OPINION: Dr Weihuan Zhou and Stéphanie Noël, Borderlex, 7 September 2017.

On 1 September 2017, Indonesia brought a dispute to the World Trade Organization over Australia’s anti-dumping measures on A4 copy paper. The implications of a ruling in this case will go far beyond the case at hand and may impact, in the long-term, the anti-dumping practice of the European Union.

The dispute arose out of Australia’s imposition of an anti-dumping duty ranging from 12.6 percent to 45.1 percent on A4 copy paper exported from Indonesia. At the core of the dispute is Australia’s Anti-Dumping Commission’s finding that Indonesian exporters had sold the subject goods to Australia at ‘dumped’ prices on the ground that a ‘particular market situation’ existed in the Indonesian market.

As a reminder, ‘dumping’ occurs where the sale of goods to overseas markets is at prices lower than the prices of ‘like’ products in the domestic market, i.e. their ‘normal value’. The calculation of ‘normal value’ is therefore essential to the determination of dumping, the magnitude of dumping margins, and the antidumping duties to be levied.

WTO law regulates how anti-dumping decisions should be made. In relation to the calculation of normal value, the primary WTO approach is to use the actual sale price of the subject goods in the market of the export country. There are exceptions to this rule: the WTO Antidumping Agreement allows members to determine the normal value by alternative methods. One such method is making references to the export price of ‘like’ goods to a third country.

Another WTO permissible option is to reconstruct the normal value on the basis of the cost of production in the country of origin, plus a reasonable amount for administrative, selling, and general costs and profits, when there are no sales of the like product in the ordinary course of trade in the domestic market of the exporting country; or, alternatively, when, because of the particular market situation, such sales do not permit a proper price comparison. However, the Antidumping Agreement does not define the concept of ‘particular market situation’, nor does WTO case law.

What is a ‘particular market situation’?

In the case at hand, the Australian antidumping authorities found a ‘particular market situation’ to exist on the ground that the Indonesian government implemented policies that distorted the price of the main raw material, which resulted in lower paper prices. This, according to the Australian anti-dumping commission, justified resorting to constructed normal value. In addition, for the purpose of constructing normal value, the commission disregarded the actual costs of pulp incurred by Indonesian producers and used instead benchmark prices.

In determining whether dumping occurred, the Australian antidumping authority compared the actual export price of paper with an artificially inflated normal value, or a hypothetical ‘undistorted’ price. It did so without establishing beforehand whether and to what extent the alleged distortion of the price of pulp prevented a proper comparison between the export price and the price on the domestic market of paper.

This practice does not seek to ensure that normal value is fit for comparison with the export price. Rather, it aims at counter-acting the effects of government policies, whether or not they affect export prices and prices on the domestic market equally.

Australia is one of the most frequent users of the ‘particular market situation’ approach under WTO law, particularly in cases targeting Chinese products. The Australian approach is different from that of other WTO members, such as the United States and the EU. These have consistently relied on the so-called ‘non-market economy’ methodology whereby the prices and costs in a market economy third country are used to calculate normal values. This methodology is only permitted until 11 December 2016.

The non market economy methodology is not available to Australia since 2005, when Australia recognized China as a full market economy as a precondition for the negotiation of the China–Australia Free Trade Agreement. For Australia, the ‘particular market situation’ method has served as a convenient substitute to the ‘non market economy’ methodology.

EU eyeing Australia

The EU has consistently taken an approach similar to that of Australia towards countries that were removed from its list of ‘non market economy’ countries in its anti-dumping regulation, albeit on a different basis.

If the European Commission determines that the input costs incurred by the producer of the product under consideration do not reasonably reflect its cost of production, it finds that because of this particular market situation for inputs, there are no sales of the product under consideration in the ordinary course of trade in the domestic market of the exporting country. On this basis, it proceeds with normal value construction, and disregards the costs actually incurred by producers in constructing normal value. A challenge to this ‘cost-adjustment methodology’ brought by Russia is still pending before the WTO Dispute Settlement Body.

The EU’ is overhauling its anti-dumping regulation. The proposed change notably provides for the removal of China from its list of ‘non market economy’ countries. Under the European Commission’s proposal, it would be allowed, whenever it has established that prices are distorted due to state intervention, to construct normal value based on costs of production and sale reflecting undistorted international prices, costs or benchmarks.

This ‘particular market situation’ approach could serve as an alternative justification for resorting to constructed normal value and sanctioning price distortion resulting from date intervention. Regulators and anti-dumping agencies in the EU have been conducting consultations with the Australian authorities on how the notion of particular market situation may be applied in practice.

The WTO dispute filed by Indonesia against Australia is the first case challenging the recourse to the ‘particular market situation’ approach. This is significant because it will not only test the WTO-legality of Australia’s (ab)use of the term ‘particular market situation’, but will also establish WTO jurisprudence on how the term should be interpreted and applied.

More broadly, the case will have far-reaching implications for the treatment of countries like China by clarifying on the flexibility to continue to use surrogate prices and costs in anti-dumping investigations under the WTO law after the recent expiry of the ‘non market economy’ methodology. Given China’s lasting concern about Australia’s treatment of it as being in a ‘particular market situation’, this dispute also offers an unprecedented opportunity for China to challenge Australia’s practice as a joint complainant.

If China does so, then this dispute will complement China’s ongoing WTO litigation against the EU’s anti-dumping regulation which continues to authorise the application of the ‘non market economy’ methodology.

Following the recent Appellate Body decision in the Argentina – Biodiesel case, this new dispute may add further clarifications on whether surrogate production costs may be used for the construction of normal value based on a finding of a particular market situation. Such clarifications will shed light on the WTO-consistency of the EU’s proposed new methodology.

Read the article here.