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Latest Proposal from European Parliament Suggests Significant Change to the Way EU Calculates Anti-dumping Tariffs

The European Parliament has proposed significant changes to the way in which anti-dumping tariffs are calculated. The latest draft position from the European Parliament specifies that EU investigators should assume an 8% profit margin in all dumping probes. This effort to modernise EU trade defence instruments also takes place in the context of the EU seeking to update its anti-dumping methodology to comply with WTO obligations.

The European Parliament’s proposal is likely to generate great controversy. As previously reported (see Regulatory Alert-EU: EU Pushes Forward with Future Anti-dumping Rules, While Mainland China Claims that Rules Still Breach EU’s WTO Obligations), Russia and mainland China have already voiced concerns over the EU’s proposal for tighter anti-dumping rules. The new EU anti-dumping methodology was informally agreed between the European Parliament and EU Council of Ministers on 3 October 2017 and seeks to abolish the current distinction between market and non-market economies. Instead, a new methodology for calculating dumping margins for imports from third countries where significant market distortions exist are set to be introduced. This will particularly be the case where the State has a pervasive influence on the economy.

Pursuant to the future changes, EU investigators will be able to construct the normal value of exporting producers on the basis of costs of production and sale reflecting undistorted prices or benchmarks, including undistorted international prices and costs, in case it is determined “that it is not appropriate to use domestic prices and costs in the exporting country due to the existence of significant distortions”.

The current trilogue negotiations, between the European Parliament, Commission and Council of Member States’ Ministers, are focusing on the modernisation of the EU’s trade defence instruments. At the most recent trilogue gathering of 7 November 2017, some progress was made on technical issues, according to the Chair of the Committee on International Trade, but “a lot of negotiation” is still necessary. At the Committee’s meeting of 9 November 2017, he reported that key outstanding issues include the lesser-duty rule and the inclusion of labour and environmental standards.

Of particular note to Hong Kong traders with export interests in mainland China is the news that the European Parliament is advocating a methodology which would require anti-dumping investigations to assume a fixed target profit level when calculating the level of injury suffered by domestic industry. It is already well known that, following an investigation, dumping tariffs are calculated on the basis of a number of factors, including the degree to which the domestic industry has been harmed by the cheaper imports. This injury margin is then set by comparing the actual profits made by the domestic industry to the profits that would have been made in the absence of dumping.

It is also understood that the Council of Member States’ Ministers prefers a target profit level of 5%, a rate which aligns more closely with typical expected profit levels. In either case, the imposition of a minimum target profit for the EU’s domestic industry represents a departure from current practice. At the moment, EU rules do not provide for a minimum target profit: as every economic sector is different, so too are the target profits applied.

In practice, target profit margins are typically set around 5% (most notably in the recent investigations concerning imports of ferrosilicon, certain pipes and tubes, and aluminium foil). Lower target profit margins also occur, such as the 3.9% applied in the investigation into ceramic tiles. On the other hand, higher target profit margins are not uncommon: 7% in the case of hot-rolled steel, 9.9% in the case of cold-rolled steel, and as much as 11% in the case of biodiesel.

However, an 8% margin would be higher than the reality in most EU industries and sectors. As a result, the European Parliament’s proposal could lead to products being subjected to excessively high tariffs following anti-dumping investigations.

Concern has also been raised that the assumption of a higher profit would have the effect of shielding other factors which may affect profits. Changes in market demand and broader market conditions may, for instance, have an impact on the profitability of an export business, and are unrelated to dumping practices. Under the current rules, investigators seek to ensure that the injury calculation is proportional to the evidence of dumping. The new proposal, however, is not guaranteed to account fairly for profits arising from dumping practices.

In this context, those exporting goods to the EU may also be concerned by the possibility of facing higher EU tariffs due to the artificiality of the 8% margin. Such margin could result in an exaggeratedly high level of injury being found.

Official comment has been scarce: the process of trade defence modernisation has progressed slowly since starting in 2013. More negotiation on this point, and others, is therefore expected.

Content provided by Picture: HKTDC Research
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