Written submission from the Manufacturing Trade Remedies Alliance [TWC0002]

How should the UK approach its trade and investment relationship with China? What opportunities does the relationship present, and what challenges and risks are involved?

Executive summary

1. The Manufacturing Trade Remedies Alliance (MTRA)[1] is a coalition of several trade associations and trade unions with an interest in UK manufacturing.  Formed in early 2017, our organisations believe that making things in the UK is good for our economy and society.  On a level playing field our manufacturers are able to compete internationally and succeed.  MTRA’s objective is to ensure that the UK’s trade policy enables that level playing field and that this should include a robust and efficient trade remedies regime.

2. This evidence covers the issue of UK trade remedies and China.  The Chinese market is affected by significant state interference which affects the allocation and pricing of factors of production in a very significant manner.  This distorts Chinese export prices and, given the high production capacity of many Chinese industries and the potential for significant export volumes, injures domestic industries in overseas markets that are otherwise able to compete against fairly priced imports.  This particular problem has resulted in China being the country subject to by far the most anti-dumping and anti-subsidy investigations amongst all the UK’s major trading partners.  Specific provisions on trade remedies relating to China were agreed when China acceded to the WTO in 2001.  These provisions were reflected in the new UK trade remedies law and it is critical that the UK uses all possible options to ensure that UK industries are able to compete with Chinese imports on a level playing field.

Evidence of Chinese distortions

3. The European Commission has produced an extensive analysis of Chinese distortions in the context of trade remedy/trade defence investigations.  This is published in Commission Staff working document on significant distortions in the economy of the PRC for the purpose of trade defence investigations (SWD(2017) 483 final/2)[2]. This report examines the existence of significant distortions in the People's Republic of China (‘PRC’) that are relevant under the Basic Regulation:

• First, it examines the core features that give the Chinese economy its current shape and structure.  The overall picture that emerges concerning the framework in which economic activity takes place in China is one where the State continues to exert a decisive influence on the allocation of resources and on their prices.
• The second part covers the various factors of production.  The analysis shows that the allocation and pricing of the various factors of production is influenced by the State in a very significant manner.
• The report goes into detail on a number of sectors that have featured most in the EU’s anti-dumping investigations e.g. steel, aluminium, chemicals and ceramics. This examination also echoes the findings in the preceding two parts, i.e. the significant distortions resulting from the specific features of the Chinese economy and those found in relation to the various factors of production.

Other evidence of state distortions in China

4.  World Bank study on China: (China 2030: Building a modern, harmonious and creative society. (2013) World Bank) - China’s transition to a market economy is incomplete in many areas. A mix of market and non-market measures shapes incentives for producers and consumers, and there remains a lack of clarity in distinguishing the individual roles of government state enterprises, and the private sector. It is imperative, therefore that China resolve these issues, accelerate structural reforms and develop a market-based system with sound foundations in which the state focuses on providing key public goods and services – while a vigorous private sector plays the more important role of driving growth

5. European Chamber of Commerce in China: (Overcapacity in China: An impediment to the Party’s Reform Agenda (2016)) - Overcapacity has been a blight on China’s industrial landscape for many years now, affecting dozens of industries and wreaking far-reaching damage on the global economy in general, and China’s economic growth in particular. Yet when the European Chamber released its first report on this topic in 2009, it was a seldom-examined phenomenon. Unfortunately, during the last six years, overcapacity in China has only continued to worsen. The fact that the overcapacity problems highlighted by the Chamber in 2009 have become more pronounced indicates that economic restructuring is now more essential than ever. It remains to be seen whether or not policy-makers are up to the task. Unfortunately—and in spite of the central government’s stated focus on curtailing overcapacity—many of the sources of the problem have resulted from macro-economic, industrial and fiscal policies that have been part of a development strategy designed to favour industrial and investment expansion over consumption: it therefore needs to be recognised that the Chinese Government’s current role in the economy is part of the problem.

6. G20 Trade Ministers have highlighted this problem (Paragraph 10 of the Shanghai Ministerial statement and paragraph 31 of the Hangzhou Summit communiqué) - We recognize that the structural problems, including excess capacity in some industries, exacerbated by a weak global economic recovery and depressed market demand, have caused a negative impact on trade and workers. We recognize that excess capacity in steel and other industries is a global issue which requires collective responses. We also recognize that subsidies and other types of support from governments or government-sponsored institutions can cause market distortions and contribute to global excess capacity and therefore require attention.

7. All major trading partners (including the US, Canada, Australia, EU) have started to have multiple countervailing duty investigations in which many WTO inconsistent and countervailable subsidies have been found. The evidence of the existence of all these schemes is provided in public documents produced by each of these countries for each investigation.

8. Trade unions have documented that China does not respect fundamental labour standards and is therefore undermining producers in the UK that have collective agreements with unions that guarantee good conditions.  The Chinese government does not respect the right to freedom of association and collective bargaining with all trade unions under direct or indirect government control. The International Trade Union Confederation has documented that there has been an increase in trade union activists being arrested and subject to violence. There is also evidence of widespread exploitation in China, particularly of temporary workers.[3] 

Chinese distortions disturb global markets

9. Chinese distortions create large quantities of unfairly priced imports that are dumped and/or subsidised that disturb the normal functioning of international trade and global markets

10. The following tables show the number of anti-dumping and anti-subsidy investigations initiated since the creation of the WTO in 1995.  It shows the proportion of cases initiated against China.  On average, China accounts for around a quarter of all anti-dumping cases, as well as one third of anti-subsidy investigations, indicating that Chinese imports cause significant distortions globally.  All the UK’s major trading partners have taken significant trade remedy actions against China as evidenced by the following two tables:

Anti-Dumping Investigations Initiated 1995-2018

Anti-Subsidy Investigations Initiated 1995-2019

11. Use of anti-subsidy is much more difficult than anti-dumping.  It is often very difficult to get evidence of subsidy schemes, some of which may operate informally.  Anti-subsidy investigations are also difficult because they involve investigation of another government’s policies.   Finally, even if evidence can be obtained, under WTO rules, subsidies can only be countervailed if they are specific (i.e. not available to all), meaning that many subsidies cannot be countervailed using the anti-subsidy rules.

12. Subsidies benefiting products that will be exported overseas have the effect of making the export price lower than it would be in the absence of subsidies.  Unfairly low subsidies that affect export prices can often be dealt with as anti-dumping investigations.  If the impact of a subsidy is to make the export price less than normal value, it can be treated as an anti-dumping investigation.  Dumping investigations are not required to assess the cause of the dumping.  Anti-dumping rules, therefore, remain a critically important instrument for countering Chinese subsidies and other unfair practices that distort export prices.

Trade remedies and China – critical issues

Primary and Secondary Legislation

13. There are several areas where the UK is much weaker than in the EU on trade remedy issues. We think it is essential these are remedied by modification of the Taxation (Cross-border Trade) Act 2018, Trade bill and secondary legislation as a matter of urgency.
14. The main areas where the UK legislation is not as robust as the EU legislation are as follows:

•            No consideration of labour and environmental standards when using 3rd country benchmarks in the establishment of normal value

•            No Minimum Target Profit (6%) in injury margin

•            Lesser duty rule  will be used even when there are structural raw material distortions or subsidies

•            No future environmental/regulatory costs taken into account in injury margin

•            No account of labour/environmental standards in lesser duty rule or acceptance of undertakings.

•            Over-complicated public interest test including an experimental economic interest test.

•            No meaningful presumption in favour of measures.

•            Unions not deemed interested parties.

•            Not robust enough on non-market economies such as China

SoS Guidance to TRID

Overview

15. When the UK leaves the EU, UK Government intends that it will operate an independent trade policy. Trade remedies will be handled, for now, by the Trade Remedies Investigations Directorate (TRID). Although some primary and secondary legislation is in place, at time of this evidence submission no guidance has been published detailing the methodology. This is urgently needed. 

16. The importance of the guidance is emphasised by the deficiencies in the primary and secondary legislation relative to the EU trade remedy system.  Recognising that changes to the primary and secondary legislation will not be possible before prorogation, we think it imperative as a temporary measure that the imminent guidance for TRID is strengthened according to the points below.

Using all methodology options for establishing normal value for China

17. Where prices and costs are distorted in the export market, UK legislation allows adjustments to be made.  This applies to all countries including China.  However, TRID will only replace specific cost items that are distorted.  This involves substantial work in situations where multiple cost items are distorted.

18. The UK legislation includes a provision that allows TRID to use an alternative (non-market economy) methodology[4] for countries where a specific WTO protocol of accession authorises it.  Certain countries have agreed, as part of their accession protocol, that non-market economy (NME) methodologies could be used where market economy conditions did not apply but the traditional NME requirements of GATT Article VI note 2 Ad para 1 were not met[5].  Three countries have so far agreed such provisions, China, Vietnam and Tajikistan. 

19. China is not a market economy, yet there is doubt as to whether it meets the requirements of GATT Article VI Note 2 Ad Para 1 (i.e. the traditional NME definition in the WTO agreements).  China engages in significant state intervention including massive subsidies and other protectionist policies that distort markets resulting in huge overcapacities. This is why special provisions were built into the Chinese WTO accession protocol, allowing a non-market methodology to be used unless Chinese exporters could establish that they were operating in market economy conditions.  

20. Some have claimed that it is no longer possible to use this provision in relation to China due to the fact that some provisions have expired.  The issue is one of interpreting the China protocols of accession to the WTO and the possibilities that this provides for using an alternative methodology in trade remedy investigations. It is true that a part of the provisions authorising using of NME methodologies expired on 11 December 2016 (15 years after Chinese accession). Some commentators have claimed that this means that NME methodologies can no longer be used against China. MTRA submits that this is incorrect and that a close reading of Paragraph 15 suggests that an NME methodology is still permitted.

21. MTRA has already prepared detailed arguments (submitted to DIT) that the expiry of a certain part of the Chinese WTO accession protocols does not mean that the NME methodology cannot be used in certain circumstances. Annex 1 sets out some analysis in this regard.

22. This has been subject to WTO litigation.  It is important to state that there has not been a ruling that continued use of non-market economy methodologies against China is WTO inconsistent. China recently requested that key WTO panels considering this issue be suspended.  It has been reported in the press that the panels in cases involving EU and US methodologies on China were about to rule against China, providing some confirmation that the MTRA analysis correct and that the UK is free to use this methodology.

23. In order to use this provision in investigations involving China it is necessary that there are provisions to determine whether the exporters concerned are operating in a market economy environment.  In this situation, alternative methodologies can be used for such countries unless the exporters concerned can prove that they are operating in market economy conditions.  DIT has assured MTRA that this provision can be used.  Thus, further work may be required by DIT on this issue.  One possibility might be to use the list of government interventions as the criteria that TRID could use to determine if market economy conditions apply.  Although this list has been defined in terms of identifying whether a ‘particular market situation’ exists, the issues identified are also relevant to the consideration of whether market economy conditions apply.  Thus, in the case of the countries where the WTO protocol of accession allows, TRID would have the discretion to reject all prices and costs and use an alternative methodology.  TRID could either use particular market situation if it felt that applied to the country concerned or it could use an alternative methodology under the protocol of accession if the level of government intervention was high and likely to have distorted all prices and costs. In order to do this, TRID would need some criteria to assess whether market economy conditions apply if one or more of the exporters claimed this.  Therefore, MTRA proposes that the government intervention list be used as a provisional guide.

Injury Margin – imminent future regulatory costs

24. The UK has significantly higher environmental standards than China.  The non-injurious price in calculating the injury margin includes the cost of meeting those standards so existing regulatory costs are built into the injury margin.  The UK has decided not to incorporate provisions equivalent to those of the EU on future regulatory costs into the primary or secondary legislation.  The EU has changed its legislation to include future regulatory costs in the cost of the production being used as the basis to calculate the non-injurious price. This is particularly important in capital intensive industries in our MTRA membership. The current UK trade remedies policy is therefore much weaker than that in the EU and should be strengthened through guidance.
25. In particular, there should be more than just a list of relevant factors that might be considered in calculating the ‘normal rate of profit’ to be used in calculating the target price For example, one of the factors should include ‘the normal investment requirements of the industry’.  It is essential that the guidance refers to imminent regulatory costs here and that the normal rate of profit should be ‘the actual level of profit that UK industry could achieve going forwards in the absence of dumped or subsidised imports’. As imminent future UK regulatory costs would affect the level of profit that could be achieved going forwards it is, therefore, a legitimate factor for TRID to consider.

Cost adjustment – preferences for data should include consideration of labour/environmental conventions

26. When Chinese prices and costs cannot be used, alternative data must be found.  Guidance needs to include preferences for choosing sources of data.  The EU has included a preference for data with satisfactory levels of social/environmental standards in its equivalent provisions.  As the UK has decided not to include this in the primary or secondary legislation it is important that the guidance is strengthened in this area. 
27. For example, if countries do not meet core ILO conventions, this can significantly distort labour costs in the cost of production.  It is not reasonable that lower labour costs due to non-compliance with core ILO conventions results in a lower normal value and thus lower dumping margin.  Establishing a preference for data from countries complying with core ILO standards will not require TRID to use such data but will allow it to take this issue into account when choosing appropriate country benchmarks.
28. For example, an 18 June 2019, Cambodia's principal newspaper, the Phnom Penh Post, published an article on the Cambodian government's attempts to tackle child labour in the Cambodian brick sector. The article can be viewed at this link: https://m.phnompenhpost.com/national/moves-prevent-child-labour-brick-factories-highlighted The article raises the issue of young children working in brick factories.  If TRID had the choice between data from a country where child labour is used or from a country complying with the core ILO conventions, we would call for TRID to choose the latter to make clear that UK trade policy actively supports respect for fundamental labour rights.

Circumvention and China

29. In the case of China, there is a high risk of circumvention of trade remedies unless customs checks are robust.  Even under the current regime, Chinese exporters have used illegitimate means to circumvent EU anti-dumping duties.  For example, the EU has had numerous anti-circumvention investigations that has resulted in the extension of measures where exports have been transhipped through a third country and designated with a false origin.  It is already difficult to monitor whether circumvention is occurring even with robust EU customs authorities.

30. Effective enforcement of trade remedies is critical to ensuring that they do the job that they were intended to do.  Circumvention of measures may precisely cause the injury to domestic producers that the remedy was supposed to correct.

31. In this regard, any solution to the NI/IRE border should ensure that customs checks are sufficiently robust to ensure that circumvention risks do not increase.  It should not become easier to circumvent UK or EU trade remedies by shipping products across the NI/IE border.

1           Annex 1 – Analysis of China Accession Protocol Issues

Expiry of Subparagraph 15(a)(ii)

The full text of Paragraph 15 of the Chinese accession protocol is provided in annex 2 of this submission with comments on its meaning. Article 15 authorises the use of other (NME) methodologies in the case of China, subject to certain rules which allow for the Chinese state or Chinese industries to claim that market economy conditions apply in which case the normal WTO anti-dumping rules would apply (i.e. domestic prices and costs would have to be used in the normal way).

One provision of Paragraph 15 states that one subparagraph of Paragraph 15 will expire 15 years after the date of accession. The implication of the expiry of this subparagraph is explored below.

The technicalities of what has expired

It is clear that paragraph 15 of the accession protocol has not expired. It is interesting to contrast paragraphs 15 and 16. Paragraph 16 authorises the use of China-specific safeguards for a period of 12 years after accession. Paragraph 9 of Article 16 states:

Application of this Section shall be terminated 12 years after the date of accession.

In this case, the drafters of the accession protocol have left no doubt. The whole paragraph expires leaving no ambiguity.

However, the drafters did not terminate the whole of Article 15, so the remaining provisions are still an integral part of WTO rules. The expiry of sub paragraph (a)(ii) leaves subpara (a)(i) and the first/third sentence of subpara (d) in effect i.e. it is clear that these have not expired.

After December 11 2016, the remaining bits of paragraph 15 read as follows:

• 15(a) authorises use of other methodologies subject to 15(a)(i)
• 15(a)(i) requires that member must use Chinese prices/costs if producers show MEC in industry.
• 15(d) first sentence – if China can show it is a market economy, then the whole provision (subparagraph (a)) expires.
• 15(d) third sentence – if China can show that ME conditions prevail in an industry or sector, then the whole provision (subparagraph (a)) expires for that industry or sector.

Paragraph 15(d) first and third sentences provide circumstances which would result in the expiry of (a) for permanent country or industry/sector graduation. It can only be assumed that the drafters understood the difference between these two provisions (i.e. paragraph (a) and subparagraph (a)(ii)).

There is an ambiguity here. Clearly the drafters intended for something to expire. At the same time, the remaining provisions must have meaning.

It would seem as if there is a major problem with the drafting of Paragraph 15 of the Chinese Accession Protocol. In this regard, it is arguable that (a)(ii) was unfortunately a superfluous provision. (a) authorises the use of other methodologies unless (i) applies. (ii) was never required to justify the use of other methodologies.

Clearly the drafters intended for something to expire after 15 years. However, the provision that expires is a superfluous provision and this means that (a) does not expire. MTRA submits that this interpretation establishes that NME methodologies can continue to be used against China.

Previous WTO disputes so far give little guidance on these issues. The Appellate Body has made some references to paragraph 15 of the Chinese Accession Protocol but not of any real significance to the above interpretation. These references are described in Annex 2.

China had initiated WTO disputes against the continued use of this methodology by the EU and US.  China recently requested that the WTO panels considering this issue be suspended.  It has been reported in the press that the panels were about to rule against China, providing some confirmation that the MTRA analysis correct and that the UK is free to use this methodology.

Other parts of the Chinese accession documents help in interpreting paragraph 15. These are set out in Annex 4.

In conclusion, MTRA submits that the UK can and should include the possibility to use NME methodologies in cases involving China when prices and costs are significantly distorted.

2           Annex 2 - Text of Paragraph 15 of Chinese Accession Protocol

3           Annex 3 - What the Appellate Body has said about paragraph 15

In EC Fasteners, the Appellate Body looked at paragraph 15. It was not in relation to issues around NME methodologies for normal value but, rather, whether paragraph 15 justified a different approach in relation to export prices. However, the AB did say two things which are interesting in the context of interpreting paragraph 15.

First, it clarified that there is possibly other types of non-market economy that do not fulfil the conditions of the second Ad Note to Article VI:

......second Ad Note to Article VI:1......appears to describe a certain type of NME.

The...Ad Note....would...not on its face be applicable to lesser forms of NMEs that do not fulfil both conditions.

This means that, in principle, there is no problem in determining that non-market economy conditions apply. This does not necessarily have significant implications in itself. Determining that non-market economy conditions apply might be considered as a ‘particular market situation’, one of the normal reasons why domestic prices might not be used. But it doesn’t necessarily authorize the methodologies other than the normal ones (i.e. constructed normal value or export prices to 3rd countries). The other interesting point is that the Appellate Body appeared to make a mistake in talking about what expires:

Paragraph 15(d) of China’ Accession Protocol establishes that the provisions of paragraph 15(a) expire 15 years after the date of China’s accession.

Some commentators might try and mistakenly use this to argue that the AB has clarified that the possibility to use NME methodologies has expired, which would be the case if 15(a) expired. However, the ordinary meaning of paragraph (d) when it refers to (a)(ii) clearly cannot be read as referring to (a).

4           Annex 4 - Other parts of accession protocol & interpreting paragraph 15

The China Accession Working Party Report states:

Several members of the Working Party noted that China was continuing the process of transition towards a full market economy. Those members noted that under those circumstances, in the case of imports of Chinese origin into a WTO Member, special difficulties could exist in determining cost and price comparability in the context of anti-dumping investigations and countervailing duty investigations

Although this does not create an obligation for China, the Accession Protocol states in the preamble that it takes note of the Report of the Working Party and thus such statements are clearly context that might be used as a supplementary means of interpretation. Indeed Article 31(2) of the Vienna Convention on the law of treaties states that, amongst other things, the preamble of a treaty shall comprise context of the purpose of interpretation of the treaty. This also includes ‘any agreement relation to the treaty which was made between all the parties in connextion with the conclusion of the treaty’ (it can be argued that the Working Party report is such an agreement).

Paragraph 46 of the Working Party Report does create an obligation14:

China would ensure that all state-owned and state-invested enterprises would make purchases and sales based solely on commercial considerations, e.g., price, quality, marketability and availability”; “the Government of China would not influence, directly or indirectly, commercial decisions on the part of state-owned or state-invested enterprises, including on the quantity, value or country of origin of any goods purchased or sold, except in a manner consistent with the WTO Agreement.

This means that it is an integral part of the WTO agreement that China must ensure that the behaviour of all state-owned enterprises is in line with the commitments made in this paragraph. It is not clear that China has met this obligation and this could be used as an argument that the special difficulties in determining cost and price comparability still exist.

Until 11 December 2016, Paragraph 15 of the Chinese Accession Protocol unambiguously authorised the use of NME methodologies. Following the expiry of (a)(ii), the non-market economy methodology is still authorised by the rest of (a). In addition, the fact that a country can determine that another WTO member is not operating as a market economy in terms of paragraph 46, and the fact that this might lead to special difficulties, might be used as context to give meaning to what remains of paragraph 15.

06/09/2019