In December 2017 the European Union issued Regulation 2321/2017, amending the basic EU Anti-dumping Regulation (1036/2016). Among other things, Regulation 2321/2017 sets out new rules for the calculation of normal value in the case of significant distortions that affect cost and price and removes rules which previously allowed for normal value to be determined via an analogue country methodology for non-market economy World Trade Organisation (WTO) members.

Dumping and anti-dumping measures

Dumping occurs when the export price of a product is less than the so-called 'normal value'. Normal value is generally determined by reference to domestic prices. However, in certain circumstances, such prices are deemed unreliable (or do not exist at all) and other means for determining normal value are used (eg, analogue country data and the calculation of cost of production).

Under WTO rules, anti-dumping duties may be imposed where dumped imports are causing injury to a domestic industry. Although not required by WTO law, some WTO members (including the European Union) also subject anti-dumping duties to a public interest test.

Amended anti-dumping rules

Normal value in case of significant distortions

Via Regulation 2321/2017, the European Union amended its rules regarding the ways in which it calculates normal value where domestic prices cannot be used.

The European Union added a new Article 2(6a) to provide for a significant distortions methodology to calculate normal value. More specifically, the amendement allows EU authorities to use an alternative cost of production methodology for calculating normal value where there are significant distortions with respect to reported domestic prices or costs (ie, prices or costs (including the costs of raw materials and energy) which are not viewed as the result of free market forces because they are affected by substantial government intervention). When assessing the existence of significant distortions, the new Article 2(6a)(b) stipulates that regard is to be had to the potential effect of one or more of the following elements:

  • 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;
  • state presence in firms allowing the state to interfere with respect to price or cost;
  • public policies or measures discriminating in favour of domestic suppliers or otherwise influencing free market forces;
  • the lack of discriminatory application or inadequate enforcement of bankruptcy, corporate or property laws;
  • distorted wage costs; and
  • access to finance granted by institutions which implement public policy objectives or otherwise fail to act independently of the state.

Where the European Commission has information before it indicating significant distortions for a country or a particular market segment for a country, it can produce and make public reports as appropriate.

On December 20 2017 the commission issued such a document for China. The commission stated that the next report issued will be for Russia.

Where significant distortions are found to exist in a particular case, the normal value will be constructed on the basis of cost of production and sales reflecting undistorted prices or benchmarks. The commission can potentially use:

  • corresponding costs in an appropriate representative country (provided relevant data is available);
  • undistorted international prices, costs or benchmarks, if appropriate; or
  • domestic costs, but only to the extent that they are positively established not to be distorted.

The constructed normal value will include undistorted and reasonable amounts for administration, sale, general costs and profits.

The new methodology applies to all new and expiry review investigations initiated after December 20 2017. Further, interim reviews and newcomer reviews of investigations concluded before the application of the new methodology will be determined in accordance with old methodologies. The commission has made clear that a change in the applicable methodology will not in itself be reason to initiate a changed circumstances interim review.

Removal of analogue country methodology for non-market economy WTO members

Alongside the addition of the significant distortions methodology, the European Union modified its rules in Article 2(7) for using the so-called 'analogue country' method to determine normal value. In short, where this method is applicable, prices in a third country are used to determined normal value, instead of in the country where allegedly dumped imports originate. The December 2017 amendment to the basic EU Anti-dumping Regulation does not change the substance of the methodology. However, it removed provisions which allowed the European Union to apply the methodology to China, Vietnam, Kazakhstan and any non-market economy country which is a member of the WTO. Following the amendment, the European Union will use this methodology only in respect of certain select countries that are not WTO members, which at present include:

  • Azerbaijan;
  • Belarus;
  • North Korea;
  • Turkmenistan; and
  • Uzbekistan.

Why did European Union change its anti-dumping rules?

When China joined the WTO, Section 15(a)(ii) of its Protocol of Accession stipulated that WTO members could use a methodology for determining normal value which was not based on a strict comparison with domestic prices or costs in China if, in the context of a relevant investigation, Chinese producers could not demonstrate that market economy conditions prevailed for their industry. This provision was the basis for the analogue country methodology for determining normal value. Section 15(a)(ii) expired in December 2016 and China challenged the continued use of the methodology in the WTO.(1) Although the European Union has denied that the continued use of the non-market economy analogue country methodology is contrary to WTO rules,(2) the expiration of Section 15(a)(ii) of China's Accession Protocol was nevertheless an important impetus for the change in the legislation.(3)

How is significant distortions methodology different from analogue country methodology?

Both the analogue country methodology and the significant distortions methodology are designed to address the situation where domestic prices or costs do not reflect market forces. Addressing non-market prices is considered important because, if they had to be considered, there would be fewer findings of dumping and the levels of dumping that were found would be much lower. From this perspective, many may view the significant distortions methodology and the analogue country methodology as fundamentally similar.

However, the new significant distortions methodology can be distinguished in some respects. First, it is generally applicable and can potentially apply in respect of any WTO member. Second, the existence of significant distortions is something that, ostensibly, must be established in each investigation, whereas under the analogue country methodology there is a presumption for the use of costs and prices which are not specific to domestic producers. However, it remains to be seen whether the apparent shifting of the initial burden of proof will lead to practically different results with the analogue country methodology, especially for Chinese producers.

Significant distortions methodology

Is it consistent with WTO law?

The European Union changed its legislation, at least in part, to avoid any WTO finding that the continued use of the analogue country methodology with China covered by the previous version of Article 2(7) of the basic EU Anti-dumping Regulation was inconsistent with its WTO obligations due to the expiry of provisions covered by Paragraph 15(a)(ii) of China's Accession Protocol.

However, this does not mean that the new rules are consistent with WTO law. The European Union's new rules are notably not contained in the WTO Anti-dumping Agreement and there is considerable debate as to whether they are permissible under WTO rules. The WTO Appellate Body recently ruled against the European Union's use of international prices when constructing a normal value in respect of biodiesel for producers from Argentina – in particular, because Article 2.2 of the WTO agreement refers to the calculation of a "cost of production in the country of origin" and because Article 2.2.2.1 requires that actual costs reflected in producers' records normally be used when calculation production costs,(4) so long as they:

"suitably and sufficiently correspond to, or reproduce, those costs incurred by the investigated exporter or producer that have a genuine relationship with the production and sale of the specific product under consideration."(5)

It has also been questioned whether the inability to apply the new significant distortions methodology before an expiry review is also contrary to WTO rules.

To date, many WTO members have voiced concern over the new significant distortions methodology, but no formal dispute settlement processes have yet been launched. It is possible that China's ongoing WTO dispute(6) will eventually address the new significant distortions methodology. When China initiated the case, the methodology had not been adopted by the European Union. However, the proposal was in existence and China's panel request stated in a footnote that it covered legislative changes resulting from that proposal.

For further information on this topic please contact Lode Van Den Hende or Jennifer Paterson at Herbert Smith Freehills LLP by telephone (+32 2 511 74 50) or email (lode.vandenhende@hsf.com or jennifer.paterson@hsf.com). The Herbert Smith Freehills LLP website can be accessed at www.herbertsmithfreehills.com.

Endnotes

(1) Please see Case DS516.

(2) For example, the European Union's first written submission.

(3) For example, Point A of the Executive Summary of the Impact Assessment accompanying the Commission Proposal that resulted in the amendments to the EU Basic Anti-dumping Regulation.

(4) Please see Case DS473.

(5) In Argentina-Biodiesel the appellate body left a small opening to refer to third-country prices when constructing normal value (eg, in cases of non-cooperation), but it notably stressed that any third-country prices cannot simply be substituted for domestic prices; rather, they must be adapted where necessary and be used to arrive at a cost of production in the country of origin. The determination was recently followed up by a panel report in Indonesia-Biodiesel which reached similar conclusions (please see Case DS480).

(6) Please see Case DS516.

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