UK-China trade relations are making headlines, with China's appetite for future investment in the UK in the balance as the newly-minted British government hesitates over the involvement of Chinese companies in the UK's infrastructure.

The EU also faces a dilemma with respect to EU-China trade relations. Buoyed by a change to the terms of China's World Trade Organization (WTO) accession agreement, China is now mounting pressure on the EU to grant it 'market economy status' (MES) under EU trade defence legislation, an outcome that would leave Chinese exporters less vulnerable to swingeing anti-dumping duties.

From an EU perspective, however, there remain concerns as to how EU industry is to be shielded from unfair competition from Chinese manufacturers in a number of strategically important sectors, such as steel, at a time of excess capacity in China. This capacity may be being 'dumped' into the EU to the detriment of the Community industry.

Accordingly, in this guidance alert, we consider the European Commission's (the "Commission") latest proposals for reform and explain why the treatment of Chinese imports under EU trade defence legislation is (and will continue to be) of significance to British manufacturers.

Market economy status

At the heart of the EU's trade defence policy is the belief that the EU's commitment to open trade with third countries can only be viably maintained if EU industries are protected from unfair trading practices such as 'dumping'[1].

Under EU trade law, the methodology for determining the maximum level of anti-dumping duties that may be imposed is predicated upon whether or not the exporting country holds MES.

Consequently, the status of the exporting country under EU trade law determines the maximum level of protection that may be offered to EU manufacturers. A concern voiced by those opposed to China being granted MES is that the application of the standard methodology to a non-market economy would fail to take account of State-induced distortions in that economy, resulting in artificially low dumping margins and a reduction in the level of legitimate protection that may be afforded to EU industries[2].

Why the change?

China's bid to attain MES in EU trade defence investigations has, to date, been rejected on the basis that it does not yet satisfy all of the EU's predetermined market economy criteria.

Instead, there is a presumption in EU trade defence investigations (rebuttable on a case-by-case basis) that Chinese exporters do not operate within a market economy and that, accordingly, Chinese imports should be assessed using the non-market economy methodology[3].

However, the continued legality of this approach is in doubt. China has fiercely argued that the expiry, on 11 December 2016, of the transitional provision (the "Transitional Provision") in China's WTO accession agreement, which forms the legal basis for the application of the non-market economy methodology to Chinese imports will mean that, as a matter of WTO law, the EU is obliged to apply the market economy methodology to Chinese imports into the EU, thereby effectively granting China MES.

While the validity of this assertion remains the subject of significant debate[4], the Commission appears to have reached the conclusion that the EU is - if not legally, at least politically - obliged to stop applying the non-market economy methodology to Chinese imports. In a speech earlier this year, Cecilia Malmström, the Commissioner for Trade, while recognising that China was "clearly not" a market economy, enumerated the potential consequences of continuing with the status quo:

"Doing nothing would initiate disputes at the WTO and beyond, with unknown outcomes. It will create uncertainty, and uncertainty has costs - at least investment and financial costs. And it may well create new and serious frictions in our bilateral relationship with China, impossible to measure in economic terms.[5]"

Despite this, there remains a strongly-held view across most of Europe that the EU should nevertheless continue to deny China MES. Indeed, in May of this year, the European Parliament adopted a non-binding resolution urging the European Commission to continue applying the non-market economy methodology to Chinese imports unless and until China satisfies the five criteria for MES.

While China's economy has undergone considerable liberalisation in recent years, comments made by Commission officials show that the country is still thought to be a long way from satisfying the EU's market economy criteria[6]. Reducing the level of protection from Chinese dumping afforded to EU manufacturers at a time of deceleration in the Chinese economy and excess capacity in a number of sectors (such as steel) could have disastrous consequences for a number of EU industries.

Finding itself between a rock and a hard place, the Commission's proposals for reform are an attempt to offer continued protection for EU manufacturers without breaching the EU's international obligations and/or starting a potentially harmful trade dispute with China.

The Commission's solution

Following an in-depth assessment of the various options for reform, Commission officials announced the EU executive's preferred reform package. The measures proposed include a number of 'general' improvements designed to make the regime "firmer and faster". These include:

  • reducing the deadline for publishing provisional findings following the publication of the notice of initiation of anti-dumping proceedings from nine months down to seven months; and
  • abolishing the lesser duty rule where significant distortions in the export market are found, thereby allowing for the possibility of higher anti-dumping duties.[7]

Perhaps most significantly, however, the Commission now proposes to introduce a 'one size fits all' methodology for assessing dumping margins. This would see EU trade officials benchmarking export prices against international prices in order to determine whether (and to what extent) dumping has taken place. This comparison would be applied regardless of whether or not the exporting country had MES, rendering the distinction meaningless.

The Commission believes that this solution complies with the EU's international obligations and will also continue to protect EU manufacturers from unfair trading practices. Announcing the proposals, the Commission Vice President, Jyrki Katainen, commented that the change "will result in anti-dumping duties that are very similar to what we have now."

This proposal is unlikely to be popular with China - an article in Xinhua, a Chinese State-owned newspaper has suggested that "the only difference between the old and new methodologies will be in scope and name[8]." Of course, if China feels it is being cheated by the EU, it could retaliate in precisely the manner the Commission is seeking to avoid.

The next stage in the process will be for the Commission to table its formal legislative proposals. A number of EU Member States, particularly in Southern Europe, could resist the suggested reform on the basis that the Commission's proposals do not go far enough to protect EU industry. As the UK - which has historically been one of the most liberal-minded EU Member States in terms of trade - inevitably sees its influence within the EU wane, countries such as Spain may be bolstered in their resolve[9].

Why these developments matter (and will continue to matter) to Britain

China's status in future EU trade defence investigations is likely to be resolved long before Britain actually leaves the EU. How the EU decides to interpret its future obligations towards China will, at least in the short to medium term, directly dictate the extent to which British manufacturers can be protected from Chinese imports within the EU.

While the devil will be in the detail, Mr. Katainen's reassurances will be a relief for those manufacturers whose businesses are vulnerable to cheap Chinese imports and who may have feared that any change would be likely to lead to a reduction in the level of protection available.

How the EU now adapts its trade defence regime (and China's reaction to any reform) is also likely to play an influential role in Britain's longer-term trading relations with both China and the EU (i.e. post-Brexit).

The British government has traditionally taken a far more liberal stance towards Chinese imports than its EU counterparts and favours resolving the current dilemma by simply granting China MES. Assuming that the British government decides to implement an independent trade defence regime post-Brexit, it could be tempted to follow Australia's lead in granting China MES in part-exchange for what is likely to be a politically desirable free trade agreement with China[10].

By adopting a markedly more liberal approach towards Chinese imports than the treatment eventually decided upon by the EU, the UK government would effectively be assisting those British companies which purchase raw materials and/or components and compete closely with other European rivals, allowing them to reduce relative purchasing costs (subject to rules of origin and the potential application of EU trade defence measures to British companies in a post-Brexit world).

Conversely, those companies which compete directly with Chinese imports would be placed under greater strain than their EU-based competitors. The huge losses incurred by Tata Steel at its Port Talbot plant have highlighted the pressure under which a number of these companies who operate in the global market already are under.

Footnotes

[1] http://ec.europa.eu/trade/policy/accessing-markets/trade-defence/index_en.htm
[2] See: DG Trade's Inception Impact Assessment considering "possible change in the methodology to establish dumping in trade defence investigations concerning the People's Republic of China".
[3] Where an individual Chinese manufacturer can rebut this presumption, Article 2(7)(b) of the Anti-dumping Regulation provides for the possibility of individual Chinese manufacturers being granted market economy treatment (MET), i.e. having their 'normal value assessed in accordance with the rules applicable to market economy countries'.
[4] For useful background on the different positions adopted see the report prepared by the European Parliamentary Research Service entitled: "Granting Market Economy Status to China: An analysis of WTO law and of selected WTO members' policy", November 2015, pages 6 and 7.
[5] Speech by Cecilia Malmström, "Trade Defence and China: Taking a careful decision", 17 March 2016.
[6] See e.g. the comments made by Cecilia Malmström in the speech cited above; and the comments made by DG Trade in its Inception Impact Assessment
[7] Pursuant to the so-called 'lesser duty rule', the level of duty imposed must be the lower of: the duty considered sufficient to remove the injury caused by the dumping to the relevant EU industry; and the difference between the exporter's normal value and export price, known as the 'dumping margin'.
[8] http://news.xinhuanet.com/english/2016-07/21/c_135529965.htm
[9] For background on a number EU Member States' respective positions in response to China's calls for reform see: http://www.ft.com/cms/s/0/9412fe0a-4dca-11e6-8172-e39ecd3b86fc.html (subscription required).
[10] "Granting Market Economy Status to China: An analysis of WTO law and of selected WTO members' policy", November 2015, page 1.