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Implementation of Significant Distortions Methodology by EU in original anti-dumping investigations – Who’s next after China?

29 July 2020

by Vikrant Nehra

The European Union (‘EU’) amended the EU Regulation 2016/1036 of 8-06-2016 (the ‘Basic Anti-Dumping Regulation’) on 12-12-2017 through which it introduced Article 2(6a).[1] The European Commission (‘Commission’) concluded in the expiry reviews of anti-dumping duty from China initiated after 20-12-2017[2] that there were significant distortions in prices and costs and therefore, the normal value cannot be determined based on domestic prices and costs in China.[3]  

Significant distortions methodology on imports from China as per Article 2(6a) has been applied in three original anti-dumping investigations namely, (i) Steel Road Wheels[4],  (ii) Glass Fibre Fabrics[5] and (iii) Hot Rolled Stainless Steel Sheets and Coils[6]. 

In Steel Road Wheels from China, Government of China (‘GOC’) did not submit questionnaire response. Some of the key observations made by the Commission regarding the existence of significant distortions are as below:

  1. Both public and private companies in the steel sector are subject to policy supervision and guidance of the GOC. Because of the high level of government intervention and share of State-Owned Enterprises (‘SOEs’) in the steel sector, even the private enterprises are not able to operate under market economy conditions. There is also significant control of the State in the raw material market of hot-rolled flat steel (‘HRS’);
  2. Major steel producers are owned by the State. Public documents of State-owned producers like Baoshan Iron & Steel (or Baosteel) and SAIC Motor have shown the intervention of GOC in both steel and automotive sectors;
  3. The Policy on Development of Automotive Industry provides for a foreign shareholding restriction in auto manufacturing joint ventures;
  4. The steel road wheels producers are also affected by the discriminatory application or inadequate enforcement of bankruptcy and property laws. For example, HRS producers benefit from the provision of land at less than adequate remuneration and the role of the State in directly influencing the outcome of bankruptcy proceedings;
  5. China has not ratified many essential conventions of the International Labour Organisation (‘ILO’). Workers who do not possess the local residence registration receive a lower income than the holders of the residence registration because of which the wage costs are distorted;
  6. The raw material HRS benefitted from preferential lending. Artificially low-interest rates by the banks result in under-pricing and excessive utilisation of the capital.

Thus, the Commission concluded that the prices or costs in China suffers from significant state intervention and it is not appropriate to use domestic prices and costs to establish normal value. Brazil was considered as the appropriate representative third country for constructing the normal value.

In Glass Fibre Fabrics from Egypt and China, the presence of significant distortions was alleged against Egypt as well, but its presence was only found in China by the Commission. The Commission in this investigation also used the facts available as no reply was received from the GOC. Following are the key observations made by the Commission regarding the existence of significant distortions:

  1. The State has significant shares in both CNBM Group and Yuntianhua Group which covers 68 % of the total production capacity in China of glass fibre fabrics and glass fibre rovings (‘GFR’), the main raw materials to produce glass fibre fabrics;
  2. Based on the Articles of Association of the exporting producers and other confidential documents, State’s presence and influence was found in the producing companies;
  3. Glass fibre fabrics industry is treated as an important industry supported by the GOC which was evident from various plans of the GOC such as the 13th Five-Year Plan for Fibre and Composite Materials Industry and the Made in China 2025 initiative. This results in advantages to the glass fibre fabrics industry stemming from the support mechanisms like Financial Support Policies and Fiscal & Taxation Policy;
  4. Bankruptcies are very low and the role of the State in insolvency proceedings is very strong;
  5. The wage costs are distorted as the full access to the social security system is limited to local residents. Other employees and workforce remain vulnerable and receive lower income. This is particularly of great significance as labour accounts between 5 % and 25 % of the total cost of production in the glass fibre fabrics;
  6. The GFR producers in China benefitted from preferential loans, both from State-owned banks and from private banks. The exporting producers borrow significant amounts from banks and potentially benefit from the preferential policies of the GOC.

Producer/exporter from China, Taishan Fiberglass Inc contented that the report on significant distortions in the economy of China which has been relied on by the Commission at various instances does not has a specific chapter on the glass fibre sector and is also outdated as it was published in December 2017. The Commission rejected these claims as the report describes different types of distortions present in China which are cross-cutting and applicable throughout the Chinese economy including to the glass fibre sector.

As a result, the Commission concluded that there exists significant distortions of prices and costs in China. The Commission considered Turkey as the appropriate representative third country for the construction of the normal value instead of using the domestic prices and costs prevailing in China.

In Hot Rolled Stainless Steel Sheets and Coils from Indonesia, Taiwan and China, significant distortions within the meaning of Article 2(6a) of the Basic Anti-Dumping Regulation were only found in China. The Commission used the facts available because no questionnaire response was received from the GOC. Some of the key observations made by the Commission regarding the existence of significant distortions are as below:

  1. The major stainless steel producers are SOEs, for example, TISCO, Baosteel, Ansteel Lianzhong, Jiujuan Iron and Steel and Tangshan. Most of the fixed asset investment has been organised by the GOC and its SOEs, both of which have displayed higher investment growth than the private sector;
  2. The GOC has a presence in the stainless steel enterprises for example in TISCO, the Deputy Secretary of the Chinese Communist Party (‘CCP’) Committee was also nominated the as the President of TISCO by a decision from the Shanxi Province CCP Committee and Government;
  3. The steel sector is an important sector of the Chinese economy. There are numerous plans and directives in place to induce operators to comply with the public policy objectives of the State that impede market forces from operating normally;
  4. The producers of hot rolled stainless steel sheets and coils are subject to the ordinary rules on Chinese bankruptcy, corporate, and property laws that suffers from distortions arising from the discriminatory application or inadequate enforcement of such laws;
  5. Conventions of the ILO are not ratified. Full access to the social security system is limited to local residents. Other employees and workforce remain vulnerable and receive lower income. The steel sector is subject to the same set of labour laws as all other enterprises. This results in wage cost distortion;
  6. Chinese credit ratings correspond to lower international ratings. Bad debt has been handled by rolling over debt, thus creating the so-called ‘zombie’ companies, or by transferring the ownership of the debt.

Therefore, the Commission preliminarily concluded that because of the significant distortions of costs and prices in China, the domestic costs and prices cannot be used for determining the normal value. Brazil was considered as the appropriate representative third country for constructing the normal value.

It is also important to note that the scope of another amendment vide Article 7(2a) of the Basic Anti-Dumping Regulation, which provided for the suspension of lesser duty rule has not been invoked in the aforementioned three anti-dumping investigations. Suspension of lesser duty rule is subject to specific conditions i.e. only when there is existence of raw material distortion through (i) dual pricing schemes, export taxes, export surtax, export quota and other such measures under (2a). and (ii) a single raw material, for which a distortion is found, account for not less than 17% of the cost of production of the product concerned, Article 7(2a) can be invoked. Moreover, a Union interest test should also be carried out before suspending the application of lesser duty rule.[7]

Examination of these anti-dumping investigations show that while individual producers/exporters continue to register their participation, there is no opposition/response from the GOC during the anti-dumping investigations to avoid the application of the significant distortion methodology. As a result, exports from China effectively face the same treatment to that of a non-market economy country in the ongoing anti-dumping investigations and are subject to a higher rate of anti-dumping duty by the EU. However, the suspension of lesser duty rule has not been implemented in case of imports from China. Its application may not be imminent due to relatively stringent conditions attached to it.

It is also of relevance to note that on 15th June 2020, the work of the WTO Panel that was established to examine the consistency of erstwhile EU provision regarding non-market economy treatment to China i.e. under Articles 2(1) to 2(7) of the Basic Anti-Dumping Regulation, was also allowed to lapse. China requested for suspension of the work of the WTO Panel in June 2019 and has now allowed it to continue for more than 12 months, which has caused the authority for the establishment of the WTO Panel to lapse. There is also no renewed challenge by China before the WTO Dispute Settlement Body (‘DSB’) against the state distortion methodology ‘as such’ or against individual instances of its application by the EU in different anti-dumping investigations.

It appears that China, who was swift in initiating WTO Dispute against the EU upon expiration of Paragraph 15(a)(ii) of Protocol on the Accession of the People's Republic of China (‘Accession Protocol’) on 11 December 2016, is now reserved about its opposition on the contentious issue of continued non-market economy and similar discriminatory treatment to its exports by the EU. It requires to be seen if the application of the significant distortions methodology will be applied only against China or it will be extended to other countries as well.[8]   

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

 

 

[1] See Introduction of Significant Distortions Methodology in the EU’s anti-dumping laws, available at: https://www.lakshmisri.com/insights/articles/introduction-of-significant-distortions-methodology-in-the-eu-s-anti-dumping-laws/

[2] The date of entry into force of amended EU Regulation 2016/1036.

[3] See Implementation of Significant Distortions Methodology by EU in review of anti-dumping duty on exports from China, available at: https://lakshmisri.com/insights/articles/implementation-of-significant-distortions-methodology-by-eu-in-review-of-anti-dumping-duty-on-exports-from-china/#

[4] Commission Implementing Regulation (EU) 2020/353 of 3 March 2020 imposing a definitive anti-dumping duty and definitively collecting the provisional duty imposed on imports of steel road wheels originating in the People’s Republic of China (OJ L 65, 4.3.2020, p. 9).

[5] Commission Implementing Regulation (EU) 2020/492 of 1 April 2020 imposing definitive anti-dumping duties on imports of certain woven and/or stitched glass fibre fabrics originating in the People’s Republic of China and Egypt (OJ L 108, 6.4.2020, p. 1).

[6] Commission Implementing Regulation (EU) 2020/508 of 7 April 2020 imposing a provisional anti-dumping duty on imports of certain hot rolled stainless steel sheets and coils originating in Indonesia, the People’s Republic of China and Taiwan (OJ L 110, 8.4.2020, p. 3).

[7] Article 7(2b) of the Basic Anti-Dumping Regulation. In Hot Rolled Stainless Steel Sheets and Coils from Indonesia, Taiwan and China, the requirements of Article 7(2a) were met against Indonesia and China, however, the lesser duty rule was still applied as it was not in the Union’s interest to impose the duty equivalent to the dumping margin because of the negative effect it would have had on the supply chains for the Union companies.

[8] .  For example, if countries which were originally considered as non-market-economy countries by the EU are also subjected to the significant distortions methodology i.e. Albania, Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Mongolia, North Korea, Tajikistan, Turkmenistan and Uzbekistan.

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