On 3 May 2017, European Union (EU) ambassadors approved the European Council's position on a new, country-neutral methodology for assessing market distortions in third countries. This is a step forward in the EU’s legislative procedure for establishing a new calculation methodology of dumping. Negotiations with the European Parliament, to agree upon the final text, will now begin.

In December 2016, certain provisions of China’s Protocol of Accession to the World Trade Organization (WTO) expired. These provisions allowed the use of a specific methodology for calculating dumping for China as a nonmarket-economy country. The expiry of these provisions necessitates the development of a new methodology for calculating the level of anti-dumping duties on imports from countries, where there are “significant market distortions.”

On 9 November 2016, the European Commission issued a proposal, which introduces changes to the EU’s anti-dumping and anti-subsidy legislation. It proposes a new methodology for calculating dumping on imports from countries where prices and costs are “distorted”, without specifically targeting China. Therefore this proposed methodology is country-neutral, non-discriminatory and a solution between granting market economy status to China and maintaining the previous system of China as a nonmarket-economy country.

The proposed methodology consists of determining normal value (the domestic price of the exporter) on the basis of “undistorted” international prices, costs or benchmarks, or corresponding costs of production and sales in an appropriate representative country, with a similar level of economic development as the exporting country. The proposal also aims to introduce clarifying provisions in EU anti-dumping legislation that describe more concretely situations where such market distortions exist.

The council's position reflects to a large extent the main principles put forward by the European Commission in its November proposal. It establishes a non-exhaustive list of examples used to identify significant market distortions, such as:

  • costs and prices of raw materials not resulting from free market forces due to state policies and influence;
  • markets being served predominantly by state-owned enterprises;
  • public policies discriminating in favour of domestic production;
  • lack of independence of the financial sector; or
  • inadequate enforcement of bankruptcy, corporate or property laws.

Pending the adoption of the final text, which should take many months at best, EU institutions continue carrying out investigations by using the existing methodology, where Chinese prices and costs for normal value calculation are disregarded and prices and costs from another market economy country (analogue country) are used. China strongly contested the continued use of this methodology and initiated WTO action against the EU in December 2016, when the relevant provisions of China’s Protocol of Accession to the WTO lapsed.

Reaching consensus, within the EU’s institutional framework, on China’s market economy status is still a very controversial issue as various pressure groups, stakeholders and EU Member States have diverging agendas and economic interests over China’s exports to the EU. A further complication, is what the U.S. will do with China. While the Commission’s proposal aims at striking the right balance between protectionism and free trade, the U.S. does not appear to agree that China is entitled to market economy treatment after the lapse of the Protocol’s provisions. A substantially different treatment of China by the EU and the U.S. may result in significant diversions of Chinese exports to the more open market territory.

We will be monitoring the progress of China’s market economy treatment on both sides of the Atlantic and will be providing regular updates, as and when key developments arise.