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Aggressive anti-dumping protection – the dark side of Australia’s FTA romance

26.10.2015

Australia’s signing of recent free trade agreements (“FTAs”) with China, Japan and South Korea, and the reportedly concluded but as yet unseen Trans-Pacific Partnership Agreement (“the TPP”), have put trade back in the centre of Australia’s policy and economic dialogue. A major topic of that debate is trade protection. With tariffs being reduced to zero or next to zero across almost all goods from our major trading partners, the role of ordinary tariffs as an instrument of protection, or of long term adjustment, has disappeared. Australian industry, although being enhanced in an outgoing sense, is now more fully exposed to international price competition than it has ever been.

In this Trade Law Bulletin Moulis Legal senior lawyer Charles Zhan looks at how Australia’s anti-dumping system has been adjusted and how new trade restrictive methods are being employed, as substitute “weapons” against the effects of trade liberalisation.

Trade “rules” protection is maintained and supported

None of Australia’s modern trade agreements withdraw the opportunity for the parties to impose higher duties on each other in accordance with the trilogy of trade rules agreements negotiated within the World Trade Organisation (“the WTO”). Those agreements are colloquially known as:

  • the Anti-Dumping Agreement – under which higher duties may be imposed on imported products if it is proved that they are sold more cheaply to Australia than in their home market, or are sold below their cost of production, where that causes injury to an Australian industry;
  • the Subsidies and Countervailing Measures Agreement – under which a subsidy benefit provided by the home government of the exporter can be counteracted by the imposition of a duty on importation into Australia, but again only if it is shown that the imported products are injuring an Australian industry;
  • the Safeguards Agreement – where a sudden escalation in the imports of certain products can be combatted by quantitative restrictions or higher duties for a temporary period if both that escalation and serious injury to the Australian industry are proven.

The use of the first two of these – anti-dumping and countervailing – has been heavily promoted to Australian industry as an available “self-help” remedy to combat the influx of lower priced imports.

Strong enforcement of anti-dumping against China, our major trading partner

Anti-dumping has been a strong preoccupation of the Chinese Government for a great many years. Before its accession to the WTO, China was labelled a non-market economy by anti-dumping user countries. This gave those countries great latitude in deciding that the home market price or costs of products exported from China were too low. Instead, they installed higher “surrogated” prices or costs in place of the Chinese ones. The result of this was that the Chinese export prices for the products concerned would almost invariably be found to be less than the surrogates, thereby creating a situation of “dumping” which was amenable to the imposition of duties.

On its accession to the WTO, China agreed to a 15 year phase-in period during which anti-dumping user countries could continue to ignore Chinese home market prices or costs, and instead use surrogates, but with an important proviso – this could not be done if market economy conditions were shown to prevail in the relevant industry in China.

The chimera of full market economy status for China

Australia went even further than that in its opening up to Chinese imports. One of the key pre-conditions for China to engage with Australia in the China-Australia Free Trade Agreement (“CHAFTA”) negotiations was the recognition by Australia of China’s market economy status (“MES”). This occurred in 2005, making Australia the first major developed economy in the WTO to recognise China’s MES (shortly after New Zealand and Singapore).

This initiative gave an early kick start to the CHAFTA negotiations, and arguably became the lynchpin for even stronger diplomatic and economic ties with China, now Australia’s most important trading partner. MES recognition was an important achievement, because China expected it to ensure that its exporters would be treated in the same way in Australian anti-dumping investigations as exporters from other countries. Essentially, to the Chinese this meant no 15 year phase-in as per its WTO entry, and no surrogation – the Australian investigating authority would always be required to determine whether there was “dumping” based on the actual costs and prices of Chinese exporters.

Fast forward to 2015, and China’s expectations have not been fully met. Under strong pressure from domestic industry, especially during the Australian dollar’s stellar value surge from 2009 to 2014, the Australian investigating authority reintroduced surrogation in its anti-dumping treatment of Chinese steel and aluminium products. How could that be, given Australia’s MES recognition of China? This was achieved by way of two mechanisms, jointly employed:

  • First, the investigating authority finds the Chinese domestic market to be subject to a “particular market situation”, on the basis of government policy influence. The investigating authority can then maintain that this influence was creative of “artificially low prices” for either the product concerned or an input in the manufacture of that product. A particular market situation finding renders home market prices as unreliable for normal value purposes, allowing the investigating authority to base its comparison with export prices on the cost of production of the products concerned.
  • Secondly, in working out that cost of production, the investigating authority would consider the artificially low price for the input concerned not to “reasonably reflect competitive market cost”, and would then surrogate what it considered to be a competitive market cost into the Chinese exporter’s cost of production. Swapping a low cost for an input with a higher cost one has an obvious effect – a higher point of comparison with export prices, and the strong likelihood that the surrogated cost of production is higher than the export price.

These mechanisms – claimed by Australia to emanate directly from the Anti-Dumping Agreement and thereby to be applicable to all WTO Members – have been strongly criticised by the Chinese Government. CHAFTA itself says nothing about them, indeed CHAFTA steers clear of the substantive anti-dumping debate entirely. In a recent review inquiry by the Australian Anti-Dumping Commission about aluminium road wheels from China, the Chinese Ministry of Commerce complained that the Australian investigating authority’s approach is disguised non-market economy treatment and a throwback to the non-market economy rules applied to China before 1997.

Particular market situation test almost guarantees actionable dumping margins

The distortive effect of Australia’s market situation/competitive market costs policy is starkly apparent. Over the past five years 14 anti-dumping investigations have been initiated and concluded against Chinese exporters. In six of the cases surrogation was not adopted, and each of these concluded with a finding of no actionable dumping. In the other eight cases – mostly involving steel and aluminium products – surrogation was adopted, with seven of them concluding in findings of actionable dumping.

China’s 15 year WTO MES phase-in period comes to an end in 2016. No doubt Australian practice has been keenly watched by other anti-dumping user countries as a means of continuing to treat China differently in anti-dumping terms in the future.

Italian exporters also affected by their government’s industry support policies

And it’s not only China that is affected. Consistent with the Australian Government’s position that the ability to discriminate on a market situation/competitive market cost basis emanates from the Anti-Dumping Agreement and applies to all WTO Members, the Australian investigating authority has now used the policy against Italian exports.

The Anti-Dumping Commission held an investigation into processed tomatoes from Italy in 2013. The investigation concluded in April 2014, with imposition of dumping duty against a number of Italian exporters, and the termination of the investigation in relation two exporters for whose exports no dumping had been found. Eight months later the ADC initiated another round of investigation into the two exporters previously found not to be dumping. This time, the investigating authority concluded that a particular market situation existed in the Italian market for processed tomatoes. The higher, “surrogated” cost for tomatoes then used by the Commission in working out the costs of production was higher than the processor’s actual costs, transforming the thin “no dumping” result from the earlier investigation into a “dumping” result in the second investigation.

The case sets an unusual precedent, in that the cause of the alleged “particular market situation”, and the uplift to the tomato cost, were based on the amount of a “subsidy” received by Italian tomato growers. But this was an anti-dumping investigation, and not a subsidy-related “countervailing” investigation. On one view, the findings confuse the dumping remedy with the subsidy remedy, in circumstances where the WTO Agreements make it clear that they should be kept apart.[1]

New artillery – targeted dumping and “zeroing”

Another systemically controversial practice that has recently surfaced in Australian trade remedy policy is so called “targeted dumping” and the adoption of a “zeroing” methodology to arrive at dumping margin conclusions in situations of targeted dumping.

Targeted dumping refers to a situation where it is alleged that export prices are “significantly different” among different purchasers, regions or periods. It looks at whether there is something peculiar about some sales by an exporter on a customer, geographic or temporal basis, the peculiarity measured by the unusual price differential of those sales as compared to other sales. If that peculiarity is identified, a different dumping margin calculation methodology can be used. That method is a comparison of individual export prices with the weighted average home market price in the period during which those “significantly different” sales were made.

Zeroing refers to a kind of dumping margin calculation methodology which disregards export prices which are not dumped. A dumping margin worked out using zeroing will inevitably be zero or above zero, because it does not take account of any export sales which are not dumped.

The WTO has made it quite clear, in its multiple rulings on the subject, that zeroing is not a permissible margin calculation methodology. Zeroing has never been a practice of the Australian investigating authority. Its usage has been warned against in past policy pronouncements of agencies such as the Department of Foreign Affairs and Trade and the Productivity Commission. In the process of passing its 2011 legislative reforms to the anti-dumping system in the Parliament the then Labor Government again rejected the use of zeroing.

Therefore it was a big surprise when the Anti-Dumping Commission in 2014 unprecedentedly used zeroing in response to an allegation of targeted dumping of power transformers from Vietnam and Thailand. That decision is now under review within the Anti-Dumping Review Panel. Zeroing as a response to targeted dumping is now for the first time the subject of a WTO dispute, in which the principal international proponent of zeroing – the United States – is arguing that zeroing is not excluded in the special circumstances of targeted dumping.[2]

Anti-circumvention – turbocharging anti-dumping protection

Australian industry – ever-concerned about continued competition with imports, even where dumping duties have already been imposed – has lobbied hard for “anti-circumvention” laws. As the word suggests, these laws are aimed at ensuring dumped goods cannot “get around” dumping duties. From the legal perspective, there are at least two problems with this – first, the WTO Anti-Dumping Agreement does not contain any provision that could serve as the basis for the implementation of stand-alone anti-circumvention laws and, secondly, what is “circumvention” and how is it to be defined?

The six circumvention activities that are now regulated by Australian law are these:

  • arrangements between exporters – whereby one exporter’s products are exported by another exporter with a lower dumping duty rate;
  • country hopping – shipping the products via a third country, such that dumping duty is not payable, because exports from the third country are not subject to the dumping duty;
  • slight modification – changing the exported products so that they are different to those that are the subject of the dumping duties;
  • assembly in another country – making the finished product in a third country from the parts that would have otherwise be used to make the product in the country subject to the dumping duties;
  • assembly in Australia – same as the previous example, except that the “third country” is actually Australia;
  • avoidance of intended effect – cases where it is alleged that an importer has not increased the on-sale price in Australia commensurate with the dumping duty paid on the product concerned.

The circumvention activities constituted by untruthful arrangements between exporters, and merely “hopping” dumped goods through a third country, are uncontroversial. However cases involving modification or assembly attract more substantive concerns, such as the degree of modification, and the costs of the finished product, each of which is important to the question of whether products are dumped at all, or if dumped whether they are causing injury. Also, labelling a decision by an exporter to assemble products in Australia, pursuant to which the exporter invests and creates jobs in Australia, as “circumvention dumping” seems to be a contradictory economic choice. Most would suggest that the desired outcome of protection is to support domestic industry, and that a result which attracted new investors to enter Australia should be preferred to one that excludes them.

But the circumvention activity constituted by “avoidance of intended effect” is the most powerfully anti-competitive instrument of them all. It seems to be one thing to penalise exporters for low prices, however to penalise an importer – who has paid the duties – by not letting the importer compete on level terms in the Australian market is something quite different. The law literally and technically prevents an importer from competing in the Australian market at lower profit levels than those it experienced before dumping duties were imposed. Australia now has one regulator, the Australian Competition and Consumer Commission, encouraging that kind of vigorous competition, and another, the Anti-Dumping Commission, enforcing the opposite.

The left-right combination – duty with a knock-out punch

The other protective mechanism that Australian industry has vigorously pursued and has now mostly secured is a preference on the part of the investigating authority to impose “combination” dumping duty. This takes the form of a dumping duty equal to:

  • the percentage margin of dumping established in the investigation; PLUS
  • the amount by which the actual export price of an imported consignment is less than the weighted average of all export prices during the investigation period in which dumping was determined.

As a result, in circumstances where international costs and prices for a dumped product go down, Australian importers must pay much more dumping duty. This has distortive effects in such circumstances, dramatically so in the case of steel products where costs and prices have recently trended to historically low levels.

Concerns have been expressed about the compliance of such a system with the Anti-Dumping Agreements’ request that WTO Members be mindful of imposing a lesser margin of duty if that would be adequate to remove the injury to the domestic industry, and with the rule that dumping duty must not be more than the margin of dumping as originally established. The fact that Australia also operates a dumping duty refund system through which importers can get back overpaid dumping duty at a later time has not dulled these concerns.

Anti-dumping – a political counterbalance

In the past, the anti-dumping policy pendulum has swung between more or less protection fairly regularly, and not too dramatically. However the reduction of tariffs brought about by multiple FTAs with major trade partners has led to an anti-dumping response which is much tougher than it has ever been. Also, unlike the previous swinging of the pendulum, many aspects of that response are now institutionalised and entrenched in administration and law.

Litigation activity has increased, and it cannot be long before one or other of Australia’s trading partners takes a long, hard look at the more extreme examples of Australia’s new trade crack down to decide whether to initiate a dispute in the WTO.

For more information, please contact Daniel Moulis or Charles Zhan in our Canberra office on +61 2 6163 1000 (daniel.moulis@moulislegal.com and charles.zhan@moulislegal.com) or Christopher Hewitt in our Brisbane office on +61 7 3367 6900 (christopher.hewitt@moulislegal.com).

 

[1]  Particular market situation is now the subject of three WTO disputes: see, European Union — Anti-Dumping Measures on Biodiesel from Argentina (DS473), and European Union — Cost Adjustment Methodologies and Certain Anti-Dumping Measures on Imports from Russia (DS474/DS494)

[2]  United States — Anti-dumping and Countervailing Measures on Large Residential Washers from Korea (DS464)