| ;International Trade 2010
EU Overview: Fair trade requires fair remedies
Edward Borovikov and Bogdan EvtimovSalansBrussels
Energy- and raw material-intensive industries in developed countries, including those of the EU, have been facing serious challenges in their global competitiveness. While prices for energy and raw materials in developed markets are high and rising, their major competitors in certain emerging markets and developing countries are continuing to benefit from much lower domestic costs for energy and/or major raw materials. Those competitors' lower costs of production not only lead to higher profitability, but also, through exports of their final products to developed markets, undercut the prices and reduce the market share of developed countries' industries.
The lower domestic prices for energy and/or raw materials in such exporting countries are due to various reasons. These often involve a mix of comparative advantages in the availability of natural resources and of government policies, including tax incentives and domestic price controls.
Where a government's involvement through such measures results in costs to certain industries which are lower than costs normally available in free market conditions, it is likely that a subsidy benefiting those industries would be found. For such reasons, those government policies have historically been examined in the context of subsidisation and have become known as "dual pricing" on inputs in international trade. This term implies that the unregulated export prices of such inputs, which follow prices in international markets, significantly exceed domestic regulated/subsidised prices of the same inputs to domestic industries.
In parallel, higher export prices on import of those inputs into many industrialised markets are not always the result of free market forces, and themselves may be supra-competitive. They may simply reflect the disequilibrium of demand and supply in such markets, exacerbated by domestic shortage of natural resources, tight supply or even distortions of competition.
The affected industries in developed countries have taken steps to remedy their growing competitiveness problem. It has been widely accepted that the best solution to dual pricing practices would be one found at the multilateral level – as part of the World Trade Organisation (WTO)'s agreements or upon new accessions of emerging economies or developing countries to the WTO. However, despite developed industries' and their authorities' efforts, including specific proposals for amendments the Doha round of multi-lateral negotiations remains in a deadlock for several years. New WTO accessions on terms favourable to developed countries have also proven more distant than foreseen and respective concessions from candidate countries for WTO membership – much harder to achieve.
Therefore, the efforts of industries in developed countries, with support from their domestic authorities, have focused on a somewhat easier "temporary" solution – use of trade defence instruments against imports of end products incorporating such low-priced inputs. Certain developed countries, including the US, have started to use more the anti-subsidy instrument against low pricing of inputs. However, in the EU, emphasis has been set on the anti-dumping instrument with use of certain cost adjustments, described below. The authors take a legal view on these approaches, and on that basis argue which instrument is more appropriate from the policy perspective.
Dumping is concerned with the pricing behaviour of exporting producers: it exists when the export price of a product is lower than the normal value of the product. Normal value is the domestic sales price in the country of export/origin, or if such price is not available or cannot be used, normal value is constructed, in most cases with use of the costs of production in the country of origin. As a matter of legal principle, the comparison between export price and normal value must also be fair.
In EU anti-dumping investigations involving imported products with low input costs, the investigating authorities replace the lower cost of production of investigated producers with the higher cost of inputs found in developed country markets, including costs in the EU. This way, the normal value is artificially increased. And since the export price remains unadjusted (that is to say, since it incorporates the actual low cost of the input), after comparison the export price is always lower than the adjusted normal value. In this way, high "dumping" is always found.
The authors observe that the anti-dumping instrument, both in the WTO and EU law contexts was neither intended, nor equipped to deal with dual pricing practices. In the WTO context the negotiating proposals in the Doha negotiations on Rules aimed to remedy dual pricing practices concern only the Agreement on Subsidies and Countervailing Measures and not the Anti-dumping Agreement. In the EU context, in 2005 the European Commission made a proposal for a sui generis trade defence instrument – a balancing mechanism ( COM (2005) 398 final). That proposal clearly implied that the EU anti-dumping instrument was not considered sufficient and appropriate to remedy situations of dual pricing on inputs. However, the latter proposal was ultimately not adopted, and the more recent practice of the EU institutions supports the application of cost adjustments of this type in anti-dumping cases.
There are other legal reasons as well. A fair comparison for dumping purposes must necessarily involve the same manufacturing costs on each side of the comparison of normal value and export price, regardless of whether normal value is based on domestic price or domestic costs. This is true since the end product sold on the domestic market and on export is one and the same product, incorporating the same costs of manufacturing irrespective of its sales destination. In other words, the costs incorporated in the investigated product must not have an impact on the comparison for dumping purposes.
Such cost adjustments in the case of market economy countries are also not justifiable under the specific provisions of the EU's Basic Anti-dumping Regulation. Since normal value is either the actual domestic sales price (Article 2(1) of the Basic Anti-dumping Regulation), or is constructed on the basis of cost of production in the country of origin (Article 2(3) of the Basic Anti-dumping Regulation), the use of a major cost component from another developed country would not satisfy the "cost of production in the country of origin" requirement of Article 2(3).
The approach of the EU institutions – use of costs of inputs in developed countries – appears to be based on an amendment to Article 2(5) of the Basic Anti-dumping Regulation, adopted in 2002. The amended Article 2(5) allows the institutions to adjust costs "which are not reasonably reflected" in the accounting records of the investigated producer, with use of costs from other cost data sources, including, but not limited to, other representative markets.
However, as shown, the EU position fails to reconcile its own interpretation of the amended Article 2(5) and Article 2(3), a provision which has the same text in EU and WTO law. In addition, the amended Article 2(5), consistent with Article 2(3), instructs the institutions to use as a priority costs from other producers in the same country of export/origin. The recourse to costs in other countries under Article 2(5) is settled practice in the case of producers from non-market economy countries enjoying individual ad hoc market economy treatment, which the authors have examined in detail elsewhere (Revue des Affaires Européennes, 2001-2002/7 p. 875-896). Therefore, it is difficult to justify the application of "developed country cost" adjustments under Article 2(5) to producers from market economy countries, without breaching the principle of non-discrimination. This would result in the same treatment of producers from countries in different legal circumstances.
For the natural reason that anti-dumping investigations focus only on the market of the investigated end product, such cost adjustments also raise very serious issues of lack of proper legal and economic analysis of the specific dual pricing practice at hand. Since such practice always concerns inputs incorporated in the imported product, it always occurs in upstream markets to that of the investigated product, which investigating authorities have no legal and practical means to investigate. By way of example, governments may regulate domestic prices for certain natural resources in which they enjoy natural comparative advantages in international trade, based on "cost plus" methods and as means of exercising regulatory oversight over enterprises vested with exclusive rights over such natural resources. Moreover, as noted above, export prices of such inputs to certain developed markets may be unduly high because are affected by tight supply or even distortions of competition, and an anti-dumping investigation of the downstream product would certainly fail to verify this.
Finally, the use of the anti-dumping instrument in the above-mentioned way against subsidised input costs would not be consistent with the provisions of the WTO's Agreement on Subsidies and Countervailing Measures (SCM Agreement), as it appears to neglect the basic legal requirements for the application of the anti-subsidy instrument (please see below).
Both WTO and EU law allow authorities in importing countries to impose countervailing measures (usually in the form of duties) to imported products which have benefited from a countervailable subsidy. According to the SCM Agreement, a subsidy is countervailable if it involves "a financial contribution" from the state or any public body, a measurable "benefit conferred" and is "specific" to certain enterprises or industries. Under current rules subsidies which are generally available in the country of export/origin are not countervailable.
As noted above, dual pricing policies on energy and/or raw material inputs often depend on tax incentives or price controls, which result in a lower domestic price for the input. In such a case, the "financial contribution" on the part of the state or public body would be either the tax measure or the provision of the input to certain industries at the regulated price. The "benefit conferred" would be the difference between the market price of the input and the regulated price, measured in value terms. Finally, the subsidy would be "specific" if the subsidy benefits not all economic operators in the country, but only certain operators or certain industries. If the subsidy targets mainly exporting enterprises, it would also likely be considered as specific.
The use of upward adjustments of low input costs in anti-dumping cases nullifies the above requirements of the SCM Agreement, notably the requirements for measuring the benefit conferred, and the specificity requirement. This is an additional consideration for viewing the anti-dumping instrument as not being a legitimate remedy against dual pricing practices.
Conversely, if a dual pricing practice meets all the above requisites of a countervailable subsidy, exported products which incorporate such subsidised costs can legitimately become subject to the anti-subsidy instrument. The above requirements – financial contribution, benefit conferred and specificity, do not appear to constitute a practical obstacle to affected industries in developed countries. The only exception may occur in cases where the regulated price for the input is available to all economic operators in the country of export, that is to say, where the subsidy is generally available and hence not "specific" or not targeting exports. However, the authors believe that such cases would be very rare in practice. In any event, such subsidies should be addressed by the respective trade remedy to be agreed in the future negotiations in the WTO context. Pending the outcome of such negotiations a temporary solution could be found in the safeguard instrument.
Recourse to the safeguard instrument can help overcoming the difficulty which affected industries in developed countries can meet in cases where dual pricing practices provide subsidies which are not countervailable for the reason that they are generally available.
The safeguard instrument would be available if imports of end products, irrespective of their country source, increase significantly and result in a serious injury, or threat thereof, to the affected industry in the importing country. In that sense, they are measures of last resort. Safeguard measures do not require a fair comparison, and do not involve assessment of specificity or calculation of a benefit conferred. However, they need to be applied to imports from all third countries, except some less competitive developing countries. Safeguard measures can be applied for an initial period of up to four years, extendable up to a total of eight years. The level and the duration of the safeguard measure must be such that the measure provides sufficient relief from increased imports and facilitates adjustment of the affected industry to the new competitive conditions.
A total period of eight years, provided by the safeguard instrument consistent with WTO and EU law, is deemed more than sufficient for a viable industry to prepare for competition with lower-cost competitors, including through improving overall efficiency or relocation of investments in manufacture to countries with lower production costs. However, since the safeguard instrument imposes stricter tests on injury, is applicable to all exporting countries of the investigated product and moreover may give rise to retaliation by the most affected exporting countries, the investigation authorities in the EU rarely impose safeguard measures. Perhaps for the same reasons the EU have so far opted for the anti-dumping instrument as the preferred remedy against dual pricing practices.
The above overview has shown that the EU anti-dumping practice of upward adjustments to low raw material or energy input costs incorporated in investigated products, or the anti-dumping instrument generally is not the appropriate remedy for dual pricing practices involving those inputs. Such anti-dumping practice, notably if applied to market economy countries, raises significant legal issues under EU law and under the WTO Agreement.
The authors suggest that the anti-subsidy instrument is by far the most appropriate remedy for dual pricing practices involving low input prices to exporting industries. This is confirmed by the current Doha negotiating texts on the Agreement on Subsidies and Countervailing Measures. Its disciplines, notably with respect to tax incentives, provision of goods by a government at less than market prices, calculation of benefit conferred and specificity are well suited to investigate most dual pricing schemes benefiting exporting industries in the relevant emerging and developing economies.
Where the anti-subsidy instrument fails to provide a remedy and while another remedy dealing with generally available subsidies is not available under the WTO rules, the safeguard instrument remains available as the last resort to prevent or remedy serious injury to the affected industries in the importing countries.
The current trade defence policies against dual pricing by authorities in developed countries need a fairness check. Fair trade can be sustainable only where any trade remedies are fair, too.