Subsidies And Dumpings In The European Union

UNIVERSITY OF BELGRADE FACULTY OF LAW Postgraduate Studies in European Integration - POGESTEI

EXAM PAPER

SUBSIDIES AND DUMPINGS IN THE EUROPEAN UNION

Teachers:

Student:

Sima Avramovic

Ksenija Sorajic

Milena Djordjevic Stevan Lilic

Belgrade, January 2009.

TABLE OF CONTENTS:

1. INTRODUCTION……………………………………………………………………...3 2. SUBSIDIES………………………….............................................................................4 2.1 Definition.....................................……………………………………………..4 2.2 Categories of Subsidies………………………………………………………..5 2.2.1 Prohibited subsidies……………………………………………….…...5 2.2.2 Actionable subsidies………………………………………………...…6 2.2.3 Non-actionable subsidies…………………………………………...….6 2.3 Remedies………….…………………………………………………………...7 3. DUMPINGS……………………………………………………….................................7 3.1 Definition…………...…………………………………………………………7 3.2 Dumping requirements………………………………………………………..8 3.3 Investigation and Anti-dumping measures……………………………………9 3.4 Dumping in the European Union…………………………………………...…9 4. CONCLUSION………………………………………………………………………..10 5. INTERPRETATION OF TERMS…………………………………………………….11 6. REFERENCE……………………………………………………………………...12-13

1.

INTRODUCTION

Both, subsidies and dumpings, are considered as a practice of unfair trading. The survival of domestic industry under the pressure of globalization and related risks of unfair competition is strongly connected with different combating measures that each state should take. In recent years, many states realized that with all benefits that international trade brings also come some difficulties that needed to be transcended. As a result of the changing characteristics of the economy, with greater emphasis on services, International Community is still trying to identify and examine potential mechanisms in solving these issues. Anti-dumping investigations are no longer a strange phenomena for most of the importers, exporters or producers. They are being increasingly subjected to such investigations by the authorities’ concerned. The history of anti-dumping duties dates back to many decades ago, even prior to the General Agreement on Tariffs and Trade (hereinafter: GATT). In due course, other countries adopted this measure against price discrimination. A provision for imposition of company and product specific duties was thereafter incorporated in the year 1947 when the GATT was drafted. Nowadays, anti-dumping measures have become one of the most favored nontariff measures to protect the interest of domestic industry in certain specified circumstances for most of the World Trade Organization (hereinafter: WTO) Members.

2.

SUBSIDIES

§ 1.2 Definition Without any doubt, International Community is aware of all difficulties that this phenomenon has provoked. One of these is its definition. Many international and regional institutions are trying to define subsidy and to make distinction point between other similar forms. Therefore, The Agreement on Subsidies and Countervailing Measures (hereinafter: SCM Agreement) contains a definition of the term 'subsidy'. This International Agreement is enacted by WTO and sets up beside general rules also countervailing measures in offsetting injuries caused by subsidized imports. Furthermore, The Uruguay Round SCM Agreement has generally been hailed as a major improvement over previous regimes, because it provides for the first time a definition of ‘subsidy’, lays down detailed standards for the conduct of countervailing duty investigations and provides a workable multilateral discipline over subsidies1. The definition contains three basic elements: a) a financial contribution b) by a government or any public body within the territory of a Member c) which confers a benefit. All three of these elements must be satisfied in order for a subsidy to exist. 2 Thereby, the Agreement requires a financial contribution and contains a list of the types of measures that represent a financial contribution (grants, loans, equity infusions, the purchase of goods, fiscal incentives, the provision of goods or services, loan guarantees). 3 Also, financial contribution ought to be made by or at the direction of a government or any public entity within the territory of a Member. Thus, it applies to measures of sub-national governments and of such public bodies as state-owned companies. Although, government very often give direct payments to enterprises subsidies are usually indirect. They may be in a form of research-and-development support, provision of raw materials at below-market prices, tax breaks, or law-interest loans or low-interest export credits guaranteed by a government agency. Third element is in connection with profits and interests. In many cases, as in the case of cash grant enduration of a benefit is obvious but in some other cases situation is more complicated. Thus, the Appellate Body has ruled that existence of a benefit is to be determined by comparison with the marketplace (i.e., on the basis of what the recipient could have received in the market).4 On the level of the European Community (hereinafter: EC) subsidy is also defined. It follows from Article 2 of the Regulation 2026/97 (hereinafter: Regulation) that two cumulative conditions must be met in order to find the existence of a subsidy: there must be a financial contribution by a government in the country of origin or export or there must be a form of income or price support within the meaning of Article XVI of the GATT 1994. 1 2 3 4

Clarke Horlick, The 1994 Subsidies Agreement, World Competition, 1994, at 41. Article 1 of the WTO Agreement on Subsidies and Countervailing Measures L336 01/01/1995; http://www.wto.org/english/tratop_e/scm_e/subs_e.htm The WTO Appellate Body Report, Canada-Aircraft WT/DS70/R, para. 157.

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There must be a benefit conferred thereby.5

Therefore, Article 2 of the Regulation is giving a clear definition that subsidy exists if there is a financial contribution by a government or any public body6 in the country of origin or export.7 The biggest challenge for the EC is to determine circumstances of financial contribution by a government. Even in the absence of a financial contribution or a public body, a subsidy may exist if ‘there is any form of income or price support within the meaning of Article XVI of the GATT 1994'.8 Also, the EC Institutions inferred that a benefit must be granted to the exporting producers.9 The benefit must be the actual not potential benefit received by a company during the investigation period. § 2.2 Categories of Subsidies There are two basic categories of subsidies and one that should be mentioned but not longer exists. The SCM Agreement creates prohibited and actionable subsidies. All specific subsidies fall into one of these categories. (1) Prohibited subsidies (“red light“) Article 3 of the SCM Agreement contains two categories of subsidies that are prohibited. These two categories of subsidies are prohibited because they are designed to directly affect trade. The first category consists of subsidies contingent, in law or in fact, whether wholly or as one of several conditions, on export performance (“export subsidies“). Export subsidy is a government policy to encourage export of goods and discourage sale of goods on the domestic market through low-cost loans or tax relief for exporters or government financed international advertising or research and development.10 Furthermore, government uses this type of subsidy to upraise the export of specified products, such as agricultural and dairy products. It is recognized that the granting by a government of a subsidy on the export of any product may have harmful effects, both importing and exporting, may cause undue disturbance on normal commercial interests.11 Accordingly, contracting parties should seek to avoid the use of subsidies on the export of primary products.12 The second category consists of subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods (“local content subsidies“). Developed countries had already accepted the prohibition on export subsidies (under the Tokyo Round SCM Agreement) and local content subsidies (under 5

6 7 8 9 10 11 12

Van Bael & Bellis, Anti-dumping and other trade protection laws of the EC, Kluwer Law International 2004, page 536. Article 1 (3) of the Council Regulation (EC) No 2026/97 (31997R2026), 1997. Ibid. Article 2 (1). Ibid. Article 2 (1) (b) Polyethylene terephthalate (PET) film (India) O.J. (1999) L 316 /1 http://en.wikipedia.org/wiki/Export_subsidies Article XVI, Section B (2), The General Agreement on Tariffs and Trade, 1947 Ibid. Article XVI, Section B (3)

the Article III of the GATT 1947). However, the SCM Agreement provides the extension of the obligations to developing countries, as well as the creation in Article 4 of this Agreement of a rapid dispute settlement mechanism for complaints regarding prohibited subsidies. In order of better understanding the SCM Agreement provides a definition of 'specificity'. Hence, a subsidy that is limited to certain enterprises located within a designated geographical region within the jurisdiction of the granting authority shall be (de-jure) specific13. If access is limited based on objective criteria then it would not be a specific subsidy. Only specific subsidies are subject to the Agreement. There are four type of 'specificity' within the meaning of the SCM Agreement: prohibited, enterprise, industry and regional subsidies. Beside this de-jure specificity there could be de-facto specificity by granting of disproportionately large amounts to certain enterprises and some other forms of discrimination. This definition has also been given in the Regulation and narrows the meaning of subsidies. (2) Aceptionable subsidies (''green light'') This type of subsidies isn't prohibited and that is the reason why it is called ''green light'' subsidy. Most subsidies fall in this category of subsidy. The Agreement on SCM does not provide any specific definition of Actionable Subsidies. However, under the Agreement actionable subsidies are those that cause injury to the domestic industry of another member, nullification or impairment of benefit accruing directly or indirectly to other members or serious prejudice to interests of another member as actionable subsidies14. Remedy is a removal of harmful effects of the subsidy or imposition of countervailing duties on imports. (3) Non-actionable subsidies (‘‘yellow light'') With a few exceptions, all permissible subsidies that are specific are actionable. Those that are not specific are non-actionable15. Above mentioned, those subsidies that are based on objective economic criteria and 'do not favor certain enterprises over others' are not specific. They are therefore non-actionable. Thus the subsidies given by governments to small and medium-sized enterprises, identified on the basis of their size or number of employees, would ordinarily be non-actionable16. Furthermore, there are subsidies that are specific but also non-actionable. That would happen if they meet three conditions given in Agreement (art. 8). § 2.3 Remedies Ea

13 14 15 16

Article 2 (2) of the SCM Agreement ibid. Article 5 and 6 ibid. Article 8 http://www.jurisint.org/pub/06/en/doc/C08.pdf

E Each state has the right to defend its economy. Two types of remedies are available for the purpose of offsetting any subsidy granted, directly or indirectly, for the manufacture, production, export or transport of any product that cause injury. Under the Regulation it is a material injury to the Community industry that attracts attention17. Country can use the WTO's dispute settlement procedure to seek the withdrawal of the subsidy or the removal of its adverse effects. Also, the country can take its own investigation and ultimately charge extra duty (known as ''countervailing duty'') on subsidized imports that are found to be hurting domestic producers. Countervailing duties (CVDs) are duties imposed under WTO Rules to neutralize the negative effects of other duties. Also, countervailing duty is a tariff designed to "counter" the effects of the foreign export subsidy. They are imposed when a foreign country subsidizes its exports, hurting domestic producers in the importing country. It is worth emphasizing that the CVD law, in this case, does not protect the "country", nor does it protect consumers. The law is designed to aid import firms exclusively18. International and European Community have developed very specific rules of these procedures. 3.

DUMPINGS

§ 3.1 Definition ''Dumping involves selling abroad at a price that is less than the price used to sell the same goods at home (the 'normal' or 'fair' value). To be unlawful, dumping must threaten or cause material injury to an industry in the export market, the market where prices are lower. Dumping is recognized by most of the trading world as an unfair practice (akin to price discrimination as an antitrust offense).'' 19 Dumping is said to occur when the export price of any product is less than the comparable price of a like product in the domestic market of the exporting Member. For a fair comparison of export price with normal value, the sale in the home market needs to be in the ordinary course of trade and should at least be five percent of the quantity sold to the importing Member20. If a company exports a product at a price (export price) lower than the price it normally charges on its own home market (normal value), it is said to be 'dumping' the product21. Opinions differ as to whether or not this is unfair competition, but many governments take action against dumping in order to defend their domestic industries. European Community is trying to defend its market of serious injuries that cause dumped imports. If left unchallenged, dumping gives the third country exporter an unfair competitive advantage, which could be exploited with considerable negative consequences for the Community industry22. European Union has a new Anti-Dumping regulation that came into force on 1 January 1995. This Regulation was updated by 17 18

19 20 21 22

Article 8 (1) of the Regulation Stevan M. Suranovic, International Trade Theory and Policy; http://internationalecon.com/Trade/Tch110/T110-3.php Ralph H. Folsom & Michael W. Gordon, International Business Transactions 6.1 § (1995); http://www.sethassociates.com/imposition_of_anti_dumping_duty.php http://www.chinadaily.com.cn/bizchina/2006-10/09/content_704098.htm http://ec.europa.eu/trade/issues/respectrules/anti_dumping/index_en.htm

Regulation 384/96, which came into force on 6 March 1996. It incorporates measures agreed in the Uruguay Round of the GATT. The parties most directly affected by an anti-subsidy proceeding are the domestic producers, foreign producers and exporters and their importers as well as representative trade associations. Dumping is to be condemned only if it causes or threatens to cause material injury to a domestic industry in the importing country or materially retards the establishment of a domestic industry. The WTO main focus is on how governments can or cannot react to dumping—it disciplines anti-dumping actions, and it is often called the "Anti-Dumping Agreement". (This focuses only on the reaction to dumping contrasts with the approach of the Subsidies and Countervailing Measures Agreement)23. § 3.2 Dumping requirements While not prohibited by the WTO, General Agreement on Tariffs and Trade (GATT) (Article VI) allows countries the option of taking action against dumping. The Anti-Dumping Agreement clarifies and expands Article VI, and the two operate together. The legal definitions are more precise, but broadly speaking the WTO agreement allows governments to act against dumping where there is genuine ("material") injury to the competing domestic industry.. Therefore, requirements are: a) case of dumping b) serious injury for a national business branch c) causal link between the dumping and the injury. The government has to be able to show that dumping is taking place, calculate the extent of dumping (how much lower the export price is compared to the exporter’s home market price), and show that the dumping is causing injury or threatening to do so. In order to identify the case of dumping government should calculate a product’s “normal value”. “Normal value” is first defined as the comparable price actually paid or payable in the ordinal course of trade for the like product intended for consumption in the exporting country or country of origin. However, only sales made in the ordinary course of business enter into the calculation24. There are three methods to calculate a product’s “normal value”. The main one is based on the price in the exporter’s domestic market. When this cannot be used, two alternatives are available—the price charged by the exporter in another surrogate country, or a calculation based on the combination of the exporter’s production costs, other expenses and normal profit margins, so called constructed value. Establishing whether dumping has occurred it is very important to define the meaning of ''export price'' and ''dumping margin''. First one is a price actually paid or payable for the product sold for the export to the EU. As well, ''dumping margin'' is the difference between the adjusted normal value and adjusted export price. Anti-dumping measures can only be applied if the dumping is hurting the industry in the importing country. Therefore, a detailed investigation has to be conducted 23 24

http://en.wikipedia.org/wiki/Dumping_(pricing_policy) Ralph H. Folsom, EU Law in a nutshell, third edition, page 237

according to specified rules first. The investigation must evaluate all relevant economic factors that have a bearing on the state of the industry in question. If the investigation shows dumping is taking place and domestic industry is being hurt, the exporting company can undertake to raise its price to an agreed level in order to avoid anti-dumping import duty. Finally, it is necessary to exist the causal link between the dumping and the injury. § 3.3 Investigation and Anti-dumping measures Detailed procedures are set out on how anti-dumping cases are to be initiated, how the investigations are to be conducted, and the conditions for ensuring that all interested parties are given an opportunity to present evidence. Anti-dumping measures must expire five years after the date of imposition, unless a review shows that ending the measure would lead to injury. Anti-dumping investigations are to end immediately in cases where the authorities determine that the margin of dumping is insignificantly small (defined as less than 2% of the export price of the product). The agreement says member countries must inform the Committee on Anti-Dumping Practices about all preliminary and final anti-dumping actions, promptly and in detail. They must also report on all investigations twice a year. When differences arise, members are encouraged to consult each other. They can also use the WTO’s dispute settlement procedure. Anti dumping is a measure to adjust the situation arising out of the dumping of goods and its negative trade effect and the main purpose is to re-establish fair trade. Anti dumping measures do not provide protection per se to the domestic industry. It only serves the purpose of providing remedy to the domestic industry against the injury caused by the unfair trade practice of dumping25. § 3.4 Dumping in the European Union As far as EC products are concerned, Community anti-dumping proceedings are presently governed by European Council Regulation 384/96. The function of the Commission is to investigate the facts and to determine whether there is sufficient evidence to justify initiating a proceeding. The Commission also has the power to impose provisional anti-dumping duties no longer then six months, which can be extended to nine months26. The bureaucratic entity responsible for advising member states on antidumping actions is the Directorate General Trade (DG Trade), based in Brussels. Community industry can apply to have an anti-dumping investigation begin. DG Trade first investigates the standing of the complainants. If they are found to represent at least 25% of community industry, the investigation will probably begin.

25 26

http://www.chinadaily.com.cn/bizchina/2006-10/09/content_704098.htm Article 7 (7) of the Regulation 384/96, 1996. O.J. (L 56) 1.

4. C O N C L U S I O N There is no need to explain the significance of all definitions, discussions, conventions and laws enacted and organized by international and European community. Although these economic and international trade law institutions aren't new and there is numerous number of books and conventions that elaborate them this field is full of blanks. However, it shouldn’t be forgotten the contribution of the WTO agreements and international acts. Nevertheless, the European Union is not left behind and has great number of regulations in combating with these unfair trading. Developed countries that have large trade web with other countries are very interested in solving the issue. But it is never that easy because it cannot be unilateral matter. Rarely countries have the same interests. States with close markets seem to have the biggest challenge cause of great product imports and low or none product exports. Finally, atmosphere in international trade law changes all the time and governments should keep up with that in its attempts to surmount the negative effects of subsidies and dumpings.

5. I N TE R PR E TAT I O N O F T E R M S Anti-dumping – a common mechanism used by countries to protect their domestic industry from unfair trade practices, such as dumping. Countervailing duty - a special duty levied for the purpose of offsetting any bounty or subsidy bestowed, directly, or indirectly, upon the manufacture, production or export of any merchandise. Countervailable subsidies – a specific subsidy that is subjected to countervailing measures. Dumping - an act of a manufacturer in one country exporting a product to another country at a price which is either below the price it charges in its home market or is below its costs of production. Dumping margin -  means the calculable difference between the normal prices and the export prices of goods imported into country of origin. Export price – a price actually paid or payable for the product sold for the export that is different from its ''normal value''. Export subsidies - payments made by the government to encourage the export of specified products. Material injury - is the state of significant decline or growth restriction in terms of capacity, price and sale of goods, profit, production development rate, employment, investment and other indexes of the domestic industry, or the state of retardation of the formation of a domestic industry. It requires an objective investigation, based on evidence of the volume and price effects of dumped imports and the consequent impact of dumped imports on the domestic industry. Normal value - comparable price, in the ordinary course of trade, actually paid or payable for the like product intended for consumption in the exporting country or country of origin. Specificity – a subsidy that is limited to certain enterprises located within a designated geographical region within the jurisdiction of the granting authority. Subsidy - in a general sense subsidy means money granted by the State or a public body to keep the prices of commodities under control.

Subsidy investigation - an investigation to determine the existence, degree and effect of any alleged subsidy initiated upon a written complaint by any natural or legal person, or any association not having legal personality, acting on behalf of the Community industry. 6. R E F E R E N C E S 1. Brink Lindey and Dan Ikenson, Antidumping 101: The Devilish Details of Unfair Trade Law, Center for Trade Policy Studies; available at: http://www.freetrade.org/node/43 [accessed on 28. November 2008];

2. COUNCIL REGULATION (EC) No 2026/97 of 6 October 1997; available at: http://eurlex.europa.eu/smartapi/cgi/sga_doc?smartapi!celexapi!prod!CELEXnumdoc&lg=EN&numdoc=3 1997R2026&model=guichett [accessed on 27. November 2008];

3. China daily, Dumping and Anti-dumping; available at: http://www.chinadaily.com.cn/bizchina/2006-10/09/content_704098.htm, [accessed on 24 November 2008];

4. Clarke Horlick, The 1994 Subsidies Agreement, World Competition, 1994 5. Dan Ikenson (policy analyst), Antidumping's Flawed Methodolohy under Fire, The Center for Trade Policy Studies; available at: http://www.freetrade.org/bios/ikenson.html [accessed on 28. November 2008];

6. Debra P. Steger, Symposium on Economic Restructuring in Korea In Light of the Doha Development Round Negotiations on Rules, Thomas & Partners, Ottawa, Canada; available at: http://www.iit.adelaide.edu.au/docs/StegerSubsidiesSpeechKITA.pdf [accessed on 28. November 2008];

7. Department of Finance-Canada, Subsidies and Countervailing Measures; available at: http://www.fin.gc.ca/activty/pubs/Sub_e.html [accessed on 26. November 2008];

8. Department for Business Enterprise & Regulatory Reform, Anti-Dumping, Anti-Subsidies and Countervailing Measures and Safeguards; available at: http://www.berr.gov.uk/whatwedo/europeandtrade/key-trade-issues/anti-dumping-subsidysafeguards/page27512.html [accessed on 28. November 2008];

9. Don Mathews, The Fallacies of Shrimps Protectionism, Ludwig von Mises Institute available at: http://www.mises.org/story/1551 [accessed on 28. November 2008];

10. Eggert, J., Observations of the EU Anti-Dumping Regulation FTA Position for the Expert Meetings; available at: http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_129812.pdf [ accessed on 20. November 2008];

11. European Commission and the WTO; Protection against dumped Imports; available at: http://ec.europa.eu/trade/issues/respectrules/anti_dumping/index_en.htm [accessed on 23. November 2008];

12. Gateway of the European Union-Treaties Office Database, Summary of Treaty, available at: http://ec.europa.eu/world/agreements/prepareCreateTreatiesWorkspace/treatiesGeneralData.do?ste p=0&redirect=true&treatyId=578 [accessed on 27. November 2008];

13. Global Subsidies Initiative, The WTO and Subsidies; available at: http://www.globalsubsidies.org/en/media-portal/the-wto-and-subsidies [accessed on 28. November 2008];

14. JURIST Legal News and Research, Rules Governing subsidies on Industrial Products, University of Pittsburgh; available at: http://www.jurisint.org/pub/06/en/doc/C08.pdf [accessed on 23. November 2008];

15. Liderpress-Hrvoje Mateljic, Bogati ce tek 2013. ukinuti poljoprivredne izvozne subvencije (Developed countries will not abolish agricultural export subsidies till 2013. year); available at: http://www.liderpress.hr/Default.aspx?sid=789 [accessed on 26. November 2008];

16. Murray N. Rothbard, Protectionism and the Destruction of Prosperity, Ludwig von Mises Institute, available at: http://www.mises.org/rothbard/protectionism.asp [accessed on 28. November 2008];

17. National Assembly Standing Committee of the State President of the Socialist Republic of Vietnam, Ordinance on Anti-dumping of Imports into Vietnam, available at http://chongbanphagia.vn/beta/down.php?file=files/Ordinance-on-AntiDumping.pdf [accessed on 26. November 2008];

18. Ralph H. Folsom & Michael W. Gordon, International Business Transactions 6.1 § (1995); 19. Seth Associates (Advocates and legal consultants), Imposition of Anti-dumping Duty-A Trade Protection Measure; available at: http://www.sethassociates.com/imposition_of_anti_dumping_duty.php [accessed on November 2008];

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20. Stevan M. Suranovic, International Trade Theory and Policy; available at: http://internationalecon.com/Trade/Tch110/T110-3.php, [accessed on 22. November 2008];

21. The Law of the World Trade Organization, Subsidies and Countervailing Measures under the WTO framework; available at: http://labspace.open.ac.uk/mod/resource/view.php?id=345420 [ accessed on 27. November 2008];

22. The WTO Agreement on Subsidies and Countervailing Measures, available at: http://ia.ita.doc.gov/regs/uraa/saa-cv.html [accessed on 22. November 2008];

23. The World Trade Organization, Export Subsidies and Competition; available at: http://www.wto.org/english/tratop_e/scm_e/subs_e.htm [accessed on 25. November 2008];

24. Van Bael & Bellis, Anti-dumping and other trade protection laws of the EC, Kluwer Law International 2004

25. Van den Bossche, Peter (2005). The Law and Policy of the World Trade Organization, Cambridge, UK: Cambridge University Press. pp. 42

26. Wikipedia, Dumping-Pricing policy; available at: http://en.wikipedia.org/wiki/Dumping_(pricing_policy) [accessed on 22. November 2008] and Subsidy; available at: http://en.wikipedia.org/wiki/Subsidy [accessed on 22. November 2008];