Fighting unfair trade practices

23. 8. 2018 | Trade policy

After 2015, with the increase in excessively cheap steel imports from China and other countries, anti-dumping protection of the EU industries became a topical issue. In the steel sector alone, the EU uses more than sixty protective tariffs to push the unfairly cheap prices of imported steel upward to the standard price levels. The new anti-dumping measures introduced in recent years to regulate trade in steel products mostly targeted Chinese producers, who had often resorted to dumping to solve their own problems with overcapacity and insufficient sales in the Chinese market.

Anti-dumping regulations and their reform
Dumping occurs whenever a producer from a non-EU country sells its products in the EU market below production cost or at prices lower than those charged by the producer in its domestic market. When a suspicion of dumping arises, the European Commission initiates an investigation to determine the normal value of the given product, which is then compared to the import price. If the normal value is higher than the import price, the imports are classified as dumping and the difference between the two is referred to as the dumping margin.

With WTO members, dumping margins are usually calculated according to standard rules where the normal value of a product is considered to be equivalent to its price in the domestic market or the production cost. However, prices and costs in the domestic market may be distorted due to state interventions including subsidies, excessively cheap credit or lax environmental protection regulations. In such cases they do not provide a suitable basis for comparison with the export price.

In 2017 the European Union introduced a new methodology for the calculation of normal value, which will be used for countries where prices and costs are distorted by state interference. The investigation will use different reference data that reflect undistorted production and sales costs. These may include production and sales costs in a suitable representative country with a comparable level of economic development. The new methodology will be used in cases when investigation reveals major distortions of the market environment that have impact on prices and costs.

State interventions are common e.g. in situations where there are many state-owned or state-controlled companies and the state authorities use their power to influence the market. The aim of the new European methodology is to take better account of the full range of potential governmental interventions, from preferential access to credit for domestic producers to welfare protections for employees in the country of origin. The European Union does not promote protectionism: it simply wants to equalize the conditions of competition between companies based in the European Union and those based in the third countries and thus preserve European production. This is especially important for countries like the Czech Republic where industry makes up a significant part of the overall economic output.

Injury to European industry
The Commission may impose anti-dumping tariffs but only if it proves that the unfairly cheap imports have caused material injury to the European industry concerned, i.e. for example, that they have significantly contributed to a drop in European prices or to a significant degree prevented a rise in European prices that would otherwise have occurred. It has been pointed out earlier, especially by representatives of the steel industry, that the extent of the injury – which is used to determine the level of the anti-dumping tariff – is calculated unfairly. For example, the Commission has been using profit margins from the period following the outbreak of the 2008-2009 financial crisis when these were far below the long-term average. The injury calculated in this way was consequently too small and the tariffs imposed were too low to be effective.

The 2018 reform of anti-dumping rules has changed the method for calculating the injury. From now on, the Commission will include in its calculations also the cost of necessary infrastructure or R&D investments and future expenses connected with the observance of welfare and environmental standards. In the case of the steel industry this includes e.g. the purchasing costs of emission allowances. The Commission will also henceforth base its calculations on a minimum profit margin of five per cent.

An anti-dumping tariff may be imposed at the earliest after sixty days from the start of the investigation. Its height is based both on the dumping margin and on the extent of the injury inflicted. The Commission may thus apply what is referred to as the lesser duty rule and impose a tariff that is equivalent to the amount of damage suffered by European companies. The resulting tariffs are often several times smaller than the dumping margins. The impact of the lesser duty rule can be clearly seen on a comparison with the United States, which does not apply this principle. Where the United States imposed a 133% punitive tariff on selected Chinese steel products, the European Union only imposed a duty of 22.5 % on the same type of imports. The European duties are thus aimed strictly at compensating the injury inflicted, while US tariffs include a punitive component.

The 2018 reform has limited the application of the lesser duty rule in some cases, albeit rather exceptional ones. The steel industry is one of the sectors that are expected to benefit from this change. The change concerns cases when European companies must compete with imports that are unfairly cheap due to artificially lowered prices of energy and raw material inputs or due to breaches of environmental protection standards. The lesser duty rule will not be applied in cases where raw materials and energy at artificially lowered prices make up more than 17 per cent of the imported product.

Duration of the anti-dumping proceedings
The provisional duty may be imposed within seven or, at most, eight months after the start of the investigation.

The final tariff is imposed after the close of the investigation, i.e. no later than fifteen months after its commencement. Anti-dumping tariffs are in effect for up to five years and may be reinstated by the Commission based on its review of the market situation.

Between January 2015 and March 2017 a number of AD measures concerning the imports of finished and semi-finished steel products were newly introduced or reviewed and prolonged for five years by the European Commission. These apply for example to wire rod, high fatigue performance rebar, steel bars, HRC (hot-rolled coils), sheets and plates, several types of cold-rolled sheets and plates as well as seamless and welded steel tubes. The investigations currently in progress concern mostly flat products, long products and steel tubes.