backWe wrote previously on this blog about the European Commissions purported approach to grant China market economy status while maintaining leverage against Chinese producers/ exporters subject to anti-dumping investigations. The approach would remove the formal designation of China as a Non-Market Economy, ignoring the non-expiring provisions of Chinas WTO Protocol, apply current market economy rules on a non-discriminatory basis, and preserve an option to use prices and costs outside China if certain conditions were satisfied.
The leverage the EU would seek to maintain over Chinese producers and exporters is based on a practice where the EU disregards, for example, reported costs of production of producers in respect of products which have distorted or artificially low costs (as a result of State inference, for example), and instead use out-of-country costs as the basis to construct normal values. The normal value is compared to a producers/exporters export price to establish the dumping margin. A higher normal value results, in principle, in a higher dumping margin and, generally speaking, replacing the reported costs of Chinese producers with out-of-country costs would ensure higher normal values.
The EUs practice, however, appears to have been significantly uprooted by the WTO Appellate Body in its decision in EU Biodiesel (DS473), released on October 6, 2016. In the underlying investigation, the EU rejected the reported costs of soybeans for Argentinian biodiesel producers and replaced them with an international reference price because the costs in Argentina were considered distorted by government intervention through an export tax system. The Appellate Body found that there was no legal basis under the WTO rules for the EU to reject the reported costs because they were considered unreasonably low or distorted. According to the Appellate Body, reported costs can be rejected under certain specific circumstances, but the reasonableness of such costs in light of some abstract international reference price or benchmark is not one of them. Moreover, the EU was faulted for simply substituting the costs of soybeans internationally for the cost of production in Argentina. While sources of information from outside Argentina could be used, the Appellate Body found that the EU was required to ensure that such information is adapted to arrive at the cost of production in Argentina. The Appellate Body essentially permitted the use of third country information provided it was apt to or capable of yielding a cost of production in the country of origin.
One open question is whether there may be other circumstances that would enable the EU or any other authority to ignore the obligation to use costs that are based on the records kept by the exporter or producer and instead resort to third country cost data that is adapted to reflect the cost of production in the country of origin. The Appellate Body expressly stated in footnote 120 that it was not examining whether there are other circumstances in which this obligation would not normally apply. The nature and scope of the Appellate Bodys findings, however, suggest that this may be a very narrow set of circumstances.
In sum, the Appellate Bodys ruling appears to deliver a significant blow to the EUs purported approach to grant China market economy status as it raises serious doubts regarding whether market economy WTO rules would support maintaining a level of protection that is equivalent to the level now available when using prices and costs outside China.