x

Implementation of Significant Distortions Methodology by EU in review of anti-dumping duty on exports from China

29 June 2020

by Vikrant Nehra

The European Union (‘EU’) amended EU Regulation 2016/1036 of 08-06-2016 (‘the Basic Anti-dumping Regulation’) on 12-12-2017 through which it introduced Article 2(6a).[1] Through this amendment, the EU created a possibility whereby actual domestic selling price and costs of producer/exporter can be rejected for determining normal value in anti-dumping investigations/reviews where there are ‘significant distortions of prices and costs’.

The amendment also created a possibility that if there is no allegation of significant distortions in prices and costs in ‘non-market economy’ country like China or if existence of significant distortions in prices and costs cannot be established by the European Commission (“Commission”) in anti-dumping investigation or reviews, the normal value can be determined based on actual domestic selling prices and cost of the producer/exporter in China.[2] The significant distortions methodology introduced by way of amendment would only apply to original investigations/reviews which get initiated from the date of entry into force of Article 2(6a), i.e. on or after 20-12-2017.

For determining ‘significant distortions of prices and costs’ during anti-dumping investigation or review, the Commission can rely on one or more of the following criteria prescribed in Article 2(6a)(b) of the Basic Anti-dumping Regulation:

  1. The market in question being served to a significant extent by enterprises which operate under the ownership, control or policy supervision or guidance of the authorities of the exporting country
  2. State presence in firms allowing the state to interfere with respect to prices or costs
  3. Public policies or measures discriminating in favour of domestic suppliers or otherwise influencing free market forces
  4. The lack, discriminatory application or inadequate enforcement of bankruptcy, corporate or property laws
  5. Wage costs being distorted
  6. Access to finance granted by institutions which implement public policy objectives or otherwise not acting independently of the state

The Commission also published a report on significant distortions existing in China for the purpose of trade defence investigations (“Report”) on 20-12-2017.[3] The report was divided into three parts namely, (i) Cross-cutting distortions – review of macro-economic structure and overall legal framework (ii) factors of production distortions – review of land, energy, labour, capital, and raw-materials related market and (iii) sector specific distortions – review of steel, aluminium, chemical and ceramic industry. The EU may rely on this report for determining existence of ‘significant distortions’ in anti-dumping investigations, however, the application of the determination of significant distortion in case of China is not a foregone conclusion due to existence of this Report. It has to be decided on a case to case basis.[4]. Therefore, it requires to be seen how EU has reviewed existence of significant distortion in China in anti-dumping investigations/reviews against China.

The applicant EU industry claimed existence of significant distortions in China in expiry review of anti-dumping duty on Certain aluminium foil in rolls originating in China initiated on 13 March 2018. For determining the information regarding the existence of significant distortions, the Commission also sent a questionnaire to the Government of China (‘GOC’). However, there was no response from the Government of China. In the regulation imposing definitive measures[5], the Commission emphasised on the overall ‘non-market economy’ foundation of the Chinese economic system. However, the Commission based its determination regarding the significant distortions after analysing information and evidence concerning the aluminium sector in China. Some of the key facts evidencing existence of significant distortions noted by the Commission were as below:

  1. Primary aluminium industry in China are subject to state control, ownership or policy supervision. State owned enterprises (SOEs) enjoy considerable benefit in terms of inputs, government support and finance;
  2. Directors, senior management, supervisors appointed by one state owned aluminium producer were representatives of Chinese Communist Party (“CCP”);
  3. There is also government intervention in functioning of private players. For example, regulating capacity expansion of privately-owned entities;
  4. Numerous plans, directives, issued at national, regional and municipal level shows that there is high degree of intervention governing every aspect of aluminium sector;
  5. Aluminium producers receive preferential treatment from banks in China and;
  6. Aluminium foil producers also receive land at less than adequate remuneration;
  7. Bankruptcies are very low and role of state in insolvency proceedings is very strong;
  8. Conventions of International Labour Organisations (ILO) are not ratified. Full access to social security system is limited to local residents. Other employees and work force remain vulnerable and receive lower income. Aluminium sector is subject to these same set of labour laws as all other enterprises. This results in wage cost distortion.  

The Commission concluded that there were significant distortions of prices and costs by substantial government intervention within the meaning of Article 2(6a)(b) of the Basic Regulation and it was not appropriate to use domestic prices and costs to establish the normal value. Consequently, the Commission constructed normal value for China on the basis of costs of production and sale in Turkey, i.e. an appropriate representative country.  

Similarly, the applicant EU industry alleged existence of significant distortions in prices and costs in China in Expiry review on imports of threaded tube or pipe cast fittings, of malleable cast iron, originating in China and Thailand.[6] For determining the information regarding the existence of significant distortions, the Commission also sent a questionnaire to the Government of China (‘GOC’). However, there was no response from the Government of China.

In the regulation imposing definitive measures, the Commission emphasised on the overall ‘non-market economy’ foundation of the Chinese economic system.[7] However, the Commission based its determination regarding the significant distortions after analysing information and evidence concerning the iron and steel sector in China. Some of the key facts evidencing existence of significant distortions noted by the Commission were as below:

  1. Major producers of steel in China are owned by the State and there is also a strong link between the enterprises in iron and steel sector and the CCP. Out of the 5 steel producers ranked in Top 10 in the world, 4 are SOEs;
  2. CCP cells exist in 70% of privately-owned entities and they have final say over business decision. Management personnel in steel industry are CCP members and functionaries. For example, Vice Chairman of the Jinan Meide Casting Co. Ltd. served as the company’s Party committee secretary; 
  3. There are export restrictions and taxes on inputs used in the production of product under consideration. Moreover, there is strict control over zinc capacities including zinc mining activities;
  4. Bankruptcies are very low and role of state in insolvency proceedings is very strong;
  5. Conventions of International Labour Organisations (ILO) are not ratified. Full access to social security system is limited to local residents. Other employees and work force remain vulnerable and receive lower income. Steel sector is subject to these same set of labour laws as all other enterprises. This results in wage cost distortion;  
  6. Access to finance from institutions is affected by strong position of SOEs. Finances are directed towards encouraged industries as per existing rules and policy objectives. Risk assessment is influenced by the firm's strategic importance to the Chinese government. Borrowing costs have been kept artificially low to stimulate investment.

The Commission determined that there existed significant distortions in prices and costs and it is not appropriate to use domestic prices and costs to establish normal value. The Commission determined Thailand as the appropriate representative country for the construction of the normal value.

Similarly, in the other expiry reviews of anti-dumping duty on exports from China namely (i) Organic Coated Steel Products[8] (ii) Tableware and Kitchenware[9] (iii) Tungsten Electrodes[10] (iv) Bicycles[11] (v) Ironing Boards[12] and (vi) Peroxosulphates[13] that were initiated after the enactment of Article 2(6a), the Commission concluded that there was significant distortions in prices and costs and therefore normal value cannot be determined based on domestic prices and costs in China.

Examination of these expiry review determinations of anti-dumping duty against China by the EU shows that the Commission has determined that there are significant distortions in prices and costs prevailing in China. Even though there is withdrawal of presumption of non-market economy in anti-dumping duty investigations/reviews, it appears that there will be no effective relief for China in fresh investigations/expiry reviews of anti-dumping duty.

[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] China has been traditionally subject to ‘non-market economy’ methodology by EU, which permitted determination of normal value based on other methods without considering actual domestic selling prices and cost in the exporting country. See Ibid.

[3] Report available at: https://trade.ec.europa.eu/doclib/docs/2017/december/tradoc_156474.pdf

[4] Article 2(6a)(c).

[5] Commission Implementing Regulation (EU) 2019/915 of 4 June 2019 imposing a definitive anti-dumping duty on imports of certain aluminium foil in rolls originating in the People's Republic of China following an expiry review under Article 11(2) of Regulation (EU) 2016/1036 of the European Parliament and of the Council (OJ L 146, 5.6.2019, p. 63).

[6] OJ C 162, 8.5.2018, p. 11.

[7] Commission Implementing Regulation (EU) 2019/1259 of 24 July 2019 imposing a definitive anti-dumping duty on imports of threaded tube or pipe cast fittings, of malleable cast iron and spheroidal graphite cast iron, originating in the People's Republic of China and Thailand, following an expiry review pursuant to Article 11(2) of Regulation (EU) 2016/1036 of the European Parliament and of the Council (OJ L 197, 25.7.2019, p. 2).

[8] Commission Implementing Regulation (EU) 2019/687 of 2 May 2019 imposing a definitive anti-dumping duty on imports of certain organic coated steel products originating in the People's Republic of China following an expiry review pursuant to Article 11(2) of Regulation (EU) 2016/1036 of the European Parliament and of the Council (OJ L 116, 3.5.2019, p. 5).

[9] Commission Implementing Regulation (EU) 2019/1198 of 12 July 2019 imposing a definitive anti-dumping duty on imports of ceramic tableware and kitchenware originating in the People's Republic of China following an expiry review pursuant to Article 11(2) of Regulation (EU) No 2016/1036 (OJ L 189, 15.7.2019, p. 8).

[10] Commission Implementing Regulation (EU) 2019/1267 of 26 July 2019 imposing a definitive anti-dumping duty on imports of tungsten electrodes originating in the People's Republic of China following an expiry review under Article 11(2) of Regulation (EU) 2016/1036 (OJ L 200, 29.7.2019, p. 4).

[11] Commission Implementing Regulation (EU) 2019/1379 of 28 August 2019 imposing a definitive anti-dumping duty on imports of bicycles originating in the People's Republic of China as extended to imports of bicycles consigned from Indonesia, Malaysia, Sri Lanka, Tunisia, Cambodia, Pakistan and the Philippines, whether declared as originating in these countries or not, following an expiry review pursuant to Article 11(2) of Regulation (EU) No 2016/1036 (OJ L 225, 29.8.2019, p. 1).

[12] Commission Implementing Regulation (EU) 2019/1662 of 1 October 2019 imposing a definitive anti-dumping duty on imports of ironing boards originating in the People’s Republic of China following an expiry review pursuant to Article 11(2) of Regulation (EU) 2016/1036 of the European Parliament and of the Council (OJ L 252, 2.10.2019, p. 1).

[13] Commission Implementing Regulation (EU) 2020/39 of 16 January 2020 imposing a definitive anti-dumping duty on imports of peroxosulphates (persulphates) originating in the People’s Republic of China following an expiry review pursuant to Article 11(2) of Regulation (EU) 2016/1036 of the European Parliament and of the Council (OJ L 13, 17.1.2020, p. 18).

Browse articles