Recent EC Anti-Dumping Practice Towards China and Vietnam: The Great Leap Backward?

01 June 2006

Edwin Vermulst & Folkert Graafsma, Vermulst Verhaeghe & Graafsma

These massive rejections of over 250 requests de facto re-qualified China and Vietnam as non-market economies. The denials came in the wake of a series of earlier proceedings in 2004 and 2005 in which the threshold for obtaining MET had already been raised. This article briefly reviews some of the recent developments of EC anti-dumping practice towards China and Vietnam since the introduction of the MET provision in 1998. 

Non-Market Economies and The Basics of Met and IT 

History 

In an EC anti-dumping investigation targeting non-market economies, the normal value is generally determined on the basis of prices or constructed values in a market-economy third country (‘analogue country’). Until 1998, China and Vietnam were routinely identified as non-market economies (NMEs). In 1998, the commission changed the Basic Anti-Dumping Regulation in such a way that China and Vietnam were no longer automatically considered non-market economies. This policy change responded to claims by the Chinese and Vietnamese governments that, following the changes in economic conditions in their respective countries, they should no longer be characterised as non-market economies. However, in addition to de-qualifying China and Vietnam as NMEs, the amendment specified conditions that must be fulfilled in order for a company to qualify for market economy treatment. 

In an MET determination, the EC will assess whether companies are operating  in accordance with market principles in a number of areas (such as absence of state influence, use of proper accounting methods, prices linked to the privatisation process, land use and sourcing of raw materials). Where a company does not satisfy these MET conditions, the regular rules on non-market economies will apply, unless the company can still prove, to the satisfaction of the commission, that it qualifies for ‘individual treatment’ (IT) per the conditions set forth in article 9(5) of the Basic Anti-Dumping Regulation. In an IT determination, the commission will base the normal value on the analogue country’s prices or costs, but will use the individual export prices of the company to determine the dumping margin. A company in China or Vietnam can therefore, since 1998, be qualified in one of three categories: MET, IT, or NME. 

Market Economy Treatment (MET) 

Companies that can successfully prove that they operate under market conditions qualify for MET. If they meet the statutorily mandated conditions, their normal values, export prices and dumping margins will be calculated individually on the basis of their own prices and production costs. 

The Legal Conditions of MET 

The five cumulative legal conditions to qualify for MET are set forth in article 2(7)(c) of the basic Regulation: “2(7)(c) A claim under subparagraph (b) must be made in writing and contain sufficient evidence that the producer operates under market economy conditions, that is if: 

• decisions of firms regarding prices, costs and inputs, including for instance raw materials, cost of technology and labour, output, sales and investment, are made in response to market signals reflecting supply and demand, and without significant State interference in this regard, and costs of major inputs substantially reflect market values; 

• firms have one clear set of basic accounting records which are independently audited in line with international accounting standards and are applied for all purposes; 

• the production costs and financial situation of firms are not subject to significant distortions carried over from the former non-market economy system, in particular in relation to depreciation of assets, other write-offs, barter trade and payment via compensation of debts; 

• the firms concerned are subject to bankruptcy and property laws which guarantee legal certainty and stability for the operation of firms; and 

• exchange rate conversions are carried out at the market rate.” 

A determination whether the producer meets these conditions for MET must be made within three months of the initiation of the investigation, after specific consultation of the Advisory Committee and after the Community industry has been given an opportunity to comment. This determination remains in force throughout the investigation. 

These five conditions appear straightforward. Having said that, EC case handlers have broad administrative discretion to interpret whether a company meets each of the conditions, particularly with respect to the first three. Moreover, since the burden of proof is on the company, and because the deadline to return the MET claim form is prohibitively short (varying between 15 and 21 days), the high threshold can sometimes not be met, simply due to logistical problems and time constraints. In fact, MET claim forms increasingly resemble mini-versions of a full questionnaire and it is questionable why the statutory 37 days minimum deadline for filing a full questionnaire response, stipulated in the WTO Anti-Dumping Agreement, does not apply. 

The MET Verification 

Companies that file an MET claim form may, in many cases, be subjected to a specific and separate ‘MET verification’. If such MET verification is indeed separately conducted, it is typically done very early in the investigation phase (within two to eight weeks after the filing of the MET claim form). If no separate MET verification is conducted, then the MET verification might either be combined with the regular verification visit or, in the case of a nonsampled producer, the commission may conduct a ‘desk-check’ analysis. 

In the authors’ experience, the double verification system, ie, separate verifications of the MET claim and the regular questionnaire response, is unduly burdensome for both respondents and commission officials. On the other hand, a combined MET and regular verification visit often distracts both respondents as well as commission officials from being able to properly focus on the exact purpose of the investigation. 

On the whole, a combined visit puts less strain on the – often limited – resources of a respondent. In order to minimise the problems resulting from this combined approach, it seems preferable that the commission conducts a more thorough deskcheck analysis in advance of the verification visit. This would keep any MET aspects of a verification visit to a bare minimum (ie, expand the verification aspect and reduce the fact-finding aspect), while allowing the company more opportunity to prove the accuracy of its regular questionnaire response and enabling commission officials to better focus on what they want to verify. 

The MET Determination and MET Disclosure 

In a typical MET disclosure document, all MET conditions will be addressed, regardless of whether they have been fulfilled. Indeed, it is generally not difficult to understand on what basis MET has been denied. The problem is more often in the substance of the decision and, as noted, problems often arise with the first three criteria. 

The first criterion, inter alia, deals with the question of whether ‘significant state interference’ is present in a company. In practice, this is often interpreted as whether there is (partial) state ownership. If this ownership exceeds 50 per cent, then state interference is assumed and MET will automatically be rejected. But in situations where the state owns less than 50 per cent, but more than 10 per cent, the tendency has been to still assume state interference. Needless to say, in the EC there are also a large number of companies that are wholly or partially state-owned. Yet for such companies located in the EC, neither is state interference assumed, nor do claimants need to prove the absence thereof. 

The second criterion concerns the condition of possessing accounting records that are audited in line with international accounting standards. In practice, this requirement is more often than not interpreted in such a way that audited accounts of companies must be in full compliance with international accounting standards (IAS). Obviously, the question of whether accounts are audited in line with, or are in full compliance with, IAS is a completely different standard of appraisal. This tough standard leads, for example, to situations where, if accounts are indeed correctly audited in line with IAS, but auditors point to a problem that should be rectified in the future, and companies have not yet undertaken sufficient steps to rectify such a problem, the second criterion may not be considered fulfilled. In fact, this second MET criterion can always be used as a ‘trump card’ by the commission if it really wants to reject MET: full compliance with Chinese GAAP tends to imply noncompliance with certain IAS criteria. The Commission Services recognise, however, that over the years Chinese GAAP has come much closer to IAS, so that the remaining differences are minor. Hence, a rejection simply because of non-compliance with IAS as a result of conformity with Chinese GAAP is becoming rarer. 

The third MET criterion concerns the transition from the “former non-market economy system” and contains a margin of discretion concerning whether, for example, assets are properly valued, land is leased at a ‘fair’ price, etc. While efforts seem to have been put in place to ‘standardise’ these yardsticks, the non-publication of the existing and most upto- date benchmarks in place is regrettable. 

After the on-the-spot verification and subsequent analysis in Brussels, the MET disclosure will be issued. Although technically this determination should be made within three months from initiation, this deadline is gradually becoming a dead letter. In fact, the commission itself also considers this a ‘soft’ deadline. As a result, MET determinations and disclosures are often not released until after seven months or, in cases of combined MET or full verifications, as long as nine months (together with the general disclosure document) after initiation. 

If MET is rejected, it is almost impossible to reverse the determination. Technically, an ‘appeal’ through disclosure comments is possible, but in the large majority of cases these appeals will be dismissed outright. This is not surprising since the persons in charge of the appeal are normally the ones that took the decision to reject the request for MET in the first place. In addition, although a court challenge after imposition of definitive anti-dumping measures is possible, it could take over three years for the Court of First Instance to make a decision, and by the time of further appeal, the anti-dumping measures may even have expired. It would therefore be appropriate to create a specific, independent tribunal for the purpose of a prompt review of any such administrative actions and determinations in the context of an antidumping proceeding, including (especially) the MET determination. Setting up a special tribunal (or ‘judicial panel’) such as this could easily be done under the umbrella of article 225a, which was inserted into the EC Treaty through the Treaty of Nice. In this manner, compliance with article 13 of the WTO Anti-Dumping Agreement could be assured. 

Individual Treatment (IT) 

If a company does not qualify for MET, its normal value will be determined on the basis of article 2(7)(a) – ie, on the basis of the prices or costs in an analogue country. Secondly, per article 9(5), its export prices will then in principle be lumped together with those of other companies. This will generally result in uniform, countrywide, anti-dumping duties on Chinese and Vietnamese products. 

There is, however, one important exception to this ‘one country, one duty’ rule. Where companies can prove that they qualify for individual treatment per the conditions stipulated in article 9(5), they can get an individual duty separate from the countrywide duty. Article 9(5) was introduced in 1996 and states that:

“An anti-dumping duty shall be imposed in the appropriate amounts in each case, on a non-discriminatory basis on imports of a product from all sources found to be dumped and causing injury, except as to imports from those sources from which undertakings under the terms of this Regulation have been accepted. The Regulation imposing the duty shall specify the duty for each supplier or, if that is impracticable, and in general where article 2(7)(a) applies, the supplying country concerned.” 

Where article 2(7)(a) applies, an individual duty shall, however, be specified for the exporters which can demonstrate, on the basis of properly substantiated claims that: 

• “in the case of wholly or partly foreignowned firms or joint ventures, exporters are free to repatriate capital and profits; 

• export prices and quantities, and conditions and terms of sale are freely determined; 

• the majority of the shares belong to private persons. State officials appearing on the board of directors or holding key management positions shall either be in a minority or it must be demonstrated that the company is nonetheless sufficiently independent from state interference; 

• exchange rate conversions are carried out at the market rate; and 

• state interference is not such as to permit circumvention of measures if individual exporters are given different rates of duty.” 

The criteria to qualify for IT are therefore less stringent than those for MET: in most situations where an MET claim fails only on one criterion, a company would often still qualify for IT. Such a company will then still receive an individual margin separate from the countrywide duty. 

Selected Issues Pertaining To Market Economy Treatment and Individual Treatment 

There are two further issues that frequently surface in MET investigations targeting China and Vietnam: cost adjustments and sampling. 

Cost adjustments to normal value 

In the past, requests for adjustments based on the comparative advantage of the NME with regard to the surrogate country were routinely rejected; from July 1998, the commission was expected to take a more lenient approach. Indeed, the commission stated in its Communication on the Treatment of China and Russia that, where exporters of these countries would meet the requirements for the granting of MET, the normal value would “accurately reflect the real conditions of production and sale in […] China.” 

Yet despite this stated declaration, even in cases where MET is granted, costs may still be adjusted at the discretion of the case handlers, in accordance with the second subparagraph of article 2(5): 

“If costs associated with the production and sale of the product under investigation are not reasonably reflected in the records of the party concerned, they shall be adjusted or established on the basis of the costs of other producers or exporters in the same country or, where such information is not available or cannot be used, on any other reasonable basis, including information from other representative markets.” 

Unfortunately, in recent years, recourse has increasingly been made to this provision, thereby partially nullifying some of the comparative advantages that MET exporters enjoy. It is submitted that use of this provision takes back with the left hand what was given with the right. If companies are more competitive because of their natural comparative advantage, and they do qualify for MET, then this should not be undone by de facto adjusting the MET costs to, effectively, the level of an analogue country. 

Sampling and desk-check analysis 

In the case of China and Vietnam, one practical challenge for the commission is often that a large number of respondents may need to be investigated for which it does not have resources. Accordingly, in such situations the commission resorts to sampling techniques. This has peculiar consequences. Although companies selected in the sample may obtain MET, IT, or the countrywide rate, the companies not selected in the sample do not get investigated. Their status (MET, IT or NME) may therefore be unknown. To remedy this latter problem, the commission has introduced the system of desk-check analysis. If a desk-check system is used, companies outside the sample will be checked in detail on the merits of their application, but will not be investigated on the spot. These non-selected companies will then, in due course, be provided with an individual disclosure document divulging their status and the weighted average duty of each status group of companies (MET, IT or NME). Each of the three groups of nonsampled companies will therefore usually have its own, separate rate. 

For example, regarding Certain Finished Polyester Filament Apparel Fabrics from China, 49 exporters requested MET, and every single such application was analysed by the commission. For the eight MET claimants selected in the sample, the information submitted in the MET claim was verified on the spot. For the MET claimants not included in the sample, a detailed desk analysis of all information submitted was carried out, and an extensive exchange of correspondence took place in case elements of the submissions were either unclear or missing. In the end, 22 of the MET claimants not selected in the sample were granted MET. In addition, 14 exporters not selected in the sample qualified for IT. The remaining companies received the NME rate. All MET and IT applicants received a companyspecific disclosure explaining why their MET or IT claim was rejected or accepted. 

Likewise, in Castings from China, 21 exporters requested MET and three exporters claimed IT. A sample of seven MET claimants was selected for which on-the-spot verifications were carried out, while the MET and IT claims of companies omitted from the sample underwent a detailed desk analysis. Of the 14 MET claimants that underwent a desk check, four were eventually granted MET and two were given IT. All MET and IT claims were thus examined and the applicants were given company-specific disclosures. 

In stark contrast to this consistent practice of the commission, no MET disclosures for non-sampled producers were issued in the Leather Uppers and Safety Shoes proceedings. Moreover, no desk check was conducted into whether the non-sampled MET applicants fulfilled the criteria as set out in article 2(7)(c) of the basic Regulation. In both these footwear cases the commission did not provide any justification for its failure to examine the MET or IT claims of the non-sampled companies. This trend is alarming since it effectively negates nonsampled companies’ statutory rights to file a market economy claim form as per articles 2(7)(b) and 2(7)(c). 

Recent Practice and Conclusions 

During the first few years of MET, the EC gradually became more liberal in granting requests for MET. This can be seen in cases such as Pocket Lighters and Zinc Oxides where in the case of China, respectively, six out of eight and three out of five Chinese companies qualified for MET; in the case of Vietnam (for Pocket Lighters) two out of four companies qualified for MET. But in recent years, the pendulum has swung back to a stricter approach, as witnessed in cases such as Bicycles, Bricks, Castings, Fabrics, Handtrucks, and TCCA, where at most, a handful of companies out of a large number of applicants were finally granted MET. This increasingly protectionist practice recently culminated in the landmark cases Leather Shoes and Safety shoes, where none of the sampled producers were granted MET, and where non-sampled companies were not even subjected to a desk check. 

It seems, therefore, that we are back in the pre-1998 days. With China and Vietnam becoming increasingly competitive and major European economies remaining stagnant, this creeping protectionism is expected to continue in the short term; in the longer term, however, this trend is untenable. Sooner rather than later the EC will no longer be able to deny reality – that China and Vietnam are vibrant market economies and that these countries as a whole should be recognised as true market economies. In this latter context, it may be noted that although the Chinese Protocol of Accession to the WTO technically provides for a 15-year transition period for such recognition, currently over 50 countries have already accepted this as a reality. 

Until the EC also accepts this, a dire need to fix some recurring practical problems will persist. Some of the most pressing problems have been identified above, and can be summarised as follows: 

• In light of the increasing complexity of the MET claim forms, respondents should be granted a normal deadline of 37 days, as is the case for regular questionnaire responses. This would also ensure compliance with Article 6.1.1 of the WTO Anti-Dumping Agreement. 

• The inconsistent practice of the number of verification visits per company should be harmonised and improved. A combined verification visit seems preferable and should suffice as long as it is preceded by a detailed, advance deskcheck analysis. 

• The benchmark for what exactly constitutes ‘state interference’, as well as the actual meaning of ‘audited in line with International Accounting Standards’ should be clarified in detail, thereby reducing administrative discretion. More consistent standards for the third criterion should also be developed. 

• The recourse to cost adjustments under article 2(5) should be curtailed. 

• Companies should not be deprived of their statutory right to file a market economy claim form due to a lack of resources of the Commission Services. A regular desk check should always be conducted, regardless of the number of exporting producers. 

• And finally, a specific, independent tribunal should be set up, for the purpose of conducting a prompt review of any administrative actions and determinations in the context of EC anti-dumping proceedings, including the MET determination. The setting up of such judicial panel is simple, as per the procedure of the aforecited article 225a of the EC Treaty, and could also ensure compliance with article 13 of the WTO Anti-Dumping Agreement.

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