Documents considered by the Committee on 28 March 2018 Contents

7EU Trade Defence Instruments

Committee’s assessment

Politically important

Committee’s decision

Cleared from scrutiny; further information requested; drawn to the attention of the International Trade Committee and the Committee on Exiting the European Union

Document details

(a) Communication on Modernisation of Trade Defence Instruments: Adapting Trade Defence Instruments to the current needs of the European Economy; (b) Proposal for a Regulation amending Council Regulation (EC) No 1225/2009 on protection against dumped imports from countries not members of the European Community and Council Regulation (EC) No 597/2009 on protection against subsidised imports from countries not members of the European Community79

Legal base

(a) — ;

(b) Article 207 TFEU; ordinary legislative procedure; QMV

Department

International Trade

Document Numbers

(a) (34838), 8493/13, COM(13) 191; (b) (34863), 8495/13 + ADDs 1–2, COM(13) 192

Summary and Committee’s conclusions79

7.1In 2013 the Commission presented legislative changes to EU trade defence instruments, aimed at tackling unfair trading practices from countries such as China and Russia. The draft Regulation is a highly technical but politically important proposal that has direct read-across to issues such as ‘dumping’80 from China and the UK/EU steel crises.

7.2The proposal faced political stalemate in the Council for nearly three years, largely due to a blocking minority of Member States (including the UK) opposing the proposed changes to the lesser duty rule,81 which limits the level of duties the EU can apply to ‘dumped’ or subsidised imports. However, following pressure to respond more effectively to unfair trading practices, such as steel dumping from China, the Council adopted a General Approach in December 2016. Key proposed changes include the ability to impose higher antidumping duties in cases of raw material distortions and the shortening of the investigation period for antidumping cases to a maximum of eight months. Following trilogue agreement on an acceptable text, the proposal is expected to move to a Council vote in April 2018.

7.3The Minister of State for Trade Policy (Greg Hands) informs the Committee that the Government intends to vote against the proposal in the Council, and sets outs the Government’s assessment of the proposed changes to EU trade defence legislation for the UK. The Government’s view is that the current lesser duty rule has proved effective in tackling unfair trade and that it adequately compensates EU producers for the injury caused by this unfair trade, without imposing disproportionate costs on other parts of the supply chain or on consumers. The Minister also updates the Committee on the implications of the proposal in the context of Brexit, stating that the future UK trade remedies system will diverge from the new EU trade remedies regime as the UK “will continue to apply the lesser duty rule in the same way the Commission has applied it for some 50 years”.

7.4The policy framework and enforcement of trade defence measures to protect the UK from unfair trading practices (such as steel dumping)—both whilst a member of the EU and after exit—is of significant political and public interest, as changes to the way duties are calculated and imposed will directly impact UK production, jobs and growth.

7.5We are content to clear the 2013 Communication—a non-legislative document—from scrutiny, noting that the more recent overarching Communication on strengthening trade defence legislation (which effectively updated the Commission’s intended approach to many of the issues raised in the 2013 Communication), was cleared by the Committee in December 2016.82

7.6Further to the Minister’s recent correspondence setting out the Government’s analysis of the draft Regulation’s impact on the UK and its reasons for objecting to the proposal, we now clear this draft Regulation from scrutiny. However, we:

a)consider that Government engagement on this issue has been very light-touch. Despite previous Committees having reminded the Government of the importance of keeping the Committee updated on any revisions to that Regulation and the Government’s position on it (in particular on the application of the lesser duty rule), the last substantive update was provided in February 2015. The Government did not provide detailed updates of the Government’s position at key stages in the negotiation process, notably ahead of the Council agreeing a General Approach in December 2016 and trilogue discussions concluding in December 2017. The Minister’s recent analysis, whilst helpful, has been shared at the end of the negotiation process, just weeks before the proposal’s expected adoption by the Council in April;

b)ask the Minister to inform the Committee of the outcome on this important dossier;

c)ask the Minister to provide the Committee with a detailed update on the work that the Government is undertaking on the UK’s future trade remedies regime after the UK exits the EU. In particular:

7.7We draw our conclusions to the attention of the Committee on Exiting the EU and the International Trade Committee, which will no doubt wish to analyse the Government’s responses to the questions outlined above and its developing plans on trade remedies.

Full details of the documents

(a) Communication on Modernisation of Trade Defence Instruments: Adapting Trade Defence Instruments to the current needs of the European Economy: (34838), 8493/13, COM(13) 191; (b) Proposal for a Regulation amending Council Regulation (EC) No 1225/2009 on protection against dumped imports from countries not members of the European Community and Council Regulation (EC) No 597/2009 on protection against subsidised imports from countries not members of the European Community: (34863), 8495/13 + ADDs 1–2, COM(13) 192

Background

State of play on the proposal to modernise trade defence instruments

7.8In April 2013, the Commission presented a proposal to modernise EU trade defence instruments (anti-dumping and anti-subsidy measures to tackle unfair trading practices) as it considered that, in its present shape, EU legislation on trade defence instruments could no longer adequately address current challenges such as external overcapacity or dumping.

7.9The previous Committee’s Report, listed at the end of this chapter, provides details of the draft Regulation and related background.

7.10The draft Regulation includes a proposal to disapply the lesser duty rule in certain cases where there are raw material distortions. Derogations from this rule under specific circumstances would allow the EU to impose higher antidumping duties on imports from third countries.

7.11The Government had previously noted that several Member States, including the UK, opposed the proposed changes to the lesser duty rule, in the absence of compelling evidence from the Commission to the contrary.

7.12However, the balance of opinion shifted in late 2016. At the European Council of October 2016, EU leaders “committed to reaching an agreement on the modernisation of all trade defence instruments by the end of 2016, and … tasked trade ministers with breaking the stalemate on the remaining issues”. In December 2016, the Council agreed a General Approach (mandate to engage in trilogues).

7.13The reform of EU trade defence instruments is not formally linked to the recently adopted new anti-dumping and anti-subsidy methodology regulations (to address the expiry of certain parts of China’s WTO Accession Protocol by removing the provisions in the legislation which refer to non-market economy), but they are related, particularly in the context of the EU steel industry crises.

The Government’s view

7.14Bar the most recent letter of 13 March 2018 from the Minister (and accompanying Annex received on 21 March 2018), the last substantive update to previous Committees on the progress of, and Government’s position on the draft Regulation, was provided in February 2015.

7.15In a general trade update to the Committee on 8 December 2017, the then Minister for Trade and Investment (Lord Price CVO) states that the “Government continues to support the Modernisation of Trade Defence Instruments, but does not agree that the case has been made for restrictions on the operation of the Lesser Duty Rule (LDR). This is under active discussion in Brussels and the Slovak Presidency is pressing for agreement before the end of the year).”

In a further general update on 24 January 2017, the former Minister notes that the Council agreed a General Approach (the UK opposed, but it was agreed through qualified majority) on 13 December 2016 and it would go to trilogues.

7.16In a general trade update to the Committee on 13 July 2017,83 the Minister simply notes continued Government engagement at working group level on the draft Regulation:

“In respect of the department’s main legislative files—namely the Modernisation of EU Trade Defence Instruments (MTDI), the new Anti-Dumping Methodology (ADM)(14249/16, 8493/13 and 8495/13) … the department continues to be actively engaged at working group level in relation to each dossier.”

7.17The Minister provided a further brief update on 7 February 2018,84 noting that the Commission, European Parliament and Presidency had agreed on a Common Approach in 2017, but did not provide any further evidence as to why the Government was continuing to object to the proposed changes to the lesser duty rule or to the post-Brexit implications of the proposal:

“A number of trilogues took place under the Estonian Presidency. During the eighth trilogue on 5 December 2017 the Commission, the European Parliament and the Estonian Presidency agreed on a common approach. The agreement still requires the approval of the European Parliament and the Council. As the Committee is aware, the UK Government position is to oppose this file due to the proposed restrictions to the lesser duty rule.”

7.18On 13 March 2018, a few weeks before the Council is expected to the vote on the draft Regulation in April, the Minister sets out the Government’s assessment of the legislative proposal (the attached Annex, which evaluates the impact the proposed changes would have on the UK was received by the Committee on 21 March 2018). The analysis covers the:

7.19The Minister concludes that the proposed revisions to the lesser duty rule are not in the UK’s interest as he considers that duties imposed under the current rules are already effective at restraining dumped imports and protecting UK industry, and that the revised rules would negatively impact consumers and intermediate users:

“ … the LDR [lesser duty rule], as it currently operates, provides UK producers in the steel, ceramics and other sectors, with the protection they need against injury caused by dumped and subsidised imports, but without imposing punitive measures that could harm downstream users or consumers.”

7.20The Minister is supportive of the shortening of antidumping and antisubsidy investigation times for imposing provisional measures to a maximum of eight months as it may help reduce market uncertainty and bring earlier protection against dumped or subsidised imports.

Brexit implications

7.21The Minister sets out the impact of those changes in the context of Brexit as follows:

“We are currently legislating through the Trade and Taxation (Cross-border Trade) Bills to ensure that the UK has the full suite of tools permitted under WTO rules in order to tackle injury caused to UK industry by unfair trading practices, or unforeseen surges in imports. The UK’s regime will be delivered by a new Trade Remedies Authority, to be established through provisions in the Trade Bill, to investigate cases and take action.

“The future UK trade remedies system will contain many similar features to the EU system and it will continue to apply the lesser duty rule in the same way the Commission has applied it for some 50 years. Evidence from a number of recent cases suggests that EU trade remedy measures have generally been very effective in reducing imports from the countries subject to measures, even with the application of the lesser duty rule. For example, in the year to August 2017, UK imports from China of rebar, hot rolled and cold rolled flat products were down over 90 percent compared with the year leading up to their respective anti-dumping investigations.

“I am aware that there are those who are concerned the UK’s system will lead to lower duties being imposed on imports into the UK than into the EU, and that this will lead to goods being deflected from Europe to the UK. I would like to reassure the Committee that we have found no evidence of trade deflection occurring between the US and Canada, or between the US and the EU, where very different levels of duty are applied. Furthermore, if duties are high enough to prevent injury to our domestic industry, then they should continue to do so. In the unlikely event that more imports do enter the UK market as a result of trade deflection, and if duties proved to be inadequate to prevent injury, then the UK system will allow the TRA to take appropriate action.”

Previous Committee Reports

Third Report HC 83–iii (2013–14), chapter 6 (21 May 2013).

Annex: The Government’s assessment of the impact of the draft Regulation

ANNEX I

The main proposed changes to the EU Regulation are as follows

A. Lesser Duty Rule (LDR)

For anti-dumping (AD) cases, disapplication of the Lesser Duty Rule (LDR) where:

For anti subsidy (AS) cases, the proposal is to disapply the LDR in all cases, without condition, and without any further Union Interest test.

B. Calculation of the Injury Margin

When the LDR still applies, the injury margin will use a minimum target profit margin of 6%. Currently there is no minimum specified in the EU Regulation.

The Commission states that social and environmental standards will be taken into account when establishing the injury elimination margin. In addition, there will be a possibility to take into account future costs stemming from implementing these standards if such costs are clearly foreseeable and objectively quantifiable, and that a) there is no double-counting of costs and b) the costs are duly substantiated.

C. Continental Shelf and Exclusive Economic Zone

An enabling clause has been introduced in the basic regulations allowing to extend measures to these areas, for example, North Sea oil and gas installations, via a future implementing act.

D. Reimbursement

If measures are repealed following an Expiry Review, importers will be reimbursed of the duties collected during the period of the Expiry review investigation.

E. Trade Unions

Trade unions will be able to prepare complaints jointly with the EU industry or expressly support complaints prepared by the EU industry.

Trade unions become “interested parties” in the proceedings, which means that they have access the non-confidential file of ongoing investigations, upon a written request. The Council had already accepted the role of trade unions in trade defence in the related new antidumping methodology file, which modified the same legal acts.

F. Duration of investigations

The duration for the imposition of provisional measures will be normally 7 months but not later than 8 months. Definitive duties will have to be imposed within 14 months.

G. Pre Disclosure85

A period of 3 weeks of pre-disclosure of the imposition of provisional anti-dumping and anti-subsidy measures. Subject to a number of conditions to mitigate a perceived risk of stockpiling.

Impact

A. Lesser Duty Rule (LDR)

Non-application of the LDR in AD cases involving raw materials distortions is likely to be the most significant element of the MTDI package. Because of the much smaller number of AS cases, and the fact that AS duties are much lower than AD duties, not applying the LDR in AS cases is likely to have a much smaller impact in the foreseeable future.

Rationale for non-application of the LDR in cases involving raw materials distortions.

Although the proposal makes the non-application of the LDR conditional on the presence of structural raw material distortions in the exporting country, the rationale for drawing this link is unclear.

In principle, distortions to raw materials in an exporting country, such as a restriction on the export of a raw material, can cause injury to EU industry in two ways. First, by providing exporters with artificially low input costs and thus allowing them to reduce export prices, EU industry may be injured. Second, where the country is a significant exporter of the raw material in question, and can affect world prices, the raw material distortion may put upward pressure on costs of their overseas competitors, including EU producers, further exacerbating that injury.

However, the current approach used by the Commission to estimate injury margins and hence determine duties under the LDR already appears to take both these effects into account. Injury margins are based on a comparison of prices of imports from the country subject to the investigation and a target price for the EU industry. The target price, in turn, is based on the EU industry’s cost of production plus a reasonable profit margin.

Injury Margin = Costs of EU Production + Profit – Import Price of dumped imports

To the extent that raw material distortions lead to either lower import prices or higher costs for EU industry, they will also lead to an increase in the injury margin and hence duties. Thus, the injurious impact of raw materials distortions should already be reflected in the duties determined under the LDR, so the removal of the LDR in these cases, and the consequent increase in duties in some cases, cannot be said to be “correcting” for the impact of these distortions.

Impact of non-application of the LDR on AD Duties

Current Use of the LDR

The Commission currently applies the LDR in all AD and AS cases. The application of the LDR has had a material impact on duties in a significant number of AD cases.

An evaluation of the European Union’s trade defence instruments86 found that, during 2005–2010, the LDR resulted in duties at the level of the injury margin, rather than the dumping margin, in around 55% of AD cases, resulting in an average reduction in the level of duties of around 9.3 percentage points. Earlier, DG Trade estimated that that the LDR affected duties in around 40% of cases during the 1990s.

In more recent AD cases, internal DIT analysis suggests that the role of the LDR has been equally, if not more, important. Since 2011 the LDR has meant that duties have been based on the injury margin in 56% of cases. Even where duties are based on the injury margin (IM) the duties are significant — a mean duty of 36%. Had the LDR not been applied to these cases the mean level of duties would have been around 29 percentage points higher. Averaged over all new cases since 2011, the duties would have been 16 percentage points higher.

Number of Cases

Share of Cases

Mean Injury Margin

Mean Dumping margin

Duty Reduction due to LDR

Determined by Injury Margin

25

56

36

65

29

Determined by the Dumping Margin

20

44

43

21

0

Total

45

100

39

45

16

Evidence on the Effectiveness of the Duties imposed under the LDR

The aim of the LDR is to ensure that duties are set at a level adequate to remove the injury caused by dumped or subsidised imports without imposing disproportionate costs to downstream industries and to consumers.

A 2012 evaluation of the EU Trade Defence Instruments for the Commission by BKP consultants considered whether the LDR is successful in achieving this objective. The evaluation found that duties imposed under the EU system using the LDR are more than sufficient to protect industry from the effects of dumped and subsidised imports and recommended the retention of the LDR.

“TDI is on the whole effective and reasonably well calibrated, although the protection is moderately greater than what would be required to offset injury, even with the application of the lesser duty rule”.

“Accordingly, the evidence adduced in … supports the continued application of the lesser duty rule …”

Evidence from more recent anti-dumping measures against Chinese steel imports also suggests that duties determined under the LDR are very effective in curtailing dumped imports. As an illustration, in the year to August 2017, UK imports from China of three key steel products, rebar, hot rolled and cold rolled flat products, were down over 90 percent compared with the year leading up to their respective anti-dumping investigations.

In all other steel cases against China over the past ten years, duties under the LDR have proved effective in curtailing dumped imports, including in cases where measures have been in place for nearly a decade. For example, duties were imposed on Chinese imports of wire rod in 2009 and on welded pipes in 2008 based on the LDR. In both cases, imports fell almost immediately, and by 2017 were still 99% and 98% below their pre-investigations levels.

Impact of the Commission Proposal

Although the precise number of AD cases where the LDR would be removed under the MTDI package is uncertain, it is likely to be significant number and that in some cases this could have significant adverse impacts on the UK interests.

Based on the focus of EU industry’s complaints about raw materials distortions, it is likely, for example, that the proposal could lead to the non-application of the LDR in a significant number of cases against China, particularly where a single raw material accounts for a significant proportion of Chinese exporters’ costs (e.g. steel or aluminium).

Since 2011, in 25 out of 45 new AD measures imposed, duties were based on the injury margin. Of these 25 cases, 17 were against China, 15 involved steel products and a further 3 involved aluminium products.

But the proposal might also have led to the non-application of the LDR in some other cases involving amongst others Russia (e.g. in products where energy is a significant production input), as well as Argentina and Indonesia, (e.g. where inputs into biodiesel were subject to raw materials distortions).

Impact on AS duties

The impact of removing the LDR in AS cases may be less significant simply because there are fewer AS cases and because subsidy margins are generally much lower than dumping margins, so the practical effect of removing the LDR affects a smaller number of cases. In 10 new Anti-Subsidy measures imposed since 2011 the subsidy margin was lower than the injury margin in all cases, so the LDR did not determine duties.

However, it is unclear how the removal of the LDR will affect duties in cases where there are parallel AD and AS investigations and it remains a possibility that duties could rise in these cases as a result of the removal of the LDR in subsidy cases.

Conclusion

Based on the above evidence, it seems reasonable to conclude that that non-application of the LDR could affect a significant number of AD cases and could lead to a significant rise in (already high) duties on those cases.

There does not appear to be a clear rationale for the removal of the LDR in cases affected by raw materials distortions, as any distortions should already be reflected in injury margins. In addition, the evidence from a major evaluation of the Commission use of trade defence instruments suggests that duties imposed under the LDR are already effective in restraining dumped imports and protecting EU and UK industry.

Based on this, it appears that the removal of the LDR is unlikely to lead to additional benefit terms of protecting UK producers from the effects of trade distorting practices. It will however lead to increased costs for downstream industrial users and consumers.

By making the application of the LDR conditional the presence of raw material distortions, the proposal will also have various implications for the administrative burdens, positive and negative, both on the Commission and on interested parties, although the net impact and significance of these is unclear at this stage

B. Calculation of the Injury Margin

Imposition of a minimum 6% target profit

As noted above, currently under the LDR, the injury margin (IM) is based on the difference between import prices and a target EU price. The latter is based on a combination of EU costs of production and a target profit. The target profit is supposed to represent the rate of profitability that the EU could achieve in normal conditions in the absence of dumping or subsidised imports. As long it acts in manner consistent with this principle, the European Commission has some discretion over the choice of the target profit, and decides the appropriate level on a case by case basis.

Imposing a minimum target profit will increase the estimated injury margin and hence the level of duties in cases where: a) the LDR determines the duty, and, b) the target profit would otherwise be less than 6%.

The BKP evaluation covered 45 AD cases over the period 2005–10, where the duties were based on injury margins. The target profit rate in these calculations, ranged from 3% to 15% and was less than 6% in 23 cases. In 15 of these cases the target profit was 5%. In these 23 cases duties calculated under the LDR would therefore have been higher had a 6% minimum target profit been imposed.

In new AD cases since 2011, the target profit was less than 6% in 10 cases where the LDR determined duties. In all but two of these 10 cases, the target profit was 5%.

New Anti Dumping Cases 2011–17: Target Profit used to Calculate Injury Margins

Target Profit

Less than 5%

5%–6%

6% or more

N/A

Number of Cases

2

8

14

1

Although imposing a 6% minimum target profit would have increased duties in these ten cases , the rise in duties would have been limited given that, in most cases, the target profit would have risen by just 1% point. Assuming a similar pattern going forward, this also suggest a limited impact, albeit the precise scale of the increase will vary significantly case to case depending on particular features of the case.

Social and Environmental costs

In order to assess the impact of social and environmental costs, it is again important to consider the current method of determining duties based on the injury margin under the lesser duty rule. The current Commission approach is, as noted above, based the difference between prices of dumped imports on the one hand and the costs of production and “normal” profits of EU producers on the other. This cost of production, and hence the injury margin, will already reflect all costs incurred by EU producers from of meeting EU labour and environmental standards. So, for these cases the proposal is merely a restatement of current practice and will not have any impact.

Similarly, to the extent that exporters attempt to gain a competitive advantage from lower labour and environmental costs, this will lead to lower import prices and hence a higher injury margin.

At present injury margins are based on actual costs. So, the proposal to include prospective costs arising from EU social or environmental regulation could affect injury margins and hence duties. It is not possible at this stage to estimate the impact of this part of the proposal. However, the fact that these should only be taken into account when quantifiable, foreseeable and verifiable, suggests that the impact will be limited.

It is worth reminding that labour and environmental standards are not referred to in the WTO Agreements and, in general, trade remedies cases are not an appropriate vehicle for such issues.

C. Continental Shelf and Exclusive Economic Zone

The proposal is to introduce an enabling clause only. Details of how this proposal would work in practice, and how many cases it might affect, is not yet clear. It is therefore not possible to determine the impact, though it would lead to a wider coverage of duties as goods consumed on the Continental Shelf and EEZs are currently not subject to AD or AS duties. The impact is likely to be felt for a limited number of products consumed by the North Sea oil and gas sector. Future implementing acts will contain more details on how to practically extend AD and AS measures in the Continental Shelf and the Exclusive Economic Zone.

D. Reimbursement

Under current arrangements, duties remain in place during Expiry Review investigations. Even where an investigation concludes that measures should be terminated, any duties collected during the investigation are not paid back to importers. This proposal will therefore bring benefits to those importers that have paid duties on imports during Expiry Review investigations, where the result of those investigations is to terminate measures. However, the benefits are likely to be small in most cases. During 2011–17, the Commission conducted 91 Expiry Reviews of which 25 resulted in termination of measures. In recent years, however, the rate of termination has fallen sharply. Of 42 Expiry reviews 2015–17, only 5 ended in termination. Another factor limiting the benefits of this proposal is that the duties paid during Expiry Review investigations will be relatively small given that, in many cases, AD and AS duties are highly effective in curtailing imports from targeted exporters.

E. Trade Unions

This is unlikely to have a significant impact on the outcome of cases. The main reason for this conclusion is that the basic WTO requirements for launching an investigation—providing prima facie of dumping or subsidy, injury and a causal relationship between the two—will still need to be met, and the data will to a large extent have to be provided by companies.

F. Duration of investigations

The duration for the imposition of provisional measures will be “normally 7 months but not later than 8 months”. Definitive duties will have to be imposed within 14 months.

Over the past ten years, the vast majority of Commission investigations up to provisional measures have taken 9 months, though a few of the most recent cases have been completed in a shorter time frame. The proposal should therefore bring some benefits in terms of reduced uncertainty in the market and earlier protection against dumping and subsidy where justified.

G. Pre Disclosure87

Although a period of pre-disclosure should bring benefits to importers and traders in terms of greater certainty and the ability to plan, the proposed period of pre-disclosure may be too short to have a material impact on decision making, as lead times for import decisions and shipping often exceed three weeks. The addition of a number of conditions to pre-disclosure, particularly greater use of registration is also likely to counteract any benefits.


79 Council Regulation (EC) No 1225/2009 and (EC) No 597/2009 were re-codified in 2016 under EU Regulation 2016/1036 and EU Regulation 2016/1037.

80 The term dumping refers to the export by a country or company of a product at a price that is lower in the foreign market than the price charged in the domestic market.

81 The lesser duty rule means that the EU imposes trade defence duties that are sufficient to remove the injury to EU industry (at the ‘injury margin’), which may be below the actual dumping margin. The lesser duty rule is recommended under WTO rules, but many of the EU’s trade partners do not apply it. It therefore compensates producers for the harm caused by unfair trade (to allow them to make a reasonable profit) rather than for the actual amount of dumping.

82 Twenty-fourth Report HC 71–xxii (2016–17), chapter 8 (14 December 2016).

85 “Pre-disclosure” means giving an advance warning to importers and distributors before proceeding 55% to impose provisional measures. At present, disclosure takes place only after the imposition of provisional measures

86 Evaluation of EU Trade Defence Instruments. BKP Development and Consulting. 2012

87 “Pre-disclosure” means giving an advance warning to importers and distributors before proceedin55% g to impose provisional measures. At present, disclosure takes place only after the imposition of provisional measures




3 April 2018