” mandates an analysis by the authority to make due allowance for export taxes in both Normal Value (as was done) and export price (which was not done);

 

Examination and Conclusion

In its examination, both the Panel and the Appellate Body concurred that the EU acted inconsistently with the AD Agreement Article 2.2.1.1 by failing to calculate the cost of production on the basis of records kept by producers. It held that the EU investigating authority’s determination violated the AD Agreement (Article 2.2 and GATT VI:1(b)(ii)) in so far as it used a “cost” for inputs that was not the cost prevailing “in the country of origin”. EU also breached Article 9.3 of the AD Agreement and Article VI:2 of GATT by imposing anti-dumping duties in excess of the margins that would have been rightly established under Article 2.
Specifically, the Appellate Body observed that the second condition under Article 2.2.1.1, “provided that such records … reasonably reflect the costs associated with the production and sale of the product under consideration” is concerned with the maintenance of records by the exporters regarding costs which are reflective of actual costs of production in the country of origin rather than whether the prices of the goods were “fair” prices, in normal circumstances excluding the alleged distortion [see end note 3]. Thus, according to the Appellate Body, the EU determination that domestic prices of soybeans in Argentina were “artificially low” due to the Argentine differential export tax system was not, in itself, a sufficient basis for concluding that the producers' records did not reasonably reflect the costs of soybeans associated with the production and sale of biodiesel in Argentina.

However, both the Panel and the Appellate Body rejected Argentina's “as such” claims against Article 2(5) of the Basic Regulation since the law does not require EU to determine that a producer's records do not reasonably reflect the costs associated with the production and sale of the product under consideration when these records reflect prices considered to be “artificially or abnormally low” as a result of a distortion. Moreover, the Panel and Appellate Body were also of the opinion that Article 2(5) of the Basic Regulation prescribes what has to be done after the EU authorities have determined that a producer's records do not reasonably reflect the costs of production, and does not govern the determination of whether those records reasonably reflect the costs of production, and thus, the Argentinean claim was misguided.

Further, since the “costs”, and thereby the CNV, were found to be inflated, the AB also determined that EU violated Article 9.3 by imposition of anti-dumping duties in excess of the dumping margins that should have been established in accordance with the AD Agreement.

With respect to the “fair comparison” issue, the Appellate Body and the Panel rejected Argentina's claims that the EU investigating authority was required to make an adjustment to the export price of the exporter reflecting actual prices of soybean and soybean oil because it had made such an adjustment to the normal value by including export taxes on soybean and soybean oil in the CNV leading to an “artificial imbalance”. The Panel observed that “the perceived distortion itself was caused by the export tax, and the undistorted price ultimately used by the EU authorities closely resembled the domestic price plus the export tax. But this does not transform the export tax on soybeans into an identifiable component of the constructed normal value itself. Unlike the examples in the illustrative list in Article 2.4, it is not a characteristic of the transactions being compared. It was a methodological approach that affected the price of biodiesel, but it did not affect the price comparability of the normal value and the export price.” On this basis, the Panel rejected the Argentinean claim. The Appellate Body, on the other hand, felt that once the issue of CNV had been settled, it was unnecessary to rule on Argentina’s “fair comparison” claim.

 

Conclusion

On the basis of the foregoing findings, the Appellate Body has unequivocally clarified the need to establish Constructed Normal Value on the basis of the exporters’ records, rather than resort to construction on another basis. This provides definitive understanding on the Authority’s inability to deviate from the exporters’ records in the calculation of normal value, a practice that has seen booming usage, particularly with investigations involving Non Market Economy countries, like China.

The EU has already begun amendment of its Basic Regulation, keeping in mind the graduation of China from NME status, and the proposed amendments affect provisions which had been challenged in EU-Biodiesel as well. The amendments [see end note 4] have gathered support and may find acceptance from EU Members. It is foreseeable that the enactment of these amendments may be put forth by EU as its “compliance” in the present case. However, the scope, impact and vulnerability of the amendments or any compliance can only be gauged once the proposals are formally enacted.

In any case, it is hoped that the EU-Biodiesel finding would discourage authorities from unduly constructing normal value by usage of reference / benchmarks even where appropriately maintained exporter’s records are available.

 

End Notes:

  1. Appellate Body Report, European Union - Anti-Dumping Measures on Biodiesel from Argentina, WT/DS473/AB/R.
  2. Article 2 (5) of the Council Regulation (EC) No. 1225/2009 of 30 November 2009 on protection against dumped imports from countries not members of the European Community (codified version), Official Journal of the European Union, L Series, No. 343 (22 December 2009), pp. 51-73, and corrigendum thereto, L Series, No. 7 (12 January 2010), pp. 22-23
  3. EU-Biodiesel, Appellate Body Report at paragraphs 6.54-6.57.
  4. Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 2016/1036 on protection against dumped imports from countries not members of the European Union and Regulation (EU) 2016/1037 on protection against subsidised imports from countries not members of the European Union, dated 9 November, 2016.

[The author is Senior Associate, International Trade Practice, Lakshmikumaran & Sridharan, New Delhi]
 

Browse articles