19 June 2009

RELATED expertise

The Court of First Instance at Luxembourg has handed down a decision that will further liberalise the treatment of Chinese exporters accused of the practice of selling products at low prices to European customers (“dumping”).

In its 17 June 2009 decision in Zhejiang Xinan Chemical Industrial Group Co Ltd v Council of the European Union the Court has ruled that the participation of the State in the ownership of Chinese companies cannot be the sole reason for denying them market economy status (known as MES). Importantly, the Court made clear that:

“Whilst State control over an undertaking is a matter which may possibly be taken into account [in order to decide whether the undertaking’s business decisions are made without significant State interference] it is not sufficient, by itself, to demonstrate the existence of ‘significant State interference’”

This decision delivers a clear and important message to the EU Council and the European Commission that MES claims must be assessed strictly on the basis of the evidence provided, and in a proper, legally-based way. The Court confirmed that Chinese exporters have the burden of establishing MES, and that EC officials do have a wide discretion in such cases. However, the Court insisted that where evidence is provided to establish MES, it must be examined carefully and impartially. Evidence which is offered to prove that the business decisions of the exporter concerned are not subject to State interference cannot be ignored by merely asserting that the exporter is State-controlled.

The decision will give further impetus to the continuing China-EU dialogue on MES. It echoes sentiments expressed by Chinese Vice-Premier Wang Qishan at the Second China-EU High-Level Economic and Trade Dialogue held in Brussels in May of this year, where he urged the EU to “evaluate the conditions of the Chinese economy in an objective and unprejudiced manner”.

In making its decision, the Court ruled that State control, which was inferred by the EU Commission from the presence of large shareholdings in Zhejiang Xinan held by State-owned entities, was “not… incompatible with the taking of commercial decisions in keeping with market economy conditions”, even if the State-owned entities, by reason of their voting power, appointed the directors.

It was also held that the EU Council committed a “manifest error of assessment” in deciding that the Chinese Government controlled glyphosate export prices. Chinese producers had instituted a system of export price verification, operated by their industry chamber with the cooperation of Chinese Customs, for the very purpose of facilitating compliance with anti-dumping regulations. This could not amount to significant State control over prices in the face of extensive evidence that there was, in fact, no such control.

Zhejiang Xinan is a large-scale Chinese agricultural chemical exporter. It has been prevented from selling “glyphosate”, a basic herbicide, to European formulators since 1998, when prohibitive anti-dumping duties were first imposed against all Chinese exporters. In 2004 the anti-dumping duties were continued for a further five years.

The Court’s order annuls that continuation, meaning that anti-dumping duties can no longer be applied against the company’s exports. The CFI also ordered the EU Council to pay Zhejiang Xinan’s costs of the proceedings.

Holman Fenwick Willem LLP represented Zhejiang Xinan in the proceedings, in collaboration with Moulis Legal, an Australian-based law firm which acts as the company’s international trade counsel. Audace Association (the Association of Users and Distributors of AgroChemicals in Europe) supported Zhejiang Xinan in the proceedings.

This memo presents an overview and commentary of the subject matter. It is not provided in the context of a solicitor-client relationship and no duty of care is assumed or accepted. It does not constitute legal advice.

© Moulis Legal 2009