Introduction
In this era of escalating tariff wars and rising protectionism, the impact of trade defence instruments is becoming increasingly profound. For instance, when the European Union imposed additional tariffs on Chinese electric vehicles following an anti-subsidy investigation, China retaliated with temporary anti-dumping duties on European brandy and initiated an anti-subsidy investigation into European dairy. Among the various trade defence tools, anti-dumping duties stand out as the most diplomatic, as they target the pricing decisions of private firms rather than questioning government actions, as is the case with subsidies, nor do they require the heavy burden of proof seen in safeguard investigations. However, when it comes to non-market economy (NME) analysis, the situation becomes more complex, since it often attempts to scrutinise state subsidisation. This paper attempts to analyse whether the current treatment of Chinese imports by European authorities is WTO-compliant.
Background of the issue
The anti-dumping agreement takes forward the provisions in Article VI of the GATT 1994, those strictly related to dumping as per the first Article of the agreement. Typically, anti-dumping duties are calculated on the basis of the dumping margin, which is essentially the difference between the normal value (which could be domestic sales price, sale price in a third country, or a constructed value) and export price. For the calculation of the normal value, costs recorded by the producers can be disregarded if it appears that the economy appears to be under complete or substantially complete control of the government as per Article VI(1) Note Ad 2 of the GATT; in that case, the prices and costs can be constructed.
The U.S., E.U., Canada, Australia, and New Zealand are considered the traditional users of the anti-dumping instrument, and naturally, the manufacturing hub of the world- China is subject to anti-dumping duties like no other WTO member. In fact, up until 31 December 2013, more than half the number of final measures imposed by WTO members were on Chinese exports. This can in part be attributed to Article 15(a) of the Chinese Accession Protocol, which outlines when Chinese prices and costs can be disregarded for price comparison in an anti-dumping investigation. If producers cannot prove the existence of market economy conditions in the relevant industry, this provision allows for disregarding of their costs and prices, often leading to higher constructed costs and greater dumping margins.
After the deadline in Article 15 of the Chinese Accession Protocol, which passed on December 11, 2016, China hoped it would no longer be treated as an NME. However, the major economies have remained steadfast in continuing their treatment of Chinese exports as those originating from an NME, prompting China to initiate consultations with the EU. When it failed, a WTO panel was established to hear China’s case against the EU regarding the use of a non-market economy methodology in anti-dumping cases. However, the panel was suspended by China before the report was set to be released, resulting in the lapse of the panel’s authority and preventing the report from being published. Although it is appealing to think that the determination of the panel would have finally settled the issue, it is not quite straightforward. In this background, the EU brought about Regulation 2017/2321, allowing the European authorities to effectively treat China as a ‘Non-Market Economy’ (NME).
Current Regulation and practice
The new regulation entered into force on December 20, 2017, introducing a new methodology for the calculation of normal value in trade defence cases. This new methodology creates no distinction between market economies and non-market economies, unlike the earlier methodology, where there was a predetermined list and required the exporter to prove that the prices and costs were not distorted. Now the complainants are required to prove that there was ‘significant distortion’ affecting the prices and costs in the country of origin before allowing for the construction of normal value with costs from an appropriate representative country, undistorted domestic costs, or undistorted international prices. However, this burden of proof has been eased, for the producers can depend on country or sector-specific reports containing evidence of market distortions made by the Commission. The first country such a report was made for was unsurprisingly China; it was created in 2017 and updated recently in 2024.
In the case of the twenty anti-dumping investigations initiated by the EU against China in 2024, every complaint claimed that the Chinese domestic prices cannot be relied on due to the existence of significant distortions in the market as understood by point (b) of Article 2(6a) of the basic Regulation, which is Council Regulation (EC) No 1225/2009. In the case of products such as epoxy resin and barium carbonate, although other countries like India, Korea, Taiwan, and Thailand were part of the investigation, the claim of significant distortion was not raised against these countries. Additionally, the Commission Staff Working Document on Significant Distortions in the Economy of the People’s Republic of China for the Purposes of Trade Defence Investigations was relied on almost mechanically. The report takes into account Chinese legislation, policy documents, and information from international organisations such as the IMF, OECD, and WTO reporting on distortions caused by the planning system, discriminatory access and allocation of resources such as land and energy, and state support in specific sectors.
WTO-Compliance
If the earlier basis for justifying the EU’s treatment of Chinese exports was the Chinese Accession Protocol, after the deadline the new basis needs to lie within the anti-dumping agreement. As per Article 2.2 of the agreement, the normal value can be constructed if there is insufficient or no sales in the ordinary course of trade or a particular market situation, for these circumstances do not allow for a proper comparison to determine the margin of dumping. Therefore, the concept of significant distortion should be categorizable under either of the two scenarios. The latter scenario has barely been relied on the European investigating authorities. The key issue now is whether insufficient or no sales in the ordinary course of trade is well-equipped to address state intervention, especially when it takes the form of subsidies, which is what significant distortions attempt to cater to.
Although ‘ordinary course of trade’ is not defined by the agreement, authors Noël and Zhou argue that the context provided by the more precise French text provides for much-needed guidance, as it introduces the element of profitability in interpreting what is ‘ordinary’. Firstly, it shall be based on an evaluation of the characteristics of the commercial transaction, giving importance to the terms of profitability. The characteristics to be assessed are those of the transaction relating to the product concerned; this was also highlighted by the appellate body in US – Hot Rolled Steel. Secondly, a low price does not rule out a standard profit margin for the firm, even if such a low price is due to state intervention, such as subsidisation.
Lastly, determining whether sales are not in the ordinary course of trade involves comparing the terms and conditions of the impugned transaction with the other transactions in that domestic market. If the price of the impugned sale is in line with usual pricing practices in the domestic market, it is unlikely that the sale can be treated as not conducted in the ordinary course of trade, whether or not there is state subsidisation. This proves that ‘no sales in the ordinary course of trade’ circumstance in the Article 2.2 of the agreement does not capture the probable manipulation of state subsidisation.
Essentially, if the subsidy has to be captured when determining dumping it should affect the export price and the domestic price differently. Even if this variation, if any, can be captured and proved to the detriment of the producer, the agreement does not allow for the investigating authority to disregard the actual costs incurred by the producers. As established by the WTO panel in EU – Biodiesel Article 2.2.1.1 of the agreement does not cater to the reasonableness of the actual costs, when constructing the normal value, as long as they are properly recorded in accordance with generally approved accounting principles. The ‘no sales in the ordinary course of trade’ circumstance concerns itself with the sale of the good, and cannot be a valid ground for constructing a normal value in order to capture state subsidisation.
Conclusion
The new burden of proof placed on the European domestic industry has proven to be little more than a façade. With the option and resources available to negate Chinese prices and costs, the European industry continues to do so. The analysis on EU’s reliance on the ‘ordinary course of trade’ has highlighted that the anti-dumping agreement is not the proper tool for addressing market distortions such as state subsidisation. These concerns should be addressed under the WTO Agreement on Subsidies and Countervailing Measures, as the anti-dumping agreement is primarily a trade policy instrument focused on a commercial firm’s pricing decisions.
Furthermore, given that both China and the EU are among the founding members of the Multi-party Interim Appeal Arbitration Arrangement, which aims to maintain the two-step dispute settlement system despite a defunct appellate body, it is unlikely that a panel report unfavourable to the EU will simply be appealed into the void, should China seek consultations with the EU on this matter. Additionally addressing this circumvention of the Subsidies Agreement would ensure fairer treatment, not only for Chinese goods but for all goods, as under Regulation 2017/2321 there are no predetermined categorisations of countries. This flexibility of the regulation allows for broader application, enabling more countries to be treated as non-market economies in the future, which can be easily exploited during shifts in geopolitical dynamics. Ultimately, if the regulation were no longer relied upon for anti-dumping investigations, it would promote a more transparent, consistent and WTO-compliant application of trade defence measures.
Nikita Lal is an LLM candidate in International Economic Law at European Public Law Organization (EPLO) Athens, Greece.
Picture Credit: Christian Ohde/IMAGO via Reuters