China MES: an update

On 17 March, St Patrick’s Day, the EU Commission hosted a public conference on possible change in the methodology to establish dumping in trade defence investigations concerning the People’s Republic of China. The conference was part of the public consultation that the Commission had already opened on 10 February 2016.

Stakeholders and general members of the public were invited to make themselves known to the Commission and indicate if they wanted to speak. The Commission then chose speakers who were given five minutes each to express their views. During the course of the conference there was a general invitation to the participants to speak.

What is significant in relation to the public consultation document and the conference itself is the fact that the Commission no longer addresses whether market economy status should be granted to China but whether there should be a change in he methodology in calculating dumping margins in relation to China. This is the first evidence of a recognition by the Commission that there are two separate issues to be addressed: i) is China a market economy and ii) can the special methodologies currently used by the Commission to determine the dumping margins continue after the expiry of paragraph (a)(ii) of Article 15 of China’s Protocol of Accession to the WTO. The expiry of (a)(ii) is fixed for 11 December 2016.

The change in approach by the Commission is a reflection that much of Article 15 of China’s Accession Protocol remains in vigour after December 2016. There are two paragraphs that call for particular attention.

Paragraph (d) provides a mechanism for China to demonstrate that either its whole economy, or sections of it, have attained the status of a market economy. The criteria to be used are those of the importing WTO member. In this case the EU. The EU has five criteria for determining whether the economy of a country is market based. China has been engaged in a process to show that it meets the five criteria. In 2008 it was determined that China only met one of the criteria. This was confirmed in 2011. In 2013 China withdrew from the process. Thus, formally, and as far as the EU is concerned, China is not a market economy.

Paragraph (a)(i) also remains in force. This paragraph provides that producers in China have a right to have costs and prices in China used in determining their dumping margin. However there is a significant proviso. The producers must show that market conditions apply to their economic sector. If the producers cannot show that market conditions prevail in their sector they do not have the right to have costs and prices from China used.

Towards the end of 2015 it seems that the Commission was more focussed on the one part of Article 15 that expires rather than those parts that remain. By focussing on the parts that remain the Commission has been able to make the distinction between China’s status and the methodologies to be used.

That being said it is not clear that the Commission has understood the full consequences of its change in focus. The Commission has published a document entitled Inception Impact Assessment in January 2016. This document sets out three Options for the EU: i) do nothing; ii) remove China from the list of non-market economies in the basic Anti-Dumping Regulation; iii) modify the methodology and improve the law and policy in relation to trade defence instruments.

The recognition, in Commission thinking, that China is not a market economy has a number of consequences. Firstly is it not clear that Option 2 can work. If China does not meet the five criteria to be considered a market economy how can the Commission justify proposing a change in the basic anti-dumping Regulation to remove China from the list of non-market economies? Article 296 of the Treaty on the Functioning of the EU requires that legal acts must state the reasons on which they are based. What reasoning would the Commission be able to give if it were to propose Option 2? China is not, by the Commission’s own evaluation, a market economy. So what reason can be given by the Commission to remove it from the list of non-market economies? If it were to make such a proposal it could find itself in breach of Article 296.

Nor is it clear that Option 1 can work. This is the do nothing option. The basic anti-dumping regulation does not reflect the provisions of paragraph (a)(i) and thus is in breach of WTO law. Paragraph (a)(i) provides that producers must show that market economy provisions prevail in their sector. Current EU law provides that producers can show that market economy conditions prevail for them individually. The EU is currently in breach of its WTO obligations. To remove this illegality there must be change to the law. On this basis the do nothing option cannot work.

During the hearing on 17 March Jean Francois Bellis, a noted EU trade lawyer, argued that the mitigating factors accompanying Option 3 did not work either. Thus the Commission is left with the position that none of its Options work. Does that really allow for proper consultation?

Examining the choices facing the EU on this basis, i.e. on the basis of what remains in vigour after December 2016, allows for more reasoned debate. The issue facing the EU is what methodology to use if the producers in an investigation cannot meet the criteria in paragraph (a)(i). WTO law does not give much guidance. Case law seems to indicate that the starting point of any methodology must be costs and prices in China: that is the normal or standard methodology. But the standard methodology allows for the construction of the normal value when the costs and prices are not set in the ordinary course of trade. If China is not a market economy, then by definition, the costs and prices are not set in the ordinary course of trade and thus they must be constructed.

What costs and prices should be used when constructing the normal value for producers in China if the costs and prices on that market are distorted?  The obvious solution would be to use costs and prices from a non-distorted market. That is what the EU does today. It uses prices from a surrogate market. This may or may not be legal in WTO law.

If the surrogate market methodology is found to be illegal then another methodology must be found. That is the dilemma currently facing the Commission.

The consultation document published by the Commission in February 2016 contains a number of questions to stakeholders. The questions are closed ended and do not allow for explanations or comments. In addition the questions only refer to the three options discussed above and do not allow for the exploration of other options. Finally the impact assessment which would allow stakeholders to understand the impact of the different options has been completed and will only be published in May, after the consultation has been closed.

The Commission has stated that the College of Commissioners, the decision making body of the Commission, will not look at the issue of China MES before the summer or before it has completed its consultation and examined the impact of the possible changes in detail. The Commission needs all the help it can get.