Documents considered by the Committee on 11 January 2017 Contents

2Strengthening trade defence instruments to deal with China Market Economy Status

Committee’s assessment

Politically important

Committee’s decision

Not cleared from scrutiny; further information requested; drawn to the attention of the International Trade Committee, the Business, Energy and Industrial Strategy Committee and the Committee for Exiting the European Union

Document details

Proposal for a Regulation amending Regulation (EU) 2016/1036 on protection against dumped imports and Regulation (EU) 2016/1037 on protection against subsidised imports

Legal base

Article 207(2) TFEU; ordinary legislative procedure/ QMV

Department

International Trade

Document Number

(38310), 14249/16 + ADDs 1–2, COM(16) 721

Summary and Committee’s conclusions

2.1China currently has over 50 EU trade defence measures imposed against it, and is the focus of the most EU trade investigations and measures. However, these only affect between 2 to 5% of total EU trade with China. This proposal comes as a response to the expiry in December 2016, on the fifteenth anniversary of China’s accession to the World Trade Organisation (WTO), of provisions in its Accession Protocol relating to its status as a Non-Market Economy.

2.2The EU has not yet made a determination on China’s Market Economy Status (MES), and China on 12 December 2016 lodged a complaint at the WTO against the EU and USA in this regard. While determination of the complaint is likely to take several years, the efficacy of EU trade defence instruments will be compromised unless relevant regulations are amended.

2.3This proposal introduces a new anti-dumping methodology, applicable to all countries, that aims to ensure that dumping margins reflect all distortions affecting prices and costs in exporters’ home markets. This involves consideration of production costs and prices prevailing in third countries rather than those reported by exporters in the country of export.

2.4The Commission also proposes to act against subsidies identified during the course of an investigation.

2.5The Minister of State for Trade Policy (Lord Price) states in the Government’s Explanatory Memorandum that:

“The UK has pressed the Commission to bring forward a proposal on how the EU should deal with the question of MES for China, including whether this is a legal requirement. The Government wishes for a proposal that meets the EU’s WTO commitments but continues to provide effective protection against unfair trade. The Commission published its proposal and impact assessment on 9 November 2016. We will need to examine the full Commission proposal and impact assessment before we can prepare our own impact assessment.”

2.6We note that on 12 December 2016, following the expiry of section 15 of its WTO Accession Protocol, China lodged a complaint against the EU and US regarding their failure to treat China as a Market Economy. While determination of this matter will undoubtedly take some time, the measures set out in this draft Regulation attempt to address the implications of the expiry of these provisions.

2.7In our recent report on the EU steel industry1 we reminded the Minister of State for Business, Energy and Industrial Strategy (Mr Nick Hurd) that we looked forward to receiving the Government’s analysis of the potential economic, social, legal and political impacts of granting China MES. We repeat that request here. The Government’s Explanatory Memorandum does not appear to take a view on the merits of the proposals in the current Regulation. We look forward to receiving more information setting out the Government position.

2.8The Government has previously told us that it is considering options on the form of trade defence regime it wishes to have on leaving the EU. We think it appropriate to remind the Government that we retain the 2013 draft Regulation on modernising trade defence instruments under scrutiny, and that we have previously requested updates on progress both on those negotiations and on the Government’s analysis of potential post-Brexit trade defence options.

2.9We retain the draft Regulation under scrutiny and draw our observations to the attention of the International Trade Committee, the Business, Energy and Industrial Strategy Committee, and the Committee for Exiting the European Union.

Full details of the documents

Proposal for a Regulation amending Regulation (EU) 2016/1036 on protection against dumped imports from countries not members of the European Union and Regulation (EU) 2016/1037 on protection against subsidised imports from countries not members of the European Union: (38310), 14249/16 + ADDs 1–2, COM(16) 721.

Background

2.10The Commission proposes a series of targeted amendments to two Regulations dealing with protection against dumped imports and subsidised imports from countries not members of the European Union. This is in response to the expiry on 11 December 2016 of provisions in the WTO Accession Protocol of China relating to its status as a Non-Market Economy.

2.11Under the EU’s existing Trade Defence Instruments, it is mandatory to apply an ‘analogue country methodology’ to Non-Market Economies to determine the normal value of a product in anti-dumping and anti-subsidy investigations. This methodology disregards the prices and costs in the country of export, and uses instead prevailing production costs and prices in a market economy at a comparable state of development to the exporting country.

2.12The WTO Protocol contains provisions for the expiry of this provision. Its interpretation is highly contentious, and the EU has not yet made a determination on the granting of MES to China. However, unless changes are made to the current regulations, trade defence measures hitherto taken against China will become less effective, with the steel and chemicals industries particularly vulnerable.

2.13We considered, in our 24th Report, some of the background to this issue.2 On 12 December 2016, China lodged a complaint against the EU and US at the WTO regarding their failure to accord it Market Economy Status.

The Commission’s Proposal

2.14The new methodology, which aims to ensure that dumping margins reflect all distortions and costs in exporters’ home markets, would apply to all members of the World Trade Organisation as well as non-members. Reference to Non-Market Economies, and specific reference to China (and two other named countries) is removed. Following an approach currently used by the US and Canada, it would enable the use of third country comparators rather than the country of supply to assess whether price and cost distortions exist.

2.15The Commission considered three options:

2.16This last option comprises two sub-options. This first deals with market distortions and transition periods in order to ensure the effectiveness of methods already in place. The second deals with the lesser duty rule and the anti-subsidy element.

2.17The Commission’s preferred option is the third option in its entirety. However, its 2013 proposed Regulation on the modernisation of trade defence instruments has until recently failed to make progress,3 due to opposition from a number of Member States, including the UK, on its core proposal to limit the use of the lesser duty rule. The previous Committee therefore held the 2013 draft Regulation under scrutiny, requesting updates to any revisions and to the Government’s position.4

2.18Consequently, the Commission has separated out the proposed adjustments to the lesser duty rule, and presents in this draft Regulation only a new anti-dumping methodology and changes to anti-subsidy legislation.

Amendments to the Basic Anti-Dumping Regulation

Basis of determination of normal value in the presence of market distortions

2.19Normal value is usually determined on the basis of domestic prices of the like product. However, there are circumstances where this would not provide a reasonable basis for determination, such as when where prices and costs are not the result of free market forces but subject to government intervention.

2.20Such a situation could be evidenced by the following:

2.21In such circumstances it would be inappropriate to use domestic prices and costs, and the Commission proposes to determine normal value by looking at undistorted costs of production and sale in “an appropriate representative country with a similar level of economic development as the exporting country”. This would enable the Commission to establish and measure the actual magnitude of dumping being practised in normal market conditions.

Transition to new system

2.22The new system would only apply to cases initiated upon entry into force of the amended provisions. Ongoing anti-dumping investigations at the time of entry into force would remain governed by the existing provisions.

Amendments to the Basic Anti-Subsidy Regulation

2.23The Commission notes that the actual magnitude of subsidisation is not always evident at the time of initiation of an investigation. Exporters under investigation have often been found to benefit from subsidies whose existence could not have been reasonably known before commencing the investigation. The Commission states that it is essential that such subsidies be adequately captured in the final analysis, and an appropriate level of duty imposed.

2.24The proposed amendment provides that when such subsidies are found in the course of an investigation or review, the Commission will offer additional consultations to the country of origin and/or export. Such countries will be provided a summary of the main elements of the newly discovered subsidies, with a view to ensuring productive consultations.

The Government’s Explanatory Memorandum

2.25The Minister of State for Trade Policy notes that the EU currently lists China and 14 other countries as being non-market economies, and deals with them by selecting an analogous country for the calculation of normal values of production and cost in the course of an investigation.

2.26While this proposal does not involve any determination of China’s MES status, the Minister notes that “the UK has pressed the Commission to bring forward a proposal on how the EU should deal with the question of MES for China, including whether this is a legal requirement. The Government wishes for a proposal that meets the EU’s WTO commitments but continues to provide effective protection against unfair trade”.

2.27The Minister further notes that while the Government has not yet prepared a full Impact Assessment, “the proposal is unlikely to have significant costs or benefits to the UK in the short to medium term”.

2.28He adds that the Commission’s Impact Assessment has found that adoption of the new anti-dumping methodology is “unlikely to have a significant impact on the level of duties imposed on China; indeed, the Commission’s aim is to maintain broadly the same level of protection as under the current methodology, while respecting the EU’s WTO commitments”.

2.29In terms of financial implications, the Minister states that “the proposal is expected to lead to a very small decline in EU’s trade defence tariffs”.

Previous Committee Reports

None, but our Twenty-Fourth Report, chapters 1 and 8 (14 December 2016) contains background on trade defence instruments and the China Market Economy Status issue.


1 See (37608), 7195/16: Twenty-fourth Report HC 71-xxii (2016–17), chapter 1 (14 December 2016).

2 See (38180), 13500/16: Twenty-fourth Report HC 71-xxii (2016–17), chapter 8 (14 December 2016).

3 See the negotiating mandate agreed by the Council on 13 December 2016 http://www.consilium.europa.eu/en/press/press-releases/2016/12/13-trade-defence-instruments-general-approach/.

4 See (34838), 8493/13 and (34863), 8495/14: Third Report HC 83-iii (2013–14), chapter 6 (21 May 2013).




13 January 2017