SIGNIFICANT DISTORTIONS METHODOLOGY: CONTINUING THE STATUS QUO

The article has been authored by Utkarshini Rai, a third-year student at NUSRL, Ranchi

Background

When China joined the World Trade Organisation (WTO) in 2001, the international market was concerned about being swamped by cheap goods from China. This led to the latter permitting other WTO members to calculate their anti-dumping tariffs, and consequently, the recognition of the fact that prices of Chinese goods could be distorted to due government interference. This set up defined the country as a Non-Market Economy (NME) according to WTO and allows importing countries to exercise discretion in the calculation of value of the products imported from NMEs. In doing so, the importing countries decide the anti-dumping duties which can be quite higher than the actual prices. This is also known as the “alternative method” rule.

The initial dispute arose because of China’s assumption of the NME presumption, in Article 15(a)(ii) of its Accession Protocol, expiring after 15 years i.e. on December 11, 2016. Some countries like Australia, Singapore, Uruguay recognize China’s Market Economy Status (MES) while others including India, the US, Japan, European Union (EU) still consider it an NME. The latter set of countries put forward the argument that for the recognition of the MES status after the 15-year period, Chinese producers would be required to demonstrate that market economy condition is present in the country. The US and EU have also stated that subsidies lower the prices of Chinese products, and have used the prices in third-party (or surrogate) countries with efficient markets to prove dumping and impose tariffs in order to improve price competitiveness of local companies.

To fulfil its obligations to the WTO to have “country-neutral” policies, the EU further proposed to amend regulations on protection against dumped imports from non-EU members which basically said that the Union would no longer publish list of NMEs. Instead, they would publish guidelines which can be used to identify a country whose economy has “significant distortions” upon which, the European Commission (EC or Commission) may apply “alternative methods”. But the proposal failed to assuage China’s concerns and it started a WTO dispute resolution process with EU and the US, claiming that their regulations for calculating value for NMEs don’t comply with WTO rules. Accordingly, a panel was established on April 3, 2017 to decide the dispute but China requested it to suspend the proceedings on May 7, 2019, in accordance with Article 12.12 of the Dispute Settlement Understanding. Ultimately, the investigative panel has lapsed on June 15, 2020.

Article 12 deals with the procedure for the panel established by organisation for settlement of dispute under Annexure 2 of the WTO Agreement. Article 12.12 states that the panel may suspend its work at any time at the request of the complaining party for a period not exceeding 12 months. If the panel work has been suspended for more than 12 months, the authority for establishment of the panel shall lapse. Here, the complainant was China and the investigative panel lapsed after the completion of 12 months from suspension.

‘Significant Distortions Methodology’

Under the methodology, domestic costs and prices would apply to all WTO members except in the cases of “significant distortions” in the market of the exporting country. The proposal has a non-exhaustive list of criteria from Article 2(6a)(b) of the Basic Anti-Dumping Regulation including:

i) The widespread presence of enterprises which the state owns or which operate under its control, policy supervision or guidance.

ii) The presence of the state in companies allowing interference with respect to prices and costs.

iii) Public policies or measures discriminating in favour of domestic companies, or otherwise influencing free market forces

iv) The access to finance granted by institutions implementing public policy objectives.

‘State interference’ can occur when the market contains a large number of firms operating under the ownership, guidance or control of the authorities of the exporting country. It could also occur when the state authorities allow interference in the prices or costs when pursuing policy objectives or public policies, which discriminate in favour of domestic suppliers. Further, taking into account the difficulty that the European industry may face in gathering evidence of market distortions in the exporting country, the Commission intends to prepare reports detailing specific circumstances of market distortions in a particular country or sector. According to the proposal, these reports would be publicly available and are intended for the use by any local industry when lodging a complaint or a request for review. The first such report that the EU plans to release is on China and next on Russia, as the former accounts for the major portion of the Union’s anti-dumping investigations and trade defence measures.

The difference between the earlier practice and the new method is that it allows for EU investigating agencies to take into account various international sources of undistorted prices while calculating the normal value, rather than solely rely on figures from a surrogate market. Further, the proposal reverses the burden of proof on the importing country, and is now on the complainant to demonstrate the existence of significant distortions. But the aforesaid proposed amendments are not tantamount to the EU granting market economy status to any economy classified as an NME, and continues its position on China’s status. The proposal merely eliminates the need for classification of any economy as an NME and can be construed to be country-neutral. China has stated that the new practice still permits the surrogate country method by giving it a new label.

The Indian Approach

India also uses the surrogate country approach for NMEs under the Para 7, Annexure 1 of Customs Tariff (Identification, Assessment and Collection of Anti-Dumping Duty on Dumped Articles and for Determination of Injury) Rules, 1995 (“Indian Antidumping Rules”). India maintained a list of countries presumed to be NMEs before the aforementioned Rules were amended in 2002. Post the amendment, the exporters can rebut the presumption by responding to a market economy questionnaire provided to them during the investigation. In case they fail to do so, India can construct the normal value of the product in accordance with Para 7 of the Indian Antidumping Rules.

Post the 15 year period, Chinese exporters have argued for consideration of domestic selling prices as China has “transitioned into a market economy as per the Accession Protocol”. But the domestic industry refutes the claim and argues for continuation of the NME status. All in all, it can be said that the Indian regulations do not differ much from the current and proposed ones in the EU.

Criticisms of the Methodology

The first and primary criticism has been regarding the non-exhaustive list for classification of a distorted economy. All of the four mentioned criteria are present in every economy across the globe and the vague wording provides a scope of discriminatory application, which is against WTO obligations. The methodology is also supposed to be without prejudice and have a neutral application. But it has been often interpreted to be a continuation of the “analogue country” practice. The publication of the country report about China has further fuelled the allegations of targeting the country.

Article 2.2 of the General Agreement on Tariffs and Trade, 1994 (GATT) permits the normal value calculation of a certain product in 3 circumstances:

(i) No domestic sales of the like product in the ordinary course of trade.

(ii) Insufficient (less than 5%) domestic sales of the like product.

(iii) When a particular market situation exists in the domestic market.

Article 2.2.1.1 of the GATT also specifies the procedure for the calculation which does not include the surrogate country practice. The methodology is in clear violation of both the aforementioned Articles. Therefore, it is likely that it will not withstand WTO-scrutiny on its implementation.

Takeaway

Although the European Council has claimed the introduction of the methodology with the intention of being WTO compliant and equal treatment of non-EU members, the finer details clearly indicate otherwise. The COVID-19 crisis has led to a widespread anti-China and anti-globalisation sentiment. It is likely that the near future might bring similar policies as can be seen in the case of EU as well as India, which has been tightening import norms especially from neighbouring countries. Therefore, it’s only a matter of time before trade law disputes start arising at a global level.