Non-market Economies in the Global Trading System

James J. Nedumpara · Weihuan Zhou Editors

Non-market Economies in the Global Trading System The Special Case of China

Non-market Economies in the Global Trading System The Special Case of China

James J. Nedumpara Weihuan Zhou •

Editors

Non-market Economies in the Global Trading System The Special Case of China

123

Editors James J. Nedumpara Centre for Trade and Investment Law Indian Institute of Foreign Trade New Delhi, Delhi, India

Weihuan Zhou Faculty of Law UNSW Australia Sydney, NSW, Australia

ISBN 978-981-13-1330-1 ISBN 978-981-13-1331-8 https://doi.org/10.1007/978-981-13-1331-8

(eBook)

Library of Congress Control Number: 2018947470 © Springer Nature Singapore Pte Ltd. 2018 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Foreword

When China acceded to the World Trade Organization (WTO) in 2001, it agreed to a series of unprecedented commitments. At the time, some Chinese criticized their trade negotiators for having capitulated to the demands of Western powers, in agreeing to a series of onerous obligations that were not sought of other developing countries. With hindsight, however, China’s WTO accession consolidated and propelled a series of much-needed economic reforms that have accelerated the country’s re-emergence as a global trading power. One of the onerous obligations was that of Section 15 of China’s Protocol of Accession. Out of fear that Chinese exporters, aided directly or indirectly by the state in a non-transparent system, might overwhelm domestic entities, the Western powers demanded that their governments, when investigating an allegation of unfair trade through dumping, could treat China as a non-market economy for fifteen years, unless the Chinese exporters being investigated could demonstrate otherwise. China reluctantly agreed, but not before a series of changes were made to the original proposal. This concession helped secure political support for China’s accession among China’s trading partners. It allowed trade negotiators a means by which to assure their domestic constituencies that if the negative consequences of China’s re-entry into the global trading system were too dramatic due to unfair Chinese trading practices, their governments could easily roll back the trade preferences granted to Chinese exporters. Indeed, on numerous occasions in ensuing fifteen years, governments did so, largely through the use of anti-dumping duties against a wide range of Chinese products. Few, however, could have envisioned that a provision designed to assuage fears of China’s re-entry into the global trading system would instead bring the WTO to the brink of crisis less than two decades later. China is now the world’s largest trading nation and is expected to become the world’s largest economy. While the Chinese are rightly proud of their enormous achievements in lowering poverty and improving living standards, workers in advanced economies complain that some of their jobs were lost because of the negative impact of the “China shock.” What rights China’s trading partners continue to retain beyond December 2016 when v

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seeking to raise tariffs against Chinese products in light of unfair trade practices is a high-stakes matter. As of this writing, two cases are now pending before the WTO’s Dispute Settlement Body concerning China’s continued treatment as a non-market economy in anti-dumping cases, with the possibility of more to come. Lingering distrust over whether the Appellate Body will properly adjudicate this question, in light of past rulings against U.S. trade remedy practices, have contributed to a stalemate over new Appellate Body appointments. Beyond this issue, broad frustration over Chinese trade practices have led the United States to initiate a series of tariffs against Chinese products, leading to a series of unprecedented tit-for-tat actions. All of this has put great strain on the WTO system. It is against this backdrop that Professors James Nedumpara and Weihuan Zhou have assembled an impressive collection of authors to address the legal issues concerning Section 15 of China’s Protocol of Accession and the Second Ad Note to GATT Article VI. The volume draws from eminent academics and practitioners who do not share necessarily a common view on the interpretation of these open issues. What the editors and contributors offer in the volume is a picture of the complexity of the legal debate. While we often speak of trade as a “win-win” phenomenon whereby both sides gain, in this instance, we face a “win-lose” dynamic. These differences cannot be easily reconciled. Someone’s interpretation will be judged correct, and another’s will be deemed wrong. Therefore, some are bound to win, while others are bound to lose. The economic and political consequences of who falls on which side of this balance are high. Much of the attention to date has focused on the practices of China’s two most important export markets, the European Union and the United States. Professors Nedumpara and Zhou have rightly highlighted that the implications extend far beyond that of these three important trading powers. Two of the chapters in the volume focus on how two fellow G20 developing countries, India and Mexico, have treated China and other non-market economies in their anti-dumping proceedings. Another highlights how Australia’s anti-dumping practices may offer a preview of what is to come in other jurisdictions. As I told the Economist magazine in December 2016 at the time of fifteenth anniversary of China’s WTO accession, the WTO cases on China’s market economy status represent but the opening salvo in what will be a multi-stage trade confrontation between China and its trading partners in the coming years. As several contributors point out, anti-dumping practices have, and will continue, to evolve in light of the legal debate. Most likely, given the unique nature of China’s economic structure, even if China is increasingly recognized as a market economy on the whole by some of its trading partners, the question over whether a particular market situation prevails in a given industry will take on growing importance. Consequently, jurisprudence arising out of existing cases not involving Chinese products will nevertheless exert an important influence on Chinese exports in the coming years.

Foreword

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What the contributors in this volume memorialize are the views of an important set of actors, beyond the official statements of trade diplomats, on China’s market economy status as the global trade crisis began to unfold in 2017-18. In the years to come, we will witness whether, and how, the WTO might survive the current crisis. Whatever the outcome, the global trading system is unlikely to return simply back to its old self. History will likely judge the debate over China’s market economy status as having contributed to the crisis and the contours of its eventual resolution. What follows is a book that richly captures the complex dimensions of an important debate that is a vital part of this story. It provides the opening coda to a continuing drama for which the ending – tragic, triumphant, or otherwise – remains yet to be written. Mark Wu Henry L. Stimson Professor of Law Harvard Law School

Acknowledgements

The editors of this book have been extremely fortunate to benefit from the intellectual inputs and imaginative insights of a large number of friends and colleagues during the preparation of this book. One of the editors (James Nedumpara) had an occasion to do a visiting fellowship at the University of New South Wales in Sydney in August 2017 where he had an opportunity to meet and interact extensively with his fellow editor (Weihuan Zhou). Both of us share significant research and academic interests in international trade law, especially in trade remedy law. We felt that the concept of non-market economies has an increasing relevance even in this day and age and that a book of ready reference on this topic capturing the views and thoughts of some of the leading academicians and practitioners could be a useful and timely contribution to this field. Considering the tight deadlines that we had imposed on ourselves, it was imperative for us to get timely submissions. We are delighted that some of the leading commentators enthusiastically participated in this project and gave top priority for completing their chapters on time amidst their numerous responsibilities. We are truly grateful to them. We owe a great deal of debt to Archana Subramanian, Senior Research Fellow at Centre for Trade and Investment Law, for going through the manuscript several times, correcting mistakes that had eluded us and reminding the authors repeatedly of each passing deadline. Archana ensured that we are on track for a timely completion of this book project. We have received remarkable support and encouragement from our respective institutions in the production of this book. In particular, one of the editors (Nedumpara) would like to acknowledge the cooperation from the Indian Institute of Foreign Trade (IIFT) and the Department of Commerce. In particular, one of us (Nedumpara) would like to place his gratitude to the Commerce Secretary Ms. Rita Teaotia, Special Secretary Dr. Anup Wadhawan, Joint Secretaries Mr. Sudhanshu Pandey and Mr. Dammu Ravi and, above all, to Dr. Manoj Pant, Director, IIFT, for their unstinted support for the various research initiatives he has taken. The other editor (Weihuan Zhou) would like to acknowledge various support that the UNSW

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Law School and particularly the China International Business and Economic Law (CIBEL) Initiative have made available during the project. One of the editors (Nedumpara) would like to express his sincere thanks to his dedicated team including Satwik Shekhar, Shiny Pradeep, Aditya Ladha, Sandeep Thomas Chandy, Girish Deepak, and Isha Das for going through some of the draft chapters. We are particularly grateful to Shruti Ramakrishnan, Advocate, and Kuladeep Medasani, a final year student at Jindal Global Law School, for providing insightful comments and for ensuring consistency in citation and formatting. Our publisher Springer has, as always, been prompt, highly accommodative and professional in taking this project to fruition. We are extremely grateful to Ms. Sagarika Ghosh and Ms. Nupoor Singh for their support. Last, but not least of all, we would like to thank our families—for Nedumpara, his mother Tresa, wife Sharmila and son Joseph and others, and for Zhou, his mother Lan and wife Jin and others—for their constant support and motivation without which it would have been impossible to devote time for a highly time intensive project. New Delhi 1 May 2018

James J. Nedumpara Weihuan Zhou

Endorsements

“Non-market Economies in the Global Trading System by James J. Nedumpara (IIFT, New Delhi) and Weihuan Zhou, University of New South Wales (Sydney, Australia) is a topical and timely scholarly work. Nedumpara and Zhou have presented a rainbow of views – illuminative, extensive, and more importantly, balanced – of one of the complex issues facing the global trading system. The assortment of essays, written by academicians and scholars from all key jurisdictions, will serve as a one-stop shop for anyone who would like to examine and understand this subject. Engagingly written and lucid in its style and approach, this book is a remarkable contribution in the field of trade remedy law.” —Rita Teaotia, Commerce Secretary, Government of India, New Delhi “The rulebook of the world trading system is in crisis. One of the many challenges is how to address “non-market economy” features in countries like China. This volume is unique in that it brings together both sides of the debate and goes beyond the usual rhetorics. It examines pressing but highly technical questions of trade remedy law ranging from external benchmarks and double remedies to particular market situations and China’s Accession Protocol. Useful lessons are drawn from experiences not only in China, but also Vietnam, Mexico and India. Answers to the challenges discussed in this book will determine the fate of the world trading system for decades to come.” —Joost Pauwelyn, Professor of International Law, Graduate Institute of International and Development Studies (IHEID), Genève, Switzerland; Murase Visiting Professor of Law at Georgetown Law Center, Washington D.C., USA “This is a very informative and instructive collection, although some of the views presented in the book will remain highly controversial and debatable. From this book, we see analysis from historical, economical, legal and technical perspectives which draw a comprehensive picture for this complex issue, i.e. the so-called non-market situation in China. Moreover, the approach to address this issue is more than welcome. Agree or not, this is a collection of opinions to start with, for both Chinese and overseas readers, practitioners and decision-makers.” —Guohua Yang, Professor, School of Law, Tsinghua University, Beijing, China

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“There is little doubt that China’s rise creates new challenges for the international economic legal order. This impressive volume of essays edited by Nedumpara and Zhou offers a comprehensive treatment of Non-market economies (NMEs), especially in the context of WTO law and domestic anti-dumping practices. Written by leading scholars and practitioners in this field, this book has tremendous appeal to anyone who is following the recent debate on China and its NME treatment.” —Gary Horlick, Partner and International Trade Lawyer, Law Offices of Gary N. Horlick, Washington D.C.; Adjunct Professor of Law, Georgetown University Law Center, Washington D.C., USA “How to define and treat a non-market economy (NME) is one of the longest-lasting and still most pressing challenges for the multilateral trading system, all the more so because of China’s influence in the global political economy. This volume is an impressive collection of articles about this issue written by ambitious and distinguished scholars and practitioners across the world. They provide thoughtful analyses and insights about NMEs in the context of trade remedy rules and practices of the World Trade Organisation (WTO) and major WTO Members. This book, therefore, is a rich resource, not only for academics and practitioners, but also for government officials, judges, and policy specialists. Through it, they can compare, contrast, and critically appraise the ways in which the NME issue is, and should be, addressed.” —Raj Bhala, Brenneisen Distinguished Professor, University of Kansas School of Law, Lawrence, USA; Senior Advisor, Dentons U.S. LLP; ‘On Point’ Columnist, Bloomberg Quint (India)

Contents

Introduction: Non-market Economies in the Global Trading System—The Special Case of China . . . . . . . . . . . . . . . . . . . . . . . . . . . . James J. Nedumpara and Weihuan Zhou

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China’s Long March to Market Economy Status: An Analysis of China’s WTO Protocol of Accession and Member Practices . . . . . . . James J. Nedumpara and Archana Subramanian

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How China Did not Transform into a Market Economy . . . . . . . . . . . . Jorge Miranda The Termination of the Grandfather Clause in China’s Accession Protocol and the Normal Value Construction After Fifteen Years of Accession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Xuewei Feng

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Double Remedy: Beyond the Non-market Economy Status . . . . . . . . . . 131 Katarzyna Kaszubska External Benchmark Choices in Anti-dumping and Countervailing Duty Proceedings: A Battle of ‘Proxies’? . . . . . . . . . . . . . . . . . . . . . . . . 155 Mukesh Bhatnagar, Pallavi Arora and Isha Das The Issue of ‘Particular Market Situation’ Under WTO Anti-dumping Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 Weihuan Zhou Shifting Sands: The Evolution and Future Course of U.S. Anti-dumping Law and Practice Against China and Vietnam . . . . . . . . 201 Moushami Joshi Treatment of China in EU Anti-dumping Investigations Post-December 2017: Plus ça change, plus c’est la même chose . . . . . . . 237 Edwin Vermulst and Juhi Sud

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Treatment of Non-market Economies in Anti-dumping Proceedings: The Mexican Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259 Amrita Bahri ‘Rebuttable Presumption’ to ‘Refutable Assumption’: An Assessment of Market Economy Treatment by the Indian Designated Authority from 1995 till 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281 Sanjay Notani, Parthsarathi Jha and Rishab Raturi Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303 James J. Nedumpara, Weihuan Zhou and Archana Subramanian Annexure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307 Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319

Editors and Contributors

About the Editors Dr. James J. Nedumpara is Professor and Head of the Centre for Trade and Investment Law (CTIL) established by the Government of India at the Indian Institute of Foreign Trade (IIFT). In this capacity, he advises the government on various aspects relating to international trade and investment law. He is currently on leave from Jindal Global Law School where he joined as a founding faculty member. He has several years of experience in the field of international trade and economic law and has worked with leading law firms, corporate firms, and also UNCTAD’s India programme before moving to academia. He was also part of the Indian delegation that appeared in the recent proceedings on India—Agricultural Products (Avian Influenza dispute) before the WTO Appellate Body. He has also taught courses in international trade law as a visiting faculty at FGV Law School, São Paolo, Brazil, ITAM Mexico City, NLSIU Bangalore, NUJS Kolkata, and the CWS-WTI Joint Summer Academy. He has also completed visiting fellowships at several leading law schools. He received his Ph.D. in Law from the National Law School of India University, Bangalore, and holds Masters degrees in Law from the University of Cambridge, UK, the New York University School of Law, USA, and the National University of Singapore. He received his Bachelor of Laws degree from Mahatma Gandhi University, India. He is the Co-Chair of the South Asia International Economic Law Network (SAIELN). Dr. Weihuan Zhou obtained his LL.M. and Ph.D. from the University of Sydney and is a Senior Lecturer in the Faculty of Law, UNSW Sydney, and a member of UNSW Law’s China International Business and Economic Law (CIBEL) Initiative. He publishes widely on the laws of the World Trade Organization (WTO), trade remedies, and free trade agreements, including a recently co-edited book on the “China—Australia Free Trade Agreement.” Weihuan has been invited to speak at internationally renowned conferences and Australian Government events and to review book proposals and manuscripts for leading academic publishers. His work has been cited in research reports submitted to the European Parliament, xv

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EU Parliament Briefings, Australia’s Productivity Commission, and also by leading experts in the field of international economic law. Weihuan is a Former Legal Consultant at the Institute for Training and Technical Cooperation of the WTO and has practised trade and commercial law with Corrs Chambers Westgarth. He has acted for governments and multinational companies in numerous major trade and investment matters.

Contributors Pallavi Arora is a Research Fellow at the Centre for WTO Studies, Indian Institute of Foreign Trade. She conducts research to aid India’s trade negotiations, both at the WTO and other forums such as Free and Preferential Trade Agreements. She is also pursuing an M.Phil. in Public International Law from the Jawaharlal Nehru University, India. Her main fields of research include international economic law and global animal law. Prior to this, she has worked as an Assistant Professor at the University of Petroleum and Energy Studies, wherein she delivered lectures on Public International Law and Indian Constitutional Law. Amrita Bahri is an Assistant Professor of Law at ITAM University and is an international trade law scholar with the experience of practice, teaching, and research. She is the Deputy Director for the Centre of International Economic Law at ITAM. She has a Ph.D. in International Trade Law from University of Birmingham and an LL.M. in International Business Law from London School of Economics. She has published on the issues of international trade law, dispute settlement, and capacity building in developing countries. Her recent articles feature in prestigious journals such as the Journal of World Trade, and Trade, Law & Development. Her other works, in the form of a book and book chapters, are published by leading publishers such as Cambridge University Press and Edward Elgar. Mukesh Bhatnagar is currently working as a Professor at the Centre for WTO Studies, Indian Institute of Foreign Trade. He has an experience of over 30 years in handling international trade-related issues. His areas of specialization include trade remedies, dispute settlement, and rules negotiations, including fisheries subsidies negotiations and the Doha Round of negotiations. Prior to joining the Centre for WTO Studies, he has worked in the Trade Policy Division of the Department of Commerce, Government of India, as well as the Directorate General of Anti-Dumping and Allied Duties (DGAD), which is India’s investigating authority for anti-dumping and countervailing duty investigations. Isha Das is a graduate of Amity Law School, IP University, New Delhi, and is interested in pursuing international trade and investment law.

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Xuewei Feng is a Senior Counsel at AllBright Law Offices in Beijing and specializes in WTO law and dispute settlement. She was formally a Legal Affairs Officer and then a Counsellor at the Legal Affairs Division of the WTO Secretariat during 2002–2011, and in that capacity, she has assisted WTO panels in a number of disputes. She participated in China’s WTO accession negotiations during 1999– 2001 and worked as a Chinese government official for the State Council Legislative Affairs Office during 1990–2002. She assisted in the drafting and researching activities and was involved in a number of visits to the legal experts and practitioners in the US and European countries for drafting various Chinese laws relating to China’s economic reforms. She also worked for revising domestic laws and regulations to achieve compliance with WTO agreements before China’s accession to the WTO. Parthsarathi Jha is a Senior Associate at the International Trade and Customs Team at Economic Laws Practice. Besides trade remedies and WTO law, he also advises on businesses on competition law and policy issues. He is a graduate of Hidayatullah National Law University and Harvard University. Moushami Joshi is an Attorney in Pillsbury Winthrop Shaw Pittman’s International Trade practice and is located in Washington, DC office. She is a dual qualified lawyer with significant experience in trade matters before Indian authorities. Ms. Joshi has experience representing exporters, importers, and governments across several industries including sugar, softwood lumber, antibiotics, rubber chemicals, paints, tires, paper, glass, steel, and capital goods in anti-dumping, countervailing duty (CVD) and safeguard proceedings in the United States and India. As a member of the Pillsbury WTO team, she has advised on the COOL dispute, the CVD investigation on imports of Sugar from Mexico and the CVD investigation on Softwood Lumber from Canada. In the past, she was a partner at Luthra & Luthra Law Offices in New Delhi, India, where her practice focused on WTO disputes, trade remedy proceedings, and WTO policy issues. She has represented the GOI in the consultation and panel proceedings in DS430, namely India–Agricultural Products, which was initiated by the USA against India involving certain SPS measures maintained by India on imports of poultry products. She has also advised the Indian government on WTO compatibility of local content laws, agricultural subsidies, and intellectual property law (IPR) policies of WTO members among other issues. She is the Vice President of Programming at the Association of Women in International Trade (WIIT) in Washington, DC and the Co-Chair of the WTO Section at WIIT. Katarzyna Kaszubska is a Ph.D. Candidate at the Faculty of Law, Delhi University, New Delhi, India, and holds LL.M. in European Law from College of Europe, Bruges, Belgium, and M.L. from University of Warsaw, Warsaw, Poland. She previously worked at the Legal Affairs Division of the European External Action Service, Brussels, Belgium, the Political and Trade Section of the EU

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Delegation to Bangladesh in Dhaka, Bangladesh, and the Economy and Development Programme at Observer Research Foundation in Delhi, India. Jorge Miranda is Lead International Trade Advisor with the International Trade Group of King & Spalding LLP. He is an economist with over 25 years of experience in the area of GATT/WTO rules, particularly those relating to trade remedies and subsidy disciplines, and has advised the private interests and/or the governments involved in 13 WTO disputes. He was with the Rules Division of the WTO Secretariat from 1995 to 2002 and in this capacity assisted six dispute settlement panels. He has authored or co-authored 20 academic publications, including A Handbook on Antidumping Investigations, and is a contributor to the Kluwer Law Blog on Globalization. He frequently participates as speaker in panel discussions and academic symposia on WTO issues. He holds undergraduate and graduate degrees in economics from Georgetown University. Sanjay Notani is a Partner at Economic Laws Practice and co-leads the International Trade and Customs Team. He represents domestic manufacturers, foreign exporters, trade associations, and importers in administrative and appellate litigation to obtain trade remedial reliefs from unfairly traded imports in anti-dumping, countervailing and safeguard duty proceedings (relating both to inbound and outbound trade). He also advises on WTO law and the application of free trade agreements. Further, he advises various multinational companies on import and export control as well as licensing issues, specifically the dual use of goods and technologies regulations maintained by the Ministry of Commerce, the Ministry of Defence, the Ministry of External Affairs, and other allied ministries. He has worked across various sectors, including pharmaceuticals, medical devices, chemicals, textiles, telecoms, energy, and consumer products. Rishab Raturi is an Associate Manager at the International Trade and Customs Team at Economic Laws Practice. His practice focuses on WTO and regulatory law and policy. Previously, he has worked with the Centre for International Trade and Economic Laws Jindal Global Law School, the World Trade Organization, and INSEAD Business School. He received his graduate degree in law from Rajiv Gandhi National University of Law and his master’s degree in international law and economics from the World Trade Institute at the University of Berne. Archana Subramanian is a Senior Research Fellow at the Centre for Trade and Investment Laws. Before joining CTIL, she worked as a Research Fellow at the Centre for International Trade and Economic Laws in Jindal Global Law School and as an Associate with AZB & Partners, Mumbai, for 2 years. She is part of the team providing research support to the Government of India on varied issues of trade and investment law. At AZB, Archana’s work focused on mergers and acquisitions, securities laws, and foreign exchange laws. She has a B.A.LL.B. (Hons.) from the National Law School of India University, Bangalore, and is interested in matters of international trade and development. She is the Secretary of the South Asia International Economic Law Network (SAIELN).

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Juhi Sud is a Counsel at VVGB Advocaten/Avocats. Her practice focuses on EU and international trade law and WTO law. For more than a decade, she has been representing governments, multinations, and trade associations in trade defence proceedings in the EU and several other jurisdictions. She has been named and recommended in top trade publications and directories. She obtained her LL.M. from Vrije Universiteit Brussel (summa cum laude) and LL.B. from the Faculty of Law, Delhi University. She holds a B.A. in History from St. Stephens College, Delhi. Edwin Vermulst is a Founding Partner of VVGB Advocaten and has practiced international trade and EU law and policy since 1985. He is a Member of the Brussels bar. He specializes in the representation of multinationals, governments, trade associations, exporters and importers in WTO, trade remedy and customs cases, and he is, among others, the Trade Counsel of the World Federation of Sporting Goods Industry (WFSGI). He has co-authored nine books, including landmark comparative analyses of the anti-dumping systems and rules of origin of countries such as Australia, Canada, the EU, and the USA. He is the Editor-in-Chief of the Journal of World Trade and a Faculty Member of the World Trade Institute in Bern and of the IELPO program in Barcelona. He is invariably selected as a top trade practitioner by publications such as Chambers, the Legal 500 and Who’s Who Legal (trade lawyer of the year for three consecutive years).

Abbreviations

ACFTU AD AD Regulations ADD ARW AS CAMEX CBSA CCIC CESTAT CHALCO CITT CNV COCEX

CPC CPE CVD DDG DET DGAD/Designated Authority

All-China Federation of Trade Unions Anti-Dumping European Union’s Anti-Dumping Regulations (as amended in 2017) Anti-Dumping Duty Aluminium Road Wheels Anti-Subsidy Council of Ministers of the Foreign Trade Chamber Canada Border Services Agency China Chamber of International Commerce Customs, Excise and Service Tax Appellate Tribunal Aluminum Corporation of China Limited Canadian International Trade Tribunal Constructed Normal Value Comision de Comercio Exterior (Foreign Trade Commission— Mexico) Communist Party of China Centrally Planned Economy Countervailing Duty Deputy Director General Differential Export Tax Directorate General of Anti-Dumping and Allied Duties

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Diario Oficial DSB EC/Commission EU EWR FOREX FTL GAAP GATT GDP HRC IA Indian Anti-Dumping Rules

IT LME MET MOFCOM MOI NAFTA NMDC NDRC NME OCTG PCN PMS POI PPA PPP PRC Protocol of Accession/Accession Protocol SCM

Abbreviations

Diario Oficial de la Federacion (Official Diary—Mexico) Dispute Settlement Body European Commission European Union Entity-Wide Rate Foreign Exchange The Foreign Trade Law—Mexico Generally Accepted Accounting Principles General Agreement on Tariffs and Trade Gross Domestic Product Hot Rolled Coil Investigating Authority Customs Tariff (Identification, Assessment and Collection of Anti-Dumping Duty on Dumped Articles and for Determination of Injury) Rules, 1995 Individual Treatment London Metal Exchange Market Economy Treatment Ministry of Commerce of the People’s Republic of China Market-Oriented Industry North American Free Trade Agreement National Mineral Development Corporation National Development and Reform Commission—China Non-Market Economy Oil Country Tubular Goods Product Control Number Particular Market Situation Period of Investigation Protocol of Provisional Application, 1947 Purchasing Power Parity People’s Republic of China China’s Accession Protocol to the World Trade Organization, 2001 Subsidies and Countervailing Measures

Abbreviations

S, G&A SIE SIMA SIMR SOE TDI TMRO TPEA TPP UPCI

US Regulations US Tariff Act USA USDOC USTR VAT VCLT WTO

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Selling, General and Administrative expenses State-Invested Enterprises Special Imports Measures Act—Canada Special Imports Measures Regulation—Canada State-Owned Enterprises Trade Defense Instruments Trade Measures Review Officer Trade Preferences Extension Act, 2015 Trans-Pacific Partnership Unidad de Practicas Comerciales Internacionales (Unit on International Trade Practices—Mexico) The United States Code of Federal Regulations The United States Tariff Act, 1930 United States of America United States Department of Commerce United States Trade Representative Value-Added Tax Vienna Convention on the Law of Treaties, 1969 World Trade Organization

List of Cases

WTO Panel and Appellate Body Reports Short title

Full case title and citation

Argentina—Footwear (EC) (2000)

Appellate Body Report, Argentina—Safeguard Measures on Imports of Footwear, WTO Doc. WT/DS121/AB/R (adopted Jan. 12, 2000) Appellate Body Report, Australia—Subsidies provided to Producers and Exporters of Automotive Leather, Recourse to Article 21.5 of the DSU by the United States, WTO Doc. WT/DS126/RW (adopted Feb. 11, 2000) Appellate Body Report, Brazil—Export Financing Programme for Aircraft Recourse by Canada to Article 21.5 of the DSU, WTO Doc. WT/DS46/AB/RW (adopted Aug. 4, 2000) Panel Report, Brazil—Export Financing Programme for Aircraft, WTO Doc. WT/DS46/R (adopted Aug. 20, 1999) Appellate Body Report, Canada—Measures Affecting the Export of Civilian Aircraft, WTO Doc. WT/DS70/AB/R (adopted Aug. 20, 1999) Panel Report, Canada—Export Credits and Loan Guarantees for Regional Aircraft, WTO Doc. WT/DS222/P/R (adopted Feb. 19, 2002) Appellate Body Report, Canada—Measures Affecting the Importation of Milk and the Exportation of Dairy Products, WTO Doc. WT/DS103/AB/R, WT/DS113/AB/R (adopted Oct. 27, 1999) Appellate Body Report, Canada—Measures Relating to Exports of Wheat and Treatment of Imported Grain, WTO Doc. WT/DS276/AB/R (adopted Sep. 27, 2004) (continued)

Australia—Automotive Leather (21.5) (2000)

Brazil—Aircraft (2001)

Canada—Aircraft (1999)

Canada—Aircraft Credit and Guarantees (2002) Canada—Dairy (1999)

Canada—Wheat Exports and Grain Imports (2004)

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List of Cases

(continued) Short title

Full case title and citation

China—Publications and Audiovisual Products (2010)

Appellate Body Report, China—Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WTO Doc. WT/DS363/AB/R (adopted Jan. 19, 2010) Panel Report, China—Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WTO Doc. WT/DS363/R (adopted Jan. 19, 2010) Panel Report, China—Measures Related to the Exportation of Rare Earths, Tungsten and Molybdenum, WTO Doc. WT/DS431/R, WT/DS432/R and WT/DS433/R (adopted Aug. 29, 2014) Panel Report, China—Measures Related to the Exportation of Various Raw Materials, WTO Doc. WT/DS394/R, WT/DS395/R and WT/DS398/R (adopted Feb. 22, 2012) Appellate Body Report, European Communities— Definitive Anti-Dumping Measures on Certain Iron or Steel Fasteners from China, WTO Doc. WT/DS397/AB/R (adopted Jul. 15, 2011) Panel Report, European Communities—Definitive Anti-Dumping Measures on Certain Iron or Steel Fasteners from China, WTO Doc. WT/DS397/P/R (adopted on Jul. 15, 2010) Appellate Body Report, European Communities— Measures Concerning Meat and Meat Products, WTO Doc. WT/DS26/AB/R, WT/DS48/AB/R (adopted Feb. 13, 1998) Panel Report, EC—Anti-Dumping Measure on Farmed Salmon from Norway, WTO Doc. WT/DS337/R (adopted Jan. 15, 2008) Appellate Body Report, European Communities— Trade Description of Sardines, WTO Doc. WT/DS231/AB/R (adopted Oct. 23, 2002) Appellate Body Report, EC—Conditions for Granting Tariff Preferences to Developing Countries, WTO Doc. WT/DS246/AB/R (adopted Apr. 20, 2004) Appellate Body Report, European Communities— Measures Affecting Trade in Large Civil Aircraft, WTO Doc. WT/DS316/AB/R (adopted Jun. 1, 2011) Panel Report, Egypt—Definitive Anti-Dumping Measures on Steel from Turkey, WTO Doc. WT/DS211/R (adopted Oct. 1, 2002) (continued)

China—Rare Earths (2014)

China—Raw Materials (2012)

EC—Fasteners (China) (2011)

EC—Hormones (1998)

EC—Salmon (Norway) (2008)

EC—Sardines (2002)

EC—Tariff Preferences (2004)

EC and certain member States— Large Civil Aircraft (2011) Egypt—Steel Rebar (2002)

List of Cases

xxvii

(continued) Short title

Full case title and citation

EU—Biodiesel (2016)

Appellate Body Report, European Union— Anti-Dumping Measures on Biodiesel from Argentina, WTO Doc. WT/DS473/AB/R (adopted Oct. 26, 2016) Panel Report, European Union—Anti-Dumping Measures on Biodiesel from Argentina, WTO Doc. WT/DS473/R (adopted Oct. 26, 2016) Panel Report, European Union—Anti-Dumping Measures on Biodiesel from Indonesia, WTO Doc. WT/DS480/6 (adopted Feb. 28, 2018) Panel Report, European Union—Anti-Dumping Measures on Certain Footwear from China, WTO Doc. WT/DS405/P/R (adopted Feb. 22, 2012) Appellate Body Report, India—Measures Concerning the Importation of Certain Agricultural Products, WTO Doc. WT/DS430/AB/R (adopted Jun. 19, 2015) Appellate Body Report, India—Patent Protection for Pharmaceutical and Agricultural Products, WTO Doc. WT/DS50/AB/R (adopted Jan. 16, 1998) Appellate Body Report, Japan—Taxes on Alcoholic Beverages, WTO Doc. WT/DS8/AB/R, WT/DS10/AB/R, WT/DS11/AB/R (adopted Nov. 1, 1998) Appellate Body Report, United States—Definitive Anti-Dumping and Countervailing Duties on Certain Products from China, WTO Doc. No. WT/DS379/AB/R (adopted Mar. 11, 2011) Panel Report, United States—Definitive Anti-Dumping and Countervailing Duties on Certain Products from China, WTO Doc. WT/DS379/R (adopted Mar. 11, 2011) Appellate Body Report, United States— Countervailing Measures on Certain Hot-Rolled Carbon Steel Flat Products from India, WTO Doc. WT/DS436/AB/R (adopted Dec. 19, 2014) Panel Report, United States—Countervailing Measures on Certain Hot-Rolled Carbon Steel Flat Products from India, WTO Doc. WT/DS436/R (adopted Dec. 19, 2014) Appellate Body Report, United States—Continued Existence and Application of Zeroing Methodology, WTO Doc. WT/DS350/AB/R (adopted Feb. 19, 2009) Appellate Body Report, United States— Countervailing and Anti-Dumping Measures on Certain Products from China, WTO Doc. WT/DS449/AB/R (adopted Jul. 7, 2014) Appellate Body Report, United States— Countervailing Duty Measures on Certain Products from China, WTO Doc. No. WT/DS437/AB/R (adopted Dec. 18, 2014) (continued)

EU—Biodiesel (Indonesia) (2018)

EU—Footwear (China) (2012)

India—Agricultural Products (2015)

India—Patents (US) (1998)

Japan—Alcoholic Beverages II (2009)

US—Anti-Dumping and Countervailing Duties (China) (2011)

US—Carbon Steel (India) (2014)

US—Continued Zeroing (2009)

US—Countervailing and Anti-Dumping Measures (China) (2014) US—Countervailing Measures (China) (2014)

xxviii

List of Cases

(continued) Short title

Full case title and citation

US—Export Restraints (2001)

Panel Report, United States—Measures Treating Export Restraints as Subsidies, WTO Doc. WT/DS194/R (adopted Aug. 23, 2001) Appellate Body Report, United States—Measures Affecting Trade in Large Civil Aircraft—Second Complaint, WTO Doc. WT/DS353/AB/R (adopted Mar. 23, 2012) Panel Report, United States—Preliminary Determinations with Respect to Certain Softwood Lumber from Canada, WTO Doc. WT/DS236/R (adopted Nov. 1, 2002) Appellate Body Report, United States—Final Countervailing Duty Determination with respect to Certain Softwood Lumber from Canada, WTO Doc. WT/DS257/AB/R (adopted Feb. 17, 2004) Panel Report, United States—Final Countervailing Duty Determination with respect to Certain Softwood Lumber from Canada, WTO Doc. WT/DS257/R (adopted Feb. 17, 2004) Appellate Body Report, United States—Final Dumping Determination on Softwood Lumber from Canada V, WTO Doc. WT/DS264/AB/R (adopted Aug. 31, 2004) Panel Report, United States—Final Dumping Determination on Softwood Lumber from Canada V, WTO Doc. WT/DS264/R (adopted Aug. 31, 2004) Appellate Body Report, United States—Investigation of the International Trade Commission in Softwood Lumber from Canada, WTO Doc. WT/DS277/AB/R (adopted May 9, 2006) Appellate Body Report, United States—Subsidies on Upland Cotton, WTO Doc. WT/DS267/AB/R (adopted Jun. 20, 2008) Panel Report, United States—Subsidies on Upland Cotton, WTO Doc. WT/DS267/P/R (adopted Jun. 20, 2008) Appellate Body Report, US—Measures Affecting Imports of Woven Wool Shirts and Blouses from India, WTO Doc. WT/DS33/AB/R (adopted May 23, 1997) Appellate Body Report, United States—Measures Relating to Zeroing and Sunset Reviews, WTO Doc. WT/DS322/AB/R (adopted Jan. 9, 2007) Appellate Body Report, US—Countervailing Measures on Certain EC Products, WTO Doc. WT/DS212/AB/R (adopted Jan. 8, 2003)

US—Large Civil Aircraft (2nd Complaint) (2012)

US—Softwood Lumber III (2002)

US—Softwood Lumber IV (2004)

US—Softwood Lumber V (2004)

US—Softwood Lumber VI (2006)

US—Upland Cotton (2008)

US—Wool Shirts and Blouses (1997)

US—Zeroing (Japan) (2007)

US—Countervailing Measures on Certain EC Products (2002)

List of Cases

xxix

GATT Panel Reports Short title

Full case title and citation

EC—Cotton Yarn (Brazil) (1995)

Panel Report, EC—Imposition of Anti-Dumping Duties on Imports of Cotton Yarn from Brazil, GATT Doc. ADP/137 (adopted on Jul. 4, 1995) Panel Report, United States—Manufacturing Clause, GATT Doc. L/5609 (adopted on May 15, 1984)

US—Manufacturing Clause (1984)

Anti-dumping Investigations I. Mexico Investigating country/authority—short title (investigated country) (year)

Full title and citation

Mexico—Polyester Short Fiber Investigation (China) (2018)

Notice for Initiation: Polyester short fiber (China), (Secretaria De Economia, Feb. 6, 2018) (initiation notification) http://www.contactopyme.gob.mx/ upci/paginas/3187.pdf (Mex.) Notice for Initiation: Bicycles for Children (China), (Secretaria De Economia, Mar. 5, 2012) (initiation notification) http://www.contactopyme.gob.mx/ upci/paginas/1611.pdf (Mex.) Notice of Initiation: Metallic Plastic Balloons (China), DIARIO OFF. (Secretaría de Economía, Jun. 26, 2017) (initiation notification), http://www. contactopyme.gob.mx/upci/paginas/3158.pdf (Mex.) Notice of Initiation: Micro-wires for Welding (China), DIARIO OFF. (Secretaría de Economía, Aug. 10, 2017) (initiation notification) http://www. contactopyme.gob.mx/upci/paginas/3173.pdf (Mex.)

Mexico—Bicycles for Children (China) (2012)

Mexico—Metallic Plastic Balloons Investigation (China) (2017)

Mexico—Micro Wires Investigation (China) (2017)

II. USA Investigating country/authority—short title (investigated country) (year)

Full title and citation

USA—Menthol Fair Value Decision (China) (1981)

Final Determination of Sales at Less Than Fair Value: Natural Menthol from the People’s Republic of China 46 Fed. Reg. 24614 (U.S. Dep’t Com., 1981) (final determ.) (continued)

xxx

List of Cases

(continued) Investigating country/authority—short title (investigated country) (year)

Full title and citation

USA—Lined Paper Products Investigation (China) (2006)

Anti-dumping Duty Investigation of Certain Lined Paper Products from the People’s Republic of China (“China”)-China’s status as a non-market economy, (U.S. Dep’t Com. Aug. 30, 2006), http://enforcement.trade.gov/ download/prc-nme-status/prc-lined-papermemo-08302006.pdf Certain Aluminum Foil from the People’s Republic of China: Notice of Initiation of Inquiry Into the Status of the People’s Republic of China as a Nonmarket Economy Country Under the Anti-dumping and Countervailing Duty Laws, 82 Fed. Reg. 62, 16162 (U.S. Dep’t Com., Mar. 29, 2017) (initiation notif.), https://www.gpo.gov/fdsys/ pkg/FR-2017-04-03/pdf/2017-06535.pdf Cast Iron Soil Pipe Fittings from the People’s Republic of China: Initiation of Less-Than-Fair Value Investigation, 82 Fed. Reg. 37,053, 37,055 (U.S. Dep’t Com., 2017) (initiation notif.) Stainless Steel Flanges from India and the People’s Republic of China: Initiation of Less-Than-Fair-Value Investigations 82 Fed. Reg. 42629, 42651 (U.S. Dep’t Com., 2017) (initiation notif.) Issues and Decision Memorandum for the Final Determination of the Less-Than-Fair-Value Investigation of 1-Hydroxyethylidene-1, 1-Diphosphonic Acid from People’s Republic of China, (U.S. Dep’t Com., Mar. 20, 2017) (final determ.) http://enforcement.trade.gov/frn/summary/ prc/2017-05805-1.pdf Decision Memorandum for the Preliminary Determination in the Anti-dumping Duty Investigation of Certain Hardwood Plywood Products from the People’s Republic of China, (U.S. Dep’t Com., Jun. 16, 2017) (prelim. determ.), http://www.hpva.org/sites/ default/files/HWPW%20AD%20Prelim% 20I&D%20Memo.pdf U.S. Department of Commerce, Certain Polyester Staple Fiber from the People’s Republic of China: Decision Memorandum for the Preliminary Results of the 2015–2016 Anti-dumping Duty Administrative Review, (U.S. Dep’t Com., Feb. 27, 2017) (prelim. determ.), http://enforcement.trade.gov/frn/ summary/prc/2017-04134-1.pdf (continued)

USA—Aluminum Foil Investigation (China) (2017)

USA—Iron Soil Pipe Investigation (China) (2017)

USA—Stainless Steel Flanges Investigation (China and India) (2017)

USA—Diphosphonic Acid Decision (China) (2017)

USA—Hardwood Plywood Products Investigation (China) (2017)

USA—Polyester Staple Fiber Decision (China) (2017)

List of Cases

xxxi

(continued) Investigating country/authority—short title (investigated country) (year)

Full title and citation

USA—Citric Acid and Citrate Salts Decision (China) (2017)

Decision Memorandum for the Preliminary Results of Anti-dumping Duty…Citric Acid and Certain Citrate Salts from the People’s Republic of China, (U.S. Dep’t Com., Jan. 31, 2017) (prelim. determ.), http:// enforcement.trade.gov/frn/summary/prc/ 2017-02528-1.pdf Decision Memorandum for the Preliminary Results of Anti-dumping Duty Administrative Review: Glycine from the People’s Republic of China; 2015–2016, (U.S. Dep’t Com., Mar. 31, 2017) (prelim. determ.), http://enforcement.trade.gov/frn/ summary/prc/2017-06994-1.pdf U.S. Department of Commerce, Issues and Decision Memorandum for Certain Cased Pencils from the People’s Republic of China: Final Results of Anti-dumping Duty Administrative Review; 2014–2015, (U.S. Dep’t Com., May 22, 2017) (final determ.), http://enforcement.trade.gov/frn/summary/ prc/2017-11053-1.pdf Oscillating Fans and Ceiling Fans from the People’s Republic of China (preliminary determinations of sales at less than fair value), 56 Fed. Reg. 25,664, 25,667 (U.S. Dep’t Com., 1991) (prelim. determ.) Chrome-Plated Lug Nuts from the People’s Republic of China, 56 Fed. Reg. 46,153, 46,154 (U.S. Dep’t Com., 1991) (initiation notif.) Notice of Anti-dumping Duty Order: Certain Frozen Fish Fillets from the Socialist Republic of Vietnam, 68 Fed. Reg. 47909 (U.S. Dep’t Com., Aug. 12, 2003) Institution of Anti-dumping Investigations and Scheduling of Preliminary Phase Investigations: Certain Frozen or Canned Warmwater Shrimp and Prawns from Brazil, China, Ecuador, India, Thailand, and Vietnam, 69 Fed. Reg. 1301 (U.S. Int’l Trade Com., Jan. 8, 2004) (initiation notif.) Jalousie-Louvre Sized Sheet Glass from Czechoslovakia, 27 Fed. Reg. 8457 (U.S. Treasury Dep’t., 1962) (continued)

USA—Glycine Decision (China) (2017)

USA—Cased Pencils Decision (China) (2017)

USA—Oscillating Fans Investigation (China) (1991)

USA—Chrome Plated Lug Nuts Investigation (China) (1991)

USA—Fish Fillets Decision (Vietnam) (2003)

USA—Warmwater Shrimp Investigation (Brazil, China, Ecuador, India, Thailand, and Vietnam) (2004)

USA—Sheet Glass Investigation (Czechoslovakia) (1962)

xxxii

List of Cases

(continued) Investigating country/authority—short title (investigated country) (year)

Full title and citation

USA—Argentina Biodiesel Determination (Argentina) (2017)

Decision Memorandum for the Preliminary Determination in the Less-Than-Fair-Value Investigation of Biodiesel from Argentina, (U.S. Dep’t Com., Oct. 19, 2017) (prelim. determ.), https://enforcement.trade.gov/frn/ summary/indonesia/2017-23602-1.pdf U.S. Department of Commerce, Notice of Final Determination of Sales at Less than Fair Value: Fresh Atlantic Salmon from Chile, 63 Fed. Reg. 31411 (U.S. Dep’t Com., 1998) (final determ.) Decision Memorandum for the Preliminary Determination in the Less-Than-Fair-Value Investigation of Biodiesel from Indonesia, (U.S. Dep’t Com., Oct. 19, 2017) (prelim. determ.), https://enforcement.trade.gov/frn/ summary/indonesia/2017-23602-1.pdf Section 129 Proceeding Pursuant to the WTO Appellate Body's Findings in WTO DS79 Regarding the Antidumping and Countervailing Duty Investigations of Circular Welded Carbon Quality Steel Pipe from the People’s Republic of China, Memorandum (U.S. Dep’t Com., July 31, 2012) (final determ.) Issues and Decision Memorandum for the Final Results of the 2014–2015 Administrative Review of the Anti-dumping Duty Order on Certain Oil Country Tubular Goods from the Republic of Korea, (U.S. Dep’t Com., Apr. 10, 2017) (final determ.), http://enforcement.trade.gov/frn/summary/ korea-south/2017-07684-1.pdf Final Negative Countervailing Duty Determination in Carbon Steel Wire Rod from Czechoslovakia, 49 US Fed. Reg. 89 (U.S. Dep’t Com., May 7, 1984) (final determ.), http://cdn.loc.gov/service/ll/fedreg/ fr049/fr049089/fr049089.pdf Petroleum Wax Candles from the People’s Republic of China: Final Determination of Sales at Less than Fair Value, 51 Fed. Reg. 25085 (U.S. Dep’t Com., 1986) (final determ.)

USA—Chile Salmon Determination (Chile) (1998)

USA—Indonesia Biodiesel Determination (Indonesia) (2017)

USA—Carbon Steel Pipe Decision (China) (2012)

USA—OCTG Decision (Korea) (2017)

USA—Steel Wire Rod (Czechoslovakia) (1984)

USA—Wax Candles Determination (China) (1986)

List of Cases

xxxiii

III. European Union Investigating country/authority—short title (investigated country) (year)

Full title and citation

EC—Melamine Anti-Dumping Investigation (China) (2011)

European Commission, Commission Regulation (EU) No. 1035/2010 of 15 November 2010 imposing a provisional anti-dumping duty on imports of melamine originating in the People’s Republic of China, 2011 O.J. (L298)10 European Commission, Commission Implementing Regulation (EU) 2016/387 of 17 March 2016 Imposing a Definitive Countervailing Duty on Import of Tubes and Pipes of Ductile Cast Iron (also known as Spheroid Graphite Cast Iron) originating in India, 2016 O.J. (L73) 1 European Council, Council Implementing Regulation (EU) No. 452/2011 of May 6, 2011, imposing a definitive anti-subsidy duty on imports of coated fine paper originating in the People’s Republic of China, 2011 O.J. (L128) 18 European Council, Council Implementing Regulation (EU) No. 451/2011 of May 6, 2011, imposing a definitive anti-dumping duty and collecting definitively the provisional duty imposed on imports of coated fine paper originating in the People’s Republic of China, 2011 O.J. (L128) 1 European Council, Council Regulation 599/2009 of July 7, 2009 imposing a definitive anti-dumping duty and collecting definitively the provisional duty imposed on imports of biodiesel originating in the United States of America, 2009 O.J. (L179) 26 European Council, Council Regulation No. 598/2009 of July 7, 2009 on imposing a definitive countervailing duty and collecting definitely the provisional duty imposed on imports of biodiesel originating in the United States of America, 2009 O.J. (L179) 1 European Council, Council Implementing Regulation (EU) No. 1194/2013 of 19 November 2013, imposing a definitive anti-dumping duty and collecting definitively the provisional duty imposed on imports of biodiesel originating in Argentina and Indonesia, 2013 O.J. (L315) 2 European Commission, Notice of initiation of an anti-dumping proceeding concerning imports of new and retreaded tyres for buses or lorries originating in the People’s Republic of China, 2017 O.J. (C264) (continued)

EC—Tubes CVD Decision (India) (2016)

EU—Coated Fine Paper Subsidy Decision (China) (2011)

EU—Coated Fine Paper AD Decision (China) (2011)

EU—Biodiesel AD Decision (USA) (2009)

EU—Biodiesel CVD Decision (USA) (2009)

EU—Biodiesel CVD Decision (Argentina and Indonesia) (2013)

EC—Retreaded Tyres Investigation (China) (2017)

xxxiv

List of Cases

(continued) Investigating country/authority—short title (investigated country) (year)

Full title and citation

EC—Lever Arch (China) (2017)

European Commission, Notice of initiation of an expiry review of the anti-dumping measures applicable to imports of lever arch mechanisms originating in the People’s Republic of China, 2017 O.J. (C290) 3, 5 European Commission, Notice of initiation of an expiry review of the anti-dumping measures applicable to imports of tartaric acid originating in the People’s Republic of China, 2017 O.J. (C122) European Commission, Commission implementing Regulation (EU) 2017/141 of 26 January 2017 imposing definitive anti-dumping duties on imports of certain stainless steel tube and pipe buttwelding fittings, whether or not finished, originating in the People’s Republic of China and Taiwan, 2017 O.J. (L22) European Commission, Commission implementing Regulation (EU) 2017/649 of 5 April 2017 imposing a definitive anti-dumping duty on imports of certain hot-rolled flat products of iron, non-alloy or other alloy steel originating in the People’s Republic of China, 2017 O.J. (L92) 68 European Commission, Commission implementing Regulation (EU) 2017/804 of 11 May 2017 imposing a definitive anti-dumping duty on imports of certain seamless pipes and tubes of iron (other than cast iron) or steel (other than stainless steel), of circular cross-section, of an external diameter exceeding 406,4 mm, originating in the People’s Republic of China, 2017 O.J. (L121) 3

EC—Tartaric Acid Investigation (China) (2017)

EU—Stainless Steel Decision (China and Taiwan) (2017)

EC—Hot-rolled Flat Products Decision (China) (2017)

EC—Seamless Pipes and Tubes Decision (China) (2017)

IV. India Investigating country/authority—short title (investigated country) (year)

Full title and citation

DGAD—Saccharin Investigation (China) (2011)

Sun Set Review of Anti-dumping duties imposed on imports of Saccharin originating in or exported from China PR, (Ministry and Com. & Indus., Dec. 7, 2011) (final find.), http://www.dgtr.gov.in/sites/default/files/ adfin_ssr_saccharin_chinapr.pdf Anti-dumping investigation concerning imports of Solar Cells, whether or not assembled partially or fully in Modules or (continued)

DGAD—Solar Cells Decision (China, Malaysia, Chinese Taipei, and USA) (2001)

List of Cases

xxxv

(continued) Investigating country/authority—short title (investigated country) (year)

DGAD—Phosphoryl Chloride Investigation (China) (2015)

DGAD—Albendazole Investigation (China) (2015)

DGAD—Melamine Investigation (China) (2015)

DGAD—Wire Rod Investigation (China) (2017)

DGAD—FKM Investigation (China) (2018)

DGAD—Belting Fabric Investigation (China) (2017)

Full title and citation Panels or on glass or some other suitable substrates, originating in or exported from Malaysia, China PR, Chinese Taipei and USA, (Ministry and Com. & Indus., May 22, 2001) (final find.), http://commerce.nic.in/ writereaddata/traderemedies/adfin_Solar_ Cells_Malaysia_ChinaPR_Chinese_Taipei_ USA.pdf Anti-Dumping Investigations concerning imports of Diethyl Thio Phosphoryl Chloride originating in or exported from China PR, (Ministry and Com. & Indus., May 6, 2010) (final find.), http://www.dgtr.gov.in/sites/ default/files/adfin_Diethyl_Thio_Phosphoryl_ Chloride_ChinaPR.pdf Anti-dumping investigation concerning imports of “Albendazole” originating in on exported from China PR, (Ministry and Com. & Indus., Nov. 5, 2015) (final find.), http:// www.dgtr.gov.in/sites/default/files/adifin_ Albendazole_ChinaPR.pdf Sunset Review of Anti-Dumping duty on Imports of “Melamine” originating in or exported from China PR, (Ministry and Com. & Indus., Dec. 5, 2015) (final find.), http:// www.dgtr.gov.in/sites/default/files/adfin_ SSR_2_melamine_chinaPR.pdf Anti-dumping investigation concerning imports of “Wire Rod of Alloy or Non-Alloy Steel” originating in or exported from China PR, (Ministry and Com. & Indus., Aug. 30, 2017) (final find.), http://www.dgtr.gov.in/ sites/default/files/FF%20WR-NCV.pdf Anti-dumping investigation concerning imports of Fluoroelastomers (FKM) from People’s Republic of China (Ministry and Com. & Indus., Jan. 2, 2018) (initiation notif.), http://www.dgtr.gov.in/sites/default/ files/Initiation%20-%20English.pdf Anti-Dumping investigation concerning imports of “Belting Fabric” originating in or exported from People’s Republic of China (Ministry and Com. & Indus., Aug. 23, 2017) (initiation notif.), http://www.dgtr.gov.in/ sites/default/files/Belting%20Febric% 20Initiation.pdf (continued)

xxxvi

List of Cases

(continued) Investigating country/authority—short title (investigated country) (year)

Full title and citation

DGAD—Wind Electricity Investigation (China) (2017)

Anti-dumping investigation concerning imports of Castings for Wind Operated Electricity Generators, whether or not machined, in raw, finished or subassembled form…from China PR, (Ministry and Com. & Indus., Jul. 28, 2017) (final find.), http://www. dgtr.gov.in/sites/default/files/casting.pdf Sunset Review (SSR) Anti-dumping investigation concerning imports of “1– Phenyl-3-Methyl-5-Pyrazolone” originating in or exported from China PR, (Ministry and Com. & Indus., Aug. 9, 2017) (final find.), http://www.dgtr.gov.in/sites/default/files/Final %20Finding%20-NCV%20Ver.%20Final.pdf Final Findings in the Sunset Review of Anti-dumping duty imposed on the imports of Pentaerythritol originating in or exported from China PR, (Ministry and Com. & Indus., May 12, 2017) (final find.), http://www.dgtr.gov.in/ sites/default/files/penta%20FF.V1_0.pdf Sunset Review of Anti-dumping duty imposed on the imports of Sodium Nitrite originating in or exported from China PR, (Ministry and Com. & Indus., Jul. 19, 2017) (final find.), http://www.dgtr.gov.in/sites/default/files/SNINCV.FFV1_.pdf Sunset Review investigation of Anti-dumping duty imposed on the imports of Certain Rubber Chemicals, namely, TDQ & PX-13 originating in or exported from the European Union and MOR and MBTS originating in or exported from the Peoples Republic of China, (Ministry and Com. & Indus., Sep. 2, 2017) (final find.) http://www.dgtr.gov.in/sites/ default/files/RC.NCVdona.final-english.pdf Anti-dumping Investigation concerning imports of “Toluene Di-Isocyanate (TDI)” originating in or exported from China PR, Japan or Korea RP, (Ministry and Com. & Indus., Mar. 28, 2017) (final find.) Anti-dumping investigation concerning imports of “Color coated/prepainted flat products of alloy or non-alloy steel” originating in or exported from China PR and European Union-reg, (Ministry and Com. & Indus., Aug. 30, 2017) (final find.), http:// www.dgtr.gov.in/sites/default/files/FF% 20CC-%20NCV.pdf (continued)

DGAD—Phenyl Methyl Pyrazolone Investigation (China) (2017)

DGAD—Pentaerythritol Investigation (China) (2017)

DGAD—Sodium Nitrate Investigation (China) (2017)

DGAD—Rubber Chemicals Investigation (China) (2017)

DGAD—TDI Investigation (China, Japan and Korea) (2017)

DGAD—Color Coated Alloy Investigation (China and EU) (2017)

List of Cases

xxxvii

(continued) Investigating country/authority—short title (investigated country) (year)

Full title and citation

DGAD—Grinding Metal Balls Investigation (China and Thailand) (2017)

Initiation of Sunset review investigation concerning imports “Grinding Media Balls” (excluding Forged Grinding Media Balls) from China PR and Thailand (Ministry and Com. & Indus., Jul. 4, 2017) (initiation notif.), http://www.dgtr.gov.in/sites/default/files/ initiation%20notification%20.V1_0.pdf Initiation of Anti-Dumping Duty Investigation Concerning Imports of “High Tenacity Polyester Yarn” Originating in or Exported from China PR (Ministry and Com. & Indus., Jun. 15, 2017) (initiation notif.), http://www. dgtr.gov.in/sites/default/files/High% 20Tenacity%20Polyester%20Yarn. compressed.pdf Initiation of anti-dumping investigation concerning imports of “Straight Length Bars & Rods of Alloy Steel” originating in or exported from China PR (Ministry and Com. & Indus., Sep. 22, 2017) (initiation notif.), http://www.dgtr.gov.in/sites/default/files/ Initiation%20English.pdf Anti-Dumping Investigation concerning Imports of Polypropylene Originating in or Exported from Oman, Saudi Arabia and Singapore—Final Findings, No. 14/5/2009-DGAD (Ministry and Com. & Indus., 2009) (final find.) Anti-Dumping Investigations concerning imports of Cathode Ray Colour Television Picture Tubes originating in or exported from Malaysia, Thailand, China PR and Korea, F. No. 14/8/2007-DGAD, (Ministry and Com. & Indus., Feb.17, 2009)(final find.) Anti-dumping duty investigation concerning imports of Elastomeric Filament Yarn from China PR, South Korea, Taiwan and Vietnam, F. No. 14/29/2015-DGAD, (Ministry and Com. & Indus., Mar. 24, 2017) (final find.) Anti-dumping investigations concerning import of Nylon Tyre Cord Fabric (NTCF) originating in or exported from China PR, F. No. 14/20/2003-DGAD, (Ministry and Com. & Indus., Mar. 9, 2005) (final find.) Anti-dumping investigations concerning imports of Compact Fluorescent Lamps originating in/exported from China PR, (continued)

DGAD—High tenacity Polyester Investigation (China and Thailand) (2017)

DGAD—Straight Length Bars Investigation (China) (2017)

DGAD—Polypropylene Decision (Oman, Saudi Arabia, and Singapore) (2009)

DGAD—Cathode Tubes Investigation (China, Korea, Malaysia, Thailand) (2009)

DGAD—Filament Yarn Investigation (China, South Korea, Taiwan, Vietnam) (2017)

DGAD—Nylon Tyre Cord Fabric Investigation (China) (2005)

DGAD—Compact Fluorescent Lamps Investigation (China, Sri Lanka, and Vietnam) (2009)

xxxviii

List of Cases

(continued) Investigating country/authority—short title (investigated country) (year)

DGAD—Vitamin A Palmitate Investigation (China, Switzerland) (2007)

DGAD—Flat Base Steel Wheels Investigation (China) (2007)

DGAD—SDH Equipment Investigation (China and Israel) (2010)

DGAD—Circular Weaving Machines Decision (China) (2010)

DGAD—Bus and Truck Tyres Investigation (China and Thailand) (2010)

DGAD—Copper Clad Laminates Investigation (China, Hong Kong, Korea, Singapore, Philippines, Taiwan, and Thailand) (2003)

DGAD—Borax Decahydrate Investigation (China and Turkey) (2003)

Full title and citation Vietnam and Sri Lanka, F. No. 14/1/2007-DGAD, (Ministry and Com. & Indus., Feb. 27, 2009) (final find.) Directorate General of Anti-dumping and Allied Duties, Anti-Dumping Investigation concerning imports of Vitamin-A Palmitate originating in or exported from Switzerland and China PR, F. No. 14/11/2005-DGAD, (Ministry and Com. & Indus., Sep. 14, 2007) (final find.) Anti-dumping investigations concerning imports of Flat-Base Steel Wheels originating in/exported from China PR, F. No. 14/8/2005-DGAD, 15, (Ministry and Com. & Indus., Nov. 28, 2007) (final find.) Anti-Dumping Investigations concerning imports of SDH Equipment originating in or exported from China PR and Israel, F. No. 14/2/2009-DGAD (Ministry and Com. & Indus., Oct. 19, 2010) (final find.) Final Findings of Anti-dumping investigation on imports of Circular Weaving Machines having six or more shuttles for weaving PP/HDPE Fabrics of a width exceeding 30 cms, originating in or exported from China PR, F. No. 14/25/2008-DGAD (Ministry and Com. & Indus., Nov. 16, 2010) (final find.) Antidumping investigation involving import of Bus and Truck Radial Tyres, originating in or exported from China PR and Thailand, F. No. 14/17/2008-DGAD (Ministry and Com. & Indus., Jan. 1, 2010) (final find.) Anti-dumping investigation concerning imports of Copper Clad Laminates originating in or exported from China PR, Taiwan, Hong Kong, Korea RP, Singapore, Philippines and Thailand, F.M. 14/44/2002-DGAD (Ministry and Com. & Indus., Dec. 23, 2003) (final find.) Anti-dumping investigation concerning imports of Borax Decahydrate originating in or exported from the Turkey and China PR, F. No. 14/40/2002-DGAD (Ministry and Com. & Indus., Nov. 21, 2003) (final find.) (continued)

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(continued) Investigating country/authority—short title (investigated country) (year)

Full title and citation

DGAD—Potassium Carbonate Investigation (China, EU, Korea, and Taiwan) (2004)

Anti-dumping investigation concerning imports of Potassium Carbonate from the European Union (EU), China PR, Korea RP and Taiwan, F. No. 14/42/2002-DGAD (Ministry and Com. & Indus., Jan. 16, 2004) (final find.) Anti-Dumping Investigations involving imports of Penicillin-G Potassium originating in or exported from China PR and Mexico and 6-APA originating in or exported from China PR, F. No. 14/19/2009-DGAD, (Ministry and Com. & Indus., Jan. 20, 2011) (final find.) Anti-dumping duty investigation on the imports of Ceramic Roller originating in or exported from China, F. No. 14/47/2016-DGAD (Ministry and Com. & Indus., Mar. 26, 2018) (final find.) Anti-dumping investigation concerning imports of “Phosphorus Pentoxide” originating in or exported from China, F. No. 14/47/2016—DGAD (Ministry and Com. & Indus., Mar. 5, 2018) (final find.) Anti-dumping investigation concerning imports of Glassware originating in or exported from People’s Republic of China and Indonesia, F. No. 14/45/2016—DGAD (Ministry and Com. & Indus., Mar. 5, 2018) (final find.) Anti-Dumping Investigations concerning imports of “Carbon Black used in rubber applications” originating in or exported from Australia, China PR, Iran, Malaysia, Russia and Thailand, F. No. 14/21/2008-DGAD (Ministry and Com. & Indus., Dec. 24, 2009) (final find.)

DGAD—Penicillin Potassium Investigation (China) (2011)

DGAD—Ceramic Roller Investigation (China) (2018)

DGAD—Phosphorus Pentoxide Investigation (China) (2018)

DGAD—Glassware Investigation (China) (2018)

DGAD—Carbon Black Rubber Investigation (Australia, China, Iran, Malaysia, Russia, and Thailand) (2009)

V. Australia Investigating country/authority—short title (investigated country) (year)

Full title and citation

Australia—A4 Copy Paper Decision (Brazil, China Indonesia, and Thailand) (2017)

Anti-Dumping Commission, Alleged Dumping of A4 Copy Paper Exported from the Federative Republic of Brazil, the People’s Republic of China, the Republic of Indonesia and the (continued)

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(continued) Investigating country/authority—short title (investigated country) (year)

Australia—HSS Decision (China, Korea, Malaysia, Taiwan, Thailand) (2012)

Australia—Aluminium Road Wheels [ARW] Decision (China) (2012)

Australia—Stainless Steel Sinks (China) (2015)

Full title and citation Kingdom of Thailand, (Mar. 17, 2017)(Austl.), http://adcommission.gov.au/cases/EPR% 20301%20%20350/EPR%20341/221%20-% 20Report%20-%20Final%20Report%20-% 20REP%20341.pdf Anti-Dumping Commission, A4 Copy Paper from Brazil, China, Indonesia and Thailand, EPR 341 (Austl.), www.adcommission.gov.au/ cases/Pages/CurrentCases/EPR-341.aspx Anti-Dumping Commission, White Uncoated A4 Copy (Cut Sheet) Paper Exported from The Federal Republic of Brazil, the People’s Republic of China, the Republic of Indonesia and the Kingdom of Thailand: Application for the publication of dumping and/or countervailing duty notices, (Feb., 2016) (Austl.), http://www.adcommission.gov.au/ cases/EPR%20301%20%20350/EPR%20341% 20-%20archived%2018%20October%202017/ 001%20-%20APPLICATION%20A4%20Copy %20Paper%20-%20Public%20File.pdf Trade Measures Review Officer, Decision of the Trade Measures Review Officer—Hollow Structural Sections, (Dec. 14, 2012), http:// www.adcommission.gov.au/cases/Documents/ TMRO-HollowStructuralSectionsDecision14Dec12.pdf Austl. Customs & Border Protection Serv., Certain Hollow Structural Sections Exported from the people’s Republic of China, the Republic of Korea, Malaysia, Taiwan and the Kingdom of Thailand, Report to the Minister No. 177 (Jun. 7, 2012) Trade Measures Review Officer, Decision of the Trade Measures Review Officer—Aluminium Road Wheels, (Dec., 2012), http://www. adcommission.gov.au/cases/Documents/ TMROReportDecember2012.pdf Austl. Customs & Border Protection Serv., Aluminium Road Wheels Exported from the People’s Republic of China, Report to the Minister No. 181 (Jun. 12, 2012) Anti-Dumping Commission, Alleged Dumping of Deep Drawn Stainless Steel Sinks Exported from the People’s Republic of China, and Alleged Subsidisation of Deep Drawn Stainless Steel Sinks Exported from the People’s Republic of China, Report No. 238 (Feb. 15, 2015) (continued)

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(continued) Investigating country/authority—short title (investigated country) (year)

Full title and citation

Australia—Galvanized Steel and Coated Steel (China) (2013)

Austl. Customs & Border Protection Serv., Dumping of Zinc Coated (Galvanised) Steel and Aluminium Zinc Coated Steel Exported from the People’s Republic of China, the Republic of Korea and Taiwan, Report to the Minister No. 190 (Apr. 30, 2013) Anti-Dumping Commission, Alleged Dumping of Certain Crystalline Silicon Photo voltaic Modules or Panels Exported from the People’s Republic of China, Report No. 239 (Oct. 6, 2015)

Australia—Crystalline Silicone Decision (China) (2015)

VI. Brazil Investigating country/authority—short title (investigated country) (year)

Full title and citation

Brazil—Technical Porcelain Decision (China) (2014)

Resolution No. 122 of December 18, 2014: Applies a trade defense measure, for a period of up to five (5) years, to Brazilian imports of technical porcelain, originating in the People’s Republic of China, (Ministry Indus., Foreign Trade & Serv., Dec. 18, 2014), http://www.camex.gov.br/ component/content/article/62-resolucoes-da-camex/ em-vigor/1446-resolucao-n-122-de-18-dedezembro-de-2014 Resolution No. 46 of July 5, 2017: Extending a definitive anti-dumping duty for a period of up to five (5) years, applied to Brazilian imports of thermal bottles originating in the People’s Republic of China, (Ministry Indus., Foreign Trade & Serv., Jul. 5, 2017), http://www.camex.gov.br/ component/content/article/62-resolucoes-da-camex/ em-vigor/1878-(resolucao-n-46-de-5-de-julho-de2017 Extending a definitive anti-dumping duty for a period upto 5 (five) years in respect of Brazilian imports of viscose fabrics originating in the People’s Republic of China (Ministry Indus., Foreign Trade & Serv., Feb. 16, 2017), http://www.camex.gov.br/ component/content/article/62-resolucoes-da-camex/ em-vigor/1787-resolucao-n-07-de-16-de-fevereirode-2017 (continued)

Brazil—Thermal Bottles Decision (China) (2017)

Brazil—Viscose Fabrics Decision (China) (2017)

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(continued) Investigating country/authority—short title (investigated country) (year)

Full title and citation

Brazil—Tempered Glass Decision (China) (2017)

Resolution No. 5 of February 16, 2017: Imposes definitive anti-dumping duty for a period of up to five (5) years on Brazilian imports of tempered and rolled automotive glass originating in the People’s Republic of China, (Ministry Indus., Foreign Trade & Serv., Feb. 16, 2017), http://www.camex.gov.br/ component/content/article/62-resolucoes-da-camex/ em-vigor/1785-resolucao-n-05-de-16-de-fevereirode-2017

VII. Canada Investigating country/authority—short title (investigated country) (year)

Full title and citation

Canada—Silicon Metal Investigation (China) (2013)

Certain Silicon Metal Originating in or Exported from the People’s Republic of China-Statement of Reasons, AD1400/4214-39 (Can. Border Serv. Agency, May 21, 2013) Large diameter carbon and alloy steel line pipe from China and Japan-Statement of Reasons, AD1408/4214-47 (Can. Border Serv. Agency, Nov. 28, 2016) Certain Concrete Reinforcing Bar from Republic of Belarus (Belarus), Chinese Taipei, the Hong Kong Special Administrative Region of the People’s Republic of China, Japan, the Portuguese Republic and the Kingdom of SpainNotice of Initiation of Section 20 Inquiry, RB 2017 RI (Can. Border Serv. Agency, Nov. 7, 2016) Fabricated Industrial Steel Components-Statement of Reasons, FISC 2016 IN (Can. Border Serv. Agency, May 10, 2017) Certain Polyethylene Terephthalate Resin Statement of Reasons, PETR 2017 IN (Can. Border Serv. Agency, Sep. 1, 2017)

Canada—Steel Pipe Investigation (China and Japan) (2016)

Canada—Concrete Reinforcing Bar Investigation (China, Japan, Spain) (2016)

Canada—Fabricated Steel Investigation (2017) Canada—Polyethylene Investigation (2017)

US Cases 1. Georgetown Steel Co. v. United States, 801 F.2d. 1308 (Fed. Cir. 1986). 2. GPX Int’l Tire Corp. v. United States, 666 F.3d 732 (C.A. Fed 2011). 3. GPX Int’l Tire Corp. v. United States (GPX 2), No. 08-00285, 2010 WL 3835022, 9-10 (Ct. Int’l Trade 2010).

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4. In re Vitamin C Antitrust Litigation, No. 13-4791 (2d Cir-2016), at 1, 3, 6, (Brief of Amicus Curie by the Ministry of Commerce of the People’s Republic of China), United States District Court Eastern District of New York (Sep. 22, 2006). 5. In re Vitamin C Antitrust Litigation, (Brief of Amicus Curie by the Ministry of Commerce of the People’s Republic of China), United States Court of Appeals for the Second Circuit, (April 14, 2014).

Indian Cases 1. Huawei Technologies Co. Ltd. v. Designated Authority, CESTAT, 2016 (334) E.L.T. 339 (Tri.-Del.). 2. Shenyang Matsushita S. Battery Co. Ltd. v. Exide Industries Ltd., 2005 (181) E.L.T. 320 (S.C.), (2005).

International Cases 1. Aegean Sea Continental Shelf, Greece v. Turkey, Judgment (Greece v. Turkey), 1978 ICJ Rep 3, (Dec. 19). 2. Case T-138/02, Nanjing Metalink International Co. Ltd v. Council, Judgment of Court of First Instance (Fourth Chamber, extended composition)., 2006 ECR., II-4351. 3. Case 35/01, Shanghai Teraoka Electronic Co. Ltd v. Council, Judgment of Court of First Instance (Fourth Chamber, extended composition)., 2004 ECR II-3671. 4. Case T-498/04, Zhejiang Xinan Chemical Group Industrial v. Council, Judgment of Court of First Instance (Fourth Chamber)., 2009 ECR II-01969. 5. Case C-337/09, Council v. Zhejiang Xinan Chemical Industrial group, Judgment of Court (Grand Chamber), 2012 ECR ECLI:471.

Miscellaneous 1. Communication from the Panel, European Union—Measures related to price comparison methodologies, WTO Doc. WT/DS516/11 (Dec. 11, 2017). 2. EU submissions: Request for Consultation, European Union—Measures Related to Price Comparison Methodologies, WTO Doc., WT/DS516/R (Dec. 12, 2016), http://trade.ec.europa.eu/doclib/docs/2017/december/tradoc_156476. pdf, http://trade.ec.europa.eu/doclib/docs/2017/november/tradoc_156401.pdf.

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3. Request for Consultation from China, United States—Measures Related to Price Comparison Methodologies, WTO Doc. WT/DS515/R (Dec. 12, 2016), https:// www.wto.org/english/tratop_e/dispu_e/cases_e/ds515_e.htm. 4. Request for Consultations by Indonesia, Australia—Anti-Dumping Measures on A4 Copy Paper, WTO Doc. WT/DS529/1 (Sept. 5, 2017). 5. Request for consultations by Russia, European Union—Cost Adjustment Methodologies and Certain Anti-Dumping Measures on Imports from Russia, WTO Doc. WT/DS474 (Dec. 23, 2013). 6. Request for consultations by Russia, European Union—Cost Adjustment Methodologies and Certain Anti-Dumping Measures on Imports from Russia (Second complaint), WTO Doc. WT/DS494 (May 7, 2015). 7. Request for Consultations from China, European Union—Measures Related to Price Comparison Methodologies, WTO Doc. WT/DS516/R (Dec. 12, 2016), https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds516_e.htm. 8. Request for the Establishment of a Panel by China, European Union—Measures Related to Price Comparison Methodologies, WTO Doc. WT/DS516/9 (Mar. 9, 2017). 9. United States Third Party Legal Interpretation document, European Union— Measures Related to Price Comparison Methodologies, WTO Doc., WT/DS516/R (Dec. 12, 2016), https://ustr.gov/sites/default/files/enforcement/ WTO/US.Legal.Interp.Doc.fin.%28public%29.pdf.

Introduction: Non-market Economies in the Global Trading System—The Special Case of China James J. Nedumpara and Weihuan Zhou

Abstract This chapter opens the discussions of the issues relating to non-market economies under the multilateral trading system by highlighting the importance of these issues and outlining the development of these issues in relation to China. It sets out the structure of the book and summarises how each subsequent chapter contributes to the understanding of and debate over non-market economies, the interpretation and application of the relevant WTO rules especially those on anti-dumping and subsidies, and the anti-dumping laws and practices in major jurisdictions, using China as a special case. Keywords Non-market economies Accession State distortion





Anti-dumping
China’s protocol of

1 Introduction The year of 2017 marked the 70th anniversary of the multilateral trading system embodied by the World Trade Organisation (“WTO”) and its predecessor the General Agreement on Tariffs and Trade (“GATT”).1 As widely reported, the WTO currently 1

The GATT, concluded in October 1947, is an international agreement which lays down rules on trade in goods applicable to its signatories, officially referred to as “Contracting Parties”. See General Agreement on Tariffs and Trade, Oct. 30, 1947, 61 Stat. A-11, 55 U.N.T.S. 194. The GATT Contracting Parties held eight rounds of negotiations to further develop trade rules and reduce trade barriers. The last GATT round – the Uruguay Round negotiation completed in 1994 – established the WTO. The instrument establishing the WTO is the Marrakesh Agreement Establishing the World Trade Organization. See Marrakesh Agreement Establishing the World Trade Organization, Apr. 15, 1994, 1869 U.N.T.S. 201 (1994) [hereinafter GATT 1994].

J. J. Nedumpara (&) Centre for Trade and Investment Law, Indian Institute of Foreign Trade, New Delhi, India e-mail: [email protected] W. Zhou Faculty of Law, University of New South Wales, Sydney, Australia e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2018 J. J. Nedumpara and W. Zhou (eds.), Non-market Economies in the Global Trading System, https://doi.org/10.1007/978-981-13-1331-8_1

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faces an array of challenges, notably the consistent failure of multilateral negotiations, the rise of unilateralism threatening the WTO’s rules-based system, the imminent crisis in the WTO’s dispute settlement mechanism, and the inadequacy of WTO rules in addressing certain systemic or contemporary issues. Collective actions by WTO Members are required to overcome these challenges, to protect and promote the values of multilateralism, and to counteract the ongoing trend of de-globalisation. Among these challenges, the issue of non-market economies (“NMEs”) has acquired growing prominence since 2016 because of China. At the core of this much debated controversy is a provision agreed to by China and other WTO Members in China’s Protocol of Accession2 (“Accession Protocol”) concerning treatment of Chinese firms and exporters in anti-dumping proceedings after December 11, 2016. In fact, the dramatic growth and transformation of China over the past decades has generated a range of perplexing issues for the world trading system. When it comes to the issue of NMEs, there is little doubt that China offers a unique example given its size and influence in global economic activities and the ever-increasing complexities in the Chinese economy. This book aims to provide readers with a one-stop shop for understanding the concept of NMEs, the practices of selected WTO Members, the interpretative issues of relevant WTO rules, and the implications for the multilateral trading system, using China as a special case.

2 Non-market Economies Under the GATT The challenge that NMEs pose to the world trading system essentially arises from state intervention in commercial activities which causes market distortions and undermines the norms and principles that are generally applicable to market-oriented economies. However, it remains a matter for debate whether the general rules of the GATT/WTO have the capacity to cope with NMEs. This matter has its roots in the GATT era. The negotiations of the GATT between 1946 and 1948 were conducted predominantly among market economy countries without much contemplation of rules that apply to NMEs.3 One major exception was the consideration of state trading as a potential barrier to trade and hence the inclusion of GATT Article XVII to impose a general obligation of non-discrimination on “State Trading Enterprises”.4 However, this rule is confined to anti-discrimination and leaves many other ways of 2

Protocol on the Accession of the People’s Republic of China, WTO Doc. WT/L/432 (Nov. 23, 2001) [hereinafter Chinese Accession Protocol]. 3 John Jackson, State Trading and Non-market Economies 23(4) INT’L LAWYER 891, 891–3 (1989). 4 See generally William Davey, Article XVII GATT: An Overview in STATE TRADING IN THE TWENTYFIRST CENTURY 17, 36 (Thomas Cottier and Petros Mavroidis (eds.), 1998); Andrea Mastromatteo, WTO and SOEs: Article XVII and Related Provisions of the GATT 1994, 16(4) WORLD TRADE REV. 601–618 (2017); For a more detailed discussion of the negotiating history of Article XVII, JOHN JACKSON, WORLD TRADE AND THE LAW OF THE GATT, 329–364 (The Bobbs-Merrill Company, 1969).

Introduction: Non-market Economies in the Global …

3

state intervention unregulated. Furthermore, Article XVII is not a special rule on NMEs and applies to state trading in both market economies and NMEs.5 In 1950s– 60s, the admission of certain NMEs (e.g. Poland, Romania, and Hungary) to the GATT led to the creation of a special anti-dumping rule to address certain extreme situations in which markets were dominated by state monopolies.6 In dealing with allegedly dumped imports from these economies, investigating authorities may decide not to use the domestic prices of these economies for the calculation of dumping margins.7 Apparently, the scope of applicability of this special rule is also limited. However, as these NMEs were “relatively small in terms of their impact on trade”,8 the limitations of the GATT rules in addressing NME-related problems did not escalate into a systemic issue until the commencement of the negotiations of China’s accession to the GATT/WTO.

3 The Special Case of China China’s negotiations to join the multilateral trading system took fifteen years between 1986 and 2001.9 At the outset of the negotiations, China was a centrally-planned economy although domestic economic reforms were launched in 1979 to transform China to a market-oriented economy. The progress of China’s transformation was a matter of crucial importance throughout the accession negotiations. In one of the earliest sessions of the GATT Working Party on China’s

5

Indeed, a recent OECD report shows the growing involvement of state-owned enterprises (SOEs) in international commercial activities across many major nations, See Organisation for Economic Cooperation and Development, State-Owned Enterprises as Global Competitors: A Challenge or an Opportunity? (OECD Publishing, Paris, 2016). 6 World Trade Organisation, GATT Analytical Index, Article VI Anti-Dumping and Countervailing Duties, 228, www.wto.org/english/res_e/booksp_e/gatt_ai_e/art6_e.pdf. 7 The second Supplementary Provision to GATT Article VI:1 reads: “It is recognized that, in the case of imports from a country which has a complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the State, special difficulties may exist in determining price comparability for the purposes of paragraph 1, and in such cases importing contracting parties may find it necessary to take into account the possibility that a strict comparison with domestic prices in such a country may not always be appropriate.” GATT 1994, supra note 1, Interpretative Note 2 to Art. VI. 8 Jackson, supra note 3, at 894. 9 For a great volume on the various issues of the negotiations and the outcomes of the negotiations, See DEBORAH CASS, BRETT WILLIAMS & GEORGE BARKER, CHINA AND THE WORLD TRADING SYSTEM: ENTERING THE NEW MILLENNIUM (Cambridge University Press, 2003). For China’s economic reforms and development during the period of accession negotiations and the implications of China’s WTO commitments, See NICHOLAS LARDY, INTEGRATING CHINA INTO THE GLOBAL ECONOMY (Brookings Institution Press, 2002).

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resumption of GATT membership,10 several members pointed out the difficulties in applying GATT rules to NMEs and hence the need for special rules on China.11 In subsequent negotiations, China was requested to respond to numerous questions on various aspects of its economic system, spanning from import and export regulatory regime to pricing mechanism, domestic subsidies, state trading, transparency, and so forth.12 In response to these concerns, the Chinese delegation insisted that China was no longer a centrally-controlled economy, but had integrated planning with market mechanism through the domestic economic reforms.13 Prior to the conclusion of the Uruguay Round, the GATT Secretariat noted that China was committed to establishing a “socialist market economy system … where the market plays a fundamental role in the rational allocation of resources under State macro-control”.14 This indicated a differentiation between China and purely centrally-controlled economies. In a press conference in Beijing after the conclusion of the Uruguay Round in 1994, Peter Sutherland, the founding Director General of the WTO, acknowledged that “China’s economic reforms have given a far greater role to market forces and have led to a rapid liberalization of its foreign trade regime.”15 In the meantime, Sutherland highlighted some specific issues that needed to be resolved in China’s accession negotiations. The negotiating history reveals the difficulties in applying the special anti-dumping rule invented in the 1950s to China given its limited applicability and ill-defined scope, and hence the need for new rules to address the changing circumstances in China. Thus, the WTO Working Party on the Accession of China (the successor of the GATT Working Party) was tasked to facilitate the negotiations of China-specific issues and draft the corresponding rules to be included in the legal instruments on China’s accession.16

10

General Agreement on Tariffs and Trade, Working Party on China, GATT Doc. GATT/AIR/ 2392 (Mar. 11, 1987); General Agreement on Tariffs and Trade, Working Party on China’s Status as a Contracting Party, GATT Doc. L/6191/Rev.1 (Feb. 25, 1988). 11 General Agreement on Tariffs and Trade, Working Party on China’s Status as A Contracting Party: Introduction and General Statements – Note by the Secretariat, Spec(88) 13 (Mar. 29, 1988). 12 See, e.g., General Agreement on Tariffs and Trade, Working Party on China’s Status as A Contracting Party: Annotated Checklist of Issues – Note by the Secretariat, Spec(88)13/Add.5 (Jun. 9, 1989). 13 General Agreement on Tariffs and Trade, Working Party on China’s Status as A Contracting Party: Communication from China, 2, Spec(88)37 (Jul. 11, 1988). 14 General Agreement on Tariffs and Trade, Working Party on China’s Status as A Contracting Party: China’s Foreign Trade Regime – Note by the Secretariat, 1, Spec(88)13/Add.4/Rev.1 (Mar. 4, 1993). For a comprehensive note on China’s foreign trade regime, see General Agreement on Tariffs and Trade, Working Party on China’s Status as A Contracting Party: China’s Foreign Trade Regime – Note by the Secretariat, Spec(88)13/Add.13 (Sep. 7, 1993). 15 General Agreement on Tariffs and Trade, Global Multilateral Trading System: The Role of the PRC, (address by Peter D. Sutherland), GATT Doc. GATT/1633, (May 10, 1994), at 4. 16 See, eg. World Trade Organisation, Communication from China, WTO Doc. WT/ACC/CHN/1 (Dec. 7 Dec, 1995); World Trade Organisation, Communication from China, WTO Doc. WT/ ACC/CHN/15 (Jul.13, 1998); World Trade Organisation, Communication from China, WTO Doc. WT/ACC/CHN/30 (Jul. 18, 2000).

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Eventually, China agreed to undertake a range of obligations in addition to the general ones set out in WTO agreements. These WTO-plus obligations are included in two accession instruments—the Chinese Accession Protocol17 and the Report of the Working Party on the Accession of China18 (“Working Party Report”). Among these obligations, the most invoked and controversial has been Section 15 of the Accession Protocol.

4 The Mysteries of Section 15 of China’s Accession Protocol Section 15 of the Accession Protocol essentially confers a right on WTO Members to treat China as an NME in anti-dumping investigations. This means that special anti-dumping rules may be applied to Chinese producers and exporters based on the assumption that they do not operate according to market economy conditions. The application of the special anti-dumping rules typically results in the use of prices and costs in a third market economy country (i.e. a surrogate country) for the calculation of a “normal value” of the Chinese goods under investigation. The extent to which the normal value exceeds the export prices of the goods during the period of investigation determines whether there is dumping, and if so, the magnitude of dumping. In practice, the use of the special anti-dumping rules almost invariably inflates the normal value depending on the arbitrary choices of surrogate values, and ultimately the quantum of anti-dumping duties to be levied.19 In practical terms, the discontinuation of the special anti-dumping rules will ensure that Chinese producers and exporters will be able to use, more often than not, their price and cost data for normal value determination. For ease of reference, the special anti-dumping rules are hereinafter referred to as the “NME Methodology”. The controversy over the application and interpretation of Section 15 stems from paragraph (d) of Section 15 which stipulates that sub-section (a)(ii) of Section 15 shall expire upon the completion of fifteen years, i.e. on December 11, 2016. Sub-section (a)(ii) allows WTO Members to apply the NME Methodology if Chinese producers under investigation “cannot clearly show that market economy conditions prevail in the industry [concerned].” Accordingly, the critical question is whether the remaining elements of Section 15 continue to provide the basis for the application of the NME Methodology. This methodology contrasts with the ordinary approaches to the determination of normal values contemplated in GATT Article VI:1 and Article 2

17

Chinese Accession Protocol, supra note 2. Working Party on the Accession of China, Report of the Working Party on the Accession of China, WTO Doc. WT/ACC/CHN/49 (Oct. 1, 2001) [hereinafter Working Party Report]. 19 Chad P Brown, Should the United States Recognize China as a Market Economy, PETERSON INSTI. INT’L ECON., 6–7 (Dec., 2016); Cecilia Bellora & Sebastien Jean, Granting Market Economy Status to China in the EU: An Economic Impact Assessment, Policy Brief. No. 11, CENTRE D'ETUDES PROSPECTIVES ET D'INFORMATIONS INTERNATIONALES, 1–16, (Sep., 2016). 18

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of the WTO Anti-Dumping Agreement,20 where surrogate prices or costs may be applied only when the prescribed circumstances are proved to exist. Section 15 triggered vigorous debates in the international trade community and is currently the subject matter of the EU—Price Comparison Methodologies dispute which China initiated against the EU at the WTO one day after the fifteen years deadline.21 China takes a position that the application of the NME Methodology must be terminated according to the deadline. This position was summarized by China’s Ambassador Zhang Xiangchen in his opening statement before the WTO panel as below: … there is no longer any basis under the [Accession] Protocol to abandon home market prices and costs. WTO Members shall apply general rules under the WTO covered agreements in anti-dumping proceedings involving China. The discriminatory provisions in the anti-dumping laws of the European Union and other Members were required to come to an end…22

The EU and the US (a third party in the dispute) took the opposite position, contending that the expired part of Section 15 concerns “burden of proof” only (i.e. the assumption of China as an NME) so that the surviving parts of it continue to justify the use of the NME Methodology.23 Scholars are divided on how Section 15 should be interpreted and applied. Some supported China’s position that upon the expiration of sub-section (a)(ii), Section 15 no longer provides a valid basis for the application of the NME Methodology. Others sided with the EU and the US, seeking to create interpretative approaches whereby the surviving parts of Section 15 continue to permit the treatment of China as an NME and the application of the NME Methodology. Arguments on both sides of the spectrum are arrayed in various chapters of this book and, more specifically, in Chapter “China’s Long March to Market Economy Status: An Analysis of China’s Protocol of Accession and Member Practices” of

20

Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1869 U.N.T.S. 201 (1994) [hereinafter Anti-Dumping Agreement]. 21 A summary of the dispute and its current status can be found at: World Trade Organisation, European Union — Measures Related to Price Comparison Methodologies, WT/DS516, www. wto.org/english/tratop_e/dispu_e/cases_e/ds516_e.htm. Simultaneously, China brought a dispute on the same subject matter against the US, which somehow remains under consultation. See World Trade Organisation, United States — Measures Related to Price Comparison Methodologies, WT/ DS515, www.wto.org/english/tratop_e/dispu_e/cases_e/ds515_e.htm. 22 China Opening Statement, European Union – Measures Related to Price Comparison Methodologies, WT/DS516, Opening Statement by Ambassador Zhang Xiangchen as a part of the Oral Statement of China at the First Substantive Meeting of the Panel in the Dispute (Dec. 6, 2017), ¶ 7, http://images.mofcom.gov.cn/wto2/201712/20171213174424357.pdf. 23 First Written Submission by the European Union, European Union – Measures Related to Price Comparison Methodologies, WT/DS516 (Nov. 14, 2017), http://trade.ec.europa.eu/doclib/docs/ 2017/November/tradoc_156401.pdf; Third Party Submission of the United States, European Union – Measures Related to Price Comparison Methodologies, WT/DS516 (Nov. 21, 2017), https://ustr.gov/sites/default/files/enforcement/DS/US.3d.Pty.Su.pdf.

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this book. This debate is unlikely to settle until the WTO Dispute Settlement Body makes a final decision on this issue, hopefully in the EU—Price Comparison Methodologies dispute.

5 The Broader Issues Relating to China’s Market Economy Status Beyond the interpretative issues of Section 15, a more fundamental question is whether China is now a market economy. Amid the EU—Price Comparison Methodologies dispute, the US Department of Commerce issued a report which concludes that China remains an NME.24 Scholars hold different views: while some believed that China has yet to graduate into a market economy due to state intervention in a wide range of economic activities,25 others observed that China is not unique in terms of regulatory intervention which is common in all markets.26 WTO Member states are at various stages of economic development, with different economic structures, policy priorities, and regulatory regimes. WTO rules do not require the Members to change their market structure or pattern of ownership,27 although some would argue that the animating spirit of free market is a defining philosophy of the WTO legal order. It is also fairly accepted that the WTO rules do not clearly provide a definition for “market economy” or “non-market economy”. This suggests a lack of consensus among the WTO membership on the general standards on how to distinguish between the two types of economies. Therefore, the WTO dispute settlement mechanism is likely to experience severe stress in the aftermath of a decision, in whosoever’s favour, in this dispute. Ideally, the negotiating arm of the WTO should have provided clear guidelines on any possible distinctions between market economies and NMEs. Although a negotiating solution would have been desirable, this is hardly a possibility within the WTO considering its current struggles and the inability to forge agreements on several outstanding issues. While the resolution of this issue will inevitably confront considerable difficulties, a failure to resolve it will leave a vacuum for the proliferation of 24

Memorandum from Leah Wils-Owens, to Gary Taverman, China’s Status as a Non-Market Economy (U.S. Dep’t Com., Oct. 26, 2017), https://enforcement.trade.gov/download/prc-nmestatus/prc-nme-review-final-103017.pdf. 25 See, e.g., Mark Wu, The ‘China, Inc’. Challenge to Global Trade Governance, 57 (2) HARV. INT’L. L. J., 261, 324 (2016); Michael Flynn, China: A Market Economy, 48 GEO. J. INT’L L., 297, 329 (2016). 26 Lisa Toohey and Jonathan Crowe, The Illusory Reference of the Transitional State and NonMarket Economy Status, 2(2) CHINA J. COMP. L., 314, 333–334 (2014); Matthew R. Nicely, Time to Eliminate Outdated Non-Market Economy Methodologies, 9(4) GLOBAL TRADE & CUSTOMS J. 160, 161 (2014). 27 Aaditya Mattoo, Dealing with Monopolies and State Enterprises: WTO Rules for Goods and Services in STATE TRADING IN TWENTY FIRST CENTURY 37 (Thomas Cottier and Petros Mavroidis (eds), 1998).

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unilateral (and often unjustified) standards and practices, which are already widespread across WTO Members, in labelling countries as NMEs.28 Pending the resolution of the fundamental issue above, a more pressing challenge concerns how the existing WTO rules may be applied to tackle China’s unique economic structure and state capitalism. In this regard, Robert Lighthizer, the US Trade Representative, has stated: in the face of market distortions to arrive at free and fair competition … we must be proactive … and that we must use all instruments we have to make it expensive to engage in non-economic behavior, and to convince our trading partners to treat our workers, farmers, and ranchers fairly. … there is one challenge on the current scene that is substantially more difficult than those faced in the past, and that is China. The sheer scale of their coordinated efforts to develop their economy, to subsidize, to create national champions, to force technology transfer, and to distort markets in China and throughout the world is a threat to the world trading system that is unprecedented. Unfortunately, the World Trade Organization is not equipped to deal with this problem. The WTO and its predecessor, the General Agreement on Tariffs and Trade, were not designed to successfully manage mercantilism on this scale. We must find other ways to defend our companies, workers, farmers, and indeed our economic system. We must find new ways to ensure that a market-based economy prevails.29

The statement conveys at least three important messages: (1) China’s economic reforms have not transformed China into a more market-oriented economy and have created more sophisticated challenges to the WTO; (2) the existing WTO rules are not adequate to cope with these challenges; and (3) the US will utilize all possible trade instruments in dealing with China. While these issues are subject to further debate, the statement encapsulates the US’ trade policy under the Trump Administration which is being carried out forcefully in various forms. These include, for example, the continued application of the NME Methodology or one similar to it in anti-dumping actions,30 the unilateral increase in tariffs on steel and aluminum imports targeting China’s overcapacity,31 and trade sanctions against

28

See generally Alexander Polouektov, Non-Market Economy Issues in the WTO Anti-Dumping Law and Accession Negotiations: Revival of a Two-tier Membership? 36(1) J. WORLD TRADE 1–37 (2002). 29 U.S. Trade Policy Priorities: Robert Lighthizer, United States Trade Representative, 4 (Centre for Strategic & Int’l Studies, Sep. 18, 2017), https://csis-prod.s3.amazonaws.com/s3fs-public/ publication/170918_U.S._Trade_Policy_Priorities_Robert_Lighthizer_transcript.pdf? kYkVT9pyKE.PK.utw_u0QVoewnVi2j5L. 30 Matthew R. Nicely and Brian Gatta, U.S. Trade Preferences Extension Act (TPEA) of 2015 Could Lead to Increased Use of ‘Particular Market Situation’ in Calculating Normal Value in Anti-Dumping Cases 11(5) GLOBAL TRADE & CUSTOMS J. 238–243 (2016). 31 The White House, Presidential Proclamation on Adjusting Imports of Steel into the United States (Mar. 8, 2018), https://www.whitehouse.gov/presidential-actions/presidential-proclamationadjusting-imports-steel-united-states/; The White House, Presidential Proclamation on Adjusting Imports of Aluminum into the United States (Mar. 8, 2018), https://www.whitehouse.gov/ presidential-actions/presidential-proclamation-adjusting-imports-aluminum-united-states/.

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China’s unfair trade practices relating to intellectual property rights32 and a concurrent WTO dispute against China’s infringement of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (“TRIPs”).33 Fundamentally, these actions demonstrate concerns about China’s economic system and dissatisfaction with the efficacy of the multilateral rules and system for dispute resolution. While the US actions and reactions by China and other countries will put the effectiveness of WTO rules to the test, any unilateral move or tit-for-tat measures undermining the WTO are destined to adversely impact the world trading system. Compared with the U.S., the EU took a more moderate approach. In the face of China’s challenge at the WTO, the EU amended its anti-dumping regulation by replacing the NME Methodology with a country-neutral methodology that is primarily aimed at addressing market distortions caused by state intervention (“Market Distortions Rule”).34 The EU Commission subsequently published a report providing a detailed analysis of market distortions in China according to the criteria contemplated in the amended regulation.35 The WTO-legality of the amended regulation will be examined in the China-EU dispute in accordance with a number of WTO rules on anti-dumping. The flexibility of these rules will therefore be tested in light of the relevant WTO jurisprudence including the latest jurisprudence in the EU—Biodiesel dispute.36 Towards this end, one has to question whether anti-dumping has been over-used or even abused in dealing with China, and whether other WTO rules could be employed. In particular, the WTO Agreement on Subsidies and Countervailing Measures37 (“SCM Agreement”) may be applied to address market distortions caused by subsidization through, for example, the grant of financial contributions to state-owned enterprises (“SOEs”) or to other entities via SOEs.38 More importantly,

32

Office of the U.S Trade Representative, President Trump Announces Strong Actions to Address China’s Unfair Trade (Mar. 22, 2018), https://ustr.gov/about-us/policy-offices/press-office/pressreleases/2018/March/president-trump-announces-strong. 33 Office of the U.S. Trade Representative, Following President Trump’s Section 301 Decisions, USTR Launches New WTO Challenge Against China (Mar. 23, 2018), https://ustr.gov/about-us/ policy-offices/press-office/press-releases/2018/March/following-president-trump%E2%80%99ssection. 34 Regulation (EU) 2017/2321 of the European Parliament and of the Council of 12 December 2017 amending Regulation (EU) 2016/1036 on Protection Against Dumped Imports From Countries Not Members Of The European Union and Regulation (EU) 2016/1037 On Protection Against Subsidised Imports From Countries Not Members Of The European Union, 2017 O.J., (L338/1). 35 European Commission, Commission Staff Working Document on Significant Distortions in the Economy of People’s Republic of China for the Purposes of Trade Defence Investigations, SWD (2017) 483 final (Dec., 20, 2017). 36 Appellate Body Report, European Union—Anti-Dumping Measures on Biodiesel from Argentina, WTO Doc. WT/DS473/AB/R (adopted Oct., 6, 2016). 37 Agreement on Subsidies and Countervailing Measures, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1869 U.N.T.S. 14. 38 See generally Julia Ya Qin, WTO Regulation of Subsidies to State-Owned Enterprises (SOEs) – A Critical Appraisal of the China Accession Protocol 7(4) J. INT’L ECO. L. 863–919 (2004).

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China’s WTO accession instruments have imposed some very broad WTO-plus commitments which may well provide the flexibility to address China-related challenges.39 Most of these commitments have not been invoked so far and therefore need to be tested before the concern on the inadequacy of WTO rules can be justified.

6 The Structure of the Book The book includes twelve chapters (including this introductory chapter and a conclusion) which contribute to the discussions of the issues outlined above. James Nedumpara and Archana Subramanian (Chapter “China’s Long March to Market Economy Status: An Analysis of China’s Protocol of Accession and Member Practices”) open the discussion by addressing many of the issues. Their chapter reviews the accession of NMEs to the GATT, the creation of the special anti-dumping rule under the GATT, and how Section 15 of China’s Accession Protocol should be interpreted and applied after the 15-year deadline. In addition, the Chapter “China’s Long March to Market Economy Status: An Analysis of China’s Protocol of Accession and Member Practices” provides an overview of the anti-dumping laws and practices against China in six major jurisdictions including the US, the EU, India, Australia, Brazil, and Canada. On the status of China’s economy, Jorge Miranda (Chapter “How China Did not Transform into a Market Economy”) argues that many features of the Chinese economy continue to demonstrate high levels of state intervention and market distortions which disqualify China from a market economy. However, Xuewei Feng (Chapter “The Termination of the Grand Father Clause in China’s Accession Protocol and the Normal Value Construction After Fifteen Years of Accession”) points out that there is no general WTO rule on NMEs and that the existence of SOEs and subsidies in an economy does not mean that the economy is an NME. As far as Section 15 is concerned, Feng treats Section 15(a)(ii) as an “enabling clause” and argues that the expiration of the “enabling clause” has removed the legal basis for the application of the NME Methodology. Feng further argues that market distortions caused by SOEs and subsidies are better addressed under the SCM Agreement rather than the Anti-Dumping Agreement. Katarzyna Kaszubska (Chapter “Double Remedy: Beyond the Non-market Economy Status”) takes a step further to analyse the use of both anti-dumping and countervailing measures against NMEs, showing convincingly that such practice is likely to lead to double remedies which are prohibited under the WTO law. Mukesh Bhatnagar and Pallavi Arora (Chapter “External Benchmark Choices in Anti39

See generally Chinese Accession Protocol, supra note 1, arts. 5.1, 6.1, 9.1, 10.2 and 11.3; Working Party Report, supra note 18, ¶¶ 42, 62, 324–336. For a detailed discussion of the WTO-plus obligations, see Julia Ya Qin, ‘WTO-Plus’ Obligations and Their Implications for the World Trade Organisation Legal System 37(3) J. WORLD TRADE 483–522 (2003).

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dumping and Countervailing Duty Proceedings: A Battle of ‘Proxies’?”) examine the use of external benchmarks in anti-dumping and countervailing duty investigations especially in the context of the Panel and the Appellate Body rulings in EU —Biodiesel. Weihuan Zhou (Chapter “The Issue of ‘Particular Market Situation’ under WTO Anti-dumping Law”) discusses the particular market situation (“PMS”) method under the Anti-Dumping Agreement and the issues relating to its interpretation and application. These issues are attracting growing attention due to the increasing importance of the PMS method (as a convenient alternative for the NME Methodology) and the lack of WTO jurisprudence on it. The subsequent four chapters provide a comprehensive review of the anti-dumping laws and practices in the US, the EU, Mexico, and India. Moushami Joshi (Chapter “Shifting Sands: The Evolution and Future Course of U.S. Antidumping Law and Practice against China and Vietnam”) discusses in detail the evolvement of the US anti-dumping law and practice against NMEs particularly China and Vietnam, and their latest developments including the increasing use of the PMS method. Edwin Vermulst and Juhi Dion Sud (Chapter “Treatment of China in EU Anti-dumping Investigations Post-December 2017: Plus ça change, plus c’est la même chose”) provide a thorough discussion of the EU law and practice in dealing with NMEs particularly China, including the old NME standards and the current Market Distortions Rule, and their WTO-consistencies. Amrita Bahri (Chapter “Treatment of Non-market Economies in Anti-dumping Proceedings: The Mexican Approach”) focuses on the approaches taken by the Mexican anti-dumping agency in adopting, in her words, a nuanced approach to the treatment of NMEs. Sanjay Notani, Parthasarthi Jha and Rishab Raturi (Chapter “‘Rebuttable Presumption’ to ‘Refutable Assumption’: An Assessment of Market Economy Treatment by the Indian Designated Authority from 1995 till 2018”) provides a survey of leading Indian anti-dumping investigations and practices involving NMEs by reviewing the cases against China and other countries in the last two decades. It should be noted that a number of chapters in the book discuss the importance of the Appellate Body ruling in the EU—Biodiesel dispute. This decision has important implications for the use of external benchmarks or, rather, surrogate values and data in trade remedy cases against NMEs in the future. How the ruling is interpreted has far-reaching implications for whether the Anti-Dumping Agreement is sufficiently flexible to allow the use of anti-dumping measures to tackle state intervention and market distortions, and hence whether WTO Members need to explore the flexibility of other WTO rules in dealing with NMEs. Finally, in Chapter “Conclusion”, we attempt to piece together the various strands of arguments spread out in this wide canvass and set out the path which most anti-dumping agencies are likely to adopt against China and similar economies.

China’s Long March to Market Economy Status: An Analysis of China’s WTO Protocol of Accession and Member Practices James J. Nedumpara and Archana Subramanian

Abstract The debate on the market economy status of China is possibly one of the most critical issues in the field of international trade law. While the use of non-Chinese costs and prices in anti-dumping proceedings hinges on the interpretation of Section 15 of China’s Protocol of Accession, individual WTO Members have undertaken peculiar and ingenious methods to address State intervention in the Chinese market. This chapter discusses the legal nuances of the debate on Section 15 and argues that despite the expiry of Section 15 (a)(ii), the use of surrogate prices can be justified through reliance on the surviving parts of Section 15. The chapter also analyses country specific practices of key anti-dumping users to determine the different practices adopted by these Members to continue rejection of Chinese costs and prices, even after December 11, 2016. Keywords China Surrogate method


Accession protocol
Anti-dumping
Non-market economy

The authors are grateful to Weihuan Zhou, Jorge Cerdio, Unnati Ashish Ghia, Anton Cooray, D. P. Mohapatra, Sanjay Notani, Amrita Bahri, Shruti Ramakrishnan and Bradly Condon for their comments and suggestions on the previous draft versions of this chapter. The authors are solely responsible for any mistakes. The views expressed in this chapter represent the views of the authors and cannot be attributed to their institutions. J. J. Nedumpara (&)
A. Subramanian Centre for Trade and Investment Law, Indian Institute of Foreign Trade, New Delhi, India e-mail: [email protected] A. Subramanian e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2018 J. J. Nedumpara and W. Zhou (eds.), Non-market Economies in the Global Trading System, https://doi.org/10.1007/978-981-13-1331-8_2

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1 Introduction The Polish golf cart dispute is a well-known tale in anti-dumping.1 In the early 1970s, Pezetal, a Polish manufacturer of aviation industry products and electric golf carts, started exporting its Melex golf carts to the United States (“U.S.”). In 1970, Elektrim, Pezetal’s predecessor, exported just eight such golf carts to the United States, which hardly foreshadowed the kind of success Pezetel would experience in the future. Slowly, the Melex golf carts (known in the name of Pezetel’s distributor) made its inroads into the beautifully manicured suburban American golf courses. By 1974, Pezetal had 19 percent of the market share in golf carts in the United States.2 American companies, including Harley Davidson, alleged that the Polish golf carts were ‘dumped’ into the United States and were sold ‘below cost’. According to the U.S. domestic industry, the Polish manufacturer had proffered prices for golf carts, which were significantly below the prices charged for comparable golf carts by domestic manufacturers. The complaints resulted in an anti-dumping investigation against Pezetal.3 Strangely enough, Poland did not have golf courses and consequently no local golf cart sales. It transpired that the golf carts were produced in Poland solely and exclusively for the U.S. market. The U.S. Treasury Department (“U.S. Treasury” or “Treasury Department”), which was then responsible for dumping determinations, faced certain hard questions: how can the production costs of goods be determined in an economy which is state-controlled and where there is no free market to set a fair price? Can prices from other jurisdictions be used? Ultimately, the U.S. Treasury had to rely upon the price of a Canadian manufacturer to determine the foreign market value of golf carts.4 Interestingly, the U.S. Treasury had only the data for carts that are similar to golf carts and had to work back to construct the data for Polish golf carts.5 Several trade policy mandarins criticized this approach. The golf cart industry also witnessed major changes in the intervening period. In subsequent anti-dumping investigations on golf carts, the U.S. Treasury could not rely upon the golf cart prices in Canada as the only Canadian manufacturer had exited by that time. The U.S. Treasury and Customs Service Officials visited the Pezetal plant in Mielec and reviewed the company’s books and pricing information. As one official noted,

1

Electric Golf Carts from Poland, Inv. No. AA1921-147, USITC Pub. 740 (September, 1975) (Final) [hereinafter Electric Golf Carts Case]. See James J. Nedumpara and Archana Subramanian, China and the Non-Market Economy Treatment in the Anti-Dumping Cases: Can the Surrogate Price Methodology Continue Post – 2016, 4(2) J. INT’L & COMP. L. 253,278 (2017). 2 Outboard Marine Corporation v. Pezetel & Ors., 535 F. Supp. 248 (D. Del. 1982). 3 Electric Golf Carts Case, supra note 1. 4 Id. 5 Ronald A. Cass and Stephen J. Narkin, Anti-dumping and Countervailing Duty Law: The United States and the GATT in DOWN IN THE DUMPS: ADMINISTRATION OF THE UNFAIR TRADE LAWS 215 (Richard Botluck eds., 1991).

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the books were “more of the Charles-Dickens-and-quill-pen school of accounting”6 and were evidently ill-suited for being taken seriously. The Treasury Department facing criticism for its approach and being under compulsion to improvise their methodology for the calculation of normal value, used a “constructed” fair price based on the Polish manufacturer’s factors of production based on data from a third country. For inputs such as labour, raw materials, administrative and selling expenses, the Treasury Department valued the prices in Spain—a country which they considered similar and comparable to Poland in its economic development. Under this methodology, the Treasury Department used the value of each factor input (for example, the raw materials such as steel and rubber, hours of labour and inputs of energy) from Spain. The calculation of factor inputs was made at Spanish price levels and, in addition, certain statutorily mandated amounts were added for overheads and profit. In essence, these labyrinthine steps were followed to simulate or approximate what the Polish producers’ manufacturing costs and prices would have been had it been operating in a market economy of comparable development.7 This practice literally meant breaking down and shoe-horning a multiplicity of cost factors to construct a hypothetical fair price for the product concerned. The Polish Golf cart case portrays the absurdities and at the same time the helplessness in choosing an appropriate methodology in dealing with an enigma known as the non-market economies (“NMEs”). It also explains how certain countries considered the concept of trade from NMEs as almost antithetical to the concept of ‘fair trade’. Examples have also been used to highlight how disconnected the NME enterprises are from the world of free market.8 But it is a fact that NMEs are not a homogenous group by any stretch of imagination; it ranges from the vast and powerful China (arguably an NME) to the tiny Albania (again arguably). More over, the GATT or even its successor WTO agreements, as we shall explain in this chapter, do not take away the right of a WTO Member to label another Member as an NME provided they satisfy certain domestically determined criteria. The treatment of NMEs in trade contingent remedies has a long history. There is evidence that this practice has been used since the days of the anti-dumping investigation on Bicycles from Czechoslovakia which dates back to 1960.9 In this case the U.S. Treasury merely looked at the home market price or the export price of similar merchandise. In this regard, the Polish Golf cart case is significant, because this case gave rise to the surrogate country methodology which was innovative by all means.

6

David A. Andelman, The Polish Golf Carts are No Toke, N.Y.TIMES (Jan 28, 1979). Note, Dumping from ‘Controlled Economy’ Countries: The Polish Golf Cart Case, 11 L. & POL’Y INT’L. BUS 771 (1979). 8 Dwight H. Perkins, Economic Transformation of China (World Scientific Publishing Co., 2015); Letter from Sen. Sherrod Brown to President Donald Trump (May 16, 2017), available at www. brown.senate.gov. 9 Bicycles from Czechoslovakia, 25 Fed. Reg. 9,782 (Dep’t Treas., 1960) (final deter.). 7

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The discussion on NME has gained recent publicity in view of China and its market economy status. But China was not the only country that was treated as an NME in the six decades of application of this practice.10 Countries such as Albania, Bulgaria, Cambodia, Czechoslovakia, Hungary, Mongolia, Poland, Romania, Soviet Union (and subsequently several CIS countries), and Vietnam were also subject to this treatment in anti-dumping investigations, especially during the GATT days on the presumption that excessive state interference had rendered the domestic prices for most commodities in these countries, extremely unreliable. Considering that the major users of anti-dumping had no incentive to discipline the concept of NME, there were no major initiatives to define or contextualize the term ‘NME’ in the Uruguay Round or the subsequent negotiations.11 Furthermore, the overwhelming perception within the international trade community was that NME as a concept has the potential of slowly slipping into irrelevance with most of the command and control economies widely adopting capitalist oriented economic policies. This view is easily contestable, and explains why there should be a book on NMEs in this age and time. Among the major economies, only China and Russia were subject to this treatment after the establishment of the WTO. While Russia received market economy status from the United States and the European Union in 2002 (almost ten years ahead of its WTO accession),12 the WTO Members retained the ability to treat China as an NME for a period of 15 years—a period which is widely disputed now and the subject matter of this chapter and generally this book —from its accession to the WTO in 2001. December 11, 2016, marked the 15th anniversary of China’s accession to the WTO. On the next day itself, i.e. on December 12, 2016, China requested consultations with the United States and the European Union under the WTO dispute settlement understanding (DSU).13 According to China, the use of NME treatment against Chinese exporters beyond December 11, 2016 is a breach of negotiated terms under the WTO.14 While a panel has been established in the complaint

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Other NME countries included Albania, Bulgaria, Czechoslovakia, Hungary, Korea, Mongolia, Poland, Romania, Soviet Union, and Vietnam. 11 Vera Thorstensen, Daniel Ramos Carolina Muller, Fernanda Bertolaccini, WTO – Market and Non-Market Economies: a hybrid case of China, 1(2) LATIN AM. J. INT’L L., 765, 772 (2013). 12 See U.S. Dep’t Com., Department of Commerce announces Market Economy Status for the Russian Federation (Jun. 6, 2002), https://www.trade.gov/media/PressReleases/may2002/ russianMESannounce_060602.html; EU Commission, EU announces formal recognition of Russia as ``Market Economy'' in major milestone on road to WTO membership (May 29, 2002), http://europa.eu/rapid/press-release_IP-02-775_en.htm. 13 Request for Consultations by China, European Union — Measures Related to Price Comparison Methodologies, WTO Doc. WT/DS516/1 (Dec. 12, 2016) [hereinafter China — EU Consultations]; Request for Consultations by China, United States — Measures Related to Price Comparison Methodologies, WTO Doc. WT/DS515/1 (Dec. 12, 2016) [hereinafter China — US Consultations]. 14 China — EU Consultations, ¶ 4; China — US Consultations, ¶ 3.

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against the European Union and the written submissions of the parties have already been filed,15 the complaint against the United States is yet to progress.16 This chapter seeks to examine the controversy involving the use of NME or surrogate methodologies against China in anti-dumping proceedings from a WTO standpoint. Section 2 of the chapter discusses the legal basis and application of NME methodologies under the GATT/WTO. In particular, this part examines the background and use of the ‘surrogate country’ method against China. Section 3 of this chapter examines the provisions of China’s Protocol of Accession, 2001 (hereinafter “Protocol of Accession” or “Accession Protocol) and the possible interpretations of the Protocol. A major focus of this chapter is on Section 15 of the Protocol of Accession. Section 4 provides a critical review of the practice of the key users of anti-dumping such as the United States, European Union, India, Brazil, Canada, and Australia in relation to China. Section 5 examines the implications of EU—Biodiesel,17 a recent WTO case which as several authors in this book and elsewhere have argued, could determine the future or perhaps the further improvisation of the surrogate country methodology. Section 6 summarizes the discussions.

2 State-Controlled Economies, Dumping and NME Status The construct of NME is specific to anti-dumping under the GATT/WTO. However, this term is nowhere defined in any GATT or WTO agreements (i.e. the WTO covered agreements) or other related instruments. Particularly in relation to products originating from NMEs, it has been a practice to ignore the domestic costs and prices of the concerned product.18 The underlying presumption was that the costs and prices in state-controlled economies are unreliable. The Agreement on Implementation of Article VI of the GATT (referred to as the Anti-dumping Agreement) under the WTO lays emphasis on the use of domestic

15

The WTO panel was established on April 3, 2017, see World Trade Organization, European Union — Measures Related to Price Comparison Methodologies, DS516, https://www.wto.org/ english/tratop_e/dispu_e/cases_e/ds516_e.htm. 16 As of April 30, 2018. 17 Appellate Body Report, European Union — Anti-Dumping Measures on Biodiesel from Argentina, WTO Doc. WT/DS473/AB/R (adopted Oct. 26, 2016) [hereinafter EU — Biodiesel (AB Report)]. 18 The policy reasons underlying dumping include curtailing price discrimination and protection of domestic industries from unfair competition, by discouraging excessively low pricing of imported goods. Anti-dumping is a trade remedy to deal with ‘dumping’ which is said to have occurred when an exporter introduces goods in the markets of the importing country at a price less than that of the like product in the domestic market of the exporter. The price of the product in the domestic market of the exporter, in the ordinary course of trade, is often referred to as the ‘normal value’.

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costs and prices of the producers in anti-dumping investigations.19 In fact, the use of domestic costs and prices was a contentious issue even in the early days of the GATT. A special provision, viz. Article VI (b) was inserted in the GATT after the 1954-55 Review Session based on a proposal from Czechoslovakia (then a communist state) to amend Article VI: 1(b) of the GATT 1947.20 The outcome of this proposal was not an amendment but the insertion of an Ad Note to Article VI of the GATT.21 Czechoslovakia’s proposal was to seek legitimacy for a different type of economic structure within the GATT which had tacitly embraced a capitalist philosophy. Czechoslovakia also wanted to preempt the discriminatory use of anti-dumping actions against command and state-controlled economies. More specifically, the purpose of the Ad Note was to avoid comparison of an administratively determined domestic price in command economies against an export price that reflected market conditions.22 In 1955, the GATT Council adopted an interpretative Ad Note23 to Article VI (“Second Ad Note to GATT Article VI” or “Second Ad Note”), which recognized that in case of imports from a country which “has a complete or substantially complete monopoly of trade and all domestic prices are fixed by the State”, the importing parties need not resort to a “strict comparison with domestic prices”.24 The significance of the Second Ad Note is that it impliedly gave rise to the concept of NME in GATT and an acknowledgement that the signatories to the GATT may have different, yet other forms of legitimate economic structures.25 In other words, Czechoslovakia’s proposal only highlighted the “inappropriateness” of a strict comparison with domestic price as a basis for dumping margin calculation. Coincidentally, the Second Ad Note did not provide a

19

Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1869 U.N.T.S. 201 (1994), art. 2.2.1 [hereinafter Anti-Dumping Agreement]. 20 GATT Secretariat, Proposal by the Czechoslovakian Delegation Relating to Article VI, WTO Doc. W9/86/Rev.1 (Dec. 21, 1954). 21 The purpose of the Ad Note is to further explain the GATT provisions. 22 Jorge Miranda, Interpreting Paragraph 15 of China’s Protocol of Accession, 9(3) GLOBAL TRADE & CUSTOMS J. 94, 95 (2014). 23 The “Ad” Articles are interpretative notes relating to specific articles of the GATT; See Carol J. Beyers, The U.S./Mexico Tuna Embargo Dispute: a Case Study of the GATT and Environmental Progress, 16 MD. J. INT’L L. 229, 237 (1992). 24 Anti-dumping Agreement, supra note 19, Note 2, Paragraph 1, Interpretative Note Ad Article VI from Annex I. It states, It is recognized that, in the case of imports from a country which has a complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the State, special difficulties may exist in determining price comparability for the purposes of paragraph 1, and in such cases importing contracting parties may find it necessary to take into account the possibility that a strict comparison with domestic prices in such a country may not always be appropriate. 25

Mark Wu, The WTO and China’s Unique Economic Structure in REGULATING THE VISIBLE HAND?: THE INSTITUTIONAL IMPLICATIONS OF CHINESE CAPITALISM 319 (Benjamin L. Leibman eds., 2016).

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preferred or recommended methodology for the determination of the domestic prices for comparison with export prices.26 In reality, the Second Ad Note to Article VI permitted a flexibility to users of anti-dumping which was susceptible to widespread misuse. While the Second Ad Note only recognized the concept of NMEs, over time, the GATT Contracting Parties and later the WTO Members rendered their own versions or adaptations of a definition of NME in their domestic legislation. While there is no legal definition for NME under the GATT/WTO other than a vague language in the Second Ad Note to Article VI, it is generally understood to be an economy wherein the State seeks to determine various economic activities through central planning and fixation of economic factors such as prices, costs, raw materials, and investment allocations.27 The definition of NME under the respective national laws also varied significantly. While the United States28 takes into consideration factors such as currency convertibility, the extent of free bargaining between labour and management in wage fixation, the extent of state planning and the presence of market forces in the economy,29 these considerations are not expressly reflected in the definitions given by other jurisdictions such as India and the EU.30 The Second Ad Note that permitted a departure from a strict comparison with domestic prices evolved into a trade law instrument of ubiquitous practice and a special trade law implement to deal with communist or ex-communist countries. Surrogate country prices were often based on factors of production such as land, labour, capital and utility costs borrowed from companies and countries that were not even remotely connected to, or reminiscent of, the producers and exporters under investigation.31 The surrogate country price approach was first applied against China in the investigation on Natural Menthol—a case where the U.S. Department of Commerce (“Department of Commerce” or “USDOC”) chose

26

Miranda, supra note 22, at 95. United Nations Conference on Trade and Development, Glossary of Custom Terms, http://www. asycuda.org/cuglossa.asp?term=market+economy. 28 The United States typically applies six statutory criteria which are: (i) free currency convertibility; (ii) wages determined by labour market; (iii) openness to foreign investments; (iv) Government ownership or control over means of production, (v) allocation of resources and price; and (vi) output decisions of enterprises. See Tariff Act, 19 U.S.C, § 1677b(c)(4) (1930), § 771 (18)(b) [hereinafter Tariff Act]. 29 Gary Clyde Hufbauer and Cathleen Cimino-Isaacs, The Outlook for Market Economy Status for China, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS (Apr. 11, 2017) https://piie.com/blogs/ trade-investment-policy-watch/outlook-market-economy-status-china. 30 Government of India, Customs Notification No. 28/2001 - Cus (NT) (May 31, 2001)(Annexure III) and substituted vide Customs Notification No. 1/2002 (NT) (Jan. 1, 2002). European Commission, Council Regulation 1225/2009 of November 30, 2009, Protection against dumped imports from countries not members of the European Community 2009 O.J. (L 343/5) 1. 31 supra note 22. 27

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Paraguay as the surrogate country.32 The comparisons between the two economies are odd, but the Department of Commerce has used even stranger substitutions which include Bulgaria, Dominican Republic, Ecuador, Peru, and Thailand in investigations involving China. In the surrogate country approach, the importing country relies on the data from a market economy at a comparable level of economic development.33 The NME exporters or producers have no right as such to insist on the use of their company’s data to establish the normal value with certain possible exceptions such as the “factor price methodology” or the “market oriented industry” (also known as the “MOI” test applied in the United States) methodology.34 Precisely for this reason, the surrogate country approach represents a marked change in the determination of normal value and continues to draw criticism on account of the discretion available to importing WTO Members in their selection of a surrogate country.35 The problem is further compounded by the lack of data availability and cooperation from producers of the surrogate country, thereby allowing the WTO Member to substitute with another surrogate country, which may not always offer the best comparison.36 Furthermore, the surrogate methodology apparently denies the NME producers the advantages enjoyed by them, for example, easier access to large pool of market resources, technology, cheap labour and other economic endowments, which may not be available to producers in the surrogate market.37 China’s current dispute with the U.S. and the EU in the WTO is a result of an extensive use of the surrogate country methodology against Chinese imports in anti-dumping proceedings, and especially its continued use after December, 2016. The basis for the use of the surrogate country methodology is contained in China’s Protocol of Accession. The next section of this article provides a detailed examination of the Protocol of Accession.

32

Final Determination of Sales at Less Than Fair Value: Natural Menthol from the People’s Republic of China 46 Fed. Reg. 24614 (U.S. Dep’t Com., 1981)(final determ.); See William P Alford, When is China Paraguay? An Examination of the Application of the “Non-Market Economies, 61 SOUTHERN CAL. L. REV., 79 (1987). 33 Michelle Zang, ‘The WTO Contingent Trade Instruments against China: What Does Accession Bring?, 58(2) THE INT’L & COMP. L. Q. 321, 329 (2009); see also Richard Lockridge, Doubling Down on Market Economies: The Inequitable Application of Trade Remedies Against China and the Case for a New WTO Institution, Southern Cali. Interdisc. L. J. 249, 258 (2014). 34 Folkert Graafsma & Elena Kumashova, ‘In re China’s Protocol of Accession and the AntiDumping Agreement: Temporary Derogation or Permanent Modification’, 9(4) GLOBAL TRADE & CUSTOMS J. 154 (2014); Judhith H. Bello et al., Searching for Bubbles of Capitalism: Application of U.S. Anti-dumping and Countervailing Duty Laws to Reforming Nonmarket Economies, 25 GEORGE WASHINGTON J. INT’L ECO. L 665, 692–705 (1992). 35 Zang, supra note 33, at 329. 36 Aaron Ansel, ‘Market Orientalism: Reassessing an Outdated Anti-Dumping Policy Towards the People’s Republic of China’ 35(3) BROOK. J. INT’L L., 883, 889 (2010). 37 Zang, supra note 33, at 330.

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3 China’s Protocol of Accession: Continuing Use of Surrogate Country Prices The involvement of the Chinese government in the Chinese economy was a major concern during China’s accession negotiations in the WTO.38 The State’s presence and dominance in various critical sectors and economic activities was unmistakable and state assets were heavily deployed in state owned entities (“SOEs”). Banks and financial institutions also played quasi-governmental functions. In a statement to the Working Party, the representative of China undertook that the “Government of China would not influence, directly or indirectly, in commercial decisions on the part of state-owned or state-invested enterprises, including on the quantity, value or country of origin of any goods purchased or sold, except in a manner consistent with the WTO Agreement”.39 In short, China’s accession instruments indicate a clear commitment on China’s part in transitioning to a market economy. Once a country has joined the WTO, the discriminatory use of anti-dumping methodologies based on the market economy conditions could be a violation of the non-discrimination obligation. In legal terminology, it is a derogation from the WTO obligations. While Articles VI:1 and VI:2 of the GATT permit a possibility of the rejection of non-market economy costs and prices in individual cases, it may not form the basis for having a sustained and preordained position against a country, namely, China in this case. This is perhaps a reason why the WTO Members specifically negotiated a provision for continuing to treat China as an NME. However, Section 15 of the Protocol of Accession was a special category. Section 15 (a) permits other WTO Members to use a methodology that is not based on Chinese costs or prices for price comparisons subject to the conditions specified in sub-paragraphs (a)(i) and (a)(ii). The provision also provided for a sunset or expiry clause in 15 (a) (ii). The relevant parts of Section 15 reads as follows: Section 15 (a) In determining price comparability under Article VI of the GATT 1994 and the Anti-Dumping Agreement, the importing WTO Member shall use either Chinese prices or costs for the industry under investigation or a methodology that is not based on a strict comparison with domestic prices or costs in China based on the following rules: (i) If the producers under investigation can clearly show that market economy conditions prevail in the industry producing the like product with regard to the manufacture, production and sale of that product, the importing WTO Member shall use Chinese prices or costs for the industry under investigation in determining price comparability;

Michael Flynn, China: A Market Economy, 48 GEO. J. INT’L L. 297, 320 (2016). Working Party on the Accession of China, Report of the Working Party on the Accession of China, WTO Doc. WT/ACC/CHN/49 (Oct. 1, 2001) at 46 [hereinafter China’s Working Party Report]. 38 39

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J. J. Nedumpara and A. Subramanian (ii) The importing WTO Member may use a methodology that is not based on a strict comparison with domestic prices or costs in China if the producers under investigation cannot clearly show that market economy conditions prevail in the industry producing the like product with regard to manufacture, production and sale of that product. … (d) Once China has established, under the national law of the importing WTO Member, that it is a market economy, the provisions of subparagraph (a) shall be terminated provided that the importing Member’s national law contains market economy criteria as of the date of accession. In any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession. In addition, should China establish, pursuant to the national law of the importing WTO Member, that market economy conditions prevail in a particular industry or sector, the non-market economy provisions of subparagraph (a) shall no longer apply to that industry or sector.

Section 15 (a) provides for two methodologies to determine the prices for comparison with the export price in anti-dumping investigations: (i) under the normal methodology, domestic Chinese prices shall be used if the Chinese producers under investigation are able to show that market economy conditions prevail; and (ii) under the special methodology, non-Chinese costs and prices will be used if market economy conditions are not established. The chapeau of Section 15 (a) permits the use of a methodology, which is not based on a strict comparison with Chinese costs and prices. Since the chapeau does not prescribe an alternative to Chinese costs and prices, the alternative to Chinese costs and prices has to be the surrogate country methodology. It must be noted that both the Second Ad Note of Article VI and Section 15 (a) of the Protocol of Accession use the terms, “not based on a strict comparison with domestic prices”. In other words, both the Second Ad Note and Section 15(a) provide for the use of special methodologies, but with important differences. While Section 15 (a) of the Protocol of Accession does not provide the specifics of ‘market economy conditions’, the Second Ad Note permits the use of non-Chinese costs and prices only in an extreme case i.e. the government has a complete or near complete monopoly of trade and controls all domestic prices. Furthermore, Section 15 (a) places a rebuttable presumption of NME on Chinese producers and exporters, whereas the Second Ad Note merely sets out an extreme form of NME.40 While the market economy status of China could be a matter of discussion, the essence of China’s consultation request with the United States and the European Union is that with the expiration of Section 15 (a)(ii), the application of the special methodology is no longer tenable. The basis of this view is the second sentence of Section 15 (d) of the Protocol of Accession, which states, “in any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession” (emphasis added). Further, China contends that after December 11, 2016, the provisions of the Anti-dumping Agreement and the GATT 1994 that ordinarily

Miranda, supra note 22, at 97; see also Mark Wu, The ‘China, Inc.’ Challenges to Global Trade Governance, 57 HARV. J. of INT’L L. 261, 306 (2006). 40

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apply to the determination of normal value for other WTO Members must apply to imports from China without derogation or qualification.41 There have been numerous commentaries and scholarly pieces concerning the interpretation of Section 15 of the Protocol of Accession.42 In this chapter, the authors have attempted to set out the various strands of interpretations regarding Section 15 and the course of action WTO Members can legitimately pursue until an authoritative opinion is available on this topic.

3.1

Surrogate Country Treatment and Sunset Clause

The most important question in China’s NME imbroglio is whether the surrogate country treatment or what is explained as special methodologies should cease to operate after December 11, 2016. Until this date, most of the anti-dumping agencies of WTO Members applied the surrogate price only after providing the producers or exporters an opportunity to demonstrate that market economy conditions existed in the sector producing the like product. This was based on Section 15 of the Protocol of Accession. If Chinese manufacturers were unable to show that the market economy conditions exist, the surrogate prices were used. The application of either methodology was contingent and dependent on the satisfaction of the condition provided in the relevant subparagraphs of 15 (a).43 It is possible to argue that the language of Section 15 (a)(i) is in the nature of an either/or binary. The two binaries available are: Chinese costs and prices, and nonChinese costs and prices. If the question is phrased this way, one interpretation of Section 15 (a)(i) would indicate that if Chinese producers are not able to clearly show that market economy conditions prevail in the industry, there is no obligation on the investigating agency to use Chinese costs and prices; as a logical corollary,

China — US Consultations, supra note 13; China — EU Consultations, supra note 13. See Jorge Miranda, More on Why Granting China Market Economy Status after December 2016 Is Contingent upon Whether China Has in Fact Transitioned into a Market Economy 11(5) GLOBAL TRADE & CUSTOMS J. (2016); Bernard O’Connor, ‘Much Ado About Nothing’: 2016, China and Market Economy Status 10 (5) GLOBAL TRADE & CUSTOMS J. (2015); Matthew Nicely, Time to Eliminate Outdated Non-market Economy Methodologies 9(4) GLOBAL TRADE & CUSTOMS J. (2014); Brian Gatta, Between ‘Automatic Market Economy Status’ and ‘Status Quo’: A Commentary on ‘Interpreting Paragraph 15 of China’s Protocol of Accession’ 9(4) GLOBAL TRADE & CUSTOMS J. (2014), Rao Weijia, China’s Market Economy Status under WTO Anti-dumping Law After 2016, 5 TSINGHUA CHINA L. REV. 151, 162 (2013); Li Zhenghao, Interpreting Paragraph 15 of China’s Accession Protocol in Light of the Working Party Report, 11(5) GLOBAL TRADE & CUSTOMS J. (2016), Theodore R. Posner, A Comment on Interpreting Paragraph 15 of China’s Protocol of Accession 9(3) GLOBAL TRADE & CUSTOMS J. (2014); James J. Nedumpara and Archana Subramanian, China and the Non-Market Economy Treatment in the Anti-Dumping Cases: Can the Surrogate Price Methodology Continue Post – 2016, 4(2) J. INT’L & COMP. L., 253, 278 (2017). 43 Rao Weijia, id., at 162. 41 42

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Scenario I: Chinese exporter clearly shows that ME conditions prevails in the industry. Scenario II: Chinese exporter cannot clearly show that ME conditions prevail in the industry.

J. J. Nedumpara and A. Subramanian

Outcome Mandatory use of Chinese domestic costs and prices. Outcome The investigating agency (IA) is not bound to use Chinese domestic costs and prices. What the IA should do is not very clear. However, a reference to the chapeau of Section 15 would imply that the surrogate methodology could be applicable.

Fig. 1 Scenarios under Section 15 (a)(i)

Scenario I: Outcome Chinese exporter cannot clearly show that The investigating agency (IA) may use a ME conditions prevail in the industry. method which is not based on Chinese domestic costs and prices. In other words, the IA can use third country prices/surrogate prices or constructed value Fig. 2 Scenario(s) under Section 15 (a)(ii)

non-Chinese costs and prices—or surrogate prices—could be used. China’s lynchpin is the second sentence of Section 15 (d), which mandates that the scenario identified in Fig. 2 would no longer exist.44 Stated differently, the scenario depicted by Fig. 2 ceases to exist. However, the reality is that the situation captured in Scenario II of Fig. 1 still exists. The latter scenario does not explicitly rule out the use of non-Chinese costs and prices or, in the other words, the surrogate price methodology itself. This aspect will be further explained below. The deletion of Section 15 (a)(ii) is of no consequence to the application of the surrogate country methodology. Even in the absence of this provision (which has now expired), the application of the special (or surrogate) methodologies is permissible under Section 15 (a)(i). There are several proponents of this view that in cases where the criteria under Section 15 (a)(i) are not met i.e. Chinese producers and exporters are unable to show that market economy conditions exist, WTO Members could continue to use the special methodologies.45 This view was, in a way, affirmed by the Appellate Body in EC–Fasteners (China), although the dispute was not directly on the use of surrogate country methodology in normal value calculation. The Appellate Body noted:

China — EU Consultations, supra note 13, ¶ 4. Bernard O’Connor, The Myth of China and Market Economy Status in 2016, WORLD TRADE LAW, 3, http://worldtradelaw.typepad.com/files/oconnorresponse.pdf.

44 45

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If Chinese producers are not able to “clearly show” that market economy conditions prevail in the industry in question, the importing WTO Member may use an alternate methodology that is not based on a strict comparison with domestic prices or costs in China, such as using surrogate third country or constructed normal value.46 (emphasis added)

An ‘a contrario’ interpretation of Section 15 (a)(i) of the Protocol of Accession also suggests the possibility that the option to use the surrogate methodology is inherent in Section 15 (a)(i).47 An ‘a contrario’ argument means an ‘argument from the contrary’; or based on a negative reasoning from another argument.48 Where Chinese producers are unable to prove market economy conditions i.e. they do not meet the requirement under subparagraph (a)(i), the default option is the use of non-Chinese costs and prices (i.e. the surrogate methodology), which is implicit in subparagraph (a)(i) itself. Thus, the surrogate methodology can find application without recourse to Section 15 (a)(ii) of the Protocol of Accession. In international law, effet utile or the “principle of effectiveness” is considered as one of the fundamental principles of treaty interpretation. This principle means that “a treaty interpreter is not free to adopt a meaning that would reduce parts of a treaty to redundancy or inutility.49 It stems from the Roman Law doctrine of ut res magis valeat quam pereat.50 Treaty interpretation is complex and no adjudicating Appellate Body Report, European Communities — Definitive Anti-Dumping Measures on Certain Iron or Steel Fasteners from China, ¶ 286, WTO Doc. WT/DS397/AB/R (adopted Jul. 28, 2011). 47 The so-called a contrario argument is fairly well accepted in the context of WTO jurisprudence. For example, in the examination of prohibited subsidies in the Illustrative List of the Subsidies and Countervailing Agreement, a contrario based arguments was used. In the Panel Report, Brazil — Export Financing Programme for Aircraft, ¶ 4.52, WTO Doc. WT/DS46/R (adopted Aug. 20, 1999), Brazil contended that under first paragraph of Item (k) of the Illustrative List, the payment by governments “of all or part of the costs incurred by exporters or financial institutions in obtaining credits” constitutes and export subsidy “in so far as they are used to secure a material advantage in the field of export credit terms.” According to Brazil, where the payments are not “used to secure a material advantage in the field of export credit terms, such payments do not constitute export subsidy”. In the Appellate Body Report, Brazil — Export Financing Programme for Aircraft Recourse by Canada to Article 21.5 of the DSU, ¶ 80, WTO Doc. WT/DS46/AB/RW (adopted Aug. 23, 2001), the Appellate Body noted as follows: 46

If Brazil had demonstrated that the payments made under the revised PROEX were not “used to secure a material advantage in the field of export credit terms”, and that such payments were “payments” of Brazil of “all or part of the cost incurred by exporters or financial institutions in obtaining credits”, then we would have been prepared to find that the payments made under the revised PROEX are justified under Item (k) of the Illustrative List. 48

AARON FELLMETH AND MAURICE HORWITZ, GUIDE TO LATIN IN INTERNATIONAL LAW, 36 (Oxford University Press, 2009). 49 Appellate Body Report, Australia — Subsidies provided to Producers and Exporters of Automotive Leather, Recourse to Article 21.5 of the DSU by the United States, ¶ 6.24, WTO Doc. WT/DS 126/RW (adopted Feb. 11, 2000). 50 The Latin maxim means, “it is better for a thing to have effect than to be made void”.

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body can render the whole of Section 15 inutile.51 The second sentence of Section 15 (d) only speaks about the expiry of Section 15 (a)(ii) and not the whole of Section 15 (a). Consequently, it can be argued that the chapeau and subparagraph (a)(i) of Section 15 continue to be in operation even after December 2016, and therefore the presumption of NME also continues. Admittedly, the standard rules of treaty interpretation provide that the terms of the treaty should be interpreted according to its terms and the interpreter must avoid attributing meaning to the terms.52 While applying effet utile principle a treaty interpreter is bound to give effect to all the terms of the treaty.53 Based on this interpretative approach, the interpreter should be able to uphold an interpretation that gives effect to the surviving clause of Section 15 (a) i.e. subparagraph (a)(i) which continues to allow the use of special methodologies if market economy conditions are not established by Chinese producers or exporters. The problem is, however, far from resolved. If the treaty interpreter seeks to uphold the remaining parts of Section 15, especially Section 15 (a)(i) and a major part of Section 15 (d), it could still lead to a virtual redundancy of the second sentence of Section 15 (d). There seems to be a clear conflict of obligations within these norms. This apparent conflict has to be either tackled or avoided by the adjudicating bodies. If the right to use the special methodologies is firmly tied only to Section 15 subparagraph (a)(ii), the interpreters will obviously have an answer. But as the Appellate Body has noted in a series of cases, the interpretative exercise must yield an interpretation that is harmonious and “sits comfortably in the treaty as a whole.”54 Such a holistic interpretation is not possible unless the whole of Section 15 and other provisions of the Protocol of Accession, including the relevant provisions of the WTO Agreements, are taken into consideration. The chapeau is a very important element in this enquiry.

Appellate Body Report, Canada — Measures Affecting the Importation of Milk and the Exportation of Dairy Products, ¶ 133, WTO Doc. WT/DS103/AB/R, WT/DS113/AB/R (adopted Oct. 27, 1999). 52 Appellate Body Report, EC — Measures Concerning Meat and Meat Products (Hormones), ¶ 181, WTO Doc. WT/DS26/AB/R (adopted Feb. 13, 1999) [hereinafter EC — Hormones (AB Report)]; Appellate Body Report, India —Patent Protection for Pharmaceutical and Agricultural Products, ¶ 45, WTO Doc. WT/DS50/AB/R (adopted Jan. 16, 1998). 53 Appellate Body Report, Japan — Taxes on Alcoholic Beverages, ¶ 12, WTO Doc. WT/DS8/AB/ R, WT/DS10/AB/R, WT/DS11/AB/R (adopted Nov. 1, 1998). 54 Appellate Body Report, United States — Continued Existence and Application of Zeroing Methodology, ¶ 268, WTO Doc. WT/DS 350/AB/R (adopted Feb. 19, 2009); See also Appellate Body Report, China — Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, ¶ 399, WTO Doc. WT/DS 363/AB/R (adopted Jan. 19, 2010). 51

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27

The Significance of the Chapeau of Section 15

The chapeau of Section 15 provides immediate context to interpretation of various sub-paragraphs. There is an overwhelming view that the chapeau to Section 15 (a) permits the use of special methodologies when it provides for the use of either Chinese prices or costs or a ‘methodology not based on a strict interpretation with domestic prices or costs’.55 Further, since the chapeau states that a price comparison should be ‘based on’ both subparagraphs (i) and (ii), even after the expiry of subparagraph (ii), the chapeau can continue to be read with the remaining parts of Section 15 (a) i.e. Section 15 (a)(i). The term ‘based on’ has been interpreted under several provisions of the WTO covered agreements. The ordinary meaning of this term refers to something that “stands” or is “founded” or “built upon” or “is supported by” by another.56 If the only trigger for the use of special methodology was subparagraph (a)(ii), then the chapeau should also have practically reflected that change after December 11, 2016 along the following suggested lines: (a) In determining price comparability under Article VI of the GATT 1994 and the Anti-Dumping Agreement, the importing WTO Member shall use either Chinese prices or costs for the industry under investigation. or a methodology that is not based on a strict comparison with domestic prices or costs in China based on the following rules: (i). If the producers under investigation can clearly show that market economy conditions prevail in the industry producing the like product with regard to the manufacture, production and sale of that product, the importing WTO Member shall use Chinese prices or costs for the industry under investigation in determining price comparability; …. (d) Once China has established, under the national law of the importing WTO Member, that it is a market economy, the provisions of subparagraph (a) shall be terminated provided that the importing Member’s national law contains market economy criteria as of the date of accession. In any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession. In addition, should China establish, pursuant to the national law of the importing WTO Member, that market economy conditions prevail in a particular industry or sector, the non-market economy provisions of subparagraph (a) shall no longer apply to that industry or sector.

While the December 11, 2016 sunset could affect, in principle, only subparagraph (a)(ii), the effect of implying an absolute expiry of the surrogate price methodology could render most part of Section 15 of the Protocol otiose as reflected in the struck-through paragraphs above. This is an outcome, which could

55

O’ Connor, supra note 45, at 4. Appellate Body Report, European Communities — Trade Description of Sardines, ¶¶ 242–245, WTO Doc. WT/DS231/AB/R (adopted Oct. 23, 2002); Appellate Body Report, European Communities — Measures Concerning Meat and Meat Products, ¶ 163, WTO Doc. WT/DS26/ AB/R, WT/DS48/AB/R (adopted Feb. 13, 1998), Appellate Body Report, India – Measures Concerning the Importation of Certain Agricultural Products, ¶ 5.77, WTO Doc. WT/DS430/AB/ R (adopted Jun. 19, 2015). 56

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inflict more substantive violence to the language of Section 15 of China’s Protocol than a possible redundancy of the second paragraph of Section 15(d). On the whole, the aforesaid interpretation seeks to give effect especially to Section 15 chapeau as well as subparagraph (a)(i). If Chinese producers are able to demonstrate that market economy conditions exist, then subparagraph (i) can immediately find application. But what if they are unable to show that market economy conditions exist? Even in the absence of subparagraph (ii), as illustrated earlier, the investigating agencies can apply the special methodologies in view of the language in Section 15 (a)(i). To explain, the second sentence of Section 15 (d) is in itself, not a restraint on the application of the special methodologies. It is more or less an enabling provision. However, the puzzle is not solved as yet: why did the drafters insert the second sentence in Section 15 (d)? The same question can be asked about Section 15 (a)(ii) as well, which is nothing but a draftsman’s tautological reinforcement of subparagraph (a)(i). In retrospect, it is reasonable to interpret that the WTO Members did not envisage an automatic market economy treatment of China in anti-dumping investigations after December 11, 2016. It has been argued that China should be subjected to a factual enquiry before such a status can be given and considering that the Chinese economy continues to be characterized by heavy state intervention, it might not be possible to consider it as a market economy from a particular date.57 Indeed, the Chinese economy is much more open and transparent than it was at the time of accession, but not many would concur that it has fully transformed into a market economy.58 State support in domestic manufacturing in China is considered to have created significant global oversupply in several sectors.59 Given these possibilities, an automatic NME treatment of China might never have been intended. The language of Section 15 (a) could have been a calculated step anticipating that if China were not to make substantial progress in reducing the role of the State and central planning with respect to various commercial activities and sectors, the importing WTO Members still had the flexibility to use non-Chinese costs and prices in anti-dumping investigations.60 An important consideration, in this setting, is the parallel provisions of the Second Ad Note. The use of non-Chinese costs and prices can be envisaged in two

57

David Bulloch, China Doesn't Deserve Its 'Market Economy' Status By WTO, FORBES (Dec. 12, 2016), https://www.forbes.com/sites/douglasbulloch/2016/12/12/china-doesnt-deserve-its-marketeconomy-status-by-wto/#555a0622b937 (last visited Jul. 23, 2017). 58 Mark Wu, The ‘China, Inc.’ Challenges to Global Trade Governance, 57 HARV. J. of INT’L L. 262 (2006). 59 Id. 60 Charlene Barshefsky, the United States Trade Representative at the time of the negotiations of the Protocol of Accession noted during a congressional hearing “[n]o agreement on WTO accession has ever contained stronger measures to strengthen guarantees of fair trade and to address practices that distort trade and investment.” See Hearing on the Accession of China to the WTO Before the H. Comm. on Ways and Means, 106th Cong. 39 (2000) (statement of Charlene Barshefsky, United Nations Trade Representative).

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separate situations: under Section 15 of the Protocol as well as the Second Ad Note. Both these provisions can be the context for each other’s interpretation. It must be remembered that the Second Ad Note also allows the use of special methodologies if the conditions therein are satisfied. The text of the chapeau uses the same terms as the Second Ad Note, viz. a methodology not based on a “strict comparison with domestic prices or costs”. As explained earlier, this phrase has historically allowed the use of special methodologies including the surrogate methodology. The phrase in the chapeau, therefore, can be the basis for invoking the surrogate methodology against Chinese importers after December 11, 2016. In addition, the principle of in dubio mitius, which provides deference to the sovereignty of States or favours an interpretation that involves less general restrictions upon the parties assuming the obligations, could be a useful interpretative tool in this context.61 A holistic reading of Section 15 of the Protocol is bound to lead to “vastly different interpretations”, and a reliance only on the text is unlikely to yield results.62 Therefore, there is a compelling case for the use of additional or supplementary tools of interpretation available in customary international law codified in the Vienna Convention on the Law of Treaties (“VCLT”).

3.3

An Imperfect Text and the Use of the Negotiating History of Section 15

As set out above, the argument for the expiry of use of special methodologies assumes that the right to use special methodologies is intrinsically tethered to Section 15 (a)(ii) and not the rest of Section 15 (a), including the chapeau. This interpretation, as we have argued, is flawed. In our view, there is enough support in Section 15 (a) and its chapeau to continue with the use of special methodologies based on the tools of interpretation under the VCLT. Article 31 of the VCLT places considerable emphasis on the text whereas Article 32 provides a basis for examining the historical evidence including the discussions, negotiations, statements and compromises that led to the acceptance of the treaty text—widely known as the travaux preparatoires (for short “travaux”).63 In the case of the continuing NME treatment of China, a reference to travaux is suggested either to confirm the meaning resulting from an interpretation of the text of Section 15 of the Protocol of Accession, Article VI: I of the GATT as well as the provisions of the Anti-dumping Agreement, or to resolve the complexity arising from the assumption that a text based interpretation is providing an outcome which is ambiguous or obscure.

EC — Hormones (AB Report), supra note 52, ¶ 195. Panel Report, China — Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, ¶ 7.1169, WTO Doc. WT/DS363/R (adopted on Jan. 19, 2010). 63 Vienna Convention on the Law of Treaties, art. 3.2, May 23, 1969, 331 U.N.T.S. 1155. 61 62

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As Julia Ya Qin notes, considering the “imperfectly formulated text of the Protocol” it may be necessary for the WTO adjudicators to refer to or take particular note of the supplementary materials.64 In this case, a reference to the supplementary materials of the Protocol of Accession may be relevant in finding out whether an “a contrario” interpretation of Section 15, subparagraph (a) (i) is specifically inapplicable or ruled out. Unless an “a contrario” interpretation is specifically excluded by the drafters, it is reasonable to sustain the surrogate country methodology based purely on subparagraph (a) (i). Accession Protocols are generally integral parts of the WTO treaty.65 In addition, at least in the case of China’s Protocol, there is an explicit reference to at least 143 paragraphs of specific commitments from China’s Working Party Report.66 Under the GATT/WTO practice, a Working Party is established to examine the application for accession, and the discussions are summarized in the working party report. The Working Party Report is conventionally written in the past tense and often incorporates the past future tense “would” at various places, which could imply that it is not a bundle of legal rights and obligations.67 The standard practice in the WTO is to prescribe all country-specific rules in the Working Party Report and to incorporate the relevant commitments by explicit reference in the Protocol of Accession.68 To clarify, whenever a specific reference is made, it will be treated as integral part of the WTO commitments. Paragraphs 151 and 152 of China’s Working Party Report specifically deal with anti-dumping. Among these, the pertinent paragraph in relation to NME and anti-dumping measures is Paragraph 151. Strikingly, Paragraph 151 is not incorporated by specific reference in China’s Protocol. Article 1(2) of the Protocol of Accession stipulates that ‘this Protocol, which shall include the commitments referred to in Paragraph 342 of the Working Party Report, shall be an integral part of the WTO Agreement’.69 This issue was specifically dealt with in EU—Footwear (China),70 in which China argued that the EU violated Paragraphs 151(e) and (f) of China’s Working Party Report. Paragraphs 151(e) and (f) of the Working Party Report requires importing WTO Members to ‘provide Chinese producers and exporters a full opportunity for the defence of their interests in a particular case’ and to ‘provide a sufficiently detailed reasoning of its preliminary and final determinations in a particular case’

Julia Ya Qin, The Challenge of Interpreting ‘WTO-Plus’ Provisions, 44 J. WORLD TRADE 127, 172 (2010); Nedumpara and Subramanian, supra note 1, at 267. 65 Protocol on the Accession of the People’s Republic of China, recital 2, WTO Doc. WT/L/432 (Nov. 23, 2001); See also Nedumpara and Subramanian, supra note 1. 66 Julia Ya Qin, The Conundrum of WTO Accession Protocols: In Search of Legality and Legitimacy, 55(2) VA. J. INT’L L. 369, 392 (2015). 67 Id. 68 China’s Working Party Report, supra note 39, at annex. 9. 69 Id., ¶ 1.2. 70 Panel Report, European Union — Anti-Dumping Measures on Certain Footwear from China, WTO Doc. WT/DS405/R (adopted Feb. 22, 2012) [hereinafter EU — Footwear (Panel Report)]. 64

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respectively, during anti-dumping proceedings.71 The WTO Panel held that Article 1(2) of the Protocol of Accession is clear on its face and cannot be understood to incorporate commitments not set out in Paragraph 342 of the Working Party Report.72 Further, the Panel held that Paragraph 151 of Working Party Report is not referred to in Paragraph 342 of the Working Party Report and consequently cannot be understood to impose a legally blinding obligation on any WTO Member and cannot be the basis of a claim in WTO dispute settlement.73 Therefore, Paragraph 151 cannot be considered as an integral part of the Protocol of Accession and can, at best, be covered as the ‘circumstances existing’74 at the time of the Protocol. However, it is also important to note Paragraph 150 of the Working Party Report. Paragraph 150 reads as follows: Para. 150. Several members of the Working Party noted that China was continuing the process of transition towards a full market economy. Those members noted that under those circumstances, in the case of imports of Chinese origin into a WTO Member, special difficulties could exist in determining cost and price comparability in the context of anti-dumping investigations and countervailing duty investigations. Those members stated that in such cases, the importing WTO Member might find it necessary to take into account the possibility that a strict comparison with domestic costs and prices in China might not always be appropriate. (emphasis added)

Paragraph 150 of the Working Party Report indicates that the Working Party was influenced by the efforts taken by China in transitioning towards a full market economy. At the time of its accession, it was recognized that China was in the process of implementing economic reforms and transforming into a more market-based economic system.75 The Chinese representative to the Working Party China’s Working Party Report, supra note 39, ¶ 151(e) and (f). EU — Footwear (Panel Report), supra note 70, ¶ 7.181. 73 Id. 74 For an explanation of ‘circumstances existing’ see Aegean Sea Continental Shelf, Greece v. Turkey, Judgment (Greece v. Turkey), 1978 ICJ Rep 3, ¶ 105–107 (December 19). In deciding the issue of whether the Turkey and Greece had, pursuant to a joint communication in May 1975, agreed to the jurisdiction of the International Court of Justice, the ICJ analysed the communication in light of the subsequent diplomatic exchanges between the two states. The ICJ held, 71 72

The information before the Court concerning the negotiations between the experts and the diplomatic exchanges subsequent to the Brussels Communiqué appears to confirm that the two Prime Ministers did not by their “decision” undertake an unconditional commitment to submit the continental shelf dispute to the Court…. Accordingly, having regard to the terms of the Joint Communiqué of 31 May 1975 and to the context in which it was agreed and issued, the Court can only conclude that it was not intended to, and did not, constitute an immediate commitment by the Greek and Turkish Prime Ministers, on behalf of their respective Governments, to accept unconditionally the unilateral submission of the present dispute to the Court. 75 Press Release, World Trade Organisation, WTO successfully concludes negotiations on China’s entry (Sept. 17, 2001), https://www.wto.org/english/news_e/pres01_e/pr243_e.htm (last visited Oct. 25, 2017). Also see Hearing on the Accession of China to the WTO Before the H. Comm. on Ways and Means (1999) (statement of Charlene Barshefsky, United States Trade Representative), http://lobby.la.psu.edu/069_WTO_Membership/Congressional_Hearings/Testimony/H_Ways_ Means_Trade_021199.htm. According to Ms. Barshefsky:

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undertook commitments in respect of state-owned enterprises running on a commercial basis, reduction of certain type of subsidies which were inconsistent with the Subsidies and Countervailing Agreement, and reforming the Chinese tax system.76 Thus, WTO Members chose to utilize the NME methodology against Chinese imports to protect themselves from the unfair trade practices that resulted from China’s state or quasi state-run economy.77 The choice of the 15 year period was made by the Working Party with the assumption that China would make the transition to a market economy by December 11, 2016 pursuant to which subparagraph (a)(ii) of Section 15 would expire.78 Thus, the use of the NME methodology is explicitly linked to the state of China’s economy and is not independent of the same. However, as set out in Section 15(d) of the Protocol of Accession, the granting of ME status continues to be governed by the “national law of the importing WTO Member”. The NME methodology would, therefore, continue to be in operation until China meets the requirements under the first or third sentences of subparagraph (d) of Section 15, that is, until the Chinese economy becomes market-based or the individual industry or sector qualifies for market economy treatment.79 Thus, any determination of market economy status to China must be made pursuant to a factual enquiry.80 As Mark Wu argues, the Chinese economy continues to be heavily influenced by State intervention through state-owned enterprises in major sectors such as petrochemicals and telecommunications, through firm control over financial institutions as well as control over prices of inputs through its central planning agency.81 In the Working Party Report to the Protocol of Accession, Members of the Working Party confirmed certain procedural criteria in respect of Section 15 (a) (ii).82 These include transparency obligations such as publishing in advance the criteria for determining whether market economy conditions exist in the industry or company producing the like product as well as the methodology used to determine Third, our trade policy will continue our progress toward integrating China, Russia and other economies in transition into the trading system…To support rather than undermine both domestic reform in these economies and the rules of the trading system, these countries must be brought into the WTO on commercially meaningful terms. The result must be enforceable commitments to open markets in goods, services and agricultural products; transparent, non-discriminatory regulatory systems; and effective national treatment at the border and in the domestic economy. 76 China’s Working Party Report, supra note 39, ¶ 172. 77 See Hearing on the Accession of China to the WTO Before the H. Comm. on Ways and Means, 106th Cong. 39 (2000) (statement of Steve Appel, President, Washington State Farm Bureau, and Co-Chairman, Trade Advisory Committee, American Farm Bureau Federation). 78 Paul Rosenthal & Jeffrey S. Beckington, The People’s Republic of China: A Market Economy or a Non-market Economy in Anti-dumping Proceedings Starting on December 12, 2016 9(7) GLOBAL TRADE & CUSTOMS J. 352,354 (2014). 79 Miranda, supra note 42, at 249. 80 Wu, supra note 58, at 306. 81 Id., at 262–285. 82 China’s Working Party Report, supra note 39, ¶ 151.

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price comparability.83 It has been argued that since these procedural norms are expressly linked to Section 15 (a)(ii),84 it is implied that the use of special methodologies is also solely tied to this subparagraph.85 Consequently, it has been argued that if this subparagraph ceases to apply, these procedural safeguards would also cease to apply.86 However, it is important to note that Paragraph 151 is not limited to providing procedural safeguards for a “methodology not based on a strict comparison with domestic prices” i.e. special methodologies. For example, it also calls for WTO members to notify their market economic criteria before applying the same.87 This bears reference to other provisions of Section 15 such as subparagraphs (a)(i) and paragraph (d) of China’s Protocol, where Chinese producers have the burden to demonstrate that market economy conditions exist in the industry or sectors concerned. Other safeguards include the need for transparency of the process of investigation, ability of Chinese producers and exporters to present evidence in writing88 and defend their interests,89 as well as certain obligations on the investigating Members to provide detailed reasoning of its preliminary and final determinations in a particular case.90 The first two of these safeguards is also applicable when Chinese producers and exporters have to prove that market economy conditions exist under the other provisions of Section 15. Thus, it can be argued that the safeguards mentioned in Paragraph 151 are generic in nature, and relate to various obligations set out in Section 15 of the Protocol of Accession. The expiry of Section 15 (a)(ii) on December 11, 2016 would not imply that these procedural safeguards are also no longer applicable. Since these procedural norms also apply to the remainder of Section 15, they would continue to find purpose and relevance even after December 2016. The aforesaid analysis reaffirms the view that the safeguards in Paragraph 151 are not intrinsically tied to Section 15 (a)(ii). This view is also borne out by the successive drafts of the Protocol of Accession and the drafts of the China Working Party Reports. In the early drafts of the Working Party Report, the procedural safeguards were provided in Article 20 of the Draft Protocol,91 which was finally incorporated as Section 15 of the Protocol of Accession.92 In the Working Party 83

Id. The chapeau to paragraph 151 of the Working Party Report states, “…In response to these concerns, members of the Working Party confirmed that in implementing subparagraph (a)(ii) of Section 15 of the Draft Protocol, WTO Members would comply with the following…”. See id. 85 Graafsma and Kumashova, supra note 34, at 157. 86 Id. 87 China’s Working Party Report, supra note 39, ¶ 151 (b). 88 Id., ¶ 151 (d). 89 Id., ¶ 151 (e). 90 Id., ¶ 151 (f). 91 Working Party on the Accession of China, Draft Report of the Working Party on the Accession of China, ¶ 12, WTO Doc. WT/ACC/SPEC/CHN/1/Rev.1 (Jul. 18, 2000). 92 Working Party on the Accession of China, Draft Protocol on the Accession of China, www. insidetrade.com, art. 20. 84

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Report of July 21, 2000, certain procedural safeguards (such as the right of Chinese exporters and producers to provide evidence in writing and defend their interests) were linked to Section 20 (1)(b) (which corresponds to Section 15 (a)(ii)) whereas certain other safeguards including the definition of market economy criteria and transparency in the selection of a surrogate economy continued to be linked to Article 20 (i.e. Section 15 in the final version) of the Draft Protocol.93 In the final draft of the Working Party Report, the reference was limited to only Section 15 (a) (ii) and not the whole of Section 15. However, as explained before, many of these procedural safeguards find application in the other parts of Section 15 and are not merely confined to Section 15 (a)(ii). There is nothing in the previous versions of the Draft Protocols to indicate that the only recourse for the surrogate country methodology stemmed exclusively from subparagraph (a)(ii) of Section 15 of the Protocol of Accession.

3.4

Surrogate Country Methodologies and China’s NME Status

One of the central issues in this discussion is the market economy status of China. According to a few commentators, the piecemeal reporting of the issue in “sound bites and one-liners” has resulted in the mischaracterization of the discourse on the interpretation of Section 15 (a) (ii) as a debate about China’s NME status.94 It is true that the debate around Section 15 is about discontinuing the practice of special methodologies against Chinese producers after December 11, 2016. However, the market economy status of China is also relevant in terms of Section 15 (d), first sentence. If China attains market economy status, the provisions of subparagraphs (a) and (d) have to be terminated altogether. This article has argued that even the sunset of subparagraph (a)(ii) does not entail the closure of the debate on China’s market economy status. It is, however, true that WTO laws do not provide for a definition of market economy or non-market economy, although the provisions of the Second Ad Note to GATT Article VI provide some indication. There is also no clear judicial exposition on the defining characters of a market or non-market economy. The Member countries have significant freedom in identifying the NME criteria and they could continue to exercise this freedom.95

93

Working Party on the Accession of China, Draft Report of the Working Party on the Accession of China, WTO Doc. ¶ 12, WT/ACC/SPEC/CHN/1/Rev.1 (July 21, 2000). 94 Id. 95 Gatta, supra note 42, at 165.

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4 Treatment of China in Domestic Anti-dumping Investigations 4.1

China as an NME: United States Practice

The Tariff Act of 1930 (Tariff Act) is the principal legislation governing anti-dumping investigations in the United States. According to Section 773 (c)(1) of the Tariff Act, if an anti-dumping investigation involves imports from a country designated as an NME and the USDOC finds that the available information does not permit determination of the normal value on the basis of the methodologies permitted by Section 773 (a) of the Tariff Act, the USDOC can determine the normal value on the basis of prices prevailing in a third country.96 Under Section 771(18) (C)(1), the administering authority i.e. the USDOC has to make a determination that a country is an NME on the basis of certain criteria set out in Section 771(18)(B).97 Such determination remains in effect until revoked by the USDOC.98 Further, any such determination is not subject to judicial review in any anti-dumping investigation conducted by the USDOC.99 In March 2017, the USDOC launched a review of China’s market economy status pursuant to Section 771(18)(C)(ii) of the Tariff Act, which states that the USDOC may make a determination with respect to a country’s NME status ‘at any

96

Section 773(c)(1) of the Tariff Act states,

In general, if (A) the subject merchandise is exported from a nonmarket economy country, and (B) the administering authority finds that available information does not permit the normal value of the subject merchandise to be determined under subsection (a), the administering authority shall determine the normal value of the subject merchandise on the basis of the value of the factors of production utilized in producing the merchandise and to which shall be added an amount for general expenses and profit plus the cost of containers, coverings, and other expenses. Except as provided in paragraph (2), the valuation of the factors of production shall be based on the best available information regarding the values of such factors in a market economy country or countries considered to be appropriate by the administering authority. Tariff Act, supra note 28, § 773(c)(1). 97 In making an NME country determination under section 771(18)(A) of the Act, section 771(18) (B) requires that the Department take into account: (i) the extent to which the currency of the foreign country is convertible into the currency of other countries; (ii) the extent to which wage rates in the foreign country are determined by free bargaining between labor and management; (iii) the extent to which joint ventures or other investments by firms of other foreign countries are permitted in the foreign country; (iv) the extent of government ownership or control of the means of production; (v) the extent of government control over the allocation of resources and over the price and output decisions of enterprises; (vi) such other factors as the administering authority considers appropriate. 98 Tariff Act, supra note 28, § 771(18)(C)(1). 99 Id., § 771(18)(D).

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time’.100 This review of China’s status as an NME as part of an anti-dumping and countervailing duty investigation on exports of aluminum foil from China is the first such review conducted by the USDOC since 2006.101 In the preliminary determination conducted by the USDOC, it was determined that China should continue to be treated as an NME on account of the fact that the “state’s role in the economy and its relationship with markets and the private sector results in fundamental distortions in China’s economy.”102 This determination was based on the factors set out in Section 771(18)(B) of the Tariff Act.103 A summary of the determination is set out Fig. 3.104,105,106,107,108,109 The decision of the USDOC to not revoke China’s NME status was on expected lines. In the initiation of the anti-dumping investigation involving Cast Iron Soil Pipe Fittings,110 China was treated as an NME and South Africa was chosen as a surrogate country for the purposes of determining normal value.111 Similarly in the Stainless Steel Flanges112 from India and China, Thailand was chosen as a surrogate country since the NME presumption against China has not been revoked by the USDOC.113 The reasoning of the USDOC to treat China as an NME is based on Article 771(18)(C)(i) of the Tariff Act, which allows the USDOC to determine and treat any country as an NME and states that such status continues to be in effect until revoked by the USDOC. Since such status has still not been revoked by the USDOC, China continues to be treated as an NME in anti-dumping

100 Certain Aluminum Foil From the People’s Republic of China: Notice of Initiation of Inquiry Into the Status of the People’s Republic of China as a Nonmarket Economy Country Under the Anti-dumping and Countervailing Duty Laws, 82 Fed. Reg. 62, 16162 (U.S. Dep’t Com., March 29, 2017)(initiation notif.) https://www.gpo.gov/fdsys/pkg/FR-2017-04-03/pdf/2017-06535.pdf 101 Id. 102 Memorandum from Leah Wils-Owens, Office of Policy, Enforcement & Compliance to Gary Taverman, Associate Deputy Assistant Secretary for Anti-dumping and Countervailing Duty Operations, “China’s Status as a Non-Market Economy” (U.S. Dep’t Com., Oct. 26, 2017), https:// enforcement.trade.gov/download/prc-nme-status/prc-nme-review-final-103017.pdf [hereinafter China NME Memorandum]. 103 See supra note 97. 104 China NME Memorandum, supra note 102, at 4, 13, 19. 105 Id., at 4, 28. 106 Id., at 5, 38, 51. 107 Id., at 6, 115. 108 Id., at 6–7, 178. 109 Id., at 7, 194. 110 Cast Iron Soil Pipe Fittings From the People’s Republic of China: Initiation of Less-Than-Fair Value Investigation 82 Fed. Reg. 37,053, 37,055 (U.S. Dep’t Com, 2017)(final find.) https://www. gpo.gov/fdsys/pkg/FR-2017-08-08/pdf/2017-16770.pdf. 111 Id. 112 Stainless Steel Flanges From India and the People’s Republic of China: Initiation of Less-Than-Fair-Value Investigations 82 Fed Reg. 42629, 42651 (U.S. Dep’t Com., 2017)(final find.) https://www.gpo.gov/fdsys/pkg/FR-2017-09-11/pdf/2017-19294.pdf. 113 Id.

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•

Currency convertibility: The USDOC noted that the Chinese government continues to maintain significant restrictions on capital account transactions and considerably intervenes in onshore and offshore foreign exchange markets. 104

•

Determination of wage rates as a result of free bargaining: The USDOC noted the institutional constraints on the extent to which wage rates are determined through free bargaining such as the prohibition on the formation of trade unions and the lack of legal right to strike. The USDOC also noted the restrictions imposed by the Chinese government on labour mobility through the hukou (household registration) system was guiding labor flows and was causing distortions to the supply side of the labour market. 105

•

Foreign investments and Joint Ventures: The USDOC found that the Chinese government continues to impose significant barriers to foreign investment, including equity limit, local partner requirements and unclear approval and regulatory procedures, technology transfer and localization requirements. Further, it was noted that that the Chinese government limited investment into sectors that were deemed strategically important while supporting foreign investment in other sectors. 106

•

Government control over factors of production: The USDOC noted that the Chinese government exerted significant control and ownership over the means of production through the prevalence of state-invested enterprises (“SIEs”).The Chinese government was also noted to have substantial control over land acquisition and use and land-use right holders were found to face restrictions in respect of tenure, challenging documentation and compensation procedures. 107

•

Government control over allocation of resources: The USDOC noted that the Chinese government played a significant role in resource allocation through formulation and execution of industrial policies. Through control on science and technology development, geographic distribution of industry and industrial restructuring, the Chinese government was able to set and guide factor input prices to distort costs and prices across the economy. Further, the USDOC also pointed out the role of the Chinese government in the banking sector which enabled the government to direct financial resources to SIEs in spite of the high levels of corporate debt, leading to soft budget constraints and consequently the market-determined pricing of risk. 108

•

Other factors that the administering authority considers appropriate: The USDOC noted that the Chinese legal system was structured to respond to the government’s policy goals and individuals and firms lacked the ability to make meaningful independent inputs into administrative rulemaking or challenge court decisions. Further, firms were noted to face challenges in obtaining impartial decisions, because of corruption or local protectionism. 109

Fig. 3 China’s status as a non-market economy: determination by the USDOC

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investigations.114 In the recent anti-dumping investigation involving Certain Hardwood Plywood Products,115 China was considered an NME and consequently, the USDOC assessed the normal value on the costs of production in Romania, a surrogate market economy.116 In the anti-dumping investigation on imports of 1Hydroxyethylidene-1 and 1-Diphosphonic Acid from China,117 Mexico was chosen as the surrogate market economy and the normal value was constructed on the basis of the prices of the factors of production, as prevalent in Mexico. Similarly, in the investigation involving imports of Glycerine from China,118 Thailand was chosen as the surrogate country. The aforesaid decisions were made in the post-December 2016 period. Surprisingly, in the aforesaid cases, the producers/exporters did not argue that with the expiry of Section 15 (a)(ii), the surrogate country methodology was rendered inapplicable. It could be that since the USDOC has not revoked the NME status of China under the domestic law stating that the expiry of Section 15 (a)(ii) would not be of consequence to the anti-dumping proceeding, raising such a plea was almost a futile exercise. However, in the anti-dumping investigation involving Certain Cased Pencils from China,119 the Chinese exporter/producer under investigation argued that

114

Certain Polyester Staple Fiber from the People’s Republic of China: Decision Memorandum for the Preliminary Results of the 2015–2016 Anti-dumping Duty Administrative Review (U.S. Dep’t Com., Feb. 27, 2017)(prelim. find.) http://enforcement.trade.gov/frn/summary/prc/2017-04134-1.pdf, at 3. In this case, the issue related to whether all the producers under investigation from a NME must be assigned at a single anti-dumping rate or whether the exporters/producers under investigation have demonstrated that they operate under market economy conditions, pursuant to which a separate rate is determinable for them; Decision Memorandum for the Preliminary Results of Anti-dumping Duty… Citric Acid and Certain Citrate Salts from the People’s Republic of China, A-570-937, 3, (U.S. Dep’t Com., Jan. 31, 2017) (prelim. find.), http://enforcement.trade.gov/frn/summary/prc/2017-02528-1.pdf. 115 Decision Memorandum for the Preliminary Determination in the Anti-dumping Duty Investigation of Certain Hardwood Plywood Products from the People’s Republic of China, A-307-824, 9, (U.S. Dep’t Com., June 16, 2017)(prelim. find.) https://enforcement.trade.gov/frn/ summary/prc/2017-13125-1.pdf. 116 In choosing such a surrogate market economy, the USDOC is required to take into account the following: (i) whether the surrogate country is at a similar level of development comparable to the NME country; and (ii) whether the surrogate country has significant producers of comparable merchandise. See U.S. Department of Commerce, Non-Market Economy Surrogate Country Selection Process, Bulletin No. 04:1 (Mar. 1, 2004), http://enforcement.trade.gov/policy/bull04-1.html. 117 Issues and Decision Memorandum for the Final Determination of the Less-Than-Fair-Value Investigation of 1-Hydroxyethylidene-1, 1-Diphosphonic Acid from People’s Republic of China, A-570-045, 4 (U.S. Dep’t Com, Mar. 20, 2017)(final determ.), http://enforcement.trade.gov/frn/ summary/prc/2017-05805-1.pdf. 118 Decision Memorandum for the Preliminary Results of Anti-dumping Duty Administrative Review: Glycine from the People’s Republic of China; 2015–2016, A-570-836, 11 (U.S. Dep’t Com., Mar. 31, 2017) (prelim. results), http://enforcement.trade.gov/frn/summary/prc/201706994-1.pdf. 119 Issues and Decision Memorandum for Certain Cased Pencils from the People’s Republic of China: Final Results of Anti-dumping Duty Administrative Review; 2014–2015, A-570-827, 17 (U.S. Dep’t Com., May 22, 2017)(final determ.), http://enforcement.trade.gov/frn/summary/prc/ 2017-11053-1.pdf.

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the Protocol of Accession unambiguously limits the application of the NME status of China to 15 years and no WTO Member can treat China as an NME after December 11, 2016.120 It was further argued that the language of the Protocol of Accession is mandatory, immediate and ‘self-executing’ and since the Protocol of Accession is ‘in-force’ domestically, it automatically vests rights in the interested parties. The USDOC disagreed with this proposition and argued that the Uruguay Round Agreements (including the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994) and the Protocol of Accession “are not self-executing” and their legal effect in the United States is governed by the implementing legislation.121 It was held that anti-dumping proceedings are conducted by the USDOC and are governed by United States law which allows for the USDOC to determine, on the basis of a complete, fact-intensive analysis of a country’s economy, whether such country must be treated as an NME for the purposes of anti-dumping. In the present case, no party had requested that China’s NME status be revoked and hence the USDOC continued to treat China as an NME for the purposes of the review.122 Considering the importance of anti-dumping as a trade defence instrument for the U.S. against China,123 an interesting recent development in this field is the recent use of ‘particular market situation’ (“PMS”) by the USDOC in an investigation involving certain Korean exporters.124 Under the Trade Preferences Extension Act of 2015 (“TPEA”), the USDOC was granted expanded authority to deviate from foreign producers’ reported home market sales prices or production costs in cases ‘outside the ordinary course of trade’ in an anti-dumping investigation. The definition of ‘ordinary course of trade’ was amended to include ‘situations in which the administering authority determines that the PMS prevents a proper 120

Id. Id., at 18. 122 Id., at 19. 123 As of December 2016, the U.S. had initiated 141 anti-dumping investigations against China. See World Trade Organisation, Dumping Measures: Reporting Member v. Exporter (1/1/1995 – 30/6/2016), WTO Anti Dumping Gateway, https://www.wto.org/english/tratop_e/adp_e/AD_ MeasuresRepMemVsExpCty.pdf. 124 While the negotiations in the Kennedy Round did not involve a discussion on PMS, it found a mention in the draft Anti-Dumping Code, which was circulated pursuant to the negotiations, see Sub-Committee on Non-Tariff Barriers, Report of the Group on Anti-Dumping Policies, WTO Doc. TN.64/NTB/W/16 (Mar. 3, 1967). It has been argued that the parties intended to have the term cover all circumstances (other than ordinary course of trade), which affects price comparability between domestic and export price, see Weihuan Zhou and Andrew Percival, Debunking the Myth of ‘Particular Market Situation’ in WTO Anti-dumping Law, 19 (4) J. INT’L ECO. L. 863, 874 (2016). At the Tokyo Round, the term was agreed by parties to be different than ‘sales at a loss’. See Committee on Anti-Dumping Practices, List of Priority Issues in the Anti-Dumping Field, WTO Doc. COM.AD/W/79 (May 31, 1978). According to Zhou and Percival, the negotiating history of PMS indicates that Parties intended it to cover all situations (other than those referred in the Anti-Dumping Agreement i.e. ordinary course of trade and low volume of sales), which affect price comparability. See Weihuan Zhou and Andrew Percival, Debunking the Myth of ‘Particular Market Situation’ in WTO Anti-dumping Law, 19 (4) J. INT’L ECO. L. 863,890 (2016). 121

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comparison with the export price or constructed export price’.125 Further, the TPEA also brings about an amendment in the definition of ‘constructed normal value’.126 Pursuant to the amendment, in case where PMS exists such that the costs of materials and fabrication or processing does not accurately reflect the cost of production in the ordinary course of trade, the administering authority is allowed to use any calculation methodology.127 In April 2017, the USDOC found a case of PMS in the final results of the administrative review on oil country tubular goods (OCTG) from the Republic of Korea.128 The petitioners had argued the existence of PMS in the Korean market on the basis of the following distortions: (i) subsidies from the Korea government that benefit the Korean producers of hot-rolled steel (which is the primary input in the production of OCTG); (ii) intervention by the Korean government in the electricity market which lead to distortions in the price of electricity; (iii) flood of low-priced hot-rolled steel imports into Korea from China which led to the domestic prices of hot-rolled steel being artificially suppressed; and (iv) “strategic alliances” between the Korean producers of OCTG and hot-rolled steel.129 In this case, the USDOC had determined in a preliminary memorandum in February 2017, that there was insufficient evidence to prove that a PMS existed in the OCTG market in South Korea.130 However, because Section 504 of TPEA does not provide any guidance on whether to consider the allegations individually or collectively, the USDOC analysed the four allegations collectively for the final results.131 On considering the cumulative effect of the four allegations on the Korean OCTG market, the USDOC found that the aforesaid allegations represent ‘facets of a single PMS’.132 The USDOC further held that while a sufficient level of evidence is required to prove a case of PMS, the petitioners had met the burden in this case. Interestingly, neither did USDOC renounce its earlier factual findings on the issue of PMS nor did it disclose any new evidence in support of its finding of 125 Trade Preferences Extension Act of 2015, Pub. L. 114–27, §504, 129 Stat. 362–419 (2015) [hereinafter TPEA]. 126 See Matthew R. Nicely and Brian Gatta, U.S. Trade Preferences Extension Act (TPEA) of 2015 Could Lead to Increased Use of “Particular Market Situation” in Calculating Normal Value in Anti-Dumping Cases, 11(5) GLOBAL TRADE & CUSTOMS J., 238–243 (2016). 127 TPEA, supra note 125, s. 504 (c). 128 Issues and Decision Memorandum for the Final Results of the 2014–2015 Administrative Review of the Anti-dumping Duty Order on Certain Oil Country Tubular Goods from the Republic of Korea, A-580-870, 40–41 (U.S. Dep’t Com., Apr. 10, 2017), http://enforcement.trade.gov/frn/ summary/korea-south/2017-07684-1.pdf, at 40–41 [hereinafter Korea OCTG Decision]. 129 Id. 130 See Memorandum from Gary Taverman, Associate Deputy Assistant Secretary for Anti-dumping and Countervailing Duty Operations, to Carole Showers, Executive Director, Office of Policy, Policy & Negotiations, 2014–2015 Administrative Review of the Anti-dumping Duty Order on Certain Oil Country Tubular Goods from the Republic of Korea: Memorandum on Particular Market Situation Allegations (U.S. Dep’t Com., Feb. 21, 2017). 131 Korea OCTG Decision, supra note 128, at 40. 132 Id.

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PMS. Instead, the USDOC described its reappraisal of the facts as a ‘refocused analysis of the totality of the conditions in the Korean market’ rather than addressing the impact of the individual allegations.133 Further, in its analysis of PMS, the USDOC did not define a standard for PMS or the facts that constitute PMS. Rather, the USDOC left the meaning of the term PMS uncertain and promised to ‘continue to develop the concepts and types of analysis that would be necessary to address future allegations’.134 The decision of the USDOC leaves the meaning and criteria of the term PMS ambiguous and leaves the door open for similar allegations against China, wherein U.S. producers can claim that state interference creates market distortions which do not allow for proper price comparison. While the decision in OCTG imports from Korea permits the U.S. anti-dumping authorities to disregard the costs and prices prevalent in the exporting country, the ruling would have to be tested against the decision of the Appellate Body in EU—Biodiesel. Until the WTO dispute settlement body sheds further light on the meaning of PMS, the scope of the term remains uncertain. It has, however, garnered criticism with China, Russia and South Korea terming the decision as having ‘serious implications for the fundamental fairness and legitimacy of the trading system’.135

4.2

China as an NME: Practice of the European Union

Like the United States, the European Union also does not grant China a market economy status.136 The basis of the use of the surrogate method in the EU is Article 2.7 of the EU Anti-Dumping Regulation.137 It provides that in the case of imports from NMEs, including China, if Chinese producers are unable to show that market economy conditions exist, the normal value shall be determined on the basis of the prices or constructed value in a surrogate country.138 Even after December 2016, 133

Id. Id., at 43. 135 U.S. 'particular market situation' ruling on Korean steel sparks concern at WTO, INSIDE U.S. TRADE (May 2, 2017), https://insidetrade.com/daily-news/us-particular-market-situation-rulingkorean-steel-sparks-concern-wto. 136 European Parliament resolution of 12 May 2016 on China’s market economy status (May 12, 2016), http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//NONSGML+TA+P8-TA2016-0223+0+DOC+PDF+V0//EN. 137 Regulation 2016/1036 of the European Parliament and of the Council of 8 June 2016 on Protection Against Dumped Imports from Countries not Members of the European Union, art. 2.7 (a), 2016 O.J. (L176/21). Article 2.7 (a) states, “An appropriate market-economy third country shall be selected in a not unreasonable manner, due account being taken of any reliable information made available at the time of selection. Account shall also be taken of time limits. Where appropriate, a market-economy third country which is subject to the same investigation shall be used”. 138 Id. 134

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the surrogate country method continues to find application in EU anti-dumping proceedings. In 2017, the EU Commission chose the United States as the surrogate country in the anti-dumping investigation on new and retreated tyres for buses and lorries originating in China.139 In the initiation notice for the expiry review of anti-dumping measures on imports of lever arch mechanisms originating in China, the Commission intended to construct the normal value by using prices and costs in third market surrogate countries such as India and Thailand.140 Similarly, according to the initiation notice for the anti-dumping proceeding on tartaric acid,141 China was considered an NME and accordingly, the Commission considered looking at prices in market economies such as Australia, Brazil, Chile and India. In January 2017, the EU Commission imposed definitive anti-dumping duties on imports of stainless steel and pipe buttwelding fittings from China and Taiwan142 wherein the normal value was computed on the basis of the prices in a third market economy i.e. Taiwan. In this case, two Chinese producers under investigation and the China Chamber of Commerce of Metals, Minerals and Chemical Importers & Exporters (“CCCMC”) raised the issue that the EU Commission could not use the surrogate methodology to determine the normal value for the Chinese exporting producers since the right to use such methodology under the Protocol of Accession had expired on December 11, 2016.143 The EU Commission noted that it does not have any discretion on whether or not to apply the provisions of the EU Regulation, and continued to use the surrogate country methodology for the purposes of the investigation.144 In the imposition of definitive anti-dumping duty on imports of certain hotrolled flat products of iron, non-alloy or other alloy steel,145 China was treated as an NME and Chinese producers were required to fill in the market economy treatment questionnaire to show that they fulfilled the market economy criteria set out in Article

139

European Commission, Notice of initiation of an anti-dumping proceeding concerning imports of new and retreaded tyres for buses or lorries originating in the People's Republic of China, 2017 O.J. (C 264) 14,16. 140 European Commission, Notice of initiation of an expiry review of the anti-dumping measures applicable to imports of lever arch mechanisms originating in the People’s Republic of China, 2017 O.J (C 290) 3, 5. 141 European Commission, Notice of initiation of an expiry review of the anti-dumping measures applicable to imports of tartaric acid originating in the People's Republic of China, 2017 O.J (C 122) 8, 10. 142 European Commission, Commission implementing Regulation (EU) 2017/141 of 26 January 2017 imposing definitive anti-dumping duties on imports of certain stainless steel tube and pipe buttwelding fittings, whether or not finished, originating in the People's Republic of China and Taiwan, 2017 O.J (L 22/14). 143 Id., ¶ 108. 144 Id., ¶ 109. The Commission noted, “In this regard, the Commission notes that it has no discretion on whether or not to apply the current rules as set out in the basic Regulation. This claim was therefore rejected”. 145 European Commission, Commission implementing Regulation (EU) 2017/649 of 5 April 2017 imposing a definitive anti-dumping duty on imports of certain hot-rolled flat products of iron, non-alloy or other alloy steel originating in the People’s Republic of China, 2017 O.J (L 92) 68.

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2(7)(c) of the EU Anti-dumping Regulation.146 The United States was chosen as the surrogate country in this case and the normal value was constructed on the basis of the costs prevalent in the United States.147 In the investigation on certain seamless pipes and tubes of iron (other than cast iron) or steel (other than stainless steel) of circular cross-section of an external diameter exceeding 406.4 mm originating in China,148 definitive anti-dumping duties were imposed using Mexico as a surrogate country for the construction of the normal value.149 In the aforesaid investigations concerning hot-rolled flat products and seamless pipes, it must be noted, that the Period of Investigation (“POI”) was a period before December 2016. On October 5, 2017, the EU Parliament and the Council decided to amend the EU Anti-Dumping Regulation following a proposal by the EU Commission in November 2016.150 The new methodology seeks to abandon the NME classification of countries which are WTO Members (including those Members such as China which have been classified as an NME) but to continue to apply it to non-WTO Members.151 Under the new practice, domestic costs and prices would be the default norm for all WTO Members, except on a finding of ‘significant distortions’152 in the market of the exporting country, in which case, the EU Commission could ‘construct’ values based on international prices or benchmarks or costs and prices in an ‘appropriate representative country’, with similar levels of economic Id., ¶ 28. As per Art. 2(7)(b) of the EU Anti-dumping Regulation, the exporting producers have to demonstrate in particular that: (i) business decisions and costs are made in response to market conditions and without significant State interference; (ii) firms have one clear set of basic accounting records which are independently audited in line with international accounting standards and are applied for all purposes; (iii) there are no significant distortions carried over from the former non-market economy system; (iv) bankruptcy and property laws guarantee legal certainty and stability and (v) exchange rate conversions are carried out at market rates. 147 Id., ¶ 28. 148 European Commission, Commission implementing Regulation (EU) 2017/804 of 11 May 2017 imposing a definitive anti-dumping duty on imports of certain seamless pipes and tubes of iron (other than cast iron) or steel (other than stainless steel), of circular cross-section, of an external diameter exceeding 406,4 mm, originating in the People's Republic of China 2017 O.J (L 121) 3. 149 Id., ¶ 36. 150 Regulation (EU) of the European Parliament and of the Council of 12 December 2017 amending Regulation (EU) 2016/1036 on protection against dumped imports from countries not members of the European Union and Regulation (EU) 2016/1037 on protection against subsidized imports from countries not members of the European Union, 2017 O.J (L338/1) 60 [hereinafter EU Regulation]. 151 Report on the proposal for a regulation of the European Parliament and of the Council amending Regulation (EU) 2016/1036 on protection against dumped imports from countries not members of the European Union and Regulation (EU) 2016/1037 on protection against subsidised imports from countries not members of the European Union, (2013) 192 final (Apr. 10, 2013). 152 The regulation sets out a non-exhaustive list of criteria, 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, and iv) the access to finance granted by institutions implementing public policy objectives. 146

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development as the exporting country.153 Under this new methodology, ‘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 determination of prices or costs when pursuing policy objectives or public policies, which discriminate in favour of domestic suppliers.154 In order to determine instances where such ‘significant distortions’ exist, the EU Commission can consider several criteria such as state policies and influence, the widespread presence of state-owned enterprises, discrimination in favour of domestic companies and the lack of independence of the financial sector.155 Further, taking into account the difficulty that the EU industry may face in gathering evidence of market distortions in the exporting country, the EU Commission is mandated to prepare reports detailing specific circumstances of market distortions in a particular country or sector.156 These reports will be publically available and are intended for use by EU industry when lodging a complaint or a request for review. The first of such reports is available on the Commission website.157 The new EU methodology also allows the Commission to take into account the ‘level of social and environmental protection’, when choosing ‘appropriate third countries’ for comparison.158 The 2017 report is dedicated to China as China accounts for the largest proportion of the EU’s anti-dumping investigations and trade defence measures.159 The report on China discusses the macro-economic details of the Chinese economy, the production factors used in the manufacturing process as well as certain sectors of the Chinese economy including steel and ceramics.160 The report on China does not represent any political views, preferences or judgments and is purely descriptive and prepared on the basis of information provided by various ministries and official agencies in China.161 The EU report on China sets out that the Communist Party of China (“CPC”) and the state continue to have significant control over the macroeconomic factors in the Chinese economy. It further notes that the state and the party seek to further strengthen state-ownership through an interventionist government policy using a broad array of tools, including guiding catalogues, investment screening, financial

153

EU Regulation, supra note 150, art. 2(6a(a)). Id., art. 2(6a(b)). 155 European Commission Press Release, Commission welcomes agreement on new anti-dumping methodology, IP/17/3668 (Oct. 3, 2017). 156 EU Regulation, supra note 150, art. 2(6(c)). 157 Id., art. 2(6a(b)). 158 Id., art. 2(6a(a)). 159 European Commission Press Release, The EU’s new trade defence rules and first country report, MEMO/17/5377 (Dec. 20, 2017). 160 Id. 161 Id. 154

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incentives etc., which leads to non-market based resource allocations.162 The report highlights that the control of the CPC extends to individual enterprises, SOEs and, at times, even privately owned enterprises, which means that business decisions are influenced by the various policy objectives pursued by the CPC.163 In respect of the planning system in China, the report sets out that even though the five-year plans maintain the stated objective of allowing the markets to determine a decisive role in resource allocation, the Chinese leadership relies on a planning mechanism that encourages allocation of resources towards sectors deemed to be strategic or emergent, regardless of whether or not it results in overcapacities.164 In respect of SOEs, the report highlights the importance of SOEs in the Chinese economy. Further, Chinese authorities are said to have extensive supervision over the mergers and acquisitions of SOEs by virtue of nominating and dismissing the management of these SOEs.165 The overall institutional setup and legal environment are also said to be conducive to business practices of SOEs including preferential access to land and energy, which distorts the effective allocation of resources.166 In respect of the financial system, the report highlights a strong presence of state-owned banks and a widespread influence of the state which imposes a number of policy objectives on the financial system, thereby undermining the operation of market forces of demand and supply.167 The report also highlights other macroeconomic issues such as the significant role of public procurement in the Chinese GDP (about 20%), and the lack of competitive market rules that have a distortive effect.168 The report also highlights the extent of state involvement in regulating domestic and foreign businesses through industrial policies, laws, regulations, and approval processes for investment.169 In addition, the report also highlights the distortions caused by governmental influence over factors of production including state control over allocation of land, energy prices, regulation of the corporate credit system as well as supply of raw materials such as coal and water.170 The major change introduced by the new method is that it permits the EU Commission to take into account undistorted international prices and costs when constructing the normal value rather than solely relying on the data from a surrogate economy. Further, the new method reverses the burden of proof, which is now

162

European Commission, Commission Staff Working Document on Significant Distortions in the Economy of People’s Republic of China for the Purposes of Trade Defence Investigations, SWD (2017) 483 final (Dec., 20, 2017). 163 Id., at 39. 164 Id., at 84. 165 Id., at 109. 166 Id., at 109. 167 Id., at 150. 168 Id., at 168. 169 Id., at 200. 170 Id., at 310.

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borne by the complainant who must demonstrate the existence of significant distortions. It must be noted that the aforesaid amendments are not tantamount to the EU granting market economy status to any economy classified as an NME. The new regulation merely eliminates the need for classification of any economy as an NME; the new regulation differentiates between WTO Members and non-Members rather than market economies and NMEs. Though China has welcomed the regulation to the extent it abolished the NME list, it has criticized the introduction of the market distortions clause, which it states amounts to prolonging the surrogate methodology under a new label.171 Some commentators argue that this revised methodology “eerily resembles” the NME methodology.172

4.3

China as an NME: Indian Practice

Like the U.S. and the EU, the Indian law also prescribes the use of the surrogate approach in respect of countries designated as NMEs.173 India’s treatment of China assumes special significance in the light of anti-dumping final measures imposed by India against Chinese exporters—199 measures as of December, 2016.174 The law governing anti-dumping investigations in India is the Customs Tariff Act, 1975 and the Customs Tariff (Identification, Assessment and Collection of Anti-Dumping Duty on Dumped Articles and for Determination of Injury) Rules, 1995 (for short, “Indian Anti-dumping Rules”). The Indian Anti-dumping Rules provide for a country to be designated as an NME if the investigating authority determines that such country does not operate on market principles or where prices are not reflective of their fair value on account of significant state intervention. In determining this fact, the investigating authority is required to consider aspects such as whether the factors of production operate on market signals without significant state interference, whether bankruptcy and property laws are applicable to firms and whether the exchange rate conversions are carried out at market rate or not.175 Prior to 2002, India maintained a list of countries presumed to be NMEs for the purposes of anti-dumping investigations which was subsequently changed

EU fails to quit “analogue country” practice on China as required by WTO, CHINA DAILY (Dec. 13, 2016), http://www.chinadaily.com.cn/bizchina/2016-12/13/content_27656900.htm. 172 Gatta, supra note 42, at 238. 173 Custom Tariff (Identification, Assessment and Collection of Anti-Dumping Duty on Dumped Articles and for Determination of Injury) Rules, Gazette of India, section II(3)(i), ¶ 7, annexure 1 (Jan. 1, 1995) [hereinafter Indian Anti-dumping Rules]. 174 World Trade Organization, Dumping Measures: Reporting Member v. Exporter (1/1/1995 – 31/ 12/2016), WTO Anti Dumping Gateway, https://www.wto.org/english/tratop_e/adp_e/AD_ MeasuresRepMemVsExpCty.pdf. 175 Indian Anti-dumping Rules, supra note 173, rule 8 (3). 171

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following an amendment in 2002.176 Pursuant to the 2002 amendment, the Indian Anti-dumping Rules provide that there exists a rebuttable presumption of an NME, if in the preceding three years, the competent authority of any WTO Member or the Indian anti-dumping agency has categorised a country as an NME.177 The presumption can be rebutted by producers by showing that decisions of producers under investigations are motivated and dictated by market signals which demonstrate a lack of state interference and by additionally establishing the criteria set out more particularly in paragraph 7 (3), Annexure 1 of the Indian Anti-dumping Rules. In anti-dumping investigations, the NME presumption can be rebutted by exporters in their responses to various questions listed in the market economy questionnaire. The market economy questionnaire generally elicits responses on aspects including ownership details, nature of contracts for inputs, utilities etc. In cases where information is unavailable, investigating authorities are compelled to resort to prices which are domestically available.178 In the event of an NME producer failing to rebut the presumption, the Indian Anti-dumping Rules permit the construction of normal value. Paragraph 7 of Annexure- 1 of the Indian Anti-dumping Rules reads as follows: In case of imports from non-market economy countries, normal value shall be determined on the basis of the price or constructed value in the market economy third country, or the price from such a third country to other countries, including India or where it is not possible, or on any other reasonable basis, including the price actually paid or payable in India for the like product, duly adjusted if necessary, to include a reasonable profit margin.179

In practice, the Directorate of Anti-Dumping & Allied Duties (“DGAD”) in India does not often determine normal value for an NME exporter on the basis of the surrogate methodology in the strict sense as cooperation from third country exporters would often be unavailing. This method is also more administratively difficult and cumbersome. In such situations, the DGAD constructs the normal value based on ‘any reasonable basis’. In the anti-dumping investigation involving solar cells from Malaysia and China,180 the DGAD found that the Chinese companies under investigation did not operate under market economy conditions. The DGAD took

176

Amendment to the Customs Tariff (Identification, Assessment and Collection of Anti-dumping Duty on Dumped Articles and for Determination of Injury) Rules, 1995, Customs Notification No. 1/2002 (Ministry of Com. & Indus., Apr. 1, 2001), http://commerce.gov.in/writereaddata/ traderemedies/compendium/comp8.pdf. 177 Indian Anti-dumping Rules, supra note 173, rule 8 (2), Annexure 1. 178 Sunset review (SSR) investigation of the anti-dumping duties imposed on the imports of Saccharin from China PR ¶ 46 (Ministry of Com. & Indus., Dec. 30, 2017) (final finding) http:// www.dgtr.gov.in/sites/default/files/adfin_ssr_saccharin_chinapr.pdf. 179 Indian Anti-dumping Rules, supra note 173, ¶ 7, Annexure 1. 180 For example see, Anti-dumping investigation concerning imports of Solar Cells, whether or not assembled partially or fully in Modules or Panels or on glass or some other suitable substrates, originating in or exported from Malaysia, China PR, Chinese Taipei and USA (Ministry of Com. & Indus., May 22, 2001) (final find.) [hereinafter DGAD Solar Cells]. http://commerce.nic.in/ writereaddata/traderemedies/adfin_Solar_Cells_Malaysia_ChinaPR_Chinese_Taipei_USA.pdf

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into account the fact that investigating authorities in the United States and EU had also not granted Chinese companies market economy treatment in recent cases involving solar cells.181 Consequently, the DGAD resorted to Paragraph-7 of the Annexure-1 to the Indian Anti-dumping Rules for calculation of normal value. In this case, the DGAD noted that the surrogate method cannot be employed since the DGAD did not have the complete and exhaustive data on third country export sales nor the domestic prices in a third market economy.182 Therefore, the DGAD proceeded to construct the normal value on ‘any other reasonable basis’ i.e. on the basis of the constructed costs of production of the most efficient domestic industry, duly adjusted to include selling, general and administrative costs/expenses and reasonable profits. The DGAD’s construction of normal value on ‘any other reasonable basis’ also includes reliance on international prices of raw materials and inputs for the construction of normal value.183 The DGAD takes into account the prices of the inputs, conversion cost, cost of utilities and selling, general and administrative expenses based on the ‘best information available’.184 The DGAD also follows the principle that cost adjustments are made to ensure that the constructed cost reflects the costs in the exporting country. This approach provides the DGAD with the flexibility to use Chinese costs and prices if some of the inputs or utilities in China are valued at market determined prices or use international prices or costs, which are duly adjusted to arrive at the cost in the exporting/investigated country. In other words, this practice closely resembles the ‘bubbles of capitalism’ approach exhaustively discussed in Chapter “Shifting Sands: The Evolution and Future Course of U.S. Anti-dumping Law and Practice against China and Vietnam” (Moushami’s chapter) of this book. In several cases post December 2016, the DGAD has addressed the effect of the expiry of Section 15 (a)(ii) of the Protocol of Accession. Chinese exporters under investigation have argued that while determining the normal value, the DGAD must consider domestic selling prices and costs since China has transitioned to a market economy in December 2016 according to its Protocol of Accession.185 On the other hand, the domestic industry reaffirmed its view that China continues to remain a 181

The EU and US authorities took into account factors such as the distortions created by an income tax system that favours certain companies and that the financial statements of certain Chinese companies did not adhere to international accounting standards. 182 DGAD Solar Cells, supra note 180, ¶ 46. 183 Anti-Dumping Investigations concerning imports of Diethyl Thio Phosphoryl Chloride originating in or exported from China PR, ¶ 68 (Ministry of Com. & Indus., May 6, 2010) (final find.); Anti-dumping investigation concerning imports of “Albendazole” originating in on exported from China PR, ¶ 29 (Ministry of Com. & Indus., Nov. 5, 2015) (final find.) http://www.dgtr.gov.in/ sites/default/files/adfin_Diethyl_Thio_Phosphoryl_Chloride_ChinaPR.pdf. 184 Sunset Review of Anti-Dumping duty on imports of ‘Melamine’ originating in or exported from China PR ¶ 31 (Ministry of Com. & Indus., Dec. 5, 2015) (final find.) http://www.dgtr.gov.in/sites/ default/files/adfin_SSR_2_melamine_chinaPR.pdf. 185 Anti-dumping investigation concerning imports of “Wire Rod of Alloy or Non-Alloy Steel” originating in or exported from China PR, ¶ 35 (Ministry of Com. & Indus., Aug. 30, 2017) (final find.) http://www.dgtr.gov.in/sites/default/files/FF%20WR-NCV.pdf.

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non-market economy and that the exporters under investigation did not satisfy the conditions laid down in domestic law to qualify for market economy treatment.186 The DGAD, in these cases, did not directly address the effect of expiry of Section 15 (a)(ii) on the investigation. According to the DGAD, since the factum of dumping causing injury to the domestic industry is established based on the conditions prevalent during the period of investigation, only the conditions applicable during the POI are relevant for the purposes of the investigation. In all these cases, the POI was prior to December 2016.187

4.4

China as a Market Economy: Australian Practice and the Use of the ‘Particular Market Situation’

While the debate on the expiry of the NME methodology continues to divide scholars and trade specialists, WTO Members continue to develop possible alternatives to the use of domestic costs and prices in anti-dumping proceedings. An example of this is demonstrated in the practice of Australia, which has relied on the

186

Anti-dumping investigation concerning imports of Castings for Wind Operated Electricity Generators, whether or not machined, in raw, finished or subassembled form…from China PR, ¶ 54 (Ministry of Com. & Indus., Jul. 28, 2017) (final find.) http://www.dgtr.gov.in/sites/default/ files/casting.pdf. 187 Anti-dumping investigation concerning imports of “Color coated/ prepainted flat products of alloy or non-alloy steel” originating in or exported from China PR and European Union-reg, ¶ 30 (Ministry of Com. & Indus., Aug. 30, 2017) (final find.), http://www.dgtr.gov.in/sites/default/files/ FF%20CC-%20NCV.pdf; Anti-dumping Investigation concerning imports of ‘Toulene Di-Isocyanate (TDI)’ originating in or exported from China PR, Japan or Korea RP, ¶ 29, (Ministry of Com. & Indus., Mar. 28, 2017) (final find.), Sunset Review investigation of Anti-dumping duty imposed on the imports of Certain Rubber Chemicals, namely, TDQ & PX-13 originating in or exported from the European Union and MOR and MBTS originating in or exported from the Peoples Republic of China, ¶ 42 (Ministry of Com. & Indus., Sep. 2, 2017) (final find.) http://www.dgtr.gov.in/sites/default/files/RC.NCVdona.final-english.pdf; Anti-dumping investigation concerning imports of “Wire Rod of Alloy or Non-Alloy Steel” originating in or exported from China PR, ¶ 38 (Ministry of Com. & Indus., Aug. 30, 2017) (final find.), http://www.dgtr.gov.in/sites/default/files/FF%20WR-NCV.pdf; Sunset Review of Anti-dumping duty imposed on the imports of Sodium Nitrite originating in or exported from China PR, ¶ 27 (Ministry of Com. & Indus., Jul. 19, 2017) (final find.), http://www.dgtr.gov.in/ sites/default/files/SNI-NCV.FFV1_.pdf; Final Findings in the Sunset Review of Anti-dumping duty imposed on the imports of Pentaerythritol originating in or exported from China PR, ¶ 24 (Ministry of Com. & Indus., May 12, 2017) (final find.), http://www.dgtr.gov.in/sites/default/files/ penta%20FF.V1_0.pdf; Sunset Review (SSR) Anti-dumping investigation concerning imports of ‘1– Phenyl-3-Methyl-5-Pyrazolone’ originating in or exported from China PR, ¶ 21 (Ministry of Com. & Indus., Aug. 9, 2017(final find.)), http://www.dgtr.gov.in/sites/default/files/Final% 20Finding%20-NCV%20Ver.%20Final.pdf, Anti-dumping investigation concerning imports of Castings for Wind Operated Electricity Generators, whether or not machined, in raw, finished or subassembled form…from China PR, ¶ 56 (Ministry of Com. & Indus., July 28, 2017) (final find.), http://www.dgtr.gov.in/sites/default/files/casting.pdf.

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‘particular market situation’ method to disregard Chinese costs and prices in anti-dumping proceedings. According to Article 2.2 of the Anti-dumping Agreement, domestic prices of products may be disregarded in cases where there are no domestic sales of the product in the ordinary course of trade, the volume of domestic sales is low or there is a ‘particular market situation’. In such cases, normal value is determined by reference to the export price of the ‘like’ product to a third country or by constructing the normal value on the basis of the cost of production in the country of origin plus a reasonable amount of selling, administrative and general expenses.188 Thus, in cases of PMS, domestic prices can be replaced with a constructed normal value. While the U.S. and the EU have incorporated the concept of PMS in their domestic legislation, the concept has not found much use considering that these Members were until now able to employ the NME methodology against Chinese exports.189 However, the use of the PMS method has come under scrutiny— Indonesia recently requested consultations with Australia over the anti-dumping measures imposed by the Australian Anti-Dumping Commission (Australian Commission) on A4 copy paper imported from Indonesia.190 In this case, the Australian Commission found a PMS in the domestic paper market in Indonesia because the Government implemented policies that increased the supply of timber, which lowered the price of timber and therefore the price of paper.191 Consequently, the Australian Commission used a constructed value method to determine the normal value. Indonesia alleges that Australia has acted inconsistently with Article 2.2 of the Anti-dumping Agreement as: (i) no PMS existed within the meaning of the term; and (ii) even if a PMS existed, both domestic and export prices would have been affected and a proper comparison could have been made without resorting to the constructed value method.192 The case, if not resolved at the consultation stage, could offer the WTO DSU an opportunity to specify and detail the meaning of PMS. 4.4.1

Use of the ‘Particular Market Situation’ in Australian Anti-dumping Proceedings

As a precondition for negotiation of the China-Australia Free Trade Agreement, Australia recognized China as a full market economy in 2005 and committed to not 188

Anti-dumping Agreement, supra note 19, art. 2.2. Zhou and Percival, supra note 124, at 865. 190 Request for Consultations by Indonesia, Australia – Anti-Dumping Measures on A4 Copy Paper, WTO Doc. WT/DS529/1 (Sep. 5, 2017). 191 Anti-Dumping Commission, Alleged Dumping of A4 Copy Paper Exported from the Federative Republic of Brazil, the People’s Republic of China, the Republic of Indonesia and the Kingdom of Thailand (March 17, 2017), http://adcommission.gov.au/cases/EPR%20301%20%20350/EPR% 20341/221%20-%20Report%20-%20Final%20Report%20-%20REP%20341.pdf, at 30. 192 Request for Consultations by Indonesia, Australia – Anti-Dumping Measures on A4 Copy Paper, ¶ 1, WTO Doc. WT/DS529/1 (Sep. 5, 2017). 189

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seek recourse to Section 15 of the Protocol of Accession.193 However, the Anti-Dumping Commission frequently treats China as having a ‘particular market situation’ in anti-dumping proceedings.194 The Customs Act, 1901 (Customs Act) requires that the normal value be calculated as per the selling price of the product in the domestic country.195 However, the Minister of Customs is allowed to divert from the aforesaid rule in cases where the “situation in the market of the country of export is such that sales in the market are not suitable for use in determining [normal value]…”196 (emphasis added). Thus, in such cases, the Minister is empowered to use other methods to determine normal value, including the constructed value method. The phrase “situation in the market” is not defined in the Customs Act; nor does the Customs Act provide any criteria to determine suitability of sales in determining normal value. In determining whether a “market situation” exists, the Anti-dumping Commission will seek to determine if the impact of the government’s involvement in the domestic market has led to materially distorted conditions of competition.197 In practice, the Australian agency has relied on evidence such as China’s macroeconomic policies promoting industrial development, financial assistance to domestic industries and measures such as tariffs and quotas.198 In the anti-dumping case involving certain hollow structural sections199 (HSS), the Australian Customs and Border Protection Service (‘Customs Service’) imposed anti-dumping duties on imports of hollowed structural sections from China, Korea, Malaysia and Taiwan. In this case, the normal value for the goods exported from China was calculated by reference to an external benchmark on the grounds that a case of PMS has made the domestic prices of HSS in China unreliable.200 A case for PMS was found on account of several Governmental macro-economic policies such as National Steel Policy, National and Regional 5-Year Plans and the Blueprint for Steel Industry Adjustment and Revitalisation. The Customs Service noted that the macroeconomic 193

Memorandum of Understanding between the Department of Foreign Affairs and the Trade of Australia and the Ministry of Commerce of the People’s Republic of China on the Recognition of China’s Full Market Economy Status and the Commencement of Negotiation of a Free Trade Agreement between Australia and the People’s Republic of China (Dep’t of For. Affairs & Trade, Apr. 18, 2005), https://dfat.gov.au/trade/agreements/chafta/Documents/mou_aust-china_fta.pdf. 194 Stephanie Noel and Weihuan Zhou, Replacing the Non-Market Economy Methodology: Is the European Union’s Alternative Approach Justified under the World Trade Organization Antidumping Agreement? 11 GLOBAL TRADE & CUSTOMS J., 559, 560 (2016). 195 Customs Act, 1901, s. 269TAC (1) (Austl.). 196 Ibid., s. 269TAC(2)(a)(ii). 197 Anti-Dumping Commission, Dumping and Subsidy Manual 35 (Nov. 2015), http://www. adcommission.gov.au/accessadsystem/Documents/Dumping%20and%20Subsidy%20Manual% 20-%20April%202017.pdf. 198 Noel and Zhou, supra note 194, at 561. 199 Decision of the Trade Measures Review Officer – Hollow Structural Sections (Trade Measures Rev. Officer, Dec. 14, 2012), http://www.adcommission.gov.au/cases/Documents/TMROHollowStructuralSections-Decision14Dec12.pdf [hereinafter HSS Decision]. 200 Id.

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measures imposed by the Chinese Government increased the supply of the inputs for HSS, which suppressed the domestic price of HSS. However, the review authority i.e. the Trade Measures Review Officer (“TMRO”) held that a ‘market situation’ that renders domestic sales unsuitable for determining normal value does not arise if the government merely exercised ordinary functions by imposing regulatory controls on the market which may affect their costs and therefore the price of the products.201 According to the TMRO, PMS exists only with respect to the suitability of domestic sales for the purposes of assessing normal value, so as to allow proper comparison with export price.202 Referring to domestic case law, the TMRO held that for a ‘market situation’ there must be ‘a degree of distortion in the market that renders arms length transactions in the ordinary course of trade unsuitable to give a true normal value, but that this unsuitability will not necessarily be brought about by any factor that simply depresses or inflates domestic prices’. The sufficiency and availability of evidence regarding government intervention and its impact on prices is crucial for a finding of PMS.203 In the case involving Aluminum Road Wheels (ARW),204 the concerned measures involved certain tax policies, which imposed higher export tax on the inputs of aluminum while imposing low or no export tax on the final product.205 According to the TMRO, the cumulative effect of such policies was to encourage the domestic manufacture of aluminum and the implementation of such policies increased the supply of aluminum in China. Consequently, this reduced the domestic price of aluminum in China, which lowered the domestic ARW prices.206 As opposed to the HSS investigation, the TMRO found positive evidence of PMS on the following grounds: (i) the tariff and tax policies had a more direct impact on the goods under consideration since it impacted aluminum which is a direct input in ARW; and (ii) the policies in the HSS case also had a rationale of environmental and labour protection, which was lacking in the measures under consideration in the ARW case.207 It must be noted that the TMRO had no direct evidence of the precise extent to which the policies of the Chinese Government impacted the domestic price of aluminum. The determination was made on the basis of a comparison between the domestic price of aluminum against a competitive market benchmark i.e., the price of aluminum on the London Metal Exchange (“LME”). As set out by the TMRO, 201

Id. Id., ¶ 110. 203 Weihuan Zhou, Australia’s Anti-Dumping and Countervailing Law and Practice: An Analysis of Current Issues Incompatible with Free Trade with China 49(6) J. WORLD TRADE, 980, 988 (2015). 204 Decision of the Trade Measures Review Officer – Aluminum Road Wheels (Trade Measures Rev. Officer, Dec., 2012), http://www.adcommission.gov.au/cases/Documents/TMROReportDecember 2012.pdf. 205 Id. 206 Id., ¶¶ 95–96. 207 Id., ¶ 100. 202

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the analysis by the Customs Service did not isolate the extent to which tariffs contributed to the lower prices since it would be extremely difficult to do so.208 However, the only alternative suggested for the low price of aluminum prevailing in China was the competitiveness of the Chinese aluminum industry. According to the TMRO, this was not a material factor in the low price of aluminum in China since the domestic price of aluminum was markedly different from the international benchmark i.e. the LME price and there was also no increase in aluminum exports—which would have occurred had there been greater competition in the domestic market in China.209 A perusal of Australian cases on the issue of PMS highlights some major findings: First, it has been argued that the determination of PMS by Australian authorities does not include an analysis on whether government intervention in raw materials has actually passed through and caused distortions in the prices of the final goods.210 It cannot be assumed, like in the ARW investigation, that because the price of aluminum (the raw material in the manufacture of ARW) is lower than competitive market prices, the price of the final product (ARW, in this case) is also artificially low.211 A finding of distortions in input prices ‘passing through’ to the final product is supported by WTO jurisprudence,212 and in the absence of such an affirmative finding, a PMS cannot be assumed to exist.213Second, in several cases, the Australian authorities have relied on external benchmarks to replace the costs of raw materials actually incurred by Chinese exporters, in constructing the normal value.214 In the ARW investigation, the domestic price of aluminum was substituted with the price of aluminum on the LME. In the investigation on galvanized steel, the normal value was calculated based on the prices of hot rolled coil (an input in the case) in Korea and Taiwan.215 The use of external benchmarks is inconsistent with the ruling of the Appellate Body in EU—Biodiesel and Article 2.2.1.1.216 While the decision in EU—Biodiesel does not preclude the use of Id., ¶ 98. Id., ¶ 99. 210 Id., at 579. 211 Zhou, supra note 203, at 988. 212 In Appellate Body Report, United States — Final Countervailing Duty Determination with Respect to Certain Softwood Lumber from Canada ¶ 140, WTO Doc. WT/DS397/AB/R (adopted Jul. 28, 2011), the Appellate Body held, where the producer of the input is not the same entity as the producer of the processed product, it cannot be presumed…that the subsidy bestowed on the input passes through to the processed product. In such case, it is necessary to analyse to what extent subsidies on inputs may be included in the determination of the total amount of subsidies bestowed upon the processed products…. 213 Zhou, supra note 203, at 988. 214 Id., at 990. 215 Dumping of Zinc Coated (Galvanised) Steel and Aluminum Zinc Coated Steel Exported from the People’s Republic of China, the Republic of Korea, Taiwan, Report to the Minister No. 190, 60–63 (Austl. Customs & Border Protection Serv., Apr. 30, 2013). http://www.adcommission.gov. au/cases/Documents/142-REP190.pdf 216 Zhou, supra note 203, at 990. 208 209

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surrogate country prices, such prices may have to be adapted to arrive at the cost of production in the country of origin.217 But pursuant to the ruling in EU—Biodiesel, Australian anti-dumping authorities will find it difficult to disregard Chinese costs and prices, if they have been recorded accurately.218 In the constructed value method, it has been argued that the Australian Anti-Dumping Commission may find that the prices of inputs are distorted due to State influence. This leads the authorities to replace domestic Chinese costs with benchmark prices such as raw material costs in a third country.219 It has been argued that this approach leads to an inflation in import costs, which consequently inflates the constructed normal value, the dumping margin and ultimately the anti-dumping duties.220 Further, it has also been argued that the practice of the Australian authorities in determining a ‘particular market situation’ is not based on positive evidence of government interference in inputs actually impacting the final price.221 While China has opposed the Australian practice of determining a ‘particular market situation’, Australia continues to engage in the determination of a ‘particular market situation’ while recognizing China as a full market economy.222

4.5

China as a Market Economy: Practice of Brazil

On the occasion of the visit of Chinese President Hu Jintao in November 2004, Brazil recognized China as a market economy.223 This was undertaken pursuant to the Memorandum of Understanding on Trade and Investment Cooperation Between the People’s Republic of China and the Federative Republic of Brazil signed on November 12, 2004 (“MOU”).224 However, Brazil has not declared China as a market economy in its domestic law, with some attributing this to low Chinese investment in Brazil as well as China’s broken promise to support Brazil for a permanent seat in the United Nations Security Council.225 Further, Chinese

EU — Biodiesel (AB Report), supra note 17, ¶ 6.76 and 6.76. Weihuan Zhou and Andrew Percival, Panel Report on EU-Biodiesel: A Glass Half Full? Implication for the Rising Issue of ‘Particular Market Situation’ 2 (2) CHINESE J. GLOBAL GOVERNANCE 142, 161 (2016). 219 Noel and Zhou, supra note 194, at 561. 220 Zhou, supra note 203, at 991. 221 Zhou, supra note 203, at 985; Noel and Zhou, supra note 194, at 561. 222 Noel and Zhou, supra note 194, at 587. 223 Brazil recognizes China as market economy: Hu, TAIPEI TIMES (Nov. 14, 2004), http://www. taipeitimes.com/News/biz/archives/2004/11/14/2003211038. 224 Embassy of People's Republic of China in Ireland, Brazil Recognizes China's Market Economy Status in the Memo (2004), http://ie.china-embassy.org/eng/jbwzlm/NewsPress/t170382.htm. 225 International Bar Association - Divisions Project Team, Anti-Dumping Investigations Against China in Latin America (Feb. 1, 2010), 26 https://papers.ssrn.com/sol3/papers.cfm?abstract_id= 1555619. 217 218

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exporters continue to receive and provide responses to questionnaires on their market economy status, indicating that there is no difference in treatment of Chinese products by Brazilian authorities even after granting market economy status.226 Under Decree 8.058/2013227—the legislation governing the anti-dumping regime in Brazil (Brazilian Anti-dumping Decree)–the Chamber of Foreign Trade (“CAMEX”) is tasked with providing market economy status to a county for the purpose of trade defense remedies.228 Unlike the United States, European Union or India, Brazil does not have a defined criteria for designating a country as an NME. Under Section 15 of the Brazilian Anti-dumping Decree, the normal value is determined on the basis of: (i) the sale price of the like product in a third country; (ii) the constructed value of the like product in a third country; (iii) the export price of the like product from a third country to other countries, except Brazil; and (iv) where none of the aforesaid methods are feasible, any other reasonably determined price including the price to be paid for the like product in the Brazilian domestic market, properly adjusted, to include a reasonable profit margin. In choosing a surrogate country, Brazilian authorities are required to take into account reliable information submitted by the producer and exporter under investigation including the volume of exports of the like products from the third country to Brazil and to other main markets across the world, the volume of sales in such third market economy, similarity of the product under investigation and the product sold in the domestic market or exported by the third country, availability of statistical information and degree of appropriateness of the information submitted in respect of the ongoing investigation.229 Producers or exporters from NMEs such as China are permitted to submit evidence of the existence of market economy conditions within a period of 70 days from the date of initiation.230 The evidence submitted by the exporter or producer must demonstrate that the prices, costs and inputs of raw materials, technology, labour etc., are based on market conditions, that such producer or exporter maintains a transparent internal accounting system which is based on international accounting principles, that the costs incurred by such producer or exporter are not subject to significant distortions stemming from current or past ties to the government and that the producer or exporter is subject to bankruptcy or property laws.231 It must further be noted under the Brazilian law the interested parties are notified of the appropriate surrogate country to be utilized at the stage of initiation

226

International Trade Association, Business Guide to Trade Remedies in Brazil, 108 (2008), http://legacy.intracen.org/publications/Free-publications/Trade_Remedies_Brazil.pdf. 227 Committee on Anti-Dumping Practices, Notification Of Laws And Regulations under Article 18.5 Of The Agreement by Brazil, WTO Doc. G/ADP/N/1/BRA/3 (Sept. 20, 2013), http:// enforcement.trade.gov/trcs/downloads/documents/brazil/GADPN1BRA3.pdf. 228 Id., art. 4. 229 Id., art. 15(1). 230 Id., art. 16. 231 Id., art. 17(1).

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itself, and if the producer/exporter disagree with the selection of such country, the producer/exporter may recommend an alternative third country.232 Despite identifying China as a market economy pursuant to the MOU in 2014, Brazilian authorities continue to treat China as an NME. In the case of Technical Porcelain originating in the People’s Republic of China,233 CAMEX held that China, for the purposes of trade defense measures, is not considered a predominantly market economy.234 It was noted that with respect to anti-dumping investigations in Brazil, a country can be designated as a market economy only pursuant to a notification by CAMEX. Since the MOU was not self-administered and that CAMEX had not issued any notification on the matter, China could continue to be treated as an NME.235 CAMEX noted that under Brazilian law, the producers/ exporters under investigation are entitled to present elements of proof of operating under market economy conditions.236 In this case, however, it was concluded that the Chinese exporters and producers under investigation did not provide sufficient evidence to support their claim that the Chinese technical porcelain tile industry operated under market conditions.237 Consequently, CAMEX determined the normal value on the basis of the export price of a like product from a market economy to other countries. In this case, the normal value was calculated on the basis of the export price of tiles from Turkey to Russia.238 232

Id., art. 15(3). Resolution No. 122 of December 18, 2014: Applies a trade defense measure, for a period of up to five (5) years, to Brazilian imports of technical porcelain, originating in the People's Republic of China (Ministry Indus., Foreign Trade & Serv., Dec. 18, 2014), http://www.camex.gov.br/ component/content/article/62-resolucoes-da-camex/em-vigor/1446-resolucao-n-122-de-18-dedezembro-de-2014 [hereinafter Technical Porcelain Decision]. 234 Id., ¶ 4.1.1. 235 Id., ¶ 4.1.5. 236 Id., ¶ 3.1.2; See Secretariat of Foreign Trade, Circular No. 59, dated 28 November 2001 (Nov., 2001), http://www.sice.oas.org/antidumping/legislation/brasil/SCX59_e.asp (Braz.). [hereinafter SECEX Circular] In the investigation, the producer/exporter under investigation and the respective government will be entitled to present elements of proof with the aim of requesting a reassessment of this qualification, involve information, inter alia, on exchange rates, interests, wages, prices, equity control, stock exchange, investment, price formation of relevant inputs and others that are considered adequate by the party or by SECEX. Article 3.3 of the SECEX Circular states, ‘for the assessment of the existence of market economy conditions, the following elements, “inter alia”, will be observed: (a) the degree of government control over the companies or over the means of production; (b) the level of state control over the allocation of resources, over prices and over the production decisions by companies; (c) the legislation to be applied in terms of ownership, investment, taxation and bankruptcy; (d) the degree of freedom in the determination of wages in negotiations between employers and employees; (e) the level at which distortions inherited from the centralized economy system persist in relation to, inter alia, assets amortization, other assets deductions, direct swap of assets and payments in the form of debt compensation; and (f) the level of state interference on currency exchange operations. 237 Technical Porcelain Decision, supra note 233, ¶ 4.1.5. 238 Turkey was chosen as a third market economy since the analysis of exports from Turkey showed that the country is proven to be globally representative in technical porcelain exports. In addition, in comparison with the other alternatives proposed, this country presents consumer 233

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The NME treatment of Chinese products by Brazilian authorities continues to be in operation even after December 2016. In the recent anti-dumping investigation involving Thermal Bottles originating in China,239 China was not considered a market economy and the petitioners for anti-dumping suggested the use of prices in a third market economy—Germany in this case. However, considering the difficulties in obtaining the domestic prices of flasks in Germany, CAMEX decided on the use of export price of the like product from Germany to the U.S.240 While the Brazilian authorities have predominantly based the normal value on the basis of export price of the like product from a third market economy to other countries,241 the surrogate method has also been used to compute the normal value in anti-dumping investigations involving China. Similarly, in the anti-dumping investigation involving Brazilian imports of tempered and rolled automative glass originating in China,242 China was considered an NME. Mexico was considered as a surrogate counntry in this case, since it was a traditional market for automative glass and sufficient similarity was found between Chinese and Mexican products.243 Several Chinese producers/exporters under investigation opposed the selection of Mexico as a surrogate country in this case and suggested India or South Korea as alternatives. However, CAMEX adopted Mexico as the surrogate country for the purpose of calculating normal value since the replies of the Mexican company to the third market questionnaire was found to be satisfactory and the same was validated on the basis of an on-site verification.244 The granting of market economy status to China by Brazil does not seem to have brought a change in the domestic anti-dumping practice and Chinese domestic market and socioeconomic conditions more similar to those existing in China. Russia was chosen as the country of destination since Russia represents the seventh largest importer of technical porcelain in the world in the period of investigation, which is closer to the volumes imported by Brazil. 239 Resolution No. 46 of July 5, 2017: Extending a definitive anti-dumping duty for a period of up to five (5) years, applied to Brazilian imports of thermal bottles originating in the People's Republic of China (Ministry Indus., Foreign Trade & Serv., July 5, 2017), http://www.camex. gov.br/component/content/article/62-resolucoes-da-camex/em-vigor/1878-(resolucao-n-46-de5-de-julho-de-2017. 240 Id., ¶ 5. 241 Resolution No. 07 of February 16, 2017: Extending a definitive anti-dumping duty for a period up to 5 (five) years in respect of Brazilian imports of viscose fabrics originating in the People’s Republic of China (Ministry Indus., Foreign Trade & Serv., Feb. 16, 2017), http://www.camex. gov.br/component/content/article/62-resolucoes-da-camex/em-vigor/1787-resolucao-n-07-de16-de-fevereiro-de-2017. 242 Resolution No. 5 of February 16, 2017: Imposes definitive anti-dumping duty for a period of up to five (5) years on Brazilian imports of tempered and rolled automotive glass originating in the People's Republic of China (Ministry Indus., Foreign Trade & Serv., Feb. 16, 2017), http://www. camex.gov.br/component/content/article/62-resolucoes-da-camex/em-vigor/1785-resolucao-n-05de-16-de-fevereiro-de-2017. 243 Id., ¶ 5.3. 244 Id., ¶ 5.3.

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prices continue to be disregarded in anti-dumping investigations. Further, the expiry of Section 15 (a)(ii) of the Protocol of Accession does not seem to impact the NME treatment of Chinese imports in Brazilian anti-dumping investigations. The practice of Brazil indicates that the granting of market economy status is a political act and is not often followed in practice.

4.6

Treatment of China in Anti-dumping Investigations: Canadian Practice

The conduct of anti-dumping proceedings in Canada is governed by the Special Import Measures Act (“SIMA”)245 and the Special Import Measures Regulations (“SIMR”).246 The NME provision-related policy titled ‘Information on the Application of Section 20 of the Special Import Measures Act (“Non-market Economies”)’ came into effect only in 2003.247 The Canada Border Services Agency (“CBSA”) and Canadian International Trade Tribunal (“CITT”) are the domestic agencies jointly responsible for its administration. Sections 20(1)(a) and (b) of SIMA deal with two types of situations: exports from prescribed countries and from non-prescribed countries, respectively. Section 20(1)(a) governs goods shipped from a country, which fulfills the twin conditions of: (i) the domestic prices in the exporting country being “substantially determined by the government of that country”; and (ii) the existence of “sufficient reason to believe”, based on determination by the President of the CBSA, that the prices of these goods are “not substantially the same as they would be if they were determined in a competitive market”. A list of such ‘prescribed countries’ is set out in Regulation 17.2 of SIMR, which includes China, Vietnam and Tajikistan.248 Notably, a previous version of Regulation 17.2 of the SIMR, when designating China as a ‘prescribed country’, stated that such designation would cease to have effect on December 11, 2016.249 However, in 2013, this expiry date provision of SIMR was deleted by an amendment and, as a result, even after December 11, 2016, China continues to be on the list.250 The rationale given in the amendment was that “without this amendment, prescribed countries under the Regulations would expire automatically and Canada’s trade remedy regime would potentially not be able to

245

Special Import Measures Act, R.S.C., 1985, c. S-15 (Can.) [hereinafter SIMA]. Special Import Measures Regulations, SOR/84-927 (1984) (Can.) [hereinafter SIMR]. 247 Information on the Application of Section 20 of the Special Import Measures Act (“Non-market Economies”), August 2007, WTO, G/ADP/Q1/CAN/15, at 14. 248 See SIMR, supra note 246, Regulation 17.1. 249 See SIMR, supra note 246, Regulation 17.1, http://laws-lois.justice.gc.ca/eng/regulations/SOR84-927/section-17.1-20060322.html#wb-cont. 250 Regulations Amending the Special Import Measures Regulations, SOR/2013-81, s. 1 (2013) (Can.) http://www.gazette.gc.ca/rp-pr/p2/2013/2013-05-08/html/sor-dors81-eng.html. 246

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take into account whether prescribed countries are operating according to market economy conditions or not. Consequently, there would be a risk of unfairly traded imports entering Canada and causing injury to domestic producers’ operations.”251 In any case, removal from the list would not have made Chinese products immune from Section 20 inquiry. Even after removal of China from the list, it is possible to subject Chinese products to an inquiry under the Section 20(1)(b) category. Under Section 20(1)(b), the non-prescribed countries fulfilling the additional requirement of government monopoly, substantially or more, of export trade, can be subject to the alternate method of calculating anti-dumping duties given in the section. Thus, in accordance with the Canadian domestic law, the expiry of Section 15(a)(ii) of the Protocol of Accession before the 2013 amendment would have merely made it tougher to put Chinese goods under NME inquiry, but not impossible. The normal value in any of the two situations under Section 20(1) above is calculated in conformity with Section 20(1)(c) by using the “surrogate country” method with domestic prices of goods adjusted according to terms and conditions of sale, taxation, price comparability in a country other than Canada and for use in that country. Alternatively, the “constructed value” method of calculating the aggregate of cost of production of “like goods”, costs and profits is also used. If satisfactory data is not available to implement one of these methods, the CBSA can rely on prices of like goods imported in Canada from a third country. It must be noted that instead of applying to an entire country, Section 20 only applies to sectors. Therefore, any inquiry under this provision will be for the determination of non-market characteristics of a sector and even then, SIMA does not provide for blanket designation of the sector or market with the label of “non-market”. The two key principles under Section 20 are: (i) non-discrimination based on country, sector or product under investigation, with the presumption being that Section 20 of the Act does not apply to the sector under investigation (unless there is evidence to suggest otherwise); and (ii) the complainant having to provide early evidence for recourse to Section 20. Based on the past practice, the presence of China’s name on the prescribed list has made the use of the surrogate country methodology easier, despite the initial burden of proof being on the complainant. This is evident from cases like Silicon Metal case252 and Large diameter carbon and alloy steel line pipe case.253 It would have been interesting to observe how China’s removal from the prescribed list would have affected a Section 20 inquiry. But as of date, there has been no change in China’s status in the prescribed list or any other treatment post December 2016.

See Regulations amending the Special Import Measures Regulations – Regulatory Impact and Analysis Statement (Jun. 14, 2013), http://www.gazette.gc.ca/rp-pr/p2/2013/2013-05-08/html/sordors81-eng.html. 252 Certain Silicon Metal Originating In Or Exported From The People's Republic Of ChinaStatement Of Reasons, AD1400/4214-39 (Can. Border. Serv. Agency, May 21, 2013). 253 Large diameter carbon and alloy steel line pipe from China and Japan-Statement of Reasons, AD1408/4214-47 (Can. Border Serv. Agency, Nov. 28, 2016). 251

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In the Polyethylene Terephthalate Resin Investigations case,254 based on the POI of April 1, 2016 to March 31, 2017, it was held that the evidence was insufficient to initiate a Section 20 inquiry against China. In the investigation on Fabricated Industrial Steel Components,255 where the POI was from January 1, 2014 to June 30, 2016 and the final determination was given on May 10, 2017, the Section 20 inquiry was held under Section 20(1)(a) i.e. China was treated as a ‘prescribed country’ and consequently, Chinese costs and prices were disregarded. Similarly, in the re-investigation of Concrete Reinforcing Bar,256 the CBSA did not take note of any change in China’s status.

5 Out of Country Prices: The Implications of EU—Biodiesel The possibility of key anti-dumping users completely abandoning the surrogate country methodology for calculating the normal value of Chinese exporters looks highly remote at this stage. It is possible that some of the key users could come up with some improvised versions or tweaking of the surrogate country methodology. However, there is an overwhelming view among several commentators that with the recent findings of the WTO panel and the Appellate Body in EU—Biodiesel,257 the space available to a WTO Member for using surrogate values in the case of market distortions in producing/exporting countries has been considerably constrained. A brief sketch of the facts in EU—Biodiesel is pertinent to this discussion. The case related to an anti-dumping investigation against biodiesel exported from Argentina. Soybeans (which are crushed to obtain soybean oil) is the major raw material and also the largest cost component in producing biodiesel. According to the EU, Argentina imposed differential export taxes (“DET”) on exports of soybeans, soybean oil, and biodiesel and the taxes imposed on the raw materials were higher than the taxes imposed on the exports of the finished product.258 The export taxes, according to the EU, allegedly depressed and distorted the soybeans and

254

Certain Polyethylene Terephthalate Resin Statement of Reasons, PETR 2017 IN (Can. Border Serv. Agency, Sep. 1, 2017). 255 Certain Fabricated Industrial Steel Components-Statement of Reasons, FISC 2016 IN (Can. Border Serv. Agency, May 10, 2017). 256 Certain Concrete Reinforcing Bar from Republic of Belarus (Belarus), Chinese Taipei, the Hong Kong Special Administrative Region of the People’s Republic of China, Japan, the Portuguese Republic and the Kingdom of Spain- Notice of Initiation of Section 20 Inquiry, RB 2017 RI (Can. Border Serv. Agency, Nov. 7, 2016). 257 Panel Report, European Union — Anti-Dumping Measures on Biodiesel from Argentina, WTO Doc. WT/DS473/R (adopted on Oct. 26, 2016). 258 Id., ¶ 5.5.

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soybean oil prices in Argentina.259 Based on this reason, the EU authorities had disregarded the costs provided by Argentinian producers. As already explained in the previous section, use of constructed normal value is a permitted option when there are no comparable domestic sales in the ordinary course of trade (in other words, implies the normal course of business), or in view of the particular market situation or low volume of sales in the domestic market of the exporter. In the Biodiesel case, the EU authorities noted that the domestic price of soybeans in Argentina was “artificially lower” than the international prices in view of the export taxes, and consequently replaced this cost with the average reference price for soybeans for exports published by the Argentine Ministry of Agriculture. The EU authorities considered that the surrogate price for soybeans reflected the international prices and what the Argentine producers would have paid in the absence of the export taxes.260 Argentina contested this methodology of the EU authorities. In particular, the Argentine challenge was built on the phrases “cost of production in the country of origin” in Article 2.2 of the Anti-dumping Agreement and “cost of production of the product in the country of origin” in Article VI: 1(b) (ii) of the GATT. The WTO Panel and later the Appellate Body ruled that the EU acted inconsistently with their obligations under the Anti-dumping Agreement and GATT 1994 by not using the cost of production in Argentina when constructing the normal value of biodiesel. The above findings in EU—Biodiesel have been relied upon to argue that surrogate prices can no longer be used in calculating constructed normal value in anti-dumping investigations for any perceived distortions in costs.261 However, EU —Biodiesel is by no means an authority for the proposition that out-of-country information cannot be used for the “cost of production in the country of origin”. It is worth noting what the Appellate Body has stated in its concluding observations. …When relying on any out-of-country information to determine the “cost of production in the country of origin” under Article 2.2, an investigating authority has to ensure that such information is used to arrive at the “cost of production in the country of origin”, and this may require an investigating authority to adapt that information.”262

In essence, the Appellate Body did not rule out the use of out-of-country prices, provided that the surrogate prices are “apt to or capable of yielding a cost of production in the country of origin”.263 The Appellate Body report only emphasized the need for adapting the out-of-country prices to make it suit the domestic cost of production. The second issue in EU—Biodiesel was whether an anti-dumping agency has to use the costs recorded by producers/exporters in the constructed normal value if it is of the view that the actual costs are far higher than what is stated in their accounting Id., ¶ 7.113. Id., ¶ 7.257. 261 See generally Zhou and Percival, supra note 124. 262 EU — Biodiesel (AB Report), supra note 17, ¶ 6.82 and 6.76. 263 Id., ¶ 6.70. 259 260

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records. This issue is a narrower subset when compared to the issue of the out-of-country costs or prices and is limited to the treatment of costs of individual parties. Obviously, one of the issues was whether Article 2.2.1.1 includes a general standard of “reasonableness” implying that the cost must be reasonable and undistorted. While the Panel and the Appellate Body emphasized the need for using production costs actually incurred by the producers or exporters for calculation of constructed normal value, the Appellate Body’s findings are not wholly unambiguous in relation to treating costs, which are distorted significantly due to state intervention. It is pertinent to quote the following part of the Appellate Body Report. …To the extent the costs are genuinely related to the production and sale of the product under consideration in a particular anti-dumping investigation, we do not consider that there is an additional abstract standard of “reasonableness” that governs the meaning of “costs” in the second condition in the first sentence of Article 2.2.1.1.264 (emphasis added)

The above observation is not free from ambiguities. The key issue is that if a particular exporter’s records do not properly capture the ‘cost’ in view of certain distortions or are not otherwise ‘faithful’ or ‘accurate’ in an economic sense, can the investigating agency disregard such costs? It is also important to refer to the terms “genuinely related”. To that extent, the Panel and the Appellate Body reports give enough room for the investigating agencies to disregard such costs.265 Furthermore, in the context of China, the Appellate Body’s findings may have limited value. It is important to state that one should not lose sight of the fact that Section 15 of China’s Protocol has not expired in its entirety. The Chinese exporters will still have to establish that market economy conditions prevail in the industry producing the like product. The surviving parts of Section 15 could still form the context and inform the operation of Article 2.2 of the Anti-dumping Agreement in relation to China. What is likely to happen in the future is the selection of a method, which may involve use of Chinese costs and prices on a case-by-case basis. As previously illustrated the constructed normal value method, which India has used in several cases in the past, could be an alternative approach. Even the U.S. has used such an approach in a number of cases.266 The significance of this approach is that it discounts the arbitrariness in the selection of a surrogate economy.

Id., ¶ 6.37. Id., ¶ 6.41. 266 See Oscillating Fans and Ceiling Fans from the People’s Republic of China (preliminary determinations of sales at less than fair value) 56 Fed. Reg. 25,664, 25,667 (U.S. Dep’t Com., 1991)(prelim. deter.); Chrome-Plated Lug Nuts from the People’s Republic of China, 56 Fed. Reg. 46,153, 46,154 (U.S. Dep’t Com., 1991)(final deter.). 264 265

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6 Conclusion The use of surrogate methodology against Chinese exporters in anti-dumping investigations post-2016 is a matter of diverging legal interpretations. Indeed, it is far more complicated than one could have imagined. The language of China’s Protocol of Accession is as ambiguous as it could be. While the legal opinions and scholarly views stand divided, a political solution to this conundrum may not be easy, especially given the vast number of countries employing NME methodology against China. This chapter has argued that the expiry of Paragraph (a)(ii) of Section 15 of the Protocol of Accession need not make the use of surrogate methodology completely inapplicable in the future. The expiry of this paragraph does not mean the prohibition of such a practice, especially when subparagraph (a)(i) of Section 15 permits a default choice of non-Chinese costs and prices—an indirect term for surrogate country values. Further, the Second Ad Note of Article VI of the GATT also permits the use of a surrogate country methodology, although the thresholds in this situation are fairly rigorous. The United States has already submitted in the ongoing dispute filed by China against the European Union that Articles VI:1 and VI:2 of the GATT provide the legal authority to reject prices and costs not determined under market economy conditions, which in its opinion, does not form the basis for a comparable price.267 A reference was also made to the accession documents of Poland, Romania and Hungary to argue that in each case, the Contracting Parties affirmed the right to reject and replace non-market economy costs and prices. The negotiating history of the Protocol of Accession also ties the use of the surrogate country methodology to the level of state interference in China’s economy. Thus, until market economy conditions are proven by Chinese exporters (under Section 15 (a) (i) or by the Chinese government (under Section 15 (d)), the NME treatment of China finds basis under the Protocol of Accession. A study of key Members such as the United States and the European Union demonstrates that such Members are not willing to grant market economy status to China, at least as of now. While the U.S. continues its NME treatment of Chinese imports, the EU has proposed to construct values based on international costs and benchmarks in the event of significant distortions. A similar approach has been used by Australia despite designating China as a market economy more than a decade ago. Australian authorities continue to arrive at a conclusion of ‘particular market situation’ and construct the normal value based on benchmark prices including prices in third countries and international price benchmarks. Similarly, while Brazil has also designated China as a market economy, it continues to rely on the surrogate methodology in anti-dumping proceedings involving Chinese imports. On the other hand, while India has used the constructed value method against Chinese exporters, Submission of the United States, European Union – Measures related to Price Comparison Methodologies, WT/DS 516, available at https://ustr.gov/sites/default/files/enforcement/WTO/US. Legal.Interp.Doc.fin.%28public%29.pdf. 267

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it has also allowed the use of Chinese costs and prices when market economy conditions have been established. Further, even when relying on the constructed value method, Indian authorities adjust international prices or costs to arrive at the cost in the exporting country (i.e. in China). This approach is consistent with the recent Panel and Appellate Body findings in EU—Biodiesel. This case has not expressly ruled out the use of out-of-country costs and prices in determining constructed normal value. What is likely to happen in the future is that a number of countries are likely to shift to the use of Chinese costs and prices in developing constructed normal values, but it appears that the use of surrogate country methodology is unlikely to disappear in its various manifestations.

How China Did not Transform into a Market Economy Jorge Miranda

Abstract China’s remarkable economic performance since the process of economic reforms began in 1978–79 is described by some as involving a transformation into a market economy. This characterization, while appealing, is inaccurate. What China did was to modernize its non-market economy by re-creating markets, abandoning central planning, and introducing some degree of privatization and opening to foreign trade and investment. Because China’s revitalized non-market economy is export-dependent, policies have been engineered to provide Chinese producers with artificial cost advantages consisting of heavily distorted factor, raw material and energy pricing. The Chinese Government also regulates industry conduct {regulation of industry conduct} to prevent “excessive competition” amongst Chinese producers. Finally, to assure that China’s industrial structure is sufficiently concentrated on high-value goods, the Chinese Government nurtures sectors, products and even production processes that it views as strategic or involving “cutting edge” technologies through development programs which result in further cost assistance, the regulation of market entry and scale of production, and even the provision of subsidies. So China has become an economic success story, but a market economy it is not. Keywords China Regulation


Non-market economy
Distortions
Factors of production

The opinions expressed in this Chapter are mine alone and do not represent in any way official views of King & Spalding LLP or its clients. I thank James Nedumpara and Weihuan Zhou, editors of this book, for comments. Bonnie Byers, J. Michael Taylor and Chris Cloutier also commented on a draft version of this Chapter. All errors remain my own, however. I thank Larry Stockel as well for ably producing electronic versions of all diagrams used. J. Miranda (&) International Trade Group, King & Spalding LLP, Washington, USA e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2018 J. J. Nedumpara and W. Zhou (eds.), Non-market Economies in the Global Trading System, https://doi.org/10.1007/978-981-13-1331-8_3

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1 Introduction China’s economic performance since the process of economic reforms began in 1978–79 is truly remarkable by any standard. One of the best illustrations of this is that China’s per capita income, measured in purchasing power parity (“PPP”) terms,1 increased from US$ 987 in 1990 to US$ 15,559 in 20162; that is, nearly 16 times. In fact, China’s per capita growth rate from 1990 through 2016 is the fastest of any country over this period, excluding net oil exporters.3 China’s economic ascent is described by the Chinese Government and some observers as involving a transformation from a non-market economy (“NME”) into a market economy. As this paper explains, such characterization is inaccurate. Actually, what China did was to modernize its non-market economy by abandoning the centrally-planned economy (or “CPE”) regime. This revitalized non-market economy involves more focused planning (instead of central planning) and some degree of privatization, price liberalization, and opening to foreign trade and foreign direct investment. Nevertheless, the State continues to pull all the necessary strings to ensure that the market does not dictate economic outcomes, particularly as regards the configuration of China’s industrial structure.4 Importantly, far from being ideological, this evolution came into being as a strategy to salvage China’s economic model by overhauling it in a way that would provide faster and steadier growth, but without compromising in the least the State-driven nature of the Chinese economy. The Chapter is organized into 12 Sections. Section 2 reviews China’s past as a CPE. Section 3 refers to historical precedent regarding multilateral trading rules being tailored for non-market economies. Section 4 explains the reasons behind China’s abandonment of the CPE regime. Sections 5 through 7 discuss the distortions affecting “factor pricing” and the costs of raw materials and energy in China. Section 8 explains the distinction between the distortions generated by the non-market economy regime and subsidization. Section 9 describes the Chinese Government’s legal authority to keep markets “orderly”. Section 10 provides an account of how Chinese state-owned enterprises (“SOEs”) can operate without an effective budget constraint. Section 11 reviews China’s planning eco-system. Section 12 provides a summary and overall conclusions.

1

Essentially, PPP exchange rates allow restating national income free of currency overvaluation/ undervaluation which enables appropriate cross-country comparisons of per capita incomes. 2 See World Bank Group, GDP per capita, https://data.worldbank.org/indicator/NY.GDP.PCAP. PP.CD. World Bank data on per capita incomes on a PPP basis are available starting 1990. 3 Own calculations based upon World Bank data. 4 What to call this later-day non-market economy is the source of controversy. Some use the term “State-driven market economy”. This is an oxymoron, however, as market economies, by definition, cannot be “State-driven”.

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2 China’s Past as a Centrally-Planned Economy The literature on China’s past as a CPE is extensive. Key works in this regard include China’s Industrial Reform (1987) by Gene Tidrick and Chen Jiyuan, the chapters relating to China in Comparative Economic Systems: Models and Cases (1989) by Morris Bornstein, Growing Out of The Plan (1995) by Barry Naughton, The Economic Transformation of China (2015) by Dwight H. Perkins, and China’s Economic Transformation (2015) by Gregory C. Chow. A (geographical) market is understood to be “{a} place or institution in which buyers and sellers of a good or asset meet”.5 It is clear from the literature that by the mid-1950s, when a CPE became firmly implanted in China, markets ceased to exist. That markets ceased to exist meant that producers stopped interacting with either consumers or input suppliers; instead, trading companies acted as intermediaries. In particular, trading agencies procured the input quantities required by producers. They also handled production destined for domestic consumption, production destined for foreign consumption, and imports.6 Producers, input suppliers, and trading agencies were all state-owned. In addition, the planning authorities micromanaged every industry setting, for each individual company, production volumes,7 the prices of the goods produced,8 the quantity of inputs to be used,9 and the cost that such inputs would represent for producers.10

5

J. BLACK, N. HASHIMZADE & G. MYLES, A DICTIONARY OF ECONOMICS 282 (3rd ed., 2009). “Inputs and outputs were generally not available on any market but only through the state’s material allocation system”. See DWIGHT H. PERKINS, THE ECONOMIC TRANSFORMATION OF CHINA 217 (2015); “All products produced by the enterprise are subject to monopoly purchasing and marketing by the state. The enterprise’s equipment and raw materials needed for production are all provided by the state.” See Chen Jiyuan, The Planning System in CHINA’S INDUSTRIAL REFORM 149 (Gene Tidrick and Chen Jiyuan, eds., 1987). 7 “The kind and amount of the many products the enterprise produced had nothing to do with market demand. Production was determined entirely by orders from the responsible higher authorities.” See Chen Jiyuan, id., at 152; “Annual plans set output targets that enterprises were obligated to try to surpass.” See Perkins, id., at 217; Gene Tidrick, Planning and Supply, in CHINA’S INDUSTRIAL REFORM 178 (1987) (explaining that physical output was one of the targets set by the planning authorities). 8 “The State Price Bureau sets the price of centrally planned production, whereas a local price bureau normally controls locally allocated output.” See Tidrick, id., at 177. 9 “Before the state completes and issues production plans to enterprises, the enterprises have to submit requisitions”. See Tang Zongkun, Supply and Marketing, in CHINA’S INDUSTRIAL REFORM 219 (1987). 10 “For nationally and ministerially controlled goods, supply contracts are usually signed between the producers and users at a national ordering conference held twice a year in accord with the state-allocated quotas.” See id., at 210. 6

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Generally speaking, the Chinese CPE aimed at self-sufficiency. However, where imports were necessary, because the targeted level of domestic consumption exceeded targeted domestic production, a sector was found that could provide exports in an amount that would yield the foreign exchange required to pay for such imports.11

3 Multilateral Trade Rules and Centrally-Planned Economies Figures 1 and 2 are graphical representations of conditions in Chinese industries at the time a CPE was in place. In both diagrams, the demand schedule, d̃, and the supply schedule, s̃, are completely vertical because neither varies according to price. The distance between each schedule and the vertical axis reflects, respectively, the level of domestic consumption (QD) and domestic production (QS) that the planning authorities arbitrarily have defined. There is no market equilibrium because the schedules do not intersect at any price level. Figure 1 represents an industry that generates exports that provide foreign exchange to pay for the imports that are needed in another sector. In Fig. 1, the distance between the supply and the demand schedules, QS − QD, indicates the quantity of exports involved (X). Conversely, Fig. 2 represents one of the sectors where imports are deemed necessary. In Fig. 2, the distance between the demand and the supply schedules, QD − QS, indicates the quantity of imports involved (M). Because the quantity of imports in Fig. 2 matches the quantity of exports in Fig. 1, and because imports are bought, and exports are sold, at the world price, PW, which for simplicity is assumed to be the same for both products,12 the foreign exchange required for importing M corresponds exactly to the foreign exchange earned from exporting X.

“Planned import volumes were determined by the projected difference between domestic demand and supply for particular goods, with export levels being determined by the planners at levels necessary to finance the planned level of imports.” See Will Martin and Christian Bach, State Trading in China, in THOMAS COTTIER AND PETROS MAVROIDIS, STATE TRADING IN THE TWENTY-FIRST CENTURY 289 (1998). 12 In reality, the world price would be expressed in a foreign currency and would need to be multiplied times the exchange rate, E, to convert it into local currency. 11

How China Did not Transform into a Market Economy Fig. 1 CPE, exporting industry (Footnote to GATT article VI). Source

Fig. 2 CPE, importing industry. Source

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In Fig. 1, the domestic price PD reflects the administratively-set price PR.13, 14 By contrast, the export price Px is aligned to the world price PW. This is so because, if exports were also priced at the administratively-set price, no foreign sales would take place since China would be uncompetitive internationally.15 Crucially, because in this particular example the administratively-set domestic price is higher than the world price, when selling abroad producers would necessarily engage in price discrimination. By contrast, in cases where the administratively-set domestic price is lower than the world price, dumping would never be found. It would appear that the arbitrariness of CPE domestic prices led Czechoslovakia in 1954 to propose amending Article VI:1(b) of the General Agreement on Tariffs and Trade (“GATT”) so that the fixing of domestic prices by the State became grounds for rejecting such prices in determining “normal value” when calculating dumping margins.16 That the Contracting Parties rejected this proposal implies they were of the view that the situation identified by Czechoslovakia could be dealt with within the existing text of Article VI:1(b). Accordingly, they adopted a second explanatory note to Article VI:1 (“the footnote”) confirming that the fixing of

13

Perkins notes that while China was a CPE prices not only were administratively-set but they also remained fixed for very long periods of time: Chinese prices fluctuated in accordance with market conditions in the early 1950s, but with the introduction of central planning and the abolition of the private sector, … output prices were frozen at existing levels. For all but a few products, industrial prices remained frozen at mid-1950s levels for the next quarter century

See Perkins supra note 6, at 238. The income or revenue that producers receive for the portion of their output that is consumed domestically (QD) is equal to QD times PR which is shown by the first rectangle (with the forward sloping lines). 15 The income or revenue that producers receive for the portion of their output that is sold abroad (QS − QD) is equal to X times PW. This is shown by the second rectangle (with the backward sloping lines). 16 In tabling its proposal, Czechoslovakia contended that 14

{i}n order to remove the difficulties caused by the application of certain standards relating to the definition of normal value contained in paragraph 1 of Article VI –which difficulties are due to the fact that no comparison of export prices with prices in the domestic market of the exporting country is possible when such domestic prices are not established as a result of fair competition in that market but are fixed by the State- the definition of normal value in paragraph 1 should be amended … See, Article VI - Proposals by the Czechoslovak Delegation - Revision, GATT Doc. W.9/86/ Rev1., (circulated on Dec. 21, 1954), at 1.

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domestic prices by the State, combined with a foreign trade monopoly, was a circumstance that could lead to rejecting domestic prices for purposes of determining “normal value”.17 Incidentally, the fact that multilateral trade rules in general, and not only those concerning antidumping, had to be adjusted for CPEs is evident in the terms under which Poland, Romania and Hungary joined the GATT in the late 1960s and early 1970s. In particular, the Working Party Reports also confirmed that domestic prices in these countries could be discarded in determining “normal value”,18 and required the adoption of undertakings regarding post-accession import volumes, in light of the recognition that, in a CPE, tariff concessions are futile as a means to expand imports.19 This point is fleshed out in Annex I and illustrated by means of a diagram. In addition, the Working Party Reports allowed the application of safeguard measures specific to imports from the three countries involved.20

17

It is recognized that, in the case of imports from a country which has a complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the State, special difficulties may exist in determining price comparability for the purposes of paragraph 1, and in such cases importing contracting parties may find it necessary to take into account the possibility that a strict comparison with domestic prices in such a country may not always be appropriate.

See Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1869 U.N. T.S. 201 (1994), Interpretative Note 2 to Art. VI:I. 18 See Accession of Poland – Report of the Working Party, GATT Doc. L/2806 (June 23, 1967), ¶13 [hereinafter Poland Working Party Report]; Accession of Romania – Report of the Working Party, GATT Doc. L/3557 (Aug. 5, 1971), ¶13 [hereinafter Romania Working Party Report]; Accession of Hungary – Report of the Working Party, GATT Doc. L/3889 (July 20, 1973), ¶18 [hereinafter Hungary Working Party Report]. 19 “The Working Party noted that the foreign trade of Poland was conducted mainly by State enterprises and that the Foreign Trade Plan rather than the customs tariff was the effective instrument of Poland’s commercial policy.” Further, “{i}t was agreed that in view of the nature of the foreign trade system of Poland its main concession in the negotiations for its accession to the General Agreement would be commitments relating to an annual increase in the value of imports from contracting parties”. See Poland Working Party Report), ¶¶ 7–8. Similar statements appear in Romania Working Party Report, ¶ 7, and Hungary Working Party Report, ¶ 6(b) in annexed draft protocol. 20 {i}f any product is imported into the territory of a contracting party from the territory of Poland in such increased quantities or under such conditions as to cause or threaten to cause serious injury to domestic producers in the former territory of like or directly competitive products, the provisions of (b) to (e) of this paragraph should apply See Poland Working Party Report, supra note 18, ¶ 7 in annexed draft protocol; Romania Working Party Report, supra note 18, ¶ 4(a) in annexed draft protocol; Hungary Working Party Report, supra note 18, ¶ 5(a) in annexed draft protocol.

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Against this backdrop, it is entirely unsurprising that China’s terms of accession to the WTO in 2001 involved close similarities with the terms of accession of Poland, Romania and Hungary to the GATT. In particular, China’s WTO Protocol of Accession similarly confirmed that domestic prices could be discarded in determining “normal value” (although not in the event that market economy conditions have materialized either in China as a whole or in the relevant industry),21 and allowed the application of China-specific safeguard measures through 2013 (that is, for twelve years after accession).22

4 China’s Abandonment of the CPE Regime The abandonment of the CPE regime in the late 1970s seems to have been motivated by the realization that, to arrive at the outcomes that the Chinese Government wanted (mainly faster and steadier growth based upon export-led industrialization), it was neither necessary nor efficient for the Chinese Government to own and run every business concern or micromanage every industry. Such outcomes could be achieved by exercising control, at some level, over industry and company conduct. This represented, of course, radical change vis-a-vis the CPE regime but did not imply China having embraced the free market. Several well-placed observers articulated this approach as follows: {T}here may be other means of control in addition to ownership and operating authority.23 {T}he state … should include market mechanisms in planning mechanisms and use such economic levers as prices, taxation, profit margins and exchange rates to adjust national economic development.24 Instead there was talk of increasing the role of economic levers (read the market) combined with continued central planning for goods of particular importance for the economy.25

Protocol on the Accession of the People’s Republic of China, ¶15, WTO Doc. WT/L/432 (Nov. 23, 2001) [hereinafter Chinese Accession Protocol]. 22 Id, ¶16. Interestingly, although the possibility to apply China-specific safeguard measures for 12 years after accession was much maligned in some quarters as “discriminatory” (ignoring that there was ample historical precedent of multilateral trading rules being tailored for acceding non-market economies), such measures actually were rarely applied. This is accountable only in part to self-restraint by Members, however. The author is aware of two cases where China derailed the institution of China-specific safeguard measures on the part of developing countries by threatening to subject such countries to massive trade reprisals. 23 Jiyuan, supra note 7, at 159. 24 Jiyuan, supra note 7, at 152. 25 Perkins, supra note 6, at 228. 21

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We must … study, design, and establish a planning system to renew economic mechanisms and control and to influence and change economic behavior.26 Enlivening the economy should be under the direction of the plan. It’s like the relationship between a bird and a cage. You can’t just hold a bird in your hand, for it will die. You have to let fly, but you can only let fly in a cage. Without a cage it will fly away. The cage has to be of the right size, and the cage itself has to be adjusted regularly. But no matter what, there has to be a cage.27

As a result of the process of economic reform that began in 1978–79, markets have re-emerged. Markets have re-emerged because, generally speaking, Chinese producers now interact directly with consumers and input suppliers. Thus, with some exceptions, they can place their output on the market, procure their inputs, and export and import without having to rely on trading agencies as intermediaries.28 Furthermore, industrial planning now focuses on specific sectors.29 There also has been some degree of privatization,30 price liberalization,31 and opening to

26

Jiyuan, supra note 7, at 173. Statement by Chinese reformer Chen Yun quoted in BARRY NAUGHTON, GROWING OUT OF THE PLAN: CHINESE ECONOMIC REFORM 1978–1993, 120 (1995). 28 Nevertheless, according to its Protocol of Accession to the WTO, China retained the right to continue channeling imports of tobacco, sugar, grains (including wheat, corn and rice), cotton, vegetable oils, crude oil, refined oil products (including gasoline) and chemical fertilizers through state trading companies. China also retained the right to continue channeling exports of tea, corn, rice, cotton, soybeans, silk, cotton yarn and cotton fabrics, certain minerals, coal, crude oil and refined oil products through state trading companies. See, Chinese Accession Protocol, supra note 21, at ¶ 5, Annex 2A1 and Annex 2A2. According to China’s latest WTO Trade Policy Review, imports of tobacco, sugar, wheat, corn, rice, cotton, crude oil, refined oil products and chemical fertilizers are still subject to state trading. The same applies to exports of tea, corn, rice, cotton, silk, certain minerals, coal, crude oil, and refined oil products. See, WTO Secretariat, Trade Policy Review: China – Report by the Secretariat, WTO Doc. WT/TPR/S/342 (Jun. 15, 2016), Tables 3.17 and 3.18 [hereinafter WTO 2016 China Trade Policy Review]. 29 See Sect. 11 of this Chapter. 30 Importantly, around half of the privatizations of SOEs took the form of management buy-outs (“MBOs”). As in such transactions share prices were set by management, management in effect paid for SOEs what it wished to pay. See, Jie Gan, James R. Barth, John A. Tatum & Glenn Yago, Privatization in China: Experiences and Lessons, in CHINA’S EMERGING FINANCIAL MARKETS: CHALLENGES AND OPPORTUNITIES 585 (2009); “The price of the shares acquired by managers was not set by the market mechanism, but rather decided internally through agreements”. Shanshan Li & Ningxiang Lu, The Influences of WTO Accession on China’s State-Owned Enterprises, 3 J. BUS. & MGMT., 195 (2015). From a WTO perspective, what this means is that any subsidies previously bestowed were not completely “washed out” by privatization (in view that the new owners did not pay for the companies a sum that would reflect the outstanding benefits accruing from subsidization). 31 In its WTO Accession Protocol, China committed itself to eliminate price controls on tradable goods and services, except in respect of certain listed goods and services. Interestingly, there was a substantial overlap between the goods subject to state trading and those subject to price controls. See, Chinese Accession Protocol, supra note 21, ¶¶ 9.1, 9.2 & Annex 4. This list included tobacco, salt, pharmaceuticals, grains, cotton, vegetable oils, refined oil products, urea, natural gas, electricity and irrigation water, inter-alia. According to China’s latest WTO Trade Policy Review, tobacco leaves, grains (except for rice and wheat), cotton and urea are no longer subject to price controls but salt, refined oil products, natural gas and electricity, inter-alia, still are. See WTO 27

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foreign trade and foreign direct investment. However, as explained in the remainder of this Chapter, although markets have re-emerged, the Chinese Government heavily interferes in their operation, on an across-the-board basis, which leads to outcomes in terms of prices, output levels, and export and import volumes that are not market-driven. China’s microeconomic policy can be viewed as comprising four main building blocks: • Make available for Chinese producers prices of “factors of production” (capital, labor, and land), key raw materials, and energy lower than elsewhere in the world,32 or at least lower than what they would otherwise be. • Allow SOEs in key upstream markets to operate without an effective budget constraint which induces overinvestment and overproduction. • Regulate firm behavior to ensure that, in both China and abroad, Chinese producers do not compete “excessively” with other Chinese producers. • Nurture the growth of Chinese industries (as well as products and even production processes) that are perceived as “core”, strategically important, or involving “cutting edge” technologies. This may involve investment incentives through further cost assistance, the regulation of market entry and scale of production, and the provision of subsidies (including “soft” loans, tax concessions and even cash contributions). Sections 5 through 7 address how “factor pricing” and the prices of key raw materials and energy in China are distorted vis-a-vis market levels by discussing at length how such prices are heavily affected by the intervention of the Chinese Government. Importantly, while China is certainly not the only country that has intervened in markets with the purpose of artificially reducing production costs, the extent of such distortions is completely unprecedented. The best illustration of this is that there is no other country that has instituted mechanisms for reducing labor costs such as the Hukou (described below).33

2016 China Trade Policy Review, supra note 28, ¶¶ 3.169, 3.170, and Tables 3.15 and 3.16. Nevertheless, as explained in Sect. 6 of this Chapter, the Chinese Government maintains de facto price controls on goods and services unlisted in Annex 4 through multiple means including ad hoc direct regulation and alleged enforcement actions under China’s competition law. 32 That the Chinese Government manages to provide Chinese producers with “factor prices” and prices of key raw materials and energy lower than elsewhere in the world is not figurative. In Deloitte’s 2016 Global Manufacturing Competitiveness Index, China is ranked as the top performer in terms of cost competitiveness. In fact, in cost competitiveness China received a near perfect score of 96.3 out of 100. See Deloitte, 2016 Global Manufacturing Competitiveness Index (2016), https://www2.deloitte.com/global/en/pages/manufacturing/articles/global-manufacturingcompetitiveness-index.html, at 18, Table 6. 33 As pointed out in Sect. 12, what defines whether China is a market economy or not is not only the extent of intervention in markets for artificially reducing production costs but also the fact that such intervention is combined with policies that control business conduct.

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5 Distortions in the Prices of the “Factors of Production” 5.1

Distinction Between “Factors of Production” and Raw Materials

According to international trade theory, countries tend to export goods in respect of which they have a “comparative advantage” (i.e., produce such goods at a comparatively lower cost) and import goods in respect of which they have a “comparative disadvantage” (i.e., produce those goods at a comparatively higher cost).34 Comparative advantage results from “endowments of factors of production” or, in short, from “factor endowments”. A factor of production is “{a}n input that exists as a stock providing services that contribute to production. The stock is not used in production, although it may deteriorate with use, providing a smaller flow of services later. The major primary factors are labor, {physical} capital …, human capital …, land and sometimes natural resources …”.35 Labor can be unskilled or skilled. Physical capital consists of plant and equipment, and its availability correlates to the availability of financial capital. Conversely, raw materials are inputs that are either consumed in the production process or are incorporated into the resulting manufactured good. Comparative advantage does not result from the local availability of cheap raw materials,36 because countries that do not produce raw materials (or otherwise do not produce enough, or do not produce enough of the right quality) should be able to import whatever amount they need at the world price. Instead, comparative advantage is generated by factor endowments (of land, physical capital, and labor, both unskilled and skilled) that are immobile and, therefore, are specific to countries.37 Peter K. Schott has studied the relative “factor content” of Chinese exports. In respect of China’s factor endowments, Schott concluded that “{t}here is no doubt that China is labor abundant” and that “{i}n addition to being relatively skill scarce, China is relatively capital and land scarce”.38 Barry Naughton observed likewise that “China’s basic economic situation is created by its abundant labor force, limited land, and relatively scarce capital”.39 So China is rich in unskilled labor, but

34

KENNETH A. REINERT & RAMKISHEN S. RAJAN, THE PRINCETON ENCYCLOPEDIA OF THE WORLD ECONOMY 198 (2009). 35 ALAN V. DEARDOFF, TERMS OF TRADE: GLOSSARY OF INTERNATIONAL ECONOMICS 217 (2006). 36 As explained in Sect. 6, the Chinese Government lowers the domestic price of key raw materials below the relevant world prices through export taxation. 37 In international trade theory, trade is a substitute for migration. Of course, in models of migration, the assumption that labor is immobile between countries is relaxed. 38 PETER K. SCHOTT, The relative sophistication of Chinese exports, 53 ECONOMIC POLICY 15 (2008). 39 Naughton, supra note 27, at 149.

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scarce in skilled labor, physical capital, and land.40 Given such factor endowments, one would have expected China to specialize in exporting goods that use unskilled labor intensively. Schott found that, to the contrary, China’s “export bundle overlaps significantly with that of developed economies”.41 Similarly, according to Caporale, Sova and Sova, following China’s re-entry in world markets, there has been a shift in Chinese exports from labor-intensive goods to capital and technology-intensive goods.42 The reason why China is has become a major exporter of goods that do not reflect its comparative advantage is that the Chinese Government heavily distorts the pricing of the “factors of production”.

5.2

Distortions in the Price of Capital

The Chinese Government distorts the cost of raising capital through loans, bonds, and even equity.

5.2.1

Distortions in the Cost of Raising Capital Through Loans

The Chinese Government has kept the cost of funding loans repressed by maintaining ceilings on deposit interest rates, often below the consumer inflation rate,43 coupled with capital controls that prevent Chinese households from sending their savings abroad to earn competitive rates of return with foreign banks.44 Importantly, although ceilings on deposit rates were lifted in October 2015,45 deposit rates have not risen subsequently, remaining at a level of 1.50% since

40

Importantly, the fact that China has foreign exchange holdings of approximately US$ 3 trillion does not make China “capital-abundant” within the meaning of international trade theory because such funds have not been converted into physical capital since they are parked as reserves. 41 Schott, supra note 38, at 9. 42 G. M. Caporale, Anamaria Sova & Robert Sova, Trade flows and trade specialization: The case of China, 34 CHINA ECONOMIC REV. 267 (2015). 43 For instance, in 2016 the deposit interest rate net of the consumer inflation rate was −0.50%. It was also negative in 2010 and 2011 and although positive in 2012–2015, it fluctuated between 0.10 and 0.75%. Importantly, this policy of financial repression is of a structural nature and predates “quantitative easing” by decades. By way of illustration, in 1993, 1994 and 1995 the deposit interest rate net of the consumer inflation rate was −4, −13 and −6%, respectively. See, International Monetary Fund, International Financial Statistics, for data on both China’s deposit interest rate and the consumer inflation rate. 44 For a detailed inventory of China’s capital controls, see, International Monetary Fund, EXCHANGE RATES AND EXCHANGE RATE RESTRICTIONS, ANNUAL REPORT 2016, at 767–781. 45 International Monetary Fund, The People’s Republic of China: Staff Report for the 2016 Article IV Consultation, at 55.

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then,46 which indicates that such liberalization has only been cosmetic.47 Given that close to 70% of bank loans are placed with non-financial corporations,48 non-financial corporations are the main beneficiaries of this policy of financial repression. Thus, Chinese industries can obtain loan financing at borrowing rates that are much lower than the ones they would have to pay if the interest rate paid to depositors was not repressed.

5.2.2

Distortions in the Cost of Raising Capital Through Bonds

The Chinese Government distorts the cost of raising capital through issuing bonds because the pricing of risk in the Chinese bond market is woefully lax as a result of the overwhelming role the Chinese Government plays in that market. In particular, most corporate bonds are issued by state-owned companies, most corporate bonds are rated by state-owned ratings agencies, and most bondholders are also state-owned.49 That the Chinese bond market does not adequately price risk is evidenced by the fact that, out of more than 6500 bonds issued between 2009 and 2015, close to 97% were rated AA or higher, including 52% AA, 25% AA+, and 20% AAA.50 In other words, nearly every issuer of bonds is rated as close to risk-free, irrespective of what its specific financial condition actually is. Reportedly, in the United States fewer than 2% of bond issues receive such top-notch ratings.51 Because government intervention distorts the pricing of risk in the Chinese bond market, the risk premium embodied in the interest rate payable on bonds issued by Chinese industries is much lower than it would be absent such intervention.

46

International Monetary Fund, International Financial Statistics. November 2017 is the more recent month for which data on Chinese deposit interest rates are available at the time of writing (February 2018). 47 Independent observers concur in that the anchoring of the deposit rate at between 1–2% reflects “window guidance” by the People’s Bank of China. See, Diego Anzoategui et al., Financial Distortions in China: A General Equilibrium Approach 4 (International Monetary Fund, Working Paper No. WP/15/274, 2015). 48 Grace Zhu & Chao Deng, Data from Wind Info cited in Why Chinese are Diverting Their Consumer Loans to Real Estate, THE WALL STREET JOURNAL (Oct, 2, 2017), https://www.wsj.com/ articles/why-chinese-are-diverting-their-consumer-loans-to-real-estate-1506771000. 49 Li-Wen Lin and Curtis J. Milhaupt, Bonded to the State: A Network Perspective on China’s Corporate Debt Market 20–24 (Columbia Law & Economics Working Paper No. 543, 2016). 50 Miles Livingston et al., Are Chinese Credit Ratings Relevant? A Study of the Chinese Bond Market and Credit Rating Industry, 87 J. BANKING & FIN. 224 (2018). The ratings AAA, AA+ and AA are the highest that can be obtained and indicate capacities to meet financial obligations ranging from extremely strong to very strong. See Standard & Poor’s, Guide to Credit Rating Essentials, https://www.spratings.com/documents/20184/774196/Guide_to_Credit_Rating_Essentials_ Digital.pdf, at 13. 51 Wojciech Maliszewski et al., Resolving China’s Corporate Debt Problem 15 (International Monetary Fund Working Paper No. WP/16/203, Oct. 2016).

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5.2.3

Distortions in the Cost of Raising Capital Through Equity

The Chinese Government distorts the cost of raising capital via equity by manipulating share prices. In particular, by propping up the share prices of Chinese companies through purchasing their equity at times of financial turbulence, the Chinese Government induces investors to continue holding in such circumstances shares of Chinese companies in their portfolios.52 The Hang Seng China AH Premium Index compares the prices of China-listed A shares against the prices of the identical Hong Kong-listed H shares.53 In principle, both kinds of shares should trade at very similar prices. This is not the case, however, due to stock purchases in China by the Chinese Government. At least since year-end 2009, China-listed A shares have generally traded at prices substantially higher than those of the identical Hong Kong-listed H shares.54 In particular, during 2017 China-listed A shares traded between 35 and 15% higher than the identical Hong Kong-listed A shares.55 As a result of the Chinese Government’ s intervention in the stock market to prop up share prices at times of financial turbulence, Chinese industries are able retain equity funding that in those circumstances would not be available.

52

China’s ‘national team’ owns at least 6 per cent of the mainland stock market as a result of the massive state-sponsored rescue effort this year to prop up share prices following the summer equity market crash. One member of the team, China Securities Finance Corp, the main conduit for the injection of government funds, owned 742 different stocks at the end of September, up from only two at the end of June.

See Gabriel Wildau, China’s ‘national team’ owns 6% of stock market, FINANCIAL TIMES (Nov. 25, 2015), https://www.ft.com/content/7515f06c-939d-11e5-9e3e-eb48769cecab. 53 Hang Seng is a Hong Kong-based commercial bank that has developed a number of indexes for the Chinese financial market. The term “A shares” stands for shares of Chinese companies listed on either of the two stock exchanges in mainland China. The term “H shares” stands for shares of Chinese companies listed on the Hong Kong stock exchange. A shares can only be purchased by Chinese nationals, Chinese institutions, or by foreign investors operating through certain investment vehicles. By contrast, H shares can be purchased by all investors, regardless of nationality. The two kinds of shares carry the same voting and cash flow rights. See, William T. Allen and Han Shen, Assessing China’s Top Down Securities Market in CAPITALIZING CHINA (Joseph P. H. Fan and Randall Morck, eds., 2012), at 154. The index has a value of 100 when the China-listed A shares trade at parity with the identical Hong-Kong listed H shares. See Hang Sang Indexes, Hang Seng Stock Connect China AH Premium Index (Nov., 2017). 54 For the values of the Hang Seng index from December 2009 through April 2017, see Inquiry into the status of the People’s Republic of China under the Antidumping and Countervailing Duty Laws – Comments on the treatment of the People’s Republic of China as a Non-Market Economy: Submission to the U.S. Department of Commerce by Wiley Rein LLP, March 10, 2017, at 80. The Financial Times reports the values of such index from January through December 2017. See Financial Times, Indices, https://markets.ft.com/data/indices/tearsheet/summary?s=HSCAHPI: HKG. 55 See Financial Times, Indices: Hang Seng China AH Premium Index, https://markets.ft.com/data/ indices/tearsheet/summary?s=HSCAHPI:HKG.

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Distortions in the Price of Labor

The advantage China enjoys in terms of cheap unskilled labor is exacerbated by two factors. First, as is well-known, in China wage rates do not reflect free bargaining because the only authorized trade union (the All-China Federation of Trade Unions or ACFTU) is subservient to the ruling Communist Party. Second, the use of the household registration system, known as Hukou, has effects that further depress labor costs for employers. In particular, the provision of welfare benefits financed through payroll taxes (including pension contributions, medical insurance, unemployment insurance and housing subsidies) is tied to the Hukou.56 Thus, individuals who move from a rural area to get a job in an industrial area but lack the legal right (through the Hukou) to settle there, are not eligible for, and do not receive, such benefits. This makes the cost of hiring such individuals by Chinese industries much lower than it would otherwise be. In fact, Huang and Tao have estimated that the Hukou depresses the cost of employing migrant workers in urban areas by up to 40%.57 In particular, if urban employers made social welfare contributions for their migrant workers, “their payrolls would rise by about 35–40%, which includes contributions to pensions (20% of payroll), medical insurance (6%), unemployment benefits (2%), work injury insurance (1%), maternity benefit (0.8%), and housing entitlement (5–10%)”.58 As migrant workers account for approximately one third of China’s labor force,59 the savings on total labor expenses that Chinese industries reap from migrant workers being disfranchised from access to benefits are huge. While in 2014 the Chinese Government released a plan to relax the Hukou, the first step of which would involve not requiring the Hukou anymore for gaining residence rights in towns and small cities, it is estimated that, at the rate of change

56

The current hukuo system is related to the access to a variety of public service and welfare programs, such as children education, medicare, housing subsidies, social security coverage, and so on … In current China, most of the public service and welfare benefits are attached to a person’s hukuo status, rather than the physical location.

See Yang Song, What should economists know about the current Chinese hukuo system? 29 CHINA ECON. REV., 205 (2014); Kam Wing Chan, The Chinese Hukou System at 50, 50 EURASIAN GEOGRAPHY & ECON. 209 (2009) (“… the extension of urban social and economic benefits to migrants remains largely nonexistent … ”). 57 Yiping Huang and Kunyu Tao, Factor Market Distortion and the Current Account Surplus in China, 9:3 ASIAN ECON. PAPERS 22 (2010). 58 Id. 59 W. Raphael Lam et al., China’s Labor Market in the ‘New Normal’ 11 (International Monetary Fund Working Paper No. WP/15/151, 2015).

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envisioned in the plan, the process of eliminating the Hukou entirely “will probably require the work of another three or four decades”.60

5.4

Distortions in the Price of Land

Articles 9 and 10 of China’s Constitution provide that all land, be it rural, urban or suburban, is owned by either the State or “collectives”. However, Article 9 of the Land Administration Law permits allocating land for use by “units” and individuals and Article 117 of the Property Law recognizes the existence of usufructuary rights on allocated land. Zhang and Xu explain that, generally speaking, land destined for public works is transferred at cost, land destined for commercial and residential use is transferred through tender, auction and listing, and land destined for industrial use is transferred through private agreements,61 where the fees involved are set in a discretionary manner. According to Zhang and Hu, “the average transaction price for listed land is only approximately 60% of the price obtained through auction”.62 If the average transaction price for listed land only amounts to 60% of the average transaction price for auctioned land, the average transaction price set in a private agreement (i.e. what is paid for most land destined for industrial use) is likely to represent a lesser proportion of the average transaction price for auctioned land. In view of the fact that the fees paid for land destined for industrial use are set arbitrarily, the cost of land for Chinese industries is held below market levels.

6 Distortions in the Prices of Raw Materials The Chinese Government distorts the cost of key raw materials through a number of policies such as formal price controls,63 ad hoc direct regulation (as happened recently with the price of coal),64 price controls disguised as enforcement actions 60

Kam Win Chan, Achieving Comprehensive Hukou Reform in China, Paulson Policy Memorandum, PAULSON INSTITUTE (Dec., 2014), at 3. 61 Li Zhang and Xianxiang Xu, Land Policy and Urbanization in the People’s Republic of China 5–7 (Asian Development Bank, ADBI Working Papers Series No. 614, Nov., 2016). 62 Id., at 6. 63 See supra note 31. 64 Although coal was not listed in China’s Protocol as a product that would be kept under price controls, it has now become subject to such regime. China has developed a new coding system for coal prices, with increasing levels of intervention to control prices as they move outside a ‘green’ zone of $70 to $80 a ton. The move follows intense volatility in global coal prices, which gained over 70% in 2016, after sharp Chinese capacity cuts collided with rebounding industrial electricity demand.

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under China’s competition law (as happened recently with the pricing of auto-parts),65 export taxation, and less than full rebating of the value added tax (“VAT”) on exported goods (which, as explained below, operates a de facto export tax). Because the latter two policies are widely used, they merit an extensive discussion.

6.1

Export Taxation

It is well-established in economic theory that, absent restrictions on international trade, the domestic prices of tradable goods (i.e., those susceptible of being traded internationally) should track the relevant world price. However, this linkage is broken in the event of an export restraint, be it in the form of an export tax or an export quota. An export tax (or an export quota), by reducing export volumes, floods the domestic market with supplies that otherwise would have been exported. As a result of this, domestic prices fall and they do so to a level below the world price. Essentially, what happens is that, for the market to adjust to a smaller export volume (smaller than without the export tax), domestic supply has to contract while domestic demand has to expand, so that the export surplus is cut down, and this can only come about at a lower domestic price (lower than the domestic price without the export tax, which would be aligned to the world price). The most straightforward way to respond to the question of exactly how much lower than the world price the domestic price would be if an export tax is levied is to note that, in the event of an export tax, domestic consumers would not be willing to pay domestic producers more than the world price net of the corresponding

See Nathaniel Taplin, As China Extols Open Markets, Price Controls Sprout Back Home, WALL STREET JOURNAL (Jan. 25, 2017), https://www.wsj.com/articles/as-china-extols-open-markets-pricecontrols-sprout-back-home-1485351983. 65 In August 2014, it was announced that ten Japanese auto parts manufacturers had been fined for alleged collusion in the Chinese market. The fines ranged between 4 and 8% of the companies’ sales revenue in the previous year. See US-China Business Council, Competition Policy and Enforcement in China (Sep., 2014), https://www.uschina.org/sites/default/files/AML%202014% 20Report%20FINAL_0.pdf, at 9. Whether the relevant investigations were conducted while observing due process is open to question, however, because it was reported then that the “authorities have ordered foreign companies not to challenge the investigations, bring lawyers to hearings, or ask for help from their home governments … tactics {that the European Chamber of Commerce in China} described as ‘intimidation’”. See, Rose Yu & Megumi Fujikawa, China Fines Japan Auto-Parts Makers $200 Million, WALL STREET JOURNAL (Aug. 20, 2014) https://www.wsj.com/articles/china-fines-japanauto-parts-makers-200-million-1408530257. Seemingly to prevent similar actions by the Chinese antitrust authorities, BMW, Chrysler and Daimler announced at the time that they would reduce prices of the auto parts they sold in China by between 15 to 20%. See, Melissa Lipman, Toyota, BMW Face Chinese Auto Part Antitrust Probe, LAW360 (August 8, 2014), https://www.law360. com/articles/565462/toyota-bmw-face-chinese-auto-part-antitrust-probe.

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export tax rate, because this is what domestic producers would make in the alternative; that is, selling to foreign markets while having to pay an export tax.66 Thus, under an export tax domestic prices should drop to a level equivalent to the world price less the applicable export tax rate.67 Downstream producers that use as an input a product subject to export taxation reap huge cost savings from the scheme because they are able to purchase such product at a domestic price lower than the world price. Thus, through the use of export taxation a country can gain an artificial comparative advantage in the cost of raw materials.68 Indeed, nurturing the growth of downstream industries is the implicit policy objective of any export restraint. Where the country involved is a large supplier in the world market, export taxation also makes the world price higher than it would otherwise be (by generating artificial scarcity in the world market).69 In its WTO Accession Protocol, China committed to limit export taxation to 89 narrowly-defined groups of products (corresponding to the same number of tariff positions) listed in Annex 6 thereof. For the most part, the list consists of minerals (such as lead, zinc and tin), pig iron, ferroalloys (e.g., ferromanganese), iron and steel scrap, and basic forms of copper and aluminum.70 The duty rates range from 20 to 40% which, as explained above, should feed into domestic prices. For 66

Since domestic producers would not be able to pass-on the export tax to foreign buyers (because they would price themselves out), they would have to absorb it fully. 67 The proposition that, in the event of an export tax, domestic prices should fall below the world price proportionally to the export tax rate is also well-established in the literature. See, for instance, DENNIS APPLEYARD ET AL., INTERNATIONAL ECONOMICS 297–298 (2008); GIANCARLO GANDOLFO, INTERNATIONAL ECONOMICS I 125–126 (1987); THOMAS GREENES, INTERNATIONAL ECONOMICS 177–178 (1984); ROBERT M. DUNN JR. & JOHN MUTTI, INTERNATIONAL ECONOMICS 151–152 (2000); BO SODERSTEN & GEOFFREY REED, INTERNATIONAL ECONOMICS 203–204 (1994); BETH YARBROUGH & ROBERT YARBROUGH, THE WORLD ECONOMY: TRADE AND FINANCE, 199 and 203 (1988). 68 As explained earlier, in theory comparative advantage derives exclusively from endowments of “factors”, such as capital, labor and land, because (absent export taxation) the price of raw materials would be the same everywhere in the world. 69 For a graphical presentation of the effects of an export tax in a “small” economy, see, for example, Sodersten and Reed, supra note 67, at 203–204. For a graphical presentation of the effects of an export tax in a “large” country, see, for example, Appleyard et al., supra note 67, at 297–298. 70 See Chinese Accession Protocol, supra note 21, ¶ 11.3 & Annex 6. In both China — Raw Materials and China-Rare Earths, China was found to be circumventing its WTO commitments as regards export taxation by applying export duties to products not included in Annex 6 of its Protocol. Both findings were unappealed. See Panel Report, China — Measures Related to the Exportation of Various Raw Materials, ¶ 8.2(a), WTO Doc. WT/DS394/R, WT/DS395/R and WT/ DS398/R (adopted Feb. 22, 2012) (“The Panel finds that the application of export duties to certain forms of bauxite, coke, fluorspar, magnesium, manganese, silicon metal and zinc … is inconsistent with Paragraph 11.3 of China’s Accession Protocol”), and Panel Report, China — Measures Related to the Exportation of Rare Earths, Tungsten and Molybdenum, ¶ 8.6.a, WTO Doc. WT/ DS431/R, WT/DS432/R and WT/DS433/R (adopted Aug. 29, 2014) (“The Panel finds that the export duties that China applies to various forms of rare earths, tungsten, and molybdenum … are inconsistent with Paragraph 11.3 of China’s Accession Protocol”). In both cases, China notified

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instance, because of export taxation, Chinese end-users should be able to buy domestic steel scrap at prices 40% below the world price.71

6.2

Null or Partial Rebating of the VAT on Exports

In China the VAT is generally collected on goods and services at a rate of 17%. A lower rate of 13% is applicable to certain goods including food and basic products such as fuel and electricity.72 As is well-known, WTO rules allow rebating product taxes such as the VAT from export goods to avoid double taxation. Accordingly, the Chinese VAT can be rebated upon exportation.73 However, whether the Chinese VAT is fully rebated, only in part, or not at all depends upon the degree of processing of the good involved and in fact there is a sliding scale of rebates (where the proportion rebated is higher the higher is the degree of processing).74 When the Chinese VAT is not reimbursed, or reimbursed only in part, exports are in effect subject to either the VAT in full or some portion thereof and in such circumstances the unrebated VAT becomes a de facto export tax that reduces export volumes.75 Chandra and Long observe that, in the event of a partial rebate of the VAT on exports, implicitly an export tax is applied at a rate equivalent to the

the Dispute Settlement Body that it had come into compliance with WTO rulings by removing all of the challenged export taxes. 71 Article XI of GATT bans export quotas although it contemplates certain exceptions to this ban. China applies export quotas on a number of products including what is described in China’s notifications as “refined oil”, although it is not clear in such notifications whether “refined oil” would cover naptha which can serve as feedstock for chemical products. If so, producing petrochemicals in China would be cheaper than it would otherwise be. China justifies such export quotas by reference to the exceptions provided in Article XI. See World Trade Organisation, 2016 China Trade Policy Review, supra note 28, at 75, Table 3.11 and Committee on Market Access, Notification Pursuant to the Decision on Notification Procedures for Quantitative Restrictions, WTO Doc. G/MA/QR/N/CH/2 (circulated on Apri. 24, 2015), at 6. 72 Xu Yan, Reforming Value Added Tax in Mainland China: A Comparison with the EU, 20(1) REVENUE L. J. 12–13 (2011). 73 Id., at 16, fn 87 (“Normally, most taxpayers must pay VAT for VAT goods first and then they can claim VAT refunds from the tax authorities based on the Exported Goods Declaration certified by Customs”). 74 Chien-Hsun Chen, et al., The effect of export tax rebates on export performance: Theory and Evidence from China, 17 CHINA. ECON. REV. 228 (2006); Piyush Chandra and Cheryl Long, VAT rebates and export performance in China: Firm-level evidence, 102 J. PUBLIC ECON. 15 (2013). 75 Chandra & Long, id., at 13. (“… a VAT system where exports do not receive complete rebates tends to an act as an export tax and hence reduces trade volume …”); Julien Gourdon et al., Export management and incomplete VAT rebates to exporters: the case of China, 3 (FERDI Working Paper No. 117, 2014) (“ … incomplete export VAT rebates amount to export taxes and lead to lower exports”).

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difference between the VAT rate and the rebate rate.76 Independent observers agree with this characterization: VAT may be rebated on exports, although the rebate rates are, by and large, lower than the VAT rates actually paid. The difference between the two rates constitutes a levy on exports, which may in turn constitute assistance to downstream processing of the products affected … China adjusts VAT rebate rates as part of its industrial policies, to control, restrict, or otherwise “manage” the export of certain products (emphasis added).77

The price effects of not rebating the VAT on exports, or rebating it only in part, are analogous to the price effects of export taxes. In particular, Feldstein and Krugman point out that “the effect of a VAT without rebate is to lower the price to producers of the exported good”,78 and that in this situation (no VAT rebate) “the price to producers net of taxation must fall in proportion to the VAT rate”.79 An example would be helpful to drive home the implications of this point. For steel scrap the VAT rate is 17% but the rebate rate is zero. Because exports of steel scrap are subject to a de facto export tax equivalent to the unrebated VAT, Chinese end-users should be able to buy domestic steel scrap at prices 17% below the world price.80

7 Distortions in the Price of Energy As noted earlier (see footnote 31), at the time of WTO accession China maintained price controls on both electricity and natural gas. More importantly, such controls are still enforced. Prices subject to a ceiling are characteristically below equilibrium levels.81 Independent observers share the view that the prices of electricity and natural gas in China are held below market levels: While China’s high energy intensity may be partly explained by the share of industry (which tends to be relatively energy intensive) in GDP, it is also undoubtedly due to the existing insufficiently market-oriented price mechanism for oil, coal, electricity and natural gas, which sets artificially low prices (emphasis added).82

Chandra & Long, supra note 74, at 15 (“ … a VAT of 17% together with a rebate of say 13% {results} in an export tax of 4%”). 77 World Trade Organization, Report by the Secretariat: China - Trade Policy Review, 43, ¶ 80, WTO Doc. WT/TPR/S/230 (Apr. 26, 2010). 78 Martin Feldstein and Paul Krugman, International Trade Effects of Value-Added Taxation in TAXATION IN THE GLOBAL ECONOMY 271 (Assaf Razin and Joel Slemrod, eds., 1990). 79 Id., at 270. 80 As noted above, exports of steel scrap are also subject to a de jure export tax of 40%. 81 DONALD RUTERFORD, ROUTLEDGE DICTIONARY OF ECONOMICS 468 (3rd ed., 2015). 82 World Trade Organization, Report by the Secretariat: China, Trade Policy Review, xiii, ¶ 24, WTO Doc. WT/TPR/S/199 (Apr. 16, 2008). 76

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A report from the Oxford Institute for Energy Studies estimates that the wellhead gas price at China’s Ordos Basin (which supplies 20% of Chinese demand) represented in 2013 only slightly more than half of the weighted average import price.83 Similarly, according to Lin and Jiang, in 2007 the producer price and the price for industrial consumption were both significantly lower than the import price. In fact, the price for industrial consumption represented only close to 70% of the import price.84 Conversely, Chinese electricity prices for industrial use are reportedly higher than international benchmarks: “… median electricity prices for industrial loads in the U.S. tend to be 34–49% lower than Chinese prices”.85 A report from the Energy Policy Research Group at Cambridge University similarly estimates that Chinese electricity prices for industrial use are 50% higher than U.S. prices, although in this calculation Chinese prices are VAT-inclusive.86 Nevertheless, if Chinese prices are adjusted for the corresponding VAT rate, Chinese prices would still be 30% higher than U.S. prices. The point remains, however, that absent price controls Chinese electricity prices for industrial loads would be higher than U.S. prices by even a greater proportion. If this were not so, they would not be subject to controls.

8 Distinction Between the Cost Distortions Generated by the Non-market Economy Regime and Subsidization The distortions described above relating to the pricing of capital, labor, and raw materials involve cross-subsidies from Chinese private parties to Chinese industry. In particular, in the case of distortions in the cost of loans, there is a cross-subsidy from Chinese households; in the case of distortions in the cost of labor, there is a cross-subsidy from labor in general (because wage rates do not reflect free bargaining) and migrant labor in particular (because the Hukou disfranchises migrant labor from access to benefits); and in the case of distortions in the cost of raw materials, there is a cross-subsidy from upstream producers. Huang and others have aptly summarized the underlying approach as follows:

83

Michael Chen, The Development of Chinese Gas Pricing: Drivers, Challenges and Implications for Demand (The Oxford Institute for Energy Studies, 89 OIES Paper: NG, July, 2014), at 6. 84 Boqiang Lin and Zhujun Jiang, Estimates of energy subsidies in China and impact of energy subsidy reform, 33 ENERGY ECONOMICS 277, Table 1 (2011). 85 Biggins, Lacy, Shapiro & Company, LLC and Tractus Asia Limited, A Comparison of U.S. & China Electricity Costs (2016), http://blsstrategies.com/docs/news/News_181.pdf, at 3 [hereinafter BLS & Co.]. 86 Michael G. Pollitt et al., Reforming the Chinese Electricity Supply Sector: Lessons from International Experience 11 (Energy Policy Research Group at Cambridge University, Working Paper No. 1704, 2017).

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J. Miranda Cost distortions in China are equivalent to production and investment subsidies … Both Chinese and foreigners invest massively in China given cheap labor, cheap capital, cheap land and cheap energy.87 These cost distortions are like producer subsidy equivalents. They lower costs of factors, increase profits of production, raise returns to investment and improve the competiveness of Chinese exports. Such cost distortions enabled China to rise as a global manufacturing center within a very short period.88 Cost distortions artificially increased profits from manufacturing production and quickly turned China into a global manufacturing center through the supply of cheap labor, cheap capital, cheap land and cheap resources.89 These distortions significantly affect the incentive structure for producers, investors and exporters.90 {C}ost distortions are also equivalent to taxes on owners of these factors, mainly households.91

Because the cross-subsidies relating to the pricing of capital, labor, and raw materials are “privately funded” through implicit taxation, they do not on their face comply with the WTO definition of subsidization, which requires that the government or a “public body” be involved through the provision of a “financial contribution”.92 In addition, although the distortions described above relating to the pricing of land and energy are cross-subsidies that comply with the “financial contribution” aspect of the WTO definition of subsidization (since some level of government owns all land and energy sources in China), they would not satisfy the further requirement WTO that they be “specific” to a particular industry or group of industries.93

87

Huang and Tao, supra note 57, at 20. Yiping Huang and Bijun Wang, Cost Distortions and Structural Imbalances in China, 18(4) CHINA & WORLD ECON. 14 (2010). 89 Yiping Huang, Dissecting the China Puzzle: Asymmetric Liberalization and Cost Distortion, 5 (2) ASIAN ECON. POL’Y REV. 292 (2010). 90 Huang and Wang, supra note 88, at 11. 91 Huang and Tao, supra note 57, at 20. 92 WTO rules also treat as a “subsidy” the provision of a “financial contribution” by a private party that has been “entrusted or directed” to do so by a government. However, given that the relevant language has been interpreted as requiring evidence of “verbalization” of such entrustment or direction, this factual standard is difficult to satisfy in practice. See Panel Report, United States — Measures Treating Export Restraints as Subsidies, WTO Doc. WT/DS194/R (adopted Aug. 23, 2001), ¶ 8.44 (“we consider that the ordinary meaning of the words ‘entrusts’ and ‘direct’ require an explicit and affirmative action of delegation and command”). 93 This does not mean that a specific subsidy may not be found to co-exist with a cost distortion arising from a NME regime. This would happen, for example, where, a particular industry receives loans on preferential terms from banks that qualify as “public bodies”, independently of the fact that the non-preferential borrowing rate is lower than it would otherwise be on account of financial repression, as described above. 88

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Accordingly, in general the cross-subsidies concerned can hardly be addressed through countervailing duty action under the WTO Agreement on Subsidies and Countervailing Measures. The Chinese Government also distorts the costs of production of Chinese industry through measures that satisfy the WTO definition of subsidization and the further WTO requirement of “specificity”. For instance, the Chinese Government provides soft loans (through state-owned banks), tax concessions (in the form of tax exemptions or preferential tax rates), and even cash grants to particular companies, industries or groups of industries. But, again, such measures are conceptually distinct from the above-described across-the-board distortions in the pricing of capital, labor, and land, in the cost of raw materials, and in the cost of energy.94

9 Allowing SOEs in Key Upstream Markets to Operate Without an Effective Budget Constraint According to China’s latest WTO Trade Policy Review, the share of output in the industrial sector produced by SOEs dropped to a low of 22.3% in 2014.95 Nevertheless, SOEs continue to hold dominant positions or weigh very heavily in key upstream markets such as steel,96 petrochemicals,97 aluminum,98 and copper.99 Let us focus on the Chinese aluminum industry as an example of how some Chinese SOEs operate without an effective budget restraint. From 2011 to 2016, China’s share in world production of primary aluminum jumped from 43 to 55%.100

Surprisingly, the WTO panel that first addressed the alleged “double remedies” problem opined there was a “general proposition that at least some double remedy will likely arise from the concurrent imposition of countervailing duties and anti-dumping duties calculated under an NME methodology”. However, the panel failed to point to any factual basis for this statement. See, Panel Report, United States — Definitive Anti-Dumping Duties and Countervailing Duties on Certain Products from China, ¶ 14.75, WTO Doc. WT/DS379/R (adopted Mar. 25, 2011). 95 WTO 2016 China Trade Policy Review, supra note 28, ¶ 3.177. 96 See MARKUS TAUBE AND PETER IN DER HEIDEN, CHINA STEEL INC.- STATE-OWNED AND STATE-RUN? 60 (2010), (“China’s leading steel conglomerates are basically government controlled. Among the top 20 corporations, only {two companies} are not explicitly state-owned on a majority basis”). 97 See European Commission, On Significant Distortions in the Economy of the People’s Republic of China for Purposes of Trade Defense Investigations, SWD (2017) 483 final/2, 20 December 2017, 404, Table 16 (showing that eight of the ten largest chemical companies are SOEs). 98 See European Commission, id., at 387–388 (“SOEs account for more than 50% of the total primary aluminum output”). 99 See THINK!DESK - CHINA RESEARCH & CONSULTING, Analysis of Market-Distortions in the Chinese Non-Ferrous Metals Industry (Apr. 24, 2017), at 121–122 (“ … mass markets and applications are firmly controlled by state-owned companies like Yunnan Copper, Jiangxi Copper and Tongling Nonferrous Metals …”). 100 Own calculations on the basis of data from the International Aluminum Institute. In 2001, China’s share was only 14%. 94

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One would have thought that China’s ascent in the world aluminum market would have correlated with very strong financials on the part of Chinese aluminum producers. Nothing further from the truth, at least not as SOEs are concerned. In 2011– 2016, the weighted average return on assets posted by the Aluminum Corporation of China Limited (“CHALCO”), the leading Chinese producer, was dismal. In fact, CHALCO’s return on assets was strongly negative in two of those six years and in three of the four remaining years was 1% or lower.101 As a result, from 2011 through 2016 CHALCO did not pay any dividends to its investors.102 If CHALCO had operated in a market economy, serious consideration would have been given to shutting it down, in light of its deplorable financial results. However, not only was CHALCO not closed but over 2011–2016 it actually stepped up investing.103 Some of the investment funds were contributed by the Chinese government via capital injections.104 CHALCO also managed to meet its capital expenditure needs and replenish working capital by issuing commercial paper and bonds bearing low interest rates.105 The only logical explanation for CHALCO being able to raise funds at a low cost in spite of its woeful financial performance is that the financial markets regard it as an integral part of the Chinese State, notwithstanding that it is only 32.81% state-owned.106 Thus, by virtue of being a Chinese SOE, CHALCO operates without an effective budget constraint. The absence of a budget constraint opens the door to ever increasing investment and output regardless of whether this course of action is economically rational given current market conditions.

10

Ensuring “Orderly Markets”

The Vitamin C antitrust litigation in the United States has been a veritable godsend as regards understanding the inner workings of Chinese industrial policies. In a nutshell, in the Vitamin C litigation the Chinese Government decided to come out in

Specifically, CHALCO’s return on assets was 0.46% in 2011, −17.24% in 2012, 2.15% in 2013, −44.65% in 2014, 0.43% in 2015 and 1.03% in 2016. See CHALCO’s Annual reports for 2011–2016. For instance, Aluminium Corporation of China Limited (CHALCO), 2016 Annual Results Announcement, 13 (2016), http://www.chalco.com.cn/chalcoen/rootfiles/2017/03/23/ 1490229844504018-1490229844506299.pdf. 102 See CHALCO Annual Reports for 2011–2016. See, for instance, id.,at 46. 103 See CHALCO Annual Reports for 2011–2016. See, for instance CHALCO 2016 Annual Report, supra note 101, at 57. 104 See CHALCO Annual Reports for 2011–2016. See, for instance CHALCO 2016 Annual Report, supra note 101, at 12; CHALCO 2015 Annual Report, http://www.chalco.com.cn/zlgfen/rootfiles/ 2016/04/06/1458177643704277-1459904312981014.pdf, 13. 105 See CHALCO Annual Reports for 2011–2016. See, for instance CHALCO 2016 Annual Report, supra note 101, at 67. 106 See CHALCO Annual Reports for 2011–2016. See, for instance CHALCO 2016 Annual Report, supra note 101, at 39. 101

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the open about how it manipulates the conduct of Chinese industry in an attempt to justify the collusive behavior of Chinese exporters of Vitamin C to the United States under the “foreign sovereign compulsion” doctrine; that is, Chinese producers had colluded in the U.S. market not because they wanted to, but because the Chinese Government had coerced them to do so, including in terms of Chinese law. In so doing, the Chinese Government revealed that it has the legal authority to dictate industry behavior, and that it does not balk at exercising such power when “discipline” needs be infused in markets, both foreign and domestic, to maintain the profitability of Chinese producers at adequate levels. In its amicus curie brief filed before the relevant U.S. District Court, China’s Ministry of Commerce (“MOFCOM”) stated that, in its capacity as “the highest administrative authority authorized to regulate foreign trade”,107 it “regulate{d} market operation to achieve an integrated, competitive and orderly market system”108 MOFCOM characterized the corresponding industry association as “a Ministry-supervised entity authorized by the Ministry to regulate vitamin C export prices and output levels”.109 MOFCOM also described the association concerned as the “facilitator” of a “government-mandated price and output regime”.110 MOFCOM further explained that the purpose of this regulatory regime over prices and output was “to ensure orderly markets” and “to promote … the profitability of the industry through coordination of pricing and control of export volumes”.111 MOFCOM underscored that the ultimate objective of such regime was to safeguard the national interests of China.112 Crucially, MOFCOM clarified that the regulatory regime over prices and output was enforced not only in foreign markets but also domestically: “… China was concerned about the possible effects (as it saw them) of unfettered competition between and among enterprises, including that it could retard the orderly development of a stable domestic vitamin C industry and adversely affect levels of employment in that industry. The Government attempted to temper the effects of economic reform in its regulation of domestic and foreign commerce (emphasis added).”113 “… this lawsuit cannot be resolved without interfering with Chinese industrial policy respecting {sic} the operation of domestic firms within China … (emphasis added).”114

107 In re Vitamin C Antitrust Litigation, No. 13-4791 (2d Cir-2016), at 1 (Brief of Amicus Curie by the Ministry of Commerce of the People’s Republic of China), United States District Court Eastern District of New York (Sep. 22, 2006). 108 Id. 109 Id., at 3. 110 Id., at 6. 111 Id., at 6. 112 Id., at 6. 113 Id., at fn 9. 114 Id., at 1.

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MOFCOM’s amicus curie brief before the relevant U.S. Appeals Court contains similar statements.115 If “smoking-gun evidence” of China not being a market economy exists, this is it. In market economies governments do not undertake to tame markets to make them “orderly”, so that there is not “too much” competition that would negatively impinge upon the profitability of domestic producers. Importantly, there is also evidence that the Chinese Government can regulate industry conduct directly without relying on industry associations. For instance, Cornot-Gandolphe reports that, to deal with a crisis in the coal industry in 2014, “in addition to the instruction given to large mining groups to reduce coal production, the {National Development and Reform Commission} instructed leading power groups to reduce coal imports significantly”.116

11 11.1

Promoting the Growth of Specific Industries Through Planning The Planning Eco-System

As is well-known, the Chinese Government steers China’s economic growth through planning. As explained in Sect. 2, prior to the onset of the economic reforms in 1978–79, the Chinese Government micromanaged every industry setting, for each individual company, production volumes, the prices of the goods produced, the quantity of inputs to be used, and the cost that such inputs would represent for producers. This modality of planning (central planning) does not exist in China anymore. What is in place now is a more targeted approach to planning by means of which the Chinese Government nurtures sectors (and even specific products and production processes) that it views as “core”, strategic or involving “cutting edge” technologies, while discouraging industries that it considers backward, obsolete or otherwise undesirable (because they pollute heavily, for instance). Arguably, planning continues to be an integral part of Chinese economic policy— albeit in a modified form—because providing Chinese producers with low “factor prices”, raw materials costs, and energy costs may turn China into the “factory of the world”, but does not assure that China’s industrial structure will be consistent with the Chinese Government’s designs in terms of economic development. In other words, continuing recourse to some modality of planning reveals a concern that, in spite of all the tampering with “factor prices”, and raw materials and energy 115

In re Vitamin C Antitrust Litigation, Brief of Amicus Curie by the Ministry of Commerce of the People’s Republic of China, United States Court of Appeals for the Second Circuit (Apr. 14, 2014). 116 Silvie Cornot-Gandolphe, China’s Coal Market: Can Beijing Tame ‘King Coal’? 81 (The Oxford Institute for Energy Studies, OIES Paper: CL 1, Dec., 2014). The role of the National Development and Reform Commission in China’s economy is discussed in Sect. 11.

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costs, absent sectoral-level policy intervention China’s industrial structure would not be sufficiently concentrated on high-value manufacturing. The National Development and Reform Commission (“NDRC”) is China’s top planning agency. Five-year national plans have been issued since 1953-1957. The national plan currently in force is the 13th Five Year Plan for Economic and Social Development (2016–2020), issued in March 2016.117 The national plan has been characterized as the “flagship document” from which a constellation of more detailed five-year plans emanates. Such progeny consists of plans at the provincial level, at the sectoral level and at other levels.118 By way of illustration, the 12th Five Year Plan was supplemented by at least 71 industry-specific plans.119 The planning eco-system also comprises longer term sector-specific development policies and the so-called Catalogues with a cross-sectional scope. The best examples of these two sets of instruments are the Steel Policy and the Catalogues for Investment Guidance (the “Catalogues”). In May 2015 the Chinese Government released the Made in China 2025 program which is peculiar in that it involves a development policy for advanced manufacturing as a group. Forced mergers (to gain economies of scale) also feature prominently in the Chinese Government tool kit and they are implemented as the Chinese Government sees fit. The remainder of this Section discusses the main features of the Catalogues, the Steel Policy, the Made in China 2025 program, and the forced mergers policy.

11.2

The Catalogues

There is a catalogue for guiding foreign investment (Catalogue of Industries for Guiding Foreign Investment) and another for guiding investment from Chinese interests (Catalogue on Readjustment of Industrial Structure). The latest Catalogue of Industries for Guiding Foreign Investment went into force in July 2017.120 117

The 13th Five Year Plan for Economic and Social Development of the People’s Republic of China 2016-2020, http://en.ndrc.gov.cn/newsrelease/201612/P020161207645765233498.pdf. 118 THINK!DESK - CHINA RESEARCH & CONSULTING, Assessment of the normative and policy framework governing the Chinese economy and its impact on international competition 32–35, AEGIS EUROPE (Jun. 25, 2016), http://www.euroalliages.com/data/1456161539THINK% 21DESK%20study%20on%20MES%20to%20China%20-%20Executive%20summary.pdf [hereinafter Think!Desk Report]. 119 Id., at 36–37. 120 The Catalogue of Industries for Guiding Foreign Investment also functions as a foreign investment law because, in addition to designating certain “industries” as “encouraged”, it identifies the industries in which foreign investment is banned and those in which foreign investment is restricted; that is, permitted only in the form of equity or contractual joint-ventures, where foreign interests can be limited to minority positions (including shares not exceeding 20% or 25%). By implication, foreign investment is unrestricted everywhere else. Importantly, the provisions of the

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Both Catalogues for Investment Guidance contain a list of “encouraged industries”, although the term is a misnomer because what is listed are products and production processes/technologies, rather than industries. In particular, in the 2017 Catalogue of Industries for Guiding Foreign Investment the list of “encouraged industries” has 348 entries including, for instance, “research, development, and manufacturing of new types of light-weight and environment-friendly materials for aviation, aerospace, automobiles and motorcycles (including but not limited to special-purpose aluminum sheets, aluminum magnesium alloy materials, and aluminum alloy motorcycle frames)”. The Catalogue on Readjustment of Industrial Structure (which, again, guides investment from Chinese interests) also designates certain “industries” as “restricted” and others as “eliminated” (“to be eliminated”, actually). The Central Government, the provincial governments, and the municipal administrations are required to take actions, within their ambit, that are consistent with the designation an “industry” has received.121 The same applies to state-owned enterprises. By way of illustration, “industries” classified as “encouraged” receive discounted electricity rates whereas “industries” classified as “restricted” or “to be eliminated” are assessed higher charges: In 2014, {the} State Council required that provincial governments impose a minimum Punitive Surcharge of US$0.0615/kWh for cement manufacturers classified as Eliminated and gave provincial governments the discretion to increase it further. This is the highest Punitive Surcharge in China to-date.122

11.3

The Steel Policy

The Steel Policy (formally known as Policies for Development of the Iron and Steel Industry) is the archetypical example of the sector-specific development policies with a longer horizon than the sectoral plans radiating from the five-year national plans. It was adopted in July 2005 and still remains in effect.123 The highlights of the Steel Policy can be summarized as follows: Article 22 of the Steel Policy requires Chinese steel producers to submit their investment projects for “examination and approval” by the NDRC. Crucially, Article 24 establishes penalties for companies whose investment plans do not comply with the development policies set for the sector, or neglect to submit their

sector-specific development policies can override the Catalogue of Industries for Guiding Foreign Investment. For instance, the steel industry is not listed in Catalogue of Industries for Guiding Foreign Investment as restricted or prohibited for foreign investment but Article 23 of the Steel Policy (further discussed in Subsection 11.3) requires majority ownership by Chinese interests. 121 Think!Desk Report, supra note 118, at 42. 122 BLS & Co., supra note 85, at 6. 123 The Steel Policy was published as Order of the National Development and Reform Commission, No. 35.

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investment plans for NDRC review. To say that such penalties are draconian is an understatement: no land use permit, no environmental permit, no production permit, no commercial registration, no approval of the company’s constitution, no loan or credit support in any form and no tax refund for imported equipment. Thus, it is safe to conclude that no projects in the steel industry lacking the NDRC seal of approval can get off the ground. Furthermore, Article 1 mandates Chinese steel producers to “maintain a reasonable scale”. Consistent with this objective, Article 3 requires the ten largest steel groups to expand so as to account for at least 50% of total production capacity by 2010 and at least 70% by 2020. The Steel Policy also regulates the conduct of input suppliers to the steel industry. In particular, Article 25 requires banks providing loans to finance investment in fixed assets to do so in terms that “comply with the development policies for the iron and steel industry”. Because the “development policies for the iron and steel industry” involve relentless growth,124 it is implicit that compliance with such objective on the part of the banking sector requires the provision of loans to steel producers in concessionary terms.

11.4

Made in China 2025

The program Made in China 2025 intends to make China the world leader in “smart manufacturing” (that is, manufacturing that is heavily reliant on automation and digitization).125 It targets 10 sectors including new generation information technology, high-end computerized machines and robots, aerospace, high-end ships, advanced railway transportation equipment, new energy and new energy-saving vehicles (including electric cars), new materials, and bio-pharma and high-tech medical equipment.126 Wubbeke et al. argue that through this program the Chinese Government is taking pre-emptive action against what it views as medium-term threats posed by rising wage costs in China and re-shoring to industrial countries driven by automation.127 The program contemplates specific import substitution targets, and supports those targets through the provision of subsidies, direct capital

124

According to data from the World Steel Association, from 2001 through 2016 China’s share in world production of crude steel went up from 18% to 50%. In 1979, at the outset of the reform period, China’s share did not even reach 5%. 125 An excellent account of how China at an earlier point in time came to dominate world markets for steel, glass, paper and auto parts is presented in USHA HALEY & GEORGE HALEY, SUBSIDIES TO CHINESE INDUSTRY: STATE CAPITALISM, BUSINESS STRATERGY AND TRADE POLICY. 126 Jost Wubbeke et al., Made in China 2025: The making of a high-tech superpower and consequences for industrial countries, MERCATOR INSTITUTE FOR CHINA STUDIES 19 (Dec., 2016). 127 Id., at 17.

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injections and preferential loans, and the institution of local content requirements.128 For example, “the centerpiece of Beijing’s plan to dominate the computer chip industry” is “the $20 billion government-controlled fund” “{f}ormally known as the China Integrated Circuit Industry Investment Fund Co.”.129 Other sources estimate this Fund to be as large as $100 billion.130 The fund has already made contributions to seed capital for startups.131 The local content requirements connected with the Made in China 2025 program are being put into place solely on a de facto basis to avoid openly running afoul of WTO rules in this regard: “Foreign batteries are not banned in China but auto-makers must use ones from a government-approved list to qualify for generous EV subsidies. The Ministry of Industry and Information Technology’s List includes 57 manufacturers, all of them Chinese”.132

11.5

Forced Mergers

The best example of China using forced mergers as part of its industrial policy is the 2008 consolidation of the then six telecommunications companies into three joint mobile and fixed-line operators.133 The coal industry provides another example. Cornot-Gandolphe reports in this connection that “the government promotes mergers and acquisitions in the coal industry to create large groups able to develop economies of scale and apply advanced mining technologies”.134 In September 2015, a five-year plan was announced to strengthen state-owned companies through mergers.135 128

Id., at 21. Eva Dou, China-Backed Fund Plays Big Role in Country’s Chip Push, THE WALL STREET JOURNAL (July 31, 2017) https://www.wsj.com/articles/china-backed-fund-plays-big-role-incountrys-chip-push-1501493401. 130 Jane Perlez, Paul Mozur & Jonathan Ansfield, China’s Technology Ambitions Could Upset the World Order, THE NY TIMES (Nov. 7, 2017), https://www.nytimes.com/2017/11/07/business/ made-in-china-technology-trade.html. 131 Li Yuan, Beijing Takes Challenge to AI Chip Leaders, THE WALL STREET JOURNAL (Jan. 5, 2018), https://www.wsj.com/articles/google-and-intel-beware-china-is-gunning-for-dominance-inai-chips-1515060224. 132 Trefor Moss, China’s Road to Electric Car Domination is Driven in Part by Batteries, THE WALL STREET JOURNAL (Oct. 21, 2017), https://www.wsj.com/articles/chinas-road-to-electric-cardomination-is-driven-in-part-by-batteries-1508587203. 133 China Orders 6 Telecoms to Merge Their Assets, THE NY TIMES (May 26, 2008), https://www. nytimes.com/2008/05/26/business/worldbusiness/26telecom.html. 134 Silvie Cornot-Gandolphe, supra note 116, at 56. 135 Lingling Wei, China Economic Plan Calls for Mergers, Public Listings by 2020, THE WALL STREET JOURNAL Sept. 5, 2015, https://www.wsj.com/articles/china-reform-plan-calls-for-mergerspublic-listings-by-2020-1441635645. 129

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95

Summary and Conclusion

Beginning in 1978–79, China abandoned the CPE regime. It embarked then on a process of modernization of its non-market economy in order to achieve faster and steadier growth based upon export-led industrialization, with the State remaining at the helm. In particular, markets re-emerged and central planning was abandoned. In addition, some privatization, price liberalization, and opening to foreign trade and foreign direct investment were introduced. However, markets have not been left to their own dynamics as the Chinese Government heavily interferes in their operation on an across-the-board basis. In fact, the Chinese Government has perfected market intervention to an art, if not a science.136 The first layer of intervention involves artificially reducing the prices of the “factors of production” (capital, labor, and land), key raw materials, and energy to turn China into the “factory of the world”. In key upstream markets SOEs can operate without an effective budget constraint which begets overinvestment and overproduction. The Chinese Government also “keeps markets in order” so as to forestall damaging competition amongst Chinese producers. Furthermore, to ensure that China’s industrial structure is sufficiently oriented towards high-value manufacturing, a multiplicity of measures have been put in place. Hundreds of products and production processes/technologies designated as “encouraged” receive preferential treatment by state organs and state-owned enterprises; discounted electricity rates, for instance. Dozens of industries continue to be micro-managed by the state through sectoral plans and policies. In the steel industry, for instance, companies’ investment plans do not materialize unless approved by NDRC. The top producers are required to achieve specific market shares. Banks are obliged to provide investment financing in concessionary terms. Even outside the context of a sectoral plan or policy, Chinese producers can be forced to merge to gain economies of scale. Finally, to speed up the growth of “smart manufacturing”, a tailor-made program has been developed, which involves specific import substitution targets that are to be achieved through a mix of subsidies, direct capital injections, preferential loans, and local content requirements. China is certainly not the only country that engages in policies such as financial repression to lower the cost of loans or export taxation to lower raw material prices. But the extent of the distortions that have been introduced as regards “factor pricing” and the cost of raw materials and energy are a historical first. In any event, 136

This is not meant to imply that the Chinese Government always obtains good results from its market interventions. By way of illustration, China has not managed to grow a world-class automobile industry in spite that this sector has been heavily supported for decades. In fact, it appears that, through the Made in China 2025 program, the Chinese Government now seeks to leapfrog conventional automobile technologies and achieve global dominance in electric and self-driven cars instead. Furthermore, even where the Chinese Government obtains good results from its market interventions, such interventions impose significant costs upon competitors which create frictions in the multilateral trading order. Discussing this issue is beyond the scope of this Chapter, however.

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what sets China apart is not only the massiveness of the distortions in “factor pricing” and the cost of raw materials and energy but also the fact that the Chinese Government takes upon itself, as it sees fit, the task of “keeping markets in order” and directing key business decisions, such as how much to produce and where to invest. In fact, the notion of “keeping markets in order” is completely inimical to a market economy. So is having the government disfranchise the private sector from making key business decisions. Because market outcomes in China, by and large, are not market-driven but State-driven, China’s economy unquestionably remains non-market.

Annex I Figure 3, below, is a variation of Fig. 2. As in Figs. 2 and 3 represents one of the industries in a CPE where imports are deemed necessary. The distance between the S demand and the supply schedules, QD 0  Q0 , indicates the quantity of imports Fig. 3 Import undertakings by A CPE

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involved (M0).137 Three different levels of import
prices, inclusive of import duties, are denoted on the vertical axis.138 PW 1 þ t1m indicates the starting level of import 139 prices and import duties. If in successive
trade negotiations the duty rate is
reduced to PW 1 þ t2m and then to PW 1 þ t3m , import volume remains the same (M0), because the fall in import (and domestic) prices resulting from the reduction in the level of tariff protection does not expand domestic demand nor does it make domestic production contract (since local demand and supply are unresponsive to price). In such circumstances, to get import volume to increase, an import undertaking has to be agreed upon. In Fig. 3, the additional import volume involved in the undertaking is denoted by MU. In order to enable import growth in this proportion, the planning authorities have to boost demand to QD 1 (which involves 

shifting the demand schedule to D). Accordingly, considering the undertaking, import volume increases to M1.

137

Again, the demand and supply schedules are completely vertical because they are unresponsive to price, as the diagram depicts a CPE. 138 As in Fig. 2, PW indicates the world price with no tariff protection.

139 Since P
W is assumed constant, the difference between PW 1 þ t1m , PW 1 þ t2m and PW 1 þ t3m has to do exclusively with the level of import duties.

The Termination of the Grandfather Clause in China’s Accession Protocol and the Normal Value Construction After Fifteen Years of Accession Xuewei Feng

Abstract A complicated legal issue tests the wisdom of a treaty interpreter. The Appellate Body in recent years has called for a holistic interpretation of the law of the World Trade Organisation (“WTO”). Both the issue of whether Section 15(a) and (d) constitute a “grandfather” clause and, therefore, should be terminated after fifteen years of accession, and the issue of whether Article 2.2.1.1 of the Anti-dumping Agreement (“AD Agreement”) allows the use of foreign information to calculate producers’ production costs, deserve a holistic approach of interpretation, taking into account all the relevant provisions and covered agreements, protocols, etc. Bearing this in mind, this chapter tries to analyze the grandfather clause nature of Section 15(a) and (d) of China’s Accession Protocol and the legal consequences. Moreover, the chapter also tries to point out the differences in the governing scope of the Agreement on Subsidies and Countervailing Measures (“SCM Agreement”) and the AD Agreement. Further, this chapter also aims to show how State-Owned Enterprises (“SOEs”) and subsidies can be dealt with under the SCM Agreement separately in a manner without causing double remedies. The SOE issue can also be examined under commercial operation obligations under the GATT. In such a contextual background, the WTO anti-dumping rule for calculating production costs under Article 2.2.1.1 of the AD Agreement should be interpreted in a way that only resolves normal value calculation, while not addressing price distortion or subsidy issues. With such a clear distinction of the governing scope, this chapter argues that production costs calculation under Article 2.2.1.1 cannot be interpreted as permitting the use of surrogate costs from other countries so that the surrogate country methodology in Section 15 of China’s Accession Protocol as a grandfather clause would not be reincarnated and inserted back into the AD Agreement.




Keywords Surrogate methodology Chinese accession protocol Grandfather clauses Anti-dumping agreement




X. Feng (&) AllBright Law Offices, Beijing, China e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2018 J. J. Nedumpara and W. Zhou (eds.), Non-market Economies in the Global Trading System, https://doi.org/10.1007/978-981-13-1331-8_4

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1 Section 15 of the Protocol Allows Surrogate Country Methodology as an Exception and an Enabling Clause with a Proviso The issue concerns Section 15 of China’s Protocol of Accession to the WTO,1 which permits WTO Members already having a domestic legislation providing for what constitutes “a market economy” to apply surrogate country price methodology to substitute the methodologies specified in Article 2 of the AD Agreement2 in calculating the normal value when determining the dumping margin for Chinese imported products under an anti-dumping investigation. There have been various discussions during the recent years among lawyers and academics on this legal issue. The Appellate Body has also shed light on when deviation from Art. I:1 of the General Agreement on Tariffs and Trade (“GATT”) is permissible, when imposing an anti-dumping duty. In EC—Fasteners, the Appellate Body noted as follows: Article VI of the GATT 1994 permits the imposition of anti-dumping duties, which may otherwise be inconsistent with other provisions of the GATT 1994, such as Article I:1. Therefore, in our view, a preliminary question to be addressed before determining whether an anti-dumping duty has been imposed inconsistently with Article I:1 of the GATT 1994 is whether the anti-dumping duty had been imposed consistently with Article VI of the GATT 1994.3

Building upon the Appellate Body’s basic logic, if an anti-dumping authority determines normal value consistently with GATT Article VI (and the AD Agreement), including Ad Article VI paragraph 2, the authority may impose anti-dumping duties in deviation from Article I:1 of the GATT 1994. Alternatively, if an anti-dumping measure is not imposed in a manner consistent with these provisions in GATT 1994 and the AD Agreement on imports from China, the authority may also determine a normal value and impose an anti-dumping duty according to Section 15(a) of China’s Accession Protocol. Section 15 permits—as an exception to the general provisions in GATT Article VI and AD Agreement Article 2—the application of surrogate country methodology with respect to China’s imports under investigation, provided all conditions contained in Section 15 are met.4 Section 15(a) (ii) is the “enabling clause” which

1 Protocol on the Accession of the People’s Republic of China, WTO Doc. WT/L/432 (Nov. 23, 2001). 2 Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1869 U. N.T.S. 201 (1994) [hereinafter Anti-Dumping Agreement]. 3 Appellate Body Report, European Communities — Definitive Anti-Dumping Measures on Certain Iron or Steel Fasteners from China, ¶392, WTO Doc. WT/DS397/AB/R (adopted July 15, 2011). 4 Appellate Body Report, US — Measures Affecting Imports of Woven Wool Shirts and Blouses from India, WTO Doc. WT/DS337/AB/R (adopted May 23, 1997) (“Article XX and XI:(2)(c)(i)

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provides the legal basis for deviation from the general rules, just as the GATT Enabling Clause5 provides legal basis for a developed country to provide Generalized System of Preferences (GSP) to developing countries in deviation from the MFN obligation in GATT Article I:1. The Appellate Body has recognized the nature of Enabling Clause to be an exception to GATT Article I:1: Paragraph 1 (of the Enabling Clause, thus excepts Members from complying with the obligation contained in Article I:1 for the purpose of providing differential and favorable treatment to developing countries, provided that such treatment is in accordance with the conditions set out in the Enabling Clause. As such, the Enabling Clause operates as an ‘exception’ to Article I:1.6

Some argue that the GATT 1994 and the AD Agreement already permitted Members to reject Chinese prices and costs when they were confronted by the absence of a market-based and transparent economy in China, since without such rejection, price comparability would be compromised.7 That is a questionable argument given that the AD Agreement and GATT 1994 only prescribe one particular circumstance under which “a strict comparison with domestic prices… may not always be appropriate”. This is expressed in the very clear text of Ad Note 2 to GATT Article VI:1. The text of Ad Note 2 to GATT Article VI:1 provides: It is recognized that, in the case of imports from a country which has a complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the State, special difficulties may exist in determining price comparability…and in such cases importing contracting parties may find it necessary to take into account the possibility that a strict comparison with domestic prices in such a country may not always be appropriate.

Clearly, unless facts fully support the conclusions that “a complete or substantially complete monopoly of its trade” exists in China and that “all domestic prices are fixed by the State”, Ad Note 2 to GATT Article VI:1 cannot be invoked by a WTO Member to justify its use of other methodologies different than those

are limited exceptions from obligations under certain other provisions of the GATT 1994, not positive rules establishing obligations in themselves.”). In the opinion of the Appellate Body, there are two types of rules in WTO Agreement, the principle rules are those setting out positive obligations for Members, exception rules are those allowing deviation from these positive obligations. Consequently, since Section 15(a) provides Members the right to deviate from those rules in GATT 1994 and in the Anti-dumping Agreement concerning the determination of the normal value, this Protocol paragraph constitutes an exception to the general rules on normal value calculation. 5 General Agreement on Tariffs and Trade, Decision of 28 November 1979 on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries, GATT Doc. L/4093 (adopted Dec. 3, 1979). 6 Appellate Body Report, EC — Conditions for Granting Tariff Preferences to Developing Countries, ¶ 90, WTO Doc. WT/DS246/AB/R (adopted Apr. 7, 2004). 7 First Written Submission by the European Union, European Union – Measures Related to Price Comparison Methodologies, ¶5, WTO Doc. WT/DS516 (Nov. 14, 2017), http://trade.ec.europa.eu/ doclib/docs/2017/november/tradoc_156401.pdf.

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provided in GATT Article VI:1 and Article 2 of the AD Agreement in determining normal value of the products concerned. No doubt, it was exactly because GATT 19478 and the AD Agreement do not provide permission to use other methodologies in calculating normal value apart from the single circumstance prescribed in Ad Note 2 to GATT Article VI:1, that the WTO Members have formulated exceptional provisions such as Section 15(a) and (d) of China’s Accession Protocol to allow the use of other methodologies than those provided in Article 2 of the AD Agreement. Article XII of the Marrakesh Agreement envisaged such negotiated provisions to be included as “terms and conditions” for the accession of the new WTO Member.9 It also gives the negotiated Protocol provisions a legal status as an “integral part” of the WTO Agreement for that newly acceded Member concerned.10 Such a special protocol provision in effect serves as a general reservation of certain obligations toward the newly acceded WTO Member—in this case, China—during an indicated period of time. This is consistent with the principle that exceptions should be limited and confined within the express limitations, including the time element.11 The current controversy is centered on the issue of whether China’s Accession Protocol allows a Member to continue the use of surrogate country methodology as provided in Section 15(a) (i) and (ii) of the Accession Protocol in determining the normal value for Chinese imports after 15 years of China’s accession, in deviation from the obligation under GATT Article VI:1 and Article 2.2 of the AD Agreement, which necessarily causes violation of Article I:1 of the GATT 1994 (the MFN treatment). The text of the second sentence of Section 15(d) provides a definite termination date of Section 15(a) (ii),12 i.e., the “enabling clause” for using surrogate country price methodology against Chinese imports:

8

General Agreement on Tariffs and Trade, Oct. 30, 1947, 61 Stat. A-11, 55 U.N.T.S 1947 [hereinafter GATT 1947]. 9 General Agreement on Tariffs and Trade, entered into force Apr. 15 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1867 U.N.T.S. 187, 33 I.L.M. 1153 [hereinafter GATT 1994]. Art. XII:1 of the GATT 1994 states, “Any State,…… may accede to this Agreement, on terms to be agreed between it and the WTO. Such accession shall apply to this Agreement and the Multilateral Trade Agreements annexed thereto.” 10 World Trade Organisation, Ministerial Conference Decision of 10 November 2001, ¶1.2, WTO Doc. WT/L/432 (adopted Nov. 23, 2001). “This Protocol, which shall include the commitments referred to in paragraph 342 of the Working Party Report, shall become an integral part of the WTO Agreement.” 11 Such principle can be similarly found in Waiver decisions made by the General Council of the Ministerial Conference of the WTO. 12 Protocol on the Accession of the People’s Republic of China, WTO Doc. WT/L/432 (Nov. 23, 2001), sec. 15(a) [hereinafter Chinese Protocol of Accession]. Sec. 15 (a) states: In determining price compatibility under Article VI of the GATT 1884 and the Anti-Dumping Agreement, the importing WTO Member shall use either Chinese prices or costs for the industry under investigation or a methodology that is not based on a strict comparison with domestic prices or costs in China based on the following rules: (i) If the producers under investigation can clearly show that market economy conditions prevail in

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In any event, the provisions of subparagraph (a) (ii) shall expire 15 years after the date of accession.

However, there are two other sentences in the same clause. The first sentence of Section 15(d) says: “Once China has established, under the national law of the importing WTO Member, that it is a market economy, the provisions of subparagraph (a) shall be terminated provided that the importing Member’s national law contains market economy criteria as of the date of accession”. The third sentence of Section 15(d) states: “In addition, should China establish, pursuant to the national law of the importing WTO Member, that market economy conditions prevail in a particular industry or sector, the non-market economy provisions of subparagraph (a) shall no longer apply to that industry or sector”. From the negotiating history, including the final version of the US–China bilateral Agreement on Market Access, we can see that the Chinese officials had added the wording “providing that the importing Member’s national law contains market economy criteria as of the date of accession” in hand written format at the end of the first sentence.13 A critical legal point is that the nature of this China-added proviso acts as a precondition for any Member to be able to apply the surrogate country methodology as provided in Section 15(a) (ii). As a starting point, without domestic law criteria on the so-called market economy, there is simply no reasonable basis for applying a surrogate country methodology on Chinese imports, in deviation from all three methodologies as provided in Article 2 of the AD Agreement. Secondly, the domestic law containing market economy criteria must have existed on the date of China’s accession, i.e., on 11 December 2001. This means, a Member cannot enact a new law containing market economy criteria thereafter, simply for the purpose of being able to use surrogate country price methodology against China. Thirdly, if a WTO Member’s domestic law containing market economy criteria existed on that date, the Member’s investigating authority still has to wait and see whether China can prove that it is a market economy according to such domestic law criteria. Based on this reasoning, whenever China is able to prove that it is a market economy, Section 15(a) would have to be terminated immediately, even

the industry producing the like product, the importing WTO Member shall use Chinese prices or costs for the industry under investigation in determining price compatibility; (ii) The importing WTO Member may use a methodology that is not based on a strict comparison with domestic prices or costs in China if the producers under investigation cannot clearly show that market economy conditions prevail in the industry producing the like product with regard to manufacture, production and sale of that product. Also see Report of Working Party on the Accession of China, Compilation of the Legal Instruments on China’s Accession to the World Trade Organization, WTO Doc. WT/ACC/CHN 49 (Oct. 1, 2001) [hereinafter Working Party Report]. 13 See Protocol Language in World Trade Organisation, Agreement on Market Access Between The Peoples Republic Of China And The United States of America in BASIC INSTRUMENTS & SELECTED DOCUMENTS ON THE NEGOTIATION FOR CHINA’S ACCESSION TO THE WORLD TRADE ORGANIZATION, Vol. 20 (China Commerce and Trade Press, 2012).

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before the expiry date as indicated in the first sentence of Section 15(d). Alternatively, if China proves that a particular industry or sector meets the criteria of an importing Member, the application of Section 15(a) would have to be terminated for that industry or sector according to the third sentence of Section 15(d). Here, the domestic law on market economy criteria sounds somewhat arbitrary. On the one hand, it presupposes that an industry can be a market economy industry regardless of what other areas of the economy looks like. On the other hand, it does not provide that a single company can be treated as having the “market economy status”. Nevertheless, this is what Section 15(d) says. Whether it makes economic sense is a different query that deserves another comprehensive examination based on economic theories. It is important to note that, whether this rule is grounded on sound economic theories or not is not our primary concern. Rather, the meanings of Section 15(a) and (d) are the core issue. Even imperfect treaty obligations have to be implemented in good faith as the old saying goes “pacta sunt servanda”.14 There is no reason for the precondition as set out in the proviso of the first sentence of Section 15(d) not to apply to the third sentence of paragraph (d), given that any termination of surrogate country methodology for an industry in the third sentence also needs to be decided based on the market economy criteria in domestic law that is only mentioned in the first sentence of Section 15(d). In addition, as the proviso in Section 15(d) serves the function of allowing the application of the existing domestic law criteria on Chinese imports during anti-dumping investigation, such domestic law criteria on market economy also constitutes “grandfather clause”. What would be the legal effect of these existing domestic law provisions (i.e., “grandfather clause”) in WTO law after 15 years of China’s accession? Does it impact the legal effect of Section 15(a) of the Protocol after 15 years? And, in what manner? The past experience of the application and termination of the GATT “grandfather clause” would offer some enlightening guidance and indicate a reasonable manner for the interpretation of the domestic law “market economy” proviso as well as the exact meaning of Section 15(a), which has been discussed in the next part of this chapter.

2 The Grandfather Clause in GATT History: The Existing GATT-Inconsistent Domestic Legislations Were Grandfathered for 15 Years After China’s Accession It is well known that the GATT 1947 was applied on the basis of the Protocol of Provisional Application (PPA) signed in 1947, in which the contracting parties reserved the right to apply Part II of the General Agreement on Tariff and Trade (Articles III to XXIII)—the part dealing with non-tariff measures. The PPA provided a precondition that GATT 1947 would apply so long as it was not 14

Vienna Convention on the Law of Treaties, May 23, 1969, 1155 U.N.T.S. 331.

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inconsistent with contracting party’s then existing domestic legislation. The relevant part provides: The governments…undertake…to apply provisionally on and after 1 January 1948: (a) Part I and III of the General Agreement, on Tariffs and Trade, and (b) Part II of that Agreement to the fullest extent not inconsistent with existing legislation.

Part I of the GATT includes only Article I, the MFN clause and Article II which ensures that tariff bindings shall not be exceeded. Part II of the GATT includes Articles III to XXIII which, inter alia includes national treatment, anti-dumping, subsidy, safeguards, customs valuation, elimination of quantitative restrictions, BOP safeguards, infant industry and state trading enterprises, general exceptions, and dispute settlement. Part III includes Articles XXIV–XXXVI. Part IV was added later into the GATT, including Articles XXXVI–XXXXVIII. Although Part II covers the broadest scope of GATT provisions, the PPA, by its express wording allowed contracting parties to keep their then existing domestic legislation if there was a discrepancy between these GATT provisions and that of the contracting party’s domestic law. In fact, these Part II provisions were originally included in the draft Charter of the International Trade Organization. Canada, the UK and the US considered these provisions essential for the protection of tariff concessions and suggested to add them to the GATT as Part II. In the end, a compromise was found between these three countries and those opposing such suggestion, that the application of GATT Part II would be made subject to the then existing domestic legislation. Such arrangement eliminated the need for revising conflicting domestic laws by contracting parties while ensuring that the value of tariff concessions cannot be nullified or impaired by new legislation.15 The conflicting domestic legislation that existed at the entry into force of the GATT is generally called a “grandfather legislation”. The PPA provided an exemption to excuse the then domestic legislations retained by contracting parties which were in conflict with the obligations under GATT Part II. PPA Paragraph 1(b) was generally called “grandfather clause” by contracting parties as indicated in the Secretariat’s codification of GATT law.16 Concerning the interpretation of such grandfather clause, there have been a few disputes during the GATT era. One is the US—Manufacturing Clause17 in which the manufacturing clause—Section 601 of Title 17 of the United States Code, as extended by Public Law 97-215 of 13 July 1982—prohibited, with certain exceptions, ‘the importation into or public distribution in the United States of a

15

For detailed reasoning and historical evidence, see Frieder Roessler, The Provisional Application of the GATT-Note on the Report of the GATT Panel on the ‘Manufacturing Clause’ in the U.S. Copyright Legislation, 19(3) J. WORLD TRADE 289–295 (1985). 16 See Roessler, id., at 289–291,and see also World Trade Organization, Analytical Index of the GATT, 1072, https://www.wto.org/english/res_e/booksp_e/gatt_ai_e/prov_appl_gen_agree_e.pdf 17 Panel Report, United States — Manufacturing Clause, GATT Doc. L/5609 (adopted May 15, 1984) [hereinafter US — Manufacturing Clause]. 85d (adopted on. May 15, 1984),ean Commission (``I:1 t)].e areference to which of the 2 citations is referred to in FN 10. are.

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copyrighted work consisting preponderantly of non-dramatic literary material in the English language, the author of which is a United States domiciliary, unless the portions consisting of such material have been manufactured in the United States or Canada’.18 The law defines “manufacture” as including typesetting if the materials are produced directly from ‘type or plates made from type, making lithographic or photo-engraved plates, and printing and binding’. The original Manufacturing Clause goes back to the Chace Act of 3 March 1891, which for the first time permitted foreign nationals to obtain copy right protection. For fear of foreign competition, the US Congress specified that copyright protection would only be granted if the manufacture took place in the US. If manufactured in foreign countries, importation of such US copyright materials would be prohibited.19 The manufacturing clause underwent some revisions. The amendment in 1976 by Public law 94-553 provided the expiry date for the manufacturing clause that it was to be applied “prior to 1 July 1982”. On 30 June 1982 however, both Houses of the US Congress passed a bill extending the expiry date of the Manufacturing Clause from 1 July 1982 to 1 July 1986. The Bill became law (Public Law 97-215) on 13 July 1982 but was challenged by the European Commission (“EC”). Both the EC and the US agreed that the Manufacturing Clause violated Article XI of the GATT. However, while the US argued that the Manufacturing Clause was the “existing legislation” and was covered by the PPA, the EC claimed that the 1982 revision of the Manufacturing Clause was not an existing legislation. Rather, it is a new legislation which is not justifiable under the PPA. The Panel, based on Brazilian Internal Tax Panel ruling,20 found that “changes to the manufacturing clause that did not alter its degree of inconsistency with the General Agreement, or which constituted a move toward a greater degree of consistency, would not cause it to cease to qualify as ‘existing legislation’ in terms of paragraph 1(b) of the Protocol of Provisional Application”.21 However, the Panel observed that: the Protocol had been conceived of as providing a temporary dispensation to enable contracting parties to apply Part II of the General Agreement without changing existing legislation or acting inconsistently with it. Given this purpose of the Protocol the Panel believed that, once a contracting party has reduced the degree of inconsistency of ‘existing legislation’ with the General Agreement, there would be no justification for a subsequent move to increase the degree of GATT inconsistency of such legislation, albeit to a level not exceeding that which had existed on 30 October 1947.22

In short, the Panel answered the question whether “existing legislation” can be revised in both directions, i.e., increasing or reducing its consistency with GATT Part II. The Panel found that only a one-way street approach is allowed, i.e.,

17 U.S.C. § 601 (1982). US — Manufacturing Clause, supra note 17, ¶5. 20 Panel Report, Brazilian Internal Taxes, GATT Doc. GATT/CP.3/SR.9 (adopted Jun. 30, 1949). 21 US — Manufacturing Clause, supra note 17, ¶ 36. 22 Id., ¶ 39. 18 19

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permitting the increasing of consistency of a measure with GATT, Part II, while any further deviation from GATT would not be permitted.23 Since the aim of the GATT was to ensure security and predictability in trade relations among the contracting parties, reversing the legislation and moving closer towards a more inconsistent direction and attempting to justify it under the PPA would not have conformed to such aim. As a reversing legislation, the US 1982 amendment extending the expiry period of the GATT-inconsistent Manufacturing Clause and was therefore not justified under the Protocol of Provisional Application as an ‘existing legislation’.24 The grandfather clause in PPA paragraph 1(b) allows contracting parties’ domestic “existing legislation” to exist notwithstanding its inconsistency with GATT Part II. But as the existing legislation is inconsistent with GATT Provisions, it should, by nature only be “temporary dispensation” as the Panel in US— Manufacturing Clause rightly stated.25 Frieder Roessler commented on the significance of this Panel’s ruling saying that [t]he Contracting Parties’ acceptance of the ‘one-way street’ principle in the interpretation of the ‘existing legislation’ clause in the Protocols by which contracting parties acceded to GATT has significantly strengthened the GATT legal system. The transitional nature of rights under those protocols are now clearly recognized. The many past moves toward GATT-consistency are now firmly anchored in GATT law; they can no longer be regarded as autonomous, reversible actions.26

However, given the transitional nature of these existing legislations, at what point in time should they be abolished? There was no indication of the termination of the grandfather clause in the PPA Paragraph 1(b). Contracting parties raised termination of grandfather clause from time to time during GATT Rounds of negotiations. It was only during Uruguay Round that the grandfather clause was terminated by the express wording of the GATT 1994 in the following provisions: The General Agreement on Tariffs and Trade 1994 (“GATT 1994”) shall consist of (a) the provision in the General Agreement on Tariffs and Trade, dated 30 October 1947, annexed to the Final Act Adopted at the Conclusion of the Second Session of the Preparatory Committee of the United Nations Conference on Trade and Environment (excluding the Protocol of Provisional Application), as rectified, amended or modified by the terms of legal instruments which have entered into force before the date of entry into force of the WTO Agreement; (b) the provisions of the legal instruments set forth below that have entered into force under the GATT 1947 before the date of entry into force of the WTO Agreement: (i) protocols and certifications relating to tariff concessions; (ii)protocols of accession (excluding the provisions (a) concerning provisional application and withdrawal of

Id., ¶ 38. Id., ¶¶ 37–39. 25 “It noted that the Protocol had been conceived of as providing a temporary dispensation to enable contracting parties to apply Part II of the General Agreement without changing existing legislation or acting inconsistently with it.” See Id., ¶ 39. 26 Roessler, supra note 15, at 295. 23 24

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In other words, the GATT 1994 requires a complete application of GATT Articles including Part II to all WTO Members in contrast to the PPA paragraph (b) in which contracting parties were allowed to keep their GATT-inconsistent existing domestic legislations as long as they did not revise these existing legislations to reduce the extent of their consistency with Part II of the GATT 1947. The WTO system became more secure and predictable with the establishment of the WTO. The entry into force of the whole package of the WTO Agreement made all the GATT provisions uniformly applicable to all WTO Members and mandated the revision of inconsistent domestic legislations towards conformity with the Annexed Agreements to the Marrakesh Agreement, according to Article 16.4 of the Marrakesh Agreement.

3 China’s Accession Protocol Section 15(a) and (d) Allow Application of Domestic Law Market Economy Criteria and Thus Constitute a Grandfather Clause in Anti-dumping China acceded to the WTO during an overall market economy reform process which is indicated in paragraph 6 of the Working Party Report.28 Members suggested that because of the economic development process of China, it was better to take a pragmatic approach in a few areas as reflected in the Protocol of Accession and the Working Party Report, which included Section 15 of the Protocol.29 Section 15(a) and (d) of China’s Accession Protocol provides a special rule on the use of surrogate country methodology in determining normal value for Chinese imports: 15. Price Comparability in Determining Subsidies and Dumping Article VI of the GATT 1994, the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (“Anti-Dumping Agreement”) and the SCM Agreement shall apply in proceedings involving imports of Chinese origin into a WTO Member consistent with the following: (a) In determining price comparability under Article VI of the GATT 1994 and the Anti-Dumping Agreement, the importing WTO Member shall use either Chinese prices or costs for the industry under investigation or a methodology that is not based on a strict comparison with domestic prices or costs in China based on the following rules:

See WORLD TRADE ORGANISATION, THE LEGAL TEXT – THE RESULTS OF THE URUGUAY ROUND of MULTILATERAL TRADE NEGOTIATION, 17 (Cambridge University Press, 1999). 28 Working Party Report, supra note 12, ¶ 6. 29 Working Party Report, supra note 12, ¶ 9. 27

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(i) If the producer under investigation can clearly show that market economy conditions prevail in the industry producing the like product with regard to the manufacture, production and sale of that product, the importing WTO Member shall use Chinese prices or costs for the industry under investigation in determining price comparability; (ii) The importing WTO Member may use a methodology that is not based on a strict comparison with domestic prices or costs in China if the producers under investigation cannot clearly show that market economy conditions prevail in the industry producing the like product with regard to manufacture, production and sale of that product.

We can evidently see from the wording above that the grandfather proviso contained in the first sentence of Section 15(d) also applies to Section 15(a), because the phrase “market economy conditions” appears in both Section 15(a) (i) and 15(a) (ii), which actually refers to the conditions set out in a Member’s domestic law that existed at the date of China’s accession. Consequently, the phrase in Section 15(d) “provided that the importing Member’s national law contains market economy criteria as of the date of accession” is a proviso that applies to both Section 15(a) and (d). As a result, only those Members that had domestic law criteria on market economy as of the date of China’s accession to the WTO, are qualified to apply Section 15(a) (ii) and use the surrogate country methodology if the Chinese producers cannot clearly show that market economy conditions prevail in the industry. This is also referred to as the “non-market economy rule”. If Chinese producers can prove based on Section 15(a) (i), that the industry concerned meets the market economy criteria, then the authority cannot apply surrogate country methodology for such industry even before December 11, 2016. The so-called market economy criteria are not based on a WTO rule; rather, they are based on an importing WTO Member’s pre-existing domestic law. They may vary from country to country. That is why Section 15(a) and (d) together constitute a special rule that expressly permit deviation from the generally applicable rules for normal value determination on the grounds that Members had pre-existing domestic law criteria on market economies on the date of China’s accession. Such pre-existing domestic laws are also “existing domestic legislations” which are not consistent with the relevant rules of the GATT 1994 and the AD Agreement. By its very nature, Section 15(a) and (d), as a “grandfather clause”, are only permitted to be applied during the agreed period of time, which is 15 years after China’s accession; and the relevant “existing domestic law” may not be revised to be more inconsistent with the WTO obligations. Based on the GATT panel’s ruling in US–Manufacturing Clause, members are not permitted to invent market economy criteria in their domestic law after China’s accession to the WTO only for the purpose of inhibiting exports from China. Furthermore, once the legal cover provided in Protocol Section 15(a) and (d) has expired, WTO members’ domestic laws on market economy criteria are no longer legalized by the WTO as an enforceable right against China. WTO Members are no longer allowed to deviate from the GATT 1994 and the AD Agreement in determining normal value for Chinese imports during anti-dumping investigations. The application of a member’s

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domestic law on another member is only permitted by special provision in a limited period of time before the package of treaty obligations equally applies to all parties.

4 Understanding Why the WTO Does not Have a Market Economy Rule, i.e., the Function of the Anti-dumping and the SCM Agreement Can Accommodate Various Economies with SOEs and Subsidies The WTO does not provide a ‘market economy’ definition. Rather, it authorizes specific methodologies for deviating from the three normal methodologies as prescribed in Articles 2.1 and 2.2 of the AD Agreement30 in determining normal value, which applies only to the special circumstance of complete state monopoly of trade and strong state intervention by setting all the prices. Only under such circumstances can surrogate country prices or costs can be used.31 But if Members think that none of these suits a particular Member, they can negotiate an exceptional clause in the specific new Member’s accession protocol allowing the use of surrogate country methodology. Under all other situations, the normal rules for determining normal value in Articles 2.1 and 2.2 of the AD Agreement are to be applied. With the three normal methodologies, there is no need for the WTO to provide a common definition on what constitutes a market economy. It is not even feasible to negotiate such a common definition among WTO Members, given the reality that different WTO Members have different definitions on market economy in their respective domestic law. In this regard, each country is unique and no one WTO Member’s economy is exactly the same as that of another WTO member although they may share certain common features. One can as well argue that as

30

Anti-Dumping Agreement, supra note 2, art. 2.1 Art. 2.1 provides the most normal comparison between export price and the domestic sales price as the compatible price to calculate dumping margin. When sales are not made in the ordinary course of trade or because of the particular market situation or the low volume of sales in domestic market that the relevant export price is not compatible directly with the export price, Article 2.2 of the AD Agreement provides two other ways of determining normal value (to make it compatible with the export price), namely, by using the export price to an appropriate third country, or, by using a constructed value consisting of the cost of production in the country of origin plus a reasonable amount for administrative, selling and general costs and for profits. These two latter ways are used when domestic sales price is NOT compatible with the export price. All three methodologies are normal rules for determining normal value, with only one statutory (or express) exception as provided in Ad Note paragraph 2 to GATT Article VI:1. 31 GATT 1994, supra note 9, Ad Note, Para 2, Art. VI:1. The Ad Note states: It is recognized that, in the case of imports from a country which has a complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the State, special difficulties may exist in determining price compatibility for the purpose of paragraph 1, and in such cases importing contracting parties may find it necessary to take into account the possibility that a strict comparison with domestic prices in such a country may not always be appropriate.

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long as the majority of commodity prices are set by the market, trade is not monopolized by state; and most companies operate under commercial considerations, such a country is a market economy in the economic sense. The fact that state-owned companies exist or that various forms of subsidies are provided to certain products or certain sectors, do not necessarily indicate that such an economy is a non-market economy. Taking the EC as an example, in US— Countervailing Measures on Certain EC Products,32 the EC challenged the US countervailing measures against several EC private producers who bought their firms from previously state-owned enterprises (“SOEs”) in France, UK and Spain. The Appellate Body ruled that after privatization at arm’s length and for fair market value, it cannot be presumed that the subsidies provided to the SOEs had simply passed to the private firm.33 The investigating authority had to prove the subsidy benefit continued to exist for the private firm whose purchase of the State-owned firm was at arm’s length and was for fair market value.34 We can see that several EC member states once had SOEs during 1990s. However, this fact alone did not change the EC’s economy as a whole to be a non-market economy during that period of time. Not even a single member had raised such a claim, nor did the US even though the US imposed countervailing measures on the EC producers in that case. We also know from WTO disputes that other countries, like India, also have SOEs in which the state holds the majority share.35 Therefore, the mere existence of SOEs, does not render market principles inapplicable. The existence of subsidies including export subsidies do not signify that the Member concerned is a non-market economy either. Taking the example of Canada, which has been challenged with respect to wheat board, diary industry, aircraft, softwood lumber, etc., the various subsidies have been found to exist in these areas by the WTO panels and the Appellate Body. However, no single WTO Member has ever argued that Canada is a non-market economy.36 This is also true where the US

Appellate Body Report, US — Countervailing Measures on Certain EC Products, WTO Doc. WT/DS212/AB/R (adopted Dec. 9, 2002). 33 Id., ¶ 126. 34 Id., ¶ 126. 35 Appellate Body Report, US — Countervailing Measures on Certain Hot Rolled Carbon Steel from India, WTO Doc. WT/DS436/AB/R (adopted Dec. 8, 2014). 36 See Appellate Body Report, Canada — Measures Affecting the Export of Civilian Aircraft, WTO Doc. WT/DS70/AB/R (adopted August 2, 1999); Appellate Body Report, Canada — Measures Affecting Importation of Milk and Exportation of Dairy, WTO Doc. WT/DS103/AB/R (adopted Oct. 13, 1999); Appellate Body Report, Canada — Measures Affecting Dairy Products, WTO Doc. WT/ DS113/AB/R (adopted Jul. 11, 2001); Panel Report, Canada — Aircraft Credit and Guarantees, WT/DS222/P/R (Jan. 28, 2002); Appellate Body Report, Canada — Wheat Exports and Grain Imports, WTO Doc. WT/DS276/AB/R (adopted Aug. 30, 2004); Panel Report, US — Softwood Lumber III,WTO Doc. WT/DS236/AB/R (adopted Sep. 27, 2002); Appellate Body Report, US — Softwood Lumber IV,WTO Doc. WT/DS257/AB/R (adopted Jan. 19, 2004); Appellate Body Report, US — Softwood Lumber V, WTO Doc. WT/DS264/AB/R (adopted Aug. 11, 2004), Appellate Body Report, US — Softwood Lumber VI, WTO Doc. WT/DS277/AB/R (adopted Apr. 13, 2006). 32

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and the EU have sued each other on various subsidy programs in their large civil aircraft industry.37 Further, the WTO Agriculture Agreement permits developed countries (and all Members) to keep their export subsidies to agriculture products and requires them only to reduce the amount of export subsidies by a certain percentage as specified in their respective Schedule commitments.38 The existence of subsidies had been found to exist by the Panel and the Appellate Body in all these cases.39 But still, this does not change the nature of the EU and US and Canada as a market economy under US law or under the EU law. Why is that? If we take a look at the SCM Agreement, the design of that agreement is aimed at prohibiting export subsidies, authorizing countervailing measures that will counteract the economic effect of the actionable (and perhaps green) subsidies. This will be sufficient in creating a level playing ground for market players in international trade relations. As a policy, green subsidies were even expressly allowed by Article 8 of the SCM Agreement until 2003. The design of the SCM Agreement establishes that subsidies are a common phenomenon even in market economy countries. If a SOE is subsidized by the government, i.e., a financial contribution or income or price support exists, and if that also confers a benefit to the recipient, it constitutes a subsidy that is countervailable (unless it is not specific). All subsidy problems can be resolved and rebalanced under the SCM agreement by countervailing measures or through the WTO dispute settlement system. It does not matter what specific format a financial contribution takes (as provided in Article 1.1 of the SCM), if it is provided by the government or a public body, it constitutes a countervailable subsidy, presuming that it is specific. Although Members have different views on the Appellate Body’s interpretation of a “public body”,40 it is nevertheless only an issue of legal interpretation of that specific term which can be applied in specific cases. What if a subsidy was provided to a certain raw material of a product and the product is then subject to an anti-dumping investigation? First of all, a countervailing measure can be taken against the effect of such subsidy on the end product according to the SCM Agreement. However, should the relevant end product be subject to an anti-dumping investigation, the investigating authority in determining the normal value of the end product does not need to take into account the effect of the subsidy on the price of the raw material. The reason is simple. The effect of the subsidy on the raw material price is equally displayed on the price for domestic sale

37 Appellate Body Report, EC and Certain Member States — Large Civil Aircraft, WTO Doc. WT/ DS316/AB/R (adopted May 18, 2011); Appellate Body Report, US — Large Civil Aircraft, WTO Doc. WT/DS353/AB/R (adopted March 12, 2012). 38 Agreement on Agriculture entered into force April 15 1994, art. 9, 1867 U.N.T.S. 410. 39 Panel Report, United States — Subsidies on Upland Cotton, WTO Doc. WT/DS267/P/R (adopted Sep. 8, 2004); Appellate Body Report, United States — Subsidies on Upland Cotton, WTO Doc. WT/DS267/AB/R (adopted Mar. 3, 2005). In both these cases, it was stated that export subsidies existed in violation of the Agriculture Agreement and the SCM Agreement. 40 Appellate Body Report, United States — Definitive Anti-Dumping and Countervailing Duties on Certain Products from China, WTO Doc. WT/DS379/AB/R (adopted Mar. 25, 2011).

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end product as on the price for exported end product. Dumping margin is calculated by comparing domestic price (normal value) with export price, the end-result of such calculation would not be affected at all by any amount of such subsidies to raw materials. If, on the contrary, the investigation authority conducts concurrent anti-dumping and countervailing investigation on the end product, and uses surrogate country methodology in determining normal value, it may well constitute “double remedy”, i.e. the offsetting of the same subsidization twice in a manner inconsistent with the SCM Agreement and the GATT 1994 Article VI, because the subsidization is counted in both the dumping margin and the countervailing duties.41 The Appellate Body has ruled in US—Anti-Dumping and Countervailing Duties that Article 19.3 of the SCM Agreement read together with GATT Article VI:5 and other SCM provisions leads to the conclusion that “dumping margins calculated based on the NME methodologies are … likely to include some component that is attributable to subsidization”, and therefore, “the imposition of double remedies, that is, the offsetting of the same subsidization twice by the concurrent imposition of anti-dumping duties calculated on the basis of an NME methodology and countervailing duties, is inconsistent with Article 19.3 of the SCM Agreement.”42 In the author’s view, even if the authority has not conducted both anti-dumping and countervailing duty investigations concurrently, given the fact that the authority may well conduct countervailing duty investigation on this end product, there is always the risk that double remedy and double counting will happen in a manner inconsistent with the GATT Article VI:5 and the SCM Agreement Article 19.3. For that reason, AD Agreement Article 2 may not be interpreted as permitting the authority to use the surrogate country methodology to remedy the subsidy given to the raw materials in an anti-dumping investigation. The right route and the applicable tool to offset such subsidization is the application of the SCM Agreement, and not the AD Agreement. Additionally, Article VI:2 of the GATT authorizes Members to impose anti-dumping duties “in order to offset or prevent dumping” only. Members are not allowed to offset the subsidization through the imposition of an anti-dumping duty; and therefore, counting the subsidy effect in the normal value determination is not legally permitted. In sum, through the use of instruments such as the AD Agreement and the SCM Agreement, the WTO can accommodate various kinds of “market economies”, including those with SOEs and subsidies. Dumping can be punished by imposing anti-dumping duties and subsidies can be offset by imposing countervailing duties. One may also say that perhaps no one Member’s market economy is exactly the same See Appellate Body Report, United States — Anti-Dumping and Countervailing Duties on Certain Products from China, ¶¶ 541–543, WTO Doc. WT/DS 379/AB/R (adopted Mar. 11, 2011). 42 Id., ¶¶ 582–583. Please also take note that Art. VI:5 of the GATT states, “No product of the territory of any contracting party imported into the territory of any other contracting party shall be subject to both anti-dumping and countervailing duties to compensate for the same situation of dumping or export subsidization.” See GATT 1994, supra note 9, art. VI:5. 41

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as that of the other member, given that the unique social and historical development process of each country. For instance, Germany calls itself “social market economy” (soziale Mmarktwirtschaft),43 whereas China calls itself “socialist market economy”. China’s socialist market economy is not only described in the Working Party Report on the accession of China,44 but also proved by its progressive improvement of the domestic legal system, enacting and implementing various purely market-oriented domestic laws and regulations. China enacted a whole set of market related domestic laws since 1990s, when “establishing socialist market economy legal framework” was set as the main plan of the National People’s Congress for many years to come. The framework was said to be established in 2010, which included the enactment or revision of a large number of laws and regulations. This was reiterated in the Communist Party’s Central Committee Document as well.45 Concerning the SOEs in the WTO, the author is of the view that the issue of who is appointed to manage the SOE is not as important as the issue whether the SOE is operating under commercial considerations. A SOE that is operating under commercial considerations, does not cause any problem in the WTO, whereas a SOE not operating under commercial consideration may face a countervailing duty investigation. Consequently, the WTO has legal tools to deal with any SOE matter. Subsidies granted through SOEs to a raw material, however, should not be considered in an anti-dumping investigation on the end product as I have already analysed above.

5 Negotiating History Shows that Surrogate Country Methodology as a Grandfather Clause Shall Be Terminated After 15 Years of Accession Under Protocol Section 15(a) and (d) We have seen that the WTO does not have and nor does it need to have a “market economy criteria”, and that the phrase in Section 15(d) of the Protocol “provided that the importing Member’s national law contains market economy criteria as of

43 See 社会主义市场经济图示(SozialMarktwirtschaftimSchaubil, translated by Liu Xiao Tian, Liaoning People’s Press, 1993). 44 Working Party Report, supra note 12, ¶ 6. 45 社会主义市场经济本质上是法治经济。使市场在资源配置中起决定性作用和更好发挥政 府作用, 必须以保护产权、维护契约、统一市场、平等交换、公平竞争、有效监管为基本 导向。完善社会主义市场经济法律制度。Socialist market economy in essence is a market economy based on rule of law. The key principle is to allow market to play a decisive role in the allocation of resources and the government to play a better role. There should be protection of properties, legal support of contracts, unified market, equal exchange and fair competition as well as effective supervision of the market as the basis of the market. The socialist market economy related legal system should be maintained and improved”. See Communist Party of China, Certain Issues on Pushing the Comprehensive Rule of Law by Communist Party Central Committee, CPC Decision during the Fourth session of the 18th Party Central Committee, 12 (Oct. 28, 2014).

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the date of accession” (emphasis supplied) is a proviso that applies to both Section 15(a) and (d). Importantly Section 15(d) is in the nature of a “grandfather clause”. What is then the reasonable legal consequence of such a proviso/ grandfather clause? Members negotiated with China an exception on applying surrogate country methodology under certain specific circumstances for 15 years of China’s accession. There is no ambiguity in the text of the second sentence of Section 15(d): “[i]n any event, the provisions of subparagraph (a) (ii) shall expire 15 years after the date of accession.” Subparagraph (a) (ii) is the only text that authorizes or enables the use of surrogate country methodology in the whole of Section 15. With the expiry of that text/authorization on 11 December 2016, there is no other text in Section 15 of the Protocol to provide any legal basis for such a methodology. The text of Section 15(a) (ii), i.e., the permission to allow Members’ own domestic law on market economy criteria to apply to China, is itself inconsistent with the GATT and the AD Agreement. That is the reason why it has to be temporary and should expire after 15 years of China’s accession. Considering that within 15 years, this enabling clause/authorization functions as an exception to the normal rule in Article 2 of the AD Agreement, with the termination of such explicit authorization, it is only logical that Members are no longer allowed to deviate from the normal rules in determining the normal value of Chinese imports during an anti-dumping investigation. Does it cause a shift of burden onto the part of the investigating authority, to prove whether an industry satisfies Member’s domestic law market economy standards? And if this cannot be proved, can the surrogate country methodology still be applied on Chinese imports? Unfortunately, there is no such wording in Section 15 of the Protocol to support this reading of Section 15 (a). Looking at the proviso in the first sentence of Section 15(d), the author has analyzed that it is in the nature of a “grandfather clause”. We have also seen that in the GATT “grandfather clause” is temporary and the reservation of the “existing legislation” in contracting parties’ domestic law system could not be revised in reverse direction as to increase its inconsistency with Part II of the GATT (i.e., they can only be revised toward achieving more consistency with the GATT). By analogy, the reservation of Members toward China on using surrogate country methodology is also temporary in nature and it is required to be eliminated by the end of the expiry date, i.e., on 11 December 2016. If surrogate country methodology as provided in Section 15(a) (ii) may still be invoked and used by WTO Member according to the same domestic legislation, then such interpretation means that the grandfather clause (the proviso in Section 15(d)) has not been terminated by the expiry date., which is illogical and unreasonable. If the surrogate country methodology is still allowed to be applied on Chinese imports, then the authorization in Section 15(a) (ii) cannot be “in any event” terminated. This result would be absurd and inconsistent with the requirement of the customary rules of interpretation as reflected in Articles 31 and 32 of the Vienna Convention.

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In addition, from the text of Section 15(a), we can also see, that it provides: 15. Price Comparability in Determining Subsidies and Dumping … (a) In determining price comparability under Article VI of the GATT 1994 and the Anti-Dumping Agreement, the importing WTO Member shall use either Chinese prices or costs for the industry under investigation or a methodology that is not based on a strict comparison with domestic prices or costs in China based on the following rules:

From the official version of the bilateral agreement, we also take note of the fact that the word “shall” has been used in hand written format in the last version of the bilateral agreement to replace the word “may” by the Chinese negotiator.46 That means, if a Member invokes a methodology that is not based on normal rules in Article 2 of the AD Agreement to determine the normal value of Chinese imports, it must be made “based on the following” i.e., subparagraph (i) or (ii) of Section 15 (a). After 15 years of China’s accession and the consequent expiry of subparagraph (ii), can Members invoke subparagraph (i) to use surrogate country methodology? The answer is absolutely no, simply because there is no such authorization in subparagraph (i) itself and the word “shall” in Section 15(a) chapeau does not allow Members to use any other legal basis to do so. Consequently, Section 15(a) entirely expires on 11 December 2016. Any interpretation that subparagraph (i) of Section 15(a) still contains authorization for using surrogate country methodology will deprive the termination of subparagraph 15(ii) of any real effect and lead to absurdity. This understanding is also confirmed by the Appellate Body’s interpretation of Section 15(a) and (d) in EC—Fasteners: Section 15(d) of China’s Accession Protocol establishes that the provisions of Section 15 (a) expire 15 years after the date of China’s accession (that is, 11 December 2016).It also provides that other WTO Members shall grant before that date the early termination of Section 15(a) with respect to China’s entire economy or specific sectors or industries if China demonstrates under the law of the importing WTO Member “that it is a market economy” or that “market economy conditions prevail in a particular industry or sector”. Since Section 15(d) provides for rules on the termination of Section 15(a), its scope of application cannot be wider than that of Section 15(a). Both paragraphs concern exclusively the determination of normal value. In other words, Section 15(a) contains special rules for the determination of normal value in anti-dumping investigations involving China. Section 15(d) in turn establishes that these special rules will expire in 2016 and sets out certain conditions that may lead to the early termination of these special rules before 2016.47

46

Basic Instruments and Selected Documents, supra note 13, at 788. Appellate Body Report, European Communities — Definitive Anti-Dumping Measures on Certain Iron or Steel Fasteners from China, ¶ 289, WTO Doc. WT/DS397/AB/R (adopted Jul. 15, 2011).

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If we look at the negotiating history, this is also confirmed by the USTR press release No. 99–95 on 15 November 1999 provides a summary of Paragraph 15: Anti-dumping and Subsidies Methodology: The agreed protocol provisions ensure that American firms and workers will have strong protection against unfair trade practices including dumping and subsidies. The U.S. and China have agreed that we will be able to maintain our current anti-dumping methodology (treating China as a non-market economy) in future anti-dumping cases without risk of legal challenge. This provision will remain in force for 15 years after China’s accession to the WTO…48

Given that the Protocol language has originated from the bilateral agreement between China and the U.S., the U.S. summary at that time signifies the U.S. official understanding as to the meaning of the whole Section 15 of the Protocol, which is, the domestic law market economy criteria is a grandfather clause and the methodology can be used only within 15 years after China’s accession.

6 Whether the Protocol, the AD Agreement, and GATT Article VI Provide Any Legal Basis for Continuing Surrogate Country Methodology on Chinese Imports Fortunately, thanks to the drafters, this issue is clearly written in Section 15 of the Protocol itself. Although Section 15(a) entirely expired on 11 December 2016, the chapeau of Section 15 states: 15 Price Comparability in Determining Subsidies and Dumping Article VI of the GATT 1994, the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (“Anti-Dumping Agreement”) and the SCM Agreement shall apply in proceedings involving imports of Chinese origin into a WTO Member consistent with the following:

According to the chapeau of Section 15, the exception rule in Section 15(a) and (d) together expired on 11 December 2016 but the normal rules in GATT Article VI and AD Agreement are to be used for determining normal value of Chinese imports after the expiry of the surrogate country methodology authorization.

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See Summary of U.S - China Bilateral Agreement, in USTR Press release No.99-95, November 15 1999: “U.S. China Sign Historical Trade Agreement”, 1107, Summary of U.S - China Bilateral Agreement, in USTR Press release No.99-95, November 15 1999:“U.S. China Sign Historical Trade Agreement”, 1107, in “中国加入世界贸易组织谈判文件资料选编 第17卷”, 中国商务出 版社, 主编索必成, 2012 年出版 [BASIC INSTRUMENTS & SELECTED DOCUMENTS ON THE NEGOTIATION FOR CHINA’S ACCESSION TO THE WORLD TRADE ORGANIZATION, Vol. 17 (China Commerce and Trade Press, 2012)].

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7 The EU’s New Regulation and Why the AD Agreement and GATT 1994 Do not Authorize the Use of Surrogate Country Methodology The EU published an amending regulation on December 12, 2017.49 Regulation (EU) 2017/2321 amending Regulation (EU) 2016/1036 authorizing the use of surrogate country methodology in determining normal value after the EC determines the existence of significant distortions in the exporting country. The criteria for “significant distortions” include the following: • 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 prices or costs; • public policies or measures discriminating in favour of domestic suppliers or otherwise influencing free market forces; • the lack, discriminatory application or inadequate enforcement of bankruptcy, corporate or property laws; • wage costs being distorted; • access to finance granted by institutions which implement public policy objectives or otherwise not acting independently of the state.50 Among these factors, the inadequate implementation of bankruptcy law, corporate or property law needs to be proved by positive evidence. The imperfect implementation in one or two cases that causes controversy may well exist in any market economy. The question is how many violations of these laws will pass the critical mass test that renders a conclusion of “inadequate enforcement”? The distortion of wages is also a matter to be objectively established with positive evidence. All the other three factors, however, have something to do with the existence and the operation of SOEs. As the author has noted above the AD Agreement and the GATT 1994 do not allow an investigating authority to use surrogate country methodology in deviation from the GATT Article VI and the AD Agreement Article 2.1 and 2.2 simply because SOEs and subsidies are involved. However, the new EU regulation provides a rule that if “significant distortions” exist, the authority is required to use surrogate country methodology to construct the normal value based on the costs of production and sale reflecting undistorted prices or benchmarks, using the following information: 49

Regulation (EU) 2017/2321 of the European Parliament and of the Council of 12 December 2017 amending Regulation (EU) 2016/1036 on Protection Against Dumped Imports From Countries Not Members Of The European Union and Regulation (EU) 2016/1037 On Protection Against Subsidised Imports From Countries Not Members Of The European Union, 2017 O.J., (L338/1). 50 Id., art. 1(1).

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• corresponding costs of production and sale in an appropriate representative country with a similar level of economic development as the exporting country, provided the relevant data are readily available; where there is more than one such country, preference shall be given, where appropriate, to countries with an adequate level of social and environmental protection; • if it considers appropriate, undistorted international prices, costs, or benchmarks; or • domestic costs, but only to the extent that they are positively established not to be distorted, on the basis of accurate and appropriate evidence…51 The normal value shall be constructed by production costs calculated using the above-mentioned surrogate country methodology, plus an undistorted and reasonable amount for administrative, selling and general costs and for profits. Is this rule consistent with the meaning of Article 2.2.1.1 of the AD Agreement? We would need to take a look at what the Panel and the Appellate Body determined in EU— Anti-Dumping Measures on Biodiesel from Argentina.52 In the above case, the EU authorities found that Argentina’s biodiesel market was distorted because Argentina imposed export tax on its main raw material— soybeans. The authority rejected the actual costs of production for raw materials as they were recorded in the record kept by the Argentinian producers and constructed a normal value by using counter-factual constructed prices for soybeans, i.e., a reference export price published by Argentine Ministry of Agriculture.53 The question is whether the authority is allowed to replace the record of the producer’s actual costs on the basis that the costs of these raw materials are artificially low under the first sentence of Article 2.2.1.1. of the AD Agreement? Article 2.2.1.1 of the AD Agreement provides: For the purpose of paragraph 2, costs shall normally be calculated on the basis of records kept by the exporter or producer under investigation, provided that such records are in accordance with the generally accepted accounting principles of the exporting country and reasonably reflect the costs associated with the production and sale of the product under consideration.

The Panel made the following findings: In sum, we consider that the proper interpretation of “provided such records … reasonably reflect the costs associated with the production and sale of the product under consideration” under Article 2.2.1.1 calls for an assessment of whether the costs set out in a producer’s

51

Id., art. 1(1). Panel Report, European Union — Anti-dumping Measures on Biodiesel from Argentina, WTO Doc. WT/DS473/P/R (adopted Mar. 29, 2016) [hereinafter EU — Biodiesel (Panel Report)]; Appellate Body Report, European Union — Anti-dumping Measures on Biodiesel from Argentina, WTO Doc. WT/DS473/AB/R (adopted Oct. 6, 2016) [hereinafter EU — Biodiesel (AB Report)]. 53 EU—Biodiesel (Panel Report), id., ¶ 7.257; EU — Biodiesel (AB Report), id., ¶ 6.63. 52

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records correspond – within acceptable limits – in an accurate and reliable manner, to all the actual costs incurred by the particular producer or exporter for the product under consideration.54

The Panel applying this interpretation to EU’s determination and found that: The investigating authority determined not to use the costs of the main raw material, soybeans, in the production of biodiesel because ‘the domestic prices of the main raw material used by biodiesel producers in Argentina were found to be artificially lower than the international prices due to the distortion created by the Argentine export tax system.’ In our view, this does not constitute a legally sufficient basis under Article 2.2.1.1 for concluding that the producers’ records do not reasonably reflect the costs associated with the production and sale of biodiesel.55

In the process of rebutting EU’s understanding of this phrase in Article 2.2.1.1, the Panel reasoned inter alia, that: First, the basic purpose of calculating the cost of production and constructing the normal value on the basis of that cost under Article 2.2 is to identify an appropriate proxy for the price ‘of the like product in the ordinary course of trade in the domestic market of the exporting country’ when that price cannot be used. To us, it clearly flows from this purpose that the ‘costs associated with the production and sale of the product under consideration’ are those that a producer actually incurred, since these would yield such a proxy more accurately. Conversely, if the actual costs incurred by a producer are not properly taken into account, this would lead to an unreliable proxy for what the price of the like product in the ordinary course of trade in the domestic market of the exporting country would have been.56

The Panel further noted: While the costs in the records might be consistent with GAAP, they may still not accord with how they would need to be considered in the context of an anti-dumping investigation, such as in respect of the proper allocation of costs for depreciation or amortization or the relevant time periods. As another example, the specific producer/exporter under investigation might be part of a vertically-integrated group of companies in which the actual cost of production of particular inputs is spread across different companies’ records, or in which transactions between such companies are not at arms-length or indicative of the actual costs involved in the production of the product under consideration.57

Consequently, the Panel rejected the EU’s interpretation with solid reason: Contrary to the arguments of the European Union, we do not understand the term ‘associated’ in the phrase ‘costs associated with the production and sale’ in Article 2.2.1.1 to be capable of denoting costs ‘normally’ associated with the production and sale of the goods in general. Such an approach could lead to a determination that the costs contained in the investigated producer/exporter’s records do not ‘reasonably reflect’ the costs of production because of the mere fact that they differ from costs incurred by other producers/exporters. The European Union’s interpretation would, in our view, frustrate the purpose of Article

EU—Biodiesel (Panel Report), supra note 52, ¶ 7.247. Id., ¶ 7.248. 56 Id., ¶ 7.233. 57 Id., ¶ 7.232. 54 55

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2.2.1.1 to enable investigating authorities to identify an appropriate proxy for the price of the like product in the ordinary course of trade in the domestic market of the exporting country for each individual producer.58

The Appellate Body considered this issue of whether the investigation authority can use surrogate country information to calculate production cost as well. The Appellate Body did not disagree with the Panel’s points of consideration. Rather, the Appellate Body started from a textual reading of Article 2.2.1.1 pointing out that it does not preclude information or evidence from other sources from being used in certain circumstances, because: Indeed, it is clear to us that, in some circumstances, the information in the records kept by the exporter or producer under investigation may need to be analyzed or verified using documents, information, or evidence from other sources, including from sources outside the “country of origin”.59

It is worth noting that the Appellate Body explained in a footnote that: “[t]his may be so e.g. where the producer under investigation purchases inputs from outside the country of origin to produce the product under consideration. We note, in this regard, that Article 6.6 of the AD Agreement provides that authorities shall satisfy themselves as to the accuracy of the information supplied by interested parties upon which their findings are based.”60

Consequently, the Appellate Body is not questioning whether the producer’s actual costs should be used or not. Rather, it is saying that when using the actual production costs of the producer in the record, the authority may still use an invoice from another country to confirm the accuracy of the actual cost of inputs of the production. However, the Appellate Body stated further: While both obligations apply harmoniously when an investigating authority constructs the normal value, the scope of the obligation to calculate the costs on the basis of the records in the first sentence in Article 2.2.1.1 is narrower than the scope of the obligation to determine the cost of production in the country of origin in Article 2.2. In circumstances where the obligation in the first sentence of Article 2.2.1.1 is to calculate the costs on the basis of the records kept by the exporter or producer under investigation does not apply, or where relevant information from the exporter or producer under investigation is not available, an investigating authority may have recourse to alternative bases to calculate some or all such costs.61

Here, the Appellate Body simply supposed that there are circumstances when alternative information may be used. The author has some doubts on this view based on the previous analysis. It is a pity that the Appellate Body did not make a “holistic interpretation” from the whole legal framework of the AD Agreement and

Id., ¶ 7.235. EU—Biodiesel (AB Report), supra note 53, ¶ 6.71. 60 Id., fn. 228. 61 Id., ¶ 6.73. 58 59

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the GATT 1994. Whereas, in Argentina—Footwear,62 the Appellate Body said that “a treaty interpreter must read all applicable provisions of a treaty in a way that gives meaning to all of them, harmoniously. And, an appropriate reading of this ‘inseparable package of rights and disciplines’ must, accordingly, be one that gives meaning to all the relevant provisions of these two equally binding agreements.”63 Although the Appellate Body did not explain when the obligation in the first sentence of Article 2.2.1.1 i.e. the obligation to calculate the costs on the basis of the records kept by the exporter or producer, does not apply, it is obvious from the explicit text of Article 2.2.1.1. that whenever two conditions are met, the authority is obliged to use the producers’ record of production cost: “provided that such records (i) are in accordance with the generally accepted accounting principles of the exporting country and (ii) reasonably reflect the costs associated with the production and sale of the product under consideration”. Whether and under what circumstances, the record costs of the producer can be replaced by other costs in an EU—Biodiesel type situation or in any circumstance, is not mentioned at all and as such is only an abstract issue. Given that the Appellate Body has not provided any interpretation on the specific circumstance when “costs” from outside of the country are permitted to be used, it is completely unclear and needs to be further elaborated or reinterpreted in future cases under Article 2.2.1.1 of the AD Agreement. On the other hand, the use of other costs or price information can be justified in cases where ‘relevant information from the exporter or producer under investigation is not available’, since Art. 6.8 of the AD Agreement provides explicit authorization for the authority to use the facts available. The Appellate Body seems to have mixed the two different provisions of the AD Agreement in its statement on whether and when in constructing normal value, can an investigating authority replace the production costs of the producer with the costs or prices from foreign countries. While the Appellate Body opens an undefined door for using alternative bases to calculate production costs under Article 2.2.1.1, it further added that “[t]his, however, does not mean that an investigating authority may simply substitute the costs from outside the country of origin for the ‘cost of production in the country of origin’”. Indeed, Article 2.2 of the AD Agreement and Article VI:1(b) (ii) of the GATT 1994 make clear that the determination is of the ‘cost of production […] in the country of origin’.64 This sounds perfectly reasonable and correct. However, in the next sentence the Appellate Body explained further that “[t]hus, whatever the information that it uses, an investigating authority has to ensure that such information is used to arrive at the ‘cost of production in the country of origin’. Compliance with this obligation may require the investigating authority to adapt the information that it collects.”

Appellate Body Report, Argentina — Safeguard Measures on Imports of Footwear, WTO Doc. WT/DS121/AB/R (adopted Dec. 14, 1999). 63 Id., ¶ 81. 64 Id., ¶ 6.73. 62

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The question is, if the costs or price information from other sources is used in calculating the producer’s production cost in the country of origin, how can this outside costs/prices provide a guarantee that such information, even after adaption will help in arriving at the “cost of production in the country of origin”? To the contrary, the Appellate Body’s observations run counter to certain foundational principles as elaborated by the Panel in EU—Biodiesel: [I]f the actual costs incurred by a producer are not properly taken into account, this would lead to an unreliable proxy for what the price of the like product in the ordinary course of trade in the domestic market of the exporting country would have been. …… we note that, pursuant to Article 6.10 of the Anti-Dumping Agreement, investigating authorities are required as a general rule to determine an individual margin of dumping for each known producer/exporter concerned of the product under investigation. This, in turn, suggests to us that costs of production will vary from producer to producer and each producer’s costs of production should be evaluated separately. In that context, it would seem anomalous to us if the ‘costs associated with the production and sale’ did not refer to the actual costs incurred by individual producers, as reflected in their records.65

With the real risk as stated by the Panel, the Appellate Body’s key statement makes much more sense: “[t]his, however, does not mean that an investigating authority may simply substitute the costs from outside the country of origin for the ‘cost of production in the country of origin”.66 Unfortunately, the Appellate Body’s reasoning does not offer a reasonably clear understanding on when the authority can use information from other sources including sources from outside of the country. Nevertheless, during the appeal, the EU challenged the Panel’s finding that the authority acted inconsistently with Article 2.2 of the AD Agreement because the authority used a surrogate price for soybeans to construct the producer’s production costs which represents an international price, not domestic price of soybeans. The Appellate Body upheld both the Panel’s interpretation of Article 2.2.1.1. and the application to the EU anti-dumping measure on biodiesel from Argentina.67 We still need to see what effect this interpretation of the Panel and the Appellate Body will have in future cases. In the light of the foregoing discussion, it is important to revisit the approach adopted in the new EU Regulation, 2017/2321. In terms of the new regulation, the EU authority is required to use surrogate country methodology to construct the normal value based on the costs of production and sale reflecting undistorted prices or benchmarks using the following information: • corresponding costs of production and sale in an appropriate representative country with a similar level of economic development as the exporting country, provided the relevant data are readily available; where there is more than one such country, preference shall be given, where appropriate, to countries with an adequate level of social and environmental protection;

EU—Biodiesel (AB Report), supra note 52, ¶ 7.233. Id., ¶ 6.73. 67 Id., ¶¶ 6.78, 6.80. 65 66

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• if it considers appropriate, undistorted international prices, costs, or benchmarks; or • domestic costs, but only to the extent that they are positively established not to be distorted, on the basis of accurate and appropriate evidence…68 As we see from EU–Biodiesel that although the Panel and the Appellate Body found the EU’s anti-dumping measure was inconsistent with Article 2.2.1.1, the Appellate Body has not interpreted Article 2.2.1.1 per se as precluding the use of outside information in constructing the production cost for the producer, so long as the construction of the production costs reflects “cost of production in the country of origin”.69 On the other hand, according to Article 2.2.1.1. first sentence, if “such records (i) are in accordance with the generally accepted accounting principles of the exporting country and (ii) reasonably reflect the costs associated with the production and sale of the product under consideration”, even if there is a so-called “artificially low price”, the record of the producer must be used by the authority in calculating production costs under Article 2.2.1.1. The notion “significant distortions” is not a WTO recognized legal standard. Although the EU determined that Argentina’s soybean price is “artificially low”, and therefore replaced the record price with another international price, the EU authority’s determination was found inconsistent with Article 2.2.1.1. Likewise, Regulation (EU) 2017/2321 sets up a self-made standard in determining the existence of “significant distortion”, and authorizes the use of surrogate costs of production in foreign countries. This in effect authorizes the EU investigating authority to disregard the legal requirements in Article 2.2.1.1 that (i) the authority must examine whether the producer’s records “are in accordance with the generally accepted accounting principles of the exporting country and reasonably reflect the costs associated with the production and sale of the product under consideration”, and that (ii) if this is true, the authority must accept such records as production costs, because of the obligation that “costs shall be calculated on the basis of the records kept by the exporter or producer under investigation”. The word “normally” defines an obligation for the exporter or producer to meet the two criteria contained in the first sentence of Article 2.2.1.1.70 Even when costs do not 68

Regulation (EU) 2017/2321 of the European Parliament and of the Council of 12 December 2017 amending Regulation (EU) 2016/1036 on Protection Against Dumped Imports From Countries Not Members Of The European Union and Regulation (EU) 2016/1037 On Protection Against Subsidised Imports From Countries Not Members Of The European Union, 2017 O.J., (L338/1). 69 Id., ¶ 6.73. 70 Article 2.2.1.1. of the AD Agreement provides: For the purpose of paragraph 2, costs shall normally be calculated on the basis of records kept by the exporter or producer under investigation, provided that such records are in accordance with the generally accepted accounting principles of the exporting country and reasonably reflect the costs associated with the production and sale of the product under consideration. Anti-dumping Agreement, supra note 2, art. 2.2.1.1.

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reasonably reflect the production of the producer, it may simply be due to the absence of proper allocation of costs for depreciation or amortization in the relevant time periods. Such circumstance can be corrected by making adjustment in the record of the producer, not by using surrogate costs from producers in other countries. Only the adjustment to reach proper cost allocation can result in “costs of production in the country of origin” as required by Article 2.2 of the AD Agreement. When facing the fact that the Appellate Body has opened a door without careful elaboration of when and under what circumstances can surrogate country costs or information be used under Article 2.2.1.1, one has to see whether the Appellate Body would close the door in the future because of the great risks, the unreasonableness of such reasoning and its potential negative consequence to the orderly functioning of the WTO rule-based system. It needs to be pondered whether the Appellate Body will continue to keep this gate open regardless of whether this will be quickly abused by the investigating authorities in many Member countries. The author is of the firm belief that the Appellate Body would close such a dangerous door which could lead to abuse of Article 2.2.1.1 of the AD Agreement and consequently invite disorder and tension.

8 Coherent Interpretation of Article 2.2.1.1 and the Resolution of State-Owned Enterprise Issue In recent years, the Appellate Body has been increasingly using and advocating the use of holistic approach of interpretation to make rulings: [t]he principles of interpretation that are set out in Articles 31 and 32 are to be followed in a holistic fashion. The interpretative exercise is engaged so as to yield an interpretation that is harmonious and coherent and fits comfortably in the treaty as a whole so as to render the treaty provision legally effective. A word or term may have more than one meaning or shade of meaning, but the identification of such meanings in isolation only commences the process of interpretation, it does not conclude it. … a treaty interpreter is required to have recourse to context and object and purpose to elucidate the relevant meaning of the word or term. This logical progression provides a framework for proper interpretation is an integrated operation, where interpretative rules or principles must be understood and applied as connected and mutually reinforcing components of a holistic exercise.71

Applying this approach of interpretation, the meaning of one provision (i.e., Article 2.2.1.1. of the AD Agreement) must be understood in the context of other relevant provisions in the same agreement, and those in other covered agreements, such as, Section 15(a) of China’s accession protocol, and the SCM Agreement, etc.

Appellate Body Report, US — Continued Existence and Application of Zeroing Methodology, ¶ 268, WTO Doc. WT/DS350/AB/R (adopted Feb. 4, 2009).

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As rightly stated by the Appellate Body, “the identification of such meanings in isolation only commences the process of interpretation, it does not conclude it.”72 We also know that the Appellate Body has interpreted Article 14(b) of the SCM Agreement as allowing for foreign benchmarks to be used under certain circumstances to calculate subsidy benefit when domestic market is dominated by government intervention.73 That means, government intervention, whether through SOEs or not, if causing serious distortion of domestic market, will be captured and addressed in determining subsidy benefit using external benchmark. The issue of governmental intervention and subsidies will be easily remedied by use of countervailing measures against such subsidy. The Appellate Body also found that there is an obligation to prevent double counting in double remedies. To avoid double counting, the authority cannot be allowed to offset the subsidy simultaneously in an anti-dumping duty even if the subsidy does causes price distortion, nor can it be allowed to be counted in dumping margin when the legitimate route of imposing countervailing duty is readily available. That is exactly why both GATT and the WTO distinguishes “dumping measure” from “subsidy measure” and provides different procedures and remedies for them. The right legal route to remedy the effect of a subsidy is the SCM Agreement; the AD Agreement is not aimed to address the distortions caused by subsidy, rather it is an instrument to remedy dumping only. Article 2.2.1.1 of the AD Agreement is designed to address a dumping measure and not a subsidy measure. The Appellate Body has found that “the imposition of double remedies, that is, the offsetting of the same subsidization twice by the concurrent imposition of anti-dumping duties calculated on the basis of an NME methodology and countervailing duties, is inconsistent with Article 19.3 of the SCM Agreement.74 Consequently, overstretching the application of Article 2.2.1.1 of the AD Agreement to offset subsidy effect will deprive the legal utility of the provisions under the SCM Agreement, which is obviously unreasonable and will eventually bring legal chaos in the WTO law. The EU’s new regulation set out 5 factors in determining the existence of “significant distortion”. It must be analysed whether the market is being served to a significant extent by enterprises, which operate under the ownership, control or guidance of state authorities. Further, it must also be examined if finance is granted to institutions that implement public policy objectives and do not function independent of the state. These, if supported by solid factual evidence, are issues relating to the operation of SOEs. In respect of SOEs, the question of who has the real control is not the core issue. Instead, the core issue is whether SOEs are conducting their business under Appellate Body Report, United States — Continued Existence and Application of Zeroing Methodology, ¶ 268, WTO Doc. WT/DS350/AB/R (adopted Feb. 19, 2009). 73 Appellate Body Report, US — Softwood Lumber IV, ¶ 89, WTO Doc. WT/DS257/AB/R (adopted Jan. 19, 2004). 74 Appellate Body Report, US — Definitive Anti-Dumping and Countervailing Duties on Certain Products from China, ¶ 583, WTO Doc. WT/DS379/AB/R (adopted Mar. 11, 2011). 72

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commercial considerations solely, or they are performing certain governmental function. Article XVII and China’s commitments have provisions to address the SOEs practice outside of the AD Agreement. This proves that AD Agreement is not the relevant covered agreement to resolve irregular SOE conducts. SOE problem can be resolved under GATT Article XVII, the SCM Agreement and other instruments containing China’s commitments.75 The EU’s second factor requiring “state presence in firms allowing the state to interfere with respect to prices or costs” and the third factor needing “public policies or measures discriminating in favor of domestic suppliers or otherwise influencing free market forces” relate to governmental policies for pricing of certain commodities and any discriminatory measures against imported products. The latter can be resolved by resort to WTO dispute settlement under GATT Article III and it is an issue even market economy Members also have. On state intervention of prices, it is not as problematic as the EU claims it to be. On December 29, 1997, China adopted Price Law, Article 3 of which states: [t]he State implements a pricing system based on market force with macro-economic management. The pricing of commodities and services should follow market valuation rule, relying on commodities’ s/services’ market values, whereas only a few items of commodity and services will be set or guided by the government.76

In reality, an overwhelming majority of commodity and service prices have long been formed in market. On the other hand, we see that in Russia, certain raw materials prices are also set by the governments (i.e., gas and oil industries, electrical production and distribution, transportation, and postal and communication services), Russia was recognized by both the EU and the US as market economy in 2002.77 In light of the above, the EU’s treatment of price distortion determination on China seems rather arbitrary and discriminatory. The EU’s fourth factor “the lack, discriminatory application or inadequate enforcement of bankruptcy, corporate or property laws” may refer to SOE’s bankruptcy. These phenomenon, may certainly exist not only in China, but also in any market economy Member. If the EU aims to target on the favorable implementation of these laws on SOEs, it has to be proved by real SOE cases and be examined under the SOE commercial consideration operation obligations, and not under the AD Agreement. The Fifth factor “wage costs being distorted”, if exists, Working Party Report, supra note 12, ¶ 46–47. 法律法规全书, 第十一版,国务院法治办公室编, 中国法制出版社2013年4月出版。第4-564 页 [STATE COUNCIL LEGISLATIVE AFFAIRS OFFICE, LAWS AND REGULATIONS COMPILATION, 4-564 (11th ed., China Legal Affairs Publishing House, April 2013).] 77 “A 1995 Law on Natural Monopolies mandates that government regulatory policies balance the interests of consumers and economic agents where natural monopolies exist and establishes a statutory list of natural monopolies: the gas and oil industries, electrical production and distribution, transportation, and postal and communication services”, See U.S. Department of Commerce, Inquiry into the Status of the Russian Federation as a Non-Market Economy Country Under the U.S. Anti-dumping Law, Public Document A821-816, 23 (Jun. 6, 2002), http://ia.ita. doc.gov/download/russia-nme-status/russia-nme-decision-final.htm. 75 76

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refers also to SOE operation that should be addressed under SOE disciplines. As we have seen the price law mandates commodities and services prices be set by market force. The negative consequence of enacting these so-called market economy standards in Members domestic law system is the lack of uniform criteria and lack of supervision on the enforcement of government application on other Members, which may easily cause arbitrary determination, and unilateral and discriminatory measures against China and some other WTO Members. Using market distortion and arbitrary retaliation/punishment, instead of the WTO legal instrument (i.e., the SCM Agreement) to address governmental intervention of the economy is also risky. Nowhere in the WTO covered agreements, the Members’ right of macro-economic management of its economy is deprived or denied. For instance, the Chinese government has used tax incentives for quite a long period of time. Article 17 of the “Foreign Invested Enterprise Law” (first enacted in 1986 and revised in 2000, 2011, and 2016) provides: Foreign invested enterprises may enjoy tax reduction, exemption treatment according to relevant tax provisions of the State. Where foreign invested enterprises reinvest within Chinese territory with their income after paying income tax, are qualified to apply for the return of the paid income tax on the reinvested amount.78

China has been providing favorable (compared to domestic enterprises) enterprise income tax treatment to foreign invested companies for many years to attract foreign investment. Tax preference for foreign companies was only phased out in the 2008 tax law revision, which harmonized income tax for both domestic and foreign invested enterprises with an equal income tax rate of 25%. The beneficiaries had long been the multinational companies, not the Chinese companies. If there were CVD investigations against such “distortion” in fiscal policy, it could have been revised earlier. However, the US and EU’s common goal in the past was to enter into Chinese market easily by making investment in China, and thus they welcomed that policy. For an objective and impartial assessment, it is interesting to recall that Peter Sutherland, the Director General of GATT Secretariat, when answering questions from an economic journalist on what change China’s accession into the WTO will bring, said in his May 1994 visit to China: [f]irst, the WTO will have a more broad representation as China is an important part of the world. Second, this will improve China’s investment environment, make the potential investors feel more secured and give those business men who want to enter into Chinese market plenty of more opportunities, which will provide more reliability for China’s trade relations. Anyway, China’s economic growth is strong and will continue to be so strong, becoming a WTO Member is a valuable and positive matter.

法律法规全书, 第十版, 国务院法治办公室编, 中国法制出版社2011年12月出版 [STATE COUNCIL LEGISLATIVE AFFAIRS OFFICE, LAWS AND REGULATIONS COMPILATION, 2-139 (10th ed., China Legal Affairs Publishing House, Dec. 2012).]. 78

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When being asked what kind of challenge China will face, Sutherland responded: the challenge China faces is to open the market. But this conforms with China’s current policy seeing from various perspectives. As we are all living in a competitive global economy, any place faces the same challenge as China does. No doubt, China is competitive in many areas, the prospect has been proven by the recent years’ experience of significant economic development. I think there is nothing to be afraid of. Once China becomes a Member of the WTO, it will get more benefits for sure.79

After 16 years of China’s accession into the WTO, China’s trading partners are facing increased competition from China, India and other Members in certain areas. This is just like what China had feared 16 years ago when it was persuaded to take the challenge of competition, and the perceived disaster did not come. Now it seems there is a need to persuade China’s western trade partners to accept the same challenge and believe that free trade is not the cause of all the problems. We need to cooperate with each other and find better ideas to resolve problems.

9 Conclusion Section 15(a) and (d) serves as an exceptional rule to the rules in Article 2.2 of the AD Agreement in determining normal value for Chinese imports. The proviso in the first sentence of paragraph 15(d) of China’s Protocol of Accession is applicable to all of Section 15(a) and (d) as a precondition that the importing Member had a market economy criterion in the domestic law on the date of China’s accession. This requirement was essential to be able to use Section 15(a). With the termination of the sole “enabling clause” in Section 15(a) (ii) after 15 years of China’s accession, both Section 15(a) (i) and (ii) have also expired. The surrogate country methodology can no longer be justified under Section 15(a) of the Protocol. Subsequent to December 11 2016, WTO Members are not allowed to reincarnate the surrogate country methodology in Article 2.2.1.1 of the AD Agreement because doing so would amount to a big step backwards, destroying the many hard efforts the Uruguay Round negotiators spent on this agreement in order to improve the disciplines of anti-dumping rules.80 Without opening a dangerous door for future abusive use of the AD Agreement, the WTO system offers relevant rules to resolve price distortion, governmental intervention and SOE operation problems. It is

79 See 财新:“WTO 首任总干事萨瑟兰逝世重温入关那些事” [Hu Shuli, WTO’s First DG Passed Away: Memory of Events on Resumption of China’s Signatory Status to GATT, CAIXIN (Jan. 8, 2018)]. 80 For a review of the history of Uruguay round negotiation on Anti-dumping Agreement, see SONG HEPING AND DONGHUI FU, RESEARCH ON WTO AD AND SCM RULES – NEGOTIATION OF DOHA ROUND 20–23 (Law Press China, 2010).

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unrealistic to try using one anti-dumping tool to resolve all other problems. It is the senior trade officials’ role to explain the different rules addressing different issues at the WTO to the political leaders. It is the author’s sincere hope that a good communication between legal experts and the leaders will play a critical role for maintaining the healthy and orderly functioning of the WTO system.

Double Remedy: Beyond the Non-market Economy Status Katarzyna Kaszubska

Abstract The chapter traces the regulatory regime of the US and the EU for conducting parallel anti-dumping and anti-subsidy investigations against imports from non-market economies. It examines the problem of double remedy, its economic rationale and the impact of the WTO Appellate Body report in US—AntiDumping and Countervailing Duties on the practice of the investigating authorities. In particular, it assesses the relevance of double remedy issue following the expiry of the relevant provisions of China’s WTO Accession Protocol and the upcoming termination of Vietnam’s Accession Protocol. In the light of the US opposition to grant China market economy status and the EU’s new methodology for the calculation of the normal value which allows to disregard exporter’s domestic prices in the anti-dumping investigations, it concludes that double remedy problem is likely to remain relevant in future trade relations between China and its trading partners. Keywords Double remedy distortions


Countervailing
Anti-dumping
Significant

1 Introduction One of the most notable problems in the application of trade remedies against imports from the non-market economies (“NMEs”) has been the issue of double remedy, or double counting, which hinges on the simultaneous imposition of countervailing duty (“CVD”) and anti-dumping duty (“ADD”) on the same product. It is understood to arise when the same situation of subsidisation is offset, fully or partially, twice: first, under anti-dumping (“AD”) proceedings, due to the specific NME methodology applied to calculate a normal value of imported goods, and for the second time, in the course of an anti-subsidy (“AS”) or CVD investigation.

K. Kaszubska (&) Facutly of Law, University of Delhi, New Delhi, India e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2018 J. J. Nedumpara and W. Zhou (eds.), Non-market Economies in the Global Trading System, https://doi.org/10.1007/978-981-13-1331-8_5

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The recourses to the multiple trade remedy actions have been most frequently employed against China’s exports following its accession to the WTO. From the outset, they were intended to offset the continuing market distortions practiced by the Chinese state, including currency manipulations and subsidisation.1 This constituted an important reversal of the longstanding doctrine according to which CVD were not considered an appropriate instrument to target NMEs.2 Most controversially, in 2006, the US Department of Commerce (“USDOC”) reversed its traditional stance against initiating CVD proceedings aimed at products from NMEs. The roots of this policy go back to the 1980s when the US was conducting the AS investigation against imports of carbon steel wire rod from Czechoslovakia and Poland. Both exporting countries, at the time, were considered NMEs and the USDOC held that it was theoretically and practically impossible to determine a subsidy in a centrally planned economy, which, by definition, disregards market forces.3 It concluded that: a subsidy (or bounty or grant) is definitionally any action that distorts or subverts the market process and results in misallocation of resources, encouraging inefficient production and lessening world wealth. In NMEs, resources are not allocated by a market. With varying degrees of control, allocation is achieved by central planning. Without a market, it is obviously meaningless to look for a misallocation of resources caused by subsidies. There is no market to distort or subvert. […] [S]ubsidies have no meaning outside the context of a market economy.4

The position prohibiting application of CVD to NMEs was reaffirmed by the US judiciary in the Georgetown Steel case.5 It was reasoned that a NME uses subsidies in order to implement its central plan and not for the purpose of unfair foreign market competition.6 This approach was based on the economic reasoning that NME governments do not operate in the manner envisaged by CVD laws which aim at offsetting subsidies applicable in the market economies. Rather it was considered that in a centrally planned economy the state owns, controls or supplies majority of businesses, assets and resources. Consequently, if a payment granted by the government was treated as a subsidy within the meaning of the CVD law, it would imply that the state is

1

Dukgeun Ahn & Jieun Lee, Countervailing Duty Against China: Opening a Pandora’s Box in the WTO System?, 14 J. INT’L ECON. L. 329, 330 (2011). 2 Id. 3 Renato Antonini & Eva Monard, The concurrent imposition of anti-dumping and countervailing measures on non-market economies: time for a clean sheet of (Chinese) paper approach?, 17 INT. TRADE L. REV. 87, 90 (2011). Dana Watts, Fair's Fair: Why Congress Should Amend US Antidumping and Countervailing Duty Laws to Prevent “Double Remedies”, 1(1) TRADE L. & DEV. 145 (2009). 4 U.S. Department of Commerce, Final Negative Countervailing Duty Determination in Carbon Steel Wire Rod from Czechoslovakia, 49 US Fed. Reg. 89 19371 (U.S. Dep’t Com., May 7, 1984) (final determ.). 5 Georgetown Steel Co. v. United States, 801 F.2d. 1308 (Fed. Cir. 1986). 6 Ahn & Lee, supra note 1, at 336.

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subsidising itself.7 Under this premise, the major users of trade defence instruments (“TDIs”) refrained from initiating CVD investigations against NMEs. Both the EU and the US limited themselves to ADD against NMEs until the last decade.8 While Canada was the first country to initiate a CVD investigation accompanied by AD proceedings targeted at Chinese imports in 2004, the US has become the heaviest users of CVD against China.9 The shift in the US policy in this area influenced other users of TDIs. In the investigation against imports of coated free sheet paper from China initiated in 2006, the USDOC argued that China no longer fully prescribes to the traditional definition of a NME as understood in the Georgetown Steel case. With the economic reforms implemented by the Chinese government, its economy transformed into a present state which allows “to determine whether the PRC Government has bestowed a benefit upon a producer (i.e., the subsidy can be identified and measured) and whether any such benefit is specific.”10 The USDOC did not officially abandon its earlier policy but differentiated the economic conditions prevailing in China from those experienced in traditional Soviet-style centrally planned economies. Following the domestic litigation over the issue,11 in the background of the WTO proceedings in the US—AD and CVD case,12 the reversal of the longstanding practice established in the Georgetown Steel case was confirmed by the amendment of the US Tariff Act of 1930.13 In 2012, the US introduced the so-called GPX Bill which requires the investigating authority to employ CVD law against imports from NMEs.14 The new legislation applied retroactively in order to encompass all CVD proceedings initiated from 2006.

7 Thomas J. Prusa & Edwin Vermulst, United States – Definitive Anti-Dumping and Countervailing Duties on Certain Products from China: Passing the Buck on Pass-Through, 12 WORLD TRADE R. 197, 197 (2013). 8 Ross Denton, The Non-Market Economy Rules of the European Community’s Anti-Dumping and Countervailing Duties Legislation, 36 INTL. COMP. L. Q. 198 (1987). 9 Ahn & Lee, supra note 1, at 345–346. Joris Cornelis & Folkert Graafsma, The Appellate Body’s Findings and EU Practice: What if the Lesser Duty Rule does not Come to the Rescue, 1 INT. TRADE L. REV. 20, 20 (2012); Carrie Lei Cai, Double Remedies in Non-Market Economies, 14 J. WORLD INV. & TRADE 147, 163 (2013). 10 Memorandum: Countervailing Duty Investigation of Coated Free Sheet Paper from the People’s Republic of China – Whether the Analytical Elements of the Georgetown Steel Opinion are Applicable to China’s Present-Day Economy, C-570-907 (U.S. Dep’t Com., Mar. 29, 2007), http:// ia.ita.doc.gov/download/prc-cfsp/CFS%20China.Georgetown%20applicability.pdf, at 10. 11 GPX Int’l Tire Corp. v. United States, 666 F.3d 732 (C.A. Fed 2011). 12 Appellate Body Report, United States — Definitive Anti-Dumping and Countervailing Duties on Certain Products from China, WTO Doc. WT/DS379/AB/R (adopted Mar. 25, 2011) [US – AD and CVD (AB Report)]. 13 Cai, supra note 9, at 160–161. 14 U.S. Pub. L. 112-99, An act to apply the countervailing duty provisions of the Tariff Act of 1930 to nonmarket economy countries, and for other purposes, 126 Stat. 265 (March 13, 2012), https:// www.congress.gov/112/plaws/publ99/PLAW-112publ99.pdf.

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The EU did not have any formalised rule against the use of AS instruments to NMEs. Nevertheless, its first CVD investigation against China was initiated only in 2010. It was finalised by the simultaneous imposition of CVD and ADD against coated fine paper from China.15 Prior to this decision the European Commission was of the opinion that CVD were not appropriate trade remedies against imports from NMEs or transition economies because “the significant state-induced distortions in such countries, [make it] often very difficult to calculate the amount of subsidy or benefit conferred.”16 However, the scope for potential recourses to CVD had been explored years before the first investigation was initiated.17 The 2005 Report evaluating the EU trade defence policy suggested a shift in the traditional position. It recommended the EU to reconsider the application of CVD to NMEs as “there is no reason in principle why the AS instrument cannot be used in these circumstances.”18 Although the report acknowledged that certain practical problems concerning identification and calculation of benefit or establishment of appropriate benchmarks arise, it concluded that “the fact that using the AS instrument in such circumstances may be difficult does not mean that it should not be used.”19 Despite its relatively late initial recourse to CVD against NMEs, the EU emerged as one of the most frequent users of the instrument. According to the WTO data, until 2016, it has initiated in total ten CVD investigations against China. The US started 60 CVD investigations, followed by Canada and Australia with 23 and 16 initiations respectively.20

2 Double Remedy and NMEs The term double remedy has not been defined or referred to in any of the WTO agreements. However, it was described in WTO jurisprudence as a situation, which may arise when the same subsidy amount is offset twice by the simultaneous

15

Council Implementing Regulation (EU) No 452/2011 of May 6, 2011 imposing a definitive anti-subsidy duty on imports of coated fine paper originating in the People's Republic of China, 2011 O.J. (L128) 18 [hereinafter Coated Fine Paper Subsidy Decision]; Council Implementing Regulation (EU) No 451/2011 of May 6, 2011 imposing a definitive anti-dumping duty and collecting definitively the provisional duty imposed on imports of coated fine paper originating in the People's Republic of China, 2011 O.J. (L128) 1 [hereinafter Coated Fine Paper AD Decision] [hereinafter collectively Coated Fine Paper Decisions]. 16 European Commission DG Trade, Summary of Evaluation of EC Trade Defence Instruments – Final Report prepared by Mayer, Brown, Rowe & Maw LLP (2006), http://trade.ec.europa.eu/ doclib/docs/2006/february/tradoc_127383.pdf, 5. 17 Antonini, & Monard, supra note 3, at 89–90. 18 European Commission DG Trade, supra note 16, at 31. 19 Id. 20 World Trade Organisation, Countervailing Initiations: Reporting Member vs Exporter 01/01/1995 - 31/12/2016, https://www.wto.org/english/tratop_e/scm_e/CV_InitiationsRepMemVsExpCty.pdf.

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imposition of CVD and ADD. The legal meaning of the term was specified by the WTO Appellate Body in the US—AD and CVD case21 as follows: [i]n essence, ‘double remedies’ may arise when both countervailing duties and anti-dumping duties are imposed on the same imported products. The term ‘double remedies’ does not, however, refer simply to the fact that both an anti-dumping and a countervailing duty are imposed on the same product. Rather […] ‘double remedies’, also referred to as ‘double counting’, refers to circumstances in which the simultaneous application of anti-dumping and countervailing duties on the same imported products results, at least to some extent, in the offsetting of the same subsidization twice.22

The risk of double remedy arising from the simultaneous imposition of ADD and CVD has been recognised by the drafters of the General Agreement on Tariffs and Trade 1994 (“GATT”). GATT Article VI:5 provides that no product “shall be subject to both anti-dumping and countervailing duties to compensate for the same situation of dumping or export subsidization.” Although this provision prohibits double counting, it applies to export subsidies only. It reflects the economic theory of passing-through of export subsidies.23 The concept is based on the assumption that an export subsidy is completely passed-though to an export price and, in any way, does not affect a home market price. Article VI:5 presumes that an export subsidy can be, in its entirety, offset by an ADD based on the comparison between a home market and an export price of a product. As a consequence, any CVD imposed in addition to an ADD on the same subsidised goods would necessarily involve double counting. The Article is however silent on the issue of domestic subsidies. This is motivated by the assumption that domestic subsidies are in equal parts passed-through to both export and home market prices.24 In such a case, a countervailable domestic subsidy cannot be offset by a dumping duty and can only be targeted in a CVD investigation.25 In principle, the problem of double remedy does not occur in cases of parallel AD and CVD proceedings countering domestic subsidies. The theory of passing-though of subsidies has been criticised for ignoring the real effect of a subsidy on the prices.26 It fails to investigate the factual utilisation of a subsidy by the recipient and the aspect of fungibility of money. In practice, the beneficiary of a subsidy might not be able to use it effectively or can even misappropriate the money.27 Also, the effects of an export subsidy do not have to be necessarily limited to an export price but can also influence a domestic market price. A domestic subsidy may affect domestic and export prices to different extent.

US — AD and CVD (AB Report), supra note 12. Id., ¶ 541. 23 Thomas J. Prusa, NMEs and the Double Remedy Problem, 16(4) WORLD TRADE REV. 619, 625 (2017). 24 Cai, supra note 9, at 150. 25 Prusa, supra note 23, at 625. 26 Id. 27 Cai, supra note 9, at 152. 21 22

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Despite these shortcomings, the notion of passing-through of export and domestic subsidies has been generally accepted both in the WTO law and in the practice of the Member States.28 The assumption that domestic subsidies are not offset by ADD becomes more challenging to justify in the context of NMEs. It is primarily attributed to the particular method for calculation of a normal value applied in AD investigations against imports from countries with NME. This specific method has been provided in the WTO Accession Protocols of China and Vietnam. During its accession negotiations to the Organization, it was acknowledged that, despite on-going internal economic reforms, China was not yet a market economy. Consequently, in exchange for the WTO membership, China agreed, among other commitments, in Section 15 of the Protocol, that other WTO Member States can deviate from the methodology based on a strict comparison with domestic prices and costs when calculating a normal value in AD investigations against its exports.29 The strict comparison procedure which applies to market economy countries is described in the Agreement on Implementation of Article VI of the GATT i.e. the 28

Prusa, supra note 23. Section 15 of the WTO Protocol of Accession of the People’s Republic of China states as follows: Price Comparability in Determining Subsidies and Dumping Article VI of the GATT 1994, the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (“Anti-Dumping Agreement”) and the SCM Agreement shall apply in proceedings involving imports of Chinese origin into a WTO Member consistent with the following: 29

(a) In determining price comparability under Article VI of the GATT 1994 and the Anti-Dumping Agreement, the importing WTO Member shall use either Chinese prices or costs for the industry under investigation or a methodology that is not based on a strict comparison with domestic prices or costs in China based on the following rules: i. If the producers under investigation can clearly show that market economy conditions prevail in the industry producing the like product with regard to the manufacture, production and sale of that product, the importing WTO Member shall use Chinese prices or costs for the industry under investigation in determining price comparability; ii. The importing WTO Member may use a methodology that is not based on a strict comparison with domestic prices or costs in China if the producers under investigation cannot clearly show that market economy conditions prevail in the industry producing the like product with regard to manufacture, production and sale of that product. […] (d) Once China has established, under the national law of the importing WTO Member, that it is a market economy, the provisions of subparagraph (a) shall be terminated provided that the importing Member's national law contains market economy criteria as of the date of accession. In any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession. In addition, should China establish, pursuant to the national law of the importing WTO Member, that market economy conditions prevail in a particular industry or sector, the non-market economy provisions of subparagraph (a) shall no longer apply to that industry or sector. [emphasis added] Protocol on the Accession of the People’s Republic of China, sec. 15 (a), WTO Doc. WT/L/ 432 (Nov. 23, 2001).

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Anti-Dumping Agreement (AD Agreement). Under this methodology an importing country is required to compare an export price (a value of the product sold in its territory) with a normal value (a value of the product in an exporting country) in order to determine if dumping occurred. However, to counter the effects of the price distortions in the Chinese market, Section 15 of the Accession Protocol allowed the investigating authorities in the importing countries to ignore Chinese prices and instead determine a normal value using other methods, e.g., by reference to a third country’s prices. This special procedure was set under subparagraph a(ii) of Section 15 of China’s Accession Protocol and is mirrored in Vietnam’s Accession Protocol.30 The NME technique, which permits investigating authorities to ignore domestic prices of imported products in calculating dumping margins, was proved to result in higher ADD partly due to double counting.31 The process of constructing a normal value by reference to a third country’s prices allowed under the NME methodology already captures domestic subsides benefiting the producers of the goods under investigation. Therefore, it allows to arrive at an unsubsidised price of the product as if it was produced under the market economy conditions. In other words, the NME methodology prevents domestic subsidies used by NME governments from passing-through to the normal value. Given that the normal value constructed for a NME purges subsidies, the dumping margin determined in this manner is ultimately also increased by the amount of domestic subsidy. As a result, the process of cumulating ADD based on the NME methodology with CVD offsets the same subsidy twice, giving rise to double remedy.32 For example, if parallel AD and CVD proceedings concern a product, subject to domestic subsidy of $10, which domestic price is $100 and export price is $95, the investigating authority under market economy methodology will use domestic price as a normal value and compare it with the export price to determine dumping margin. Consequently, the product will be subject to ADD of $5 and CVD of $10. However, under NME methodology, the investigating authority can disregard domestic price and construct normal value using surrogate country prices which are not affected by market distortions, including domestic subsidies. The constructed normal value should thus be set at $110 leading to the increase in dumping margin. In such case, the parallel investigations will result in ADD of $15 and CVD of $10. The combination of ADD and CVD under the NME methodology offsets the same domestic subsidy twice. From the economic perspective, there are limited circumstances when double counting does not occur or is restricted in the simultaneous ADD and CVD imposed

30

Vietnam’s Accession Package, Report of the Working Party, 255, WTO Doc. WT/ACC/VNM/ 48 255 (Oct. 27, 2006). 31 US Government Accountability Office, U.S. – China Trade: Eliminating Nonmarket Economy Methodology Would Lower Antidumping Duties for Some Chinese Companies, GAO-06-231 (Jan. 10, 2006), http://www.gao.gov/products/GAO-06-231. 32 Cai, supra note 9, at 151; Prusa, supra note 23, at 626; Prusa & Vermulst, supra note 7, at 218–219.

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against NMEs’ imports.33 One such hypothetical situation could arise if third country’s producers, whose prices are used to calculate a normal value, are also benefiting from subsidies. In such a case, a dumping margin will be lower and will not take into account a subsidy from the NME, at least not its entire amount. Another situation occurs when producers from a NME exercise a dominant position in the international market and influence the world price of the product. The NME subsidised prices can unnaturally depress the value of the product in a surrogate country. In effect, the dumping margin would again be lower despite the use of the NME methodology. This is a valid concern under the EU system for calculating a normal value for imports from NMEs which relies on surrogate country prices. Finally, a normal value established under the NME method can be reduced due to the reliance on depressed profit margins from a surrogate country. Benefiting from subsidies, the producers in NME can lower their export prices which in turn might diminish profit rates in the third country. For example, in order to compete with the low export price of Chinese goods, the producers of the same products in the surrogate country may be required to lower their profits. In effect, despite the use of surrogate country’s data by the investigating authority, an ADD might not fully capture the amount of subsidies. This is particularly relevant in case of the NME technique adopted by the US to calculate a normal value of imported products. The US investigating authority collects data concerning an exporting company’s factors of production and then assesses their value based on the prices in a selected surrogate country. Further, it adds actual profit amounts and general expenses of producers from the third country. Under this approach, the NME methodology arrives at the normal value which is a combination of factors of production of the NME exporting company and prices of these factors as well as profits from the surrogate country.34 In effect, an ADD applied in such theoretical scenarios might not fully capture the effects of a domestic subsidy. By limiting the amount of subsidy reflected in a dumping margin, the probability of double remedy stemming from parallel ADD and CVD also diminishes. Nevertheless, even if such circumstances occur, it is unlikely that the problem of double counting will be fully eliminated.

3 Double Remedy in the Light of Appellate Body Decision in US—AD and CVD Case The US’ practice of imposing cumulative ADD and CVD on imports from China was challenged before the WTO in the US—AD and CVD case in 2011. Following the reversal of the traditional US policy against applying CVD law to NMEs and its first case of cumulative duties on the import of Chinese products, the 33

Prusa, supra note 23, at 633. Id., at 627–628; Tariff Act of 1930, 19 U.S.C. § 1677b(c)(1) (2012).

34

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Chinese government brought a claim in the WTO arguing that the US acted inconsistently with its obligations under the WTO law. In particular, China argued that the US practice of dual investigations resulting in CVD and ADD calculated on the basis of NME methodology led to double remedy. It argued that offsetting the same subsidies twice is inconsistent with the Agreement on Subsidies and Countervailing Measures (SCM Agreement). The US, on the other hand, claimed that Chinese exporters did not provide evidence that the concurrent AD and CVD investigations resulted in double remedy. Moreover, it stressed that the WTO law distinguishes between export and domestic subsidies. Article VI:5 GATT explicitly forbids double counting in case of former type of subsidisation, there is however no such prohibition in reference to domestic subsidies. Although the Panel admitted that the NME methodology employed by the US to calculate a normal value in AD investigations, when combined with CVD, is ‘likely’ to result in double counting, it dismissed China’s claim. Rather, it agreed with the US that the WTO law only addresses the issue of double remedy in connection to export subsidisation. None of the provisions of the SCM Agreement render double counting of domestic subsidies impermissible.35 This position was however reversed by the Appellate Body. It found that Article 19.3 of SCM Agreement, which requires CVD to be imposed in an ‘appropriate amount’, when read in the context of other provisions, prohibits offsetting the same situation of domestic subsidisation twice under cumulative ADD and CVD. In other words, double counting is inconsistent with the requirement of appropriateness of CVD. Further, it agreed with the Panel that double remedies are ‘likely’ to arise in parallel investigations when the AD NME methodology is applied to establish a normal value of imported goods.36 It explained that [i]n the dumping margin calculation [based on the NME method], investigating authorities compare the product’s constructed normal value (not reflecting the amount of any subsidy received by the producer) with the product’s actual export price (which, when subsidies have been received by the producer, is presumably lower than it would otherwise have been). The resulting dumping margin is thus based on an asymmetric comparison and is generally higher than would otherwise be the case.37

The Appellate Body also disagreed with the US’s argument that China did not demonstrate in the particular case that double remedy occurred. Due to the likelihood of double counting to arise when concurrent duties are imposed against imports from NMEs, it found that the burden to prove the contrary lies on the importing country imposing the TDIs. Effectively, the investigation authority has to

Panel Report, United States — Definitive Anti-Dumping and Countervailing Duties on Certain Products from China, ¶14.120, 14.130-148, 14.182, WTO Doc. WT/DS379/R (adopted Mar. 25, 2011). 36 US — AD and CVD (AB Report), supra note 12, ¶541. 37 Id., ¶ 542. 35

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make necessary adjustments in order to ensure that the same subsidisation is not being offset twice in the cumulative investigations.38 Nevertheless, instead of finding a definitive passing-through of a domestic subsidy to the normal value under the NME methodology, the Appellate Body encouraged the investigating authority to calculate the actual degree of double counting occurring from cumulative duties. It has been observed that the US NME method could have been found ultimately illegal by drawing a parallel to Article VI:5 GATT which relies on the logic comparable to the economic implications of the US practice in simultaneous proceedings against NMEs.39 The prohibition of simultaneous imposition of CVD and ADD to counter the same situation of export subsidies codified by Article VI:5 GATT is based on the assumption that export subsidy does not pass-through to normal value. Similarly, the US NME method, which relies on the surrogate country prices, does not allow NME subsidies to pass-through to the calculated normal value. As a result, US parallel investigation almost inevitably led to double remedy. Nevertheless, despite deciding that double remedies are ‘likely’ to occur in cases of cumulative duties against NMEs, the Appellate Body found that it can be remedied if necessary adjustments are made by an investigating authority. It effectively permitted importers to continue applying simultaneous ADD and CVD against NMEs if they take cautious approach and specifically adjust the findings to ensure that double counting does not arise.40 Following the WTO decision, in 2012 the US adopted the so-called GPX legislation which requires the investigating authority to conduct CVD investigations against imports from NMEs.41 It also purports to address the problem of double counting. In case of parallel investigations, it provides that the amount of ADD should be reduced to the extent by which a subsidy inflated the dumping margin. The GPX Bill specifies that the investigating authority will “reduce the antidumping duty by the amount of the increase in the weighted average dumping margin.”42 However, this adjustment depends on the investigating authority’s ability to reasonably estimate the extent to which a countervailable subsidy increased a dumping margin for an imported product.43 Thus, when such reasonable determination cannot be made, the legislation continues to require the authority to calculate CVD.44

Id., ¶ 542. Prusa, supra note 23, at 629; Prusa & Vermulst, supra note 7, at 11. 40 Prusa, supra note 23, at 629. 41 An act to apply the countervailing duty provisions of the Tariff Act of 1930 to nonmarket economy countries, and for other purposes, H.R. 4105, 112th Congress (2012) [hereinafter Congress NME Act]. 42 Id. 43 Id. 44 Elliot J. Feldman & John J. Burke, Testing the Limits of Trade Law Rationality: The GPX Case and Subsidies in Non-Market Economies, 62(4) AM. UNIV. L. REV. 787, 813–814 (2013). 38 39

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Shortly after the new legislation was adopted, China challenged its WTO compliance in the US—CV and AD Measures case.45 Both the WTO Panel and Appellate Body upheld the claim in part arguing that the US CVD proceedings against Chinese products conducted between 2006 and 2012, which were excluded from the application of GPX Bill requiring the authority to investigate and avoid double remedy, violated the SCM Agreement. However, neither the Panel nor the Appellate Body found the US legislation as such inconsistent with the relevant WTO rules. As a result of the WTO decision on double counting and the legislative changes, the US’s trade remedy cases targeting Chinese imports led to the reduction of combined duties.46 However, the investigating authority continues to focus the pass-through analysis primarily on NME input subsidies that affect variable costs.47 The adjustments to the dumping margin are made mainly for the value of raw materials or additional input provided by the state, rather than other types of government assistance.48 Nevertheless, the findings in the US—AD and CVD case had important implications for the practice of concurrent imposition of AD and CVD measures on imports originating from NMEs by many countries.

4 The EU’s Approach to Double Remedy Problem The EU’s first parallel proceedings against NME were concluded after the report in the US—AD and CVD was already adopted. The European Commission was thus aware of the Appellate Body’s conclusions and its decision in coated fine paper case included several important observations demonstrating the EU approach to the issue of double remedy.49 In particular, the EU argued that its cumulative AD and CVD proceedings are WTO-consistent because the final measures were calculated in accordance with the lesser duty principle and the sum of both types of duties was limited by the injury margin. These specific characteristics of the EU methodology will be discussed in detail in the present section. At the outset, the EU’s method for the calculation of a normal value for products from NMEs differs significantly from the US technique discussed above. The European Commission determines a normal value of a product based entirely on the

45 Appellate Body Report, United States — Countervailing and Anti-Dumping Measures on Certain Products from China, WTO Doc. WT/DS449/R/AB (adopted Jul. 22, 2014). 46 Final Determination: Section 129 Proceeding Pursuant to the WTO Appellate Body's Findings in WTO DS79 Regarding the Antidumping and Countervailing Duty Investigations of Circular Welded Carbon Quality Steel Pipe from the People’s Republic of China, Memorandum, 12–13 (U. S. Dep’t Com., Jul. 31, 2012)(final determ.). 47 Id., at 17. 48 Id., at 18. 49 See Coated Fine Paper Decisions, supra note 15.

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data from a third country.50 It does not incorporate in its analysis information, such as factors of production, from NME producers. However, the Appellate Body in the US—AD and CVD case referred generally to the practice of comparing a non-subsidised constructed normal value with a subsidised export price, which combined with parallel AS proceedings, may give rise to double remedy. Given this broad understanding of the NME methodology, as identified by the Appellate Body, the findings of the case seem to equally apply to the EU technique. In addition, the EU is one of the few WTO Members that mandates the application of the lesser duty rule in CVD and AD investigations.51 The principle of lesser duty implies that CVD or ADD can be imposed only to the amount necessary to remedy the injury suffered by the domestic producers in cases where the investigation arrives at the injury margin lower that the margin of dumping/subsidy. The rule is codified in the EU Basic Anti-Dumping and Anti-Subsidy Regulations.52 The EU has also developed a particular approach to the application of the rule in cases of dual investigations. The principle affects not only the value of ADD and CVD individually but also their cumulated amount. In other words, the combined duties do not equate to the sum of their individual values but rather are set at the level which does not exceed the injury margin. The lesser duty rule is particularly relevant in the investigations against products from NMEs where the specific methodology for the calculation of a normal value by reference to a surrogate country’s prices generally results in a higher dumping margin. As a result, in the overwhelming majority of the EU’s investigations against Chinese products the definitive duties were significantly lower in comparison to the established margins.53 The EU has thus argued that the application of the lesser duty rule in its parallel AD and CVD investigations against NMEs exempts it from the risk of arriving at double remedy. The view of the EU authorities on the interplay between the lesser duty rule and the double remedy problem has been elaborated in the Regulation imposing CVD on coated fine paper from China54 adopted simultaneously with the Regulation imposing ADD on the same product.55 In the EU’s opinion double remedy can only occur “where there is a cumulation of the dumping margin and the amount of

50

Cai, supra note 9, at 150. Edwin Vermulst & Brian Gatta, Concurrent trade defence investigations in the EU, the EU’s new anti-subsidy practice against China, and the future of both, 11(3) WORLD TRADE REV. 527, 532 (2012). 52 Regulation (EU) 2016/1036 of the European Parliament and of the Council of June 8, 2016 on protection against dumped imports from countries not members of the European Union, 2016 O.J. (L176) 21, art. 9(4); Regulation (EU) 2016/1037 of the European Parliament and of the Council of June 8, 2016 on protection against subsidised imports from countries not members of the European Union, 2016 O.J. (L176) 55, art. 15(1). 53 Vermulst & Gatta , supra note 51, at 535. 54 Coated Fine Paper Subsidy Decision, supra note 15. 55 Coated Fine Paper AD Decision, supra note 15. 51

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subsidy i.e. where the combined level of two types of duty exceeds the higher of the dumping margin or the amount of subsidy.”56 The Regulation stated that the dumping margin, determined in the case, was higher than the injury margin which was the same for both AD and AS proceedings. In line with the lesser duty rule, the amount of duties imposed was based on the injury margin. As a consequence, it explained that the subsidy margin found in the [concurrent] anti-subsidy investigation will not provide any additional protection to the Union industry as compared to the dumping margin because the anti-dumping duty will already be capped by the injury margin. Therefore there is no overlap or cumulation of duties in the two parallel proceedings.57

The operation of the lesser duty rule, in the EU practice, appears to render the AS investigation futile since the same rate of duty could have been achieved under the standalone AD proceedings based on the NME methodology.58 Without conducting additional calculations on the extent to which both duties offset the same subsidy, the EU Council in the Regulation imposing CVD concluded that in view of the use of the lesser duty rule in the anti-dumping investigation carried out in parallel and the amount of subsidisation found in the present investigation, it was not considered necessary to further examine whether and to what degree the same subsidies are being offset twice when anti-dumping and countervailing duties are simultaneously imposed on the same imported product.59

The EU recognised the peril of double counting arising in the cumulative AD and CVD investigations, however, it relied on the notion of injury elimination level of duties to justify that the parallel proceedings did not result in double counting in the analysed case. Nonetheless, the operation of the lesser duty principle does not necessarily shield the EU practice from the potential risks of double remedies. Although, its application in the particular case appears to remedy the issue of excessive remedy, this will not necessary occur if the injury margin increases and the lesser duty rule does not come into play.60 In such circumstances the likelihood of double counting increases and more specific adjustments are required to ensure that parallel proceedings do not result in offsetting the same subsidies twice.61 While determining the amount of duties imposed on a particular product the lesser duty rule makes no

Coated Fine Paper Subsidy Decision, supra note 15, ¶ 272. Id., ¶ 273. 58 Antonini & Monard, supra note 3, at 96. Vermulst & Gatta , supra note 51, at 534. 59 Coated Fine Paper Subsidy Decision, supra note 15, ¶500. 60 Chien-Huei Wu, Key Issues Regarding the EU’s Concurrent Imposition of Anti-Dumping and Countervailing Duties on Chinese Coated Fine Papers: Analogue Country, Market Economy Treatment, Individual Treatment, and Double Remedy, 10 ASIAN J. WTO INTL. HEALTH POL. 263, 278–279 (2015). 61 Cornelis & Graafsma, supra note 9, at 26–27. 56 57

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account of the value of subsidies offset by either AD or AS investigation.62 Apart from indicating that final cumulative duties are set on the basis of the lower injury margin rather than dumping margin, the lesser duty rule does not guarantee that double remedy is avoided. Consequently, it has been argued that without an in-depth quantitative examination of how the lesser duty corresponds to the amount of offset subsidisation, there can be no ultimate assurance that the same subsidy was not offset twice.63 In addition, the EU submitted that as long as the aggregate rate of ADD and CVD does not exceed the amount set in accordance with the injury margin, there is no scope for double counting. The injury margin was established by comparing the import price with the non-injurious price of domestic product, consisting of cost of production and profit of 8%.64 Further, the EU authority concluded that the injury margin was set at the same level in both investigations. This understanding of the function of the injury margin in combined investigations was also criticised.65 Due to the application of the lesser duty rule by the EU, the injury margin actually determines the level of cumulative duties imposed on Chinese imports. Consequently, the investigating authority is mandated to ascertain that the determination of injury margin leads to appropriate amount of duties, required under Article 19.3 WTO SCM Agreement and Article 9.2 AD Agreement, and ensure that the same instances of subsidization are not offset twice under the cumulative duties.66 In order to determine appropriate amount of ADD and CVD to remove the injury suffered by domestic industry, the investigating authority has to calculate the injury cause by dumping and subsidization respectively in individual investigations.67 The injury margin, although appears in both AD and SCM Agreements, is defined as a separate concept for dumping and subsidisation. It has been observed in the literature that, despite the fact that similar factors are required to be taken into account when determining the injury to the domestic industry under AD and AS proceedings, it does not automatically lead to “the same injury margin in different investigations, because dumping margin and subsidy margin are two different variables affecting consequentially and differentially the injury margin in two different contexts.”68 The WTO law requires investigating authorities to establish a causal link between the injury suffered by domestic industry and the specific

62

John S. Mo, Double Remedy and Illegality of the EU Determinations to Impose Concurrent Duties on the Imported Coated Fine Paper from China, 45 REVUE JURIDIQUE THÉMIS 495, 513 (2011). 63 Id., at 514–515. 64 Coated Fine Paper Subsidy Decision, supra note 15, ¶ 492–499; Coated Fine Paper AD Decision, supra note 15, ¶ 156–157. 65 Mo, supra note 62, at 516–520. 66 US — Definitive AD and CVD (AB Report), supra note 12, ¶ 601. 67 Mo, supra note 62, at 533. 68 Id., at 51.

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instances of dumping and subsidisation.69 In coated fine paper case, the EU investigating authority considered various indicators contributing to the injury suffered by domestic industry,70 however, in either of the investigations, it did not take into account that the product was simultaneously subject to both dumping and subsidization. Specifically, the AD investigation failed to analyse the contribution of subsidization to the injury, and the CVD proceedings it did not acknowledge parallel dumping when determining the injury. As a result, the EU established that the dumping margin of 43.5–63% and the subsidy margin ranging between 4 and 12%, respectively, resulted in the injury margin of 20–39.1% in both investigations.71 It has been argued that, by attributing the equal injury to both proceedings, the EU failed to adequately allocate causality between the injury margin and the individual instances of dumping and subsidisation which have their own respective causative injury impact on the domestic industry.72 Consequently, it has been argued that the injury margin, set irrespective of the value of subsidization and dumping, should not be relied on as a guarantee that the same subsidy was not offset twice in the parallel proceedings. The operation of the injury margin, under the lesser duty rule, only ensures that the cumulative duties are imposed at the injury elimination level which is lower in comparison to the dumping margin inflated by the use of surrogate country data, in particular due to selection of the US as the analogue country to calculate the normal value of Chinese products.73 It appears that the practice of setting the aggregate amount of ADD and CVD at the level established by the injury margin does not necessarily ensure that the same instances of subsidisation are not being offset twice. Finally, the EU maintained that its parallel AD and AS proceedings in the coated fine paper case did not result in double remedy because the investigating authority deducted the CVD rate from the injury margin in order to determine the maximum level of ADD. In practical terms when it comes to the actual composition of combined duty, the European Commission first imposes the duty amount established in the CVD investigation. The remaining gap between CVD and the injury margin is then filled with ADD. As a result, there can be no double counting “because the combined level of duties could already have been justified as a result of the anti-dumping investigation alone.”74

69

Agreement on Implementation of Article VI of the GATT, April 15, 1994, 1868 U.N.T.S. 201, art. 3, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1869 U.N.T. S. 14 [hereinafter Anti-dumping Agreement], Agreement on Subsidies and Countervailing Measures, April 15, 1994, 1869 U.N.T.S. 14, art. 15. 70 Coated Fine Paper Subsidy Decision, supra note 15, ¶ 376–433; Coated Fine Paper AD Decision, supra note 15, ¶ 84–129. 71 Coated Fine Paper Subsidy Decision, supra note 15, ¶ 499; Coated Fine Paper AD Decision, supra note 15, ¶ 165. 72 Mo, supra note 62, at 518, 532–534. 73 Coated Fine Paper AD Decision, supra note 15, ¶ 62. 74 Coated Fine Paper Subsidy Decision, supra note 15, ¶ 273.

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The order of adjustments under the EU practice appears to differ from the one proposed by the Appellate Body in the US—AD and CVD decision. In this case, the Appellate Body was presented with the scenario where CVD were adopted after the amount of subsidy had already ‘likely’ been offset by ADD. Consequently, the adjustment requirement was aimed at the CVD investigation. The EU, on the other hand, prefers the opposite order when it first applies the entire amount of CVD and then reduces the level of ADD accordingly. Despite this distinction, both methods seem to obtain the same result of avoiding double remedy, thus appear comparable, especially in the light of the coherent and consistent application of the WTO AD and SCM Agreements adopted by the Appellate Body.75 However, if the EU approach is intended to comply with the adjustment requirement prescribed by the Appellate Body, then it would effectively imply that all subsidies, which were offset by the Commission in the CVD investigation, were also reflected in the dumping margin. Although the practice of deducting a CVD from the final amount of ADD seems to ensure that double counting does not occur, it also nullifies the effect of parallel investigations because the same objective could have been also achieved under the standalone AD proceedings.76 As described by the US Court of International Trade, this method “renders concurrent CVD and AD investigations unnecessary because the same remedial price adjustment can otherwise be obtained by mere conducting an NME AD investigation [and it is] also unreasonable due to the expense associated with the conducting an additional investigation that is essentially useless.”77 In its first cumulative AD and AS investigations against a NME, the EU determined that double remedy does not play any role due to the application of the lesser duty rule and the practice of deducting the amount of CVD from the final ADD.78 However, the methodology has not yet been scrutinised by the Appellate Body, thus, its compliance with the WTO law remains to be confirmed.

5 Double Remedies on the Horizon The debate over double remedies has been predominantly limited to the parallel CVD and AD proceedings tied to the NME methodology for the calculation of a normal value. Thus, it has been generally considered that the problem will become

US — Definitive AD and CVD (AB Report), supra note 12, ¶ 571; Cornelis & Graafsma, supra note 9, at 24–25. 76 Antonini & Monard, supra note 3, at 96; Vermulst & Gatta, supra note 51, at 534; Cornelis & Graafsma, supra note 9, at 26–27. 77 GPX Int’l Tire Corp. v. United States (GPX 2), No. 08-00285, 2010 WL 3835022, 9–10 (Ct. Int’l Trade 2010). 78 US — Definitive AD and CVD (AB Report), supra note 12, ¶ 272. 75

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less relevant with the expiry of the provisions of China’s and Vietnam’s WTO Protocols of Accession which authorised the importing countries to adopt the NME method in AD investigations against imports from these countries. The relevant section of the Chinese Protocol expired in December 2016, while Vietnam’s equivalent mechanism is set to terminate in December 2018. Nevertheless, there appears to be great resistance among the major users of TDIs to convert to the ordinary market economy methodology in AD proceedings against Chinese products despite the deadline provided in its Protocol. As a result, the double remedy problem is unlikely to vanish from the WTO dispute resolution history in the nearest future. In particular, the US is yet to recognise China as a market economy. In the meantime, it chose to preserve the status quo by continuing to apply the NME methodology in its AD investigations. It has maintained that the expiry of specific provisions of the Chinese Protocol of Accession merely requires importing countries to no longer presume that China is a NME, and instead to examine the status of its economy. The USDOC conducted a review of its economy in the context of the AD proceedings on aluminium foil from China which was also the first investigation instigated by the US against Chinese goods since December 2016. In the Memorandum issued in October 2017, the DOC concluded that China does not operate sufficiently on market principles in order to permit the use of its prices and costs for the purposes of AD analysis.79 Accordingly, it determined that, due to the significant distortions and government’s control over its economy, China remains a NME country and the US investigating authority will continue to apply the NME methodology for the calculation of normal value of Chinese imports. It remains to be seen whether this approach is WTO consistent. On 12 December 2016, China initiated the WTO dispute consultations against the US for continuing to treat it as a NME, however, it has not proceeded with the request for the establishment of a panel so far.80 It appears that the US DOC will continue to rely on the existing NME methodology and, thus, the issue of double counting in the parallel AD and CVD investigations remains as valid as in the past. The EU, on the other hand, proposed a modernisation and strengthening of its internal trade defence mechanism in response to the expiry of the provisions of

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U.S. Department of Commerce, Review: China’s Status as a Non-Market Economy, A-570-053 (October 26, 2017), https://enforcement.trade.gov/download/prc-nme-status/prc-nme-review-final103017.pdf. 80 Request for consultations by China, United States — Measures Related to Price Comparison Methodologies. WT/DS515 (Dec. 12, 2016).

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Section 15 of China’s WTO Protocol.81 The reform envisages a new methodology that “would be used to address situations where market conditions do not prevail, […] where there are massive production overcapacities in exporting countries, […] where there are market distortions, or where the state has a pervasive influence on the economy”.82 The new framework eliminates the list of NMEs from the EU legislation. However, the domestic industry, requesting an initiation of an AD investigation, will be able to establish that market distortions exist in the exporting country, which would allow the EU investigating authority to disregard its domestic prices. It specifies that “in case of substantial market distortions the Commission would be allowed […] to construct values based on ‘costs of production and sale reflecting undistorted international prices, costs, or benchmarks, or corresponding costs of production and sale in an appropriate representative country with a similar level of economic development as the exporting country.”83 Although it has been distinguished by the EU,84 the proposed new system appears comparable to the cost adjustment methodology, used to adjust a normal

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Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 2016/1036 on protection against dumped imports from countries not members of the European Union and Regulation (EU) 2016/1037 on protection against subsidised imports from countries not members of the European Union, COM (2016) 721 final (Nov. 9, 2016), http:// trade.ec.europa.eu/doclib/docs/2016/november/tradoc_155079.pdf; European Commission, Communication from the Commission to the European Parliament, the European Council and the Council: Towards a robust trade policy for the EU in the interest of jobs and growth, COM (2016) 690 final (Oct. 18, 2016), http://trade.ec.europa.eu/doclib/docs/2016/october/tradoc_155024.pdf . The European Commission last applied the NME methodology in two anti-dumping investigations against imports of Chinese products initiated on December 10, 2016. In both cases, the investigation period did not extend beyond September 2016.

See Commission Implementing Regulation (EU) 2017/1480 of August 16, 2017 imposing a provisional anti-dumping duty on imports of certain cast iron articles originating in the People's Republic of China, 2017 O.J. (L211) 14. Also see Commission Implementing Regulation (EU) 2017/1444 of August 9, 2017 imposing a provisional anti-dumping duty on imports of certain corrosion resistant steels originating in the People's Republic of China, 2017 O.J. (L207) 1. 82 European Commission Press Release IP/16/3475, Commission urges Member States to Support Proposals to Strengthen European Defences Against Unfair Trade (Oct. 19, 2016). 83 European Parliament, Protection from dumped and subsidised imports, EU Legislation in Progress Briefing (Nov. 10, 2017), at 6, http://www.europarl.europa.eu/RegData/etudes/BRIE/ 2017/595905/EPRS_BRI%282017%29595905_EN.pdf; See Regulation (EU) 2017/2321 of the European Parliament and of the Council of 12 December 2017 amending Regulation (EU) 2016/ 1036 on protection against dumped imports from countries not members of the European Union and Regulation (EU) 2016/1037 on protection against subsidised imports from countries not members of the European Union, 2017 O.J. (L388) 1, art. 1(1) [hereinafter EU NME Amendment]. 84 The approach differs from the existing ‘cost adjustment methodology’ applied to market economies in Preparation of the proposal The changes the proposal would bring EPRS Protection from dumped and subsidised imports Background Proposal Views Legislative process References ‘particular market situations’, such as the Russian gas sector under Article 2(5) of the AD regulation in terms of the extent and pervasiveness of the market distortions to be captured. European Parliament, Protection from dumped and subsidised imports, id.

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value of products from market economies due to a ‘particular market situation’, which has been frequently employed by the EU in the AD investigations against imports from former NMEs like Russia and Ukraine.85 In particular, it was used to construct a normal value for inputs provided by a state if it was considered that they had not been purchased in the ordinary course of trade.86 Russia has contested the EU’s practice of disregarding its in-country prices before the WTO.87 Further, in the recent ruling in the EU—Biodiesel case,88 which involved the same technique, the Appellate Body concluded that the EU acted inconsistently with the WTO law by disregarding the costs of Argentina’s producers because domestic prices of raw material were artificially low due to the state interventions. Interpreting Article 2.2 WTO AD Agreement, the Appellate Body did not rule out the use of out-of-country prices, it held however that such prices must be adapted to arrive at the cost of production in the country of origin.89 In the light of this decision, the WTO-compliance of the new method proposed under the legislative reform, which continues to disregard domestic prices in constructing a normal value, remains questionable.90 In addition, China’s WTO complaint against the EU for continuing to treat it as a NME, launched on 12 December 2016, also extends to

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See Council Regulation (EC) No 661/2008 of 8 July 2008 imposing a definitive anti-dumping duty on imports of ammonium nitrate originating in Russia following an expiry review pursuant to Article 11(2) and a partial interim review pursuant to Article 11(3) of Regulation (EC) No 384/96, 2008 O.J. (L185) 1, ¶59. Council Regulation (EC) No 1256/2008 of 16 December 2008 imposing a definitive anti-dumping duty on imports of certain welded tubes and pipes of iron or non-alloy steel originating in Belarus, the People's Republic of China and Russia following a proceeding pursuant to Article 5 of Regulation (EC) No 384/96, originating in Thailand following an expiry review pursuant to Article 11(2) of the same Regulation, originating in Ukraine following an expiry review pursuant to Article 11(2) and an interim review pursuant to Article 11(3) of the same Regulation, and terminating the proceedings in respect of imports of the same product originating in Bosnia and Herzegovina and Turkey, 2008 O.J. (L343) 1, ¶111. See also Jochem de Kok, The Future of EU Trade Defence Investigations against Imports from China, 19 J. INT’L ECON. L. 515, 517 (2016). Anne McGregor & Arnoud Willems, Russia recognised as a “market economy country” in EC anti-dumping legislation: an overview of the 2002 amendments to Regulation 384/ 96, 9(1) INT. TRADE L. REV. 29 (2003). Vermulst & Gatta, supra note 51, at 539. 86 Vermulst & Gatta, supra note 51, at 539. 87 Request for consultations by Russia, European Union — Cost Adjustment Methodologies and Certain Anti-Dumping Measures on Imports from Russia, WTO Doc. WT/DS474 (Dec. 23, 2013). Request for consultations by Russia, European Union — Cost Adjustment Methodologies and Certain Anti-Dumping Measures on Imports from Russia (Second complaint), WTO Doc. WT/ DS494 (May 7, 2015). The disputes have not progressed beyond consultation stage. 88 Appellate Body Report, European Union — Anti-Dumping Measures on Biodiesel from Argentina, WTO Doc. WT/DS473/AB/R (adopted October 6, 2016) [hereinafter EU — Biodiesel (AB Report)]; Kok, supra note 85, at 517. 89 EU — Biodiesel (AB Report), id., ¶6.82. 90 Kok, supra note 85.

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“any modification, replacement or amendment to the measures identified above, and any closely connected, subsequent measures” and explicitly refers to the proposed reform.91 Given that the new EU methodology, which seems to be built on Article 2.2 WTO AD Agreement, will continue to rely on the out-of-country prices to make adjustments to normal value, it will essentially produce results comparable to the NME method, including the inflated dumping margin which is ‘likely’ to offset domestic subsidies benefiting exporters. Thus, when combined with AS proceedings, it may still produce double remedy effect. It has also been observed that the problem of double counting is not exclusively reserved for proceedings based on the NME methodology. The market economy methodologies which employ surrogate country prices can as well result in an excessive remedy.92 Double remedy arose, for example, in the case of the EU parallel investigations against biodiesel from the US where the essentially unsubsidised normal value was compared to the subsidised export price under the constructed normal value method in the AD proceedings.93 The calculated ADD was combined with the CVD set at the level equal to the full amount of the investigated subsidy without any adjustments.94 In fact, the Appellate Body in the US—AD and CVD report observed that [d]ouble remedies may also arise in the context of domestic subsidies granted within market economies when anti-dumping and countervailing duties are concurrently imposed on the same products and an unsubsidized, constructed, or third country normal value is used in the anti-dumping investigation.95

It can thus be argued that double remedy is likely to arise when the surrogate data is used to determine a normal value and it is not necessarily restricted to the NME cases.96 The findings in US—AD and CVD case concerning the necessary adjustments to cumulative duties can be essentially translated to other methods for the calculation of a normal value provided under the WTO AD Agreement. Given the Appellate Body’s broad interpretation of the term ‘appropriate amount’ of CVD prescribed under the SCM Agreement, there is a potential for future claims of double remedies even in cases not involving the NME methodology. Following prohibition of double counting under the NME technique, it appears unlikely that

91 Request for consultations by China, European Union — Measures Related to Price Comparison Methodologies, WTO Doc. WT/DS516 (Dec. 12, 2016), ¶11. 92 Brian D. Kelly, Market economies and concurrent antidumping and countervailing duty remedies, 17 J. INT’L ECON. L. 105 (2014). 93 Council Regulation 599/2009 of 7 July 2009 imposing a definitive anti-dumping duty and collecting definitively the provisional duty imposed on imports of biodiesel originating in the United States of America, 2009 O.J. (L179) 26, ¶ 52–53 [hereinafter EU Biodiesel AD Decision]. 94 Council Regulation No 598/2009 of July 7, 2009 on imposing a definitive countervailing duty and collecting definitely the provisional duty imposed on imports of biodiesel originating in the United States of America, 2009 O.J. (L179) 1, ¶195; EU Biodiesel AD Decision, id., ¶47. 95 US — Definitive AD and CVD (AB Report), supra note 12, ¶543. 96 Kelly, supra note 92, at 119.

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the WTO would allow double remedies to arise under the market economy methods for calculating a normal value.97 The double remedy risk is further aggravated by the fact that another major aspect of the EU modernisation envisages the abolition of the systematic application of the lesser duty rule. The EU intends not to apply the lesser duty in cases where exporters benefit from raw material distortions, dual pricing or export taxes or it is deemed to be “in the Union’s interest”.98 Considering subsidies as particularly distortive of trade, the lesser duty rule will also not apply in AS investigations.99 Given that the lesser duty principle is currently being invoked by the EU to argue that the parallel AD and CVD proceedings comply with the WTO law and do not create double counting, its elimination from the domestic legislation entails that the Commission will have to engage in a more thorough analysis to establish that double remedy does not occur in its investigations. In the words of the Appellate Body, it will be under an “affirmative obligation to establish the appropriate amount of the duty under Article 19.3 [in order to determine] whether and to what degree the same subsidies are being offset twice when anti-dumping and countervailing duties are simultaneously imposed on the same imported products.”100 As demonstrated by the US practice, the identification of necessary adjustments and the extent to which specific subsidies are offset under both dumping and subsidy margin is far from straightforward.101 The reform is also aimed at strengthening the EU AS law to target exports benefiting from trade-distorting subsidies. Specifically, the proposal indicates that the new legislation will allow to counter subsidies discovered in the course of an investigation, and not only those specified in an initial complaint.102 Further, it will use to the full advantage the existing methods provided under AS law.103

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Prusa, supra note 23, at 629. European Parliament, Committee on International Trade, Provisional agreement resulting from interinstitutional negotiations, Proposal for a regulation of the European Parliament and of the Council amending Council Regulation (EC) No 1225/2009 on protection against dumped imports from countries not members of the European Community and Council Regulation (EC) No 597/ 2009 on protection against subsidised imports from countries not members of the European Community, COM (2018) 192 final (Jan. 10, 2018) 12. 99 Id., at 30. 100 US — Definitive AD and CVD (AB Report), supra note 12, ¶602. 101 Preliminary Determination of Adjustments to the Antidumping Duty Cash Deposit Rates: Section 129 Proceeding Pursuant to the WTO Appellate Body’s Findings in WTO DS379 Regarding the Antidumping Duty Investigation of Circular Welded Carbon Quality Steel Pipe (CWP) from the People’s Republic of China, Memorandum (U.S. Dep’t Com., May 31, 2012) (prelim. determ.). 102 EU NME Amendment, supra note 83, art.2. 103 Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 2016/1036 on protection against dumped imports from countries not members of the European Union and Regulation (EU) 2016/1037 on protection against subsidised imports from countries not members of the European Union COM (2016) 721 final (Nov., 9, 2016), Explanatory Memorandum, ¶1.2. 98

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The proposed modernisation of the AS law signifies the EU’s growing attention to CVD measures, and consequently, forecasts an increase in the parallel investigations in the future. In view of the US position to maintain NME status for Chinese imports and the described reform of the EU TDIs, the issue of double remedy is unlikely to disappear, despite the expiry of the NME provisions of the Chinese WTO Accession Protocol and the upcoming termination of the relevant articles in Vietnam’s Protocol. In particular, the EU approach to imposing cumulative ADD and CVD has not been yet scrutinised by the WTO DSB. In addition, the proposed new methodology, which continues to disregard exporter’s data in AD investigations and abolishes systemic application of the lesser duty rule, when combined with the parallel AS proceedings can increase the risk of excessive remedy. Consequently, the issue of double remedy can be expected to remain equally relevant in the near future.

6 Conclusion Double remedy is a situation which commonly occurs from the simultaneous imposition of ADD and CVD on the same product. The problem hinges on the application of a surrogate country benchmarking for the calculation of a normal value in AD investigations—a methodology which is used predominantly against imports from NMEs. The WTO legality of double counting in case of domestic subsidies has been a contentious issue over the years until the recent decision in the US—AD and CVD case. The Appellate Body findings clarified that cumulative duties which result in double remedy are not permitted under the SCM Agreement, thus rendering parallel investigations more difficult for importing countries. The investigating authorities are under the obligation to make necessary adjustment to ensure that the same situation of subsidisation is not offset twice under ADD and CVD. As a result, the US introduced an amendment to its domestic legislation which requires the investigating authority to reduce ADD to the extent the coutervailable subsidy inflated the dumping margin. However, the practice has been criticised for limiting the adjustment to the dumping margin mainly to the value of raw materials and additional input provided by the state and ignoring other types of subsidies. The EU, on the other hand, defended its practice of parallel AD and CVD investigations against imports from NME arguing that the double counting is avoided because the final measures were calculated in accordance with the lesser duty principle and the sum of both types of duties was limited by the injury margin. However, this position has not been yet examined by the WTO DSB. Although the Appellate Body has scrutinised only the NME methodology, its broad findings are equally applicable to other techniques for the calculation of normal value which are likely to produce a double remedy effect when combined with parallel CVD investigation. Specifically, Article 2.2 of the WTO AD Agreement which, in particular circumstances, authorizes importing countries to disregard exporter’s

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domestic prices as the basis for calculating normal value, will probably become more relevant for importing countries which can no longer treat China as NME. The investigating authorities are likely to interpret Article 2.2 AD Agreement creatively in order to establish new methodologies to allow the use of out-of-country data for the calculation of normal value for Chinese imports. Such new techniques resulting in inflated dumping margin, when combined with cumulative CVD, can also lead to excessive remedy. As a result, the problem of double counting is not expected to become entirely irrelevant following the expiry of the NME dumping provisions of China’s and Vietnam’s Protocols of Accession. In particular, the review of the Chinese economy, recently concluded by the USDOC, found that the country does not operate sufficiently on market principles in order to permit the use of its prices and costs for the purposes of AD analysis. The review determined that due to the significant distortions and government’s control over Chinese economy the US investigating authority will continue to apply the NME method to determine a normal value in AD investigations against Chinese imports. The US repeated its legal analysis rejecting China’s claim for market economy status in its third party submission in the WTO dispute initiated by China against the EU for continuing to treat it as a NME. Moreover, the EU reform of its TDI, in addition to abolishing the lesser duty rule, envisages a system which essentially preserves the main features of the original NME methodology. Specifically, the proposed modernisation of AD rules permits investigating authority, due to market distortions in exporting country, to disregard exporter’s costs and prices when constructing a normal value. Finally, the use of simultaneous ADD and CVD against China and Vietnam is likely to increase, especially once these countries are no longer treated as NMEs. In the light of these developments, it appears that the problem of double remedy is not going to disappear in the near future. The decision in US—AD and CVD could have just heralded the new saga of double remedy cases in the WTO dispute resolution history.

External Benchmark Choices in Anti-dumping and Countervailing Duty Proceedings: A Battle of ‘Proxies’? Mukesh Bhatnagar, Pallavi Arora and Isha Das

Abstract The use of external benchmark prices, in the determination of ‘dumping’ under the Anti-Dumping Agreement and ‘benefit’ under the SCM Agreement, is one of the most controversial topics in trade remedy jurisprudence today. The Appellate Body Report in EU—Biodiesel (Argentina) and the Panel Report in EU—Biodiesel (Indonesia) provide some useful indications for employing an external benchmark for constructing the normal value in an anti-dumping investigation. In relation to the SCM Agreement, reliance may be placed on the Appellate Body Reports in US—Softwood Lumber IV, US—Carbon Steel (India) and US—Countervailing Measures (China). These disputes provide circumstances in which departure from the prevailing in-country prices approach could be made during the subsidies and countervailing duty calculations. This chapter aims to analyse the use of external benchmarks in the calculation of ‘dumping’ under the Anti-Dumping Agreement and ‘benefit’ under the SCM Agreement—especially in the context of the expiry of Section 15(a)(ii) of the China’s Protocol of Accession to the World Trade Organization (2001).




Keywords External benchmarks Normal value construction nation EU—biodiesel Countervailing duty








Benefit determi-

M. Bhatnagar
P. Arora (&) Centre for WTO Studies, Indian Institute of Foreign Trade, New Delhi, India e-mail: [email protected] M. Bhatnagar e-mail: [email protected] I. Das Amity Law School, Guru Gobind Singh Indraprastha University, New Delhi, India e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2018 J. J. Nedumpara and W. Zhou (eds.), Non-market Economies in the Global Trading System, https://doi.org/10.1007/978-981-13-1331-8_6

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1 Introduction In an anti-dumping investigation, investigating authorities (“IAs”) principally determine the normal value of the exported goods on the basis of the home market sale price of a like product in the exporting country.1 However, an IA may adopt a different methodology when: (i) there are no sales of the like product in the ordinary course of trade in the exporting country; or (ii) the home market sales do not permit a proper comparison because of a particular market situation or low volume of sales.2 In such situations, an IA can construct the normal value on the basis of the “comparable price of the like product when exported to an appropriate third country… or on the basis of the cost of production in the country of origin, plus a reasonable amount for administrative, selling and general costs [S, G & A] and for profits”.3 Constructing the normal value on the basis of the cost of production plus S, G & A and profits is a commonly used methodology.4 However, when resorting to the same, IAs are confronted with the issue of reasonableness of the cost of inputs that go into the manufacture of the finished product, which is the subject matter of investigation.5 On certain occasions, IAs may not rely on the cost of the principal input, as reflected in the records of the exporter or producer under investigation, but adopt instead an alternative benchmark price.6 IAs do so when the records of the exporter or producer do not reflect the real market price of that input. The recorded costs could be distorted, if the exporting country’s government supplies the input at a preferential price, which is not market determined, or suppresses the input cost to ensure its availability in the country of export—for example, through the levy of export taxes on the input.7 In order to address the issue of government induced market distortions, IAs use an external benchmark for constructing the normal value of exports. For instance, the Indian authorities had substituted the cost of the main raw material in the

1

Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1869 U.N.T.S. 201 (1994), art. 2.1 [hereinafter Anti-Dumping Agreement]. 2 Id., art. 2.2. 3 Id., art. 2.2. 4 See Edwin A. Vermulst, The WTO Anti-Dumping Agreement: A Commentary 5 (Oxford University Press, 2005). 5 See generally, Mikyung Yun, The Use of “Particular Market Situation” Provision and its Implications for Regulation of Anti-Dumping, 21(3) East Asian Econ. Rev. 231, 238–242 (2017). 6 Id. 7 Id., at 231, 238–242.

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anti-dumping investigation concerning polypropylene exports from Saudi Arabia on account of dual pricing.8 An external benchmark was also resorted to by the EU in the anti-dumping investigation concerning biodiesel from Argentina and Indonesia.9 The EU authorities had constructed the cost of production of biodiesel by using the international prices of soybeans, as opposed to the costs recorded by the domestic exporters or producers. The EU authorities did so with a view to offset the market distortion caused by the Differential Export Tax (“DET”) levied by the Argentine and Indonesian governments.10 The use of external benchmarks in the context of anti-dumping has been upheld by the Appellate Body in EU—Biodiesel (Argentina)11 and later by the Panel in EU—Biodiesel (Indonesia).12 However, a DET was held not to be egregious enough market distortion to merit the use of an external benchmark.13 IAs have also resorted to an external benchmark in countervailing duty investigations, when determining the ‘adequacy of remuneration’ for calculating the amount of benefit. The use of external benchmarks in the context of the Agreement on Subsidies and Countervailing Measures (1994) (for short “SCM Agreement”)14 has been upheld by the Appellate Body in US—Softwood Lumber IV.15 Further, in US—Carbon Steel (India)16 and US—Countervailing Measures (China), 17 the

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Directorate General of Anti-Dumping and Allied Duties, Anti-Dumping Investigation concerning Imports of Polypropylene Originating in or Exported from Oman, Saudi Arabia and Singapore – Final Findings, No. 14/5/2009-DGAD ((Ministry of Com. & Indus., May 14, 2009)(final finding) [hereinafter Polypropylene Decision]. 9 See generally, Panel Report, European Union — Anti-Dumping Measures on Biodiesel from Indonesia, WTO Doc. WT/DS480/6 (adopted Feb., 28, 2018) [hereinafter EU — Biodiesel from Indonesia (Panel Report)]; Appellate Body Report, European Union — Anti-Dumping Measures on Biodiesel from Argentina, WTO Doc. WT/DS473/AB/R (adopted Oct. 6, 2016) [hereinafter EU — Biodiesel from Argentina (AB Report)]. 10 See EU — Biodiesel from Argentina (AB Report), supra note 9, ¶ 5.5; EU — Biodiesel from Indonesia (Panel Report), supra note 9, ¶ 7.13. 11 EU — Biodiesel from Argentina (AB Report), supra note 9. 12 Id. 13 See Id., ¶ 6.56; EU — Biodiesel from Indonesia (Panel Report), supra note 9, ¶ 7.33. 14 Agreement on Subsidies and Countervailing Measures, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1869 U.N.T.S. 14 [hereinafter SCM Agreement]. 15 Appellate Body Report, United States — Final Countervailing Duty Determination with respect to Certain Softwood Lumber from Canada, WTO Doc. WT/DS257/AB/R (adopted Feb. 17, 2004) [hereinafter US — Softwood Lumber (AB Report)]. 16 Appellate Body Report, United States — Countervailing Measures on Certain Hot-Rolled Carbon Steel Flat Products from India, WTO Doc. WT/DS436/AB/R (adopted Dec. 19, 2014) [hereinafter US – Carbon Steel (AB Report)]. 17 Appellate Body Report, United States — Countervailing Duty Measures on Certain Products from China, WTO Doc. No. WT/DS437/AB/R (adopted Dec. 18, 2014) [hereinafter US — Countervailing Measures (China) (AB Report)].

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Appellate Body comprehensively discussed the conditions that merit the use of an external benchmark in a countervailing duty investigation, and concluded that the facts of the said cases did not justify reliance on an external benchmark. An external benchmark was also resorted to by the EU authorities in the countervailing duty investigation concerning the imports of ductile cast iron pipes from India.18 Benchmark determination in anti-dumping and countervailing duty proceedings is one of the most controversial areas of the WTO trade remedy jurisprudence. The approach of the WTO’s Appellate Body and Panel has been to allow IAs a greater flexibility in using an external benchmark in a countervailing duty investigation, as compared to an anti-dumping investigation. This chapter examines whether the constricted approach of the Appellate Body and Panel in using an external benchmark in anti-dumping investigations, would debilitate IAs from effectively addressing instances of market distortions in exporting countries. This query is particularly relevant in the context of the expiry of Section 15(a) (ii) of China’s Accession Protocol to the World Trade Organization (2001) (for short “Accession Protocol”)19 on 11 December 2016. Most trade lawyers endorse the view that in anti-dumping investigations henceforth, IAs would be precluded from finding a special legal basis in Section 15 of the Accession Protocol for employing Non-Market Economy (“NME”) methodologies to construct the normal value of Chinese exports.20 IAs will now have to rely exclusively on the provisions of the Anti-Dumping Agreement when investigating exports from China.21 In light of the findings in EU—Biodiesel, this chapter analyses whether the practice of employing surrogate country prices to construct the normal value of Chinese exports would be compatible with the Anti-Dumping Agreement.

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Commission Implementing Regulation (EU) 2016/387 of 17 March 2016 Imposing a Definitive Countervailing Duty on Import of Tubes and Pipes of Ductile Cast Iron (also known as Spheroid Graphite Cast Iron) originating in India, 2016 O.J. (L 73) 1 [hereinafter Tubes CVD Decision]. 19 Protocol on the Accession of the People’s Republic of China, WTO Doc. WT/L/432 (Nov. 23, 2001). 20 See, eg, Minyou Yu and Jian Guan, The Non-Market Economy Methodology shall be Terminated after 2016, 12(1), Global Trade & Customs J. 16, 16–24 (2017); Li Zhenghao, Interpreting Paragraph 15 of China’s Accession Protocol in Light of the Working Party Report, 11(5), Global Trade & Customs J. 229, 229–237 (2016); Stephanie Noel, Why the European Union Must Dump So-called ‘Non-Market Economy’ Methodologies and Adjustments in Its Anti-Dumping Investigations, 11(7/8) Global Trade & Customs J. 296, 296–305 (2016). 21 See generally Edwin Vermulst, Juhi Dion Sud and Simon J. Evenett, Normal Value in AntiDumping Proceeding against China Post-2016: Are Some Animals Less Equal than Others? 11(5) Global Trade & Customs J. 212, 212–225 (2016); Weihuan Zhou and Andrew Percival, Debunking the Myth of ‘Particular Market Situation’ in WTO Anti-Dumping Law, 19(4) J. Int’l. Econ. Law, 863, 871–884 (2016).

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2 Use of an External Benchmark in Countervailing Duty Investigations IAs have resorted to an external benchmark when determining the “adequacy of remuneration” for calculating the amount of benefit under Article 14 of the SCM Agreement. The Appellate Body has allowed this practice in US—Softwood Lumber IV, US—Carbon Steel (India) and US—Countervailing Measures (China). In fact, Article 14(d) of the SCM Agreement has been interpreted by the Appellate Body in a manner that allows an IA ample flexibility to choose an external benchmark to address government induced market distortions.

2.1

US—Softwood Lumber IV

The measure at issue in US—Softwood Lumber IV was the imposition of a countervailing duty by United States Department of Commerce (“USDOC”) in respect of softwood lumber from Canada. The Canadian government had put in place certain stumpage programmes, which conferred a right upon lumber producers to harvest lumber at less than adequate remuneration.22 The USDOC contended that this amounted to a ‘financial contribution’ in the form of a provision of goods by the government,23 which conferred a ‘benefit,’24 and was ‘specific’ to the lumber industry of Canada.25 According to the USDOC, this was an actionable subsidy under the SCM Agreement, and was accordingly countervailable.26 On the issue of ‘benefit’, the USDOC stated that the Canadian government conferred a ‘benefit’ upon its domestic lumber industry, by providing them with stumpage at less than adequate remuneration. For calculating the amount of ‘benefit’ under Article 14(d) of the SCM Agreement, the USDOC had to determine the adequacy of remuneration of the Canadian stumpage programmes in relation to the prevailing market conditions for stumpage in Canada. The USDOC did not use the private stumpage prices in Canada as the benchmark for the above comparison.27 According to the USDOC, the private stumpage prices in Canada were not market-determined but distorted due the government’s stumpage programmes.28 Thus, the USDOC used as a benchmark, the prices of stumpage in certain bordering

US — Softwood Lumber (AB Report), supra note 15, ¶ 2. SCM Agreement, supra note 14, Article 1.1(a)(1)(iii). 24 SCM Agreement, supra note 14, Article 1.1(b). 25 US — Softwood Lumber (AB Report), supra note 15, ¶ 2. 26 Id., ¶ 3. 27 Id., ¶ 15. 28 Id., ¶ 2. 22 23

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states in northern USA, making adjustments purportedly to reflect the Canadian market conditions.29 The Panel held that the use of an external benchmark by the USDOC was inconsistent with USA’s obligations under Article 14 and 14(d) of the SCM Agreement.30 However, the Appellate Body reversed the finding of the Panel in this regard.31 The foremost question before the Appellate Body was whether an IA can resort to a benchmark other than in-country prices under Article 14(d) of the SCM Agreement.32 In answering this question, the Appellate Body analysed the chapeau to Article 14 and Article 14(d) in detail. Article 14 of the SCM Agreement provides: For the purpose of Part V, any method used by the investigating authority to calculate the benefit to the recipient conferred pursuant to paragraph 1 of Article 1 shall be provided for in the national legislation or implementing regulations of the Member concerned and its application to each particular case shall be transparent and adequately explained. Furthermore, any such method shall be consistent with the following guidelines: … d) The provision of goods or services or purchase of goods by a government shall not be considered as conferring a benefit unless the provision is made for less than adequate remuneration, or the purchase is made for more than adequate remuneration. The adequacy of remuneration shall be determined in relation to prevailing market conditions for the good or service in question in the country of provision or purchase (including price, quality, marketability, transportation and other conditions of purchase or sale) (emphasis added).

According to the Appellate Body, the use of the phrase “prevailing market conditions … in the country of provision” under Article 14(d), does not mean that private prices in the market in which the subsidy is provided are the exclusive benchmark.33 Rather, an alternative benchmark which is more closely connected with the market conditions prevailing in the country of provision can be used. The Appellate Body reasoned that under Article 14(d), the adequacy of remuneration has to be determined by comparing the prices of the subsidized good or service “in relation to” the prevailing market conditions in the country of provision.34 The phrase “in relation to” is similar in meaning to phrases like “as regards” and “with respect to”.35 Thus, it does not require a rigid comparison with the prevailing market conditions in the country of provision, as proposed by the Panel.36 Id., ¶ 77. Panel Report, United States – Final Countervailing Duty Determination with respect to Certain Softwood Lumber from Canada, ¶¶ 7.64 and 7.65, WTO Doc. WT/DS257/R (adopted Feb. 17, 2003). 31 US — Softwood Lumber (AB Report), supra note 15, ¶ 157. 32 Id., ¶¶ 82–96. 33 Id., ¶ 97. 34 Id., ¶ 89. 35 Id., ¶ 89. 36 Id., ¶ 89. 29 30

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The Appellate Body noted that, Thus, the use of the phrase “in relation to” in Article 14(d) suggests that, contrary to the Panel’s understanding, the drafters did not intend to exclude any possibility of using as a benchmark something other than private prices in the market of the country of provision. This is not to say, however, that private prices in the market of provision may be disregarded. Rather, it must be demonstrated that, based on the facts of the case, the benchmark chosen relates or refers to, or is connected with, the conditions prevailing in the market of the country of provision.37

The Appellate Body further observed that, Although Article 14(d) does not dictate that private prices are to be used as the exclusive benchmark in all situations, it does emphasize by its terms that prices of similar goods sold by private suppliers in the country of provision are the primary benchmark that investigating authorities must use when determining whether goods have been provided by a government for less than adequate remuneration… This approach reflects the fact that private prices in the market of provision will generally represent an appropriate measure of the “adequacy of remuneration” for the provision of goods. However, this may not always be the case … investigating authorities may use a benchmark other than private prices in the country of provision under Article14(d), if it is first established that private prices in that country are distorted because of the government’s predominant role in providing those goods.38

The Appellate Body also reasoned that the Panel’s restrictive interpretation of Article 14(d) was not consistent with Article 31 of the Vienna Convention on the Law of Treaties (1969),39 because it frustrated the object and purpose of the SCM Agreement.40 According to the Appellate Body, if the private prices are artificially low, then the resultant amount of ‘benefit’ arrived at would also be “artificially low or even zero”.41 In such a situation, the IA would not be able to determine the appropriate amount of countervailing duty, to fully offset the effect of the subsidy.42 Upholding the US argument, the Appellate Body stated that the Panel’s interpretation of Article 14(d) conflicts with the concept of ‘benefit’ under Article 1.1 (b) of the SCM Agreement. The Appellate Body in Canada—Aircraft43 had held that a financial contribution confers a benefit under Article 1.1 (b) if the “‘financial contribution’ makes the recipient ‘better off’ than it would otherwise have been, absent that contribution”.44 The Appellate Body was of the opinion that if the comparison under Article 14(d) is made with artificially depressed private prices,

Id., ¶ 89. Id., ¶ 90. 39 Vienna Convention on the Law of Treaties, May 23, 1969, 1155 U.N.T.S. 331. 40 US — Softwood Lumber (AB Report), supra note 15, ¶ 95. 41 Id., ¶ 95. 42 Id., ¶ 95. 43 Appellate Body Report, Canada — Measures Affecting the Export of Civilian Aircraft, WTO Doc. WT/DS70/AB/R (adopted Aug. 20, 1999). 44 Id., ¶ 157. 37 38

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then “there is no way of telling whether the recipient is “better off” absent the financial contribution”.45 For the above reasons, among others, the Appellate Body allowed a deviation from the choice of private prices in the country of provision and allowed the use of alternative benchmarks. Another question before the Appellate Body was whether an alternative benchmark under Article 14(d) could include proxies that take into account prices for similar goods quoted on world markets; in other words, an external benchmark.46 The Appellate Body affirmed that an external benchmark could be resorted to, provided that it “relates or refers to, or is connected with, prevailing market conditions in the country of provision, and must reflect price, quality, availability, marketability, transportation and other conditions of purchase or sale, as required by Article 14(d)”.47 Thus, the Appellate Body held that an out-of-country price could be a legitimate proxy for determining the adequacy of remuneration under Article 14(d). However, a precondition for the use of an out-of-country price is that it be adequately adjusted to reflect the prevailing market conditions in the country of provision.48 The Appellate Body identified three situations where an IA could reject the private prices in the country of provision. Firstly, where the government is the only supplier of the particular good or service.49 Secondly, where the government administratively controls all of the prices for those goods in the country.50

US — Softwood Lumber (AB Report), supra note 15, ¶ 93. Id., ¶¶ 104–107. 47 Id., ¶¶ 106. 48 This has also been upheld in US — Carbon Steel (AB Report), supra note 16, ¶ 4.184. The Appellate Body held that the second sentence of Article 14(d) of the SCM Agreement allows IAs to use any appropriate benchmark- private prices, government prices or international prices- to arrive at prices that reflect prevailing market conditions in the country of provision. For these purposes, in-country prices may be used only as a starting point for determining a benchmark. Furthermore, a combination of in-country government and private prices may also be used. 49 US — Softwood Lumber (AB Report), supra note 15, ¶ 98. Recalling the Appellate Body’s statement in US —Carbon Steel (AB Report), supra note 16, that a government, in its role as a provider of a good, may distort in-country prices by setting an artificially low price, the Appellate Body in US – Countervailing Measures (China) explained: 45 46

In such circumstances, those prices cannot be said to be market determined. We emphasize that the ability of a government provider to have such an influence on in-country private prices presupposes that it has sufficient market power to do so. The Appellate Body explained that, in such a situation, ‘the government’s role in providing the financial contribution [may be] so predominant that it effectively determines the price at which private suppliers sell the same or similar goods, so that the comparison contemplated by Article 14 would become circular.’ Because this would lead to a calculation of benefit that is artificially low, or even zero, the right of Members to countervail subsidies could be undermined or circumvented in such a scenario. US — Countervailing Measures (China) (AB Report), supra note 17, ¶ 4.50. US — Softwood Lumber (AB Report), supra note 15, ¶ 98.

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Thirdly, where the government is the predominant supplier of the same or similar goods in the country of provision, provided that on account of the predominant role of the government, the private suppliers have no option but to align their prices with those of the government-provided goods.51 The resultant private prices may be artificially depressed “to the point where there may be little difference, if any, between the government price and the private prices”.52 According to the Appellate Body, the resultant comparison under Article 14(d) “would indicate a “benefit” that is artificially low, or even zero, such that the full extent of the subsidy would not be captured… As a result, the subsidy could be undermined or circumvented when the government is the predominant provider of certain goods”.53 Accordingly, the Appellate Body concluded that the USDOC was justified in relying on an alternative benchmark since the Canadian government being the predominant provider of stumpage, had distorted the private stumpage prices in Canada.

2.2

US—Carbon Steel (India)

In US—Carbon Steel (India), India challenged the countervailing duties levied by the US on certain hot rolled carbon steel flat products (for short “carbon steel”) from India. First, India brought claims against certain provisions of the United States Tariff Act, 1930 (for short “US Tariff Act”) and the United States Code of Federal Regulations (for short “US Regulations”),54 for being inconsistent “as such” with the SCM Agreement. Second, India raised “as applied” claims, relating to the application of the US Tariff Act and the US Regulations in the context of the original countervailing duty investigation and subsequent reviews.55 The Panel concluded that the USDOC had acted inconsistently with certain provisions of the SCM Agreement.56 Both India and the US went in appeal against certain issues of law and legal interpretation in the Panel Report. The findings of

Id., ¶ 100. Id., ¶ 100. 53 Id., ¶ 100. 54 19 C.F.R. § 351.511(a)(2)(i)-(iv) and 351.308. 55 The difference between “as such” and “as applied” claims was explained by the Appellate Body in EU —Biodiesel (Argentina) as follows: 51 52

[A] claim that a measure is inconsistent ‘as such’ challenges a measure of a Member that has general and prospective application [such as a law or regulation], whereas a claim that a measure is inconsistent “as applied” challenges one or more specific instances of the application of such a measure. EU — Biodiesel from Argentina (AB Report), supra note 9, ¶ 6.154. Panel Report, United States – Countervailing Measures on Certain Hot-Rolled Carbon Steel Flat Products from India, WTO Doc. WT/DS436/R (adopted Dec. 19, 2014).

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Appellate Body, inter alia, provide a critical understanding on the issue of benefit determination and the choice of external benchmarks. With respect to India’s claim that Section 351.511(a)(2)(ii) of the US Regulations, setting forth the US benchmarking mechanism for calculating benefit, was “as such” inconsistent with Article 14(d) of the SCM Agreement, the Appellate Body made the following determinations: First, India claimed that Section 351.511(a)(2)(i) of the US benchmarking system was “as such” inconsistent with Article 14(d) of the SCM Agreement because it excluded the use of government prices as benchmarks.57 India argued that the provision of goods by a government is not to be considered as conferring a benefit ipso facto, unless proved otherwise.58 The Appellate Body disagreed with the Panel to the extent it suggested that IAs could, at the outset, discard all prices of government-related entities in a benchmark analysis.59 According to the Appellate Body, IAs cannot presumptively reject government-related prices as relevant benchmarks. Thus, under Section 351.511(a)(2)(i), the USDOC was required to consider in its benchmark analysis, all market-determined prices in the country of provision for the good in question, including such “prices of government-related entities, other than the entity providing financial contribution”.60 Second, India claimed that Section 351.511(a)(2)(i) of the US Regulations is “as such” inconsistent with Article 14(d) of the SCM Agreement because it permits the use of out-country benchmarks in situations in which the government is not the predominant provider of the good in question.61 India relied on US—Softwood Lumber IV to argue that an IA could rely on external benchmarks in a countervailing duty investigation only in three situations—namely where: (i) the government is the sole supplier of a good or service; (ii) the government administratively controls the prices; and (iii) the government is the predominant supplier of a good or service; provided that on account of the predominant role of the government, the private suppliers have no option but to align their prices with those of the government-provided goods.62 India also relied on US—Anti-dumping and Countervailing Duties (China), wherein the Appellate Body had restricted the ability of IAs to depend on benchmarks other than private prices “when it has been established that such private prices are distorted due to predominant role of government as the provider of same or similar goods”.63 The Appellate Body rejected India’s claim. The Appellate Body explained that the three circumstances envisaged in US—Softwood Lumber IV were not exhaustive, and catered to the facts and

US — Carbon Steel (AB Report), supra note 16, ¶¶ 4.162 and 4.163. Id., ¶¶ 4.162 and 4.163. 59 Id., ¶¶ 4.168 – 4.173. 60 Id., ¶ 4.168. 61 Id., ¶¶ 4.179 and 4.180. 62 Id., ¶ 4.180. 63 Appellate Body Report, United States — Definitive Anti-Dumping and Countervailing Duties on Certain Products from China, ¶ 439, WTO Doc. No. WT/DS379/AB/R (adopted Mar. 11, 2011). 57 58

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circumstances of that case, as those were the only grounds appealed.64 The Appellate Body interpreted Article 14(d) generally to state that there could be other circumstances in which such external benchmarks could be used—such as when the information regarding in-country prices is not verified to corroborate whether they were market determined or not.65 Hence, the Appellate Body extended the power of the IAs to take recourse to external benchmarks in situations other than when there is a distortion of prices due to government intervention.66 However, the Appellate Body added a caveat—before using an external benchmark, an IA must demonstrate that the in-country prices do not reflect the “prevailing market conditions” in the country of provision, and the out-of-country benchmarks used must be adequately adjusted to ensure that they reflect the prevailing market conditions in the country of provision.67 Third, India argued that the use of “as delivered” benchmarks under Section 351.511(a)(2)(iv) of the US Regulations was “as such” inconsistent with Article 14(d).68 India contended that the use of “as delivered” prices did not require that the said prices be adjusted to reflect delivery charges that approximate the generally applicable delivery charges in the country of provision.69 The Appellate Body rejected India’s claim and upheld the Panel’s finding in this regard. According to the Appellate Body, the US benchmarking system did not preclude adjustments to benchmarks to reflect the delivery charges in the country of provision.70 Fourth, India contended that the US benchmarking system did not require IAs to assess the adequacy of remuneration from the perspective of the government provider before assessing whether a benefit had been conferred on the recipient, and thus violated Article 14(d) of the SCM Agreement.71 Rejecting India’s contention, the Appellate Body held that it is not mandatory that the assessment of adequacy of remuneration be done from the government provider’s perspective, prior to the assessment of whether or not a benefit has been conferred to the recipient.72 India also went in appeal against the Panel’s “as applied” findings regarding benefit under Article 14 of the SCM Agreement. The following determinations of the Appellate Body on India’s “as applied” claims are relevant to the discussion on external benchmarks: First, India contended that the USDOC’s exclusion of the National Mineral Development Corporation’s (NDMC) export prices from its benchmark was

US — Carbon Steel (AB Report), supra note 16, ¶ 4.184. Id., ¶ 4.189. 66 Id., ¶ 4.190. 67 Id., ¶ 4.190. 68 Id., ¶¶ 4.222–4.224. 69 Id., ¶¶ 4.222–4.224. 70 Id., ¶ 4.251. 71 Id., ¶¶ 4.117–4.120. 72 Id., ¶ 4.129. 64 65

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inconsistent with Article 14.73 The Panel had rejected India’s contention on the ground that the export prices of the NDMC were government prices, which are not an indicator of the prevailing market conditions, and therefore, could not be used as a benchmark for benefit determination under Article 14.74 However, the Appellate Body reversed the finding of the Panel and upheld India’s claim. According to the Appellate Body, “[w]hile there may be reasons to exclude an export price of a government provider in determining an alternative benchmark, we are not persuaded that an IA can presume that the export price set by a government provider is inherently unreliable”.75 Thus, the Appellate Body held the USDOC’s exclusion of the NDMC’s export prices, on the ground that they are government prices and therefore do not reflect the prevailing market conditions, was inconsistent with Article 14(d) and the chapeau of Article 14 of the SCM Agreement.76 Second, India contended that the use of “as delivered” prices from Australia and Brazil in assessing whether the NDMC provided iron ore for less than adequate remuneration, was inconsistent with Article 14(d) of the SCM Agreement.77 The Appellate Body upheld India’s claim that the use of benchmarks from Australia and Brazil by the US was inconsistent with Article 14(d), on the ground that the “as delivered” prices at issue did not reflect the prevailing market conditions in India.78 The above findings of the Appellate Body provide critical insights into the use of external benchmarks for calculating the benefit conferred in a countervailing duty investigation.

2.3

US—Countervailing Measures (China)

The measure at issue in US—Countervailing Measures (China) was, inter alia, the USDOC’s rejection of in-country Chinese prices of the products in question79 for a benefit-benchmark analysis under Article 14(d) of the SCM Agreement.80 The USDOC had argued that “the in-country prices offered by the State Owned Enterprises (SOEs) in China were distorted by virtue of the GOC’s [Government of China’s] allegedly ‘predominant’ role in the market as a supplier of the goods in

Id., ¶¶ 4.280 and 4.281. Id., ¶¶ 4.284–4.286. 75 Id., ¶ 4.287. 76 Id., ¶ 4.288. 77 Id., ¶ 4.300. 78 Id., ¶ 4.314. 79 The products under issue in US — Countervailing Measures (China) (AB Report), supra note 17, were thermal paper, pressure pipe, line pipe, citric acid, lawn groomers, kitchen shelving, oil country tubular goods, wire strand, magnesia bricks, seamless pipe, print graphics, drill pipe, aluminium extrusions, steel cylinders, solar panels, wind towers, and steel sinks from China. 80 US — Countervailing Measures (China) (AB Report), supra note 17, ¶ 2.1. 73 74

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question”,81 and accordingly, could not be used as a benchmark under Article 14(d) of the SCM Agreement.82 The Panel decided in favour of the USDOC.83 China went in appeal against the Panel Report.84 On the issue of benefit-benchmark determination, China argued before the Appellate Body that “if government ownership and control are an insufficient basis on which to deem the provision of goods by an SOE to be ‘governmental’ conduct for purposes of the public body and financial contribution inquiries, it follows that these factors must likewise be an insufficient basis for finding the provision of goods by an SOE to be ‘governmental’ conduct for the purposes of benchmark inquiry”.85 In other words, China contended “there must be a single legal standard for defining the ‘government,’ including public body, that provides financial contribution under Article 1.1(a)(1), and for defining the ‘government,’ including public body, whose predominant role in the market may be found to distort private prices under Article 14(d)”.86 On principle, the Appellate Body agreed with China that there is a “single legal standard that defines the term ‘government’ under the SCM Agreement”.87 The Appellate Body noted that the “government” in Article 1.1(a)(1) “encompasses both the government in the ‘narrow sense’ and ‘any public body within the territory of a Member’”.88 Thus, to find that a contribution within the meaning of Article 1.1(a) (1) exists, “investigating authorities must determine whether such financial contribution has been provided by a government in the narrow sense, or by a public body”.89 In the context of determining whether a benefit has been conferred by a government’s provision of goods, Article 14(d) then “establishes that investigating authorities are required to determine whether such provision of goods by the government has been made for less than adequate remuneration”.90 Thus, the Appellate Body agreed with China that there is a single definition of the term ‘government’ for purposes of Article 1.1(a)(1) and Article 14(d) of the SCM Agreement. However, unlike China, the Appellate Body considered that a single legal standard for ‘government’ under the SCM Agreement does not imply that the benchmark selection process under Article 14(d) is limited to an examination of whether or not the relevant entities in the market fall within the definition of ‘government’—either in the narrow sense or as public bodies.91 Rather, a

81

Id., Id., 83 Id., 84 Id., 85 Id., 86 Id., 87 Id., 88 Id., 89 Id., 90 Id., 91 Id., 82

¶ 2.1. ¶ 2.1. ¶¶ 2.1, 2.3, 2.6 - 2.27. ¶ 1.13. ¶ 4.37. ¶ 4.39. ¶ 4.42. ¶ 4.42. ¶ 4.42. ¶ 4.42. ¶¶ 4.43 and 4.63.

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benefit-benchmark analysis under Article 14(d) requires an examination of whether the prices of goods offered by the relevant entities can be considered as market determined.92 Thus, according to the Appellate Body the determination of “whether a price may be relied upon for benchmarking purposes under Article 14(d) is not a function of its source, but rather, whether it is a market-determined price reflective of prevailing market conditions in the country of provision”.93 The Appellate Body further observed that IAs when selecting a benchmark for the purpose of Article 14(d) cannot outrightly reject the in–country prices from any particular source, “including government–related prices other than the financial contribution at issue”.94 In order to establish an inconsistency with Article 14(d) an IA is required to determine whether the proposed benchmark prices are market determined.95 The Appellate Body reversed the Panel’s decision to uphold the USDOC’s rejection of private prices as potential benchmarks under Article 14(d), on the ground that such prices were distorted.96 The Appellate Body completed the legal analysis and found that in respect of countervailing duty investigations concerning oil country tubular goods, solar panels, pressure pipe, and line pipe, the USDOC had acted inconsistently with the United States’ obligations under Articles 14(d) and 1.1(b) of the SCM Agreement, by rejecting prices in China as benchmarks in its benefit analyses.97 Thereafter, China instituted compliance proceedings against the US under Article 21.5 of the Dispute Settlement Understanding.98 China argued that the USDOC violated Article 14(d) of the SCM Agreement by rejecting the Chinese prices for inputs on the ground that they were not market determined.99 The Panel reiterated the view that a benchmark selected under Article 14(d) of the SCM Agreement “must consist of market-determined prices for the same or similar goods in the country of provision”.100 According to the Panel, an IA cannot rely on an alternative benchmark if the in-country prices are market determined.101 In case an IA chooses to disregard the in-country prices, it must adequately explain its reason for choosing an alternative benchmark.102

Id., ¶¶ 4.43 and 4.63. Id., ¶ 4.48. See also US — Carbon Steel (AB Report), supra note 16, ¶ 4.154. 94 Id., ¶ 4.64. 95 Id., ¶ 4.61. 96 Id., ¶ 4.80. 97 Id., ¶¶ 4.81–4.107. 98 Panel Report, United States — Countervailing Duty Measures on Certain Products from China – Recourse to Article 21.5 of the DSU by China, WTO Doc. WT/DS437/RW (circulated Mar. 21, 2018). 99 Id., ¶ 7.143. 100 Id., ¶ 7.157. 101 Id., ¶ 7.157. 102 Id., ¶ 7.157. 92 93

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China argued that an IA “may resort to an out-of-country benchmark only when it has established that in-country prices are effectively determined by the government, either de jure or de facto”.103 The Panel rejected China’s contention.104 According to the Panel an IA can reject in-country prices only on the ground that they are distorted, and not on the ground that “a government ‘effectively determines’ the price of the goods at issue”.105 Thus, the Panel rejected China’s claim that the US violated Articles 1.1(b) and 14(d) of the SCM Agreement by rejecting the in-country Chinese prices for the inputs “without having first found that the prices in question were effectively determined by the Chinese government”.106 Thereafter, the Panel considered China’s arguments concerning the alleged lack of evidence supporting the USDOC’s conclusion that the in-country prices of the inputs at issue were distorted.107 The Panel stressed that an IA must furnish “a reasoned and adequate explanation”108 of how government intervention causes the in-country prices to deviate from the market price.109 The Panel found that the USDOC fell short of this standard,110 and therefore, violated Articles 1.1(b) and 14 (d) of the SCM Agreement.111

2.4

The EU’s Countervailing Duty on Ductile Cast Iron Pipes and Tubes from India

In 2016, the EU Commission (for short “the Commission”) had imposed a countervailing duty on the imports of ductile cast iron pipes and tubes from India.112 The Commission contended that the Indian domestic prices of iron ore, the principal input in ductile cast iron pipes and tubes, had been distorted due to government intervention.113 The Commission cited two reasons for its claim that the Indian prices of ductile cast iron pipes and tubes were distorted. Firstly, that the Indian government had entrusted private parties to supply iron ore for ‘less than adequate remuneration’ to the domestic producers.114 Secondly, that the export taxes on iron ore had resulted Id., ¶ 7.160. Id., ¶ 7.162. 105 Id., ¶ 7.165. 106 Id., ¶ 7.174. 107 Id., ¶ 7.3.3.3. 108 Id., ¶ 7.205. 109 Id., ¶ 7.205. 110 Id., ¶ 7.220. 111 Id., ¶ 8.1. 112 Tubes CVD Decision, supra note 18. 113 Id., ¶¶ 131–133. 114 Id., ¶ 131. 103 104

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in enabling these private parties to supply iron ore for “less than adequate remuneration” to the domestic producers of ductile iron pipes and tubes.115 The Commission concluded that taxes imposed on the export of iron ore by the Indian government was a targeted export restraint to induce mining companies to sell iron ore locally, and at lower prices.116 According to the Commission, this targeted restraint had ensured that domestic prices of iron ore were low and remained stable, irrespective of the hike in prices of the same internationally.117 On account of the above stated government distortions, the Commission had resorted to an external benchmark for calculating the amount of benefit; namely, the Australian prices of iron ore, with necessary adjustments.118 This determination by the Commission throws open the issue as to whether the levy of export taxes can give rise to a countervailing action. In view of the discussion above, it seems that an IA has enough elbow room to use an external benchmark in the context of a countervailing duty investigation. An IA can resort to an external benchmark when the in-country prices are distorted because, inter alia, (i) the government is the sole provider of the good or service; (ii) the government administratively controls the prices of the good or service; or (iii) the government is the predominant supplier of the good or service, provided that on account of the predominant role of the government, the private suppliers have no option but to align their prices with those of the government-provided goods. However, the external benchmark must be adequately adjusted to reflect prevailing market conditions in the country of provision. The next section examines the flexibility that an IA enjoys as regards the adoption of an external benchmark in the context of an anti-dumping investigation.

3 Use of an External Benchmark in Anti-dumping Investigations The central objective of this section is to establish that an IA does not enjoy much flexibility to adopt an external benchmark in the context of an anti-dumping investigation in comparison to the flexibility permitted in respect of countervailing measures. To this end, the section analyses the Appellate Body Report in EU— Biodiesel (Argentina), the Panel Report in EU—Biodiesel (Indonesia) and the anti-dumping investigation conducted by India concerning polypropylene exports from Oman, Saudi Arabia and Singapore on account of dual pricing.

115

Id., Id., 117 Id., 118 Id., 116

¶ 133. ¶ 182. ¶ 166. ¶¶ 205–211.

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EU—Biodiesel (Argentina)

In EU—Biodiesel, the EU authorities had sought to impose an anti-dumping duty on the imports of biodiesel from Argentina. In order to determine the dumping margin, the EU authorities constructed the normal value of biodiesel in Argentina on the basis of the “cost of production in the country of origin plus a reasonable amount for administrative, selling and general costs and for profits”.119 In order to determine the cost of production of biodiesel in Argentina, the EU authorities did not rely on the actual cost of soybeans that was reported in the Argentine biodiesel producer’s records. The EU authorities argued that under the DET system, Argentina had imposed differential taxes on exports of soybeans, soybean oil and biodiesel. The taxes imposed on the exports of raw materials were higher than the taxes imposed on the exports of the finished product. Accordingly, the EU authorities alleged that the DET system depressed the domestic price of soybeans and soybean oil, and therefore, distorted the cost of production of biodiesel in Argentina.120 Instead of relying on the distorted actual costs, the EU authorities used the international prices of soybeans; namely, the average of the reference prices of soybeans published by the Argentine Ministry of Agriculture, minus fobbing costs.121 Argentina challenged, inter alia, the determination of the dumping margin by the EU authorities, on the ground that the EU authorities did not rely on the actual cost of soybeans in Argentina, when determining the cost of production of biodiesel. The Panel Report, albeit not foreclosing the option of using an alternate benchmark under Article 2.2 of the Anti-Dumping Agreement, significantly constricted the use of an alternate benchmark only to the two instances specified under Article 2.2.1.1.122 Both Argentina and the EU went in appeal against certain aspects of the Panel Report. The foremost question before both the Panel and Appellate Body was whether under the Anti-Dumping Agreement, the EU authorities could rely on the international prices of soybeans when determining the cost of production of biodiesel in Argentina.

119

Anti-Dumping Agreement, supra note 1, art. 2.2. EU — Biodiesel from Argentina (AB Report), supra note 9, ¶ 5.5. 121 Id., ¶ 5.7. 122 Panel Report, European Union — Anti-Dumping Measures on Biodiesel from Argentina, WTO Doc. WT/DS473/R (circulated on Oct., 26, 2016) [hereinafter EU — Biodiesel from Argentina (Panel Report)]. 120

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Article 2.2 of the Anti-dumping Agreement and Article VI:1(b) (ii) of the General Agreement on Tariffs and Trade (1994)123

Argentina contended, before the Appellate Body, that the use of the phrases “cost of production in the country of origin” under Article 2.2 of the Anti-Dumping Agreement and “cost of production … in the country of origin” under Article VI:1 (b)(ii) of the GATT (1994), limits the sources of information or evidence that may be used in establishing the cost of production in the country of origin to sources inside the country of origin.124 The Appellate Body rejected Argentina’s contention. According to the Appellate Body, the cost of production to be determined under Article 2.2 of the Anti-Dumping Agreement is that of the country of origin, but this provision does not forbid the use of information from countries other than the country of origin in the calculation of such cost of production. Produced below is the observation of the Appellate Body in this regard, We observe that Article 2.2 of the Anti-Dumping Agreement and Article VI:1(b)(ii) of the GATT 1994 do not contain additional words or qualifying language specifying the type of evidence that must be used, or limiting the sources of information or evidence to only those sources inside the country of origin. An investigating authority will naturally look for information on the cost of production “in the country of origin” from sources inside the country. At the same time, these provisions do not preclude the possibility that the authority may also need to look for such information from sources outside the country. The reference to “in the country of origin”, however, indicates that, whatever information or evidence is used to determine the “cost of production”, it must be apt to or capable of yielding a cost of production in the country of origin (emphasis added). This, in turn, suggests that information or evidence from outside the country of origin may need to be adapted in order to ensure that it is suitable to determine a “cost of production” “in the country of origin”.125

However, as per the facts of the present case, the EU was precluded from relying on the international prices of soybeans to this end. According to the Appellate Body, the reference price of soybeans published by the Argentine Ministry of Agriculture reflected the international price of soybeans and not the domestic price prevailing in Argentina.126 The EU authorities made no adjustments to the international price of soybeans (except for the deduction of fobbing costs) to ensure that it represented the cost of soybeans in Argentina for the producers or exporters of biodiesel.127 Thus, the surrogate price adopted by the EU was held to be in

123

General Agreement on Tariffs and Trade 1994, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1867 U.N.T.S. 187 [hereinafter GATT 1994]. 124 EU — Biodiesel from Argentina (AB Report), supra note 9, ¶ 6.66. 125 Id., ¶ 6.70. 126 Id., ¶ 6.81. 127 Id., ¶ 6.81.

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violation of Article 2.2 of the Anti-Dumping Agreement and Article VI:(1)(b)(ii) of the GATT (1994).128 In view of the foregoing determination, it can be concluded that Article 2.2 of the Anti-Dumping Agreement and Article VI:(1)(b)(ii) of GATT (1994), allows an IA to rely on an external benchmark for determining the cost of production in the country of origin, provided that it has been adequately adjusted to reflect the prevailing market conditions in the country of origin.

3.1.2

Article 2.2.1.1 of the Anti-dumping Agreement

According to Article 2.2.1.1 of the Anti-Dumping Agreement, when constructing the normal value on the basis of the cost of production in the country of origin, an IA has to rely on the records of the domestic producers. The first sentence of Article 2.2.1.1 identifies two situations when a digression from the records of the domestic producers’ can be made. According to the first condition, the domestic records can be rejected if they are not consistent with the generally accepted accounting principles (GAAP). As per the second condition, the domestic records can be rejected if they do not “reasonably reflect the costs associated with the production and sale of the product under consideration”.129 In the instant case, the EU authorities rejected the cost of soybeans recorded by the Argentine producers in their records; and instead used the international prices of soybeans. The Panel held that, “the European Union acted inconsistently with Article 2.2.1.1 of the Anti-Dumping Agreement by failing to calculate the cost of production of the product under investigation on the basis of the records kept by the producers”.130 The EU appealed against the above finding of the Panel. Firstly, the EU argued that the second condition of Article 2.2.1.1 does not call for an assessment of the ‘actual costs’, but of the ‘costs under normal circumstances’.131 Secondly, the EU contended that the second condition permits an examination of the ‘reasonableness’ of the reported costs themselves, and not just the reasonableness of the records.132

Id., ¶ 6.83. Anti-Dumping Agreement, Article 2.2.1.1 states,

128 129

For the purpose of paragraph 2, costs shall normally be calculated on the basis of the records kept by the exporter or producer under investigation, provided that such records are in accordance with the generally accepted accounting principles of the exporting country and reasonably reflect the costs associated with the production and sale of the product under consideration. Anti-dumping Agreement, supra note 1, art. 2.2.1.1. EU — Biodiesel from Argentina (AB Report), supra note 9, ¶ 7.249. 131 Id., ¶ 6.11. 132 Id., ¶ 6.11. 130

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The Appellate Body did not decide in favour of the EU. Discussed below are the arguments proffered by the Appellate Body for rejecting the EU’s arguments.

3.1.2.1

‘Actual Costs’ Versus ‘Costs Under Normal Circumstances’

According to the EU, the second condition of Article 2.2.1.1 does not entail an assessment of the ‘actual costs’, but of the ‘costs under normal circumstances’.133 According to the EU, the ‘costs under normal circumstances’ would be costs incurred by the producers and exporters of biodiesel in the absence of the distortion caused by the Argentine DET system.134 The Appellate Body rejected the EU’s claim on appeal and upheld the finding of the Panel. The Panel had held that although Article 2.2.1.1 does not explicitly refer to ‘actual costs’, the second condition relates to whether the costs set out in the producers’ or exporters’ records “correspond—within acceptable limits—in an accurate and reasonable manner [] to all the actual costs incurred by the particular producer or exporter for the product under consideration”.135 Thus, according to the Panel, the comparison referred to under the second condition of Article 2.2.1.1 involves a comparison between the costs in the producers’ or exporters’ records and the costs actually incurred by the producer or exporter.136 Concurring with the finding of the Panel, the Appellate Body stated that the phrase “costs associated with the production and sale” under the second condition, refers to costs incurred by the investigated exporter or producer that are ‘genuinely related’ to the production and sale of the product under consideration.137 According to the Appellate Body, it is the ‘actual costs’ that have a “genuine relationship with the production and sale of the product under consideration”.138 Allowing the EU authorities to consider the cost of production of biodiesel under ‘normal circumstances’, i.e. in the absence of the alleged distortion caused by the DET, “would add words to the condition, namely, the costs that “would pertain” and “in normal circumstances””.139 The EU further argued that the first condition of Article 2.2.1.1, which requires that the records of the producer or exporter be GAAP consistent, already instructs Id., ¶ 6.30. Id., ¶ 6.11. 135 Id., ¶¶ 7.247 and 7.242. 136 The Panel relied on Panel Report, United States — Final Dumping Determination on Softwood Lumber from Canada V, ¶ 7.312, WTO Doc. WT/DS264/R (adopted Aug. 31, 2004); Panel Report, Egypt — Definitive Anti-Dumping Measures on Steel from Turkey, ¶¶ 7.422–7.426, WTO Doc. WT/DS211/R (adopted Oct. 1, 2002); Panel Report, EC — Anti-Dumping Measure on Farmed Salmon from Norway, ¶¶ 7.506–7.507 and 7.514, WTO Doc. WT/DS337/R (adopted Jan. 8, 2008). 137 EU — Biodiesel from Argentina (AB Report), supra note 9, ¶ 6.30. 138 Id., ¶ 6.30. 139 Id., ¶ 6.30. 133 134

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companies to record costs that are actually incurred, and therefore the second condition of Article 2.2.1.1 avers to the ‘costs under normal circumstances’.140 However, the Appellate Body rejected the said argument of the EU, because “records that are GAAP consistent may nonetheless be found not to reasonably reflect the costs associated with the production and sale of the product under consideration”.141 Therefore, the requirement of recording ‘actual costs’ is contained in the second condition and not the first condition of Article 2.2.1.1.

3.1.2.2

Reasonableness of Record Versus Reasonableness of Costs

The second argument of the EU was that the second condition of Article 2.2.1.1 includes a general standard of reasonableness, which permits an IA to disregard the records kept by the exporter if the IA determines that the costs in such records are not reasonable. Therefore, under the second condition of Article 2.2.1.1, an IA has to consider not just the reasonableness of the record but also the reasonableness of the costs so recorded.142 However, the Appellate Body rejected the EU’s claim. According to the Appellate Body, the adverb ‘reasonably’ modifies the verb ‘reflect’ in a phrase where the subject of the sentence is the producers’ or exporters’ ‘records’. The adverb ‘reasonably’ does not modify the word ‘costs’.143 Thus, according to the Appellate Body, “[t]o the extent that costs are genuinely related to the production and sale of the product under consideration in a particular anti-dumping investigation, we do not consider that there is an additional or abstract standard of ‘reasonableness’ that governs the meaning of ‘costs’”.144 The Appellate Body concluded its findings as follows, In sum, we consider that the second condition in the first sentence of Article 2.2.1.1 of the Anti-Dumping Agreement – that the records kept by the exporter or producer under investigation reasonably reflect the costs associated with the production and sale of the product under consideration – relates to whether the records kept by the exporter or producer under investigation 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 (emphasis added)… With respect to the application of Article 2.2.1.1 to the anti-dumping measure on biodiesel, we agree with the Panel that the EU authorities’ determination that domestic prices of soybeans in Argentina were lower than international prices due to the Argentine export tax system was not, in itself, a sufficient basis to conclude that the producers’ records did not

140

Id., Id., 142 Id., 143 Id., 144 Id., 141

¶ ¶ ¶ ¶ ¶

6.31. 6.33. 6.35. 6.37. 6.37.

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reasonably reflect the costs of soybeans associated with the production and sale of biodiesel, or for disregarding the relevant costs in those records when constructing the normal value of biodiesel.145

The above approach of the Appellate Body was later affirmed by the Panel in EU—Biodiesel (Indonesia),146 which concerned anti-dumping measures against the imports of biodiesel from Indonesia. It involved the same claims as that of EU-Biodiesel (Argentina) and earlier was the subject of the Argentine dispute. Indonesia claimed that the EU authorities had acted inconsistently with Article 2.2.1.1 of the Anti-Dumping Agreement in constructing normal value of the product by departing from the account books kept by producers and using alternative costs.147 It was Indonesia’s contention that the records kept by producers were in accordance with GAAP and reasonably reflected the cost of production of biodiesel, and there was no reason to depart from such records.148 In the present case, the Panel found no reason to digress from the approach of the Appellate Body in EU—Biodiesel (Argentina) as the facts were identical to that of the Argentine case. Accordingly, the Panel found a violation of Article 2.2 of the Anti-Dumping Agreement and Article VI:1(b)(ii) of the GATT (1994).149

3.2

The Expiry of Section 15(a)(ii) of the Accession Protocol

When China acceded to the WTO in 2001, it was considered an NME, as the Chinese prices were not determined by the interaction of demand and supply, and were hence incapable of reflecting the normal value of the like product.150 Thus, the objective of Section 15(a) of the Accession Protocol was to allow IAs to determine the normal value of Chinese exports on the basis of an NME methodology.151 IAs could determine the normal value of Chinese exports on the basis of prices or costs of production occurring in a market economy third country, instead of a “strict

Id., ¶ 6.56. See EU — Biodiesel from Indonesia (Panel Report), supra note 9. 147 Id., ¶ 3.1(a). 148 Id., ¶ 3.1(a). 149 Id., ¶ 7.33. 150 See generally Ming Du, China’s State Capitalism and World Trade Law, 63 Int. & Comp. L.Q., 409, 409-430 (2014); Mark Wu, The “China Inc.” Challenge to Global Trade Governance, 27(2) Harvard Int. Law J., 261, 269-284 (2016); Yuhua Wang, Beyond Local Protectionism: China’s State-Business Relations in the Last Two Decades, 226 China Quart. 319, 320–339 (2016). 151 See generally Julia Ya Qin, WTO Regulation of Subsidies to State-Owned Enterprises (SOEs) – A Critical Appraisal of the China Accession Protocol, 7(4) J. Int’l. Econ. Law, 86, 91–93 (2004); Jorge Miranda, Interpreting Paragraph 15 of China’s Protocol of Accession, 9(3) Global Trade & Customs J., 94, 95–103 (2014). 145 146

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comparison with domestic prices and costs in China”.152 However, after the expiry of Section 15(a)(ii) on 11 December 2016, any methodology used henceforth, must be consistent with Articles 2.1 and 2.2 of the Anti-Dumping Agreement and Article VI:1 of the GATT (1994).153 On 12 December 2016, China had requested consultations with the US and the EU, for continuing to treat China as an NME for normal value determination, despite the expiry of Section 15(a)(ii).154 Accordingly, China alleged a violation of Articles 2.1 and 2.2 of the Anti-Dumping Agreement, and Articles I:1 and VI:1 of the GATT (1994).155 Thereafter, on 3 April 2017, the Dispute Settlement Body on the request of China, established a Panel to hear its case against the EU,156 the proceedings of which are still underway. In view of the above developments it is important to examine whether Article 2.2 of the Anti-Dumping Agreement allows an IA any flexibility to adopt external benchmarks for normal value determination. It is imperative to note that the Second Supplementary Provision of Article VI:1 of the GATT (1994)157 and Article 2.7 of the Anti-Dumping Agreement158 allow for normal value to be determined by methods that do not entail the use of in-country prices. However, this exception is only applicable to an economy that “has a complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the State”,159 i.e. a centrally planned economy—and at present, no WTO Member can be characterized as such.160

152

See Accession Protocol, supra note 19, Chapeau to Section 15(a). See generally Vermulst, Sud and Evenett, supra note 21, 212–225; Zhou and Percival, supra note 21, 871–884. 154 Request for Consultations by China, United States — Measures related to Price Comparison Methodologies, WTO Doc. WT/DS515/1 (Dec., 12, 2016); Request for Consultations by China, European Union — Measures Related to Price Comparison Methodologies, WTO Doc. WT/ DS516/1 (Dec., 12, 2016). 155 Id. 156 Request for the Establishment of a Panel by China, European Union — Measures Related to Price Comparison Methodologies, WTO Doc. WT/DS516/9 (Mar. 9, 2017). 157 The second Supplementary Provision to GATT Article VI:1 reads, 153

It is recognized that, in the case of imports from a country which has a complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the State, special difficulties may exist in determining price comparability for the purposes of paragraph 1, and in such cases importing contracting parties may find it necessary to take into account the possibility that a strict comparison with domestic prices in such a country may not always be appropriate. GATT 1994, supra note 123, art. VI:1. Anti-Dumping Agreement, supra note 1, art. 2.7 states, “This Article is without prejudice to the second Supplementary Provision to paragraph 1 of Article VI in Annex I to GATT 1994.”. 159 GATT 1994, supra note 123, Interpretative Note Ad Article VI from Annex 1, para. 1(2). 160 See Helena Detlof and Hilda Fridh, The EU Treatment of Non-market Economy Countries in Anti-Dumping Proceedings, 2 (7/8) Global Trade & Customs J. 265, 270 (2007). 158

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Thus, for an IA to rely on out-of-country benchmarks for the normal value determination of Chinese exports, it must firstly establish the existence of a “particular market situation” in China under Article 2.2 of the Anti-Dumping Agreement.161 The IA could then proceed to determine the normal value of Chinese exports on the basis of the cost of production in China plus S, G & A and profits.162 However, the WTO-consistency of an IA relying on the prices in third country market economies when determining the input costs in China seems highly questionable in light of the Appellate Body Report in EU—Biodiesel (Argentina).163 It is interesting to note that on 12 December 2017, the European Commission amended the EU’s Anti-Dumping Regulations (for short “AD Regulation”).164 The amendments were made in order to make the AD Regulation compliant with Articles 2.1 and 2.2 of the Anti-Dumping Agreement and Article VI:1 of the GATT (1994), following the expiry of Section 15(a)(ii). The AD Regulation stipulates that if on account of “significant distortions affecting to a considerable extent free market forces”165 it is not appropriate to use the domestic prices and costs in the exporting country, then normal value shall be constructed exclusively on the basis of costs of production and sale reflecting undistorted prices or benchmarks.166 The AD Regulation specifies the circumstances in which significant distortions can be considered to have a considerable influence on free market forces. It states that this is the case when reported prices or costs, including the costs of raw material and energy, are not the result of free market forces because they are affected by substantial government intervention.167 The AD Regulation allows for the use of the analogue country methodology for constructing the normal value when there exists significant market distortions. As per the analogue country methodology, the normal value is constructed on the basis of undistorted international prices, costs or benchmarks, or the corresponding costs of production and sale in an appropriate representative country with a similar level of economic development as the exporting country.168 Australia has consistently treated China as having a “particular market situation” in anti-dumping investigations. See Weihuan Zhou, Australia’s Anti-Dumping and Countervailing Law and Practice: An Analysis of Current Issues Incompatible with Free Trade with China, 49(6) J. World Trade, 975, 980–990 (2015). 162 See Weihuan Zhou, Appellate Body Report on EU — Biodiesel: The Future of China’s State Capitalism under the WTO Anti-Dumping Agreement, 17 World Trade Rev. (2018). 163 Id. 164 Regulation (EU) 2017/2321 of the European Parliament and of the Council of 12 December amending Regulation (EU) 2016/1036 on Protection against Dumped Imports from Countries not Members of the European Union and Regulation (EU) 2016/1037 on Protection against Subsidized Imports from Countries not Members of the European Union, 2017 O.J. (L338) 1 [hereinafter EU NME Amendment]. 165 See id., Preamble. 166 Id., art. 1. Article 1 amends Regulation (EU) 2016/1036 infra note 169, by inserting Article 2.6a. 167 Id., art. 1. 168 Id., art. 1. 161

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The EU Regulation preceding the AD Regulation allowed normal value determination of exports from China, Vietnam and Kazakhstan (i.e. an NME country which is a Member of the WTO) as per the analogue country methodology, provided the concerned producer failed to show that it is operating under market conditions.169 After amendment, the AD Regulation no longer de jure discriminates against WTO Members on the basis of whether they are market economies or NMEs.170 Instead the amended AD Regulation provides the Commission with the discretion to use the analogue country methodology with regard to exports from any country, if the Commission is of the opinion that it is inappropriate to determine normal value on the basis of in-country prices.171 However, the WTO-consistency of the amended AD Regulation is a contentious proposition, in light of the Appellate Body Report in EU-Biodiesel (Argentina). The approach of the Appellate Body in EU—Biodiesel (Argentina) poses one very pertinent question; i.e. does an IA have enough leverage to use an external benchmark in an anti-dumping investigation in order to address the market distortion in China? State intervention in the Chinese economy exists on account of the dominant role of SOEs and State Invested Enterprises,172 as well as the complex nature of State-business relationships.173 In light of the Appellate Body Report in EU—Biodiesel (Argentina), it is highly questionable if government influence or state intervention in the Chinese economy can be redressed by IAs through the adoption of an external benchmark in an anti-dumping investigation. Although the Appellate Body has upheld the legitimacy of using an external benchmark under Article 2.2, its application under Article 2.2.1.1, has been severely constricted. According to the Appellate Body, under Article 2.2.1.1, an IA has to first and foremost rely on the records of the domestic producer or exporter. An IA can use an external benchmark, under Article 2.2.1.1 only when: (i) the records are GAAP inconsistent; and (ii) the records do not “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”.174 In doing so, the Appellate Body has limited the resort to an external benchmark under the second condition, only to instances when the ‘actual costs’ are not reproduced in the records of the producer, and has divested the IA of any authority to determine the reasonableness of the costs per se. According to the Appellate Body in EU—Biodiesel (Argentina), the fact that “the domestic prices of soybeans in Argentina were lower than international prices

169

Regulation (EU) 2016/1036 on Protection against Dumped Imports from Countries not Members of the European Union, 2016 O.J. (L176) 21, Section 2.7(b). 170 EU NME Amendment, supra note 164. 171 Id. 172 See, e.g., Du, supra note 150, at 411. 173 See, e.g., Wu, supra note 150, at 261–324; Wang, supra note 150, at 319–341. 174 EU — Biodiesel from Argentina (AB Report), supra note 9, ¶ 5.65.

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due to the Argentine export tax system was not, in itself, a sufficient basis to conclude that the producers’ records did not reasonably reflect the costs of soybeans associated with the production and sale of biodiesel”.175 In other words, an export tax is not reason enough for resorting to an external benchmark under the second condition of Article 2.2.1.1. However, the threshold of market distortion that would allow an IA to adopt an external benchmark under the second condition of Article 2.2.1.1, remains unclear. Case in point is China, where the government is the predominant supplier of principal inputs and the domestic prices are distorted.176 It is uncertain whether China’s unique economic system would constitute a sufficient basis to allow an IA to use third country market economy prices when constructing the normal value. In fact, in its appellant submission before the Appellate Body, the EU had raised a similar question. The EU had argued that if the second condition of Article 2.2.1.1 is interpreted so narrowly, then regardless of how unreasonable the production costs in the records are, an IA would still not be permitted to adopt a proxy or benchmark consistent with the normal market conditions.177 The Appellate Body again upheld the reasoning of the Panel, stating as follows: [T]he Panel explained that its understanding of this condition does not imply that “whatever is recorded in the records of the producer or exporter must be automatically accepted”. [] To the Panel, an investigating authority is “certainly free to examine the reliability and accuracy of the costs recorded in the records of the producers/exporters” to determine, in particular, whether all costs incurred are captured; whether the costs incurred have been over- or understated; and whether non-arms-length transactions or other practices affect the reliability of the reported costs [] (emphasis added). The Panel further stated that “Article 2.2.1.1 does not involve an examination of the ‘reasonableness’ of the reported costs themselves, when the actual costs recorded in the records of the producer or exporter are otherwise found, within acceptable limits, to be accurate and faithful. [] In light of these statements, we consider the Panel’s interpretation to Article 2.2.1.1 to be more nuanced than the European Union’s argument suggests.178

According to the Appellate Body and Panel, the instances when an IA can examine the reliability of the reported costs are, for example, when the costs have not been adequately captured; or costs have been over- or understated; or transactions are at non-arms-length. However, it is doubtful if the Appellate Body actually averred to the price distortion, if any, due to State intervention, when talking above about the examination of the accuracy of the recorded costs. In view of the foregoing, it is imperative to state that while interpreting Article 2.2 of the Anti-Dumping Agreement, the Appellate Body had stated that,

Id., ¶ 5.65. See, e.g., Li Wen Lin, A Network Anatomy of Chinese State-Owned Enterprises, 1–14 (European University Institute, Working Paper No. RSCAS 2017/07, 2017). 177 European Union’s appellant submission, Appellate Body Report, European Union — AntiDumping Measures on Biodiesel from Argentina, ¶ 84, WTO Doc. WT/DS473/AB/R (adopted Oct. 6, 2016). 178 EU — Biodiesel from Argentina (AB Report), supra note 9, ¶ 6.41. 175 176

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Turning to the relevant context, we recall that Article 2.2.1.1 of the Anti-Dumping Agreement identifies the “records kept by the exporter or producer under investigation” as the preferred source for cost of production data to be used in such calculation. [] We do not see, however, that the first sentence of Article 2.2.1.1 precludes information or evidence from other sources from being used in certain circumstances. Indeed, it is clear to us that, in some circumstances, the information in the records kept by the exporter or producer under investigation may need to be analysed or verified using documents, information, or evidence from other sources, including from sources outside “the country of origin.[footnote 228] (emphasis added).179

Under footnote 228, the Appellate Body has cited some instances when an IA can rely on out-of-country information to analyse or verify the information in the producers’ records. Footnote 228 states, “[t]his may be so e.g. where the producer under investigation purchases inputs from outside the country of origin to produce the product under consideration”. Again, the example stated under footnote 228, does not indicate that the Appellate Body intended to cover instances of market distortion. In summing up the discussion, it can be said that while Article 2.2 allows the use of an external benchmark, it is fettered by Article 2.2.1.1—which mandates reliance on the records of the domestic producer, and allows a digression only when the records are not GAAP consistent or do not reasonably reflect the actual costs incurred by the producer. In this regard, the Appellate Body had observed that both Article 2.2 and Article 2.2.1.1 “apply harmoniously”.180 According to the Appellate Body, [T]he scope of the obligation to calculate the costs on the basis of the records in the first sentence in Article 2.2.1.1 is narrower than the scope of the obligation to determine the cost of production in the country of origin in Article 2.2. In circumstances where the obligation in the first sentence of Article 2.2.1.1 to calculate the costs on the basis of the records kept by the exporter or producer under investigation does not apply, or where relevant information from the exporter or producer under investigation is not available [], an investigating authority may have recourse to alternative bases to calculate some or all such costs (emphasis added).181

However, it seems unlikely that price distortion due to governmental action, as prevalent in China, would allow a digression from the obligation to rely on the producers’ records. In light of the findings of the Appellate Body in EU—Biodiesel (Argentina), it seems likely that the distortion of input prices in the exporting country may not, in itself, justify a determination that the investigated producers’ records do not reasonably reflect the costs of production, under Article 2.2.1.1 of the Anti-Dumping Agreement. Thus, IAs will find it difficult to discard the actual costs recorded by the

Id., ¶ 6.71. Id., ¶ 6.73. 181 Id., ¶ 6.73. 179 180

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Chinese producers or exporters, solely on the ground that they are distorted by actions of the Chinese government, as it could potentially lead to a breach of Article 2.2.1.1 and 2.2 of the Anti-Dumping Agreement, and Article VI:1 of the GATT (1994).

3.3

Dual Pricing

Some countries that are endowed with natural resources, such as energy, have resorted to the practice of dual pricing. Dual pricing refers to a situation where the government intervenes to provide inputs to the domestic users at lower prices, whereas the same input is exported at a higher export price. On account of the low priced inputs used by the domestic downstream industry, the price of the final product is also low. As a consequence, the domestic final products are able to outcompete similar products when exported to other countries, which do not benefit from low priced inputs.182 In most cases, dual pricing refers to the lowering of the cost of inputs for domestic production over those for exports.183 However, a less common scenario is a State artificially lowering the prices of inputs in order to encourage exports.184 Dual pricing was a contentious issue during the accession negotiations of Saudi Arabia and Russia to join the WTO. Both these States have for long resorted to dual pricing in their energy sector, and were under intense pressure to undertake specific commitments in this regard at the time of their WTO accession negotiations.185 Saudi Arabia, through a government decree (now repealed), offered a 30% discount (based on the lowest export price) to natural gas liquids or feedstock used for domestic production over those for export. This practice indirectly damaged the petrochemical industry of WTO Members who did not have access to the low priced feedstock.186 Likewise, in Russia the price of natural gas or feedstock is not market determined on account of government control over the gas and electricity sectors. Russia charges lower prices for natural gas or feedstock destined for domestic consumption than for export. Several WTO Members maintain that their imports from Russia

182

See Vitaliy Pogoretskyy, The System of Energy Dual Pricing in International Trade: Subsidies and Anti-Dumping Perspectives, in Regulation of Energy in International Trade Law: WTO, NAFTA and Energy Charter (Julia Selivanova ed., 2011). 183 See James Nedumpara, Energy Security and the WTO Agreement, in Trade, the WTO and Energy Security: Mapping the Linkages for India (Mathur S ed., 2014). 184 Id. 185 Vitaliy Pogoretsky, The System of Energy Dual Pricing in Russia and Ukraine: The Consistency of the Energy Dual Pricing System with the WTO Agreement on Anti-Dumping, 4(10) Global Trade & Customs J. 313, 313–323 (2009). 186 Nedumpara, supra note 183, at 31–32.

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were prejudiced by the fact that the energy prices for domestic consumption in Russia were lower than world prices. 187 In view of the opposition to dual pricing, both Saudi Arabia and Russia in their Protocol of Accession to the WTO, committed that their domestic providers of feedstock would “operate on the basis of normal commercial considerations, based on the full recovery of cost and a reasonable profit”.188 The practice of dual pricing can be addressed either through the imposition of anti-dumping duties or countervailing duties. On account of the market distortion caused by dual pricing, an IA would have to rely on an alternative benchmark when: (i) constructing the normal value in an anti-dumping investigation; or (ii) determining the adequacy of remuneration for calculating the amount of benefit, in a countervailing duty investigation. It is fitting to recount that in 2010 the Indian IA had initiated an anti-dumping investigation concerning the imports of polypropylene originating in or exported from Saudi Arabia.189 The Indian IA had imposed an anti-dumping duty on Saudi Arabia on account of the fact that the prices of propane, the principal input for the production of polypropylene, in Saudi Arabia were fixed significantly lower than the comparative export prices.190 The IA concluded that a “particular market situation” existed in Saudi Arabia wherein the domestic costs and prices of the subject goods were always significantly lower than the export price.191 When the constructing the normal value of polypropylene on the basis of the cost of production, plus S, G & A and reasonable profits, the IA “considered it appropriate to modify the cost of production in respect of propane [feedstock] prices”.192 In other words, the IA had relied upon an alternative benchmark price of propane (feedstock) for constructing the cost of production of polypropylene. The authority had reasoned that the second condition of Article 2.2.1.1 allowed an IA to discard the records of the domestic producers when the recorded costs were not reasonable.193 It is imperative to note that since the above finding of the IA came before the Appellate Body Report in EU—Biodiesel (Argentina), the IA rejected the recorded costs of the feedstock by going into the reasonableness of the costs per se. However, after EU—Biodiesel (Argentina), an IA’s ability to discard the cost of

187

Id. World Trade Organisation, Report of the Working Party on the Accession of Saudi Arabia, ¶ 33, WTO Doc. WT/ACC/SAU/61 (Nov. 1, 2005); World Trade Organisation, Report of the Working Party on the Accession of the Russian Federation, ¶ 132, WTO Doc. WT/ACC/RUS/70 and WT/ MIN (11)/2 (Nov. 17, 2011). 189 Polypropylene Decision, supra note 8. Under the same finding, an anti-dumping duty was also imposed on Oman and Singapore, but for reasons other than dual pricing. 190 Id., ¶ 80. 191 Id., ¶ 81. 192 Id., ¶ 82. 193 Id., ¶ 80. 188

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production on the ground of reasonableness of costs under the second condition of Article 2.2.1.1 is severely curtailed. In view of the discussion in EU—Biodiesel, it is unclear whether dual pricing meets the level of market distortion that would allow an IA to adopt an external benchmark under the second condition of Article 2.2.1.1. However, it seems difficult that the prevalence of dual pricing in the country of export would allow an IA a free-hand to determine the reasonableness of cost, over and above the reasonableness of record.

4 Conclusion In view of the above analysis, it is worth noting that in a countervailing duty investigation, an IA can resort to an alternative benchmark (including an external benchmark) where: (i) the government is the sole supplier of a good or service; (ii) the government administratively controls the prices; and (iii) the government is the predominant supplier of a good or service; provided that on account of the predominant role of the government, the private suppliers have no option but to align their prices with those of the government-provided goods. However, in an anti-dumping investigation, it is doubtful if an IA would be able to resort to an external benchmark to address government induced market distortions. This is on account of the constricted approach of the Appellate Body in EU— Biodiesel (Argentina) and the Panel in EU—Biodiesel (Indonesia), with respect to the adoption of an external benchmark in an anti-dumping investigation. Thus, an IA does not have much flexibility to employ an external benchmark in an anti-dumping investigation to address instances of market distortion caused by the government by virtue of being the sole/predominant supplier or by administratively controlling prices. Since IAs enjoy greater flexibility to use external benchmark prices in a countervailing duty investigation, as compared to an anti-dumping investigation—IAs would now find it more practical to address instances of market distortion by imposing countervailing duties under the SCM Agreement, as opposed to anti-dumping duties under the Anti-Dumping Agreement. Thus, IAs may now have to shift focus to the SCM Agreement to overcome challenges of state intervention and price distortion, through the adoption of an external benchmark in the benefit-benchmark analysis, instead of tackling the same through anti-dumping measures.

The Issue of ‘Particular Market Situation’ Under WTO Anti-dumping Law Weihuan Zhou

Abstract The expiry of the so-called NME Methodology under China’s WTO Accession Protocol has led to the search for potential alternatives to continue to treat China as an NME in anti-dumping actions, and the growing importance of the concept of ‘particular market situation’ (“PMS”) under the WTO Anti-Dumping Agreement. This chapter discusses how the PMS method should be interpreted and applied and the implications of the Appellate Body’s recent decisions in the EU— Biodiesel dispute for the issue of PMS. The chapter then offers a brief overview of Australia’s application of the PMS method in anti-dumping actions, and the latest development of anti-dumping laws and practices in the US and the EU in this connection. Keywords Particular market situation Anti-dumping agreement


EU—Biodiesel
Proper comparison

1 Introduction One of China’s most well-known and controversial WTO-plus obligations has been its commitment to allowing other WTO Members to treat it as a non-market economy (NME) in anti-dumping investigations, and on that basis, to use non-Chinese prices or costs in a market economy third country for the purpose of determining normal values. This is known as the ‘NME Methodology’. Various chapters of this book have reviewed the practical application of the NME Methodology in different jurisdictions, and have discussed whether that methodology may be applied after the fifteen-year deadline (i.e. 11 December 2016) as

W. Zhou (&) Faculty of Law, University of New South Wales, Sydney, Australia e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2018 J. J. Nedumpara and W. Zhou (eds.), Non-market Economies in the Global Trading System, https://doi.org/10.1007/978-981-13-1331-8_7

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contemplated under Sect. 15(d) of China’s WTO Accession Protocol.1 This chapter is not intended to join the already robust debate over the interpretation of Sect. 15; instead, it explores the issue of Particular Market Situation (PMS) under the WTO Agreement on Anti-Dumping (AD Agreement). Article 2.2 of the AD Agreement provides: When there are no sales of the like product in the ordinary course of trade in the domestic market of the exporting country or when, because of the particular market situation or the low volume of the sales in the domestic market of the exporting country, such sales do not permit a proper comparison, the margin of dumping shall be determined by comparison with a comparable price of the like product when exported to an appropriate third country, provided that this price is representative, or with the cost of production in the country of origin plus a reasonable amount for administrative, selling and general costs and for profits. (emphasis added)

Thus, like the NME Methodology, the PMS method provides a pathway to the use of surrogate prices for calculating normal values. That is, a finding that a PMS exists in the market of the exporting country would allow investigating authorities to disregard the actual sale prices of the subject goods in that market (i.e. normal value) and then to determine the normal value based on a constructed method (i.e. constructed normal value (CNV)). In calculating a CNV, surrogate costs of production are often applied so as to address market distortions caused by government intervention. Thus, the PMS method may be employed to deal with NMEs if Sect. 15 of China’s Accession Protocol is interpreted as no longer providing the basis for the application of the NME Methodology. Neither the AD Agreement nor WTO jurisprudence has provided sufficient guidance on how to assess whether a PMS exists or not. This has led to growing prominence of the issue of PMS under the WTO antidumping law and practice as countries have been exploring alternatives for the NME Methodology. This chapter proceeds as follows. Section 2 discusses how the term PMS should be interpreted and applied, and the implications of the Appellate Body’s landmark decisions in the EU—Biodiesel dispute. Section 3 offers a brief overview of Australia’s application of the PMS method in antidumping actions, and the latest development of antidumping practices in the US and the EU in this connection. Section 4 concludes.

1 Protocol on the Accession of the People’s Republic of China, WTO Doc. WT/L/432 (Nov. 23, 2001). Many other publications have also discussed the interpretative issues of Sect. 15, see, e.g., Edwin Vermulst, Juhi Dion Sud & Simon Evenett, Normal Value in Anti-Dumping Proceedings against China Post-2016: Are Some Animals Less Equal Than Others? 11(5) GLOBAL TRADE & CUSTOMS J., 212, 228 (2016); Jorge Miranda, Interpreting Paragraph 15 of China’s Protocol of Accession, 9(3) GLOBAL TRADE & CUSTOMS J., 94, 103 (2014); Stewart, T.P., Fennell, W.A, Bell, S. M. & Birch, N.J., The Special Case of China: Why the Use of a Special Methodology Remains Applicable to China after 2016, 9(6) GLOBAL TRADE & CUSTOMS J., 272, 279 (2014); David Kleimann, The Vulnerability of EU Anti-Dumping Measures against China after December 11, 2016 1–10 (EU University Institute, Working Paper No. RSCAS 2016/37, July 2016); Andrei Suse, Old Wine in A New Bottle: The EU’s Response to the Expiry of Sect. 15(A)(II) of China’s WTO Protocol of Accession 1-31 (Leuven Centre for Global Governance Studies, Working Paper No. 186, May 2017).

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2 Interpreting PMS and the Appellate Body Report in EU—Biodiesel 2.1

A Standard Approach to PMS

The AD Agreement does not provide any definition of PMS. On the face, it ‘may be understood as referring to the state of certain part or segment of that market which is affected by something while the other parts or segments of the market are not similarly affected.’2 However, this definition provides no clarification on what situations in the market may be regarded as ‘particular’. Article 2.2 envisages several circumstances which may trigger the use of CNVs, including (1) ‘no domestic sales of like products in the ordinary course of trade’; or (2) the existence of a PMS; or (3) ‘low volume of sales in the country of exportation’. Arguably, these circumstances are distinct such that the term PMS does not include the other two circumstances. Furthermore, Article 2.7 of the AD Agreement provides that Article 2 of the AD Agreement is ‘without prejudice to the second Supplementary Provision to paragraph 1 of Article VI’ of the GATT which provides: It is recognized that, in the case of imports from a country which has a complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the State, special difficulties may exist in determining price comparability for the purposes of paragraph 1, and in such cases importing contracting parties may find it necessary to take into account the possibility that a strict comparison with domestic prices in such a country may not always be appropriate.

Thus, this Ad Note contemplates certain extreme market situations where imports and exports as well as domestic prices are controlled by the State. The wording ‘without prejudice to’ under Article 2.7 suggests that the interpretation of the other provisions of Article 2 must not ‘detrimentally affect, encroach upon, or impair’ the right of WTO Members to disregard domestic prices in an exporting country where such extreme situations arise.3 Accordingly, no matter whether these situations may fall within the ambit of PMS, the term PMS may not be interpreted in a way that diminishes Members’ right under the Ad Note. The above interpretation still leaves the meaning and scope of PMS largely unclear. Further textual and contextual guidance is therefore required. Under Article 2.2 of the AD Agreement, the reason why the concept PMS is significant within the meaning of dumping is that the existence of such a situation would preclude a ‘proper comparison’. Given the definition of dumping under Article 2 of the AD Agreement, the ‘comparison’ refers to one between export prices and domestic 2

Weihuan Zhou and Andrew Percival, Debunking the Myth of 'Particular Market Situation' in WTO Antidumping Law, 19(4) J. INT’L ECON. L., 863, 868 (2016). 3 Appellate Body Report, China — Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, ¶ 219, WTO Doc. WT/DS363/ AB/R (adopted Jan. 19, 2010).

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prices of the subject goods. Thus, it is reasonable to argue that the interpretation of PMS does not hinge on the alleged market situation per se, but on whether the existence of the situation has rendered the ‘proper comparison’ between export prices and domestic prices impossible. In EEC—Cotton Yarn, the GATT panel held that the exchange rate freeze and high inflation in the Brazilian market did not constitute a PMS on the following ground: … the test for having any … recourse [to use of CNV under Article 2.2 of the WTO AD Agreement] was not whether or not a ‘particular market situation’ existed per se. A ‘particular market situation’ was only relevant insofar as it had the effect of rendering the sales themselves unfit to permit a proper comparison. In the Panel’s view, therefore, Article 2:4 [now Article 2.2] specified that there must be something intrinsic to the nature of the sales themselves that dictates they cannot permit a proper comparison.4

This ruling lends support to the view that a PMS may be found to exist only if the situation concerned has affected domestic prices of the subject goods so that they are not suitable for comparison with the export prices. On the contrary, a PMS would not arise if the alleged situation does not preclude a proper comparison between domestic prices and export prices. Accordingly, at the core of the issue of PMS is the comparability of domestic prices vis-à-vis export prices. Whether such comparability has been affected must be evaluated by reference to both of the prices. If a market situation has impacted domestic prices and export prices to the same extent, then the comparability of the domestic prices is not affected because a proper comparison between the two prices would not be precluded. Only when the situation has affected the two prices asymmetrically that it would constitute a PMS. This interpretation is arguably in line with the object of the AD Agreement. It is widely recognised that the purpose and object of the AD Agreement is not to condemn the practice of dumping, but to discipline the use of anti-dumping measures (typically in the form of customs duties) to protect domestic import-competing industries by imposing substantive and procedural obligations on investigating authorities.5 In this connection, Article 9.3 of the AD Agreement provides that ‘[t]he amount of the anti-dumping duty shall not exceed the margin of dumping as established under Article 2.’ Article 18.1 prohibits Members from taking anti-dumping actions ‘except in accordance with’ the GATT and the AD Agreement. These provisions suggest strongly that the determination of dumping must strictly comply with the rules under Article 2 so as to avoid the charge of excessive anti-dumping duties. Accordingly, the term PMS must not be interpreted in a way that may lead to unjustified inflation of dumping margins. Such an inflation would not be possible if the approach advanced above is applied to the interpretation of PMS.

GATT Panel, EC — Imposition of Anti-Dumping Duties on Imports of Cotton Yarn from Brazil, ¶ 478, GATT Doc. ADP/137 (adopted Jul. 4, 1995). 5 Appellate Body Report, European Union — Anti-Dumping Measures on Biodiesel from Argentina, ¶ 6.25, WTO Doc. WT/DS473/AB/R (adopted Oct. 26, 2016) [hereinafter EU — Biodiesel (AB Report)]. 4

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As will be shown in Sect. 3 below, the use of the PMS method in practice has relied heavily on government influence on prices of raw materials used in the production of the final goods subject to anti-dumping investigations. Such government influence is often found to have artificially lowered the costs of production and consequently the price of the final goods, thereby creating a PMS in the raw materials market and the final goods market. However, the use of the PMS method in such a way is inherently flawed and is often not supported by sufficient evidence. Significantly, it is likely to inflate dumping margins. If the alleged market situation has actually affected/lowered the price of the raw materials concerned, further evidence is required to establish that the effect has flowed through to the price of the final goods. A mere assumption that the ‘flowing-through’ has occurred falls short of the evidentiary requirements under the AD Agreement for the purpose of finding that a PMS exists in the market of the final goods.6 It is incumbent upon the investigating authorities to establish the ‘flowing-through’ effect. In addition, even the ‘flowing-through’ effect is established, it does not substantiate a finding of PMS. Applying the interpretative approach developed above, the PMS method may be employed only when the situation in question has affected the comparability of the domestic prices of the final goods vis-à-vis the export prices. If the source of the price distortion lies in the raw materials market, that distortion may affect the export prices in the same way and to the same extent as it may affect the domestic prices.7 Thus, investigating authorities must consider whether domestic prices and export prices of the final goods have been affected by the same distortion. An assumption that only the domestic prices are affected is unjustifiable not only due to the lack of positive evidence, but also because it would preclude a ‘proper comparison’ between domestic prices and export prices. That is, such an assumption would lead to a comparison between an undistorted CNV and distorted export prices and eventually an inflation of dumping margins. This is because the CNV would be calculated using undistorted surrogate costs in a chosen third country while the export prices would still carry the distorted or artificially lowered cost of production. In short, it is submitted that in determining whether a PMS exists, investigating authorities are responsible to consider whether the alleged market situation or distortion has affected the domestic prices and export prices of the subject goods even-handedly so as to ensure a ‘proper comparison’ between the two prices and avoid unjustified inflation of dumping margins in accordance with the AD Agreement.

Appellate Body Report, United States — Final Countervailing Duty Determination with Respect to Certain Softwood Lumber from Canada, ¶ 140, WTO Doc. WT/DS257/AB/R, (adopted Feb. 17, 2004). Also see Sherzod Shadikhodjaev, How to Pass a Pass-Through Test: the Case of Input Subsidies, 15(2) J. INT’L ECON. L., 621, 646 (2012). 7 Thomas Prusa and Edwin Vermulst, United States — Definitive Anti-Dumping and Countervailing Duties on Certain Products from China: Passing the Buck on Pass-Through, 12(2) WORLD TRADE REV., 197, 234 (2013). 6

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The Implications of EU—Biodiesel for the Interpretation of PMS

The significance of the Appellate Body report in EU—Biodiesel lies in the great clarity it has provided on whether surrogate production cost can be used for the determination of normal value under the AD Agreement, and more broadly, its far-reaching implications for the scope of the AD Agreement, that is, whether the agreement and hence antidumping measures should be used to tackle price distortions associated with state intervention.8 This section focuses on discussing how the rulings of the Appellate Body shed light on the issue of PMS. The dispute arose out of the EU’s imposition of antidumping duties on biodiesel exported from Argentina and Indonesia.9 In determining the dumping margins, the EU authorities were concerned about Argentina’s Differential Export Tax (DET) system which imposed taxes on the exports of soybeans and soybean oil— the main raw materials used in the production of biodiesel. The EU authorities found that the DET system depressed the domestic prices of the raw materials and created a PMS in the relevant market.10 On that basis, the EU authorities disregarded the records of the Argentinean producers which in the eyes of the authorities do not reasonably reflect the costs of the raw materials, and established the normal value using reference prices that reflect the level of international prices.11 The difference between the reference prices and the cost actually incurred by the Argentinean producers was essentially the amount of the export taxes imposed under the DET system. On appeal, the Appellate Body was requested to consider whether the EU authorities’ use of the surrogate production cost for the calculation of the CNV breached the rules under Article 2.2.1.1 of the AD Agreement. Article 2.2.1.1 provides in the relevant part: For the purpose of paragraph 2, costs shall normally be calculated on the basis of records kept by the exporter or producer under investigation, provided that such records are in accordance with the generally accepted accounting principles of the exporting country and reasonably reflect the costs associated with the production and sale of the product under consideration. (emphasis added)

8

For a detailed analysis of the Appellate Body report, see Weihuan Zhou, Appellate Body Report on EU — Biodiesel: The Future of China’s State Capitalism under the WTO Anti-Dumping Agreement, WORLD TRADE REV., 1–25 FirstView (2018). 9 Panel Report, European Union — Anti-Dumping Measures on Biodiesel from Argentina, WTO Doc. WT/DS473/R, ¶ 2.2-2.3, 7.179-7.184 (adopted Oct. 26, 2016); EU — Biodiesel (AB Report), supra note 5, ¶ 5.1, 5.10. 10 Council Implementing Regulation (EU) No. 1194/2013 of 19 November 2013, imposing a definitive anti-dumping duty and collecting definitively the provisional duty imposed on imports of biodiesel originating in Argentina and Indonesia, 2013 O.J (L315), ¶ 30. 11 Id., ¶ 34.

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Thus, Article 2.2.1.1 requires investigating authorities to use the cost actually incurred by producers in constructing normal values insofar as the two conditions are met, including: (1) the cost is recorded in conformity with the generally accepted accounting principles (GAAP) of the exporting country, and (2) the records ‘reasonably reflect the costs associated with the production and sale of’ the subject goods (Reasonably Reflecting Test). Evidently, the major task of the Appellate Body was not to clarify the meaning of PMS, but to determine how the Reasonably Reflecting Test should be interpreted and applied.12 Nevertheless, the Appellate Body’s ruling is relevant to the issue of PMS as the EU authorities’ application of the reference prices relied on the finding of a PMS in the raw materials market in Argentina, which in turn was based on the finding of the distortions associated with the DET system. In expounding the Reasonably Reflecting Test, the Appellate Body rejected the EU’s argument that this test requires the use of costs associated with ‘the production and sale of biodiesel in normal circumstances, i.e. in the absence of the alleged distortion caused by Argentina’s export tax system.’13 Contrary to the EU’s view, the Appellate Body believed that the Reasonably Reflecting Test does not require the costs recorded by producers to be ‘reasonable’, and that the actual costs must be used for the construction of normal value as long as they are genuinely related to the production and sale of the goods under consideration.14 The Appellate Body agreed with the panel that while a ‘reasonableness’ test is not required, investigating authorities are ‘free to examine the reliability and accuracy of the costs recorded … to determine, in particular, whether all costs incurred are captured; whether the costs incurred have been over- or understated; and whether non-arms-length transactions or other practices affect the reliability of the reported costs.’15 Eventually, the Appellate Body upheld the panel’s finding that the EU authorities’ determination that domestic prices of soybeans in Argentina were lower than international prices due to the Argentine export tax system was not, in itself, a sufficient basis under Article 2.2.1.1 for concluding that the producers’ records do not reasonably reflect the costs of soybeans associated with the production and sale of biodiesel, or for disregarding those costs when constructing the normal value of biodiesel.16

Recall that the EU’s use of the reference prices was based on the finding of the distortions associated with the DET system and hence a PMS in the raw materials market, the Appellate Body’s rulings above have important implications for the interpretation of PMS. While the Appellate Body did not consider whether the distortions caused by the Argentinean government’s regulation in the raw materials market may create a PMS, its rulings suggest that the existence of such distortions

12

EU Id., 14 Id., 15 Id., 16 Id., 13

— Biodiesel (AB Report), supra note 5, ¶ 6.16. ¶ 6.30. ¶ 6.35–6.37, 6.39. ¶ 6.41. ¶ 6.55.

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and the resultant PMS does not provide sufficient basis for the use of surrogate production cost in determining a CNV. This is because the Reasonably Reflecting Test does not authorize investigating authorities to disregard producers’ costs which are considered to be ‘unreasonable’ or not to reflect such costs ‘in normal circumstances’. Rather, the Reasonably Reflecting Test merely allows authorities to check whether producers’ costs are recorded in an accurate and reliable manner. As the Appellate Body explained in more detail in other parts of its report, the ‘accuracy and reliability’ check concerns the allocations and adjustments of costs in a way that reflects the costs actually incurred in the production of the subject goods by each exporter or producer under investigation.17 Furthermore, the ‘accuracy and reliability’ test may also involve an examination of whether raw materials have been supplied between related parties at arm’s length prices. Such an examination, however, concerns whether the sales are made ‘in the ordinary course of trade’ and does not concern the issue of PMS. In this regard, the Appellate Body observed that Article 2.2 of the Anti-Dumping Agreement concerns the establishment of the normal value through an appropriate proxy for the price of the like product in the ordinary course of trade in the domestic market of the exporting country when the normal value cannot be determined on the basis of domestic sales. The costs calculated pursuant to Article 2.2.1.1 of the Anti-Dumping Agreement must be capable of generating such a proxy. This supports the view that the “costs associated with the production and sale of the product under consideration” in Article 2.2.1.1 are those costs that have a genuine relationship with the production and sale of the product under consideration. This is because these are the costs that, together with other elements, would otherwise form the basis for the price of the like product if it were sold in the ordinary course of trade in the domestic market.18

While this ruling may be interpreted as leaving the flexibility for authorities to consider the ‘reliability’ of production costs recorded by producers, it does not affect the observation that the finding of PMS based on price distortions caused by government intervention does not, in itself, justify a deviation from the recorded costs. Rather, evidence in addition to the existence of a PMS, e.g. sales not ‘in the ordinary course of trade’, is required to establish that producers’ costs do not satisfy the Reasonably Reflecting Test and hence may be disregarded. In this connection, it is worth pointing out that the ‘in the ordinary course of trade’ test differs from the PMS test which may involve consideration of government intervention in the market. As explained by the Appellate Body in US—Hot-Rolled Steel, the ‘in the ordinary course of trade’ test concerns the terms and conditions in business transactions,19 not price distortions caused by state intervention. Accordingly, to the extent that the Reasonably Reflecting Test allows consideration of the ‘reliability’

Id., ¶ 6.22. Id., ¶ 6.24. 19 Appellate Body Report, United States – Anti-Dumping Measures on Certain Hot-Rolled Steel Products from Japan, ¶ 140–143, WTO Doc. WT/DS184/AB/R (adopted Aug. 23, 2001). See also Stéphanie Noël and Weihuan Zhou, Replacing the Non-Market Economy Methodology: Is the European Union’s Alternative Approach Justified Under the World Trade Organization AntiDumping Agreement?, 11(11/12) GLOBAL TRADE & CUSTOMS J., 559, 563–565 (2016). 17 18

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of producers’ costs as opposed to the ‘reasonableness’ of the costs, it leaves little flexibility for consideration of government or regulatory interventions in the raw materials market. The analysis above finds support in the WTO panel’s rulings in the recent US— OCTG (Korea) dispute. The panel was requested to consider whether the US authority may reject the actual sale price of steel coils (the main input in the production of oil country tubular goods (OCTG)) between two affiliated entities (i.e. NEXTEEL and POSCO) in accordance with Article 2.2.1.1 of the AD Agreement.20 In examining whether NEXTEEL’s records ‘reasonably reflected’ the costs of steel coils, the panel clarified and applied the Appellate Body’s reasoning in EU—Biodiesel, and confirmed that the Reasonably Reflecting Test does not involve an examination of ‘whether the reported costs are themselves reasonable’ but allows for a consideration of whether the transactions in question were at arm’s length.21 Since the panel had already found in favour of the US authority’s conclusion that ‘NEXTEEL’s steel coil purchases were not at arm’s length prices’, the panel held that the US did not breach Article 2.2.1.1 in finding that ‘NEXTEEL’s records did not reasonably reflect the costs associated with production and sale of OCTG.’22 In summary, the meaning and scope of PMS remains unsettled under the WTO jurisprudence. However, the Appellate Body’s rulings in EU—Biodiesel has sent a strong signal that a finding that a PMS exists on the basis of state intervention and price distortions in the raw materials market does not justify the application of surrogate production cost.

3 The Application of the PMS Method in Australia, the US, and the EU: Recent Developments 3.1

Australia

As the author has discussed at length elsewhere, Australia’s investigating authorities—the Anti-Dumping Commission (AD Commission) and formerly Australian Customs and Border Protection Service (Australian Customs)—have consistently treated China as having a PMS in antidumping investigations.23 While Australia

Panel Report, United States – Anti-Dumping Measures on Certain Oil Country Tubular Goods from Korea, ¶ 7.184, WTO Doc. WT/DS488/R (adopted Jan. 12, 2018). 21 Id., ¶ 7.194, 7.197. 22 Id., ¶ 7.198-7.200. 23 Weihuan Zhou, Australia’s Anti-Dumping and Countervailing Law and Practice: An Analysis of Current Issues Incompatible with Free Trade with China, 49(6) JWT., 975–1010 (2015). 20

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recognized China as a full market economy in 2005,24 it has applied the PMS method as a substitute to the NME Methodology. In practice, the Australian authorities’ findings of PMS predominantly relied on the Chinese government’s intervention in the raw materials markets, such as the steel and iron industry and the aluminum industry, which artificially lowered the prices of the raw materials.25 In constructing normal values, the authorities replaced the actual production costs incurred by the Chinese exporters under investigation with benchmark prices, leading to uplifted production costs and consequently inflated normal values and dumping margins.26 The most recent Australian antidumping investigation involving the issue of PMS and the use of surrogate costs concerned A4 Copy Paper exported from Brazil, China, Indonesia and Thailand.27 The applicant, Paper Australia Pty Ltd, argued that both China and Indonesia had a PMS as the domestic prices of A4 copy paper were artificially lowered by the governments.28 Consequently, the applicant proposed a CNV for China and Indonesia respectively using benchmark production costs.29 In its final report, the AD Commission found that a PMS existed in Indonesia, and in constructing a normal value, that ‘the actual cost of pulp recorded by exporters in 24

Memorandum of Understanding between the Department of Foreign Affairs and the Trade of Australia and the Ministry of Commerce of the People’s Republic of China on the Recognition of China’s Full Market Economy Status and the Commencement of Negotiation of a Free Trade Agreement between Australia and the People’s Republic of China (Apr. 18, 2005), https://dfat.gov. au/trade/agreements/chafta/Documents/mou_aust-china_fta.pdf. 25 See, e.g., Austl. Customs & Border Protection Serv., Certain Hollow Structural Sections Exported from the people’s Republic of China, the Public of Korea, Malaysia, Taiwan and the Kingdom of Thailand, Report to the Minister No. 177, 118–148 (Jun. 7, 2012) [hereinafter HSS Decision]; Anti-Dumping Commission, Alleged Dumping of Certain Crystalline Silicon Photo voltaic Modules or Panels Exported from the People’s Republic of China, Report No. 239, 88–89 (Oct. 6, 2015) (Austl.) [hereinafter Crystalline Silicon Decision]; Austl. Customs & Border Protection Serv., Aluminium Road Wheels Exported from the People’s Republic of China, Report to the Minister No. 181, 36–37 (Jun. 12, 2012) [hereinafter Aluminium Road Wheels Decision]. 26 See, e.g., HSS Decision, supra note 25, at 43–62, 257-274; Aluminium Road Wheels Decision, supra note 25, at 36–44; Austl. Customs & Border Protection Serv., Dumping of Zinc Coated (Galvanised) Steel and Aluminium Zinc Coated Steel Exported from the People’s Republic of China, the Republic of Korea, and Taiwan, Report to the Minister No. 190, 60-63 (Apr. 30, 2013); Anti-Dumping Commission, Alleged Dumping of Deep Drawn Stainless Steel Sinks Exported from the People’s Republic of China, and Alleged Subsidisation of Deep Drawn Stainless Steel Sinks Exported from the People’s Republic of China, Report No. 238, 41–43 (Feb. 15, 2015). 27 Anti-Dumping Commission, A4 Copy Paper from Brazil, China, Indonesia and Thailand, EPR 341, (Austl.), www.adcommission.gov.au/cases/Pages/CurrentCases/EPR-341.aspx. 28 Anti-Dumping Commission, White Uncoated A4 Copy (Cut Sheet) Paper Exported from The Federal Republic of Brazil, the People’s Republic of China, the Republic of Indonesia and the Kingdom of Thailand: Application for the publication of dumping and/or countervailing duty notices, 44–49 (Feb., 2016) (Austl.), http://www.adcommission.gov.au/cases/EPR%20301%20% 20350/EPR%20341%20-%20archived%2018%20October%202017/001%20-%20APPLICATION %20A4%20Copy%20Paper%20-%20Public%20File.pdf. 29 Id., ¶¶ 52–54.

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their records does not reasonably reflect a competitive market cost.’30 The AD Commission observed that … a market situation is primarily concerned with the effect on prices in the domestic market from government influence. On that basis the primary and most relevant comparison in assessing a market situation is a comparison of domestic prices with government influence and domestic prices without government influence.31

The AD Commission identified a series of Indonesian government policies and programs in the pulp and paper sector, and observed that while these measures served economic, social and environmental objectives, they provided ‘ongoing support for the Indonesian pulp industry’.32 Moreover, the AD Commission found that the export ban on Indonesian logs artificially lowered the cost of producing pulp.33 The AD Commission compared Indonesian log and pulp prices with the prices in the Asian region and found that the former were lower than the benchmark prices.34 Accordingly, the AD Commission concluded that the actual cost of pulp recorded by Indonesian exporters ‘does not reasonably reflect a competitive market cost’.35 In constructing a normal value, the AD Commission replaced the actual pulp cost with a benchmark ‘consisting of quarterly import pulp prices into China and Korea based on an average CIF price for bleached eucalyptus kraft wood originating from Brazil and South America.’36 The above represents the AD Commission’s standard approach to the issue of PMS and the use of surrogate costs. This approach contravenes the EU—Biodiesel decision. In essence, the Australian approach relies on alleged government intervention and price distortions and a comparison between allegedly distorted prices and selected benchmark prices which are assumed to be undistorted. The EU— Biodiesel decision explicitly disapproves of this approach to using benchmark costs for the construction of normal value. In relation to China, the AD Commission found, for the first time in recent years, that there was no PMS despite the Chinese government’s influence in the pulp industry distorting the domestic pulp price.37 Central to this finding were the facts that the Chinese paper industry predominantly relied on imported pulp and that the Chinese pulp price was typically higher than regional benchmarks. The latter is

30

Anti-Dumping Commission, Alleged Dumping of A4 Copy Paper Exported from the Federative Republic of Brazil, the People’s Republic of China, the Republic of Indonesia and the Kingdom of Thailand, 50–51 (March 17, 2017) (Austl.), http://adcommission.gov.au/cases/EPR%20301%20% 20350/EPR%20341/221%20-%20Report%20-%20Final%20Report%20-%20REP%20341.pdf [hereinafter A4 Copy Paper Decision]. 31 Id., ¶ 167. 32 Id., ¶ 168. 33 Id., ¶¶ 170–172. 34 Id., ¶¶ 173–174. 35 Id., ¶ 230. 36 Id., ¶ 230. 37 Id., ¶ 153.

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arguably the determinative factor; if the Chinese pulp price were lower than the benchmarks, then given the AD Commission’s findings on Indonesia, it is conceivable that it would make the same findings on China and adopt the same approach to the construction of normal value. This confirms that the Australian authorities rely heavily on benchmarks in determining whether a PMS exists and surrogate prices should be employed. The Australian approach has created several WTO-consistency issues, including: 1. a lack of positive evidence and objective assessment of whether any alleged government influence in upstream markets (e.g. the raw materials markets) has actually affected or flowed through to the domestic price of final goods under investigation (Article 2.2); 2. a lack of positive evidence and objective assessment of whether the above government influence has precluded a proper comparison between export price and normal value due to any asymmetric impact on the two prices (Article 2.2); and 3. the use of surrogate costs on the sole basis that producers’ costs are lower than selected benchmark prices and do not represent competitive market prices (Article 2.2.1.1).

3.2

The US

The US Department of Commerce (USDOC) has primarily relied on the NME Methodology permitted under China’s Accession Protocol to resort to CNV and surrogate prices. In dealing with exports from other countries, the primary basis for the use of CNV has been ‘outside the ordinary course of trade’.38 As a result, the term PMS has rarely been invoked. In anticipation of the expiry of the NME Methodology, the US amended its antidumping laws, through the Trade Preferences Extension Act of 2015, by (1) expanding the scope of ‘outside the ordinary course of trade’ to cover ‘situations in which the administrative authority determines that the particular market situation prevents a proper comparison with the export price or constructed export price’, and (2) expanding the application of PMS to the use of surrogate costs when ‘the cost of materials and fabrication or other processing of any kind does not accurately reflect the cost of production in the ordinary course of trade.’39 The changes create the flexibility for consideration of price distortions associated with state intervention in determining whether surrogate costs should be used and hence the possibility of violating Article 2.2.1.1 of the AD

38

Matthew R. Nicely and Brian Gatta, U.S. Trade Preferences Extension Act (TPEA) of 2015Could Lead to Increased Use of “Particular Market Situation” in Calculating Normal Value in AntiDumping Cases, 11(5) GLOBAL TRADE & CUSTOMS J. 238, 243 (2016). 39 Id., ¶ 243.

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Agreement. They respond to the expiration of the NME Methodology by encouraging the USDOC to resort to PMS. The term PMS was recently applied in the USDOC’s Administrative Review of Certain Oil Country Tubular Goods (OCTG) from South Korea.40 In its final determinations released on 17 April 2017, the USDOC was satisfied that ‘record evidence supports a finding that a particular market situation exists in Korea which distorts the OCTG costs of production.’41 This finding was based on consideration of four factors collectively, including:42 1. Korean imports of hot rolled coil (HRC)—a major raw material for the production of OCTG—from China. Due to the overcapacity in Chinese steel production, the significant imports of Chinese HRC at artificially lowered prices, combined with the Korean subsidisation of steel products, distorted the HRC prices in Korea; 2. Strategic alliances between certain Korean HRC producers and Korean OCTG producers which may have impacted ‘HRC pricing in a distortive manner’; 3. Korean HRC subsidies; and 4. Electricity market distortions. The USDOC observed that a PMS ‘may exist where there is government control over prices to such an extent that home market prices cannot be considered to be competitively set.’ The USDOC concluded that ‘[t]hese intertwined market conditions signify that the production costs of OCTG, especially the acquisition prices of HRC, are distorted, and, thus, demonstrates that the costs of HRC to Korean OCTG producers are not in the ordinary course of trade.’43 Based on these findings, the USDOC imposed an uplift on the HRC costs recorded by the Korean exporters by the amount of the subsidies received by HRC producers and suppliers.44 The USDOC’s approach to PMS above is slightly different from the AD Commission’s as it did not explicitly resort to a benchmark. In effect, however, both the USDOC and the AD Commission treated government intervention as being sufficient to create a PMS and the resultant price distortions as being sufficient to employ surrogate costs. Both the US and Australian authorities are comfortable in making the (unjustified) assumptions that input price distortions would lead to price distortions of final goods and hence preclude a proper comparison between export

40

Issues and Decision Memorandum for the Final Results of the 2014-2015 Administrative Review of the Anti-dumping Duty Order on Certain Oil Country Tubular Goods from the Republic of Korea, 40-41 (U.S. Dep’t Com., Apr. 10, 2017), http://enforcement.trade.gov/frn/summary/ korea-south/2017-07684-1.pdf. 41 Id., ¶ 40. 42 Id., ¶¶ 40–41. 43 Id., ¶ 41. 44 Id., ¶ 42.

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price and normal value.45 Using state intervention and price distortions as the basis to employ surrogate production costs, both authorities have acted inconsistently with Article 2.2.1.1 of the AD Agreement. While the Australian approach has been consistently applied for a decade, it remains to be seen how the US approach will develop in future investigations.

3.3

The EU

Like the USDOC, the EU authorities have primarily relied on the NME Methodology and ‘no sales in the ordinary course of trade’ in deciding to employ the constructed method and surrogate costs.46 However, the EU authorities also have experience of replacing actual producers’ costs with surrogate costs based on findings of PMS, as seen in EU—Biodiesel. While the relevant EU regulation was found to be not WTO-unlawful ‘as such’, the application of the regulation in practice has been squarely condemned by the WTO tribunals in EU—Biodiesel. The EU recently amended its antidumping regulation by replacing the NME Methodology with a country-neutral methodology that is primarily aimed at addressing market distortions caused by state intervention. The amended regulation introduces a new Article 2(6)a, which applies to anti-dumping investigations of imports from WTO Members. The main sections of Article 2(6) a state47: (a) In case it is determined, when applying this or any other relevant provision of this Regulation, that it is not appropriate to use domestic prices and costs in the exporting country due to the existence in that country of significant distortions within the meaning of point (b), the normal value shall be constructed exclusively on the basis of costs of production and sale reflecting undistorted prices or benchmarks, subject to the following rules. (…) The constructed normal value shall include an undistorted and reasonable amount for administrative, selling and general costs and for profits. (b) Significant distortions are those distortions which occur when reported prices or costs, including the costs of raw materials and energy, are not the result of free Id., ¶ 43. The USDOC observed that “where a particular market situation affects the cost of production for the foreign like product, such as through distortions in the cost of inputs, for example, it is reasonable to conclude that such a situation may prevent a proper comparison with the export price or constructed value.” . 46 Stéphanie & Zhou, supra note 19. For an overview of the relevant EU regulations on NMEs, see Suse, supra note 1, at 7–8. 47 Regulation on Protection against Dumped Imports from Countries not Members of the European Union, EUR. PARL. DOC. 2016/1036 (Jun. 8, 2016); Regulation on Protection against Subsidised Imports from Countries not Members of the European Union, EUR. PARL. DOC. (EU) 2016/1037 (Jun. 8, 2016); Regulation of the European Parliament and of the Council , EUR. PARL. DOC. PE-CONS 50/17 (Nov. 23, 2017). 45

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market forces because they are affected by substantial government intervention. In assessing the existence of significant distortions regard shall be had, inter alia, to the potential impact 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 prices or costs; – public policies or measures discriminating in favour of domestic suppliers or otherwise influencing free market forces; – the lack, discriminatory application or inadequate enforcement of bankruptcy, corporate or property laws; – wage costs being distorted; – access to finance granted by institutions which implement public policy objectives or otherwise not acting independently of the state. This new approach will replace Articles 2.7(b) and 2.7(c), which previously authorize the treatment of China as an NME (i.e. the NME Assumption) and the application of the NME Methodology. On its face, Article 2(6)a removes the NME Assumption and shifts the burden to EU industries in establishing state intervention and price distortions according to the factors contemplated in sub-paragraph (b). However, under sub-paragraph (c) of Article 2(6)a (which was not set out above), the EU Commission proposes to collect the relevant evidence and issue a report on these factors for domestic industries to use in applications for antidumping investigations. By doing so, the Commission seeks to ‘assure the EU industry and Member States, that the new rules would not diminish in any significant way the availability of remedial action against cheap imports from China.’48 In a press release of the European Council, it was confirmed that ‘[w]hen a significant distortion is recognized in an exporting country’, the new methodology would allow the Commission to ‘set a price for the product by referring either to the costs of production and sale prices in a country with similar levels of economic development or to appropriate undistorted international costs and prices.’49 It is intended that the new methodology would lead to the same level of antidumping duties as the EU had been able to impose through the NME Methodology.50 Given the text and the intended effect of the new methodology, it may constitute both an ‘as such’ and an ‘as applied’ violation of Article 2.2 of the AD Agreement. Under the standard approach to PMS developed in this chapter, the use of surrogate prices solely based on price distortions caused by government intervention is 48

Suse, supra note 1, at 19–20. European Council Press Release IP231/17, Anti-Dumping Methodology: Council Agrees Negotiating Position (May 3, 2017). 50 European Commission, Joint Press Conference by Jyrki Katainen, Vice-President of the EC, and Cecilia Malmström, Member of the EC, on the Treatment of China in Anti-Dumping Investigations (Jul. 20, 2016), https://ec.europa.eu/avservices/video/player.cfm?ref=I124960. 49

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unlikely to pass the test of PMS. Furthermore, the EU—Biodiesel decision has established that state intervention and resultant price distortions do not constitute sufficient ground for the use of surrogate/benchmark production cost for the calculation of a CNV. Accordingly, to the extent that sub-paragraphs (a) and (b) of Article 2(6)a mandate the EU authorities to use undistorted benchmark costs for the construction of normal value on the sole basis that Chinese costs are distorted by government intervention, these provisions are not only inconsistent with Article 2.2.1.1 of the AD Agreement by themselves, but also will most likely be applied in a way that contravenes these WTO rules.

4 Conclusion This chapter has argued that the existence of a situation in a market does not in itself constitute a PMS within the meaning of the AD Agreement. To avoid unjustified inflation of dumping margins, a finding of a PMS must be based on an assessment of the comparability between domestic prices and export prices of the subject goods. A PMS may be found to exist only when the alleged market situation has affected the two prices asymmetrically. It is the responsibility of investigating authorities to inquiry into the ‘comparability’ of the prices so as to comply with the ‘proper comparison’ standard enshrined in Article 2.2 of the AD Agreement. While the EU—Biodiesel decision does not clarify the meaning and scope of PMS, it has the effect to restrict the use of PMS on the basis of state intervention and price distortions as a pathway to the use of surrogate production costs. In practice, however, it would be realistic to anticipate that WTO Members will try hard to explore the flexibilities (if any) left by the EU—Biodiesel decision in the application of anti-dumping measures. In the absence of WTO jurisprudence on the issue of PMS, it is likely that the use of the PMS method will continue to increase. Indeed, this chapter has shown the increasing use of this method in the US. The EU’s new approach, which concerns a market situation caused by government intervention, also implies that the concept of PMS may be employed to justify the use of surrogate prices or costs in determining normal values. In this connection, it is important to note that how the term PMS should be interpreted and applied tends to be a more systemic issue than the NME Methodology. While the NME Methodology is exclusively available to WTO Members against China, PMS may be invoked in respect of all WTO Members. Thus, the lack of WTO standards on PMS may lead to tit-for-tat anti-dumping actions and pose serious challenges to the world trading system. To avoid any retaliatory application of the PMS method, there is a pressing need for the WTO tribunals to develop the relevant jurisprudence.

Shifting Sands: The Evolution and Future Course of U.S. Anti-dumping Law and Practice Against China and Vietnam Moushami Joshi

Abstract This article traces the history and development of the current non-market economy methodology (NME) under U.S. anti-dumping law and practice as it applies to China and Vietnam and examines the likely change the methodology might undergo in the event that either China or Vietnam were granted market economy treatment. The study reviews early days of U.S. anti-dumping practice, which evolved to address imports from centrally planned economies such as Czechoslovakia and Poland where domestic prices were considered unreliable due to the centrally planned nature of these economies. The Department of Commerce in those early cases weighed different methodologies to calculate normal value for goods originating from these countries and developed a practice where it tended to rely on data from non-state controlled third country “surrogates”. The surrogate country methodology had its limitations, and as Chinese imports made their way to the United States in the 1980s, the Department of Commerce again reworked its methodology to arrive at what is now known as the “factors of production methodology”. The factors of production methodology has led, to what many believe, inflated dumping margins on Chinese and Vietnamese exports. As part of its accession to the WTO, China agreed to be treated as an NME in domestic anti-dumping proceedings but it premised its agreement to such treatment on the understanding that NME treatment would end after 15 years of China’s accession to the WTO, i.e. by December 11, 2016. However, the United States and the European Union continue to apply the NME methodology to Chinese exports even after this date, resulting in a challenge by China at the WTO. Against the backdrop of the battle at the WTO, U.S. anti-dumping law continues to evolve to address unfair trade concerns with the application of new pricing methodologies, such as the “particular market situation” methodology which is being increasingly relied on by the Department of Commerce to reject both costs and domestic prices of exporters from market economy countries. That the methodology is being applied to market economy exports suggests that any success which China may have at the WTO in

M. Joshi (&) Pillsbury Winthrop Shaw Pittman LLP, New York, USA e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2018 J. J. Nedumpara and W. Zhou (eds.), Non-market Economies in the Global Trading System, https://doi.org/10.1007/978-981-13-1331-8_8

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compelling the United States or the European Union (EU) to end its NME status may well be limited. The article concludes with a look to the future including the evolution of the “particular market situation” methodology and the potential WTO challenges that might arise in response to its continued application.







Keywords Particular market situation United states China of production methodology Surrogate country methodology





Factors

1 Introduction When China became a member of the World Trade Organization (WTO) in December 2001 after almost 15 years of hard-fought negotiations, it undertook several conditions for a chance to enter the global trading system.1 One such set of conditions pertained to its treatment under anti-dumping law where it agreed to be treated as a “non-market economy” country (NME) in anti-dumping proceedings initiated by other WTO Members.2 In essence China accepted a special set of rules that would disadvantage its exporters by allowing for the rejection of exporters’ own prices and costs in normal value calculations thereby giving rise to the possibility of inflated dumping margins. These rules had already been in place for over two decades in U.S. anti-dumping law and practice against China and had led to more numerous anti-dumping orders and higher anti-dumping duties on imports from China than might otherwise be the case.3 China nonetheless negotiated a

China was in accession negotiations first with the GATT and then the WTO from 1986 to 2001. See, Working Party on the Accession of China, Report of the Working Party on the Accession of China, 1, WTO Doc. WT/ACC/CHN/49 (Oct. 1, 2001). 2 Anti-dumping duties seek to address unfair pricing by exporters which hurts or injures an importing country’s domestic industry. In anti-dumping proceedings an investigative authority determines if a merchandise is being “dumped” i.e. whether a foreign firm sells merchandise in an export market at a price lower than the price it charges for a comparable product sold in its domestic market. The price of the merchandise in its home market is called the normal value, while the price in the export market is called the export price. The difference between a company’s export price and the normal value is called the dumping “margin,” which often is expressed as a percentage of the export price. In some instances, normal value may be ascertained by relying on the foreign firm’s price for the merchandise in a third country export market or by computing the firm's cost of producing the merchandise, taking into account the selling, general, and administrative expenses, and profit. Either way, an importing country's investigating authority will rely on an exporters own prices or costs as the basis for a price comparison. This is not the case for exporters from non-market economy countries such as China where a foreign firm’s domestic prices and costs are disregarded in deriving normal value. See, U.S. Dep’t Com., 2015 Anti-dumping Manual – Fair Value Comparisons, 2, https://enforcement.trade.gov/admanual/index.html [hereinafter USDOC Anti-dumping Manual]. 3 China accounted for 13 percent of all anti-dumping investigations initiated by the United States between 1995 and 2001, making it the most frequent target of U.S. anti-dumping investigations even though the country was only the fifth largest exporter to the United States, and accounted for only 8 percent of the U.S. market. Further between 1980 and 2004, the average country-wide duty 1

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compromise, that would permit the use of the NME methodology provided its application was limited in time.4 Accordingly, China’s Protocol of Accession to the WTO (China’s Protocol of Accession) in Sect. 15(d) provided that the NME methodology would expire 15 years after the date of China’s Accession, i.e. December 11, 2016.5 However that deadline came and went with no change in U.S. anti-dumping law. On December 12, 2016 China took the matter to the WTO’s dispute settlement system claiming that the provisions of the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (WTO Anti-dumping Agreement) and the General Agreement on Trade and Tariff 1994 (GATT 1994)6 that ordinarily apply to the determination of normal value should apply to imports from China without derogation.7 The United States believes otherwise. Taking a much narrower interpretation of Sect. 15(d), the United States claims that all that expired on December 11, 2016 was the China-specific rule on standard of evidence, i.e. Chinese exporters did not bear the burden of proving that an industry functioned under market conditions. Except for the reversal in the burden of proof, the December 11, 2016 date changed nothing and WTO Members are permitted to use a methodology that is not based on a strict comparison with Chinese domestic prices or costs if it is found that market economy conditions do

rates applied against China was about 98 percent, ‘over 60 percentage points higher than the average 37 percent all-others duty rate applied to market economy exporters of the same products. See, Ka Weng et. al., US anti-dumping actions against China: the impact of China's entry into the World Trade Organization, 562 REV. INT’L POL. ECON, 567 (2010). 4 See, Opening Statement by Ambassador Zhang Xiangchen as a part of the Oral Statement of China at the First Substantive Meeting of the Panel, European Union – Measures Related to Price Comparison Methodologies, WTO Doc. WT/DS516, (Dec. 6, 2017), http://wto2.mofcom.gov.cn/ article/chinaviewpoins/201712/20171202684583.shtml. 5 Section 15 (d) of China’s Protocol of Accession reads, “…..In any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession……”, see, Protocol on the Accession of the People’s Republic of China, art.15(d), WTO Doc. WT/L/432, (Nov. 23, 2001) [hereinafter China’s Protocol of Accession]. It is noteworthy that between 2002 and the end of 2016, the United States had 292 anti-dumping orders in effect, of which 102 were imposed on imports from China. As of 2016 the United States imposed anti-dumping duties on 9.2 percent of imports from China. In comparison, anti-dumping covered only 2.1 percent of U.S. imports from the rest of the world. See, Chad P. Bown, ‘Steel, Aluminum, Lumber, Solar: Trump’s Stealth Trade Protection’, Policy Brief, PETERSONINSTITUTE FOR INTERNATIONAL ECONOMICS, (June 2017), at 3. 6 See, Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1869 U.N.T.S. 201 (1994), art. 2 [hereinafter Anti-dumping Agreement]; Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1869 U.N.T.S. 201 (1994), art. VI:1 [hereinafter GATT 1994]. 7 See, Request for Consultations by China, United States– Measures Related to Price Comparison Methodologies, WTO Doc. WT/DS515/1, (Dec. 12, 2016) [hereinafter US-China NME Consultations]; Request for Consultations by China, European Union – Measures Related to Price Comparison Methodologies, WTO Doc. WT/DS516/1 (Dec. 12, 2016) [hereinafter EU — China NME Consultations].

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not prevail in China or in the industry or sector under investigation.8 Along the same lines, in October 2017 the United States Department of Commerce (USDOC) confirmed its continuing designation of China as a non-market economy.9 Vietnam like China agreed to being treated as a non-market economy in anti-dumping proceedings as a condition of its accession to the WTO and like China agreed to a time bound expiration of the use of NME methodology against its exporters. That date for Vietnam is December 31, 2018.10 Whether Vietnam graduates to market economy status as on January 1, 2019 is unclear, particularly in light of the United States’ position against treating China as a market economy country. The fate of Vietnam in many respects hinges on the outcome of China’s WTO cases against the European Union11 and the United States.12 Theoretically it is possible that in the interim a Vietnamese industry (as opposed to the entire country of Vietnam) could attempt and be successful at claiming market economy status for itself as Vietnam’s Protocol of Accession enables an industry to prove that it operates on market economy conditions.13 But that is highly unlikely given the stringency of the standard employed under U.S. anti-dumping law which enables industries to claim market economy status.14 U.S. trade deficit with China and Vietnam further make that possibility highly unlikely. By the end of 2017, United States had the largest trade deficit with China at $375 billion and the sixth largest trade deficit with Vietnam at $38 billion.15 The history of U.S. anti-dumping practice shows that its increasing trade deficits with countries, See Third Party Submission of the United States, European Union – Measures Related to Price Comparison Methodologies WTO Doc. WT/DS516/l, (Nov. 21, 2017), https://ustr.gov/sites/ default/files/enforcement/DS/US.3d.Pty.Su.pdf. 9 Memorandum from Leah Wils-Owens, to Gary Taverman, China’s Status as a Non-Market Economy (U.S. Dep’t Com., Oct. 26, 2017), https://enforcement.trade.gov/download/prc-nmestatus/prc-nme-review-final-103017.pdf. [hereinafter China NME Memorandum] Also see, Certain Aluminum Foil From the People’s Republic of China: Notice of Initiation of Inquiry Into the Status of the People’s Republic of China as a Nonmarket Economy Country Under the Anti-dumping and Countervailing Duty Laws, 82 Fed. Reg. 62, 16162 (U.S. Dep’t Com., Mar. 29, 2017). 10 The provisions on anti-dumping in the Protocol of Accession of Socialist Republic of Vietnam mirror those in China’s Protocol of Accession. See, Protocol of Accession of Socialist Republic of Vietnam, WTO Doc. WT/L/662 (Nov. 15, 2006) [hereinafter Vietnam’s Protocol of Accession]. 11 EU — China NME consultations, supra note 7. 12 US — China NME consultations, supra note 7. 13 See Article 255 (a) (i) of Vietnam’s Protocol of Accession which states: “If the producers under investigation can clearly show that market economy conditions prevail in the industry producing the like product with regard to the manufacture, production and sale of that product, the importing WTO Member shall use Vietnamese prices or costs for the industry under investigation in determining price comparability.” Vietnam’s Protocol of Accession, supra note 10, art. 255 (a)(i). 14 See infra section 2.3, for a discussion on the Market Oriented Industry (MOI) test under U.S. Anti-dumping law. 15 See generally United States Census Bureau, U.S. Trade in Goods by Country, https://www. census.gov/foreign-trade/balance/index.html. 8

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particularly NMEs have correspondingly resulted in increased anti-dumping initiations and orders against such countries.16 Even if China were successful in its recent WTO challenge to U.S. and EU NME practice, the real battle may yet have to be fought in the not so distant future. Changes to U.S. anti-dumping law by virtue of the Trade Preferences Extension Act of 2015 (“TPEA”) and its application in a number of recent cases foretell a trend wherein the USDOC may be increasingly amenable to rejecting exporters domestic prices and costs on grounds of the existence of a “particular market situation”. Though current cases applying the particular market situation methodology relate to exports from market economy countries, the parameters and standards that are evolving with respect to its application has ramifications for exporters from China and Vietnam if the status of the two countries were to change and they were to be designated as market economy countries. Section I of this chapter traces the development of U.S. anti-dumping practice towards NMEs and its evolution to its current “factors of production” approach. Section II reviews the criteria by which countries are designated as NMEs under U.S. law and its application to China and Vietnam. This section also discusses aspects of U.S. anti-dumping law such as “separate rates” which are prejudicial to NME exporters. Finally, Section III examines recent changes to U.S. anti-dumping law including the increasing reliance on the “particular market situation” methodology and its ramifications for exporters from China and Vietnam.

See, Judith H. Bello et. al., ‘Searching for “Bubbles of Capitalism”: Application of the U.S. Anti-dumping and Countervailing Duty Laws to Reforming Nonmarket Economies’, 25 GEO. WASH. J. INT’L l & eCON., 669 (1992). The author notes China’s exports constituted 66.7 percent of all NME exports to the United States in 1984 which jumped to 87.6 percent in 1990 and 89.5 percent in the first half of 1991. This led to a flurry of new AD cases against China. See, Mark E. Manyin, The Vietnam-U.S. Normalization Process, CRS Issue brief for Congress, (Aug. 15, 2003), http://www.usvtc.org/info/reports/CRS-Normalization%20Process%20Aug03.pdf. In the case of Vietnam the entry into force of the Bilateral Trade Agreement (BTA) on December 10, 2001 normalizing trade relations between the United States and Vietnam led to a sharp rise in U.S.Vietnam trade. Trade between the countries doubled from its 2001 value to over $2.9 billion in 2002. Vietnam captured most of that trade and the trade deficit, which was $632 million in 2001 increased to $1.8 billion in 2002. Vietnam’s exports of catfish increased from over 3 million MT in 1999 to nearly 22 million MT in 2002, capturing almost 20 percent of the U.S. market. This led to the first instance of anti-dumping duties being imposed against Vietnam. See, Notice of Anti-dumping Duty Order: Certain Frozen Fish Fillets from the Socialist Republic of Vietnam, 68 Fed. Reg. 47909 (U.S. Dep’t of Com., Aug. 12, 2003). There was also an increase in imports of Vietnamese shrimp in that period with Vietnam being the fourth-largest foreign supplier of shrimp in 2002. This led to the initiation of the anti-dumping investigation and imposition of duties on shrimp from Vietnam. See, Institution of Anti-dumping Investigations and Scheduling of Preliminary Phase Investigations: Certain Frozen or Canned Warmwater Shrimp and Prawns from Brazil, China, Ecuador, India, Thailand, and Vietnam, 69 Fed. Reg. 1301 (U.S., Int’l. Trade Com., Jan. 8, 2004); Final Determination of Sales at Less Than Fair Value: Certain Frozen and Canned Warmwater Shrimp From the Socialist Republic of Vietnam, 69 Fed. Reg. 71005 (U.S. Dep’t of Com.,Dec. 8, 2004). 16

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2 Section I 2.1

Early Days of U.S. Anti-dumping Practice Against Controlled Economies

The present anti-dumping framework in the United States i.e. the Tariff Act of 1930, as amended, can be traced to the Anti-dumping Act of 1921 (1921 Act), which did not distinguish treatment between market and non-market economy countries and therefore did not provide unique methodologies for calculating normal value of goods originating from centrally planned economies. Under the 1921 Act, normal value (foreign market value as it was then called) was to be derived, in order of preference, from home market sales, sales to third countries, or constructed value based on the exporting country’s costs, irrespective of the source of the exports.17 The 1921 Act’s established scheme of calculating foreign market value of a merchandise began to undergo some changes as exports from communist/ socialists countries made their way to the United States. It was in the 1960s that the U.S. Treasury Department18 began addressing for the first time the issue of price comparability between a product’s import price in the United States and its home market price, when such product originated from a centrally planned economy.19 This period also coincides with negotiations under the GATT 1947 where members tried to address imports from centrally planned economies. Czechoslovakia proposed amending Article VI of the GATT 1947 to address situations where domestic prices could not be used to calculate normal value because they were “fixed by the State” and suggested that import prices be compared with “the average comparable price for the like product for export by third countries to the importing country in question in the ordinary course of trade”, to determine the existence of dumping.20 That proposal was not accepted and instead Contracting Parties adopted an interpretative note to GATT Article VI, which became the present second paragraph of Ad Article VI. The interpretative note exempts importing countries from undertaking a strict comparison with, an exporter’s domestic prices in situations where the exporting country has complete or substantially complete monopoly of its trade and where “all domestic prices are fixed by the State”.21 17

Anti-dumping Act of 1921, Ch. 14 .§ 201–12, Pub. L. No 67-10, 42 Stat. 9, 11–15. See, Donald L. Cuneo et.al., ‘Roadblock to Trade: The State-Controlled Economy Issue in Anti-dumping Law Administration’, 5(2) FORDHAM. INT’L l. J. 277, 282 (1982). 18 The Treasury Department used to handle anti-dumping cases before the authority was turned over to the Department of Commerce in the late 1970s. 19 Cuneo et.al., supra note 17, at 282, 284. 20 See, Article VI – Proposals by the Czechoslovakia Delegation, Revision, WTO Doc. W.9/86/ Rev.1, (Dec. 21, 1954). 21 Paragraph 2 of Ad Article VI states as follows: “It is recognized that, in the case of imports from a country which has a complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the State, special difficulties may exist in determining price comparability for the purpose of paragraph 1,

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The earliest U.S. anti-dumping cases that grappled with the question of how to address exports from controlled economies arose in the context of dumping investigations against Czechoslovakia. The determinations in these cases exhibit the Treasury Department’s weighing and balancing of the statutory scheme to address the treatment of imports from a country that could not be said to have a free market economy.22 In order to calculate dumping the Treasury Department in these earliest cases preferred to rely on the exporter’s domestic market prices and constructed value in calculating normal value as was already provided in the statute. For instance in the anti-dumping investigation concerning Bicycles from Czechoslovakia,23 Treasury used both the home market price and constructed value to compare with U.S. import price and found dumping.24 Likewise in Jalousie-Louvre Sized Sheet Glass from Czechoslovakia25 the Treasury Department appears to have first exhausted available statutory options for calculating foreign market value before it placed reliance on a new methodology it developed at the time, that of using import prices from third countries to calculate normal value. The determination states that foreign market value was based on import prices for similar glass from Western Europe because the exporter did not have home market sales or sales to third countries and information on actual costs of materials and labor in Czechoslovakia was absent for purposes of constructed value calculations.26

2.2

Tinkering with the Anti-dumping Toolbox

Over time the preference for adhering to the available statutory options to calculate normal value for goods originating from planned economies started to dissipate.27 The Treasury Department as a matter of course began using import prices from and in such cases importing countries may find it necessary to take into account the possibility that a strict comparison with domestic prices in such a country may not always be appropriate.” GATT 1994, supra note 6, Ad Art. VI, ¶ 2. See also Sub-Group III-A of Review Working Party III to Trade other than Restrictions or Tariffs, Final Report of Sub-Group III-A, GATT Doc. W.9/220 (Feb. 22, 1955); Review Working Party III, Report of Review Working Party III to Trade other than Restrictions or Tariffs, GATT Doc. W.9/220 (Feb 22, 1955), WTO Doc. L/334 (March 3, 1955). 22 Cuneo et. al., supra note 17, at 284. 23 Bicycles from Czechoslovakia: Determination of Sales at Less than Fair Value, 25 Fed. Reg. 6657 (U.S. Dep’t of Com., July 7, 1960). 24 Id. 25 Jalousie-Louvre Sized Sheet Glass from Czechoslovakia: Determination of Sales at Less than Fair Value, 27 Fed. Reg. 8457 (U.S. Treasury Dep’t., Aug. 15, 1962). 26 Id. 27 See Portland Cement from Poland, 28 Fed. Reg. 6660 (U.S. Treasury Dep’t., June 21, 1963) [hereinafter Portland Cement Case], where the U.S. Treasury Department relied on import prices from a Western European country because sales for home consumption in Poland were not made in the ordinary course of trade and Polish exports to third countries were considered to be inadequate.

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non-state controlled third countries into the United States to determine normal value, with little or no explanation for this change in practice, especially when the emerging novel methodology was not provided for in the statue or the Treasury Department’s regulations.28 In other cases, price comparisons were made between import price in the United States and the ex-factory price at which similar merchandise was sold for home consumption in a “free economy country”.29 The absence of a legal basis supporting the Treasury Department’s evolving practice was remedied somewhat by the promulgation of new regulations in 1968, which addressed for the first time merchandise from controlled economy countries.30 The regulations provided that the basis for price comparability for merchandise originating from such countries would be prices at which same or similar merchandise was sold by a non-state-controlled country either for (i) home consumption in its own market or (ii) to other countries, including the United States.31 In 1974 Congress passed the Trade Act of 1974 incorporating a third option for calculating normal value in case of imports from state controlled economies, that of constructed value of similar merchandise in a non-state controlled economy.32 In most instances products manufactured in controlled economies were also manufactured in non-controlled economies so that the price of the product from the controlled economy could be substituted by one of the three options available, i.e. the price of the product for home consumption in the non-state controlled country, export price from the non-state controlled country to other countries, including the United States or constructed cost of the same or similar merchandise in a non-state

28

See Fur Felt Hoods, Bodies and Caps from Czechoslovakia: Fair Value Determination, 27 Fed. Reg. 6099 (U.S. Treasury Dep’t., Jun. 22, 1962) where the Treasury Department made a negative determination of dumping despite the use of third country import prices into the United States. The Treasury Department explained its inability to use domestic sales price on account of these sales being inadequate to calculate normal value but it does not explain why it dispensed with the other two alternatives for calculating foreign market value, namely sales to third countries and constructed value and relied instead on import prices from third countries into the United States. See also Window Glass from Czechoslovakia: Determination of Sales at less than Fair Value, 29 Fed. Reg. 8381 (U.S. Treasury Dep’t., Sep. 21, 1964); Shoes from Czechoslovakia: Notice of Tentative Determination, 31 Fed. Reg. 1207 (U.S. Treasury Dep’t. Jan. 20, 1966); Fur Felt Hat Bodies from Czechoslovakia: Notice of Intent to Discontinue Investigation and to Make Determination that No Sales Exist Below Fair Value, 31 Fed. Reg. 15024 (U.S. Treasury Dep’t., Nov. 21, 1966). 29 Cuneo et. al., supra note 17, at 288-290. 30 Id., at 290. 31 Id., at 291. The author notes that cases emerging between 1968 and 1974 presented the Treasury Department with little difficulty as the Department routinely employed uniform language in dumping determinations that the exporting country was a controlled economy. In such cases, price comparisons would be made between the purchase price (export price) and either a home consumption price for that product in a non-state controlled country or the product’s export price from such non-state controlled country to the United States or other countries. The determinations however gave no indication if the Treasury Department had carried out an analysis that the country or sector under examination was state controlled. 32 Id., at 292.

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controlled country. But where the only countries producing the product under investigation were the United States and the controlled economy and there were no non-state controlled third countries manufacturing the product in question, the available statutory options fell short of providing a solution for undertaking fair value comparisons. This happened in the anti-dumping investigation on Electric Golf Carts from Poland33 leading to the emergence of the “factors of production” methodology. The method called for determining the amount of each factor of production such as labor, raw materials, administrative and selling expenses, of the controlled economy manufacturer (in this case Poland) while valuing the cost for each factor input with prices from a market economy country at a comparable level of economic development to the controlled economy.34 In the Electric Golf Carts case, Spain was chosen as the market economy country for purposes of valuing the factors of production.35 The Electric Golf Carts case prompted the Treasury Department to once again amend its regulations in 1978 to incorporate the factors of production methodology as part of its tool kit to determine foreign market value for goods from controlled economies.36 The new methodology did not replace the already existing surrogate country methodology (of using non-state controlled country prices for home consumption, export or constructed cost) but supplemented it, such that resort to the factors of production methodology was permitted only when it was impossible to find an appropriate non-state controlled surrogate country.37

33

Electric Golf Carts from Poland: Determination of Sales at Less Than Fair Value, 40 Fed. Reg. 25497 (U.S. Treasury Dep’t. Jun. 16, 1975). In this case, constructed value of golf carts in Canada initially provided the basis for the normal value. But when the Canadian producer stopped producing golf carts, the Treasury Department no longer had a basis for verifying the foreign market value for the Polish manufacturer by reference to the Canadian market economy manufacturer. 34 See, Electric Golf Carts from Poland: Preliminary Results of Anti-dumping Duty Administrative Review, 56 Fed. Reg. 64239 (Dec. 9, 1991). See also, Bello et. al., supra note 16, at 675. 35 See, Bello et. al., supra note 16, at 675. 36 Id. The U.S. domestic industry resisted this approach stating that if in the first instance prices and costs from controlled economies were unreliable, so were the combination of factors of production, since they were based on unreliable price and cost relationships. Despite U.S. industry objections the regulations were adopted. 37 See, Robert H. Lantz, ‘The Search for Consistency: Treatment of Nonmarket Economies in Transition under United States Anti-dumping and Countervailing Duty Laws’, 10 AM. U. INT’L l. REV. 1004 (1995). The article describes the passage of the Trade Agreements Act of 1979 which codified the factors of production methodology. At this time, authority for administering the dumping aspects of anti-dumping law was handed over to Department of Commerce from the Treasury Department. Soon, USDOC issued regulations outlining the hierarchy of methods for determining normal value in investigations involving state controlled economies providing that normal value should first be calculated based on home market prices in a surrogate country, then by relying on export prices for the merchandise when shipped from the surrogate, third, where accurate prices were not available, by relying on constructed value of such merchandise in a surrogate country and finally by identifying the factors of production of the NME and valuing the factors on the basis of prices in a surrogate country.

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China Under the Lens: Re-Tooling for Economies in Transition

Anti-dumping investigations against the People’s Republic of China (PRC) began in the early 1980s with the first investigation initiated against imports of Natural Menthol from the PRC.38 Right from the beginning there was a concerted effort by Chinese exporters to establish that the PRC economy was unlike a typical centrally controlled communist economy where all production and investment decisions were made by the central government. Chinese exporters stressed that market oriented reforms had been undertaken in several sectors such that even if the economy at the macro-level was generally controlled, several sectors operated on market principles,39 and therefore reliance on the producers own prices and costs for purposes of normal value determination was appropriate.40 It is no wonder then that the overriding issue for the USDOC in the Menthol investigation was deciding whether the determination of a “controlled economy” was to be made at the PRC economy level or at the sectoral level. In that investigation the USDOC held that both the PRC economy and the agriculture sector were state controlled because the framework of state controls affected production and pricing of menthol such that PRC home market and export prices were unreliable.41 Normal value was based on export prices from Paraguay (the chosen surrogate country at a level of economic development similar to the PRC) to the United States.42 Likewise in the anti-dumping investigation on Petroleum Wax 38

See Natural Menthol from the People’s Republic of China: Final Determination of Sales at Less Than Fair Value, 46 Fed. Reg. 24614 (U.S. Dep’t Com., May 1, 1981) [hereinafter Natural Menthol Case]. 39 See also, Bello et. al., supra note 16, at 684–685. Congress mandated the USDOC to conduct a study on the market orientation of the PRC economy. In the study the USDOC noted that between 1979 to 1988 China had undertaken many market oriented reforms including a reduction in the scope of central planning, greater integration into the world economy and reforms in enterprise management and ownership. The USDOC also noted that while Congress should modify U.S. anti-dumping law to accommodate a sectoral analysis for centrally planned economies in transition, it was skeptical that such analysis was possible under the law as it was then without further guidance on factors to consider for such analysis. 40 Natural Menthol Case, supra note 38, at 24614. See also, Cuneo et. al., supra note 17, at 297. 41 See also, Cuneo et. al., supra note 17, for a detailed review of submissions made by the PRC menthol producer arguing that state controls on the PRC agriculture sector were minimal. The USDOC observed that while purchase and sales of menthol in the PRC were based on market considerations, land and labor, the major factors of production for menthol were subject to extensive state controls. Incidentally Paraguay, the chosen surrogate country also maintained state controls on menthol such as state set minimum export prices and dual exchange rate system which ironically did not exist in the PRC. See also, Joseph P. Hornyak, Treatment of Dumped Imports from Nonmarket Economy Countries, 15 Md. J. Int’l L. 23, 37–43 (1991), where the author discusses cases from U.S.S.R and Romania which outline the USDOC’s thinking at the time, which reflected a preference for a macroeconomic approach, i.e. evaluating whether an economy was controlled at the national level rather than at the sectoral level. 42 Natural Menthol Case, supra note 39, at 24615.

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Candles from the PRC, the USDOC noted that despite some “indicia of market forces at work in the PRC candle sector”, the sector was not devoid of state control.43 Two factors led to this finding. First, paraffin wax a major input in candles was subject to quotas (despite finding that the PRC government did not establish the price of wax or the amount of wax that went into the candles) and second, that wax candles were predominantly sold to state owned trading companies. The USDOC determined normal value based on Malaysian export prices to the United States.44 In 1988 Congress passed the Omnibus Trade and Competitiveness Act (OTCA 1988) which required the USDOC to determine if normal value for NME producers could be calculated under regular methodologies reserved for market economy producers (i.e. home market prices, sales to third countries or constructed cost) before resorting to the factors of production approach. Which PRC exporters viewed this as enabling the USDOC to conduct a sectoral analysis.45 Separately the OTCA 1988 also adopted the factors of production methodology as the preferred approach for determining normal value.46

43 Petroleum Wax Candles from the People’s Republic of China: Final Determination of Sales at Less than Fair Value, 51 Fed. Reg. 25085 (U.S. Dep’t Com., July 10, 1986), at 25086 [hereinafter Petroleum Wax Candles Determination]. The USDOC held that the PRC economy was state controlled based on an analysis of the following factors (i) degree of government ownership of the factors of production (ii) degree of centralized control over allocation of resources or inputs (iii) degree of government control over output and (iv) the relative convertibility of the country’s currency and degree of government control over trade. 44 Id. The USDOC’s initial choice for a surrogate country would have been either of Egypt, India, Indonesia, Morocco Pakistan, Philippines or Thailand. However the USDOC received next to no replies from manufacturers in these countries. Chinese exporters suggested the USDOC use the factors of production methodology. The USDOC agreed and even received information on the PRC producers’ factors of production. But it had to abandon the methodology as information to value the factors from the identified surrogate counties was not available. 45 See, 19 USC § 1677b(c)(1)(B). The Omnibus Trade and Competitiveness Act of 1988 also provided for the first time a definition of a NME country, provided criteria for making the NME determination and further provided that such determination would not be judicially reviewable. See § 1677 (18) (A), (B) and (D). See also, Bello et. al., supra note 17, at 691. 46 Up until then the factors of production methodology was viewed as a means of last resort and used sparingly. In the anti-dumping investigation of Chloropicrin from the PRC the USDOC was unable to locate an appropriate surrogate country and therefore had to resort to the use of the factors of production methodology where PRC factors for raw materials, labor, energy and factory overheads were valued based on data from Indian chemical companies. Japan and France, the only non-state controlled economies apart from the United States that manufactured chloropicrin were considered unsuitable. See Chloropicrin from the People’s Republic of China: Final Determination of Sales at Less than Fair Value, 49 Fed. Reg. 5982 (U.S. Dep’t Com., February 16, 1984). The change in moving away from the surrogate methodology to the factors of production methodology was also prompted by criticism of the surrogate methodology, including that it led to inflated margins, that it produced arbitrary and unpredictable results against exporters from controlled economies and that it burdened the USDOC with finding suitable surrogates that provided reliable and verifiable data. See, Lantz, supra note 37 at 1004-1007. See also, Bello et. al., supra note 16, at 679–686.

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In Oscillating Fans from the PRC47 respondent exporters sought to establish that the fans sector was devoid of state control and urged the USDOC to calculate normal value based on PRC prices. The USDOC rejected the argument that the fan sector was a “bubble of capitalism” stating that unless “all costs and prices” were market oriented, the presumption of state control over the sector, and by extension, over the exporter would remain. It would however make exception where inputs for production of the product were purchased from a market economy country or if purchased in the PRC, the purchase was at market oriented prices.48 In the Lug Nuts determination,49 USDOC reiterated that it would not find that the sector was a ‘bubble of capitalism’ in an otherwise non-market economy unless all price and costs for the producer were market driven. However it held that steel and chemicals, two major inputs in the production of the product were purchased under market conditions even though the suppliers of both inputs were Chinese state owned companies.50 For all other factors found to be state controlled, Pakistan was used as a surrogate to value these factors.51 The unintended consequence of this decision was that domestic U.S. industry which had earlier objected to the USDOC using PRC driven prices for factor inputs began filing countervailing duty (CVD) cases against PRC fan and lug nut exports.52 The USDOC eventually abandoned this approach and instead adopted 47

See, Oscillating Fans and Ceiling Fans from the People’s Republic of China: Preliminary Determination of Sales at Less than Fair Value, 56 Fed. Reg. 25664 (U.S. Dep’t Com., June 5, 1991) [hereinafter Oscillating Fans Case]. 48 Bello et. al., supra note 16, at 692, 693. 49 Chrome Plated Lug Nuts from the People’s Republic of China: Final Determination of Sales at Less Than Fair Value, 56 Fed. Reg. 46153 (U.S. Dep’t Com., Sep. 10, 1991) [hereinafter Lug Nuts Determination]. 50 Id., at 46155. 51 Id., at 46156. It is interesting that in the Petroleum Wax Candles Determination supra note 43, the USDOC summarily rejected input costs for paraffin wax on the ground that it was a quota product despite submissions that it was purchased at market prices by the candle producers. Yet a similar fact situation in the Lug Nuts determinations led to a different result. 52 See, Lantz supra note 37, at 1040–1041. Unlike the U.S. anti-dumping laws, U.S. CVD laws had not been traditionally applied to nonmarket economies. This was because the USDOC was of the opinion that there was no adequate way to measure market distortions caused by subsidies in an economy that is not based on market principles. The USDOC’s view was that countervailable subsidies could not conceptually speaking, be found within a nonmarket economy and because all economic activity in NMEs was centrally controlled, there existed no way to practically disaggregate government action in such a way as to identify the exceptional action that was a subsidy. The USDOC’s determination to not initiate CVD cases against NMEs was upheld by the U.S. Court of Appeals for the Federal Circuit which held that subsidies could not be said to apply to NMEs. As a result there were no CVD investigations against NMEs until 1991, i.e. until the Oscillating Fans Case and the Lug Nuts determination. In those cases though the USDOC refused to find that the fan or lug nuts industries were “bubbles of capitalism”, several input prices were held to be market oriented. This provided the opening for petitioners to allege that though the economy as a whole was controlled there was enough market based reforms so that subsidies could indeed be found and quantified for certain products. See, Jane M. Smith, ‘U.S. Trade Remedy Laws and Nonmarket Economies: A Legal Overview’, CRS REPORT fOR CONGRESS, (Jan. 31, 2013), at

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the Market Oriented Industry (MOI) approach in 1992 in the anti-dumping determination of Sulfanilic Acid.53 The MOI test was a significantly more restrictive test to determine if the sector producing the export product was market driven.54 The test requires the responding industry to meet the following factors before an industry could be said to be “market oriented”; (i) virtually no government involvement in setting prices or volumes to be produced (ii) private or collective ownership should characterize the industry under investigation (iii) market-determined prices must be paid for all but an insignificant portion of the inputs accounting for the total value of the merchandise.55 Additionally the USDOC requires that the MOI request should represent all or virtually all the producers in the industry in question.56 Thus far no industry or sector within a NME country has been found to be market oriented, which is no surprise, given that the test requires the responding industry prove a negative, namely that no government control exits.57 Additionally the strict criteria underpinning the MOI test makes it significantly difficult for NME respondents to prove that their industry functions on market oriented criteria and it is unlikely that an industry from a NME country such as China or Vietnam will be able to meet the MOI criteria in the near future.58

6,7,8,9. The author also provides a good historical overview on how CVD law came to be applied to NMEs. 53 Sulfanilic Acid from the People’s Republic of China: Final Determination of Sales at Less than Fair Value, 57 Fed. Reg. 9409 (U.S. Dep’t Com., March 18, 1992). 54 See also, K. William Watson, ‘Will Nonmarket Economy Methodology Go Quietly into the Night? U.S. Anti-dumping Policy towards China after 2016’, Policy Analysis, CATO INSTITUTE, No. 763, (2014) at 6. 55 See, Lantz, supra note 37, at 1042. See also, Chrome Plated Lug Nuts From the People's Republic of China: Amendment to Final Determination to Sales at Less than Fair Value and Amendment to Anti-dumping Duty Order, 57 Fed. Reg. 15052 (U.S. Dep’t Com., Apr. 24, 1992). 56 See Certain Color Television Receivers from the People’s Republic of China: Final Determination of Sales at Less than Fair Value and Negative Final Determination of Critical Circumstances, 69 Fed. Reg. 20594 (U.S. Dep’t Com., Apr. 16, 2004). In this case respondents accounted for about 79.6 percent of the production which was held to be insufficient to represent the industry. 57 See, Lantz, supra note 37, at 1047. The author discusses the preliminary findings in Certain Helical Spring Lock Washers from China case, where the PRC made substantial effort to prove that the spring lock washer industry operated on market principles but fell short due to the strict MOI criteria. 58 Joseph A. Laroski, Jr., ‘NMES: A Love Story Nonmarket and Market Economy Status Under U. S. Anti-dumping Law’, 30 LAW & POL’Y INT’L BUS. 375 (1999). See also, K. William Watson, supra note 54, at 6.

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3 Section II 3.1

Negotiated Bargain: Anti-dumping Provisions in China and Vietnam’s Protocol of Accession

China’s Protocol of Accession incorporates to a large degree U.S. anti-dumping practice that had emerged in the context of China over the course of nearly two decades (1986-2001).59 It recognizes China as a transitioning economy but also notes difficulties that importing countries face in making comparisons with Chinese prices and costs for anti-dumping purposes and therefore continues to give importing countries full flexibility60 in devising normal value calculation methodologies until such time as China remains a non-market economy.61 Much like the MOI test devised by the USDOC, China’s Protocol of Accession in Sect. 15 (a)(i) places the burden on Chinese producers to demonstrate market economy conditions on an industry wide basis before investigating authorities are compelled to use Chinese prices and costs.62 Vietnam like China agreed to be treated as a non-market 59

See, China Working Party Report, supra note 1, at 1. Ibid., at 29–30. China had expressed concern with anti-dumping measures imposed by various countries including methodologies for price comparison. The Working Party noted China’s concerns and observed that in applying Sect. 15 (a)(ii) of the Accession Protocol, countries that did not have established anti-dumping practice should make best efforts to employ a methodology which is similar to one that takes into account, “the prices or costs in one or more market economy countries that were significant producers of comparable merchandise and that either were at a level of economic development comparable to that of China or were otherwise an appropriate source for the prices or costs to be utilized in light of the nature of the industry under investigation….” The China Working Party report therefore clearly shows that NME methodologies already in use by the USDOC would be permissible within the meaning of Sect. 15 (a)(ii) of China’s Protocol of Accession. 61 See China’s Protocol of Accession, supra note 5, art. 15(a)(ii). Art. 15 (a)(ii) provides: “The importing WTO Member may use a methodology that is not based on a strict comparison with domestic prices or costs in China if the producers under investigation cannot clearly show that market economy conditions prevail in the industry producing the like product with regard to manufacture, production and sale of that product.” China has claimed that NME treatment should have ended by December 11, 2016 as per Sect. 15(d) which reads: “….In any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession……” (emphasis added). See China’s Protocol of Accession, supra note 5, art. 15(d). The United States and European Union disagree with this interpretation resulting in WTO disputes against the two by China. See, US-China NME consultations, supra note 5 and EU — China NME consultations, supra note 7. 62 China’s Protocol of Accession, supra note 5, art. 15(a)(i) states as follows: “(a) In determining price comparability under Article VI of the GATT 1994 and the Anti-Dumping Agreement, the importing WTO Member shall use either Chinese prices or costs for the industry under investigation or a methodology that is not based on a strict comparison with domestic prices or costs in China based on the following rules: (i) If the producers under investigation can clearly show that market economy conditions prevail in the industry producing the like product with regard to the manufacture, production and 60

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economy for the purposes of anti-dumping proceedings and its Protocol of Accession is based in all significant respects on China’s Protocol of Accession including in providing investigative authorities broad discretion to use a methodology that does not require a strict comparison with Vietnamese prices and costs and in placing the burden on Vietnamese producers and the government to establish that certain industries are market oriented.63 Given that no NME respondent has been successful in meeting the USDOC’s MOI test by proving that an industry is market oriented, the practical viability of the provisions in China and Vietnam’s Accession Protocol enabling Chinese or Vietnamese respondents to prove an industry works on market principles in domestic anti-dumping proceedings is questionable. China and Vietnam have therefore had to resort to proving that market economy conditions operate on an economy wide basis in an effort to avoid the application of the factors of production approach in U.S. anti-dumping proceedings.64 Thus far the two countries have not been successful and both continue to be treated as NME countries in U.S. anti-dumping investigations. The USDOC evaluates six factors in determining whether a country should be treated as an NME under Sect. 771(18)(A)65 of the Tariff Act of 1930.66 • the extent to which the currency of the foreign country is convertible into the currency of other countries; • the extent to which wage rates in the foreign country are determined by free bargaining between labor and management;

sale of that product, the importing WTO Member shall use Chinese prices or costs for the industry under investigation in determining price comparability.” See also, Watson, supra note 54, at 7. 63 See, Working Party on the Accession of Vietnam, Report of the Working Party on the Accession of Vietnam, WTO Doc. WT/ACC/VNM/48 (Oct. 27, 2006), art. 255. 64 Section 15(d) of the Chinese Accession Protocol states, “Once China has established, under the national law of the importing WTO Member, that it is a market economy, the provisions of subparagraph (a) shall be terminated provided that the importing Member's national law contains market economy criteria as of the date of accession. In any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession. In addition, should China establish, pursuant to the national law of the importing WTO Member, that market economy conditions prevail in a particular industry or sector, the non-market economy provisions of subparagraph (a) shall no longer apply to that industry or sector.” (emphasis added) China’s Protocol of Accession, supra note 5, art. 15(d). It is to be noted Article 255 (d) of the Vietnam’s Protocol of Accession, supra note 10 is substantially similar. 65 See, 19 USC 1677 (18)(A). It states “[T]he term “nonmarket economy country” means any foreign country that the administering authority determines does not operate on market principles of cost or pricing structures, so that sales of merchandise in such country do not reflect the fair value of the merchandise”. 66 19 USC 1677 (18)(B). See also, § 1677 (18)(C) where a determination that a foreign country is a nonmarket economy country remains in effect until revoked. The USDOC can make a NME determination with respect to any foreign country at any time. The evaluation is made on an economy wide level as opposed to at an industry or company level.

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• the extent to which joint ventures or other investments by firms of other foreign countries are permitted in the foreign country; • the extent of government ownership or control of the means of production; • the extent of government control over the allocation of resources and over the price and output decisions of enterprises; and • such other factors as the administering authority considers appropriate. The USDOC made a determination that China still operates as an NME most recently in the anti-dumping investigation concerning imports of Certain Aluminum Foil from the People’s Republic of China.67 Though the review of China’s NME status was motivated by the December 11, 2016 deadline the USDOC made it clear that China’s NME status would not change unless a review under the Act found otherwise.68 With respect to each of the six factors it found as follows: 1. Currency convertibility: Though the renminbi was convertible into foreign currencies for trade purposes and the government had taken steps to develop its foreign exchange (FOREX) market, the government still maintained significant restrictions on capital account transactions and intervened in onshore and offshore FOREX markets.69 2. Wage rates: While wage rates varied across regions and sectors, wage rates were not fully determined though free bargaining between labor and management. Restrictions on formation of independent trade unions and labor flows distorted the supply side of the labor market.70 3. Foreign investment: Foreign investment is limited in strategic sectors. Further, China continues to impose significant barriers to foreign investment, including equity limits and local partner requirements, opaque approval and regulatory procedures, and technology transfer and localization requirements.71 4. Government ownership over means of production: The Chinese government allocates resources to state-invested-enterprises (SIEs) in strategic sectors, shields SIEs from failures, appoints key personnel in SIEs and participates in corporate decision making. It also exercises control over land and remains the final arbiter of who uses land and for what purpose.72 5. Government allocation of resources: The Chinese government controls prices and sets factor inputs costs such as in electricity where it adopts differential pricing. The government owns and controls commercial banks, allocates credits to SIEs despite high corporate debt thereby providing government guarantees 67

China NME Memorandum, supra note 9. Certain Aluminum Foil from the People’s Republic of China: Notice of Initiation of Inquiry into the Status of the People’s Republic of China as a Nonmarket Economy Country under the Anti-dumping and Countervailing Duty Laws, 82 Fed. Reg. 16162, (U.S. Dep’t Com., March 29, 2017). 69 China NME Memorandum supra note 9, at 5. 70 Id., at 31. 71 Id., at 51. 72 Id., at 115. 68

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that undermine market determined pricing of risk. These controls serve largely as a means for state-owned and controlled parties to lend and borrow capital through opaque institutions and channels outside the formal banking sector.73 6. Other factors: the review observed that China’s legal system does not function independently of government and communist party control. Individuals and firms are constrained in their ability to have meaningful independent input into administrative rulemaking or to challenge administrative decisions. Further firms continue to face challenges in obtaining impartial outcomes, either because of corruption or local protectionism.74 Based on the six factors the USDOC found that the PRC government continues to maintain and exercise broad discretion to allocate resources with the goal of achieving specific economic outcomes resulting in fundamental economic distortions. Hence the economy could not be said to be operating under market conditions. The analysis of China’s NME status does not differ significantly from the one conducted almost eleven years ago in the Lined Paper Products investigation where the USDOC noted China’s important strides towards transitioning to a market economy but also noted that the level of government intervention in the economy was still so significant that prices and costs were unreliable.75 Likewise for Vietnam, the USDOC noted that though the country had taken substantial steps to open its market to the international community, it had not transitioned to a full market economy on account of significant government intervention across the economy, which prevented market forces from being fully developed so that prices and costs were not an appropriate indication of value.76 With respect to the first factor, Vietnam’s currency the dong, was not fully convertible for current and capital account transactions and the government set the exchange rate.77 On wage rates, the picture was more positive. USDOC noted that a free labor market had developed in Vietnam and foreign and domestic Vietnamese

73

Id., at 7. Id., at 7. 75 Memorandum for David Spooner from Shauna Lee-Alaia, Anti-dumping Duty Investigation of Certain Lined Paper Products from the People’s Republic of China (“China”) China’s status as a non-market economy (“NME”), A- 570-901 (Aug. 30, 2006). 76 See, Certain Frozen Fish Fillets from the Socialist Republic of Vietnam: Notice of Final Anti-dumping Duty Determination of Sales at Less Than Fair Value and Affirmative Critical Circumstances, 68 Fed. Reg. 37116 (June 23, 2003). This was the first anti-dumping investigation to be initiated against Vietnam since the signing of the Bilateral Trade Agreement (BTA) between the United States and Vietnam on July 13, 2000, which went into force on December 10, 2001. See, Michael F. Martin, “U.S.-Vietnam Economic and Trade Relations: Issues for the 114th Congress”, Cong. Research. Serv., R41550, (2016). 77 See, Memorandum for Faryar Shirzad from Shauna Lee-Alaia, Anti-dumping Investigation of Certain Frozen Fish Fillets from the Socialist Republic of Vietnam- Determination of Market Economy Status, A-552-801, (Nov. 8, 2002) at 8 [hereinafter Vietnam NME Memorandum]. Vietnam’s NME status has not changed. 74

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enterprises competed for labor reflecting in higher wages.78 On the issues of foreign investment, though Vietnam had taken impressive steps to attract foreign direct investment, it nonetheless placed limits through licensing, registration and limits on corporate form.79 As for government ownership over factors of production, the USDOC found Vietnam continues to preserve a key role for state owned enterprises within its economy and competition between the private and public sectors was limited.80 Importantly, the right to own private property was severely restricted.81 As for the fifth factor, the government continued to control over 70 percent of the banking sector while commercial banking grew at a slow pace.82 The government also continued to control interest rates and lending policies which constrained availability of credit for small and medium businesses. Finally the USDOC noted other factors such as weak rule of law, non-independence of the judiciary from the communist party and high levels of corruption as undermining Vietnam’s efforts to transition to a market economy.83 Unable to refute the presumption of being a non-market economy, exporters from China and Vietnam are subject to the factors of production methodology in the calculation of normal value in anti-dumping proceedings.84

3.2

Factors of Production Methodology

Factors of production include materials, labor, energy and other utilities, and representative capital cost, including depreciation.85 The factors are valued based on prices from an appropriate or comparable surrogate country. A surrogate country is considered comparable when its economy is at a level of economic development similar to that of the NME and the surrogate is a significant producer of comparable merchandise.86 The USDOC relies on per capita gross national income data as reported in the most current annual issue of the World Development Report to

78

Id., at 11. Id., at 16. 80 Id., at 22. 81 Id., at 27. 82 Id., at 31. 83 See, Memorandum to Gary Taverman from James Maeder, Certain Frozen Fish Fillets from the Socialist Republic of Vietnam: Decision Memorandum for the Preliminary Results, Preliminary Determination of No Shipments, and Partial Rescission of the 2015–2016 Anti-dumping Duty Administrative Review, A-552-801, (U.S. Dep’t Com., August 31, 2017). See also, Certain Frozen Fish Fillets from the Socialist Republic of Vietnam: Preliminary Results, Preliminary Determination of No Shipments, and Partial Rescission of the Anti-dumping Duty Administrative Review; 2015–2016, 82 Fed. Reg. 42785, (U.S. Dep’t Com., Sep. 12, 2017). 84 19 USC §1677b (c) (1)(B). 85 19 USC §1677b (c) (3). 86 19 USC §1677b (c) (4). 79

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determine which surrogate is at a comparable level of economic development.87 Surrogate countries that produce identical merchandise would qualify as producers of comparable merchandise but where identical products are not produced in the surrogate country the USDOC reviews whether the products have similar production processes, end uses and physical characteristics to be considered comparable. Further the extent to which the surrogate country is a significant producer of the product is evaluated based on characteristics of world production and trade in the product in question as opposed to evaluation against the NME country’s level of production of such merchandise.88 The factors of production are valued using publicly available information. The USDOC’s regulations further instruct the USDOC to normally value all factors in a single surrogate country.89 The requirement to rely on publicly available information presumably emerged in response to past practice where the USDOC found it next to impossible to gather data from surrogate countries because producers in such countries had no incentive to share their confidential data to the USDOC in anti-dumping proceedings that did not concern them.90 The USDOC has a preference for using official import prices rather than domestic prices to value the respondent’s reported inputs because import prices, unlike domestic prices, do not include domestic taxes. But the USDOC will also exclude imports from countries that provide general export subsidies and in situations where prices seem aberrational.91 The USDOC will not use surrogate values if a NME producer purchases a particular input from a market economy producer and the purchase is paid for in a market economy currency.92 For labor, the USDOC uses regression-based wage rates reflective of the observed relationship between wages and national income in market economy countries.93 Factory overheads, sales, general and administrative expenses (“S, G&A”) and profits are derived from publicly available financial statements of comparable merchandise from the primary surrogate country.94 Each factor input quantity (based on the NME respondent’s data) is then multiplied by

87

U.S. Dep’t Com., Anti-dumping Methodologies in Proceedings Involving Non–Market Economy Countries: Surrogate Country Selection and Separate Rates, 72 Fed. Reg. 13246 (2007). 88 USDOC Anti-dumping Manual, supra note 2, Chapter “Nonmarket Economies”, at 12. 89 19 CFR § 351.408(c) (1) and (2). 90 Lantz, supra note 37, at 1004–1007. See also, Bello et. al., supra note 16, at 679–686. 91 USDOC Anti-dumping Manual, supra note 2, Chapter “Nonmarket Economies”, at 14. 92 19 CFR§ 351.408(c) (1). This reflects the limited application of the “bubbles of capitalism” approach considered by the USDOC in the Lug Nuts determination. See, Lug Nuts Determination, supra note 49. 93 19 CFR §351.408(c) (3). 94 19 CFR §351.408(c) (4).

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the value assigned to that factor from the surrogate country to arrive at the normal value for the product in question.95 The factors of production has been criticized for inflating dumping margins96 because among other things costs are not transferable from one country to another despite efforts to use costs from economies at a comparable level of economic development. The methodology almost always wipes away the NME’s comparative advantage. “Manufacturers tend to use more of the factors of production they have in abundance, with a relatively lower cost, and less of [the] scarce factors carrying a relatively higher cost.”97 Combining factors of production from a NME country manufacturer with the costs for the factors from a surrogate market country that has a different cost structure almost always produces higher dumping margins than would be assessed for a manufacturer from a market economy country.98

3.3

Separate Rate Test

Another impediment that only NME exporters have to cross is the one relating to separate rate test. This test does not apply to market economy exporters. Under U.S anti-dumping law there is a rebuttable presumption that all companies within the NME country are subject to governmental control (government wide entity) and should be assigned a single anti-dumping duty rate99 unless an exporter demonstrates the

USDOC Anti-dumping Manual, supra note 2, Chapter “Nonmarket Economies”, at 12. A 2006 study by the Government Accountability Office (GAO) found that the average anti-dumping duty rates imposed on Chinese (NME) exporters’ between 1980–2004 have been significantly higher than those imposed on market economy exporters of the same products. Taking all rates into consideration (including those calculated for individual companies, weighted averages of these rates, and country-wide rates applied to China) the average rate applied to Chinese companies in the 25 cases that were examined was about 67 percent—over 20 percentage points higher than the average rate of 44 percent applied to market economy companies. See, U.S. Government Accountability Office Report to Congressional Committees, US–China Trade: Eliminating Non-Market Economy Methodology would Lower Anti-dumping Duties for Some Chinese Companies, (Jan. 2006), at 19 http://www.gao.gov/new.items/d06231.pdf. 97 Lantz, supra note 37, at 1007. 98 Lantz, supra note 37, at 1008. For instance in the anti-dumping investigation concerning Certain Frozen Fish Fillets from Vietnam, where Bangladesh was chosen as a surrogate country for purposes of valuing factors of production, Vietnamese officials and farmers pointed out that the Vietnamese industry had a natural comparative advantage in that they ran fully-integrated businesses. This was in stark contrast to the fish industry in Bangladesh where none of the catfish companies were fully integrated. See, Joshua Startup, “From Catfish To Shrimp: How Vietnam Learned To Navigate The Waters Of “Free Trade” As A Non-Market Economy”, 90 IOWA L. REV. 1963, 1969 (May, 2005). 99 See, 19 CFR § 351.107 (d) which reads: “Rates in anti-dumping proceedings involving nonmarket economy countries. In an anti-dumping proceeding involving imports from a nonmarket economy country, “rates” may consist of a single dumping margin applicable to all exporters and producers.” (original emphasis). 95 96

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absence of both de jure and de facto governmental control over its export activities.100 This single anti-dumping rate is called the entity wide rate (EWR) because the underlying assumption is that all companies within the country are essentially operating units of a single, government wide entity.101 Evidence of de jure absence of government control over export activities includes (i) an absence of restrictive stipulations associated with an individual exporter’s business and export licenses; (ii) any legislative enactments decentralizing control of companies; and (iii) any other formal measures by the government decentralizing control of companies.102 Evidence of absence of de facto government control over export activities includes: (i) whether the export prices are set by, or subject to the approval of, a governmental authority; (ii) whether the respondent has authority to negotiate and sign contracts and other agreements; (iii) whether the respondent has autonomy from the central, provincial and local governments in making decisions regarding the selection of its management; and (iv) whether the respondent retains the proceeds of its export sales and makes independent decisions regarding disposition of profits or financing of losses.103 Mandatory respondents from NME countries, i.e. those exporters selected by the USDOC to respond to the investigation also have to establish that their export activities are devoid of de jure or de facto government control to be entitled to their own dumping margin, otherwise they are assigned the EWR which may be based on adverse facts available and is hence a prohibitively high rate.104 This is unlike mandatory respondents from market economy countries who will receive an individual firm rate without having to show they are entitled to a “separate rate”,

100

See, Sparklers from the People's Republic of China: Final Determination of Sales at Less Than Fair Value, 56 Fed. Reg. 20588 (U.S. Dep’t Com., May 6, 1991), [hereinafter Sparklers Determination] as modified in Silicon Carbide from the People's Republic of China: Final Determination of Sales at Less Than Fair Value, 59 Fed. Reg. 22585, 22587 (U.S. Dep’t Com., May 2, 1994) [hereinafter Silicon Carbide Determination]. 101 See, U.S. Dep’t Com., Department of Commerce’s Separate-Rates Practice and Application of Combination Rates in Anti-dumping Investigations involving Non-Market Economy Countries, Enforcement and Compliance Policy Bulletins, (Apr. 15, 2005) https://enforcement.trade.gov/ policy/bull05-1.pdf [hereinafter USDOC Separate Rate Practice Bulletin]. 102 See, Sparklers Determination, supra note 100. 103 See, the Silicon Carbide Determination, supra note 100. 104 The separate rate applications for China and Vietnam require detailed information on company structure, affiliations and shareholder information. Responses are due 30 days from the date of initiation of the investigation. See Separate Rate Application and Required Supporting Document for the Socialist Republic of Vietnam, https://enforcement.trade.gov/nme/sep-rate-files/app20150323/srv-sr-app-20150416.pdf; Separate Rate Application and Required Supporting Document for the People’s Republic of China, https://enforcement.trade.gov/nme/sep-rate-files/ app-20150323/prc-sr-app-20150323.pdf.

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i.e. they do not have to prove additionally that their export activities are devoid of government control.105 The separate rate test is especially prejudicial to non-mandatory respondents from NME countries. Like mandatory respondents, non- mandatory respondents in NME cases also have to submit a detailed application showing an absence of government control over their export activities to receive a “separate rate”.106 When such firms are successful, they are assigned a weighted average of the rates calculated individually for the mandatory respondents.107 Therefore firms from NME countries are required to expend considerable resources simply to qualify for the average rate and avoid the punitive adverse facts available rate.108 This also means that all firms from the NME country not queried during the investigation and ones that do not request separate-rate eligibility, by default receive the EWR based on adverse facts available. However all non-queried firms from market-economy countries would normally receive an “all others” rate based on a weighted average of nonzero and non-de minimis margins as opposed to the EWR adverse facts available rate applicable to non-queried NME exporters.109 Chinese country-wide rates have exceeded 100 percent ad valorem in one-half of AD cases initiated against Chinese imports since 1995, with an average rate of 112.85 percent.110 The possibility of being hit with a prohibitive EWR motivates non-mandatory respondents to apply and seek a separate rate. While applicants in a majority of cases are rewarded with a separate rate, the resources that firms have to expend towards receiving what is essentially an average rate calculated for other exporters, is

105

Where mandatory respondents do not co-operate (whether from a NME or market economy country), such respondents receive the adverse facts available rate. 106 See USDOC Separate Rate Practice Bulletin, supra note 101. 107 Where a mandatory NME respondent has received a rate of zero or a de minimis rate, or its rate is based entirely on facts available because it did not cooperate, such company’s rate is excluded when calculating the average rate for the NME non-mandatory respondent that qualifies to receive a separate rate. See USDOC Anti-dumping Manual, supra note 2, Chapter 10 – Nonmarket Economies. 108 Daniel Ikenson, Nonmarket Nonsense: U.S. Anti-dumping Policy toward China, Trade Briefing Paper, CATO INSTITUTE, (Mar. 27, 2005). 109 See, 19 USC §1673b(d) and §1673d(c) (5). See also, Tomer Broude et al, ‘US - Anti-Dumping Measures on Certain Shrimp from Viet Nam: A Stir-Fry of Seafood, Statistics, and Lacunae’, 12 (2) WORLD TRADE REVIEW 13 (2013). 110 The all-others-rate for non-investigated market economy exporters has been significantly lower. “China and Malaysia were the targets of a recent case involving Color Television Receivers. The countrywide rate for uninvestigated Chinese companies that did not qualify for the Section A rate was 78.45 percent, while the rate for uninvestigated Malaysian firms was 0.75 percent. In a case involving Collated Roofing Nails, Chinese, Korean, and Taiwanese exporters were investigated. The countrywide rate for China was 118.41 percent, while the average all-others rate for Korea and Taiwan was 2.68 percent. In Structural Steel Beams, the countrywide rate for China was 89.17 percent, but the average all-others rate was only 6.14 percent for the exporters in six market economies.” Ikenson, supra note 108, at 7.

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unnecessarily burdensome and unjustified given that exporters from market economies do not face similarly burdensome market access barriers.111

4 Section III 4.1

China’s Status After December 11, 2016 in U.S. Anti-dumping Investigations

It is China’s hope that it be accorded full market economy status so that the treatment of its exporters in anti-dumping investigations is on a level playing field with exporters from other economies. As discussed, the application of NME methodology has led to inflated dumping margins and almost always eroded the comparative advantage of Chinese exporters. Market economy treatment for China would mean that anti-dumping authorities would be compelled to calculate normal value based on Chinese home market prices.112 Even if home market prices were rejected, authorities would be compelled to account for export prices to third countries or construct a cost of production value based on the exporter’s own costs.113 Either way, the factors of production approach would be unavailable and with it would end the ability of the USDOC to choose third country costs for various factors of production to construct a Chinese home market price. As discussed previously, China did not graduate to a market economy country on December 11, 2016 and as the Aluminun Foil114 anti-dumping determination demonstrates, China is yet to be treated as a market economy country by the Department of Commerce. While a ruling in favor of China in its WTO dispute will immediately enable China to compel countries such as the United States and the European Union to accord market economy treatment, that result may not necessarily mean immediate victory. Based on recent developments in U.S. anti-dumping law, it appears China may yet have a steep hill to climb before the USDOC accepts Chinese prices and costs in anti-dumping determinations. The developments pertain to the concept of “particular market situation”, a concept which has been enthusiastically espoused by domestic petitioners to claim that an exporter’s home market sales and costs are distorted and hence unreliable, even when that exporter is from a market economy country.

Id., at 8. “An analysis of final DOC anti-dumping decisions between July 1995 and May 2004 reveals that 439 out of 442 companies representing approximately 50 industries, successfully demonstrated an absence of government control…” . 112 Anti-dumping Agreement, supra note 6, art. 2.1. 113 Anti-dumping Agreement, supra note 6, art. 2.2. 114 China NME Memorandum, supra note 9. 111

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4.2

The Peculiar Case of the Particular Market Situation Methodology

4.2.1

Oil Country Tubular Goods: DOC’s First Test Case Under an Expanded Statute

In its final determination in an administrative review of Oil Country Tubular Goods (OCTG) from Korea, USDOC found that respondent exporters had dumped OCTG in the U.S. market.115 The ruling is unprecedented because the USDOC rejected a market economy respondents’ input costs for hot rolled steel (a major input in OCTG) on the grounds that the cost was distorted due to the existence of a “particular market situation” leading to a significant increase in dumping margin.116 This was the first time that the USDOC had applied “particular market situation” methodology to deviate from a foreign producers home market costs in calculating normal value. The ruling was all the more surprising given that the USDOC did an about face from its position in the preliminary determination where it rejected the petitioner’s allegations that Korean exporters’ domestic costs for hot rolled steel and electricity were distorted because they were out of the “ordinary course of trade”.117 The USDOC’s novel approach in the OCTG investigation was facilitated by the enactment of the Trade Preferences Extension Act of 2015 (TPEA) which amended the Tariff Act of 1930 so that the USDOC can in the calculation of normal value, reject a market economy producer’s home market sales and also its costs due to the existence of a particular market situation. Section 504 of the TPEA amended the definition of “ordinary course of trade” and the method for determining constructed value to incorporate the concept of particular market situation. Before the amendments, the USDOC could reject home market sales in deriving normal value under Sect. 771 (15) of the Tariff Act if home market sales were not “in the ordinary course of trade”.118 Specifically, home market sales made below cost of production119 and sales to affiliated parties120 could be disregarded as not being in the ordinary course of trade. Section 504 of the TPEA added “particular 115

See, Certain Oil Country Tubular Goods from the Republic of Korea: Final Results of Anti-dumping Duty Administrative Review; 2014–2015, 82 Fed. Reg. 18105 (U.S. Dep’t Com., April 17, 2017). 116 See, Certain Oil Country Tubular Goods from the Republic of Korea: Preliminary Results of Anti-dumping Duty Administrative Review; 2014–2015, 81 Fed. Reg. 71074 (U.S. Dep’t Com., Oct. 14, 2016). For Nexteel Co. Ltd., the preliminary dumping margin was 8.04%, while for SeAH Steel Corp. it was at 3.80%. In the final determination Nexteel’s margin was adjusted upward to 24.92%, while SeAH’s was adjusted down to 2.76%. 117 See, ‘Lawyers Rip White House For Intervening In Dumping Review’, Law360, https://www. law360.com/articles/905398/lawyers-rip-white-house-for-intervening-in-dumping-review. 118 19 U.S.C. § 1677(15). 119 19 U.S.C. § 1677b(b)(1). 120 19 U.S.C. § 1677b(f)(2).

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market situation” as yet another scenario where home market sales could be rejected as the basis for normal value.121 In addition, the definition of “constructed value” under Sect. 773(e)122 was amended to provide that if the cost of materials and fabrication or other processing of any kind does not accurately reflect the cost of production in the ordinary course of trade, the USDOC may use any other calculation methodology. What this means is that market economy producers and exporters are no longer insulated from the vagaries that have long characterized normal value calculation for NME producers and exporters. With the TPEA amendments, a producer’s costs may be rejected in the calculation of constructed value due to the existence of a particular market situation thus entitling the USDOC to “use any other calculation methodology”, including substituting a market economy producer’s costs with costs from a surrogate country. In the OCTG investigation the U.S. petitioner identified four situations as contributing to the “particular market situation” for hot rolled steel and electricity (i) subsidies from the Korean government that benefit Korean producers of hot rolled steel, the primary input in the production of OCTG; (ii) a flood of low-priced hot rolled steel imports from China to Korea; (iii) “strategic alliances” between the Korean OCTG producers and Korean suppliers of hot rolled steel; and (iv) intervention by the Korean government in the electricity market that distorts its cost.123 In the preliminary determination, USDOC analyzed the aforementioned four particular market situation allegations, and concluded that none of the four, taken individually, provided persuasive evidence that production costs were not in the ordinary course of trade. However, for the final determination, without the benefit of additional information, the USDOC re-analyzed the four allegations and found that a “particular market situation” did exist. USDOC stated that the four factors considered as a whole, represent “facets of a single particular market situation,” such that the costs of hot rolled steel to OCTG producers in Korea are not in the ordinary course of trade.124 To substantiate the subsidy allegation on hot rolled steel the USDOC relied on findings from an unrelated countervailing duty (CVD) investigation of hot rolled steel, in which it had found a Korean exporter, POSCO to have received subsidies.125 Based on that separate case, the USDOC found that the mandatory respondents in the OCTG case had purchased subsidized steel from POSCO. Further, because hot rolled steel 19 U.S.C. § 16177 (15) (C) provides “Situations in which the administering authority determines that the particular market situation prevents a proper comparison with the export price or constructed export price.”. 122 19 U.S.C. § 1677b(e). 123 Memorandum from Ronald Lorentzen to James Maeder, Issues and Decision Memorandum for the Final Results of the 2014–2015 Administrative Review of the Anti-dumping Duty Order on Certain Oil Country Tubular Goods from the Republic of Korea, (U.S. Dep’t Com., April 10, 2017), at 40 [hereinafter Korea OCTG Memorandum]. 124 Id. 125 Id., at 40, 41. 121

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constituted 80 percent of OCTG production, USDOC reasoned, distortions in the input market have an impact on production costs in the OCTG market. This without any analysis of upstream subsidies and whether the suppliers of the input, namely hot rolled steel and OCTG producers were “affiliated”.126 As for the allegation of “strategic alliances” between Korean OCTG producers and hot rolled steel suppliers, the USDOC admitted that evidence showing that such alliances directly created a distortion in input pricing for OCTG purchasers was lacking. However the factor was relevant in that alliances “may have created distortions in the prices of hot rolled steel in the past, and may continue to impact steel pricing in a distortive manner during the instant period of review and in the future.”127 Though the USDOC did not exclusively rely on the “strategic alliances” factor, the analysis demonstrates the application of a very low bar of evidence in the finding of market distortions that rise to the level of a “particular market situation”.128 In order to quantify the impact of the “particular market situation,” the USDOC made an upward adjustment to the mandatory respondents’ reported costs of hot rolled steel. For hot rolled steel purchased by the respondents from POSCO, the USDOC revised the price of this steel by basing the adjustment on the subsidy rates found for POSCO and all other producers of hot rolled steel in the separate CVD investigation. The adjustment was quantified as the “net domestic subsidization rate”, which was the countervailing duty rate minus all export subsidies.129 The USDOC was unable to quantify the impact of the other three factors.130 The USDOC’s reliance on “a particular market situation” in the OCTG case to specifically reject hot rolled steel costs departs significantly from historical USDOC practice. In the past, a finding that a particular market situation existed resulted in entire home market sales being rejected in favor of third country sales or constructed value since the market itself was considered unsuitable for comparison with export price.131 For instance, in the anti-dumping investigation on Fresh Atlantic

See, 19 CFR §351.523 which contain regulations on upstream subsidies. Korea OCTG Memorandum, supra note 123, at 41. 128 Id. Note that with respect to the second and fourth factor, the USDOC found excess capacity in Chinese hot rolled steel had led to depressed prices in the Korean market. As for electricity while the largest electricity supplier was a government entity, it did not address whether such control led to a distortion in electricity prices. 129 Ibid., at 42. 130 Ibid., at 43. 131 “…Commerce may determine that home market sales are inappropriate as a basis for determining normal value if the particular market situation would not permit a proper comparison. The Agreement does not define “particular market situation,” but such a situation might exist where a single sale in the home market constitutes five percent of sales to the United States or where there is government control over pricing to such an extent that home market prices cannot be considered to be competitively set. It also may be the case that a particular market situation could arise from differing patterns of demand in the United States and in the foreign market. For example, if significant price changes are closely correlated with holidays which occur at different times of the year in the two markets, the prices in the foreign market may not be suitable for comparison to prices to the United States.” (emphasis added) 126 127

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Salmon from Chile, the USDOC noted that the Chilean salmon industry was almost exclusively export focused so that domestic sales were “incidental” to export sales and further that domestically sold salmon was of “industrial” or “reject” grade. The significant difference in quality rendered the home and export market incomparable leading to the rejection of all home market sales.132 Likewise in the investigation on Certain Frozen Warmwater Shrimp from Ecuador, home market sales were rejected because they were of low quality and incidental to Ecuador’s export market for shrimp.133 But with the OCTG case and the expanded authority provided by the TPEA, the USDOC can choose those elements of a respondent’s costs that are allegedly distorted due to the existence of a particular market situation and selectively reject such costs without having to reject all of the respondents reported costs.134

U.S. Dep’t of Com., The Statement of Administrative Action, https://enforcement.trade.gov/ regs/uraa/saa-ad.html. 132 See, Notice of Final Determination of Sales at Less than Fair Value: Fresh Atlantic Salmon from Chile, 63 Fed. Reg 31411 (U.S. Dep’t Com., June 9, 1998) [hereinafter Chile Salmon Investigation]. 133 See, Issues and Decision Memorandum for the Final Results of New Shipper Review of the Anti-dumping Duty Order on Certain Frozen Warmwater Shrimp from Ecuador, 71 Fed. Reg. 54977, (U.S. Dep’t Com., Sep. 20, 2006) . 134 See, ‘U.S. 'particular market situation' ruling on Korean steel sparks concern at WTO’, INSIDE U.S. TRADE (May 2, 2017), https://insidetrade.com/daily-news/us-particular-market-situationruling-korean-steel-sparks-concern-wto. Note that in the OCTG case the USDOC had already found that both mandatory respondents did not have sufficient home market sales to use as the basis of normal value. One respondent also lacked third country sales, and therefore USDOC used constructed value for this respondent. For the other respondent the USDOC used constructed value, but also used the respondents’ data for its sales to Canada (third country). See, Issues and Decision Memorandum for the Final Results of the 2014–2015 Administrative Review of the Anti-dumping Duty Order on Certain Oil Country Tubular Goods from the Republic of Korea, (U. S. Dep’t Com., Apr. 10, 2017), at 17 and 20. See also, Mikyung Yun, ‘The Use of “Particular Market Situation” Provision and its Implications for Regulation of Anti-dumping’, 21(3) J. EAST ASIA ECON. INTEGRATION 159 (2017). This article discusses past decisions of the USDOC where it rejected petitioners’ allegations of the existence of a “particular market situation” on account of government control in the product market. The article notes that in Certain Durum Wheat and Hard Red Spring Wheat from Canada, though the Canadian Wheat Board was a government entity that had a monopoly over the buying and selling of wheat in the domestic market, USDOC did not consider the evidence on record to show that the Board’s control was so extensive that prices were not competitively set. This even when there was a parallel CVD investigation which found the existence of subsidies. It notes another case, Certain Cold Rolled and Corrosion Resistant Carbon Steel Flat Products from Korea, where the USDOC rejected allegations that Korean steel prices were unreliable due to the presence of the government control. The petitioners cited flat steel prices as indication of government influence over prices. The USDOC rejected these arguments on grounds that the evidence was not convincing enough. Past practice of the USDOC indicates it had set a high standard for the type of evidence of government control it would consider adequate before perfunctorily rejecting domestic sales prices.

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From OCTG to Biodiesel: Evolving Application of the Particular Market Situation Methodology

The OCTG determination employing the particular market situation methodology was made in an administrative review of an underlying anti-dumping order. Since then, USDOC has employed the methodology in original investigations and an administrative review as discussed below. Following closely on the heels of the OCTG determination, petitioners in Steel Concrete Reinforcing Bar from Taiwan, claimed the existence of a particular market situation with respect to respondent’s purchase of steel billets from China and sought the rejection of the domestic price of billets in constructing normal value.135 But price differentials between domestic and imported billets showed that on average Chinese billets were priced higher than Taiwanese billets. The USDOC was unpersuaded by petitioners’ argument that just as Chinese import prices for hot rolled steel were rejected in the OCTG investigation due to the existence of a particular market situation, so too should prices for billet imports from China be rejected in this particular instance. The USDOC highlighted that in the OCTG case, the fact of Chinese imports was one of several factors leading to a finding of a particular market situation as opposed to being the only factor as in the current investigation.136 More importantly the data supplied by the petitioner did not support a finding of a particular market situation in the market for steel billets from China.137 Likewise in Certain Softwood Lumber Products from Canada, the USDOC rejected allegations that the lumber byproducts market was distorted due to the existence of a particular market situation and declined to reject the grant of offsets for the sale of byproducts to each of the mandatory respondent in its normal value calculations.138 The distortion in the lumber byproducts market (e.g., wood chips, shavings, sawdust) was allegedly on account of Government of Canada’s subsidization of bioenergy programs that consume lumber byproducts, subsidization and involvement in Canada’s electricity market, and subsidization of stumpage. The USDOC rejected these allegations citing a lack of evidence demonstrating a connection between the bioenergy programs and a change in demand and prices for lumber byproducts in Canada.139 In the administrative review of Certain Steel Nails from Korea, the petitioners took a cue from the OCTG investigation to allege that a particular market situation 135

Memorandum from James Maeder to Gary Taverman, Issues and Decision Memorandum for the Final Affirmative Determination in the Anti-dumping Duty Investigation of Steel Concrete Reinforcing Bar from Taiwan, (U.S. Dep’t Com., Jul. 20, 2017), at 7. 136 Id., at 10. 137 Id., at 7,8,9. 138 Certain Softwood Lumber Products From Canada: Final Affirmative Countervailing Duty Determination, and Final Negative Determination of Critical Circumstances, 82 Fed. Reg. 51806 (U.S. Dep’t Com., Nov. 8, 2017). 139 Id. The USDOC also held that given its negative particular market determination regarding the bioenergy programs, the allegations regarding electricity and stumpage were moot.

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existed with respect to steel wire rod such that its price should be excluded in the constructed cost calculation of steel nails.140 The Petitioner’s based the allegation on three factors, namely (1) a strategic alliance between a respondent exporter and a subcontractor, (2) low-priced steel exports from China, and (3) the Korean government’s distortion of the electricity market. The USDOC rejected all three factors individually and collectively for a lack of persuasive evidence. The USDOC noted that the petitioner made general allegations regarding all three factors without providing tangible price effect of the allegedly distortive market condition. This was unlike the OCTG determination where the USDOC found quantifiable evidence of a distortion, i.e. an affirmative CVD determination on hot rolled steel, a major input in the manufacture of OCTG. As a result, in the OCTG determination, other factors, such as Chinese steel imports, were found to be contributory considerations when viewed in conjunction with such subsidization.141 However in Biodiesel from Argentina142 and Indonesia,143 the USDOC found that a particular market situation existed on two fronts; in the market for biodiesel and also in its main input (soybean for Argentina and crude palm oil for Indonesia) resulting in the rejection of home market sales for calculation of normal value and additionally the rejection of the cost of the main input in the calculation of constructed value.144 For Argentina, the petitioner claimed that the Government set both, a mandatory sales price and sales quota on a monthly basis for biodiesel producers with the intent to promote domestic consumption of biodiesel resulting in a distorted market for the product in question, i.e. biodiesel. Further, the Government imposed an export tax on the exports of soybean which resulted in depressing raw material prices for biodiesel producers below world market prices.145 Allegations against Indonesia were similar in that it was alleged that the

140 See Decision Memorandum for Preliminary Results of the 2014–2016 Anti-dumping Duty Administrative Review of Certain Steel Nails from the Republic of Korea, (U.S. Dep’t Com., Jul. 31 2017) at 14, 15. Normal value for most sales by mandatory respondents was derived from their respective home market sales. However the USDOC found that the mandatory respondents had more than 20 percent of their home sales at prices at less than cost of production. For these below-cost sales, normal value was based on the constructed value method. 141 Memorandum from James Maeder to Gary Taverman, Decision Memorandum for the Final Results of the 2014–2016 Administrative Review of the Anti-dumping Duty Order on Certain Steel Nails from the Republic of Korea, (U.S. Dep’t Com., Jan. 19, 2018) at 7–13. 142 Biodiesel from Argentina: Preliminary Affirmative Determination of Sales at Less Than Fair Value, Preliminary Affirmative Determination of Critical Circumstances, in Part, 82 Fed. Reg. 50391 (U.S. Dep’t Com., Oct. 31, 2017) . 143 Biodiesel from Indonesia: Preliminary Affirmative Determination of Sales at Less Than Fair Value, 82 Fed. Reg. 50379 (U.S. Dep’t Com., Oct. 31, 2017) . 144 See, Argentina Biodiesel at 18 and Indonesia Biodiesel at 17, infra n. 142 and 143. 145 Memorandum from James Maeder to Gary Taverman, Decision Memorandum for the Preliminary Determination in the Less-Than-Fair-Value Investigation of Biodiesel from Argentina, (U.S. Dep’t Com., Oct. 19, 2017) at 19 [hereinafter Argentina Biodiesel].

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Government imposed low mandatory prices and quotas as part of its public service obligation on producers and also imposed an export tax of 30% on exports of crude palm oil.146 In both cases the USDOC adjusted the cost of production in the calculation of constructed value for each exporter by substituting the input price of soybean (for Argentina) and crude palm oil (for Indonesia) with a higher market determined price.147 It is noteworthy that in both cases, as it rejected home market sales due to the existence of a particular market situation, the USDOC calculated normal value by using the constructed value method as opposed to relying on the exporter’s sales to a third country market, claiming that in so doing it was following “long-standing practice”.148 It is also noteworthy that like the OCTG investigation, USDOC in the two Biodiesel cases relied on findings of subsidization of the inputs in question (soybean and crude palm oil) in parallel CVD investigations to find the existence of a “particular market situation” in the anti-dumping investigations. This led to exporters from Indonesia warning that taking the fact of subsidization into account in both the CVD and anti-dumping investigations amounted to double remedies.149 146 Memorandum from James Maeder to Gary Taverman, Decision Memorandum for the Preliminary Determination in the Less-Than-Fair-Value Investigation of Biodiesel from Indonesia, (U.S. Dep’t Com., Oct. 19, 2017) at 18 [hereinafter Indonesia Biodiesel]. 147 Argentina Biodiesel, supra note 145, at 24; Indonesia Biodiesel, supra note 146, at 23. 148 The DOC stated, “…prior to the TPEA, Sect. 773(a)(1)(B)(ii)(III) of the Act provided that the Department would rely on a third-country market if “the administering authority does not determine that the particular market situation in such other country prevents a proper comparison with the export price or constructed export price.” (emphasis added). The TPEA removed reference to “in such other country” from this provision. Therefore, we find that if the Department has determined that a PMS exists in the home market, it is not required to examine third-country market sales, and may instead rely on CV.” See, Argentina Biodiesel, supra note 146, at 23 and Indonesia Biodiesel, supra note 146, at 22. See also, 19 CFR § 351.404(f) which establishes a preference for calculation of normal value by way of sales to third country as opposed to constructed value if information is available and verifiable. See also 19 CFR 351.404(c) which establishes sales in a third country as the preferred basis to calculate normal value where there are insufficient sales of the foreign like product in the exporting country and thus the market is not viable. In August of 2016 the USDOC issued a proposed rule modifying this hierarchy for purposes of normal value calculation. It states, “This modification would invert the preexisting order of preference that, where the exporting country does not constitute a viable market, the Department normally calculates normal value based on sales in a viable third country. The Department proposes this modification in light of certain advantages of constructed value over third country sales, such as availability of cost of production information and comparability to U.S. prices.” See U.S. Dep’t Com., Modification of Regulations Regarding basis for Normal Value, 81 Fed. Reg. 58419 (Aug. 25, 2016). 149 Indonesia Biodiesel, supra note 146, at 23. Double remedies or double counting of subsidization refers to a situation where a product is subject to both anti-dumping and countervailing duties and there is no adjustment to the dumping margin to account for the decrease in price of the product on account of subsidization. GATT Article VI:5, which states that an imported product may not be “subject to both anti-dumping and countervailing duties to compensate for the same situation of dumping or export subsidization” essentially recognizes the problem of double

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The USDOC disagreed. The USDOC stated that because it substituted a world market price of crude palm oil for the price paid by the exporters as opposed to adding the CVD to U.S. price or deducting CVD from the constructed value, USDOC’s reliance on subsidization from the parallel CVD investigation did not lead to a situation of double remedies.150 There may be some force in the argument made by the Indonesian exporters. The Tariff Act of 1930 currently accounts for double remedies arising out of parallel anti-dumping and CVD investigations in the case of market economy countries by adjusting the export price upwards to account for export subsidization.151 It also accounts for double remedies arising out of anti-dumping and CVD investigations in the case of NME countries by adjusting downwards the dumping margin calculated using a surrogate country methodology by the amount of the CVD found in the parallel CVD investigation.152 In many

remedies but in the context of export subsidization. This may be because while domestic subsidies presumably lower the price of the subject merchandise both in the home and the export markets, export subsidies, by contrast, benefit only exported merchandise by lowering the export price for the product and consequently increasing the dumping margin. Therefore imposing both an export-subsidy CVD and an anti-dumping duty, calculated with no adjustment for that CVD, would impose a double remedy specifically prohibited by Article VI:5. Domestic subsidies are assumed not to affect dumping margins, because they lower prices in both the export market and the domestic market of the exporting country equally. The Tariff Act 1930 (19 USC 1677(c) (1) (C)) addresses this issue by requiring that export price (and constructed export price) be adjusted by increasing it by the amount of an export subsidy found on the product in a CVD investigation. While the adjustment on the export side to account for export subsidization described may address double remedies in AD/CVD investigations involving goods of market economy countries, it does not address double remedies in AD/CVD investigations involving NME countries. This is because in the case of NME exporters, normal value is calculated on the basis of surrogate country data as opposed to the exporters own domestic prices, which are considered distorted due to government intervention and subsidization. Thus domestic price which incorporates the element of domestic subsidization is rejected for a third country non-distorted price. Yet when a parallel CVD investigation on the same product finds domestic subsidization and authorities do not adjust the normal value derived from surrogate country methodology to account for the subsidization, it can lead to double counting of the subsidization on the product or double remedies. See, Jane M. Smith, supra note 52, at 12, 13. China challenged the U.S. practice of imposing AD/CVD duties on products from NME countries at the WTO and was successful. The Appellate Body in denouncing that double remedies were permissible held that offsetting the same subsidization twice by the simultaneous imposition of anti-dumping duties based on NME methodology and countervailing duties is inconsistent with Article 19.3 of the SCM Agreement, which requires that, when a CVD is imposed on a product, it be levied “in the appropriate amount in each case.” See, Appellate Body Report, United States — Definitive Anti-Dumping and Countervailing Duties on Certain Products from China, ¶¶ 582, 583, WTO Doc. WT/DS379/AB/R (adopted Mar. 11, 2011). The United States amended the Tariff Act 1930 in response to the WTO case and provided that in the case of NME exporters where the normal value is derived from surrogate country costs and a CVD investigation finds countervailable subsidies, in such cases the dumping margin will be reduced to account for the countervailable subsidy. See, 19 USC 1677f-1(f)(C). 150 Indonesia Biodiesel, supra note 146, at 23. 151 19 USC 1677(c) (1)(C). 152 19 USC 1677f-1(f)(C).

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respects the ‘particular market situation’ methodology employed by the USDOC to disregard an exporter’s own costs and substitute it with a surrogate cost mirrors the surrogate country methodology used to calculate normal value for NMEs. However the statute does not provide for adjustments to the normal value on account of this new development. One will have to await a formal challenge at the WTO by either Indonesia or Argentina for a WTO ruling on the legality of the USDOC’s non-adjustment in particular market situation methodology cases and whether this leads to a situation of double remedies. Since the OCTG case, allegations of “particular market situation” have been raised in four separate original investigations. This foretells a developing trend where petitioners will be more willing to raise particular market situation objections as a matter of course, and will more likely succeed, especially when the government intervenes in the market for the input.

5 Conclusion The OCTG, Biodiesel and other determinations provide several clues to how the USDOC might evaluate particular market situation in future cases. It appears that the USDOC (i) will directly resort to the constructed value method for determining normal value instead of reviewing third country sales when it rejects domestic prices due to the existence of a particular market situation; (ii) is likely to initiate parallel anti-dumping and CVD investigations; (iii) may not hesitate to rely on unrelated CVD investigations to find input subsidization and reject the market economy respondent’s own input costs; (iv) will likely find that a product market is distorted because the government is the primary or largest supplier of an input without further analysis whether such price is distorted; (v) might penalize an exporting country for not reining in imports of low priced inputs with its own anti-dumping duty especially when the input is imported from China, and (vi) will require quantifiable evidence of price distortion in an investigated market for atleast one factor where several factors are alleged. If such evidence is present, other alleged factors would serve to contribute to an affirmative finding without the petitioner having to prove a precise degree of distortion in the production costs from every alleged market condition. The rejection of producer costs on grounds of the existence of a particular market situation may not pass muster under the WTO Anti-dumping Agreement. Already there have been rulings from WTO panels and the Appellate Body on a similar methodology employed by the EU holding it to be violative of the WTO’s Anti-dumping Agreement. In EU — Anti-dumping Measures on Biodiesel from

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Argentina153 the Appellate Body considered whether the rejection by the EU in an anti-dumping investigation of Argentinian biodiesel exporters’ domestic price for soybean oil in constructing normal value accorded with Article 2.2.1.1154 of the WTO Anti-dumping Agreement. As in the above mentioned U.S. anti-dumping action against Argentina, the EU rejected the price of soybean oil on grounds that an export tax on the input distorted the domestic price paid for soybean oil by Argentinian biodiesel producers. The EU relied instead on international prices for the input, and as a result the dumping margin for exporters increased significantly. Like the TPEA, the EU law permitted a rejection of costs paid for by exporters in the calculation of constructed cost unless “the records reasonably reflect the costs associated with the production and sale of the product under consideration.”155 Argentina challenged the EU’s rejection of exporters’ input costs and prevailed both before a WTO panel and later the Appellate Body. The EU argued that Article 2.2.1.1 is informed by a standard of “reasonableness” that permits an investigating authority to disregard the records kept by the exporter or producer if the authority determines that the costs in such records are not reasonable.156 The Appellate Body disagreed. It stated that under Article 2.2.1.1 records of the investigated producer constitutes the preferred source of information for the determination of the cost of production which can be rejected in two circumstances. The first is when the records are inconsistent with the generally accepted accounting principles of the exporting country. The second is when the records do not reasonably reflect the costs associated with the production and sale of the product under investigation.157 However the second condition does not permit an investigating authority to examine the reasonableness of reported costs incurred by an exporting producer when the actual costs recorded in the records of the producer or exporter are

Appellate Body Report, European Union — Anti-Dumping Measures on Biodiesel from Argentina, WTO Doc. WT/DS473/AB/R (adopted Oct. 6, 2016) [hereinafter EU — Biodiesel from Argentina (AB Report)]. 154 Article 2.2.1.1 of the Anti-dumping Agreement states: 2.2.1.1 For the purpose of paragraph 2, costs shall normally be calculated on the basis of records kept by the exporter or producer under investigation, provided that such records are in accordance with the generally accepted accounting principles of the exporting country and reasonably reflect the costs associated with the production and sale of the product under consideration. Authorities shall consider all available evidence on the proper allocation of costs, including that which is made available by the exporter or producer in the course of the investigation provided that such allocations have been historically utilized by the exporter or producer, in particular in relation to establishing appropriate amortization and depreciation periods and allowances for capital expenditures and other development costs. Unless already reflected in the cost allocations under this sub-paragraph, costs shall be adjusted appropriately for those non-recurring items of cost which benefit future and/or current production, or for circumstances in which costs during the period of investigation are affected by start-up operations. (emphasis added) Anti-dumping Agreement, supra note 6, art. 2.2.1.1. 155 Council Regulation 1225/2009, art. 2(5) 2009 O.J (L343/51) (EC). 156 EU — Biodiesel from Argentina (AB Report), supra note 153, ¶ 6.35. 157 Id., ¶¶ 6.18, 6.46. 153

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found within acceptable limits to be accurate and faithful.158 Thus in order to establish whether the records reasonably reflect the costs actually incurred, a comparison between the costs in the producer’s or exporter’s records and the costs incurred by that producer or exporter was appropriate. But such a comparison did not permit an investigating authority to enquire into whether the records of the producer or exporter reasonably reflect some hypothetical costs that might have been incurred under a different set of conditions or circumstances.159 In a more recent WTO panel ruling in EU—Anti-dumping Measures on Biodiesel from Indonesia,160 the Panel again ruled against the EU methodology of rejecting a respondent’s input costs on grounds that the costs were distorted because they did not reasonably reflect the costs associated with the production and sale of the product under consideration.161 The Panel found no reason to deviate from the ruling already established in the Argentina case162 and held that the EU acted inconsistently with its obligations under Article 2.2.1.1 by derogating from using the costs reflected in the records kept by the producers.163 WTO panel and Appellate Body rulings are unlikely to deter the increased reliance on the particular market methodology in U.S. anti-dumping investigations. One can expect U.S. petitioners will start making “particular market situation” allegations with more regularity both in original investigations as well as in administrative reviews and as the USDOC continues to take these allegations on record it will likely evolve into a sort of standard practice. Further, while the methodology is currently being tested against market economy producers, the USDOC may well be arming itself in the event that China and Vietnam are accorded market economy status under U.S. law. Further since the methodology will be equally applicable to all market economy countries it will shield the United States from allegations of discriminatory treatment towards former NME countries. In any event, the current application of the particular market methodology sets a low standard of evidence for supporting claims that a particular home market is distorted. While this may presently enable U.S. petitioners to seek higher dumping margins it also risks being replicated in other jurisdictions and used equally effectively against U.S. exports. However, deep concerns remain about trade

Id., ¶ 6.37. Id., ¶¶ 6.30, 6.37 and 6.39. 160 Panel Report, European Union — Anti-Dumping Measures on Biodiesel from Indonesia, WTO Doc. WT/DS480/6 (adopted Feb., 28, 2018). 161 The EU rejected Indonesian exporters’ input costs of crude palm oil because of an export tax on the same which the EU claimed made the oil available to domestic biodiesel producers at prices significantly lower than international prices. Id., ¶ 7.14. 162 Id., ¶ 7.26. The Panel pointed out that it is well established that adopted panel and Appellate Body reports create legitimate expectations, and that the same legal issues should be resolved in the same way in subsequent cases, absent cogent reasons for finding differently. 163 Id., ¶¶ 7.27, 7.28. 158 159

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deficits the United States maintains with its largest trading partners, and the particular market situation methodology is likely to be viewed as a timely and relevant tool available to the USDOC as part of its anti-dumping toolkit to help shield domestic industry from unfair foreign competition. Acknowledgements The author would like to thank Peggy A Clarke and Stephan E. Becker for their comments and feedback.

Treatment of China in EU Anti-dumping Investigations Post-December 2017: Plus ça change, plus c’est la même chose Edwin Vermulst and Juhi Sud

Abstract The case of China against the European Union at the World Trade Organisation on market economy treatment and the consequent use of the analogue country methodology against Chinese producers and exports in anti-dumping investigations has brought about unease in political and legal circles. The European Union, in the interim, has put forth a new methodology, which allows the European Commission to rely on third country and international benchmarks in case where “significant distortions” are found in the exporting country. While this new methodology does away with the classification of Members as market or non-market economies, it is argued that the new methodology of the European Union presents the earlier law in a new form. This chapter examines the nuances of the new anti-dumping legal framework introduced by the European Union and provides a critical analysis of the EU law vis-à-vis China. Keywords Significant distortions treatment External benchmarks





European Union
Market economy

E. Vermulst (&)
J. Sud VVGB Advocaten, Brussels, Belgium e-mail: [email protected] J. Sud e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2018 J. J. Nedumpara and W. Zhou (eds.), Non-market Economies in the Global Trading System, https://doi.org/10.1007/978-981-13-1331-8_9

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1 Introduction Until December 19, 2017, in European Union [“EU”] anti-dumping investigations, Chinese exporting producers were subject to the analogue country methodology and the exception to it in the form of market economy treatment [“MET”] as provided for in Article 2(7) of the Basic Anti-Dumping Regulation [“Basic Regulation”].1 The expiry of Section 15(a)(ii) of China’s accession protocol on December 11, 2016 led to significant, albeit belated, debate in the EU and under heavy pressure of domestic producer interests, the EU considered a proposal from the European Commission [“Commission”] in November 20162 and introduced a new methodology to calculate normal value in anti-dumping proceedings involving non-market economies in the post-December 11, 2016 era. As was foreseeable, the Commission’s proposal did not make it through the EU co-decision procedure in time3 and China initiated a World Trade Organization [“WTO”] dispute settlement proceeding against the EU on December 12, 2016.4 Finally, on December 19, 2017, the EU adopted the proposed provisions in its anti-dumping rules to address ‘significant distortions’ of raw material and energy costs in third countries [“Significant Distortions Rules”].5 Although presented as country-neutral, the text, context, timing and expected implementation of the new methodology (confirmed by the issuance of a “Commission Staff Working Document on significant distortions in the economy of the People’s Republic of

1

Regulation (EU) 2016/1036 of the European Parliament and of the Council on Protection Against Dumped Imports from Countries Not Members of The European Union, 2016 O.J. (L176/21) (2016) [hereinafter EU Basic Regulation]. The EU Basic Regulation has been amended and repealed several times. The predecessor of Regulation (EU) 2016/1036 was Council Regulation (EC) No 1225/2009 on protection against dumped imports from countries not members of the European Community, 2009 O.J. (L343/51). 2 Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 2016/1036 on Protection Against Dumped Imports from Countries Not Members Of The European Union And Regulation (EU) 2016/1037 on protection against subsidized imports from countries not members of the European Union, COM (2016) 721 final (Nov. 9, 2016). 3 Treaty on the Functioning of the EU, Dec. 14, 2007, art. 294, 2008 O.J. (C 115/4)7. 4 Request for consultations by China, European Union – Measures Related to Price Comparison Methodologies, WTO Doc. WT/DS516/1 (Dec. 12, 2016). The dispute involves a challenge by China to certain provisions of the Basic Regulation. China argues that pursuant to the expiry of paragraph 15 (a)(ii) of the Chinese Accession Protocol to the WTO, Chinese producers and exporters cannot be subject to special calculation methodologies and the differential treatment accorded by the Basic Regulation to Chinese producers and exporters is inconsistent with the WTO covered agreements. 5 Regulation (EU) 2017/2321 of the European Parliament and of the Council of 12 December 2017 amending Regulation (EU) 2016/1036 on Protection Against Dumped Imports From Countries Not Members Of The European Union and Regulation (EU) 2016/1037 On Protection Against Subsidised Imports From Countries Not Members Of The European Union, 2017 O.J., (L338/1). [hereinafter Significant Distortion Rules].

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China for the purposes of trade defence investigations” [“China Country Report”]6) indicate that the claimed neutrality of the Significant Distortions Rules was merely a fig leaf. The main and consistent targets of the new methodology will undoubtedly be Chinese exporting producers (although other practices the EU considers objectionable may also be subjected to the new methodology). Indeed, a plain reading of the new provisions makes it evident that the Significant Distortions Rules basically re-introduce the erstwhile MET criteria albeit in a modified format. In the authors’ view, the WTO compatibility of the Significant Distortions Rules is highly questionable and more WTO litigation can be expected. However, a detailed discussion of this aspect falls outside the scope of this paper.7 This chapter

6

See Commission Staff Working Document on Significant Distortions in the Economy of People’s Republic of China for the Purposes of Trade Defence Investigations, http://trade.ec.europa.eu/ doclib/docs/2017/december/tradoc_156474.pdf. 7 See for detailed discussion, among others, Edwin Vermulst, Juhi Sud, Simon Evenett, Normal value in anti-dumping proceedings against China post-2016: Are some animals less equal than others? 11:5 GLOBAL TRADE & CUSTOMS J., 212–228 (2016). See also Barbara Barone, One Year to Go: The Debate over China’s Market Economy Status (MES) Heats Up, DIRECTORATE-GENERAL FOR EXTERNAL POLICIES AT THE EUROPEAN PARLIAMENT, 1–24 (2015); Business Europe, China’s Market Economy Status, position paper (2015); Joris Cornelis, China’s Quest for Market Economy Status and Its Impact on the Use of Trade Remedies by the European Communities and the United States, 2:2 GLOBAL TRADE & CUSTOMS J., 105–115 (2007); Laura Puccio, Granting Market Economy Status to China: An Analysis of WTO Law and of Selected WTO Members Policy, EUROPEAN PARLIAMENTARY RESEARCH SERVICE (2015); Brian Gatta, Between ‘Automatic Market Economy Status’ and ‘Status Quo’: A Commentary on Interpreting Paragraph 15 of China’s Protocol of Accession, 9:4 GLOBAL TRADE & CUSTOMS J, 165–172 (2014); Folkert Graafsma and Elena Kumashova, In re China’s Protocol of Accession and the Anti-Dumping Agreement: Temporary Derogation or Permanent Modification?, 9:4 GLOBAL TRADE & CUSTOMS J., 154-159 (2014); Jorge Miranda, Interpreting Paragraph 15 of China’s Protocol of Accession, 9:3 GLOBAL TRADE & CUSTOMS J., 94–103 (2014); Matthew R. Nicely, Time to Eliminate Outdated Non-Market Economy Methodologies, 9:4 GLOBAL TRADE & CUSTOMS J., 160-164 (2014); Bernard O’Connor, Much Ado About ‘Nothing’: 2016, China and Market Economy Status, 10:5 GLOBAL TRADE & CUSTOMS J., 176–180 (2015); Bernard O’Connor, Market-economy Status for China is Not Automatic, THE CENTRE FOR ECONOMIC POLICY RESEARCH (2011) as consulted on 20 December 2015, http://www.voxeu.org/article/china-market-economy; Bernard O’Connor, The Myth of China and Market Economy Status in 2016 as consulted on 20 December 2015, available at http://worldtradelaw.typepad.com/files/oconnorresponse.pdf; Bernard O’Connor, China and Market Economy Status III, INTERNATIONAL ECONOMIC LAW AND POLICY BLOG (2012) as consulted on 20 December 2015, available at http://worldtradelaw.typepad.com/ielpblog/2012/05/china-andmarket-economy-status-iii.html; Theodore Posner, A Comment on Interpreting Paragraph 15 of China’s Protocol of Accession by Jorge Miranda, 9:4 GLOBAL TRADE & CUSTOMS J., 146–153 (2014); Mathieu Rémond, The EU’s Refusal to Grant China ‘Market Economy Status’ (MES), 5:3 ASIA EUR J., 345-356 (2007); Marie‐José Rinaldi‐Larribe, William Lightfoot and Zhongxiu Zhao, Does China Deserve the Market Economy Status?, 2:2 J. CHINESE ECONOMIC & FOREIGN TRADE STUD., 110–120 (2009); Paul Rosenthal and Jeffrey Beckington, The People’s Republic of China: A Market Economy or a Non-market Economy in Anti-Dumping Proceedings Starting on December 12, 2016? 9:7/8 GLOBAL TRADE & CUSTOMS J., 352–355 (2014); Laurent Ruessmann and Jochen Beck, 2016 and the Application of an NME Methodology to Chinese Producers in AntiDumping Investigations, 9:10 GLOBAL TRADE & CUSTOMS J., Nicholas Birch, The Special Case of China: Why the Use of a Special Methodology Remains Applicable to China after 2016, 9:6

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therefore assesses the rules applied to Chinese exporting producers in EU anti-dumping investigations prior to 19 December 2017 and provides an overview of the Significant Distortions Rules.

2 Legal Framework for the Treatment of Chinese Exporting Producers in Anti-dumping Investigations Until December 19, 2017 Until December 19, 2017, Article 2(7) of the Basic Regulation of the EU contained specific rules for the calculation of dumping margins for producers based in NMEs and an exception for WTO NME countries. The basic legal presumption with respect to NMEs was that domestic costs and prices in NMEs are inappropriate for the purposes of establishing normal value in anti-dumping investigations and this therefore requires that normal value be based on prices or constructed value of the investigated product in a third, so-called analogue or surrogate country. In April 1998, in recognition of the changed economic conditions in Russia and China,8 a producer-specific exception, i.e. the MET exception, was adopted and became applicable from July 1, 1998.9 This exception permitted the calculation of dumping margins for exporting producers from Russia and China to be on the basis of market economy methods if the concerned exporting producers satisfied the newly introduced MET criteria. The possibility of granting MET to other NMEs was extended in the year 2000.10 Therefore, until its amendment in December 2017, Article 2(7) of the Basic Regulation provided the rules applicable for normal value establishment for Chinese exporting producers in EU anti-dumping investigations. Article 2(7)(a) laid out the analogue country methodology. It provided that in the case of imports from NMEs, as listed in the footnote to that provision, which

GLOBAL TRADE & CUSTOMS J., 272–279 (2014); Christian Tietje and Karsten Nowrot, Myth or Reality? China’s Market Economy Status under WTO Anti-Dumping Law after 2016, Pol’y Papers on Transnational Econ. L., No. 34, Transnational Economic Law Research Center as consulted on 20 December 2015, 1–12 (2011), http://telc.jura.uni-halle.de/sites/default/files/telc/PolicyPaper34. pdf; Lisa Toohey and Jonathan Crowe, The Illusory Reference of the Transitional State and NonMarket Economy Status, 2:2 CHINESE J. COMP. L., 314–336 (2014); Yanning Yu, Rethinking China’s Market Economy Status in Trade Remedy Disputes After 2016: Concerns and Challenges, 8:1 ASIAN J. WTO & INT’L HEALTH L. & POLY., 77 (2013). 8 Council Regulation (EC) No 905/98 of 27 April 1998 amending Regulation (EC) No 384/96 on Protection Against Dumped Imports from Countries Not Members Of The European Community, 1998 O.J. (L128/18), preamble. 9 Ibid. 10 Council Regulation (EC) No 2238/2000 of 9 October 2000 amending Regulation (EC) No 384/ 96 on Protection Against Dumped Imports from Countries Not Members of the European Community, 2000 O.J. L257/2.

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included China,11 normal value had to be determined on the basis of the price or constructed value in a market economy third country, or the price from such a third country to other countries, including the EU, or where that was not possible, on any other reasonable basis, including the price actually paid or payable in the EU for the like product, duly adjusted, if necessary, to include a reasonable profit margin. The provision further provided that an appropriate market-economy third country had to be selected in a manner not unreasonable, due account being taken of any reliable information made available at the time of selection and where appropriate, a market-economy third country subject to the same investigation had to be used. Article 2(7)(b) of the Basic Regulation provided the MET exception. It stipulated that in anti-dumping investigations concerning imports from China, Vietnam, Kazakhstan or any NME country which was a member of the WTO at the date of the initiation of the investigation, normal value had to be determined in accordance with the standard-market economy-methodology, if it was shown, on the basis of properly substantiated claims by the concerned exporting producer subject to the investigation, that market economy conditions prevail for it in respect of the manufacture and sale of the like product concerned. In case of failure to establish that MET conditions existed, the non-market economy rules in Article 2(7)(a) were to be applied with respect to that exporting producer. Article 2(7)(c) listed the following five MET criteria which had to be satisfied in order to obtain MET: • Decisions of firms regarding prices, costs and inputs, including for instance raw materials, cost of technology and labour, output, sales and investment, are made in response to market signals reflecting supply and demand, and without significant State interference in this regard, and costs of major inputs substantially reflect market values; • Firms have one clear set of basic accounting records which are independently audited in line with international accounting standards and are applied for all purposes; • The production costs and financial situation of firms are not subject to significant distortions carried over from the former non-market economy system, in particular in relation to depreciation of assets, other write-offs, barter trade and payment via compensation of debts; • The firms concerned are subject to bankruptcy and property laws which guarantee legal certainty and stability for the operation of firms; and • Exchange rate conversions are carried out at the market rate. A claim for MET had to be made in writing—by completing the MET claim form—and had to be supported by sufficient evidence showing that the exporting producer operated under market economy conditions. A determination whether the

11

The countries listed in the Basic Regulation as NMEs were Albania, Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Mongolia, North Korea, Tajikistan, Turkmenistan and Uzbekistan.

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producer met the MET criteria was originally supposed to be made within three months of the initiation of the investigation but was extended to a maximum of eight months following an amendment to the Basic Regulation in December 2012.12 In practice, the above-mentioned legal framework was applied in all original investigations and reviews—including interim, expiry and new exporter reviews as well as in refund investigations concerning Chinese companies. The exporting producers that obtained MET received relatively low or at times zero duties based on the dumping margin. However, the criteria to be satisfied for obtaining MET were very cumbersome and required the provision of a significant amount of data and accounting information within a short period of 21 days from the initiation of the investigation, along with English translations of all documents.13 In addition, the data provided was subjected to rigorous on-the-spot verification by the Commission Services. Moreover, the MET criteria were drafted in a very open-ended manner which gave the Commission excessive discretion in assessing MET claims. As a result, the interpretation of the specific MET criteria was slowly expanded to cover virtually every aspect of a company’s operation and accounting practices to the extent that even minor discrepancies could lead to the rejection of MET. The denial of MET led to several EU court cases. While in some cases the EU courts held that as Article 2(7)(c) represented an exception to the NME methodology, it had to be interpreted strictly14; on the other hand, in certain cases the courts did find the Commission’s denial of MET to be erroneous.15 Additionally, over the years, it became increasingly difficult for Chinese companies to obtain MET on account of the wide discretion that the Commission had in assessing the MET criteria, and the arguably arbitrary application. According to Commission data, in the five-year period 2006–2010, 173 MET applications were received and 37 were granted while in the five year period 2011–2015, 75

12

Regulation (EU) No 1168/2012 of the European Parliament and of the Council of 12 December 2012 amending Council Regulation (EC) No 1225/2009 on Protection Against Dumped Imports from Countries Not Members of the European Community, 2012 O.J. (L344/1). 13 For a detailed discussion of the substantive and procedural aspects of the MET system and the application of the analogue country methodology, see, EDWIN VERMULST, EU ANTI-DUMPING LAW AND PRACTICE (Sweet & Maxwell, Oct. 2010). 14 Case T-138/02, Nanjing Metalink International Co. Ltd v. Council, Judgment of Court of First Instance (Fourth Chamber, extended composition)., 2006 ECR., II - 4351; Case 35/01, Shanghai Teraoka Electronic Co. Ltd v. Council, Judgment of Court of First Instance (Fourth Chamber, extended composition)., 2004 ECR II – 3671. 15 Case T-498/04, Zhejiang Xinan Chemical Group Industrial v. Council, Judgment of Court of First Instance (Fourth Chamber)., 2009 ECR II-01969; Case C-337/09, Council v. Zhejiang Xinan Chemical Industrial group, Judgment of Court (Grand Chamber)., 2012 ECR ECLI:471.

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applications were received and only four were granted.16 In fact, the Commission initiated interim reviews following requests from EU producers or ex officio to re-assess the situation of Chinese exporting producers who had been granted MET in original investigations. As a result of such reviews, MET originally granted to Chinese exporting producers were revoked in several cases and their duty rates substantially increased.17 Therefore, the use of the analogue country methodology in anti-dumping investigations against China became the default approach in the EU and MET was relegated to the background. Further, in 2002, consolidating its NME ‘one country, one duty’ rule, the EU introduced the individual treatment [“IT”] criteria in Article 9(5) of the Basic Regulation18 and applied it to exporting producers from NMEs such as China and Vietnam. Following that rule, the EU granted individual dumping margins and duties to NME exporting producers only if they qualified for MET or IT. Failure to obtain MET and IT implied that the exporting producer would be subject to the standard country-wide duty. China subsequently challenged the IT provisions in two WTO disputes namely EC—Fasteners19 and EU—Footwear.20 The Panels in both the cases found the IT provisions to be incompatible with WTO law. On 15 July 2011, the Appellate Body confirmed the Panel ruling in EC—Fasteners stating that Article 9(5) of the Basic Regulation was inconsistent “as such” with Articles 6.10 and 9.2 of the WTO Anti-Dumping Agreement.21 The Appellate Body held that the IT rule in Article 6.10 was mandatory and had to be applied irrespective of the whether the exporting country was a market economy or NME.22 In respect of Article 9.2 of the WTO Anti-Dumping Agreement, the Appellate Body read the first and second sentences of Article 9.2 to conclude that investigating authorities are required to specify an individual duty for each supplier, except where this is

16 See Commission Staff Working Document on Impact assessment, Possible change in the calculation methodology of dumping regarding the People’s Republic of China (and other non-market economies) accompanying the document Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 2016/1036 on protection against dumped imports from countries not members of the European Union and Regulation (EU) 2016/1037 on protection against subsidized imports from countries not members of the European Union, 6, COM (2016) 370 final (Nov. 9, 2016) [hereinafter Staff Working Document]. 17 For further discussion on this aspect, see European Parliament, Directorate-General for External Policies of the Union, Assessment of Trade Defence Policy Decisions for 2014, 23–26 (2015). 18 Council Regulation (EC) No 1972/2002 of 5 November 2002 amending Regulation (EC) No 384/96 on the Protection Against Dumped Imports From Countries Not Members of the European Community, 2002 O.J (L305/1). 19 Panel Report, European Communities — Definitive Anti-Dumping Measures on Certain Iron or Steel Fasteners from China, WTO Doc. WT/DS397/P/R (adopted Dec. 3, 2010). 20 Panel Report, European Union — Anti-Dumping Measures on Certain Footwear from China, WTO Doc. WT/DS405/P/R (adopted Oct. 28, 2011). 21 Appellate Body Report, European Communities — Definitive Anti-Dumping Measures on Certain Iron or Steel Fasteners from China, WTO Doc. WT/DS397/AB/R (adopted Jul. 15, 2011) [hereinafter EC — Fasteners (AB Report)]. 22 Id., ¶ 329.

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impracticable.23 Following these WTO rulings, in September 2012, the EU removed the IT criteria from the Basic Regulation and amended Article 9(5).24

3 The MET Debate in the EU and Its Outcome When China joined the WTO in 2001, the EU reserved the right to continue to use its NME treatment system25 to determine normal value in anti-dumping proceedings against imports from China as long as China at the macro-economic level did not meet the five (cumulative) EU criteria26 for being treated as a market economy. In the EU’s assessment, even today most of these criteria have not been met by China, which is not surprising in light of their vagueness.27 These criteria are as follows: 1. A low degree of government influence over the allocation of resources and decisions of enterprises, whether directly or indirectly (e.g. through public bodies), for example through the use of state-fixed prices, or discrimination in the tax, trade or currency regimes; 2. An absence of state-inducted distortions in the operation of enterprises linked to privatization and the use of non-market trading or compensation system; 3. The existence and implementation of a transparent and non-discriminatory company law which ensures adequate corporate governance (application of

Id., ¶ 354. Amended Article 9(5) of the EU Basic Regulation states as follows: Suppliers which are legally distinct from other suppliers or which are legally distinct from the State may nevertheless be considered as a single entity for the purpose of specifying the duty. For the application of this subparagraph, account may be taken of factors such as the existence of structural or corporate links between the suppliers and the State or between suppliers, control or material influence by the State in respect of pricing and output, or the economic structure of the supplying country. See Regulation (EU) No 765/2012 of the European Parliament and of the Council of 13 June 2012 amending Council Regulation (EC) No 1225/2009 on Protection Against Dumped Imports From Countries Not Members of the European Community, 2012 O.J (L237/1), art. 9(5). 25 For more details see, EDWIN VERMULST, EU ANTI-DUMPING LAW AND PRACTICE (Sweet & Maxwell, 2d ed., Oct. 2010). 26 See Staff Working Document, supra note 16, at 13. Compare Commission Staff Document on progress by the People’s Republic of China towards graduation to Market Economy Status in Trade Defence Investigations (2008), http://trade.ec.europa.eu/doclib/docs/2009/june/tradoc_ 143599.pdf, at 4. 27 The EU found in 2004 that China met the second criterion, see Vermulst, Sud, Evenett, Normal value in anti-dumping proceedings against China post-2016: Are some animals less equal than others? 11:5 GLOBAL TRADE & CUSTOMS J., 212–228, 223 (2016). The last assessment by the EU took place in 2008. The five country-wide criteria are very similar to the five MET discussed above. 23 24

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international accounting standards, protection of shareholders, public availability of accurate company information); 4. The existence and implementation of a coherent, effective and transparent set of laws which ensure the respect of property rights and the operation of a functioning bankruptcy regime; and 5. The existence of a genuine financial sector which operates independently from the state and which in law and practice is subject to sufficient guarantee provisions and adequate supervision. The fact that the EU granted Russia market economy status in 2002 and Ukraine in 2005, i.e. even before they joined the WTO, strongly indicates that the EU’s decision whether countries meet these criteria is political rather than economic. Initially, it seemed that the EU would terminate the use of the analogue country methodology vis-à-vis China in December 2016,28 and the Commission as well as the European Parliament’s legal teams endorsed this approach. However, in 2015, around 25 EU industry associations with a strong stance against China and significant interest in the EU’s continued use of such methodology against countries termed as NMEs such as China, formed an EU association called AEGIS Europe and began lobbying intensively against the EU granting market economy status to China.29 In February 2016, the Commission issued an ‘inception impact assessment’30 in which it outlined three options to address the issue. The first option was to maintain

28

See Karel De Gucht (then EU trade Commissioner), Modernization of trade defence: Getting the job done, Nov. 7, 2013, http://trade.ec.europa.eu/doclib/docs/2013/november/tradoc_151873.pdf; Moreover, the EU itself argued in the WTO dispute, European Communities-Definitive AntiDumping Measures on Certain Iron or Steel Fasteners from China, that section 15 of China’s Accession Protocol “entitles” it to treat China as a NME, until 2016. Appellate Body Report, European Communities — Definitive Anti-Dumping Measures on Certain Iron or Steel Fasteners from China, ¶¶ 25, 361, WTO Doc. WT/DS397/AB/R (adopted Jul. 15, 2011). Additionally, in the proposal for the EU’s position on the accession of China to the WTO, the Commission stated as follows: “The EU’s present legislation which provides specific procedures for dealing with cases of alleged dumping by Chinese exporters, which may not yet be operating in normal market economy conditions, will remain available for up to fifteen years after China enters the WTO …”. Proposal for a Council Decision establishing the Community position within the Ministerial Conference set up by the Agreement establishing the World Trade Organization on the accession of the People's Republic of China to the World Trade Organization, recital 54, COM (2001) 517 final, http://trade.ec.europa.eu/doclib/docs/2016/november/tradoc_155079.pdf; See Andrei Suse, Old Wine in A New Bottle: The EU’s Response to the Expiry of Section 15(A)(II) of China’s WTO Protocol of Accession 1–31 (Leuven Centre for Global Governance Studies, Working Paper No. 186, 2017). 29 See AEGIS Europe groups industry associations in various sectors such as steel (Eurofer), bicycles (EBMA), solar panels and cells (EU ProSun), metals (Eurometaux), metal alloys (Euroalliages) and ceramics (Cerame-Unie), http://www.aegiseurope.eu. 30 See European Commission, Possible change in the methodology to establish dumping in trade defence investigations concerning the People’s Republic of China: Inception Impact Assessment (2016), http://ec.europa.eu/smart-regulation/roadmaps/docs/2016_trade_002_dumping_investiga tions_china_en.pdf.

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the status quo, which however was indicated as being the less preferred option.31 The second was to modify the Basic Regulation by excluding China from the list of NMEs. This meant application of the market economy normal value calculation method to Chinese exporting producers. The third option—which was ultimately pursued in a modified format—was a compromise solution consisting of (a) new provisions to address ‘cost distortions’, (b) grandfathering of existing measures, (c) investigating and countervailing new subsidy schemes found in the course of an investigation, and (d) the abolition of the lesser duty rule in certain cases. While the first three aspects are covered under the Significant Distortions Rules, the last aspect is being dealt with in the context of the modernization of the EU’s trade defence rules32 and as agreed by the three EU institutions, the lesser duty rule will not be applied in the case of structural raw material distortions and in case of subsidization.33 In May 2016, the European Parliament overwhelmingly adopted a resolution (546-28, with 77 abstentions) to not grant China market economy status as long as it did not meet the five EU criteria.34 Thus, it became increasingly evident that the EU was on route to changing its position. Subsequently, in July 2016, the clear message that emerged from the College of Commissioners’ orientation debate35 was that granting of market economy status to China was not foreseen and would not be the subject of any further discussion amongst the EU institutions. The EU-China tensions on overcapacity in certain sectors such as steel and ceramics overshadowed the discussions and the outcome of the debate focused on a highly protectionist orientation of the anticipated changes.

The inception impact assessment report states as follows on page 4: “Certain provisions in the Protocol on the accession of China to the WTO expire in 2016, and this may affect the ability of other WTO Members, such as the EU, to use the Non-Market-Economy methodology automatically.” See European Commission, Inception Impact Assessment (2016), http://ec.europa.eu/smartregulation/roadmaps/docs/2016_trade_002_dumping_investigations_china_en.pdf. 32 On April 10, 2013, the Commission published a legislative proposal aimed at modernizing the block’s trade defence instruments. The proposal introduced several protectionist elements including the initiation of ex officio investigations in case of a perceived threat of retaliation and the removal of the lesser duty rule in certain situations. See, Proposal for a Regulation of the European Parliament and of the Council amending Council Regulation (EC) No 1225/2009 on protection against dumped imports from countries not members of the European Community and Council Regulation (EC) No 597/2009 on protection against subsidised imports from countries not members of the European Community, COM (2013) 192 final (Apr. 10, 2013), http://trade.ec. europa.eu/doclib/docs/2013/april/tradoc_150838.pdf. 33 See EU modernises its trade defence instruments, Fact Sheet, (Jan. 23, 2018), http://europa.eu/ rapid/press-release_MEMO-18-396_en.htm. 34 European Parliament resolution of 12 May 2016 on China’s market economy status, PARL. EURO. DOC. P8_TA 0223 (2016). 35 See College Orientation Debate On The Treatment Of China In Anti-dumping Investigations (July 20, 2016), http://europa.eu/rapid/press-release_IP-16-2567_en.htm. 31

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Eventually, on 9 November 2016, the Commission published its proposal on the treatment of China post expiry of Section 15(a)(ii) of the accession protocol.36 As the proposal was issued just prior to the December 11, 2016 deadline and could not possibly have been adopted by the co-legislators, i.e. the Council and the European Parliament, within a month, nothing changed in the EU when the clock struck midnight on December 11, 2016. As a result, on 12 December 2016, China filed a request for consultations at the WTO challenging the EU’s approach for the calculation of normal value for Chinese exporting producers.37 A Panel was established by the dispute settlement body on 3 April 2017 and the Panel was composed on 10 July 2017. This dispute is currently pending and the Panel recently issued a communication mentioning that it does not expect to issue its report to the parties before the second half of 2018.38 During the course of 2017, the Commission negotiated extensively with the Council and the European Parliament to reach a compromise and on 3 October 2017, the two institutions reached an agreement39 on the Commission’s proposal40 with some amendments. The compromise proposal entered into force on December 19, 2017 with the publication in the Official Journal of the EU of a Regulation amending the Basic Regulation and introducing the Significant Distortions Rules which came into force the following day.41

4 The New Legal Framework for the EU’s Approach Towards China in Anti-dumping Investigations The Significant Distortions Rules have two fundamental aspects. First, the list of NMEs in the Basic Regulation has been deleted which means that the issue of recognizing China as a market economy has been sidestepped. Instead, a new Article 2(6a) has been added to the Basic Regulation which introduces the concept of

36

See Commission Proposes Changes to the EU’s Anti-Dumping And Anti-Subsidy Legislation (Nov. 9, 2016), http://europa.eu/rapid/press-release_MEMO-16-3605_en.htm. 37 Request for Consultations by China, European Union – Measures Related To Price Comparison Methodologies, WTO Doc. WT/DS516/1 (Dec. 12, 2016). 38 Communication from the Panel, European Union – Measures related to price comparison methodologies, WTO Doc. WT/DS516/11 (Dec. 11, 2017). 39 European Commission Press Release, Commission welcomes Agreement On New Anti-Dumping Methodology, (Oct., 3 2017), http://trade.ec.europa.eu/doclib/press/index.cfm?id=1735. See also European Parliament Press Release, EU anti-dumping measures that protect jobs: MEPs and ministers strike deal (Oct., 3, 2017), http://www.europarl.europa.eu/news/en/press-room/ 20171003IPR85229/eu-anti-dumping-measures-that-protect-jobs-meps-and-ministers-strike-deal. 40 See Commission fact sheet, The EU is changing its anti-dumping and anti-subsidy legislation to address state induced market distortions (Oct. 5, 2017), http://trade.ec.europa.eu/doclib/press/ index.cfm?id=1736. 41 See Significant Distortion Rules, supra note 5.

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‘significant distortions’. This change however does not extend to non-WTO NMEs and the latter will continue to be subject to the analogue country methodology.42 Second, the new methodology that replaces the analogue country methodology provides that in case of a finding of significant distortions, the new rules provide for the use of third country prices/costs or international prices/benchmarks to establish an undistorted normal value. The new methodology is analysed in detail in the next part of this chapter.

4.1 4.1.1

Assessment of Significant Distortions Identifying Significant Distortions

The new Article 2(6a)(b) defines significant distortions as distortions which occur “… when reported prices or costs, including the costs of raw materials and energy, are not the result of free market forces because they are affected by substantial government intervention.” The relevant factors for this assessment shall include the potential impact of one or more of the following elements43: – Whether the market in question is to a significant extent being served 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 prices or costs; – Public policies or measures discriminating in favour of domestic suppliers or otherwise influencing free market forces; – The lack of or discriminatory application or inadequate enforcement of bankruptcy, corporate or property laws; – Wage costs being distorted; and – Access to finance granted by institutions which implement public policy objectives or otherwise not acting independently from the state. In terms of the evidence of ‘significant distortions’, Article 2(6a)(c) provides that in cases where the Commission has “well founded indications of the possible extent of significant distortions”, the Commission shall make a public report discussing the factors set out in article 2(6a)(b), in the context of such country of sector. Article 2(6a)(c) additionally provides that the Commission’s country/sector-specific report and the evidence on which it is based “shall” be placed on the file of any investigation pertaining to that country or sector, and interested parties “shall” have

42

Such countries would be covered by the new Article 2(7) which basically replicates the thus far applicable Article 2(7)(a). 43 Significant Distortion Rules, supra note 5, art. 2(6)(b).

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ample opportunity to rebut, supplement, comment or rely on the report and the underlying evidence in each anti-dumping case in which such report or evidence is used. As will be discussed in more detail below, at the same time as the adoption of the Significant Distortions Rules, the Commission issued a country report which pertains to China.44 Article 2(6a)(c) further states that in making its assessment of significant distortions, the Commission shall take into account all the relevant evidence on the investigation record.

4.1.2

Triggering the New Methodology

Per Article 2(6a)(d), EU complainants may rely on the evidence in the Commission’s reports when they lodge complaints or request reviews to justify the calculation of the normal value. The fact sheet issued by the Commission following the compromise between the EU institutions clarified that the proposed amendments do not impose any additional burden on the EU industry and in fact, “[i]t is the Commission who [sic] will have the additional work to establish that significant distortions exist in a particular country. When lodging a request for the initiation of an anti-dumping investigation EU industry will be able to rely on the Commission’s detailed country and sector level reports as evidence that distortions exist.”45 Further, Article 2(6a)(e) provides that when the Commission finds that there is sufficient evidence pursuant to Article 5(9) of the Basic anti-dumping Regulation that significant distortions exist and it decides to initiate an investigation on that basis, the notice of initiation shall specify this. Additionally, the Commission “shall” collect the data required for the construction of the ‘undistorted’ normal value, and evidence regarding the existence of significant distortions “… may only be taken into account if it can be verified in a timely manner within the investigation”. Article 2(6a)(e) further provides that interested parties in an anti-dumping investigation shall be informed promptly, of initiation about the relevant sources that the Commission intends to use for the purpose of determining the ‘undistorted’ normal value and will be given 10 days to comment. In order to make their comments, interested parties will be granted access to the investigation file and all evidence relied upon by the Commission subject of course to confidentiality provisions.

44

European Commission, Commission Staff Working Document on Significant Distortions in the Economy of People’s Republic of China for the Purposes of Trade Defence Investigations, SWD (2017) 483 final (Dec., 20, 2017) [hereinafter China Country Report]. 45 See Commission Fact Sheet, The EU is changing its anti-dumping and anti-subsidy legislation to address state induced market distortions (Oct. 5, 2017), http://trade.ec.europa.eu/doclib/press/ index.cfm?id=1736.

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The New Methodology Addressing Significant Distortions

Article 2(6a)(a) provides that if the Commission considers that it is not appropriate to use domestic prices and costs in the exporting country for normal value establishment on account of the existence of significant distortions, the normal value “shall” be constructed exclusively on the basis of costs of production and sale reflecting undistorted prices or benchmarks. The sources that the Commission “may” use to arrive at such an ‘undistorted’ constructed normal value include the following: (i) “corresponding costs of production and sale in an appropriate representative country with a similar level of economic development as the exporting country, provided the relevant data are readily available.” In this context, if there is more than one analogue country available, preference “shall” be given to countries with an adequate level of social and environmental protection; or (ii) if considered appropriate, “… undistorted international prices, costs, or benchmarks”; or (iii) domestic costs, only to the extent that they are positively established not to be distorted, on the basis of accurate and appropriate evidence. The appropriateness of using domestic costs would be assessed on an exporter/ producer-specific basis. Article 2(6a)(a) also states that “… an undistorted and reasonable amount for administrative, selling and general costs and for profits” shall be used for the purpose of the undistorted constructed normal value.

4.3

Other Changes Linked to the Significant Distortions Rules

With regard to the application of the Significant Distortions Rules in the context of the measures in force, the concept of ‘grandfathering’ of the measures at the current level has been introduced. A new sub-paragraph has been added to Articles 11(3) and 11(4) of the Basic Regulation which stipulates that the new methodology can only be used pursuant to the initiation of the first expiry review following the entry into force of the Significant Distortions Rules. This is intended to preclude interested parties from asking for interim or newcomer reviews on the basis of the Significant Distortions Rules. Furthermore, an additional sub-paragraph has been added to Article 11(9) providing that in relation to the circumstances relevant for the determination of the normal value pursuant to Article 2, due account shall be taken of all relevant evidence, including relevant reports regarding the circumstances prevailing on the

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domestic market of the exporters and producers and the evidence on which they are based, which has been placed on the file, and upon which interested parties have had an opportunity to comment.

5 Preliminary Assessment of the Significant Distortions Rules The Significant Distortions Rules are very imprecise as far as the key concepts and details are concerned. This is perhaps intentionally designed to complicate WTO challenges and to grant broad discretion and flexibility for the Commission in the application of these rules. Moreover, inflated dumping margins can be expected to result from the use of the new methodology to establish an undistorted normal value and China can be expected to be the main target of these rules. As of April, 2018, the last EU anti-dumping investigation against China was initiated in October 201746 and the last expiry review against measures on Chinese products was initiated on December 6, 2017.47 These investigations are therefore covered by the old rules. Thus, the Significant Distortions Rules are yet to be tested in any case and it remains to be seen how the EU will implement them. The Significant Distortions Rules, however, can be critiqued on the following grounds.

5.1

Extreme Ambiguity and Broad Scope

The Significant Distortions Rules are very ambiguous as far as the main legal elements are concerned. First, the new provisions conflate domestic sales prices and costs of production, and no distinction regarding the criteria for finding significant distortions with respect to the two has been made. It remains unclear whether for instance, sales prices would first be tested for distortion, or whether distorted costs would be the justification for rejection of domestic sales prices, or whether simply on account of country-wide/sector-specific reports all domestic sales prices and costs would be deemed to be significantly distorted. Second, it is unclear how the provisions of Article 2(6a) would be applied in conjunction with Articles 2(3) to 2(5) of the Basic Regulation, which deal with the establishment of normal value.

46

European Commission, Notice of Initiation of An Anti-Dumping Proceeding Concerning Imports of Electric Bicycles Originating in the People’s Republic of China, 2017 O.J. (C353/1). 47 European Commission, Notice of Initiation of An Expiry Review of the Anti-Dumping Measures Applicable to Imports of Chamois Leather Originating in the People's Republic of China, 2017 O.J. (C416/15).

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Third, the criteria for assessing the existence of significant distortions are non-exhaustive and lack a proper definition and are therefore open to expansive interpretation by the Commission (and complainants). To give a few examples, as regards wage cost distortion, it is not clear under what circumstances can wage costs be deemed to be distorted. Similarly, it is not clear as to what is implied by “public policies or measures … otherwise influencing free market forces” and under what circumstances “public policies or measures discriminating in favor of domestic suppliers …” are indicative of significant distortions. Indeed, almost every country in the world—including EU Member States—has policies to promote its domestic industries for example in the form of subsidy schemes involving funding, tax breaks, duty drawback, local content policies or non-tariff trade barriers. Similarly, the extent of state presence in firms allowing interference with prices or costs that would amount to significant distortion is questionable, for instance, whether the mere presence of government appointed officials on a company’s board will be sufficient or more is required. Thus, the criteria to assess significant distortions, on account of their ambiguous wording, will be subject to discriminatory as well as expansive interpretation and application by the Commission on a case-specific basis as seen in the context of the MET assessments.

5.2

Re-Introduction of the MET Criteria

A plain reading of the criteria for the assessment of significant distortions in Article 2(6a)(b) indicates that they subsume the erstwhile MET criteria. For example, the first MET criterion dealt with direct and indirect state influence in a company’s operations including among others, state interference in raw material costs.48 In the anti-dumping investigation concerning Ironing Boards from China,49 the MET request of a Chinese exporting producer was rejected because the price of steel, which was the main raw material to make ironing boards, was determined to be distorted due to government intervention. Making this determination, the Council stated:

The first MET criterion stated as follows: “Decisions of firms regarding prices, costs and inputs, including for instance raw materials, cost of technology and labour, output, sales and investment, are made in response to market signals reflecting supply and demand, and without significant State interference in this regard, and costs of major inputs substantially reflect market values.” EU Basic Regulation, supra note 1, art. 2(7)(c). 49 European Council, Implementing Regulation of the Council (EU) No 270/2010 of 29 March 2010 amending Regulation (EC) No 452/2007 imposing a definitive anti-dumping duty on imports of ironing boards originating, inter alia, in the People’s Republic of China, 2010 O.J. (L84/13). 48

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The investigation established that the applicant did not meet the MET criterion referred to in the first indent of Article 2(7)(c) (criterion 1) of the basic Regulation as regards costs of major inputs. It was established that after the investigation period in the original investigation, i.e. after 2005, export restrictions were imposed by the State on several steel products, including the main raw materials for the production of ironing boards, i.e. steel plate, steel pipes and steel wire. It is noted that the cost of these raw materials represent a significant part of the total raw materials cost. The imposition of export taxes decreased the incentive to export and thereby increased the volumes available domestically, leading in turn to lower prices. It was also found that a number of subsidy schemes were available for Chinese steel producers, as well as publicly available accounts of a number of steel producers confirm that the Chinese State is actively supporting the development of the steel sector in the PRC. As a consequence, domestic steel prices in the PRC were during the review investigation period far below prices on other sizeable world markets, notably steel prices in North America and North Europe, and these price differences cannot be explained by any competitive advantage in the production of steel. Moreover, from the information on the file, it was found that the applicant was benefiting from these artificially low and distorted prices of steel, as it purchased its raw materials on the domestic Chinese market.50

In Melamine from China,51 the Commission rejected the MET claims of Chinese exporting producers because it found State interference and distortions in the natural gas and urea markets. Melamine is a white crystalline powder obtained from urea and the major cost of producing the latter was found to be accounted for by natural gas costs. In that investigation, the Commission found that the natural gas market in China was dominated by three State-owned companies and therefore, exporting producers that produced urea, which was then used by them to produce melamine, benefited from a low government fixed gas price for the production of urea.52 The Commission also held that the low gas price allowed melamine producers to produce it “… at unnaturally reduced prices, taking advantage of the distorted low price of natural gas.”53 However, as some Chinese exporting producers bought urea on the domestic market, the Commission also assessed the prices of that raw material and held that the urea market was also distorted by three main types of State interference namely: the existence of strict import quotas for urea and export taxes in the investigation period; the exemption of domestic urea sales from VAT; and the direct involvement of the Chinese government in the market through the “State Fertilizer System”,

50

Id., recitals 14-16. European Commission, Commission Regulation (EU) No 1035/2010 of 15 November 2010 imposing a provisional anti-dumping duty on imports of melamine originating in the People's Republic of China, 2011 O.J. (L298/10). 52 Id.,¶ 21. 53 Id., ¶ 22. 51

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whereby the State purchases urea directly from producers to keep in a strategic reserve and can also release quantities of urea in the domestic market.54 In the same vein, the fourth MET criterion, i.e. “the firms concerned are subject to bankruptcy and property laws which guarantee legal certainty and stability for the operation of firms” is effectively reflected in the fourth criterion for assessing significant distortions, i.e. the lack of or discriminatory application or inadequate enforcement of bankruptcy, corporate or property laws.55 That the MET criteria have been reintroduced in the guise of ‘significant distortions’ is also supported by the Commission’s China Country Report. In the context of the sector-specific analysis for the chemicals and ceramics sectors, for example, the Commission refers to the negative MET determinations in anti-dumping cases against China concerning products belonging to those sectors and the various forms of government intervention found in those investigations as proof of State intervention relevant for finding significant distortions.

5.3

Country-Wide Approach

The Significant Distortions Rules refer to horizontal country-wide reports but the criteria for assessing significant distortions are mostly company-specific,56 and otherwise sector-specific.57 Therefore, to what extent the country or sector-specific reports would/could serve as ‘evidence’ of significant distortions at a companyspecific level is questionable. Indeed, it is quite commonly seen in anti-subsidy investigations that subsidy schemes available to a particular industry or sector are not availed of by specific exporting producers. The China Country Report issued by the Commission does not shed any light on this issue. Moreover, the Significant Distortions Rules indicate that once there is a country or sector-specific report, a determination of significant distortions would likely be a foregone conclusion in anti-dumping cases concerning that country/sector of that country. This follows from the fact that the Commission has assured that there will be no increase in the evidentiary burden on EU complainants and that they can simply rely on the country/sector-specific reports to meet the standard of evidence

54

Id., recitals 20–24. Significant Distortions Rules, supra note 5, art. 2(6a)(b). 56 See for instance the following criteria in Significant Distortions Rules, supra note 5, art. 2(6a)(b). It states, “state presence in firms allowing the state to interfere with prices or costs; wage cost distortion; access to finance from institutions implementing public policy objectives; lack of/discriminatory application of bankruptcy, corporate or property laws”. 57 See for instance the following criteria in Significant Distortions Rules, supra note 5, art. 2(6a)(b). It states, “the market in question is to a significant extent served by state-owned/controlled firms; public policies discriminating in favor of domestic suppliers”. 55

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required under Article 5(9) of the Basic Regulation.58 A finding of distortion will then undoubtedly become a self-fulfilling prophecy. Such an approach of rejecting exporting producers’ prices or costs due to a finding of country-wide or sector-wide distortions is contrary to the concept of ‘dumping’ which as noted by the Appellate Body, concerns the pricing behavior of individual exporters/foreign producers.59 That said, once the investigation is initiated, the establishment of normal value for exporting producers on the basis of undistorted costs will be a given as it would be unlikely that the Commission would find its own report/evidence therein insufficient evidentiary proof of significant distortions. In addition to the fact that there is no provision pursuant to which interested parties would have the opportunity to rebut the significant distortions claim, individual exporting producers would find it difficult to provide evidence for a sector or the economy as a whole. Article 2(6a)(a) does provide a possibility of using individual exporting producers’ “undistorted” costs if they can be positively established to be undistorted on the basis of appropriate and accurate evidence. However, it would likely be extremely difficult, if not impossible, for a company that is determined to be a part of a distorted sector to prove that its costs are undistorted, as the Commission’s current MET practice evidences.

5.4

Establishment of Undistorted Costs

Once the investigation is initiated including with regard to significant distortions, an undistorted normal value would be established on the basis of undistorted costs in a representative country or using international benchmarks as outlined in Article 2 (6a)(a). It is clear that the Commission will have excessive discretion to select the benchmarks and supposedly representative third countries as there are no coherent rules for their selection. On the one hand, Article 2(6a)(a) states that undistorted costs would need to be used and on the other hand, that a representative country with a similar level of economic development would need to be selected and the level of social and environmental development would also be considered if there is more than one representative country. However, the criteria, if any, that the Commission would consider for determining that a particular country is ‘representative’ and also abides by the social and environmental criteria, and that the costs in the representative country are undistorted, have not been outlined.

58

See Significant Distortions Rules, supra note 5, art. 2(6a)(e). Appellate Body Report, United States — Measures Relating to Zeroing and Sunset Reviews, ¶ 111, WTO Doc. WT/DS322/AB/R (adopted Jan. 9, 2007). 59

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To conflate things further, if social and environmental standards are to be taken into account then it is unlikely that any country with a similar level of economic development would be found for the commonly investigated countries by the EU.

5.5

China Will Likely Be the Main Target

It is the authors’ view that the main target of the Commission’s ostensibly country neutral rules will be China. Indeed, the Significant Distortions Rules are the outcome of the discussion that was started to address the expiry of a specific provision in China’s accession protocol. Moreover, the various criteria for assessing the existence of significant distortions-apart from replicating the MET criteria-reflect key Commission determinations in anti-subsidy cases against China. Additionally, simultaneously with the publication of the Significant Distortion Rules, the Commission issued the rumored China Country Report.60 This is the only report issued thus far and is likely to be the only one for some time.61 Therefore, the Commission’s actions which seem to speak louder than words, reinforce the point that China will be the main target. In the authors’ view, the China Country Report shows an utter lack of objectiveness and raises serious questions regarding the Commission’s approach. The report spans around 466 pages, and admittedly “… examines the existence of significant distortions in the People’s Republic of China (‘PRC’) that are relevant under the Basic Regulation”. Broadly divided into three parts, the first and second parts examine the Chinese economy and manufacturing in terms of the factors of production respectively in a horizontal manner followed by the third part that delves more deeply into four specific sectors namely steel, aluminium, chemicals and ceramics.62 The report is clearly drafted with the aim of reaching a pre-determined result and relies to a notable extent on the EU’s stance in anti-subsidy cases and on negative MET determinations as well as findings of the US authorities. The report emphasizes the allegedly key role of the State and the five-year planning system, the relevance of SOEs in the Chinese economy and government control over them through various mechanisms, and the overwhelming reach of the government in every sector of the economy including the financial and investment sectors in addition to the four identified sectors. The broad conclusion repeated in every chapter is, as one would expect, that the “… State continues to exert a decisive influence on the allocation of resources and on their prices”, and “… the allocation and pricing of the various factors of production is influenced by the State in a very

60

See China Country Report, supra note 44. Russia is supposed to be next in line with the report likely to focus on Russia’s dual pricing system for gas. 62 China Country Report, supra note 44, at 346–436. 61

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significant manner.”63 This report, if it were to be a prelude to the EU’s future approach against China in anti-dumping cases, indicates a biased and discriminatory application of the new rules.

6 Conclusion While it remains to be seen how the EU practice with respect to the Significant Distortions Rules will develop over time, it is clear that the EU has re-instituted the MET criteria with enhanced discretion for the Commission. The new rules are unlikely to benefit Chinese companies and may hurt producers in other countries where, in the view of the EU Commission, significant distortions exist. In the authors’ view, the Significant Distortions Rules are not as WTO compliant as the EU projects them to be, including with respect to the concept of significant distortions, the establishment of an undistorted normal value and the standstill provision. Thus, a WTO challenge by China seems only a question of time.64 In fact, when the Significant Distortions Rules were just a proposal they were sharply criticized by several WTO members: Russia, Kazakhstan, Egypt, Kuwait, Oman, Qatar, the United Arab Emirates and Colombia all questioned the proposal in a meeting of the Committee on Anti-Dumping Practices.65 While it would not be the first time that the EU’s anti-dumping law and practice are challenged before the WTO,66 WTO guidance on what the EU can and cannot do under its anti-dumping regime against perceived significant distortions is much needed.

63

China Country Report, supra note 44, at 3. In fact, China included the new methodology in its WTO dispute with the EU regarding the normal value calculation methodology brought on 12 December 2016 by means of a footnote reference. 65 World Trade Organisation, Meeting of the Committee on Anti-Dumping Practices of 25 October 2017 (Oct. 25, 2017), https://www.wto.org/english/news_e/news17_e/anti_25oct17_e.htm. 66 As discussed above, China successfully argued the illegality of the EU’s IT test before the WTO and recently both Argentina and Indonesia successfully challenged the ‘cost adjustment methodology’ applied by the EU in the anti-dumping investigation against Argentine and Indonesian biodiesel. See for more details, Appellate Body Report, European Union-AntiDumping Measures on Biodiesel from Argentina, WTO Doc. WT/DS473/AB/R (adopted Oct., 6, 2016); Panel Report European Union — Anti-Dumping Measures on Biodiesel from Indonesia, WTO Doc. WT/DS480/R (adopted Jan., 25, 2018). 64

Treatment of Non-market Economies in Anti-dumping Proceedings: The Mexican Approach Amrita Bahri

Abstract Mexico has employed special methodologies for price-determination and calculation of dumping margins against Chinese imports in almost all anti-dumping investigations. This chapter attempts to explain and analyze the NME-specific procedures employed by Mexican authorities in anti-dumping proceedings against China. It also clarifies the Mexican standpoint on the controversial issue of how the expiry of Section 15(a)(ii) of China’s Accession Protocol to the WTO impacts the surviving parts of Section 15 of the Protocol, and whether Mexico has changed its treatment towards Chinese imports following the expiry of Section 15(a)(ii) post 12 December 2016. Keywords Mexico Anti-dumping


Non-market economy
Burden of proof
China

1 Introduction Mexico has gradually established itself as one of the leading international trade players in Latin America as well as in the world.1 From being a closed economy, it has become one of the most open economies for import and export of goods and services. Currently ranked as the second largest economy in Latin America2 (based on Gross 1

International Monetary Fund, Trade Developments in the Latin America and the Caribbean, Background Papers (Mar., 2017). 2 World Bank Group, Mexico Overview (Apr. 16, 2018), http://www.worldbank.org/en/country/ mexico/overview. A. Bahri (&) Assistant Professor of Law ITAM University, Mexico City, Mexico e-mail: [email protected] A. Bahri Assistant Professor of Law WTO Co-Chair for Mexico, WTO Chair Program, Mexico City, Mexico © Springer Nature Singapore Pte Ltd. 2018 J. J. Nedumpara and W. Zhou (eds.), Non-market Economies in the Global Trading System, https://doi.org/10.1007/978-981-13-1331-8_10

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Domestic Product, hereinafter GDP), ‘World Bank analysts have predicted that by 2050 the Mexican economy will be the sixth largest economy in the world’.3 Mexico’s success in international trade can be attributed to its large and skilled labour market, geographical location, consistent economic growth and well-negotiated free trade agreements to which it has become a party. Mexico is now the thirteenth largest exporting and twelfth largest importing economy in the world.4 Its top exports include cars, vehicle parts, delivery trucks and computers, and its main exporting partners are the US, Canada and China. Mexico is the largest exporter of flat-screen TVs, refrigerators and freezers.5 Its top imports are refined petroleum, vehicle parts, integrated systems, computer parts, and broadcasting accessories with these goods primarily being imported from the USA, China, Japan, South Korea and Germany.6 Together, exports and imports contribute almost eighty percent to Mexican GDP.7 Hence, foreign trade contributes significantly to the economic growth of Mexico. In mid 1980s, Mexico undertook the process of trade liberalization as it opened up its economy to trade and investment through market-oriented policies, putting an end to an era of closed economy that employed the policy of import substitution for almost fifty long years.8 Shortly after embarking on the journey of liberalizing trade in 1980s, Mexico created legislation for dealing with unfair trade practices, thereby becoming one of the first developing countries in the world to have a national trade defence system. Trade liberalization reforms, in the form of elimination or reduction of tariffs and non-tariff barriers to trade, coincided with the international developments Mexico was actively taking part in. In 1986, Mexico became a member of GATT 1947. Upon joining GATT, Mexico also joined the Tokyo Round Anti-Dumping Code. In 1993, it signed North American Free Trade Agreement (NAFTA) with the US and Canada. Mexico also participated actively in Uruguay Round negotiations, and subsequently in 1995, it joined the WTO as a founding member. Since then, Mexico has signed multiple bilateral and regional trade agreements with its major trade partners including South and Central American countries, the EU, Japan and Israel. Moreover, it recently became part of Trans-Pacific Partnership (TPP) which is a free trade agreement designed to liberalize trade and investment between eleven (after the US exit) pacific-rim countries.

3

Oliver Houlcroft, How Mexico Became an International Trade Leader, BIZLATIN HUB (Mar. 1, 2018), https://www.bizlatinhub.com/mexico-international-trade/. 4 World Bank Group,, World Bank Database 2016 (Mar. 5, 2018), http://databank.worldbank.org/ data/home.aspx. 5 World Bank Group, World Integrated Trade Solution, (Mar. 5, 2018), https://wits.worldbank.org/ CountrySnapshot/en/MEX/textview. 6 Ibid. 7 World Bank Group, World Integrated Trade Solution, (Mar. 5, 2018), https://wits.worldbank.org/ CountryProfile/en/Country/MEX/StartYear/1990/EndYear/2016/Indicator/NE-IMP-GNFS-ZS. 8 M. Angeles Villarreal, NAFTA and the Mexican Economy, CONG. RES. SERV. (Jun. 3, 2010), https://fas.org/sgp/crs/row/RL34733.pdf.

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Fig. 1 Trade remedy investigations, sector-wise. Source Official Statistical Report published by UPCI, Ministry of Economy, Mexico. (Ministry Of Economy, The Official Statistical Report: Industry And Commerce/International Commercial Practice Unit Of Mexico (Jan. 2018), https:// www.gob.mx/cms/uploads/attachment/file/288333/Estadisticas_UPCI_160118.pdf)

In the very year of GATT accession, Mexico enacted legislation that allowed its domestic producers to seek relief against unfair trade practices. Since then, its foreign trade legislation has undergone multiple amendments and reviews. The present legislation and accompanying regulations create a strong and robust trade defense mechanism against unfair trade practices including dumping and subsidization, in order to ensure fair competition between domestic and imported products.9 In terms of the numbers of anti-dumping (AD) investigations it has initiated, Mexico is the eleventh most active in the world and third most active in Latin America.10 A total of 144 initiations of AD proceedings in Mexico (from 1995 to 2016) shows that its domestic industries have made heavy use of these legal provisions.11 What makes the story of Mexican experience even more relevant is the fact that around thirty-four percent of AD proceedings over the last three decades in Mexico have targeted Chinese imports.12 Most of these investigations were launched against Chinese metal and manufactured goods, because Mexican

9

A trade practitioner with the experience of dealing in anti-dumping matters in Mexico disagrees with the characterization of this system as “strong and robust”, and opines that there are many flaws in the system that needs to be overcome. [Email conversation with a trade lawyer, 22 March 2018]. This is not the focus of the chapter, and hence is not dealt with any further. 10 World Trade Organization, Statistics on Anti-Dumping, WORLD TRADE ORG. (Feb. 28, 2018), https://www.wto.org/english/tratop_e/adp_e/adp_e.htm. The data reflects the number of Anti-dumping Initiations as reported by members to WTO. The covered time range is 01/01/1995 31/12/2016. 11 Id. 12 See Fig. 2.

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Most Frequently Investigated Countries in Mexico (1995-2017) UNITED STATES 24%

OTHER COUNTRIES 27%

UKRAINE 4% GERMANY 3% INDIA 4% SOUTH KOREA 4% BRAZIL 4% EUA CHINA BRAZIL SOUTH KOREA

CHINA 34%

INDIA

RUSSIA

UKRAINE

OTHER COUNTRIES

Fig. 2 Most frequently investigated countries in Mexico. Source Official Statistical Report published by UPCI, Ministry of Economy, Mexico. (Ministry of Economy, The Official Statistical Report: Industry And Commerce/International Commercial Practice Unit of Mexico (1995–2017) https://www.gob.mx/cms/uploads/attachment/file/306426/Anuario_estad_stico_UPCI_2017.pdf)

industries producing and manufacturing these products have faced the heat of direct competition from Chinese steel and other manufactured goods.13 The Fig. 1 outlines the type of sectors that have faced AD proceedings in Mexico. Figure 1 shows that the metal and chemical derivatives’ industries are the most active sectors in filing petitions with the Mexican investigating authorities for the protection of their domestic market interests. This can be attributed to the fact that Mexico is one of the world’s leading producers of metal, petroleum and chemicals, and these industries have the required resources to organize their interests and satisfy evidential requirements for the filing of petitions to initiate AD investigations. Most of the investigations initiated against Chinese imports in Mexico have

13

Ministry Of Economy, The Official Statistical Report: Industry And Commerce/ International Commercial Practice Unit Of Mexico (Jun., 21, 2015), https://www.gob.mx/se/acciones-yprogramas/industria-y-comercio-unidad-de-practicas-comerciales-internacionales-upci.

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been in the areas of steel, textile and clothing, and chemicals.14 The Fig. 2, which illustrates the most frequently investigated countries, shows that Chinese imports have been the most frequent subject of AD investigations in Mexico. The Fig. 2 lists the countries that have most frequently been involved in trade remedy investigations in Mexico. The numbers show that China and the US have been the most frequent respondents in AD investigations. Together, China and the US have been the respondents in over fifty-percent of AD investigations initiated in Mexico. Chinese imports alone have been targeted in thirty-four percent of AD proceedings since 1995. This seems puzzling as Mexico receives over forty-five percent of its imports from the US and only around seventeen percent from China.15 However, this can be explained. China’s victimhood at the hands of Mexican authorities could be attributed to the frequent unfair dumping practices carried out by the exporters in China. It can also be attributed to the Mexican treatment of non-market economies (NMEs) in AD investigations and its constant use of special methodologies in establishing dumping against Chinese imports. Mexico has treated China as a NME in almost all AD investigations and it has therefore employed special methodologies for price-determination and calculation of dumping margins. This chapter attempts to explain and analyze how Mexico has treated NMEs (mainly China) in AD investigations and if that approach has undergone a change post 12 December 2016. The following section provides an account of how AD procedures are handled pursuant to the existing legal and institutional frameworks in Mexico. In Section 3, the focus lies on the NME-specific procedures employed by Mexican authorities for investigating imports from China. Section 4 clarifies the Mexican standpoint on the controversial issue of how the expiry of Section 15(a)(ii) of China’s Accession Protocol to the WTO impacts upon the surviving parts of Section 15 of the Protocol, and whether Mexico has changed its treatment towards Chinese imports following the expiry of Section 15(a)(ii) post 12 December 2016. The final section puts forward some concluding thoughts that reiterate how Mexican treatment of this issue has reaffirmed Mexico’s long-standing interest in the multilateral trading system. Its explicit and proactive change of approach post the expiry of Section 15(a)(ii) can lay down a roadmap for other member countries to follow. The findings laid down in this chapter are based on the available literature, database of domestic AD cases, official legislations and semi-structured interviews that the author has conducted with the Mexican government officials and private trade lawyers.

14

Id. World Bank Group, World Integrated Trade Solution 2015, (Feb. 28, 2018), https://wits. worldbank.org/CountryProfile/en/Country/MEX/Year/2015/Summarytext.

15

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2 Legal and Institutional Frameworks: Handling of Anti-dumping Procedures in Mexico As per Article 133 of the Constitution of Mexico, international treaties occupy a higher position than the domestic laws; the provisions of the former prevail in case of a conflict with the latter.16 This consequently means that the Agreement Establishing the World Trade Organization17 (along with its multilateral agreements including the Anti-Dumping Agreement18) constitutes a part of Mexican law. In addition, Mexico has also codified its trade remedy commitments in its domestic legislations and regulations. The Foreign Trade Law19 (Ley de Comercio Exterior, hereinafter ‘FTL’) and the accompanying set of Regulations to the Foreign Trade Law20 (Reglamento de la Ley de Comercio Exterior, hereinafter ‘Regulations’) are two official texts that have ratified and reinforced Mexico’s commitment towards WTO trade remedy provisions. These official texts provide a detailed and somewhat comprehensive account of procedures for the conduct of investigations and the application of AD, countervailing and safeguard measures. FTL and the accompanying Regulations make Mexico’s Ministry of Economy (Secretaria de Economia) responsible for the conduct of trade remedy procedures including antidumping, countervailing and safeguard investigations and to make determinations regarding compensatory duties. The Unit on International Trade Practices (Unidad de Practicas Comerciales Internacionales, hereinafter ‘UPCI’) is the primary ministerial unit responsible for the administration of trade remedies system. UPCI’s key function is to operate the trade defense system in an efficient and timely manner and to provide protection to the domestic industry against unfair international trade practices. UPCI is responsible for investigating the existence of dumping or subsidies, injury, and the causal relation between them. After carrying out the investigations, which can either be initiated on a petition or on suo moto basis, the UPCI makes recommendations regarding the imposition of AD or countervailing duties to the Minister (Secretario de Economia).21 The UPCI also provides technical and substantive assistance to the domestic exporters facing trade remedy proceedings in other countries. The Foreign Trade Commission (Comision de Comercio Exterior, hereinafter ‘COCEX’) is an advisory authority that can

16

Political Constitution of the United Mexican States, CP, art. 133, Diario Oficial de [a Federaci6n [DOF] (Feb. 5, 2017) (Mex.). 17 Marrakesh Agreement Establishing the World Trade Organization, Apr. 15, 1994, 1867 U.N.T. S. 154, 33 I.L.M. 1144. 18 Agreement on the Implementation of Article VI of GATT 1994, Apr. 15, 1994, 1868 U.N.T.S. 201, Marrakesh Agreement Establishing the World Trade Organization, Apr. 15, 1994, 1867 U.N. T.S. 154, 33 I.L.M. 1144. 19 Ley De Comercio Exterior § 1–98 (1995) (Mex.). [hereinafter FTL]. 20 Reglamento De La Ley De Comercio Exterior § 1–215 (2014) (Mex.). [hereinafter Regulations]. 21 FTL, supra note 19, art. 5.

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CHIEF OF UNIT

DIRECTOR GENERAL

DUMPING AND SUBSIDIES INVESTIGATIONS

INJURY/CAUSATION AND SAFEGUARDS

ACCOUNTING AND FINANCE

NATIONAL LEGAL AFFAIRS

INTERNATIONAL LEGAL AFFAIRS

Fig. 3 Institutional framework of UPCI

advise modification or review of trade remedy determinations proposed by the UPCI. As per Article 6 of FTL, it is an obligatory consulting organ and is in charge of giving opinion on subjects related to foreign trade. All its opinions are published in the Diario Oficial de la Federacion (Diario Oficial) (Fig. 3). As can be seen in Figure 3, UPCI is divided into several specialized divisions which are known as Deputy General Directorates (Direccion General Adjunta). As illustrated in the diagram, UPCI is headed by a Chief (Jefe de la Unidad) and then a Director General. The Unit is organized in five specialized divisions and each of these divisions is headed by a Deputy Director General (DDG). Each DDG is assisted by several Director level officials. The five divisions are as follows: (i) Dumping and Subsidy Investigations division that conducts investigations to determine whether dumping or subsidy exists or not; (ii) Injury/Causation and Safeguards division that investigates whether dumped or subsidized products cause injury or threat to injury to the domestic industry; (iii) Accounting and Finance division provides assistance on the accounting and finance matters involved in investigations; (iv) National Legal Affairs division ensures that all domestic actions and decisions are consistent with the foreign trade legislation and international trade rules, and it represents the Ministry of Economy in domestic judicial proceedings including appeals filed in national courts against the decisions taken by UPCI; (v) International Legal Affairs division seeks to protect Mexican trade interests at an international level through multiple functions that include the following: defending Mexico at international dispute settlement proceedings (including the WTO dispute settlement forum and other forums under various bilateral and regional trade agreements); participating in multilateral as well as bilateral negotiations on trade remedy matters; and providing assistance to Mexican exporters facing trade remedy proceedings abroad. The UPCI has a staff of approximately 100 officials (that include around 80 specialists and 20 support staff). The divisions consist of various experts including lawyers, economists, international trade, and finance and accounting specialists. The selection process of UPCI’s staff is long and rigorous. The selection of public service officials at UPCI is made with the help of an intense recruitment process that

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includes interviews, written tests and a lengthy training procedure. The public service officials during their assignment at the UPCI are required to look beyond their individual expertise and acquire a working understanding of different areas including law, economics, international trade, diplomacy and finance.

3 Anti-dumping Investigations: Methodologies Used for Non-market Economies The WTO members have agreed under Article VI of GATT 1994 and the Anti-Dumping Agreement that it is necessary to ensure comparability between the normal value and the export price in AD investigations. This comparability can only be ensured if the normal value of the product in exporting country is not distorted or unreliable due to reasons including “non-market” conditions prevailing in the exporting country or in that specific industry. In non-market economies, prices are influenced by state intervention and hence not determined by the forces of supply and demand following an “arm’s length” transaction between buyers and sellers. Non-market economy (NME), officially referred to as ‘centrally planned economy’ (economia centralmente planificada) in the Mexican legislation, is considered as an economy that does not operate on market principles.22 Article VI:I of GATT 1994, read together with Second Ad Note to Article VI, confirms that if an economy, or an industry or sector of an exporting member does not generate market-determined prices and costs due to NME conditions, an importing member may employ an alternative market-determined normal value for price comparability by following special set of methodologies.23 However, WTO legislation does not indicate how normal value can be calculated in such circumstances. It does not prescribe the use of any alternative method and, hence, WTO members have employed different methodologies for dealing with the calculation of normal value in cases where they reject or replace the home-market prices and costs. In Mexico, the UPCI can determine the normal value using one of the several methods. Article 31 of FTL provides that if market economy conditions prevail, the normal value can be calculated using one of the three options. The first option is to use the sales price in the exporting country’s home market. The second option is to use the export price of an identical product to a third country. The third option is to use the constructed value method based on the cost of production and other general costs and profits in ordinary course of trade in the country of origin. The second and

22

FTL, supra note 19, art. 33. The term NME does not exist in the Mexican legislation. It is nonetheless used in this chapter interchangeably with centrally planned economies. 23 This is in consonance with World Trade Organisation, Protocol on the Accession of the People’s Republic of China, art. 15 (a)(ii), WTO Doc. WT/L/432 (Nov. 23, 2001) [hereinafter Chinese Accession Protocol].

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third options are employed when the home market prices cannot be used due to no sales of the given or similar product in the home market, or lack of availability of product or information, or unreliability of prices due to market distortions.24 Article 33 provides that in case of NMEs, the UPCI can calculate the normal value by using a surrogate country. In this case, UPCI can calculate the normal value with the help of surrogate’s home market prices, export price, or a constructed value based on the costs and prices derived from the chosen surrogate.25 In case of China, the UPCI can use Chinese prices and costs for the industry under investigation where it is established that market economy conditions prevail in that industry, and it may reject those prices or costs where market economy conditions do not prevail.26 The constructed value method will be used in NME investigations only when the petitioners have proved that the internal prices of the surrogate country are not suitable for price comparison. UPCI will normally use the sales price of surrogate country in cases where the industry or economy does not operate in market economy conditions. In fact, this is the most commonly used method in investigations involving NME conditions which are precisely defined in the Mexican legislation.27 Article 48 of the Regulations, read together with Article 33 of FTL, provides three classifying elements that clearly define the term “centrally planned economy”. (i) The cost and price structures do not reflect market principles; or (ii) The enterprises of the sector or industry under investigation have cost and price structures which are not determined in accordance with such principles; (iii) And hence, in both cases, sales of the identical or like product in the country in question do not reflect the market value of the product. Attention must be paid to the conjunctions used in the provision. The first two criteria are alternate, and the third factor is consequential upon the first or the second criteria. An economy will be treated as a centrally planned economy if either the first and third criteria are met or the second and third are met. The use of ‘or’ between the first and second criteria symptomatically widens the classification of centrally planned economies. This means that UPCI has the authority to determine whether an economy is centrally planned or not either based on a macro analysis of the cost and price structures in the country as a whole or a micro analysis of the cost and price structures of the specific industry or sector that is under investigation. The only complementing requirement in both scenarios is that market value or cost of production of the product under investigation seems distorted and unequal to the market value or cost of production of a like product manufactured in a different country which is not centrally planned.

24

FTL, supra note 19, art. 31. Id., arts. 33 and 48. 26 Chinese Accession Protocol, supra note 23, art. 15(a)(ii). 27 The method is provided in art. 33 of FTL, supra note 19 and art. 48 of the Regulations, supra note 20. Surrogacy method as employed by UPCI is explained in the following section. 25

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Mexico does not differentiate between NMEs and economies in transition. Moreover, there is no list of countries classified as NMEs in Mexico as this status is granted on a case-by-case basis. Article 48 of the Regulations provides seven factors, inter alia, that must be taken into account by UPCI officials to determine whether home-market prices of exporting country can be used or if they need to be replaced by alternative prices and costs for price comparison. In other words, the following factors are considered to examine whether an economy or a specific industry in question should be treated as NME or a market economy. (i) the currency of the foreign country under investigation must be generally convertible in the international currency markets; (ii) salaries in the said foreign country must be established through free negotiation between workers and employers; (iii) decisions relating to prices, cost and supply of inputs, including raw materials, technology, production, sales and investment, in the sector or industry under investigation, must be taken in response to market signals without any significant State interference; (iv) the industry under investigation must have only one set of accounting records which it uses for all purposes and which is audited according to generally accepted accounting criteria; (v) the production costs and financial situation of the sector or industry under investigation must not be distorted in relation to the depreciation of assets, bad debts, barter trade and debt compensation; (vi) the foreign investment and joint ventures with foreign firms are allowed; or (vii) any other factors considered relevant by the investigating unit. The first six factors are to be considered to determine whether the industry or sector under investigation operates in full market economy conditions. They are not alternative to each other. However, the official text switches to the use of ‘or’ between the sixth and the seventh factor. This signifies that the investigating authority has the full discretion to apply any other factors or criteria in addition to the ones provided in this legal provision to determine whether a given industry operates in market economy conditions. The seventh factor gives a wide discretionary power in the hands of the UPCI officials to apply any other factor which it deems relevant for the assessment. This indicates that the list provided in this statutory provision is not exhaustive. Article 48 provides an indicative list of factors; however, the practice dictates that it is mandatory to address the first six factors along with the required evidence. Nevertheless, this assessment is systemic in nature. In other words, UPCI may determine that market economy conditions exist even if all the factors are not completely and sufficiently satisfied as long as sufficient evidence and arguments are presented to satisfy at the least two or three of these factors. Before 12 December 2016, the petitioner was only required to point to the legal presumption under Section 15 (a)(ii) of the China’s Accession Protocol to argue the prevalence of NME conditions. However, post 12 December 2016, the petitioner is required to

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provide arguments and evidence in support of these factors. There is a question as to whether these factors mentioned in paragraph two of Article 48 should be read with its preceding paragraph. Put differently, once you have satisfied or shown that some of these factors are not met, it is unclear as to whether there is a second layer of statutory requirement to show that the failure of having met these factors are having an actual impact on the cost and prices in China. As can be seen, some of these factors are industry-specific, while the others are country-specific. A combination of industry and country centric factors allows UPCI to conduct a comprehensive macro-level as well as micro-level analysis of the prevailing conditions. The requirement of currency convertibility, free negotiation for determination of salary between workers and employers, and permissibility of foreign investment and joint ventures are the country-specific factors that allow UPCI to carry out a macro-level assessment of the conditions prevailing in the country. Macro-level assessment is important because the conditions prevailing in the country as a whole may have a significant bearing on the state of conditions a specific industry or sector is operating in. The other three factors in the list are industry or sector specific. These factors are: (i) the possibility and extent to which a state can interfere in decisions relating to costs, prices, supply, production, sales and investment; (ii) the use of generally accepted accounting criteria; and (iii) the distortion of production costs and financial state of the industry due to depreciation of assets, bad debts, barter trade and debt compensation. These factors allow a micro-level analysis of the market economy conditions prevailing in the specific industry or sector which is under investigation. Practice dictates that the seventh factor, which does not specify a specific criterion but creates a wide discretion in favor of the UPCI, allows the investigating officials to take into account additional product-specific factors. Empirical findings suggest that the investigating officials at the UPCI give heavier emphasis to micro-level than the macro-level factors to determine this issue. In practice, petitioners propose whether the product under investigation should be treated as operating under NME conditions, and the UPCI would generally accept these suggestions. This has particularly been observed in investigations against Chinese imports, as petitioners in Mexico have suggested the use of NME methodology in almost all AD investigations initiated against Chinese products. It is surprising to learn that in the last 15 years, while facing an AD investigation in Mexico, respondents from China have never presented strong arguments or evidence to counter these assertions.28 In a majority of the cases, they have not made any attempt to rebut the legal presumption that was provided under Section 15(a) (ii). It seems that they either accepted the NME assertions made against their imports or they had assumed that the investigating authorities would not accept their home-market prices in any event, or perhaps they were not fully prepared to face the proceedings and challenge the presumption with sufficient evidence.

28

Interview with a trade lawyer; confirmed in interview with government officials [details withheld].

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Because the Chinese respondents almost never rebutted the legal presumption, the UPCI has employed surrogate or (occasionally) constructed value approach in almost all AD investigations against Chinese imports.

4 The Use of Surrogacy Method Against Chinese Imports Article 33 of FTL provides that in cases where the imports originate in a centrally planned economy, the price of an identical or like product in a comparably substitutable third country (known in trade law jargon as a “surrogate country”) with market economy conditions shall be taken to be the normal value of the good in question. Article 48 of the Regulations complements this provision and provides a criterion that can be used by UPCI for the selection of a surrogate country. It provides that there should be ‘reasonable’ similarity between the surrogate country and the exporting country. In particular, for the purposes of selecting a surrogate country, UPCI officials must apply economic criteria such as the similarity between the production processes, the cost of the elements that are extensively used in the production process of the product under investigation, or, if this information relating to the product in question is not available, than they can look at the production process or cost of production for the closest group or category of products that are available in the country of origin as in the surrogate country. As it can be seen, these factors that guide the selection of a surrogate country are quite industry-specific. Even in practice, it has been observed that the surrogate country is mostly selected on the basis of a micro-level analysis that involves a “reasonable” similarity comparison between the respective industries or sectors of exporting and surrogate country.29 Industry-specific similarity analysis may include a study of production processes, nature and costs of inputs, quantity and quality of inputs, production capacity, scale of production, number of domestic producers, and the availability of reliable data regarding home-market prices.30 The following illustrations provide an empirical look at the UPCI’s selection of surrogate countries against Chinese imports in the recent years (Figs. 4 and 5). As can be seen in Figure 4, the most frequently used countries as surrogates in AD investigations in Mexico against Chinese imports are Brazil and the US. Brazil has been used by the UPCI in more than forty percent of the investigations and the US in more than twenty percent of investigations against China. This shows a selective approach of Mexico as its selection has been limited to either the US or Brazil in more than sixty percent of these investigations. This might be a bit puzzling for the readers; however, this narrowly selective approach can be

Notice for Initiation, Polyester short fiber (China) § 24 (J, K), 212, (Secretaria De Economia, Feb. 5, 2018) (Mex.), http://www.contactopyme.gob.mx/upci/paginas/3187.pdf. 30 Jorge Miranda & Eduardo Diaz-Gavito, Mexico in GUIDE TO INTERNATIONAL ANTI-DUMPING PRACTICE 433–34 (Derk Bienen eds., 2013). 29

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SURROGATE COUNTRIES USED IN MEXICO (JANUARY 2007 - JUNE 2017) 35 31 30 25 20 16 15 10 7 4

5

3

3

2

2

2

Turkey

Italy

Indonesia

0 Brazil

US

India

Venezuela Colombia ArgenƟna

Fig. 4 Surrogate countries used, frequency of their use. Source Semi-annual reports submitted by Mexico to the WTO Committee on Anti-Dumping Practices. (The time range covered is from 1 January 2007 to 30 June 2017. The semi-annual report from 1 January to 30 June 2017 is the most recently submitted report (as of the date of this writing). The data records original investigations only. Review and subsequent proceedings are not taken into account)

explained by looking at the sector-wise selection of surrogate countries (as shown in the Fig. 5). This table is prepared with the help of Semi-annual reports submitted by Mexico to the WTO Committee on Anti-Dumping Practices.31 The selection of India and Turkey for textiles and clothing products, and India for bicycles, testifies the industry-specific approach employed by UPCI in selecting a surrogate country. Moreover, the selection of the US and Brazil for majority of the AD investigations against steel imports from China confirms this observation further as the steel industries in Brazil, the US and China are well-organized gigantic business sectors and share a lot of features in common. However, there seem to be other reasons behind their frequent selection as surrogates by UPCI. China occupied

31

The time range covered is from 1 January 2007 to 30 June 2017. The data records original investigations only. Review and subsequent proceedings are not taken into account. No information is provided on the use of surrogate country for most of the investigations reported in the semi-annual reports for the years 2007 and 2008. Hence, information relating to those investigations is deleted from this table. World Trade Organisation, Notifications by individual members on anti-dumping (1 Jan. 2007–1 Jun. 2017), https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_ S006.aspx?Query=@Symbol=%20g/adp/n/*%20and%20%20@Symbol=%20mex&Language=ENG LISH&Context=FomerScriptedSearch&languageUIChanged=true.

Fig. 5 Product-specific use of surrogate countries

2010 Brazil Brazil Turkey Brazil -

2011 Brazil Brazil Brazil IN, TR -

2012 2013 2014 USA India India India Brazil Brazil Brazil USA Brazil Brazil Brazil Brazil USA USA Brazil Brazil India India Brazil Brazil USA USA USA Colombia Colombia Colombia Brazil Brazil -

2015 Brazil Brazil USA Brazil Brazil USA India Brazil Brazil Brazil USA -

2016 USA Brazil Brazil USA Brazil Brazil -

IN: India TR: Turkey ID: Indonesia VE: Venezuela

2007 2008 2009 Products Carbon and alloy steel tubing Coated flat steel products Steel wire rod Ceramic floor and wall tiles Aluminium kitchenware Prestressed products Ammonium sulphate Children's bicycles Hot-rolled steel coils Steel and zamak handles Cold-rolled sheet Stainless steel sinks Steel ropes and cables Blenders for domestic and commercial use USA USA Steel plate in sheets Galvanized carbon steel wire mesh Pencils Blankets of synthetic fibres USA Seamless steel tubing Italy Italy Ceramic and porcelain dishware and loose articles Radio guide Graphite electrodes for electric arc furnaces Amoxicillin trihydrate Denim fabric Nuts of carbon steel, black or coated Valves without caps and plastic atomizers Argentina Argentina Argentina Type I steel beams Door knob locks Venezuela Venezuela Natural, synthetic or mixed hog bristle paint brushes VE, ID VE, ID, IN Conventional electrodes USA -

2017 USA Brazil -

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first position as the biggest steel producer in the world in the year 2017, wherein the US occupied the fourth position and Brazil the ninth position in the world. Japan and India rank higher than the US and Brazil in terms of their share of steel production in the world, and hence are closer to China’s ranking. Hence, it is puzzling as to why other countries (like India and Japan) have not been preferred as surrogates in investigations against Chinese steel products. A reason to explain this could perhaps be the ease involved in collecting information. The empirical findings suggest that these decisions can also be taken on a more practical basis by looking at the countries you could conveniently fetch information on costs and prices from.32 The petitioners are expected to gather and supply this information, and more than often, they gather this information through independent market research with the help of their trade partners in third countries. Selection of a neighboring trade partner, the US, in many investigations can be seen as an example evidencing this point. Selection of Brazil, an important trade partner for Mexico from Latin America, as the most frequently used surrogate country can also be seen as strengthening this observation. The practice dictates that the initial onus of choosing a substitutable surrogate country is put on the petitioner; however, the petitioner’s recommendations can be rejected if the UPCI officials find the proposed country not reasonably substitutable or if the petitioner has failed to provide sufficient evidence of proposed surrogate’s substitutability. The Mexican approach of choosing a surrogate country has been controversial. The UPCI has mostly based its decisions on industry-specific factors, but it has on certain occasions taken into account purely country-specific factors in making this determination.33 For example, in the recent investigation of Polyester short fiber imports from China, the US was selected as a surrogate on the grounds of similarity between the quality, production process and cost, and level of production of the product under investigation in the US and China.34 On the other hand, in the case of Bicycles for Children (China),35 the petitioners proposed the use of Taiwan or India as surrogate countries based on the similarity of industries and the levels of economic development in these countries. The UPCI accepted India as the most reasonable substitute to China on the grounds that the level of economic development in India is similar to the economic development in China.36 They based their economic development similarity analysis on country-specific economic indicators including comparisons of gross domestic product, per capita income, price inflation and country’s overall level of trade intensity (share of exports and imports of goods

32

Interview with government officials (details withheld). Interview with government officials (details withheld). 34 Notice for Initiation: Polyester short fiber (China) 197–212 (Secretaria De Economia, Feb. 6, 2018), (Mex.), http://www.contactopyme.gob.mx/upci/paginas/3187.pdf. 35 Notice for Initiation: Bicycles for Children (China) (Secretaria De Economia, Mar. 5, 2012), (Mex.). http://www.contactopyme.gob.mx/upci/paginas/1611.pdf. 36 Id., ¶ 43. 33

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and services to country’s GDP).37 Hence, the approach employed in this case was very different to the one employed in Polyester Short Fiber case. The diverse category of countries (as shown in Fig. 5) Mexico has chosen as surrogates for China, ranging from highly developed to low-income developing countries, contradicts the country-specific approach used in the Bicycle case. The government officials have argued that this change or contradiction in approach from one case to the other is a result of procedural evolution and that the UPCI officials have preferred to employ micro-level factors in the more recent years.38 Nevertheless, it is possible to argue that the use of either industry-specific or country-specific factors on a case-by-case basis can possibly allow Mexican investigating authority or petitioners some room for choosing a country that enables them to calculate the maximum amount of margin.39

5 Changes Post 12 December 2016: The Increase in Burden of Proof on Petitioners The WTO Members should treat all Member States equally in AD investigations, failing which they can potentially violate the core non-discriminatory obligations provided in GATT 1994. This might create difficulties for importing countries to achieve price comparability to determine dumping allegations, especially in cases of exporting countries or industries wherein prices cannot be relied upon to calculate the normal value of the product in question. To avoid a potential WTO challenge for the alleged violation of GATT 1994 from China, the Member States at the time of China’s accession negotiated Section 15 of the Protocol of Accession. Section 15 allowed Members to continue to treat China as a NME and employ special methodologies in investigations against Chinese imports. China signed the Protocol of Accession as its “ticket for entry” into the WTO club. Section 15(a) allows a WTO Member to reject and replace the home-market prices and costs for price comparison in AD investigations against Chinese imports and use special methodologies. However, Section 15(d) provides for an expiry clause of Section 15(a)(ii) after 15 years from the date of China’s accession (i.e., on 12 December 2016). This has caused an intense debate and discussion among WTO members. China has filed WTO consultation requests with the EU and the US on the very date of the expiration of Section 15(a)(ii), i.e., 12 December 2016.40 China

Id., ¶ 42. Interview with government officials (details withheld). 39 International Bar Association, Report on Anti-Dumping Investigations Against China in Latin America, 13 INT’L B. ASS’N, (Feb. 29, 2018) https://www.ibanet.org/ENews_Archive/IBA_Jan_ 2010_ENews_AntiDumping_investigations_against_China.aspx. 40 Request for Consultations from China, European Union-Measures Related to Price Comparison Methodologies, WTO Doc. WT/DS516/R (Dec. 12, 2016); Request for Consultation from China, 37 38

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in these consultation requests claims that with the expiry of Section 15(a)(ii), the WTO members should revert to the application of normal methodology against Chinese imports. China argues that after 12 December 2016, normal AD provisions for determination of normal value provided in Anti-Dumping Agreement and the GATT 1994 must apply to the imports from China and that Chinese imports should no longer be subject to special methodologies including the surrogacy system. The respondents, the US and the EU have resisted this claim as they maintain that their right to reject and replace the home market prices and costs survives even after the expiry of Section 15 (a)(ii). They have argued that Article VI:I of GATT 1994, read with Section 15(a)(i) of Accession Protocol and Articles 2.1 and 2.2 of Anti-Dumping Agreement, confirms that the Member States may find an alternative, market-determined normal value for the purposes of making price comparisons for AD investigations if the economy or an industry or sector of an exporting country does not generate comparable and market-determined prices and costs. They also argue that the surviving provision of Section 15(a)(i) of Accession Protocol requires an importing member to use Chinese prices and costs only when the domestic producers under investigation can clearly establish that market economy conditions prevail over the Chinese industry in question. This can also be interpreted as meaning that where the market economy conditions do not prevail, the industry’s prices and costs in China cannot be comparable and hence cannot be used in investigation.41 Mexico’s relation with China in trade remedy matters deserves a special mention as it has changed over the years. Before China joined WTO as a member, Mexico had imposed a number of AD duties on Chinese imports. However, in order to avoid facing a possible WTO litigation against its AD duties from China once it joined the WTO, Mexico negotiated a ‘peace clause’ and the same was inserted in China’s Protocol of Accession.42 The clause provided that the existing Mexican AD duties ‘shall not be subject to the provisions of either the WTO Agreement or the AD provisions of this Protocol’ for a period of six years after China’s WTO accession.43 When this peace clause expired in 2007, China and Mexico found another mutually acceptable solution for the (apparently) WTO-inconsistent Mexican AD measures still in force against Chinese imports by signing the

United States-Measures Related to Price Comparison Methodologies, WTO Doc. WT/DS515/R (Dec. 12, 2016). 41 EU submissions: Request for Consultation, European Union-Measures Related to Price Comparison Methodologies, 9, 33, WTO Doc. WT/DS516/R (Dec. 12, 2016), http://trade.ec. europa.eu/doclib/docs/2017/december/tradoc_156476.pdf, http://trade.ec.europa.eu/doclib/docs/ 2017/november/tradoc_156401.pdf; United States Third Party Legal Interpretation document, European Union-Measures Related to Price Comparison Methodologies, 38, WTO Doc. WT/ DS516/R (Dec. 12, 2016), https://ustr.gov/sites/default/files/enforcement/WTO/US.Legal.Interp. Doc.fin.%28public%29.pdf. 42 Chinese Accession Protocol, supra note 23, Annex 7: Reservations by WTO Members. 43 International Bar Association, supra note 39, at 25.

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Mexican-Chinese Agreement on Commercial Remedies.44 In compliance with the Agreement, Mexican authorities closed a series of review cases, made decisions on the gradual phase-out of AD duties until December 2011, and eliminated remaining duties which used to be covered by the Peace Clause until 15 October 2008. On the other hand, Mexico secured its right to impose transitional measures on certain ‘sensitive’ products such as textiles, footwear and toys (as these Mexican products were facing fierce competition from Chinese imports) until December 2011. Post the expiry of this Agreement in 2011, the AD proceedings between Mexico and China are solely governed by FTL and its Regulations. As regards the issue of how the expiry of Section 15(a)(ii) should impact future AD investigations against Chinese imports, Mexican authorities took over a year to clarify their standpoint. For the last two years, Mexican officials have been involved in discussions with several foreign investigating authorities on this subject. Some authorities, together with Mexico, have argued that the complete non-acknowledgment of the expiration of a provision of the Accession Protocol could lead to violation of WTO laws. Others, such as the US, have expressed divergent opinion.45 However, when seen in practice, Mexican authorities’ approach post 12 December 2016 is not entirely different from the US and the EU’s approach, though it may not be an exaggeration to say that the Mexican approach is more proactive and explicit. Post this date, the Ministry of Economy has explicitly changed its approach.46 It recognizes that post the expiry of Section 15(a)(ii), the legal presumption of NME has ceased to exist and hence the Mexican industry petitioners are required to submit sufficient evidence to establish a legal presumption of prevailing NME conditions. Before this date, the petitioners could use the legal presumption provided under Section 15(a) (ii) of Accession Protocol of China to base their claim that NME methodologies should be used against Chinese imports. However, the practice dictates that the petitioners post 12 December 2016 in AD investigations against Chinese imports have been required to provide concrete evidence to argue that NME conditions prevail in the specific industry and for the specific product in question. The replacement of the old official format (provided by UPCI to petitioners for solicitation of AD investigations) with a new and modified official template post 12 December 2016 documents this change in approach towards China. In the revised template, the UPCI officials require petitioners to document micro-level industry-specific evidence before they can reject Chinese prices and costs and apply alternate methodologies to calculate the dumping margins.47 Hence, the threshold for petitioners to argue NME conditions is now higher than before.

44

Acuerdo entre el Gobierno de los Estados Unidos Mexicanos y el Gobierno de la Republica Popular China en material de medidas de remedio comercial (Jan. 29, 2009), (Mex.), https://www. gob.mx/cms/uploads/attachment/file/50842/A497.pdf. 45 Interview with government officials (details withheld). 46 Interview with government officials (details withheld). 47 The revised and the old official templates are on file with the author.

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It is important to note that the domestic legislation does not impose a legal obligation on the petitioner to provide evidence with respect to NME conditions. This seems fair, because it might be unaffordable or otherwise impossible for domestic industries to gather the required information and evidence to establish the presumption. However, an implicit interpretation of Article 5.2 of Anti-Dumping Agreement read with Section 15(a)(i) of the Accession Protocol of China (which are self-executing in Mexico under its Constitution) has allowed the UPCI officials to impose such evidentiary requirements on the petitioners in the revised format required for the solicitation of AD investigations. The UPCI has launched three AD investigations against Chinese imports since 12 December 2016 (holds true until the date of writing this chapter which is 26 March 2018).48 In Polyester short fiber case,49 the petitioner proposed that market economy conditions do not prevail in the industry under investigation, and hence the UPCI should use the US as surrogate country to calculate the normal value of Polyester short fiber imports from China.50 UPCI accepted these arguments.51 Petitioners successfully established the legal presumption of NME in this case by providing sufficient evidence to prove that the government had some control over the production of the product under investigation.52 On this basis, UPCI decided to employ the surrogacy method. They justified the selection of the US on the grounds that the like product in the US has similar characteristics and quality, there is similarity between the production process and capacity, and that the levels of production of the like product in the US are similar to the levels of production of the product in question in China.53 This practice conforms to the industry-specific approach employed by UPCI officials in selecting surrogate countries for AD investigations. This also confirms that post the expiry of Section 15(a)(ii), there is an observable change in the UPCI’s treatment of Chinese imports in AD investigations as the petitioners have a much higher burden of proving the existence of NME conditions post 12 December 2016. In Micro-wires for Welding (China),54 the petitioners argued that the Micro-wire industry in China operates under NME conditions. To prove this argument, they

Notice of Initiation: Polyester short fiber (China), DIARIO OFF. (Secretaría de Economía, Feb. 6, 2018), http://www.contactopyme.gob.mx/upci/paginas/3187.pdf.; Notice of Initiation: Metallic Plastic Balloons (China), DIARIO OFF. (Secretaría de Economía, Jun. 26, 2017), (Mex.), http:// www.contactopyme.gob.mx/upci/paginas/3158.pdf; Notice of Initiation: Micro-wires for Welding (China), DIARIO OFF. (Secretaría de Economía, Aug. 10, 2017), (Mex.), http://www.contactopyme. gob.mx/upci/paginas/3173.pdf. 49 Notice of Initiation: Polyester Short Fiber (China), DIARIO OFF. (Secretaría de Economía, Feb. 6, 2018), (Mex.), http://www.contactopyme.gob.mx/upci/paginas/3187.pdf. 50 Id., ¶ 24. 51 Id., ¶¶ 187, 196, 212. 52 Id., ¶ 24. 53 Id., ¶¶ 197–212. 54 Notice of Initiation: Micro-wires for Welding (China), DIARIO OFF. (Secretaría de Economía, Aug. 10, 2017), (Mex.), http://www.contactopyme.gob.mx/upci/paginas/3173.pdf. 48

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presented a market study that analyzed the industry’s structure, production methods and costs. The petitioners provided information to prove that the micro-wire’s cost of production does not even cover the cost of the raw material used in its manufacturing, and hence it does not reflect its actual value.55 The petitioners also supplied information and arguments to demonstrate that NME conditions prevail in that industry and hence surrogate prices should be used in this analysis56; however, these arguments were rejected by UPCI as being insufficient to raise a legal presumption.57 The UPCI found that the information provided by the petitioners did not sustain the presumption that the concerned enterprises in China do not have the costs and prices determined by market principles. Hence, they rejected petitioner’s proposal to use the surrogate method for calculating the normal value in this case.58 As a consequence, in consonance with Article 31 of FTL, UPCI employed the constructed value method to calculate the normal value of the product in question.59 In calculating the value, they took into account various industry-level economic factors including the cost of raw materials and the international prices of wire, the prices of the supplies that were used by the producing companies in Mexico, the labor cost and other administrative expenses including energy and taxes.60 This, to some extent, confirms the argument that the threshold for petitioners to argue NME conditions is now higher than before and the UPCI in the future cases will require strong and compelling evidence from petitioners to use the surrogate method in an investigation against Chinese imports. In Metallic Plastic Balloons (China),61 the petitioners proposed that the industry under investigation operates in NME conditions and that the method of surrogacy should be used to calculate the normal value of the product.62 The UPCI rejected these arguments because the supporting evidence provided by petitioners was not sufficient to establish the presumption that NME conditions prevail over that specific product in China.63 UPCI found that this particular industry complies with market economy conditions and requirements mentioned in Article 33 of FTL and Article 48 of Regulations.64 As a result, UPCI used the product’s home-market prices for calculating normal value in this case.

Id., ¶ 21. Id., ¶ 21. 57 Id., ¶ 91. 58 Id., ¶¶ 89, 90. 59 Id., ¶ 97. 60 Id., ¶¶ 57–59. 61 Notice of Initiation: Metallic Plastic Balloons (China), DIARIO OFF. (Secretaría de Economía, Jun. 26, 2017), (Mex.), http://www.contactopyme.gob.mx/upci/paginas/3158.pdf. 62 Id., ¶ 18. 63 Id., ¶ 59. 64 Id., ¶ 59. 55 56

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The acceptance of home-market prices and costs for Chinese imports in this investigation reinforces Mexico’s change in approach. It also reaffirms Mexico’s commitment towards and respect for its multilateral trade obligations. These developments do not suggest that Mexico cannot reject or replace home-market prices and costs against Chinese imports on a case-by-case basis; it can and it might use NME methodology against Chinese imports in the future. Mexico has not granted a change of status to China so far. However, the change in approach reflected in these latest investigations against China strongly suggests that there is an increase in burden of proving NME conditions on Mexican petitioner(s) post 12 December 2016. From the point of view of Mexican industries, this is a very significant change which has increased the cost and complexity of requirements they have to fulfill as a petitioner against Chinese products in AD investigations.

6 Concluding Remarks This work has brought to light the treatment of NMEs (particularly China) by one of the most heavy-weight Latin American users of AD procedures. Other countries can learn from the immensely rich Mexican trade remedies experience that dates back to 1980s. Its infrequent use of constructed value method, a predominantly industry-specific approach for selection of surrogates, and a mixed approach for determination of market economy conditions codified in the form of six mandatory factors can prepare a ‘menu’ of methods that other countries can chose to employ. Other member countries can employ the broad, discretionary approach employed by Mexico for choosing surrogate countries, or they can choose to employ an approach that is based on assessing macro-level similarities between the surrogates and exporting countries. Other countries can also learn from the subtle and at the same time progressive change of approach noticed in the Mexican practice of dealing with Chinese imports post 12 December 2016. The approach is subtle, because Mexico has not granted a change in status to China and retains its right to use alternate methods; however, the approach is progressive because the documented requirement of establishing legal presumption of NME conditions imposed on domestic petitioners shows a progressive development in favor of China. Politics play a major role in AD law as AD investigations can have significant repercussions for domestic industries of member countries. This makes the granting of market economy status to China (post 12 December 2016) quite a sensitive and politically charged issue. WTO Members are conscious of the direct competition their domestic industries can face from low-priced Chinese imports if they are made to accept China as a market economy in the future. Hence, the automatic acceptance of China as market economy by other WTO Members that have not granted China a market economy status does not seem plausible in the future. This could change if the WTO Panel decides in favor of China and clarifies that with the expiry of Section 15(a)(ii), the US and the EU (and other WTO members) have lost their right to reject and replace the home-market prices of China for price-determinations

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in AD investigations. However, it seems very unlikely that the WTO Panel would make such a determination, especially in these times when the very existence of WTO and its adjudicatory mechanism is being challenged. It is likely that the Panel will rule that the NME methodology can still be applied by WTO Members post 12 December 2016 based on the surviving provisions of Section 15 of the Accession Protocol; however, it may suggest investigating authorities to require a higher standard of proof for applying NME methodologies against Chinese imports. As seen in the latest AD investigations in Mexico against China (discussed in the previous section), such an outcome will have significant repercussions for domestic petitioners as it will increase the evidentiary requirements they have to fulfill in a petition against China. However, this seems to be a plausible outcome as it can balance China’s expectations for its exporters to receive a favorable change in treatment on one hand and on the other hand Member States’ reluctance to provide unqualified non-discriminatory treatment to China in future AD investigations. Acknowledgements I am indebted to the Mexican Ministry of Economy and in particular the UPCI officials who have provided valuable insiders’ insight to this research project. I am also thankful to private trade lawyers who have enriched this research with their guidance and views. Special thanks to Jorge Miranda for his feedback. Also, thanks to my brilliant research assistants, Lorena Martinez and Emilio Aguilar Castellano, who have contributed to the statistical analysis and translation work that was required for this chapter. All interviewees remain anonymous. All errors and omissions are author’s own.

‘Rebuttable Presumption’ to ‘Refutable Assumption’: An Assessment of Market Economy Treatment by the Indian Designated Authority from 1995 till 2018 Sanjay Notani, Parthsarathi Jha and Rishab Raturi

Abstract This chapter analyses the approaches adopted by India’s Anti-dumping Authority since 1995 in dealing with producers from China and other Non-Market Economies in anti-dumping investigations. It discusses the relevant Indian legislative framework and emphasizes on factors that have been considered for determining the market economy status of co-operating producers/exporters. The chapter also highlights the methodology adopted by the Anti-Dumping authorities in calculating the normal value of products exported from China. Keywords Non-market economy Market economy treatment


China
India
Normal value

1 Introduction The expiry of Section 15(a)(ii) of the Protocol on the Accession of the People’s Republic of China1 (“Accession Protocol”) has generated much debate amongst academia and practitioners alike as to how China would be treated in anti-dumping

1

Protocol on the Accession of the People’s Republic of China (Nov. 10, 2001), Sec. 15, WTO Doc. WT/L/432, U.N. Doc. 2182 U.N.T.S. 138 [hereinafter Chinese Accession Protocol].

S. Notani (&)
P. Jha
R. Raturi Economic Laws Practice, Mumbai, India e-mail: [email protected] P. Jha e-mail: [email protected] R. Raturi e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2018 J. J. Nedumpara and W. Zhou (eds.), Non-market Economies in the Global Trading System, https://doi.org/10.1007/978-981-13-1331-8_11

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investigations by the World Trade Organization (“WTO”) Members after 11 December 2016.2 By way of background, the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 19943 permits WTO Members to impose duties on dumped imports which cause or threaten to cause injury to the domestic industry of the importing country. In order to ascertain a dumping margin, investigating authorities typically calculate the difference between the imported product’s export price and the comparable home market price in the country of origin/export, subject to certain conditions being met.4 If the prescribed conditions are not met, the investigating authorities determine the dumping margin on the basis of the difference between the export price of ‘like’ product to other third countries and the export price of the imported product, or the difference between the constructed normal value, based on the cost of production in the country of origin, and export price of the imported product.5 However, the home market prices, prices to third country, or costs of production in the country of origin may not be suitable for the determination or construction of normal value in cases where the country of origin is not operating under free market economy conditions, thereby making it a non-market economy (“NME”).6 For these economies, WTO rules permit Members to apply alternative dumping methodologies such as values other than home market prices or costs as comparisons to calculating dumping margins. The genesis of this formal distinction between market economies and NMEs can be traced to the Second Supplementary Provision to paragraph 1 of Article 6 in Annex 1 to GATT 1994, which provides as follows: It is recognized that, in the case of imports from a country which has a complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the State, special difficulties may exist in determining price comparability for the purposes of paragraph 1, and in such cases importing Members may find it necessary to take into account the possibility that a strict comparison with domestic prices in such a country may not always be appropriate.7

2

Barbara Barone, One Year To Go: The Debate Over China's Market Economy Status (MES) Heats Up, DIRECTORATE – GENERAL FOR EXTERNAL POLICIES, EUROPEAN PARLIAMENT (Dec., 2015), https://www.eesc.europa.eu/resources/docs/one-year-to-go.pdf; Michael Flynn, China: A Market Economy, 48 GEORGETOWN J. INT’l L. (2016); Chad P Brown, Should the United States Recognize China as a Market Economy, PETERSON INSTI. INT’l ECON., (Dec., 2016). 3 Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1869 U.N.T.S. 201 (1994), art. 2.1 [hereinafter Anti-Dumping Agreement]. 4 Id. 5 Anti-Dumping Agreement, supra note 3. 6 Interestingly, while the term “non-market economy” has been in vogue ever since the establishment of the WTO, the GATT 1994 or the Anti-dumping Agreement do not use the term or define it. Rather what is a non-market economy has been determined by the member countries in accordance with their municipal laws. 7 Marrakesh Agreement Establishing the World Trade Organization, Apr. 15, 1994, Annex 1A Second Supplementary Provision, 1857 U.N.T.S. 154.

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When China acceded to the WTO in 2001, a provision in the Accession Protocol adopted a similar approach8 for price comparisons in cases of anti-dumping and anti-subsidy investigations for producers from China.9 Section 15 of the Accession Protocol places the onus on producers from China to demonstrate that market economy conditions prevail in the relevant industry in order for them to receive the benefit of normal value determination based on costs and prices as recorded by them. However, if the producers failed to discharge that burden, other Members enjoyed wide discretion in adopting a methodology for price comparison under Section 15(a)(ii) of the Accession Protocol. By incorporating this provision, other Members could construct normal value for Chinese producers on best facts available basis which typically is higher than the home market price in China and compare it with the export price influenced by non-market forces resulting in higher dumping margins.10 The said provisions of sub-paragraph (a)(ii) of Section 15 of the Accession Protocol expired on 11 December 2016.

Appellate Body Report, European Communities — Definitive Anti-dumping Measures on Certain Iron or Steel Fasteners from China, WTO Doc. WT/DS397/AB/R, at 285 (adopted Jul. 15, 2011). 9 Sec. 15 of the Chinese Accession Protocol, supra note 1, reads in relevant part as follows: 8

Article 6 of the GATT 1994, the Agreement on Implementation of Article 6 of the General Agreement on Tariffs and Trade 1994 (“Anti-Dumping Agreement”) and the SCM Agreement shall apply in proceedings involving imports of Chinese origin into a WTO Member consistent with the following: (a) In determining price comparability under Article 6 of the GATT 1994 and the Anti–Dumping Agreement, the importing WTO Member shall use either Chinese prices or costs for the industry under investigation or a methodology that is not based on a strict comparison with domestic prices or costs in China based on the following rules: (i) If the producers under investigation can clearly show that market economy conditions prevail in the industry producing the like product with regard to the manufacture, production and sale of that product, the importing WTO Member shall use Chinese prices or costs for the industry under investigation in determining price comparability; (ii) The importing WTO Member may use a methodology that is not based on a strict comparison with domestic prices or costs in China if the producers under investigation cannot clearly show that market economy conditions prevail in the industry producing the like product with regard to manufacture, production and sale of that product. … (d) Once China has established, under the national law of the importing WTO Member, that it is a market economy, the provisions of subparagraph (a) shall be terminated provided that the importing Member's national law contains market economy criteria as of the date of accession. In any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession. In addition, should China establish, pursuant to the national law of the importing WTO Member, that market economy conditions prevail in a particular industry or sector, the non–market economy provisions of subparagraph (a) shall no longer apply to that industry or sector. 10 Richard Lockridge, Doubling Down in Non-Market Economies: The Inequitable Application of Trade Remedies Against China and the Case for a New WTO Institution, 24 S. CAL. INTERDISC. L. J. 249, 259.

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Pursuant to the expiry of Section 15(a)(ii) of the Accession Protocol, China contends that it should no longer be treated as an NME for the purposes of price comparison and, therefore, the special methodology for price comparison must be discontinued. Accordingly, it has initiated disputes against the United States of America (“the United States”) and the European Union at the WTO.11 The United States and the European Union have formally opposed China’s claim of automatic migration to market economy status.12 India joined the WTO dispute initiated by China against the European Union on price comparison methodologies as a third party.13 However, as of April 2018, India has not articulated a formal position on effects of expiry of Section 15(a)(ii) of the Accession Protocol. This chapter does not aim to interpret the legal effects of expiry of Section 15(a)(ii) of the Accession Protocol or the approach which the Indian investigating authority ‘may’ or ‘ought’ to take. Rather, it discusses the approach that the Indian investigating authority, i.e. the Directorate General of Anti-Dumping and Allied Duties (“Designated Authority”) has adopted over the years while dealing with producers from China in anti-dumping investigations. Part II of the chapter lays out the Indian legislative framework with particular emphasis on factors relevant for determining the market economy status of co-operating producers/exporters and methodology adopted for determination of normal value in cases of NMEs. Part III of the chapter analyses the approach adopted by the Designated Authority in assessing market economy claims and normal value construction. Part IV of the chapter makes a specific analysis of the investigations of products from China undertaken by the Designated Authority after 11 December 2016. Part V of the chapter draws conclusions on the approach adopted by the Designated Authority in the recent past.

2 Indian Legislative Framework Rules relating to anti-dumping investigations in India are contained in the Customs Tariff Act, 197514 (“Act”) and the Customs Tariff (Identification, Assessment and Collection of Anti-Dumping Duty on Dumped Articles and for Determination of

Request for Consultations by China, United States — Measures related to Price Comparison Methodologies, WTO Doc. WT/DS515/1; Request for Consultations by China, European Union — Measures Related to Price Comparison Methodologies, WTO Doc. WT/DS516/1. 12 Aaron P. Bernstein, US Formally Opposes China Market Economy Status at WTO, CNBC, (Nov. 30, 2017), https://www.cnbc.com/2017/11/30/us-formally-opposes-china-market-economystatus-at-wto.html. 13 See World Trade Organisation, European Union — Measures Related to Price Comparison Methodologies, https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds516_e.htm. 14 Customs Tariff Act, No. 51 of 1975, India Code, Sec. 9A-9C (1975) [hereinafter the Customs Act]. 11

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Injury) Rules, 1995 (“Indian Anti-Dumping Rules”).15 Section 9A(1)(c) of the Act defines normal value in line with Article 2.2 of the Anti-dumping Agreement.16 However, those rules do not apply to firms operating in NME conditions. Rule 10 of the Indian Anti-Dumping Rules provides that the Designated Authority shall determine normal value in accordance with the principles laid down in Annexure I to the Indian Anti-Dumping Rules. The Indian Anti-Dumping Rules have been amended from time to time to address the issues concerning NMEs.17 On several occasions, the amendments are in line with the geo-political relationships18 that India shares with the countries which were listed in the prior iteration of the legislation.19 Paragraphs 7 and 8 of Annexure I to the Indian Anti-Dumping Rules set out the principles that govern the determination of normal value in cases where producers are based in NMEs. According to paragraph 7, normal value for firms from NMEs shall be determined on the basis of: (i) the price or constructed value of a ‘like’ product in a market economy third country,20 or; (ii) the price from such a third country to other countries, including India, or; (iii) where it is not possible, on

15

Custom Tariff (Identification, Assessment and Collection of Anti-Dumping Duty on Dumped Articles and for Determination of Injury) Rules, Gazette of India, section II(3)(i) (Jan. 1, 1995) [hereinafter the Indian Anti-Dumping Rules]. 16 Customs Act, supra note 14, Sec. 9A-9C. 17 See, e.g. Amendment in the Customs Tariff (Identification, Assessment and Collection of Antidumping Duty on Dumped Articles and for Determination of Injury) Rules, No. 44/1999 (N.T.), (Ministry of Com. & Indus., Jul. 15, 1999) [hereinafter Indian Anti-Dumping Rules Amendment]; Customs Notification, No. 28/2001 (N.T.), (Central Board of Excise and Customs May 31, 2001) [hereinafter Customs Notification 2001]; Customs Notification, No. 1/2002 (N.T.) [hereinafter Customs Notification 2002]; (Central Board of Excise and Customs Jan. 4, 2004); Customs Notification, No. 101/2003 (N.T.), (Central Board of Excise and Customs Nov. 10, 2003). 18 For instance, India granted Viet Nam market economy status upon Viet Nam’s insistence during the signing of the India-ASEAN Free Trade Agreement in 2009. See India grants market economy status to Viet Nam, THE HINDU (Oct. 25, 2009), http://www.thehindu.com/news/national/Indiagrants-market-economy-status-to-Vietnam/article16888472.ece. 19 Annex I to the Indian Anti-Dumping Rules had listed the following countries as non-market economies: Albania, Armenia, Azerbaijan, Belarus, People’s Republic of China, Georgia, Kazakhstan, North Korea, Kyrgyzstan, Moldova, Mongolia, Russia, Tajikistan, Turkmenistan, Ukraine, Uzbekistan and Viet Nam. However, based on amendments made in 2002, However, this was replaced by the term “any country”. 20 Paragraph 7 of Annexure I provides that: [a]n appropriate market economy third country shall be selected by the designated authority in a reasonable manner keeping in view the level of development of the Country concerned and the product in question and due account shall be taken of any reliable information made available at the time of the selection. Account shall also be taken within time limits; where appropriate, of the investigation if any made in similar matter in respect of any other market economy third country. The parties to the investigation shall be informed without unreasonable delay the aforesaid selection of the market economy third country and shall be given a reasonable period of time to offer their comments. See Indian Anti-Dumping Rules, supra note 15, Annexure I, ¶ 7.

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any other reasonable basis, including the price actually paid or payable in India for the ‘like product’, duly adjusted if necessary, to include a reasonable profit margin, export price and margin of dumping with regard to NMEs. According to Paragraph 8(1) of Annexure I to Indian Anti-Dumping Rules, NME means “any country which the designated authority determines as not operating on market principles of cost or pricing structures, so that sales of merchandise in such country do not reflect the fair value of the merchandise, in accordance with the criteria specified in sub-paragraph (3) [of Annexure I to Indian Anti-Dumping Rules]”.21 This means that sales of merchandise in that country does not reflect the fair value of the merchandise in accordance with the criteria specified in sub-paragraph 8(3) of the Indian Anti-Dumping Rules.22 Sub-paragraph 8(3) of the Indian Anti-Dumping Rules requires the Designated Authority to consider following criteria in determining whether a country should be granted market economy status: (a) the decisions of concerned firms in such country regarding prices, costs and inputs, including raw materials, cost of technology and labour, output, sales and investment, are made in response to market signals reflecting supply and demand and without significant State interference in this regard, and whether costs of major inputs, substantially reflect market values; (b) the production costs and financial situation of such firms are subject to significant distortions carried over from the former NME system, in particular in relation to depreciation of assets, other write-offs, barter trade and payment via compensation of debts; (c) such firms are subject to bankruptcy and property laws which guarantee legal certainty and stability for the operation of the firms; and (d) the exchange rate conversions are carried out at the market rate.23 Therefore, these rules create a rebuttable presumption against firms participating in the investigation based in NMEs and places upon them the obligation to prove that they operate under market economy conditions.24 If a firm can, based on the above-listed factors, demonstrate that it operates under market economy conditions, then the normal value for such firm would be based on costs and prices reported by that firm. WTO rules do not provide for adoption of any specific methodology in determining normal value in cases of NMEs. Further, while NMEs have not been defined in WTO law, Ad Note to Article 6(1) of GATT, second paragraph, provides guidance on how to deal with ‘special difficulties’ that may arise in determining ‘price comparability’ in cases of imports from a Member which has complete or substantially complete monopoly of its trade, and where domestic prices are fixed 21

See Indian Anti-Dumping Rules Amendment, supra note 17, Annexure I; Customs Notification 2002, supra note 17; Customs Notification 2001, supra note 17; Customs Notification, No. 101/ 2003 (N.T.), (Central Board of Excise and Customs Nov.10, 2003), http://www.cbec.gov.in/ htdocs-cbec/customs/cs-act/formatted-htmls/cs-import-rule16. 22 See Indian Anti-Dumping Rules, supra note 15, Annexure I, sub-para. 8 (1). 23 See Indian Anti-Dumping Rules, supra note 15, Annexure I, sub-para. 8 (3). 24 See, Indian Anti-Dumping Rules, supra note 15, Annexure I, proviso to sub-para. 8 (3).

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by the State. Accordingly, Members have formulated their individual methodologies and practices for determination of normal value in case of NMEs. This point is further illustrated in the next section.

3 Approach of the Designated Authority Procedurally, the Designated Authority issues an additional questionnaire along with the exporter’s questionnaire while initiating an investigation against NMEs. This additional questionnaire, known as market economy treatment questionnaire or MET questionnaire, is required to be filed by producers as well as all its affiliated entities based in the NME. The questionnaire is designed to retrieve relevant information for assessment of market economy status if such producers decide to claim market economy treatment. Alternatively, producers are permitted to waive their MET claims and call upon the Designated Authority to verify their export transaction only for determining the injury margin and dumping basis. In such cases, the Designated Authority may determine the normal value based on an appropriate methodology and will only rely upon the export price of the cooperating producer. Broadly, the MET questionnaire seeks information on several aspects of a firm’s structure and processes including its corporate structure, ownership, affiliation, business decisions, costs, accounting system, labour issues, wages, bankruptcy and property laws, industrial property rights, loans and foreign currency transactions.25 A firm based in a NME country that claims market economy status must respond to the MET questionnaire in its totality by the prescribed deadline. Upon receiving the responses, the Designated Authority assesses the merits of the claims and seeks to verify whether the cooperating producer/exporter functioned in conditions which were not influenced by the State, de jure or de facto, in a manner that could be comparable to what would prevail in a market economy country. Should the cooperating exporter/producer satisfactorily rebut the presumption of NME in terms of Paragraphs 7 and 8 of Annexure I of the Indian Anti-Dumping Rules, its normal value calculation will be made based on its cost and price data and accounts maintained by the firm. The final determination as to whether a firm producing the product under consideration in NME meets the requirement of a market economy rests with the Designated Authority. If the Designated Authority concludes that the firm in question does not operate on market principles, then it would not consider that firm’s costs and prices to determine the normal value and will, instead, adopt one of the methods under Paragraph 7 of Annexure I. This section analyses the approach of the Designated Authority in assessing market economy claims and subsequently if the market economy is denied, the methodology adopted for carrying out normal value determination.

25

Director General of Anti-Dumping and Allied Duties, Market Economy Questionnaire, http:// dgtr.gov.in/sites/default/files/nmequestionnaire.pdf.

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Assessment of Market Economy Status

A reading of the Paragraph 8(3) of Annexure I and the MET questionnaire clarifies that the Designated Authority has the discretion to determine the market economy status of the concerned exporting country. It does so by analysing multiple factors within the framework of facts presented before it through the information provided in the questionnaire submitted to it, subject to verification. Besides this, the Designated Authority also refers to findings by other Designated Authorities on issues, including those related to NMEs. During the Cathode Ray Tube investigation,26 on the question of NME determination of a firm, the Designated Authority conducted on-site verification at the site of the firm under investigation in China as well as that of its exporter in Singapore. The Designated Authority was prima facie satisfied with the assessment that the firm was working in market economy conditions. Yet, the Designated Authority did not, in its final findings, illustrate the reasons on which it made its assessment during the on-site verification. Much rather, it referred to an anti-dumping investigation that had been concluded by the European Union around the same time where the Designated Authority of the EC had granted market economy status to the firm. The final finding stated that27: […] the company provided a copy of the disclosure document issued by EC on the issue of assessment of market economy treatment claims on confidential basis. Perusal of the document indicated the detailed assessment of the [Market Economy] claims of this company, which has been relied upon by the authority for grant of [Market Economy] status to this company. In view of this, the Authority treats this Company to be operating under Market Economy conditions.

Notably, one of the factors that assists in determining market economy status is whether the decisions of the firm are taken without significant interference from the State. What act constitutes ‘State interference’ and how much interference is ‘significant’ has not been provided. As a result, little or no guidance is provided to the Designated Authority in determining the market economy status of a producer except to gauge from the conduct of the operations of the co-operating producer and the sector it which they operate. In undertaking this analysis, the Designated Authority appears to follow an ‘elimination approach’. In other words, if there is sufficient evidence to prove a nexus between State interference and its effect on the investigated firm’s operations, then the Designated Authority could reject market

Anti-Dumping Investigations concerning imports of “Cathode Ray Colour Television Picture Tubes originating in or exported” from Malaysia, Thailand, China PR and Korea, F. No. 14/8/2007-DGAD, ¶ 65 (Ministry and Com. & Indus. Feb.17, 2009) (final finding) [hereinafter Cathode Ray TV Investigation]. 27 Id. 26

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economy treatment on any one of the factors. Further, it could also refuse the claim without analyzing any or all other factors as stated in Paragraph 8(3) of Annexure I to the Indian Anti-Dumping Rules.28 For example, in the Compact Fluorescent Lamps investigation, one of the producers from China was denied market economy status since the administration of Foshan, a prefecture-level city in China, had a shareholding in the company.29 The shares held by the Foshan government were transferred to private entities sometime during the period of investigation. The Designated Authority observed that “in view of the substantial shareholding of the State government with the company, the interference of the State in the management and day-to-day affairs cannot be ruled out.”30 Accordingly, the Designated Authority did not conduct an analysis of the other evidence offered by the producers based on the factors listed in Paragraph 8(3) of Annexure I. However, this does not imply that the Designated Authority does not normally analyze other relevant factors if government ownership or influence is established. In the same investigation, another producer was also found to have government shareholdings. Yet, this entity was granted market economy status after the Designated Authority verified the relevant factors under Paragraph 8(3) of Annexure I and concluded that the State interference was not significant. Another feature of the Designated Authority’s analysis of market economy claims is that even if it does not find actual State interference, it may still deny market economy status based on the possibility of State interference. A case in point is the Vitamin-A Palmitate investigation.31 One of the questions that confronted the Designated Authority was whether significant distortions were carried out through the transfer of land and certain fixed assets from a holding company to the firm under investigation.32 Here, one of the Chinese producers, M/s Zhejiang NHU

See Anti-dumping duty investigation concerning imports of “Elastomeric Filament Yarn” from China PR, South Korea, Taiwan and Vietnam, F. No.14/29/2015-DGAD, 47 (Ministry of Com. & Indus., Mar. 24, 2017) (final finding) [holding that INVISTA cannot be given market economy status as it failed to show supporting documents for raw material purchases]. While this appears to be the usual approach, there are investigations where the Designated Authority has undertaken a comprehensive analysis of all other relevant factors. See Anti-dumping investigations concerning import of “Nylon Tyre Cord Fabric” originating in or exported from China PR, F. No.14/20/ 2003-DGAD, 47 (Ministry of Com. & Indus., Mar. 9, 2005) (final finding). 29 Antidumping investigations concerning imports of “Compact Fluorescent Lamps” originating in/ exported from China PR, Vietnam and Sri Lanka, notification dated Feb. 27, 2009, No. 14/1/2007 (Ministry of Com. & Indus., Feb. 27, 2009) (final finding) [hereinafter Compact Flurescent Lamps Invesitgation]. 30 Id., ¶ 42. 31 Anti-Dumping Investigation concerning imports of “Vitamin-A Palmitate” originating in or exported from Switzerland and China PR, F. No.14/11/2005-DGAD, 42.3 (Ministry of Com. & Indus., Sep. 14, 2007) (final finding). 32 Id., ¶ 45. 28

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Company Limited (“NHU”) made a claim for market economy status. Majority of the shares of NHU were held by a holding company, M/s Xinchang County Synthetic Chemicals Factory (“Xinchang”), which had been established in 1989 as “collectively owned enterprise” and was later incorporated as “collectively owned corporation” under the new Chinese company law. Investments into Xinchang had initially been made by a group of State schools and school teachers. NHU was established in 1998 as a company limited by shares; Xinchang was the major shareholder. All the assets of Xinchang, except land, was invested in NHU, and an appraisal report to this effect was presented to the Designated Authority. While assessing the market economy claim, the Designated Authority noted that the ownership status of the major shareholders of NHU, i.e., Xinchang, remained doubtful because of the involvement of the State in the form of capital investments through these schools.33 On this basis, the market economy treatment claim was denied. A similar conclusion was arrived at by the Designated Authority in the Flat Base Steel Wheel Investigation where one of the firms unsuccessfully requested for market economy treatment. The firm in question had been restructured from a “collectively owned enterprise” to joint-stock business. The Designated Authority found that despite the restructuring, the firm’s costs and prices were significantly distorted due to ‘carry-over’ effects from the NME system.34 In other words, the Designated Authority concluded that some of the financial benefits ‘carried over’ or passed-through to the firm despite the changed the nature of its operating entity and this percolated into the costing and pricing factor of the firm’s products. Another interesting point is the treatment of subsidies in dealing with firms operating in NME conditions. The Designated Authority has treated the existence of subsidies as State interference and, on this basis, has denied market economy claims for the determination of normal value. For example, in the earlier mentioned Vitamin-A Palmitate investigation, the Designated Authority held that NHU had benefitted from two subsidy programs, albeit “in a limited way”.35 These two programs were the ‘National Torch Programme’, which aimed at promoting industrialization of high-technology research and development technologies in China, and China’s quality control promoting and anti-counterfeiting ‘Brand Promotion Programme’. The Designated Authority observed that while the investigation was not a subsidy investigation, the impact of the support on the cost and prices of the company “would affect the normal value determination”.36 Based on this and other reasonable evidence which, as mentioned earlier, was the capital

Id., ¶¶ 34–44. Anti-dumping investigations concerning imports of “Flat-Base Steel Wheels” originating in/ exported from China PR, F. No. 14/8/2005-DGAD, 15 (Ministry of Com. & Indus., Nov. 28, 2007) (final finding) [hereinafter Flat-Steel Base Wheels Investigation]. 35 Id., ¶ 44. 36 Id., ¶ 46. 33 34

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investment through schools, the Designated Authority denied the firm market economy status.37 Thus, it is evident that the burden of proof on the firms from NME seeking market economy treatment can be onerous. In the SDH Equipment38 investigation, one of the participating producers from China was refused market economy treatment as it was not able to provide supporting documents to demonstrate additions to capital or changes in ownership structures, which are normal business phenomena. In the context of market economy treatment determinations, the fundamental issue that the Designated Authority attempts to verify are the source of funds of the invested capital, changes in ownership structure, and compatibility of ownership structure with capital investments. The exporter, in this investigation, could not establish the source of funds for large amount of investments. It claimed that these documents were “old” and the company did not keep records before a certain period of time. Unconvinced by this argument, the Designated Authority proceeded to deny market economy treatment to the exporter.39 Given the high evidentiary thresholds set in practice for receiving market economy status, it is not surprising that only 12 producers have received market economy treatment since 1995 till April 2018.40 In the majority of the cases, firms had requested market economy treatment at the onset of the investigations by filing relevant questionnaire response but eventually withdrew their claims during the course of the investigation.41 This could be attributed to several reasons, including the burdensome documentation requirements stemming from the complexity of the data and factors affecting the firm in question. Nevertheless, the high threshold of evidence through documentation creates predictability in the rigour of analysis by the Designated Authority. The table below provides the list of documents and factors that the Designated Authority assessed in determining some of the successful market economy claims from 1996 till 2018. While these documents and factors are non-exhaustive in nature, they have been listed below as they were mentioned explicitly in the relevant final findings issued by the Designated Authority: Id., ¶ 46. Anti-Dumping Investigations concerning imports of “SDH Equipment” originating in or exported from China PR and Israel, F. No.14/2/2009-DGAD, 42.3 (Ministry of Com. & Indus., Oct. 19, 2010) (final finding) [hereinafter SDH Equipment Investigation]. 39 Id., ¶¶ 96–97. 40 10 firms can be identified in the investigations identified from footnote 42 till footnote 52. The 11th firm is identified in the SDH investigation on Supra note 38; the 12th firm has been identified in the Final Findings of Anti-dumping investigation on imports of “Circular Weaving Machines” having six or more shuttles for weaving PP/HDPE Fabrics of a width exceeding 30 cms, originating in or exported from China PR, F. No. 14/25/2008-DGAD, ¶¶ 14, 15 (Ministry of Com. & Indus., Nov. 16, 2010) (final finding). 41 For example, Qingdao Doublestar Tire Industrial Co Ltd., a firm under investigation in one of the anti-dumping investigations, withdrew its request for MET claim. See Antidumping investigation involving import of “Bus and Truck Radial Tyres”, originating in or exported from China PR and Thailand, F. No.14/17/2008-DGAD, 21 (Ministry of Com. & Indus., Jan. 1, 2010) (final finding). 37 38

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Name of the firm

Conditions assessed by DGAD

Beijing Matsushita Color CRT Co. Ltd. (Cathode Ray TV Investigation, supra note 26, ¶ 33.)

• The firm in question provided the disclosure document issued by Investigating Authority of EC. This document detailed the facts and reasoning as to why the EC considered that the firm was operating under market economy conditions • Designated Authority verified these facts • Designated Authorities inspected the following documents in arriving at its conclusion that the firm was operating in market economy conditions: organization chart, portfolio review, business licenses, certificates for approval, articles of association and amendments to business terms • Designated Authority was provided a copy of China’s Industry Land Investigation report which illustrated the land usage rates as an additional document to the agreement on the right to use the land and the building • Designated Authority noted that more than 90% of the investments in this firm was made by an Indian group through its foreign share holdings • Designated Authority inspected the following documents in arriving at its conclusion: certificate of incorporation, purchase invoices of assets of the company, details of assets that were outstanding during period of investigation along with its acquisition details, copy of business license, all approvals obtained from the Government of China and its agencies prior to the establishment of the business, organization of the firm, information on the change in the structure of the company since inception along with details of share capital and details of ownership, information of any parent companies and subsidiaries of the company and all other persons affiliated with the company, articles and memorandum of associations, tax registration certificates, labor payment contracts, foreign business registration certificates, catalogues and brochures of the subject goods under investigation, list of raw material and utilities suppliers (continued)

Shenzhen Samsung (SDI) Co. Ltd. (Id., ¶ 33.)

Thomson Guangdong Display Company Limited (Id., ¶ 33.)

Osram China Lighting Ltd. (Compact Flurescent Lamps Invesitgation, supra note 29.)

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(continued) Name of the firm

Conditions assessed by DGAD

Philips & Yaming Lighting Co. Ltd. (Id., ¶¶16, 17.) Hangzhou Feihua Lighting & Electrical Applicance Co. Ltd. (Id., ¶¶17–18.)

• Same as above

Shanghai Nanya [Anti-dumping investigation concerning imports of Copper Clad Laminates originating in or exported from China PR, Taiwan, Hong Kong, Korea RP, Singapore, Philippines and Thailand, F.M. 14/44/ 2002-DGAD, 19 (Ministry of Com. & Indus., Dec. 23, 2003) (final finding)]

Dashiqiao [Anti-dumping investigation concerning imports of Borax Decahydrate originating in or exported from the Turkey and China PR, F. No. 14/40/2002-DGAD, 17,18 (Ministry of Com. & Indus., Nov. 21, 2003) (final finding)]

• Designated Authority noted that all contributions made by the shareholders were evaluated by a certified public accountant prior to incorporation of the firm • Designated Authority noted that the firm had sourced its raw materials from abroad after negotiations, without any interference by the State • Designated Authority concluded that the firm provided incentives and overtime allowances in addition to the basic wages to labourers • Designated Authority observed that the selling price of the product was also negotiated between the buyer and seller without the interference by the State • Designated Authority noted that the firm was subject to income tax, urban construction tax and education tax • Designated Authority stated that the firm had received ISO-9002 certificate (an industry standard created by the International Organization for Standardization which indicates “model for quality assurance in production, installation and servicing.”) • The firm in question had successfully demonstrated to the Designated Authority that it did not receive equity holdings from the Government of China • The firm was able to show to satisfaction of the Designated Authorities that management and the control of the firm in terms of production, marketing and pricing was operations were sufficiently independent from the State • Designated Authority carried out verification at the premises of the firm and examined circumstances under which the firm operated • The firm in question also arranged a meeting with officials from China’s Ministry of Commerce (“MOFCOM”). These officials provided clarifications to investigating officers from the Designated Authority on certain State Laws that were listed as responses to the MET Questionnaire (continued)

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(continued) Name of the firm

Conditions assessed by DGAD

Jiande DaYang [Anti-dumping investigation concerning imports of Potassium Carbonate from the European Union (EU), China PR, Korea RP and Taiwan, F. No14/42/ 2002-DGAD, 23 (Ministry of Com. & Indus., Jan. 16, 2004) (final finding)]

• Designated Authority noted that raw materials were procured from Canada and other similar market economies • Designated Authority noted that capital and credit of the company was raised by money from the shareholders and documented loans from banks. Further, it was also noted that the firm paid tax and wages were arrived at after negotiation • Designated Authority observed that wages provided were beyond the minimum wage limit • Designated Authority was satisfied upon assessing individual invoices and related documents • Designated Authority verified the records of the firm in question and concluded that the domestic sales were profitable and comprised of more than 5% of total exports to India during the period of investigation • Designated Authority noted that the firm was a Sino-Foreign Joint venture with 80% of the capital contributed by a company listed in Netherlands and the technology was also provided by this company • Designated Authority also noted that the firm was being managed by a Board of Directors consisting of 4 persons having equal votes. Of these, three were representing the foreign investor • With regards to purchase of raw materials, the Designated Authority noted that the firm was procuring its raw materials from both related and unrelated companies • The Designated Authority noted that the selling prices of the product were fixed by the company on its own in response to market forces of demand and supply • The accounting records were examined, and it was observed that the accounts had been audited by independent Chartered Public Accountants. Moreover, the accounting methods complied with the GAAP as well as Chinese accounting standards

Cooper Chengshan (Shandong) Tire Company Ltd. [Antidumping investigation involving import of Bus and Truck Radial Tyres, originating in or exported from China PR and Thailand, F. Np. 14/17/2008-DGAD,18 (Ministry of Com. & Indus., Jan. 1, 2010) (final finding)] Zhangjiakou Gist Brocades Pharmaceutical Co. Ltd. [Anti-Dumping Investigations involving imports of Penicillin-G Potassium originating in or exported from China PR and Mexico and 6-APA originating in or exported from China PR, F. No. 14/19/2009-DGAD, 15 (Ministry of Com. & Indus., Jan. 20, 2010) (final finding)]

A perusal of the cases where firms were granted market economy treatment amply illustrates a foregone conclusion: no two cases are the same. Facts differ from firm to firm and industry to industry. This list identifies some of the indicators that have been inspected by the Designated Authority in determining whether a firm

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operated in market economy conditions. However, it would be incorrect to conclude, based on these indicators, that a firm works on market economy principles even if it can reasonable demonstrate the absence of State interference through the abovementioned indicators. The overarching reason for this conclusion is that identification of an NME is a factually intensive exercise. A firm may demonstrate no State interference based on any of the listed factors but the Designated Authority, through its investigation, could still conclude, based on other available evidence, that the firm does not operate on market economy conditions. The Designated Authority has, thus far, been well within its rights, based on the rebuttable presumption that firms in China operate in NME conditions, while conducting NME analysis. In other words, in addressing the issue of State interference in anti-dumping investigations, the Designated Authority was under no obligation to function within a “standard of proof”-framework. That onus lay solely on the producers from China. Further, two notable trends emerge from an assessment of these investigations. Firstly, the investigations where market economy treatment claims was successfully granted took place between 2004 and 2011. Post-2011, the Designated Authority has not granted market economy status in anti-dumping investigations. There is no cogent argument which can effectively illustrate why the Designated Authority did not find any firm operating in market economy conditions from China. In one sense, it could be said that 2004–2011 was the time-period when the practice of deciding on market economy treatment claim was crystallized by the Designated Authority. However, a detailed assessment of economic and legal factors will be required to authoritatively support this hypothesis. Secondly, market economy treatment has till now been requested by firms in over 200 anti-dumping investigations in India. Of these, only 12 have received market economy treatment status. This necessarily indicates that an overwhelming majority of firms have not been granted market economy treatment. Despite this trend, only one firm has moved domestic courts in India on the limited point of market economy treatment. In Huawei Technologies v, Union of India,42 one of the petitioner argued at the Customs, Excise and Service Tax Appellate Tribunal (“CESTAT”) that it had improperly been determined as a NME by the Designated Authority.43 The CESTAT, however, was content with the Designated Authority’s analysis in the final findings which indicated that government shareholdings and role of the State in the management demonstrated State interference.44 Therefore, it did not reverse the findings by the Designated Authority. Pertinently, the CESTAT noted that “[n]o new material has been brought on record to dislodge the above

42

Huawei Technologies Co. Ltd. v. Designated Authority, CESTAT, 2016 (334) E.L.T. 339 (India) [hereinafter Huawei Case]. 43 CESTAT is an independent appellate forum to hear the appeals against orders and decisions passed under the Customs Act 1962. 44 Huawei Case, supra note 42, ¶ 93.

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findings of Designated Authority”.45 This effectively suggests that firms were permitted to introduce new evidence to demonstrate that it was operating under market economy conditions. This could have been an efficient route to challenge the NME analysis by the Designated Authority.

3.2

Determination of Normal Value for Firms from NMEs

Paragraph 7 of Annexure I provides a methodology to determine the normal value for firms that operate under NME conditions. In essence, it sets out three options for calculating normal value: (i) the price or constructed value in a market economy third country (i.e. surrogate third country), or; (ii) the price from such a third country to other countries, including India, or; (iii) where it is not possible, on “any other reasonable basis”, including the price actually paid or payable in India for the ‘like’ product, duly adjusted, if necessary, to include a reasonable profit margin. While the Indian Anti-Dumping Rules do not provide for any order of choice among the three options, the Supreme Court of India (“Supreme Court”) has clarified that the Designated Authority must exhaust the first method (i.e. surrogate third country) before opting for other alternatives.46 Notwithstanding the interpretation given by the Supreme Court, the Designated Authority often relied on “any other reasonable basis” to determine normal value.47 Id., ¶ 36. Holding that “Para 7 to Annexure I now provides for the determination of the normal value with reference to the price paid by a third country with a market economy to India of a like product. If such a third country is selected, the Designated Authority has to inform the exporters of the selection and grant them a reasonable period to offer their comments. It is only if this procedure is not possible that the Designated Authority can act on any other ‘reasonable basis’. In other words, the Designated Authority must exhaust the first method before moving to the alternative procedure. Shenyang Matsushita S. Battery Co. Ltd. v Exide Industries Ltd., 2005 (181) E.L.T. 320 (S.C.), 7 (2005) (India). 47 See Anti-dumping investigation concerning imports of “Castings for Wind Operated Electricity Generators, whether or not machined, in raw, finished or sub-assembled form, or as a part of a sub-assembly, or as a part of an equipment/component meant for wind-operated electricity generators”, originating in or exported from China PR, ¶ 64 (Ministry of Com. & Indus., Jul. 28, 2017) (final finding); Anti-dumping investigation concerning imports of “Hot-Rolled flat products of alloy or non-alloy steel” originating in or exported from China PR, ¶ 35 (Ministry of Com. & Indus., Apr. 10, 2017) (final finding); Anti-dumping investigation concerning imports of “O-Acid” originating in or exported from China PR, ¶ 32 (Ministry of Com. & Indus., Dec. 19, 2017) (final findings); Anti-dumping duty investigation on the imports of “Ofloxacin” originating in or exported from China PR ¶ 22 (Ministry of Com. & Indus., Dec. 22, 2017) (final findings); Sunset review (SSR) investigation of the anti-dumping duties imposed on the imports of “Saccharin” from China PR ¶ 27 (Ministry of Com. & Indus., Dec. 30, 2017) (final finding); Anti-dumping duty investigation on the imports of “Sulphonated Naphthalene Formaldehyde” originating in or exported from China PR ¶ 27 (Ministry of Com. & Indus., Dec. 30, 2017) (final finding); Anti-dumping duty investigation on the imports of “Sulphonated Naphthalene Formaldehyde” originating in or exported from China PR ¶¶ 26–27 ((Ministry of Com. & Indus., Dec. 30, 2017) 45 46

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This preference for adopting the third methodology could be linked to the fact that the first and second method requires collection of the significant amount of information from third countries, which is often not readily available.48 Moreover, anti-dumping investigations are time bound making it difficult for the Designated Authority to procure and verify relevant information within the available time period. Be that as it may, the practice of the Designated Authority shows that it exercises significant discretion in constructing normal value, subject to best information being made available to it during the course of the investigation. A classic example of the wide latitude of discretion exercised by the Designated Authority can be observed in the Carbon Black investigation.49 In this investigation, the participating exporters from China failed the test of market economy. The Designated Authority adopted a hybrid approach for determining normal value without providing any telling reasons as to why the surrogate third country methodology could not be adopted. It constructed the normal value in the following manner: (i) prices of major input, coal based tar on the basis of the price at which this material has been claimed to have been exported from China to Japan.; (ii) consumption of raw materials was adopted on the basis of information/data of efficient respondent from China; (iii) conversion costs were adopted on the basis of information/data of efficient producer of the Indian domestic industry; (iv) selling, general & administrative costs were taken on the basis of information/data of efficient producer of the Indian domestic industry; and (v) profit was taken at 5% of ex-factory cost excluding interest.50 Therefore, the normal value had elements from Japan, China

(final finding); Anti-dumping investigation concerning imports of “Methyl Ethyl Ketone” or MEK, originating in or exported from China PR, Japan, South Africa and Taiwan ¶ 31 (Ministry of Com. & Indus., Feb. 18, 2018) (final finding). 48 See Anti-Dumping Investigations concerning imports of “Cast Aluminium Alloy Wheels or Alloy Road Wheels used in Motor Vehicles”, whether or not attached with their accessories, of a size in diameters ranging from 12 inches to 24 inches, originating in or exported from China PR, Korea RP and Thailand ¶¶50–54 (Ministry of Com. & Indus., Jul. 9, 2014) (final finding); Anti-dumping investigation concerning imports of “USB Flash Drives”, originating in or exported from China PR, Taiwan and Republic of Korea ¶ 96 (Ministry of Com. & Indus., Dec. 19, 2014) (final finding); Anti-Dumping investigation concerning imports of “Glazed/Unglazed Porcelain/ Vitrified tiles in polished or unpolished finish with less than 3% water absorption”, originating in or exported from China PR ¶¶ 114, 115 (Ministry of Com. & Indus., Apr. 8, 2014) (final finding); Anti-dumping investigation concerning imports of “Toluene Di- Isocyanate (TDI)” originating in or exported from China PR, Japan and Korea RP ¶ 42 (Ministry of Com. & Indus., Dec. 13, 2017) (final findings); Anti-dumping investigation concerning imports of “Polyester Staple Fibre” from China PR, Indonesia, Malaysia and Thailand ¶ 45 (Ministry of Com. & Indus., Jan. 25, 2018) (final finding). 49 Anti-Dumping Investigations concerning imports of “Carbon Black used in rubber applications” originating in or exported from Australia, China PR, Iran, Malaysia, Russia and Thailand, F. No.14/21/2008-DGAD (Ministry of Com. & Indus., Dec. 24, 2009) (final finding). 50 Id., ¶ 60.

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and India, making it a ‘hybrid method’. Yet, this methodology did not strictly fall into any one of the options set out in Paragraph 7 of Annexure I, except that of “any other reasonable basis”. The approach adopted by the Designated Authority may also vary on account of technical differences in products being investigated. This difference is borne out well from the Radial Tyre’s investigation51 and SDH Equipment investigation.52 In Radial Tyres, one of the producers from China successfully availed market economy treatment.53 The Designated Authority applied the normal value determined for the said producer to all other co-operating producers from China that had failed the market economy test.54 Subsequently, in SDH Equipment, one of the producers, i.e. Hangzhou ECI Telecommunication Co. Ltd., was granted market economy status. In light of its approach in Radial Tyres case, the Designated Authority could have applied the normal value determined for Hangzhou ECI Telecommunication Co. Ltd. to other participating producers from China. Instead, it constructed the normal value based on the actual weighted average price of all the major components separately for the Synchronous Digital Hierarchy (“SDH”) transmission equipment of different types based on domestic industry import prices, duly adjusted for freight.55 Once again, the Designated Authority provided no reason for adopting the domestic industry prices instead of applying the normal value determined for Hangzhou ECI Telecommunications. However, the variance in methodology could have arisen on account of the technical differences in the products concerned. In other words, the product control numbers (“PCNs”) were so diverse in the SDH case that the normal value of Hangzhou ECI Telecommunications may not have sufficiently represented the range of products sold by other Chinese producers.

4 Assessment by the Designated Authority After 11 December 2016 The effects of the expiry of Section 15(a)(ii) of the Accession Protocol has percolated into anti-dumping investigations in India. While the Designated Authority has still not granted market economy status to any producers from China since 2011, no investigation has been initiated where the period of investigation has been exclusively post-11 December 2016. Nevertheless, one final finding has been issued

Antidumping investigation involving import of “Bus and Truck Radial Tyres”, originating in or exported from China PR and Thailand, F. No.14/17/2008-DGAD, (Ministry of Com. & Indus., Jan. 1, 2010) (final finding) [hereinafter Radial Tyres Investigation]. 52 SDH Equipment Investigation, supra note 38. 53 Radial Tyres Investigation, supra note 51, ¶ 51. 54 SDH Equipment Investigation, supra note 38, ¶ 94. 55 Id., ¶ 106. 51

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where the period of investigation overlaps the 11 December 2016 expiry date of Section 15(a)(ii) of the Protocol of Accession. For this reason, the Ceramic Rollers investigations provide insights into the shaping of discourse of the NME question in India.56 The domestic industry primarily argued that “since the period of investigation pertain[s] majorly to the period before the expiry of the Accession Protocol, the Chinese producers are required to be treated as NME based firms till such time the investigation period includes the period specified in Accession Treaty protocol”.57 Other interested parties requested the Designated Authority not to use the “surrogate country” methodology in determining the normal value, contending that the spirit of pacta sunt servanda placed an obligation on India to treat China as a market economy country.58 Markedly, the Designated Authority dispatched MET Questionnaires. It justified this by stating that “[a]t the stage of initiation, the Authority proceeded with the presumption that China PR is a non-market economy country”.59 These MET Questionnaires were not filled by any of the producers under investigation; much rather, they were filled by an industry body, the China Chamber of International Commerce (“CCIC”). The Designated Authority rejected this questionnaire since CCIC was neither a producer nor an exporter of the subject goods.60 Since none of the producers under investigation had filed responses to the MET Questionnaire, the Designated Authority proceeded to treat China as an NME. The absence of a formal position by the Designated Authority regarding the NME treatment of Chinese producers is also manifesting in the text and structure of recently issued final findings related to NME status of China. For instance, two final findings were issued on the same day, i.e., 5 March 2018—Phosphorus Pentaoxide61 and Glassware investigations.62 The period of investigation in both these findings were prior to the expiry of Section 15(a)(ii) of the China’s Accession Protocol. Yet, the standard of analysis of determining the question of NME in both the findings were different. In the Glassware investigation, the Designated Authority made reference to paragraph 8(1) of Annexure I to the Indian Anti-Dumping Rules, before proceeding to reproduce Section 15 of China’s Accession Protocol to determine—and eventually decline—the market economy

56 Anti-dumping duty investigation on the imports of “Ceramic Roller” originating in or exported from China, F. No. 14/47/2016-DGAD, (Ministry of Com. & Indus., Mar. 26, 2018) (final finding) [hereinafter Ceramic Roller Investigation]. 57 Id., ¶ 22. 58 Id., ¶ 23. 59 Id., ¶ 26. 60 Id., ¶ 27. 61 Anti-dumping investigation concerning imports of “Phosphorus Pentoxide” originating in or exported from China, F. No. 14/47/2016 – DGAD, (Ministry of Com. & Indus., Mar. 5, 2018) (final finding) [hereinafter Phosphorus Investigation]. 62 Anti-dumping investigation concerning imports of ‘Glassware’ originating in or exported from People’s Republic of China and Indonesia, F. No. 14/45/2016 – DGAD, (Ministry of Com. & Indus., Mar. 5, 2018) (final finding).

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status of the producers from China.63 In contrast, the Designated Authority, in the Phosphorus Pentaoxide investigation, referred to Section 15 of China’s Accession Protocol before proceeding to Article 2.2.1.1 of the WTO Agreement on Anti-Dumping read with paragraph 8(1) of Annexure I of the Indian Anti-Dumping Rules which “requires that the financial records of producer/exporter reasonably reflect the production costs”.64 The reference to Article 2.2.1.1 of the WTO Agreement on Anti-Dumping is a recent feature in the MET section of the final findings. The first instance where reference to this article was made was in the Methyl Ketone final finding which was issued in February 2018.65 At present, it is unclear whether the Designated Authority is considering a recourse through Article 2.2.1.1 of the WTO Anti-Dumping Agreement. However, the Designated Authority should be mindful of the WTO Appellate Body ruling in the European Union— Anti-Dumping Measures on Biodiesel (Argentina)66 and the panel report in European Union—Anti-Dumping Measures on Biodiesel (Indonesia)67 where the burden of proof is onerous on the Designated Authority in concluding that records do not reasonably reflect the costs associated with the production and sale of the product under investigation. One thing is certain: the wide-ranging discretionary powers of the Designated Authority in applying the ‘elimination approach’ while determining the market economy status of a producer will be greatly curtailed with the expiry of Section 15 (a)(ii) of the Accession Protocol. A paragraph of the final finding in the Glassware investigation expresses the Designated Authority’s resignation to the fate of the automatic rebuttable presumption that Chinese producers functioned under NME conditions: Section 15 implies that provisions of one of the subparagraphs shall expire in 15 years from the date of China’s Accession. The provisions of this paragraph expired on 11 December 2016. Since the factum of dumping causing injury to the domestic industry is established based on investigation period, the conditions prevalent during the investigation period alone is relevant, appropriate and necessary for the purpose of present investigation. The Period of Investigation (POI) for the purpose of the present review is September 2015 to October 2016. Since the subparagraph of Section 15 was in existence during the period of investigation, the Authority may use a methodology that is not based on a strict comparison with domestic prices or costs in China if the producers under investigation cannot clearly show that market economy conditions prevailed in the industry producing the like product with regard to manufacture, production and sale of that product.68 [Emphasis added]

Id., ¶ ¶ 60, 61. Phosporus Investigation, supra note 61, ¶ 32. 65 Anti-dumping investigation concerning imports of “Methyl Ethyl Ketone” originating in or exported from China PR, Japan, South Africa and Taiwan, F. No. 14/26/2016-DGAD, ¶ 30, (Ministry of Com. & Indus., Feb. 1, 2018) (final finding). 66 Appellate Body Report, European Union — Anti-Dumping Measures on Biodiesel from Argentina, WTO Doc. WT/DS473/AB/R (adopted Oct. 26, 2016). 67 Panel Report, European Union — Anti-Dumping Measures on Biodiesel from Indonesia, WTO Doc. WT/DS480/R (adopted Feb. 28, 2018). 68 Glassware Investigation, supra note 62, ¶ 61. 63 64

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Nevertheless, the expiry of Section 15(a)(ii) of the Accession Protocol would not, in principle, imply that prices or costs from China will be accepted as they are submitted, given that the possibility of market distortions affecting the industry could still exist. Conceptually, the standard set under Article VI:1 of GATT 1994 along with the Ad Notes would continue to provide contextual guidance regarding distorted market situations. How this analysis would be conducted by the Designated Authority remains to be seen. The Designated Authorities may also consider adopting ‘Particular Market Situation’ practices that have been adopted by WTO Members such as Australia when dealing with anti-dumping investigations from China. In any event, it seems unlikely that the automaticity of China’s market economy claim will result in their costs and prices being accepted as submitted. Fundamental changes in the conduct of anti-dumping investigations regarding NME status are also anticipated because of the cessation of the rebuttable presumption of China’s NME status. Firstly, additional burden will be placed on the domestic industry to prove that the industry was functioning in distorted market conditions. The role of producers from China would, in turn, be limited to rebutting claims raised by the domestic industry. The Designated Authority will have to test the veracity of the claims by the domestic industry. To do so, it will require a detailed analysis of the market situations in which the industry operates before arriving at its conclusions. Given that this analysis may now be subject to potential challenge at the WTO, future final findings by the Designated Authority would contain detailed analysis and explanations to support its conclusions as to whether or not a firm was operating under distorted market conditions.

5 Conclusion In conclusion, this chapter analysed the different approaches adopted by the Designated Authority over the years while dealing with producers from China in anti-dumping investigations. In doing so, the chapter laid out the Indian legislative framework and emphasized on factors relevant for determining the market economy status of co-operating producers/exporters as well as the methodology adopted for determination of normal value in cases of NMEs. Further, the chapter highlighted that the current rules incorporated a rebuttable presumption against firms participating in the investigation from NME countries and placed upon them the obligation to prove that they operated under market economy conditions. It also discussed in detail the approach adopted by the Designated Authority in assessing market economy claims and normal value construction. Based on a detailed assessment of all anti-dumping investigations undertaken by the Designated Authority for products originating in China, the chapter observed that that, the Designated Authority had a wide discretion to determine market economy status of firms. This is evident from the ‘elimination approach’ adopted by the Designated Authority on the basis of which it could reject market economy treatment if it

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concluded that sufficient evidence of nexus between State interference and its effect on the investigated firm’s operations existed. The exact course of action that the Designated Authority will take from here on with regard to the determination of normal value of products from China is speculative at best. However, the rebuttable presumption of China’s NME status has, since the expiry of Section 15(a)(ii) of the Accession Protocol, been altered to a refutable assumption where the firms under investigation can ‘refute’ claims by the domestic industry of operating in a distorted market.

Conclusion James J. Nedumpara, Weihuan Zhou and Archana Subramanian

Abstract This chapter draws some overall conclusions and provides observations regarding the significance of the materials and arguments presented in this book to the understanding of and debate on non-market economies. It reiterates the challenges that non-market economies have posed to the world trading system and anticipates that these challenges are likely to remain so that how WTO rules may be utilized or otherwise developed to tackle these challenges will remain crucial for the future of global economic order. Keywords WTO of Accession


Non-market economies
Trade distortions
China’s Protocol

It took China fifteen long years of negotiations to join the multilateral trading system. At the time of China’s accession in 2001, most WTO Members had noted that China had made significant steps to embrace free market principles, but was not yet a market economy. Has China taken enough steps to become a full-fledged market economy to the satisfaction of its trading partners? Or, is it the case that some of the key economies are denying China the benefit of negotiated terms? The debate on NMEs in the context of anti-dumping will have to be properly contexualised. This debate rings a particular resonance in the context of the much-bandied State Capitalism—an exceptional form of economic order wherein the

J. J. Nedumpara (&)
A. Subramanian Centre for Trade and Investment Law, Indian Institute of Foreign Trade, New Delhi, India e-mail: [email protected] A. Subramanian e-mail: [email protected] W. Zhou Faculty of Law, University of New South Wales, Sydney, Australia e-mail: [email protected] © Springer Nature Singapore Pte Ltd. 2018 J. J. Nedumpara and W. Zhou (eds.), Non-market Economies in the Global Trading System, https://doi.org/10.1007/978-981-13-1331-8_12

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State and the market remain intertwined and inseparable, thus fostering unique engagements and linkages between the Chinese Communist Party (“CCP”), the Chinese government and other public and private firms.1 It is a fact that China is the leading target in anti-dumping, or perhaps, trade remedy proceedings in most jurisdictions. However, as existing statistics would demonstrate, the amount of trade affected by anti-dumping is not substantial as a percentage of overall trade.2 In short, the debate on NMEs is not just about a particular methodology in anti-dumping calculations, it is about wider concerns. According to this view, this debate is about the role of the State, not necessarily in state planning, but in revitalizing the economy (See Miranda’s chapter). For China, the goal is to ensure that other WTO Members understand and follow what China implied as what it secured as part of the final bargain (See Feng’s Chapter); for others, especially the Western trading nations, this debate is all about rebalancing the economic equations, containing an existential economic threat and a superpower, or to keep the genie back in the bottle. As most of the essays of this edited volume would unanimously agree, the wording of Section 15 of China’s Protocol of Accession to the WTO is less than perfect; it is confusing and to use a term that treaty negotiators and judges often use, the text of the Protocol is not a “model of clarity”. There are compelling arguments to buttress both the points of view concerning the use of non-Chinese costs and prices in anti-dumping investigations post December, 2016. This debate is central to the world trade order, considering China’s growing stature. The debate is likely to remain active at least for the next few years and, in all probability, poised to determine and shape the global trading system and its anchoring institutions. As we had stated in the introductory chapter, the purpose of this edited volume was to bring forth multiple perspectives from diverse jurisdictions on the NME treatment of Chinese producers and exporters in anti-dumping cases. Several scholarly articles have already appeared at least on the interpretation of Section 15 of the Protocol. However, except a few WTO Members, many countries are yet to take a firm stand on this issue. The United States, as expected, has spoken unambiguously on this issue. The U.S. Department of Commerce in its October 27, 2017 decision has clearly stated that China is an NME because “it does not operate sufficiently on market principles”.3 The European Union has made some superficial changes in their law, but the “significant distortion” test has been criticized as imposing the NME methodology in a disguised way. Even countries such as Australia, which have granted ‘market economy’ status to China, have developed Mark Wu, The ‘China, Inc.’ Challenges to Global Trade Governance, 57 HARV. J. OF INT’L L. 261, 270 (2016). 2 Chad Bown, Taking Stock of Antidumping, Safeguards and Countervailing Duties, 1990–2009, 34 WORLD ECON. 1955 (2011). 3 Memorandum for Gary Taverman, Deputy Assistant Secretary for Import Administration, for Antidumping and Countervailing Duty Operations, performing the non-exclusive functions and duties of the Assistant Secretary for Enforcement and Compliance—China’s Status as a Non Market Economy” (U.S. Dep’t Com., Oct. 26, 2017), available at https://enforcement.trade.gov/ download/prc-nme-status/prc-nme-review-final-103017.pdf. 1

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new methodologies so as to avoid the use of Chinese costs and prices. As of now, only a judicially determined solution seems feasible, although it is likely to further stretch the already stressed WTO dispute settlement mechanism. The use of surrogate country methodology was an ingenious tool to deal with state-controlled economies. In its five decades of existence, the tool has been overused, and often abused, initially by the United States and subsequently by all new users. This concept has almost outlived its existence, although it will be premature to write off its continued validity and frequent use. As some of the chapters of this book vividly demonstrate, the concept of surrogate country methodology means different things in different jurisdictions. Moushami’s as well as Vermulst & Sud’s chapters, in particular, explain how this concept operates in some major jurisdictions. The concept of choosing a surrogate country of a similar economic development is practiced only in few countries. Even some of the traditional users have either supplanted or supplemented the traditional surrogate country methodology with new methodologies. For example, the factors of production methodology or the market oriented industry method have tweaked the traditional surrogate country methodology of using the sale price of another entity in a market economy. Some of the new users have used more pragmatic and prudent methods and refuse to refer to terms such as ‘surrogate country’ prices. For most of these users, the NME methodology is strikingly similar to the ‘constructed cost’ method, which is often used when the exporter from a subject country does not cooperate in investigations. India and Mexico may fall within this category (See Bahri’s and Notani & Raturi’s chapters). As a matter of practice, the extent of cooperation from NMEs is significantly low in anti-dumping investigations and the use of the constructed methodology may not look aberrational. It is possible that a vast majority of such users will use this flexibility to continue with their practice in ignoring Chinese costs and prices, or in selectively using them. In such a context, it may not be often possible to target such a practice through an as such WTO challenge. It may require individual examination based on the use of an applied measure, on a case-by-case basis. There will be greater tendency to use the existing provisions in Ad Article VI:1 of the GATT and Article 2 of the Anti-dumping Agreement to deal with dumped imports from China. It is expected that the concept of ‘Particular Market Situation’ will be put to greater use in the future. This is already happening in jurisdictions such as Australia and the United States (See Nedumpara and Subramanian (Chapter “China’s Long March to Market Economy Status: An Analysis of China’s Protocol of Accession and Member Practices”) as well as Zhou (Chapter “The Issue of ‘Particular Market Situation’ Under WTO Anti-dumping Law”). In recent times, a view has emerged whether the Agreement on Subsidies and Countervailing Measures (ASCM) could be a good substitute for dealing with state-induced distortions in international trade. Feng as well as Bhatnagar et al. have addressed this view. To a limited extent this looks like a possibility. However, choosing an undistorted external benchmark could be a key issue in both anti-dumping and countervailing cases. The use of external benchmarks, especially

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in an NME situation, looks increasingly difficult in the context of the Anti-dumping Agreement particularly in view of the EU—Biodiesel4 case. However, in the context of the ASCM, the use of out-of-country benchmarks have been permitted at least in a few cases. However, the inherent arbitrariness in the use of external benchmarks will continue to remain even if there is a shift to the countervailing route. Furthermore, it remains to be seen whether countervailing actions, per se, may be a good enough remedy to correct any of the underlying distortions, if the nature, grounds and extent of the distortions are economy-wide, pervasive and deeply embedded in an economy. In addition, identifying financial contribution and establishing the elements of ‘public body’ within the meaning of the ASCM may not be easy (see Katarzyna’s article). In practice, the WTO annual statistics show an overwhelming preference of Members to anti-dumping over countervailing actions.5 This suggests that countervailing actions are widely believed to have a limited scope and have not been seen as effective and convenient as anti-dumping in addressing various features of unfair trade. To this extent, the debate on the use of non-Chinese costs and prices in anti-dumping investigations remains a crucial one. With wide-ranging impact on aspects of commerce, law and polity, the debate has serious implications for the global economic order.

4 Appellate Body Report, European Union — Anti-Dumping Measures on Biodiesel from Argentina, WT/DS473/AB/R (adopted Oct. 6, 2016). 5 See World Trade Organisation, Countervailing Initiations: By Exporter (1/1/1995 – 30/6/2016), https://www.wto.org/english/tratop_e/scm_e/CV_InitiationsByExpCty.pdf; World Trade Organisation, Anti-dumping Initiations: By Exporter (1/1/1995 – 30/6/2016), https://www.wto. org/english/tratop_e/adp_e/AD_InitiationsByExpCty.pdf.

Annexure

China’s Protocol of Accession to the WTO, 2001 Section 15 (a) In determining price comparability under Article VI of the GATT 1994 and the Anti-Dumping Agreement, the importing WTO Member shall use either Chinese prices or costs for the industry under investigation or a methodology that is not based on a strict comparison with domestic prices or costs in China based on the following rules: (i) If the producers under investigation can clearly show that market economy conditions prevail in the industry producing the like product with regard to the manufacture, production and sale of that product, the importing WTO Member shall use Chinese prices or costs for the industry under investigation in determining price comparability; (ii) The importing WTO Member may use a methodology that is not based on a strict comparison with domestic prices or costs in China if the producers under investigation cannot clearly show that market economy conditions prevail in the industry producing the like product with regard to manufacture, production and sale of that product. … (d) Once China has established, under the national law of the importing WTO Member, that it is a market economy, the provisions of subparagraph (a) shall be terminated provided that the importing Member’s national law contains market economy criteria as of the date of accession. In any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession. In addition, should China establish, pursuant to the national law of the importing WTO Member, that market economy conditions prevail in a particular industry or sector, the non-market economy provisions of subparagraph (a) shall no longer apply to that industry or sector. © Springer Nature Singapore Pte Ltd. 2018 J. J. Nedumpara and W. Zhou (eds.), Non-market Economies in the Global Trading System, https://doi.org/10.1007/978-981-13-1331-8

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Australia 1. Customs Act, 1901 §269TAC (4) Subject to subsections (6) and (8), where the Minister is satisfied that it is inappropriate to ascertain the normal value of goods in accordance with the preceding subsections because the Government of the country of export: (a) has a monopoly, or substantial monopoly, of the trade of the country; and (b) determines or substantially influences the domestic price of goods in that country; The normal value of the goods for the purposes of this Part is to be a value ascertained in accordance with whichever of the following paragraphs the Minister determines having regard to what is appropriate and reasonable in the circumstances of the case: (c) a value equal to the price of like goods produced or manufactured in a country determined by the Minister and sold for home consumption in the ordinary course of trade in that country, being sales that are arms length transactions; (d) a value equal to the price determined by the Minister to be the price of like goods produced or manufactured in a country determined by the Minister and sold in the ordinary course of trade in arms length transactions for exportation from that country to a third country determined by the Minister to be an appropriate third country; (e) a value equal to the sum of the following amounts ascertained in respect of like goods produced or manufactured in a country determined by the Minister and sold for home consumption in the ordinary course of trade in that country: (i) such amount as the Minister determines to be the cost of production or manufacture of the like goods in that country; (ii) such amounts as the Minister determines to be the administrative, selling and general costs associated with the sale of like goods in that country and the profit on that sale; (f) a value equal to the price payable for like goods produced or manufactured in Australia and sold for home consumption in the ordinary course of trade in Australia, being sales that are arms length transactions. (5C) Without limiting the generality of the matters that may be taken into account by the Minister in determining whether a third country is an appropriate third country for the purposes of paragraph (2)(d) or (4)(d), the Minister may have regard to the following matters: (a) Whether the volume of trade from the country of export referred to in paragraph (2)(d) or the country first-mentioned in paragraph (4)(d) is similar to the volume of trade from the country of export to Australia; and

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(b) Whether the nature of the trade in goods concerned between the country of export referred to in paragraph (2)(d) or the country first-mentioned in paragraph (4)(d) is similar to the nature of trade between the country of export and Australia. (5D) The normal value of goods (the exported goods) is the amount determined by the Minister, having regard to all relevant information, if the exported goods are exported to Australia and the Minister is satisfied that the country of export has an economy in transition and that at least one of the following paragraphs applies: (a) both of the following conditions exist: (i) the exporter of the exported goods sells like goods in the country of export; (ii) market conditions do not prevail in that country in respect of the domestic selling price of those like goods; (b) both of the following conditions exist: (i) the exporter of the exported goods does not sell like goods in the country of export but others do; (ii) market conditions do not prevail in that country in respect of the domestic selling price of those like goods; (c) the exporter of the exported goods does not answer questions in a questionnaire given to the exporter by the Commissioner under subsection 269TC(8) within the period described in that subsection or subsection 269TC(9) for answering questions; (d) the answers given within the period mentioned in subsection 269TC(8), or the period mentioned in subsection 269TC(9), by the exporter of the exported goods to a questionnaire given to the exporter under subsection 269TC(8) do not provide a reasonable basis for determining that paragraphs (a) and (b) of this subsection do not apply. Note: Subsection 269TC(8) deals with the Commissioner giving an exporter of goods to Australia a questionnaire about evidence of whether or not paragraphs (a) and (b) of this subsection apply, with a specified period of at least 30 days for the exporter to answer the questions. Under subsection 269TC(9) the Commissioner may allow the exporter a further period for answering the questions.

Brazil Brazil’s Decree No. 1602, 1995 Article 7 When difficulties occur in determining a comparable price as in the case of imports originating in a country that is not predominantly oriented toward a market economy, where domestic prices are for the most part established by the State, the normal value may be determined based on the price charged or on the value determined for the like product in a third country that has a market economy, or on the price charged by the latter country for its exports to other countries, excluding Brazil, or, whenever this is not possible, based on any other reasonable price,

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including the price paid or to be paid for the like product in the Brazilian market, duly adjusted, if necessary, to include a reasonable margin of profit. 7.1 The choice of the third country with an adequate market economy shall take into account any reliable information presented at the time of selection. 7.2 The time frames of the investigation shall be taken into account and, whenever feasible, recourse shall be had to a third country with a market economy that is the object of the same investigation. 7.3 The interested parties shall be notified, immediately after the initiation of the investigation, regarding the third country with a market economy that is to be used, and a period of time shall be established for returning the respective questionnaires mentioned in the lead paragraph of Art. 27.

Canada 1. Special Imports Measures Act, 1985 §20 (1) Where goods sold to an importer in Canada are shipped directly to Canada (a) from a prescribed country where, in the opinion of the President, domestic prices are substantially determined by the government of that country and there is sufficient reason to believe that they are not substantially the same as they would be if they were determined in a competitive market, or (b) from any other country where, in the opinion of the President, (i) the government of that country has a monopoly or substantial monopoly of its export trade, and (ii) domestic prices are substantially determined by the government of that country and there is sufficient reason to believe that they are not substantially the same as they would be if they were determined in a competitive market, the normal value of the goods is: (c) where like goods are sold by producers in any country other than Canada designated by the President for use in that country, (i) the price of the like goods at the time of the sale of the goods to the importer in Canada, adjusted in the prescribed manner and circumstances to reflect the differences in terms and conditions of sale, in taxation and other differences relating to price comparability between the goods sold to the importer in Canada and the like goods sold by producers in the country other than Canada designated by the President for use in that country, or (ii) the aggregate of: (A) the cost of production of the like goods, (B) a reasonable amount for administrative, selling and all other costs, and

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(C) a reasonable amount for profits, whichever of the price or aggregate the President designates for any case or class of cases; or (d) where, in the opinion of the President, sufficient information has not been furnished or is not available to enable the normal value of the goods to be determined as provided in paragraph (c), the price of like goods (i) produced in any country designated by the President, other than Canada or the country from which the goods were shipped directly to Canada, and (ii) imported into Canada and sold by the importer thereof in the condition in which they were imported to a person with whom, at the time of the sale, the importer was not associated, such price to be adjusted in the prescribed manner and circumstances to reflect the differences in terms and conditions of sale, in taxation and other differences relating to price comparability between the goods sold to the importer and the imported like goods in relation to their sale by the importer thereof. Marginal note: Limitation (2) The President may not designate a country under paragraph (1)(d) if (a) the like goods of that country are also the subject of investigation under this Act, unless the President is of the opinion that those goods are not dumped goods; or (b) in the opinion of the President, the price of the like goods imported into Canada has been significantly influenced by a country described in paragraphs (1)(a) and (b).

2. Special Import Measures Regulation, 1985 Normal Value and Export Price Quantitative Adjustments Section 3 For the purposes of sections 15, 19 and 20 of the Act, the price of like goods shall be adjusted to reflect the quantity discount generally granted in connection with a sale of like goods in the same or substantially the same quantities as the quantities of the goods sold to the importer in Canada. Section 4 Where the quantity discount referred to in section 3 cannot be ascertained, the price of like goods shall be adjusted by (a) adding thereto the amount that would reflect the costs that would be incurred by the exporter, or (b) deducting there from the amount that would reflect the savings that would accrue to the exporter,

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if the like goods were sold by the exporter in the same or substantially the same quantities as the quantities of goods sold to the importer in Canada. Qualitative Differences Section 5 For the purposes of sections 15, 19 and 20 of the Act, where the goods sold to the importer in Canada and the like goods differ (a) in their quality, structure, design or material, (b) in their warranty against defect or guarantee of performance, (c) in the time permitted from their date of order to the date of their scheduled shipment, or (d) in their conditions of sale, other than the conditions referred to in paragraphs (b) or (c) or any conditions that result in any adjustment being made pursuant to any other section of these Regulations, and that difference would be reflected in a difference between the price of the like goods and the price at which goods that are identical in all respects, including conditions of sale, to the goods sold to the importer in Canada would be sold in the country of export, the price of the like goods shall be adjusted (e) where the price of the like goods is greater than the price of the identical goods, by deducting therefrom the estimated difference between those prices; and (f) where the price of the like goods is less than the price of the identical goods, by adding thereto the estimated difference between those prices. Discounts Section 6 For the purposes of sections 15, 19 and 20 of the Act, where any rebate, deferred discount or discount for cash is generally granted in relation to the sale of like goods in the country of export, the price of the like goods shall be adjusted by deducting there from the amount of any such generally granted rebate or discount for which the sale of the goods to the importer in Canada would qualify if that sale occurred in the country of export.

European Union 1. European Union’s Regulation 2016/1036 of the European Parliament and the Council on Protection Against Dumped Imports from Countries not Members of the European Union, 2016 Article 2.3 When there are no or insufficient sales of the like product in the ordinary course of trade, or where, because of the particular market situation, such sales do not permit a proper comparison, the normal value of the like product shall be calculated on the

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basis of the cost of production in the country of origin plus a reasonable amount for selling, general and administrative costs and for profits, or on the basis of the export prices, in the ordinary course of trade, to an appropriate third country, provided that those prices are representative. A particular market situation for the product concerned within the meaning of the first subparagraph may be deemed to exist, inter alia, when prices are artificially low, when there is significant barter trade, or when there are non-commercial processing arrangements. Article 2.7 (a) In the case of imports from non-market-economy countries1, the normal value shall be determined on the basis of the price or constructed value in a market economy third country, or the price from such a third country to other countries, including the Union, or, where those are not possible, on any other reasonable basis, including the price actually paid or payable in the Union for the like product, duly adjusted if necessary to include a reasonable profit margin. An appropriate market-economy third country shall be selected in a not unreasonable manner, due account being taken of any reliable information made available at the time of selection. Account shall also be taken of time limits. Where appropriate, a market-economy third country which is subject to the same investigation shall be used. The parties to the investigation shall be informed shortly after its initiation of the market-economy third country envisaged and shall be given 10 days to comment. 2. European Union Regulation 2017/2321 of the European Parliament and of the Council, 2017 Recital 2 Article 2(7) of Regulation (EU) 2016/1036 constitutes the basis on which normal value should be determined in the case of imports from non-market economy countries. In view of developments with respect to certain countries, it is appropriate that normal value be determined on the basis of Regulation (EU) 2016/1036 as amended by this Regulation with effect from 20 December 2017. In the case of countries which are, at the date of initiation of an investigation, not Members of the World Trade Organization (WTO) and listed in Annex I to Regulation (EU) 2015/755 of the European Parliament and of the Council2, normal value should be determined in accordance with a specific methodology designed for those countries. This Regulation 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 1

Including Albania, Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Mongolia, North Korea, Tajikistan, Turkmenistan and Uzbekistan. 2 Regulation (EU) 2015/755 of the European Parliament and of the Council of 29 April 2015 on common rules for imports from certain third countries (OJ L 123, May 19, 2015, at 33).

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the Marrakesh Agreement Establishing the World Trade Organization done on 15 April 19943.” 3. Regulation (EU) 2016/1036 of the European Parliament and the Council of 8 June 2016 2.7(b) In anti-dumping investigations concerning imports from the People's Republic of China, Vietnam and Kazakhstan and any non-market-economy country which is a member of the WTO at the date of the initiation of the investigation, the normal value shall be determined in accordance with paragraphs 1 to 6, if it is shown, on the basis of properly substantiated claims by one or more producers subject to the investigation and in accordance with the criteria and procedures set out in point (c), that market-economy conditions prevail for this producer or producers in respect of the manufacture and sale of the like product concerned. When that is not the case, the rules set out under point (a) shall apply. (c) A claim under point (b) must be made in writing and contain sufficient evidence that the producer operates under market-economy conditions, that is if: – decisions of firms regarding prices, costs and inputs, including for instance raw materials, cost of technology and labour, output, sales and investment, are made in response to market signals reflecting supply and demand, and without significant State interference in that regard, and costs of major inputs substantially reflect market values, – firms have one clear set of basic accounting records which are independently audited in line with international accounting standards and are applied for all purposes, – the production costs and financial situation of firms are not subject to significant distortions carried over from the former non-market-economy system, in particular in relation to depreciation of assets, other write offs, barter trade and payment via compensation of debts, – the firms concerned are subject to bankruptcy and property laws which guarantee legal certainty and stability for the operation of firms, and – exchange rate conversions are carried out at the market rate. A determination whether the producer meets the criteria referred to under this point shall normally be made within seven months of, but in any event not later than eight months after, the initiation of the investigation, after the Union industry has been given an opportunity to comment. That determination shall remain in force throughout the investigation. The Commission shall provide information to the Member States concerning its analysis of claims made pursuant to point (b) normally within 28 weeks of the initiation of the investigation. (d) When the Commission has limited its investigation in accordance with Article 17, a determination pursuant to points (b) and (c) of this paragraph shall be limited to the parties included in the investigation and any producer that receives individual treatment pursuant to Article 17(3).

3

OJ L 336, Dec. 23, 1994, at 3.

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India 1. Custom Tariff (Indentification, Assessment and Collection of Anti-dumping Duty on Dumped Articles and for Determination of Injury) Rules, Annex I and Note to Annex I, 1995 Rule 74 In case of imports from non-market economy countries, normal value shall be determined on the basis of the price or constructed value in a market economy third country, or the price from such a third country to other countries, including India, or where it is not possible, on any other reasonable basis, including the price actually paid or payable in India for the like product, duly adjusted if necessary, to include a reasonable profit margin. An appropriate market economy third country shall be selected by the designated authority in a reasonable manner5, keeping in view the level of development of the country concerned and the product in question and due account shall be taken of any reliable information made available at the time of the selection. Account shall also be taken within time limits; where appropriate, of the investigation if any made in similar matter in respect of any other market economy third country. The parties to the investigation shall be informed without unreasonable delay the aforesaid selection of the market economy third country and shall be given a reasonable period of time to offer their comments. Rule 86 (1) The term “non-market economy country” means any country which the designated authority determines as not operating on market principles of cost or pricing structures, so that sales of merchandise in such country do not reflect the fair value of the merchandise, in accordance with the criteria specified in sub-paragraph (3). (2) There shall be a presumption that any country that has been determined to be, or has been treated as, a non-market economy country for purposes of an anti-dumping investigation by the designated authority or by the competent authority of any WTO member country during the three year period preceding the investigation is a non-market economy country. Provided, however, that the non-market economy country or the concerned firms from such country may rebut such a presumption by providing information and evidence to the designated authority that establishes that such country is not a non-market economy country on the basis of the criteria specified in sub-paragraph (3). (3) The designated authority shall consider in each case the following criteria as to whether:

4

Government of India, Customs Notification No. 44/99-Cus(NT) (July 15, 2017 (Annexure - II). Government of India, Customs Notification No. 28/2001 - Cus (NT) (May 31, 2001) (Annexure III). 6 Government of India, Customs Notification No. 28/2001 - Cus (NT) (May 31, 2001) (Annexure III) and substituted vide Customs Notification No. 1/2002 - Cus (NT) (Jan. 1, 2002). 5

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(a) the decisions of concerned firms in such country regarding prices, costs and inputs, including raw materials, cost of technology and labour, output, sales and investment, are made in response to market signals reflecting supply and demand and without significant State interference in this regard, and whether costs of major inputs, substantially reflect market values; (b) the production costs and financial situation of such firms are subject to significant distortions carried over from the former non-market economy system, in particular in relation to depreciation of assets other write-offs, barter trade and payment via compensation of debts; (c) such firms are subject to bankruptcy and property laws which guarantee legal certainty and stability for the operation of the firms, and (d) the exchange rate conversions are carried out at the market rate. Provided, however, that where it is shown by sufficient evidence in writing on the basis of the criteria specified in this paragraph that market conditions prevail for one or more such firms subject to anti-dumping investigations, the designated authority may apply the principles set out in paragraphs 1 to 6 instead of the principles set out in paragraph 7 and in this paragraph. (4) Notwithstanding anything contained in sub-paragraph (2), the designated authority may treat such country as market economy country which, on the basis of the latest detailed evaluation of relevant criteria, which includes the criteria specified in sub-paragraph (3), has been, by publication of such evaluation in a public document, treated or determined to be treated as a market economy country for the purposes of anti-dumping investigations, by a country which is a Member of the World Trade Organisation.

Mexico Foreign Trade Act, 1993 Article 33 In the case of imports originating in a country with a centrally planned economy, the normal value of the goods in question shall be taken to be the price of identical or like goods in a third country with a market economy, which may be regarded as a substitute for the country with a centrally planned economy for the purposes of the investigation. The normal value shall be determined in accordance with the provisions of the preceding articles.

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South Africa International Trade Administration Act, 2002 §32(4) If the Commission, when evaluating an application concerning dumping, concludes that the normal value of the goods in question is, as a result of government intervention in the exporting country or country of origin not determined according to free market principles, the Commission may apply to those goods a normal value of the goods established in respect of a third or surrogate country.

Turkey Regulation on Prevention of Unfair Competition in Imports No. 23861, Part Two 1999 NonMarket Economy Countries Article 7 In the case of imports from non-market economy countries, normal value shall be determined on the basis of one of the following methods: (a) Price actually paid or payable for the like product when destined for consumption in the domestic market of a market economy third country, or (b) Export price from a market economy third country to other countries, including Turkey; or (c) Constructed value based on the unit cost of production plus selling, general and administrative costs and a reasonable amount for profits, in a market economy third country for the like product, or (d) Where those are not possible, any other reasonable basis, including the price actually paid or payable in Turkey for the like product or constructed value on the basis of the cost of production in Turkey for the like product, plus selling, general and administrative costs and a reasonable amount for profits.

United States of America Tariff Act, 19 USC (1930), §1677b Normal Value (c) Nonmarket economy countries (1) In general If, (A) the subject merchandise is exported from a nonmarket economy country, and (B) the administering authority finds that available information does not permit the normal value of the subject merchandise to be determined under subsection (a) of this section,

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the administering authority shall determine the normal value of the subject merchandise on the basis of the value of the factors of production utilized in producing the merchandise and to which shall be added an amount for general expenses and profit plus the cost of containers, coverings, and other expenses. Except as provided in paragraph (2), the valuation of the factors of production shall be based on the best available information regarding the values of such factors in a market economy country or countries considered to be appropriate by the administering authority. (2) Exception If the administering authority finds that the available information is inadequate for purposes of determining the normal value of subject merchandise under paragraph (1), the administering authority shall determine the normal value on the basis of the price at which merchandise that is— (A) comparable to the subject merchandise, and (B) produced in one or more market economy countries that are at a level of economic development comparable to that of the nonmarket economy country, is sold in other countries, including the United States. §1677(18) Nonmarket economy country (B) Factors to be considered In making determinations under subparagraph(A) the administering authority shall take into account (i) the extent to which the currency of the foreign country is convertible into the currency of other countries, (ii) the extent to which wage rates in the foreign country are determined by free bargaining between labour and management, (iii) the extent to which joint ventures or other investments by firms of other foreign countries are permitted in the foreign country, (iv) the extent of government ownership or control of the means of production, (v) the extent of government control over the allocation of resources and over the price and output decisions of enterprises, and (vi) such other factors as the administering authority considers appropriate. S1677 (18) (C) Determination in effect (i) Any determination that a foreign country is a non-market economy country shall remain in effect until revoked by the administering authority. (ii) The administering authority may make a determination under subparagraph (A) with respect to any foreign country at any time.

Index

A Accession Protocol chapeau of Section 15, 22, 24, 27, 117 Section 15 (a)(i), 5, 21, 23, 24, 25, 26, 27, 28, 30, 63, 136, 275, 277 Section 15 (a)(ii), 5, 6, 10, 13, 21, 22, 24, 25, 26, 28, 29, 32, 33, 34, 38, 48, 49, 58, 59, 63, 100, 103, 115, 136, 137, 155, 158, 176, 177, 178, 238, 245, 247, 259, 263, 268, 269, 274, 275, 276, 277, 279, 281, 283, 284, 298, 299, 300, 301, 302 Section 15 (d), 5, 22, 24, 26, 28, 32, 34, 63, 99, 102, 103, 104, 108, 109, 114, 115, 116, 129, 136, 203, 215, 274 Agreement on Subsidies and Countervailing Measures, 9, 87, 99, 139, 145, 157, 305 Agreement on Trade-Related Aspects of Intellectual Property Rights, 9 All China Federation of Trade Unions, 79 Aluminum Corporation of China Limited, 88 Analogue country methodology, 178, 179, 237, 238, 240, 242, 243, 245, 248 Anti-dumping Agreement, 5, 10, 11, 17, 18, 20, 21, 22, 27, 29, 39, 50, 61, 62, 99, 100, 101, 102, 108, 110, 116, 117, 123, 124, 129, 136, 137, 145, 155, 156, 158, 171, 172, 173, 175, 176, 177, 178, 180, 181, 182, 184, 185, 190, 192, 214, 239, 243, 264, 266, 275, 277, 282, 283, 285, 300, 305, 307 Anti-Dumping Duty (ADD), 38, 40, 42, 43, 46, 47, 48, 49, 57, 100, 113, 126, 131, 134, 143, 148, 149, 150, 171, 183, 188, 190, 197, 205, 252, 253, 284, 285, 289, 296, 299, 315

Anti-dumping investigation Article 2.2, 50, 61, 62, 102, 110, 120, 121, 122, 123, 125, 129, 149, 150, 152, 153, 171, 172, 173, 176, 177, 178, 179, 180, 181, 186, 187, 188, 192, 196, 199, 200, 285 Article 2.2.1.1, 53, 62, 99, 119, 120, 121, 122, 124, 125, 126, 173, 174, 175, 176, 179, 180, 181, 182, 183, 184, 190, 191, 193, 196, 198, 200, 233, 234, 300 Article 5.2, 277 Period of Investigation (POI), 5, 49, 57, 233, 289, 292, 294, 298, 299, 300 Second Ad Note to GATT Art. VI, 18, 19, 22, 34, 63, 101, 102, 110, 266, 286 Anti-dumping measures, 9, 11, 17, 25, 30, 42, 50, 60, 100, 116, 119, 123, 141, 149, 157, 171, 174, 175, 176, 180, 184, 186, 188, 190, 192, 193, 200, 222, 233, 234, 243, 245, 247, 251, 257, 283, 300, 305 Appellate Body, 9–11, 17, 24, 25, 26, 27, 41, 53, 60, 61, 62, 64, 99, 100, 101, 111, 112, 113, 116, 119, 121, 122, 123, 124, 125, 126, 131, 133, 135, 138, 139, 140, 141, 142, 146, 149, 150, 151, 152, 155, 157, 158–168, 170–172, 174–176, 178–181, 183–193, 231–234, 243, 245, 255, 257, 283, 300, 305 Argentina – Safeguard Measures on Imports of Footwear, 122 Arora, Pallavi, 10, 155 Artificially low price, 84, 124, 162 Australia Anti – Dumping Commission, 50, 51, 54, 193, 194, 195

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320 Australia (cont.) Australian Customs and Border Protection Service, 51, 193 Customs Act, 1901, 51, 308 Customs (International Obligations) Regulation 2015, 00 Trade Measure Review Officer (TMRO), 52, 53 Australian Anti-dumping commission, 50, 54 B Bahri, Amrita, 11, 259 Basic Anti-dumping Regulation (EU) Individual treatment, 243, 314 MET criteria, 239, 257 Benchmark prices, 54, 63, 155, 156, 168, 183, 184, 194, 195, 196 Bhatnagar, Mukesh, 10, 155, 305 Bicycles from Czechoslovakia, 15, 207 Biodiesel from Argentina, 9, 17, 60, 119, 123, 149, 157, 163, 171, 172, 173, 174, 179, 180, 188, 190, 229, 233, 257, 300, 305 Biodiesel from Indonesia, 157, 176, 229, 230, 234, 257, 300 Bornstein, Morris, 67 Bown, Chad, 203, 304 Brazil Trade Measures Review Officer, 51–53 Brazilian Internal Taxes, 106 C Canada Canada Border Services Agency, 58 Canadian International Trade Tribunal, 58 Special Import Measures Act (SIMA), 58 Canada - Aircraft, 111 Caporale, G.M., 76 Carbon Black, 297 Cathode Ray Tubes, 288 Centrally planned economy, 3, 66, 67, 132, 177, 206, 266, 267, 270, 316 Ceramic Rollers, 299 Certain Aluminum Foil from the People’s Republic of China, 36, 204, 216 Certain Frozen Warmwater Shrimp from Ecuador, 227 Certain Softwood Lumber Products from Canada, 228 Certain Steel Nails from Korea, 228 Chamber of Foreign Trade, Brazil (CAMEX), 55

Index China 13th Five Year Plan for Economic and Social Development (2016-2020), 91 Brand Promotion Programme, 290 Catalogue of Industries for Guiding Foreign Investment, 91, 92 Catalogue on Readjustment of Industrial Structure, 91, 92 China Chamber of Metals, Minerals and Chemical Importers & Exporters, 42 Economic Planning, 94 Foreign Invested Enterprise Law, 128 Iron and Steel Industry Development Policy, 92, 93 Made in China 2025 program, 91, 93, 94, 95 National Development and Reform Commission, 90, 91, 92 National plans, 91, 92 National Torch Programme, 290 Policy for Development of the Iron and Steel Industries, 92, 93 Working Party Report, 5, 9, 21, 23, 30, 31, 32–34, 103, 108, 114, 127, 158, 214 China — EU Consultations, 16, 23, 24 China – Trade Policy Review, 73, 74, 83, 84, 87 China — US Consultations, 16, 23 Chow, Gregory C., 67 Collectively owned corporation, 290 Collectively owned enterprise, 290 Comision de Comercio Exterior (COCEX), 264 Communist Party of China, 44, 114 Compact Fluorescent Lamps, 289 Comparative advantage, 75, 76, 82, 220, 223 Constructed normal value, 25, 40, 50, 54, 61, 62, 64, 137, 139, 142, 150, 186, 198, 250 Cost distortions, 85, 86, 246 Cost of production, 40, 50, 54, 59, 61, 110, 120–124, 144, 149, 156, 157, 171–174, 176, 178, 181, 183, 186, 189, 196, 198, 223–225, 229, 230, 233, 266, 267, 270, 278, 282, 308, 310, 312, 317 Countervailing duty, 10, 14, 20, 31, 36, 40, 53, 78, 87, 113, 114, 126, 131–133, 135, 140, 141, 150, 155, 157–161, 163, 164, 166, 168, 169, 170, 183, 184, 189, 194, 204, 205, 209, 212, 216, 225, 226, 228, 304

Index Countervailing Investigation, 113 Cross-subsidies, 85–87 Currency convertibility, 19, 37, 216, 269 Customs Act, 1901 (Austl.), 51, 308 CVD investigation, 128, 131, 133, 134, 135, 139, 140, 142, 143, 145, 146, 147, 152, 212, 225, 226, 227, 230, 231, 232 D December 11, 2016, 2, 5, 13, 16, 22, 23, 27, 28, 29, 32, 33, 34, 39, 42, 58, 109, 186, 201, 203, 214, 216, 223, 238, 247 Differential Export Tax, 60, 157, 190 Directorate General of Anti-dumping and Allied Duties, 157 Double remedy, 87, 113, 131, 134, 135, 137, 138, 139, 140, 141, 142, 143, 144, 145–147, 150, 151, 152, 153, 231 Dual pricing, 151, 157, 170, 182–184, 256 Dumping, 15, 17, 18, 39, 54, 70, 100, 108, 110, 113, 123, 126, 136, 137, 138, 142, 143, 144, 150, 153, 155, 180, 186, 187, 188, 194, 200, 202, 208, 209, 220, 221, 223, 224, 230, 231, 233, 234, 240, 242, 243, 245, 251, 255, 259, 261, 263–265, 274, 276, 282, 286, 287, 300, 317 E EC — Fasteners (China), 100, 116, 243, 245, 283 EEC – Cotton Yarn, 188 Effet utile, 25, 26 Electric Golf Carts from Poland, 14, 209 Enabling clause, 10, 100–102, 115, 129 Energy Policy Research Group, 85 Entity Wide Rate (EWR), 221 EU — Biodiesel (Argentina) country of origin, 21, 50, 54, 61, 110, 121–125, 149, 156, 171–173, 181, 186, 266, 270, 282, 312, 317 out-of-country information, 61, 181 reasonableness, 62, 125, 156, 173, 175, 179, 180, 183, 184, 191, 193, 233 EU — Biodiesel (Indonesia), 155, 157, 170, 176, 184, 300 EU — Footwear (China), 30 EU — Price Comparison Methodologies, 6, 7, 16, 63, 101, 150, 177, 203, 204, 238, 247, 274, 275, 284 European Commission first country report on China/China country report, 239, 249, 254, 256, 257 inception impact assessment, 245, 246 European Union

321 Anti-dumping Regulation, 9, 41, 43, 178, 238, 249 Article 2.7, Anti-dumping Regulation, 9, 41, 43, 178, 238, 249 MET Exception, 240, 241 Significant Distortion Rules, 238, 247, 248, 256 External benchmarks, 10, 11, 53, 155, 157, 164–166, 177, 305, 306 F Factor pricing, 66, 74, 95, 96 Factors of production market oriented test, 20, 204, 213–215 Factors of production methodology, 201, 209, 211, 218, 305 Feng, Xuewei, 10, 99, 305 Flat Base Steel Wheel, 290 Foreign sovereign compulsion, 89 Fresh Atlantic Salmon from Chile, 227 G General Agreement on Tariffs and Trade (GATT) Article VI: 1, 3, 5, 18, 61, 70, 101, 102, 110, 122, 172, 176–178, 182, 301, 305 Article XVII, 2, 127 Contracting parties, 1, 3, 18, 19, 63, 70, 71, 101, 104–108, 110, 115, 177, 187, 206 Generalized System of Preferences (GSP), 101 Generally accepted accounting principles, 119, 122, 124, 173, 190, 191, 233 Glassware, 299, 300 Grandfather clause, 99, 104, 105, 107–109, 114, 115, 117 Gross Domestic Product (GDP), 45, 66, 84, 260, 273, 274 H Hang Seng China AH Premium Index, 78 Hukou, 37, 74, 79, 80, 85 I Inception impact assessment, 245, 246 India Cost adjustments, 48 Customs Excise and Service Tax Appellate Tribunal (CESTAT), 295 Customs Tariff Act, 1975, 46, 284 Customs Tariff (Identification, Assessment and Collection of Anti-Dumping Duty on Dumped Articles and for Determination of Injury) Rules, 1995, 46, 47, 284

322 India (cont.) Directorate of Anti-Dumping & Allied Duties (DGAD/Designated Authority), 47 elimination approach, 288, 300, 301 Huawei Technologies v. Union of India, 295 Shenyang Matsushita S. Battery Co. Ltd. V., 296 Indian Anti-dumping Rules Paragraph 7, Annexure I, 47, 48, 285, 287, 296, 298, 316 Paragraph 8(1), Annexure I, 286, 299, 300 In dubio mitius, 29 Interpretation ‘a contrario’ interpretation, 25 effet utile, 25, 26 pacta sunt servanda, 104, 299 ut res magis valeat quam pereat, 25 Ironing Boards from China, 252 J Jalouise-Louvre Sized Sheet Glass from Czechoslovakia, 207 Jefe de la Unidad, 265 Jha, Parthsarathi, 281 Jiang, Zhujun, 85 Jiyuan, Chen, 67, 72, 73 Joshi, Moushami, 11, 48, 201, 305 K Kaszubska, Katarzyna, 10, 131, 306 L Lesser duty rule, 133, 141–146, 151–153, 246 Less Than Fair Price, 14, 15 Lighthizer, Robert, 8 Lin, Boqiang, 85 Lined Paper Products, 217 London Metal Exchange (lme), 52 M Market access, 83, 103, 223 Market distortion, 2, 8–11, 41, 44, 46, 60, 79, 87, 128, 132, 137, 148, 153, 156–159, 178–184, 186, 197, 198, 212, 226, 247, 249, 267, 301 Market distortion rule, 238, 247, 248, 256 Market economy, 2, 4–7, 10, 11, 13–16, 19–25, 27, 28, 31, 34–36, 38, 41–43, 46–49, 51, 54–56, 57, 59, 62–66, 72, 74, 78, 88, 90, 95, 96, 100, 102–104, 108–118, 127–129, 131–133, 131, 137, 140, 143, 147, 153, 158, 176, 177, 180, 192, 194, 201–207, 209–215, 217,

Index 219–225, 231, 232, 234, 237–241, 243–247, 259, 266–270, 275, 277–279, 281–292, 294–301, 303–305, 307, 309, 310, 313–318 Market Economy Treatment (MET), 11, 14, 23, 28, 32, 42, 48, 49, 143, 201, 223, 237, 238, 281, 287, 288, 290, 291, 294, 295, 298, 301 Market Oriented Industry (MOI) Approach, 20, 204, 212, 305 Marrakesh Agreement Article XII, 102 Melamine from China, 253 Mexico Jefe de la Unidad, 265 Ley De Comercio Exterior,1995 (FTL), 264 Reglamento De La Ley De Comercio Exterior, 2014 (Regulations), 264 Secretaria de Economia, 264, 270, 273, 277, 278 Unidad de Practicas Comerciales Internacionales (UPCI), 262, 264 Microeconomic Policy China, 74 Ministry of Commerce, China, 51, 89, 194, 293 Miranda, Jorge, 10, 18, 23, 65, 176, 239, 270 N Natural Menthol from the PRC, 210 Naughton, Barry, 67, 73, 75 Nedumpara, James, 1, 10, 14, 30, 182, 305 NME Methodology, 5, 6, 10, 32, 46, 49, 50, 63, 113, 126, 131, 137–140, 142 Non-market economy, 7, 14, 21–23, 27, 32, 34, 36, 37, 38, 43, 47, 48, 51, 63, 65, 66, 78, 95, 103, 109, 111, 117, 127, 133, 136, 158, 177, 185, 192, 201, 202, 204, 206, 212, 214, 217–221, 239, 241, 246, 259, 266, 281, 282, 299, 307, 313–318 Normal Value, 5, 10, 15, 17, 20, 23–25, 35, 36, 38, 40–43, 45, 47, 48, 50–57, 59–64, 70, 72, 99–102, 108, 110, 112, 113, 115–123, 129, 131, 136–142, 145–147, 149–153, 155, 156, 158, 171, 173, 176–180, 183, 185, 186, 190–192, 194–196, 198, 200–203, 206–212, 214, 218, 220, 223–233, 238–241, 244, 246–251, 255, 257, 266, 267, 270, 274, 275, 277, 278, 281–287, 290, 296–299, 301, 302, 308–318 North American Free Trade Agreement (NAFTA), 260 Notani, Sanjay, 11, 305

Index O Oil Country Tubular Goods (OCTG) from Korea, 40, 166, 168, 193, 197, 224, 225, 227 Ordinary Course of Trade, 17, 39, 40, 50, 52, 61, 110, 120, 121, 123, 149, 156, 186, 187, 192, 196–198, 206, 207, 224, 225, 266, 308, 312, 313 Oxford Institute of Energy Studies, 85, 90 P Pacta Sunt Servanda, 104, 299 Particular Market Situation Article 2.2, 53, 61, 62, 99, 102, 110, 119–126, 129, 149, 150, 152, 153, 171–181, 183, 184, 186–188, 190–193, 196, 198–200, 233, 234, 285, 300 Proper Comparison, 39, 50, 52, 156, 186–189, 196–198, 200, 225, 226, 230, 312 suitability test, 51, 52 USDOC’s Administrative review of certain oil country tubular goods from South Korea, 197 People’s Republic of China, 2, 9, 19, 20, 32, 36, 38, 42, 45, 54, 56, 57, 59, 60, 62, 72, 76, 78, 80, 87, 89–91, 100, 102, 134, 141, 148, 149, 158, 194, 195, 203, 204, 210–213, 216, 221, 239, 244, 245, 249, 251–253, 256, 266, 281, 285, 299, 314 Perkins, Dwight H., 15, 67, 70, 72 Petroleum wax candles from the PRC, 211, 212 Phosphorus pentaoxide, 299, 300 Price comparability, 3, 18, 21, 27, 31, 33, 39, 59, 71, 101, 108, 109, 116, 117, 136, 177, 187, 204, 206, 208, 214, 266, 274, 282, 283, 286, 307, 310, 311 Product Control Numbers(PCN), 298 Protocol of accession, 2, 6, 10, 13, 17, 18, 20–23, 25, 26, 28–34, 39, 42, 48, 51, 58, 59, 63, 72, 73, 100, 102, 108, 129, 136, 147, 155, 176, 183, 186, 203, 204, 214, 215, 239, 245, 274, 275, 299, 305, 307 Protocol of Provisional Application (PPA), 104, 106, 107 Purchasing power parity, 66 Q Questionnaire, MET, 42, 47, 55, 57, 287, 288, 291, 293, 299, 309, 310 R Radial Tyre, 291, 294, 298 Raturi, Rishab, 11, 305

323 Reasonably Reflecting Test, 191–193 Roessler, Frieder, 105, 107 S Schott, Peter K., 75, 76 SDH Equipment, 291, 298 Secretario de Economia, 264 Section 15, China’s Protocol of Accession, 2, 6, 10, 13, 17, 18, 20, 21, 23, 63, 100, 129, 155, 176, 186, 203, 204, 214, 215, 239, 275, 304, 305, 307 Separate rate test, 220, 222 Significant distortions, 9, 43–46, 55, 63, 87, 118, 124, 147, 153, 178, 198, 199, 237–241, 246–252, 254–256, 257, 286, 289, 314, 316 South Africa, 36, 297, 300, 317 Sova, Anamaria, 76 Sova, Robert, 76 Soziale Mmarktwirschaft, 114 Special Import Measures Act (SIMA), Canada, 58 Special Import Measures Regulations (SIMR), Canada, 58, 59 Special methodologies, 22–24, 26–29, 33, 34, 259, 263, 274, 275 State intervention, 2, 7, 9, 10, 11, 32, 46, 62, 110, 127, 149, 179, 180, 184, 190, 192, 193, 196, 198, 199, 200, 254, 266 State invested enterprises, 21, 37, 179, 216 State-owned enterprises, 3, 9, 32, 44, 66, 73, 92, 99, 111, 176, 180 State trading enterprises, 2, 105 Steel Concrete Reinforcing Bar from Taiwan, 228 Subramanian, Archana, 10, 14, 23, 303, 305 Sud, Dion Juhi, 11, 158, 177, 186, 237, 238, 244, 246 Sulfanilic Acid, 213 Supreme Court of India, 296 Surrogate Country Methodology, 15, 17, 20, 22, 24, 30, 34, 38, 42, 59, 60, 63, 64, 99, 102–104, 108–110, 113–119, 123, 129, 201, 202, 209, 231, 232, 299, 304, 305 Sutherland, Peter, 4, 128, 129 Synchronous Digital Hierarchy (SDH), 298 T Tajikistan, 58, 241, 285, 313 Tariff Act of 1930 Section 771(18)(A), 35 Section 771(18)(C)(1), 35 Section 771(18)(B), 36 Section 771(18)(C)(ii), 35

324 Section 773 (c)(1), 35 Trade preferences extension act of 2015, 196, 205, 224 Thailand, 20, 36, 38, 42, 50, 149, 194, 195, 205, 211, 288, 291, 293, 294, 297, 298 Tidrick, Gene, 67 Trade defence instruments, 133, 134, 246 Transition economies, 134 Trans-Pacific Partnership (TPP), 260 Travaux preparatoires, 29 U Unidad de Practicas Comerciales Internacionales (UPCI), 262, 264 Unilateralism, 1 United States Omnibus Trade and Competitiveness Act, 1988, 211 Tariff Act, 1930, 19, 35, 36, 46, 133, 138, 140, 163, 206, 215, 224, 231, 284, 317 Trade Preference Extension Act, 2015, 39, 40, 196, 205, 224 United States Department of Commerce (USDOC), 159, 204 United States Trade Representative Charlene Barshefsky, 28, 31 Robert Lighthizer, 8 United States Treasury Department, 14, 207 Double remedies, 10, 87, 99, 113, 126, 132, 133, 139, 140, 143, 146, 150, 230–232 US — Anti-Dumping and Countervailing Duties, 3, 112, 113, 126, 131, 133, 135, 139, 143, 150, 151, 164, 189, 230, 231 US — Carbon Steel (India), 155, 157, 159, 163 US — Countervailing Measures (China), 157, 162, 166 US – Manufacturing Clause, 106, 107, 109 US — Softwood Lumber, 53, 111, 126, 155, 157, 159, 160, 162, 164, 174, 189, 228 US – Softwood Lumber IV, 111, 126, 157, 159, 164 Ut Res Magis Valeat Quam Pereat, 25

Index V Value Added Tax, 81, 83 Vermulst, Edwin, 11, 133, 137, 140, 142, 143, 146, 149 , 156, 158, 177, 186, 189, 237 Vienna Convention on Law of Treaties, 1969, 29, 104, 161 Vietnam, 11, 16, 48, 58, 136, 153, 179, 204, 205, 213, 214, 215, 217, 218, 220, 221, 234, 241, 243, 285, 289, 314 Vitamin – A Palmitate, 289, 290 Vitamin C, 88–90 W Wages, 19, 56, 118, 218, 219, 287, 294 Working Party Report Paragraph 150, 31 Paragraph 151, 30, 31, 33 Working Party Report on Accession of Saudi Arabia, 183 Working Party Report on Accession of the Russian Federation, 183 Working Party Report on the Accession of China, 114 Working Party Report on the Accession of Vietnam, 215 World Trade Organization Dispute Settlement Understanding (DSU), 16, 168 Report on by the Secretariat: China – Trade Policy Review, 73, 83, 84, 87 Wu, Mark, 7, 22, 32, 176, 205 X Xu, Xianxiang, 80 Z Zhang, Li, 6, 80, 203 Zhang, Xiangchen, 6, 203 Zhou, Weihuan, 1, 10, 39, 51, 65, 158, 178, 185, 190, 192, 303