What Are Trade Defence Instruments?

In the real world of international trade, governments get involved in supporting their own domestic industries. Trade defence instruments (“TDIs”) are mechanisms, allowed by WTO rules, that WTO members can deploy to defend their own industries against “unfair” foreign competition. There are two types of TDIs: “countervailing measures”, which are additional duties designed to deal with goods that have been subsidised by exporting country governments, and “anti-dumping duties” to deal with dumping.

These measures can be very significant. The recent proposed action by the United States concerning alleged Canadian subsidies for the aircraft manufacturer Bombardier attracted a lot of press coverage, and if confirmed will have major implications for Bombardier’s business, including its plant in Northern Ireland. On this side of the Atlantic, the EU had 98 TDIs in place in 2015: and duties imposed by those measures can be very high (the EU has recently imposed duties at rates over 64%). The US has gone far above this level and imposed an anti-dumping duty of 265.79 % on a certain type of steel.

The UK Government, in its White Paper on the UK’s future trade policy, published on 9 October 2017, made it clear that the United Kingdom will, after Brexit, have systems in place to impose TDIs: a further post will consider what the White Paper has to say on that.

Anti-dumping duties

At WTO level, the Anti-Dumping Agreement (WTO Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994) regulates the concept of dumping and the steps WTO members are permitted to take to deal with it. In the EU, Regulation 1036/2016 sets out the legal framework.

The concept of “dumping” comes from the US, where anti-dumping legislation dates from the early part of the 20th century. A product is said to have been “dumped” if its “export price” to the importing country is less than its “normal value”.

For those who know some competition law, it bears some relationship to the concept of predatory pricing (pricing by a company in a dominant position at below cost, with the aim of excluding a competitor from the market). But it does not involve any claim that the perpetrator is “dominant” or has market power. Rather, the intuition is that exporting states may offer their industries guaranteed domestic markets, insulated from competition by high tariff or non-tariff barriers.

Those industries could, the argument goes, use those profits to fund loss-making exports (i.e. a “cross-subsidy”): and if they do so those loss-making exports will damage the domestic industry of the importing country, which will be unable to compete with those artificially low prices. The extent to which dumping is in fact a significant economic issue is highly debatable: but all significant WTO members make use of the concept.

Countries impose duties on dumping, in order to remove the “dumping margin”. This is calculated by comparing the difference between the “export price” of a good and its “normal value”. The really difficult issue is how to determine the “normal value”. One might assume that the domestic price in the exporting country was the “normal value” – and that is, indeed, the case if there are normal market conditions in that country. But there may be few such sales, or domestic sales may be between associated companies or distorted in various other ways. One possibility in such circumstances may be to look at prices in other countries to which the exports at issue are made: but, again, there may be no clear third country comparator. In that case, a “normal value” has to be constructed by adding together production costs, a reasonable amount for general overheads, and a reasonable profit.

Needless to say, there is room for considerable dispute, involving accounting and economic evidence, as to what those costs are. The importing country authorities will often need to seek a considerable volume of data from the exporters, even though (because they are outside their jurisdiction) it can be hard to force those exporters to provide it. In the EU, those difficulties are dealt with to some extent by allowing the authorities to make assumptions if reliable information is not provided.

Even once the “normal value” has been settled, there are issues with comparing it to the actual export price. This is because exporting is generally more expensive than supplying the home market (think of factors such as transport, customs formalities, credit, packing, and assistance with technical standards). These costs have to be taken into account.

Once all of this has been taken into account, a “dumping margin” can be calculated and a duty imposed so as to eliminate that margin.

China and “market economy status”

China poses particular problems in this context. When it acceded to the WTO, members took account of China’s economic system at the time by providing in the accession agreement that, for 15 years after its accession in 2001, importing countries would be allowed to base their calculation of “normal value” not on Chinese prices and costs but on a constructed methodology, unless the Chinese exporters could show that market economy conditions obtained in that sector in China.

After 15 years that rule expired – and the expiry of that rule is sometimes referred to as China obtaining “market economy status”. However, in practice the expiry of the 15-year rule has not meant much change so far. That is because the expiry of the 15-year rule simply means that the general rules apply: and those general rules allow departure from a domestic price and costs model in appropriate circumstances. The EU Commission’s response to the end of the 15-year special rule for China has therefore been to announce, in effect, that it will rely more heavily on the general rules: its proposal (agreed last week by the EU Council) is for a

new methodology [in the EU anti-dumping Regulation] that will be country-neutral. It will apply the same way to all WTO members and will take into account significant distortions in certain countries, due to state influence in the economy” stating that “in determining distortions, several criteria will be considered, such as state policies and influence, the widespread presence of state-owned enterprises, discrimination in favour of domestic companies and the independence of the financial sector.”

Whether this proposal is WTO-compliant is in dispute.

Countervailing measures

Countervailing measures (“CVMs”) deal with government subsidies. The EU regime is set out in Regulation 1037/2016. Under the WTO Subsidies and Countervailing Measures Agreement, a subsidy is defined as a financial contribution (or income or price support) that confers a benefit: “financial contribution” here includes not just grants but also loans and equity investment provided on favourable terms, as well as tax credits or provision of discounted goods or services. It does not matter if the contribution is made by central or local government, or even whether it comes directly from the state (a direction by the state to one private company to pay money to an exporter is caught by the rules).

However, a WTO member can impose countervailing measures only if the subsidy is

  • “prohibited”: when the subsidy is given in return for export performance (for example, a grant that depends on a certain volume of exports being achieved) or use of domestic over imported goods, or
  • “actionable”: when the subsidy is specific to a company, industry, set of industries, or regions.

The effect of these rules is that WTO members cannot impose CVMs in relation to measures such as a generally low rate of corporation tax in the exporting country – but could do so in response, for example, to a low rate of corporation tax confined to a particular region or sector. Finally, CVMs can be imposed only if the subsidy causes injury to the industry of the importing country.

The amount of duty imposed has to be based on the amount of the subsidy. Again, the calculations of the value of the subsidy are beset with difficult accounting and economic issues, as well as the difficulty in obtaining evidence. And assessment of whether the industry of the importing country has suffered injury is also complex, as it involves assessing what would have happened in terms of prices on the affected market if the subsidy had not been granted.

Circumventing TDIs

One obvious response of a company facing TDIs is to ship its goods to a third country, slap the equivalent of a new coat of paint on them, and then export them from that country. To stop that, anti-circumvention measures may be taken. As often the case with anti-avoidance provisions, these can be extremely complicated.

What can a domestic producer do if it thinks it is affected by a subsidy or by dumping?

The decision whether to impose anti-dumping duties or CVMs is for the government concerned. So it is up to the domestic producer to try to persuade its government to take action.

There may well be a number of reasons why a government will not want to impose anti-dumping duties or CVMs even if it has a good legal basis for doing so. After all, purchasers in the importing countries (which may include domestic industry as well as consumers) may well benefit from the low price of the exported goods, even if the goods are “dumped” or those prices are subsidised. So, as is so often the case in trade matters, the decision to impose CVMs or anti-dumping duties typically involves complex trade-offs between clashing domestic interests.

Indeed, the relevant EU rules provide that CMS or anti-dumping duties may not be applied where it is not in the “Union interest” to do so. Thus, Article 21 of Regulation 1036/2016 (Article 31 is the equivalent provision in the Regulation dealing with CVMs) requires that the Union interest must be “based on an appreciation of all the various interests taken as a whole, including the interests of the domestic industry and users and consumers.”

However, that Article also requires that “special consideration” be given to the “need to eliminate the trade distorting effects of injurious dumping and to restore effective competition”. It also requires a clear conclusion that the imposition of duty is not in the Union interest before a decision can be taken not to impose duty. That all means that the default position is that if dumping is found, duty will be imposed. Further, it is unclear whether it is legitimate for the EU authorities to take into account wider trade-related or political considerations.

The US goes even further – its complex procedures make no provision for a “public interest” override, so that if a complainant (such as Boeing in the Bombardier case) can show that dumping is occurring, the US authorities have to impose anti-dumping duty.

In both cases, however, cynics may note that the complexity and imprecision of much of the analysis required in a TDI case inevitably gives the authorities in practice considerable “wriggle room” to avoid politically inconvenient findings.

What can an exporter do if it finds itself at the wrong end of a TDI?

There are two main courses of action open to it (which can both be taken at the same time).

One is to seek to challenge the decision in the courts of the state imposing the measures. In the EU, that is done by applying to the General Court of the EU for an order annulling the measure on the basis of error of law (which would include procedural errors) or manifest error of fact. The losing party can then appeal to the Court of Justice of the EU.

The other is to persuade its own government to invoke the WTO’s own dispute resolution mechanisms, but that involves persuading that government to take action, a decision that will always be “political”. Further, the WTO mechanism takes time and offers no right to damages or repayment for the companies affected.

Conclusion

TDIs are a critical element of a modern trade policy. They remain deeply controversial (indeed, many experts in the field are very sceptical of the rationale for anti-dumping rules, as well as critical of the somewhat very rough-and-ready methodologies sometimes employed). But there is a broad consensus, shared by the UK Government, that whatever its role as a “global champion of free trade”, the United Kingdom will need to establish a robust mechanism for implementing them post-Brexit. The issues involved in setting up a UK system of TDIs will be discussed in a separate post on this blog.

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We welcome suggestions for further reading on the subject.

George Peretz QC

@GeorgePeretzQC

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