Legal Update October 19, 2017
EU Institutions Agree On Draft Trade Remedy Legislation
In Particular, Proposing a Non-Standard Dumping Calculation Methodology to Address Cost and Price Distortions
On 10 October 2017, the provisional agreement resulting from inter-institutional negotiations on a proposal for amending the trade defense legislation of the European Union (the "Negotiated Proposal") was made public through the Committee on International Trade of the European Parliament.1 The Negotiated Proposal is based on the proposal published by the European Commission on 9 November 2016 ("Initial Proposal")2 in the context of the debate on whether China should be treated as a market economy as a result of Sections 15(a) and 15(d) of its Protocol of Accession to the WTO.
The Initial Proposal was intended to replace the current "analogue country" methodology that applies to non-market economies with a "nonstandard" methodology, foreseen to apply in a neutral, horizontal manner to all WTO Members, where it is demonstrated that domestic prices and costs in the exporting country are deemed inappropriate "due to the existence of significant distortions".
The European Parliament voiced concerns that the new methodology proposed by the European Commission may be insufficient to strengthen the existing trade defense legislation, may create an additional burden on companies seeking relief under the applicable anti-dumping rules and failed to consider labor and environmental standards. Following negotiations, on 3 October 2017, the European Commission announced that
an agreement had been reached on the Negotiated Proposal between the European Parliament and the Council.3
Rationale for Proposing a New, "Non-Standard" Dumping Calculation Methodology
As the law stands, the European Union determines dumping for exporters from non-market economies based on the so-called "analogue country" methodology, meaning that the domestic price to be used for the purpose of establishing a dumping margin is not based on either the actual prices paid or the actual costs incurred in the country of origin, as normally required under Article 2 of the WTO Anti-Dumping Agreement ("ADA"), but on those of producers located in a third-country market economy.4
This methodology mainly, but not only, applies to anti-dumping investigations initiated against imports from China. Section 15(d) of China's WTO protocol of accession provides that reliance on Section 15(a)(ii) had to expire 15 years after the date of accession of China to the WTO, i.e., by 11 December 2016. Section 15(a)(ii) provided for the possibility to rely on a methodology that is not based on a strict comparison with domestic prices or costs in China if the producers under investigation could not clearly show that market economy conditions prevail in
the industry producing the like product with regard to manufacture, production and sale of that product.
Many divergences of interpretation arose as to whether or not the "analogue country" methodology could be applied against China in accordance with Section 15(a)(i) of the Protocol of Accession.5 Rather than taking a position directly addressing these divergences, the European Union will be adopting a "nonstandard" methodology, that would equally apply, in an horizontal manner, to all WTO Members (i.e., not only China), where "significant distortions" affect costs and prices in the country targeted by an anti-dumping investigation. In the Negotiated Proposal, the EU institutions stress that this does not equate to granting "market economy status" to China, a status that has been vigorously challenged by a number of stakeholders. As emphasized in the preamble of the Negotiated Proposal, this is "without prejudice to establishing whether or not any WTO Member is a market economy or to the terms and conditions set out in protocols and other instruments in accordance with which countries have acceded to the Marrakesh Agreement establishing the WTO".6
A Horizontal "Non-Standard" Methodology to Address Cost and Price Distortions
As a principle, the standard dumping calculation methodology would apply to all investigations. This means that the European Commission would need to establish normal value on the basis of the actual costs and prices incurred by an exporting producer in its home market.
However, the European Commission would be entitled to rely on a non-standard methodology where it is demonstrated that domestic prices and costs in the exporting country are deemed inappropriate "due to the existence of significant distortions".
WHAT SIGNIFICANT DISTORTIONS MAY JUSTIFY THE APPLICATION OF THE NONSTANDARD METHODOLOGY?
Significant distortions that may justify departing from the standard methodology are defined as "those distortions which occur when reported prices or costs, including the costs of raw materials and energy, are not the result of free market forces as they are affected by substantial government intervention".7
Whether this is the case would be analyzed on the basis of an illustrative list of factors relating to the degree of governmental control and the possibility of the State to influence the market, for instance through the presence of Stateowned or controlled entities, the existence of public policies or discriminatory measures favoring domestic industries. The Negotiated Proposal adds as well references to the application of bankruptcy laws, distortions of wages costs and access to finance through institutions which do not act autonomously from the State.
The Negotiated Proposal in addition clarifies, in its preamble, that "[w]hen assessing the existence of significant distortions, relevant international standards, including core ILO conventions and relevant multilateral environmental conventions, should be taken into account, where appropriate".8
HOW IN PRACTICE WOULD THE NEW METHODOLOGY WORK?
Where the European Commission would resort to the non-standard methodology, domestic prices and costs of the exporting producer would be disregarded and its normal value would be constructed on the basis of costs of production and sale reflecting undistorted prices or benchmarks, to which an undistorted and reasonable amount for administrative, selling and general costs and for profits is to be added.
While the Initial Proposal only considered the possibility of replacing the distorted costs of production and sales with those of an
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"appropriate representative country with a similar level of economic development", the Negotiated Proposal now contemplates the possibility to:
(i) favor countries with "adequate level of social and environmental protection" in case costs of production and sales are to be based on an "appropriate representative country",9
(ii) use "undistorted international prices, costs or benchmarks",
(iii) use domestic costs, which are proven to be undistorted; it being understood that this assessment is to be done for each exporting producer separately.10
Based on the European Commission's impact assessment, the non-standard methodology would achieve results similar to those of the analogue country methodology, ensuring that anti-dumping duties remain at a high level.11
THE EUROPEAN PARLIAMENT'S EFFORTS TO ENSURE THAT NO ADDITIONAL BURDEN IS BORN BY THE EUROPEAN UNION INDUSTRY
Whereas the Initial Proposal introduced a shift in the onus of proof, forcing the European Union industry to provide prima facie evidence of the existence of significant distortions in a given market when filing an anti-dumping complaint, the European Parliament has ensured that the new methodology would not create any additional burden on complainants.
As a result, the European Commission is now required, when it has "well-founded indications of the possible existence of significant distortions", to prepare a report describing the market circumstances in a country or sector. These reports are to be produced and regularly updated so that the European Union industry may rely on them when lodging a complaint or a request for a review.
In parallel, these reports would be placed on the file of a given investigation so that interested parties would in parallel be entitled to comment,
rebut, supplement or rely on the findings contained therein.
THE NON-STANDARD METHODOLOGY WOULD APPLY TO ALL WTO MEMBERS, BUT TO WTO MEMBERS ONLY
Although theoretically neutral, China is the main country concerned by this new methodology. This notwithstanding, all WTO Members are concerned by the non-standard methodology. In practice, the elimination of the current text of Article 2(7) of the basic Regulation by the Negotiated Proposal means that explicit designation as non-market economies is removed not only for China, but also for Albania, Armenia, Georgia, Kazakhstan, Kyrgyzstan, Moldova, Mongolia, Tajikistan and Vietnam. These countries would therefore no longer be subject to the "analogue country" methodology, but to the new methodology as well. However, to the extent the non-standard methodology will apply to all WTO Members, regardless of their market economy status, it may equally be of relevance to countries like Russia, in respect of which the European Commission has in past cases already made adjustments for alleged distortions of energy costs.
On the other hand, according to the new text of Article 2(7), the "analogue country" methodology would still apply to non-market economy countries that are not WTO Members, such as Azerbaijan, Belarus, Iran, North Korea, Turkmenistan and Uzbekistan.
THE TEMPORAL SCOPE OF APPLICATION OF THE NON-STANDARD METHODOLOGY UNDER THE NEGOTIATED PROPOSAL
The non-standard methodology would only apply to original and review investigations initiated after the entry into force of the Negotiated Proposal. This means that all ongoing investigations and measures in force would remain unaffected. In particular, in ongoing investigations, the European Commission would still, where relevant, determine dumping on the basis of the "analogue country" methodology.
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The Negotiated Proposal has also clarified the application of the non-standard methodology in the context of interim and newcomer reviews under Articles 11(3) and 11(4) of the EU's basic anti-dumping regulation, i.e., Regulation (EU) 2016/1036. Thus, in the context of these reviews, the non-standard methodology would only replace the "analogue country" methodology after the date on which the first expiry review of the relevant measures, following the entry into force of the Negotiated Proposal, is initiated.
The Negotiated Proposal in addition clarifies that the transition from the "analogue country" methodology to the new, non-standard methodology is not a sufficient reason to request the initiation of an interim review under Article 11(3) of the EU's basic anti-dumping regulation.12
The Compatibility of the Non-Standard Methodology with Applicable WTO Rules Will, in all Likelihood, Be Put to the Test
Under the non-standard methodology, as contemplated in the Negotiated Proposal, the European Commission would be entitled to disregard prices and costs, including costs of raw materials and energy, in the country of origin where they are deemed to be impacted by "significant distortions", resulting from "substantial government intervention".
Where domestic costs are distorted, the European Commission would be entitled to rely on either (i) corresponding costs in an appropriate representative country, with preference being given to countries with an adequate level of social and environmental practices or (ii) undistorted international prices, costs or benchmark.
More likely than not, this will be the subject of a WTO dispute settlement as cost adjustments have already been tested in a previous WTO dispute in relation to the cost adjustment methodology applied by the European Union in the biodiesel anti-dumping investigations against Argentina and Indonesia. In those investigations, the European
Commission disregarded the costs of the relevant exporters because it considered that they were distorted as a result of differences between the export tax on the raw materials used the production of biodiesel and the export tax imposed on the finished biodiesel. This, according to the European Commission, artificially reduced the costs of the biodiesel producers, so that "costs associated with the production and sale of the product under investigation are not reasonably reflected in the record of the party concerned", as per Article 2(5) of the EU's basic anti-dumping regulation, which implements Article 18.104.22.168 of the WTO ADA. On that basis, the European Commission decided to re-construct normal value based on the international prices of the raw materials.
Both Argentina and Indonesia have challenged the validity of the European Commission's costadjustment methodology before the WTO. While the case brought by Indonesia is still pending, the WTO Appellate Body in Argentina Biodiesel,13 upholding the Panel's findings, concluded that the European Commission's determination that domestic prices of raw materials in Argentina were "artificially low" due to the Argentinean 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, so that they could be adjusted under Article 22.214.171.124 of the WTO ADA. Whether or not records "reasonably reflect the costs associated with the production and sale of the product under consideration" under Article 126.96.36.199 of the WTO ADA relates to the issue of whether 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".
Furthermore, Argentina had also made claims under Article 2.2 of the ADA, which requires that the normal value be constructed on the basis
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of, inter alia, the "cost of production [...] in the country of origin", so that the European Commission could not rely on international prices as a proxy for substituting the allegedly distorted costs of raw materials. In that respect, the Appellate Body found that, even though the phrase "cost of production [...] in the country of origin" does not limit the sources of information or evidence that may be used in establishing such cost to sources inside the country of origin, when out-of-country information is relied on, an investigating authority has to ensure that such information is used to arrive at the "cost of production in the country of origin" and that this may require the investigating authority to adapt that information.
One may anticipate that some will be arguing the following vis--vis the proposed nonstandard methodology, as elaborated in the Negotiated Proposal:
(i) A conflict with Article 188.8.131.52 of the ADA on the ground that the adjustments to costs and prices would solely be based on the existence of "significant distortions" linked to governmental intervention, without account being taken of whether or not the records of the exporting producers concerned have a "genuine relationship with the production and sale of the specific product under consideration".
(ii) A conflict with Article 2.2 of the ADA on the ground that the relevant costs to be used for the purpose of constructing normal value would, in all likelihood, be based on "out-ofcountry" evidence, with no specific adjustments foreseen to adapt them to an "in-country" cost of production.
It remains that the Appellate Body left some margin of maneuver by clarifying that:
(i) while the preferred source for cost of production data should be the records kept by the exporter or producer under investigation,
Article 184.108.40.206 of the ADA does not preclude information or evidence from other sources from being used in certain circumstances.
(ii) Article 2.2 of the ADA does not preclude the use of out-of-country evidence for determining costs of production, and although such out-ofcountry evidence may not simply substitute the costs in the records of the exporter or producer under investigation, this may be used to arrive at the cost of production in the country of origin, by adapting the information collected.
It will have to be seen how the EU will implement the new provisions when they enter into force and, thereafter, whether and how the provisions and practice will be challenged.
Reinforcement of the European Commission's Investigation Power in Anti-Subsidy Proceedings
The Negotiated Proposal has kept untouched the provisions contained in the Initial Proposal expanding the European Commission's capability to tackle and impose measures in respect of subsidy schemes that were not initially listed in the notice of initiation of an anti-subsidy investigation, but were found to exist afterward, during the investigation.
This, nonetheless, mainly ensures transparency with regard to a practice that was already informally applied to a certain extent by the European Commission.
The Negotiated Proposal must still be formally adopted by the European Parliament and the Council before it becomes binding law. This process is however expected not to raise any concern as the proposed text is the result of a political compromise between representatives of both institutions. The Negotiated Proposal should therefore be adopted without any substantial change and may enter into force as soon as December 2017.
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1 COM(2016)0721 C8-0456/2016 2016/0351(COD).
2 COM(2016) 721 final, 2016/0351 (COD), available at:
3 Press release, Commission welcomes agreement on new antidumping methodology, 3.10.2017, IP/17/3668, available at:
4 Note, however, that, under certain conditions, exporting producers in a non-market economy may request the application of the standard methodology in a particular investigation by demonstrating that they operate under normal market economy conditions (so-called "market economy treatment" claim).
5 Note that China has already initiated dispute settlement proceedings before the WTO on 12 December 2016 to challenge the EU's continued application of the "analogue country" methodology after 11 December 2016. See Case DS516, European Union -- Measures Related to Price Comparison Methodologies.
6 Negotiated Proposal, Recital (2).
7 The reference to the distortions affecting "raw materials and energy" has notably been added through the Negotiated Proposal.
8 Negotiated Proposal, Recital (3).
9 Note in that respect that Recital (4) of the Negotiated Proposal provides that "[w]hen data are sourced in representative countries and the Commission has to establish whether the level of social and environmental protection in such countries is adequate, the Commission will examine whether those countries comply with core ILO and relevant multilateral environmental conventions".
10 Recital (4) of the Negotiated Proposal clarifies that "where the costs for a given exporter and producer are only partially distorted, including where a given input is sourced from different sources, the part of costs that is distorted should in any event be replaced by undistorted costs".
11 SWD(2016) 370 final, available at:
12 Negotiated Proposal, Recital (6).
13 Appellate Body Report, European Union AntiDumping Measures on Biodiesel from Argentina, WT/DS473/AB/R, 6.10.2016, available at:
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