Communication from the Commission to the Council and the European Parliament on the treatment of former non- market economies in anti-dumping proceedings
Date: 1997-12-12
Institutions: European Commission
Subjects: China, Russia, anti-dumping legislation, import policy, market economy

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 12.12.1997 
COM(97)677  final 

97/0368 (ACQ 

COMMUNICATION FROM THE COMMISSION 
TO THE COUNCIL AND THE EUROPEAN PARLIAMENT 

on 
the treatment of former non-market economies in anti-dumping proceedings and 

a  proposal  for  a  Council  Regulation  amending  Council  Regulation  (EC)  No 

384/96. 

Proposal for a 

COUNCIL REGULATION (EC) 

amending Council Regulation (EC) No 384/96 on protection against 

dumped imports from countries not members of the European 

Community. 

(presented by the Commission) 

EXECUTIVE SUMMARY 

At present, EU Anti Dumping legislation categorises a large number of third countries 

as  Non  Market  Economies  (NMEs).  In  NME  countries,  it  is  considered  to  be 

impossible to calculate normal value according to standard domestic price  information 

because  of  the  significant  distorting  effect  of  heavy  state  control  and  the  absence of 

meaningful  market  signals.  Thus,  the  so  called  analogue  country  system  was 

developed  so  that  normal  value  in  NMEs  is  established  by  reference  to  prices  and 

costs  in  a  comparable  market  economy  in  a third  country.  For  countries  labelled  as 

Market Economies, on the other hand, the problem does not arise, and normal value is 

calculated according to the domestic economic information  of the country in question. 

The special treatment of NMEs under the antidumping rules dates from the  1950s, and 

the  practice  associated  with  NME  status  was codified  by the EU  in  1979. Since  that 

time, however, the fall  of Communism  in Central  and Eastern  Europe  and  the  former 

Soviet  Union  and  the  unprecedented  launch  of  economic  reform  in  China  and 

elsewhere  has  significantly  altered  the  economic  circumstances  in  many  of  the 

countries  labelled  as  Non  Market  Economies.  In  recognition  of  their  economic 

transformation  and  the  progress  towards  European  Union  membership,  the  countries 

of Central and Eastern Europe have already been removed  from  the NME list and are 

now treated as market economies under the EU antidumping rules. 

In the cases of Russia and China, however, the remarkable advances brought about by 

economic  reform  remain  unrecognised  in  EU  Anti  Dumping  legislation.  As  a result 

the  price  calculation  methods  automatically  applied  to  all  investigations  relating  to 

these  two  countries  are  no  longer  always  appropriate,  and  there  is  clear  economic 

justification  to adapt EU antidumping practice so as to reflect their present conditions. 

Both  Russia  and  China  are  vitally  important  trading  partners  for  the  EU  and  present 

enormous  potential  markets  for  the  future.  The  volume  of  trade  between  the 

Community  and  these  two  countries  has  increased  rapidly  over  the  last  decade  and 

- 1 -?  -  4-

will  no doubt continue to do so as they grow  in economic  stature.  Anti-dumping  rules 

have  of  course  played  a  key  role  in  maintaining  equilibrium  in  the  trading 

relationships  where  unfair  pricing  has  taken  place.  But  despite  the  fact  that  a  small 

part of  trade is covered  by  anti  dumping  measures  (for  eg,  approximately  only  1 % of 

imports  from  both countries  was  affected  by  anti-dumping  measures  in  the  European 

Union  in  1996),  both  Russia  and  China  have  attached  great  political  significance  to 

EU antidumping policy, in particular their status as NMEs. 

The purpose  of  this  proposal  is  to  introduce  specific  adjustments  to EU  antidumping 

practice  based  on  an objective  assessment  of  existing  economic  conditions  in  Russia 

and China without weakening  the EU's commercial  defence  instruments. In particular, 

this proposal will  allow  a degree of flexibility  on a case by case basis to  accommodate 

instances  where the existence  of verifiable  market economic  conditions  prevail.  It will 

also remove  the  labelling  of  Russia  and China  as NMEs  and  it will  introduce  a more 

systematic  approach  to  the  calculation  of  individual  treatment  and  comparative 

advantage. 

In this  way,  the proposed  changes  will  be  a recognition  of  the  efforts  made  so  far by 

China  and  Russia  to  transform  their  economies.  They  will  also  act  as  an  important 

incentive  for  continued  and  accelerated  reform  in  those  enterprises  in  Russia  and 

China which do not yet operate in a market economic  environment  and will bolster the 

efforts  of  the  Russian  and  Chinese  Governments 

to  advance  reform  at  a 

microeconomic  level.  Finally  they will bring the EU  anti  dumping  rules  into line  with 

those  of  some  of  our  main  trading  partners  (eg  US,  Australia,  Canada)  all  of  whom 

have  the  ability  to  adjust  their  anti  dumping  instruments  to  match  the  economic 

realities on the ground. 

This Communication sets out the  following: 

• 

the background to, and implications  of,  the treatment currently  applied  vis-à-vis 

non-market economies  in anti-dumping proceedings; 

• 

the implications of  the process of economic  reform  in Russia and China  for anti 

dumping; 

a proposal for changes to the current anti-dumping  practice. 

COMMUNICATION TO THE COUNCIL AND THE EUROPEAN 

PARLIAMENT ON THE TREATMENT OF FORMER NON MARKET 

ECONOMIES IN ANTI-DUMPING  PROCEEDINGS 

A. 

Introduction 

1.  According  to EU Anti  Dumping  legislation, third countries are either categorised 

as  'Market  Economies'  (ME) or  'Non  Market  Economies'  (NME). The countries 

regarded  by  the  EU  as  non-market  economies  are  not  listed  in  the  Basic  anti 

dumping  regulation  itself, but  in  an  annex  to  Council  Regulation  519/94 on  the 
common  rules  for  imports  from  certain  third  countries1.  All  other  countries  are 

considered  to be market economies. The main  practical  difference  between  these 

two categories  is related  to the  way in  which  'normal  value'  (the price  at which 

exporters  sell  goods  on  their  domestic  market),  and  hence  the  existence  of 

dumping, is determined for the purpose of anti dumping investigations. 

2.  Dumping  occurs  when  a  producer  sells  goods  on  an  export  market  at  a  price 

which  is  lower  than  the  normal  value,  that  is  the  price  of  the  goods  on  the 

producer's  home  market. 

In  anti-dumping  proceedings  concerning 

'market 

economy'  countries, normal  value  is  usually  based  on the domestic  prices  in the 

exporting  country.  Where  domestic  prices  do  not  truly  reflect  normal  value, 

because  for  instance  domestic  sales  are not  sufficient,  the costs  of  production  in 

the exporting country arc used instead. 

3. 

In the case  of NMEs  it  is considered  to be  impossible  to calculate  normal  value 

according  to  domestic  standard  price  information  because  of  the  significant 

distorting  effect  of  heavy  state  control  and  the  absence  of  meaningful  market 

Countries  considered  as  non-market  economies  are  Albania,  Armenia,  Azerbaijan  Belarus,  P.R.  China, 
Georgia, Kazakhstan, North Korea, Kyrgyzstan, Moldavia, Mongolia, Russia, Tajikistan, Turkmenistan, Ukraine, 
Uzbekistan, Vietnam 

signals. For this reason,  the Antidumping Regulation contains  special  provisions 
for  the  calculation  of  normal  value2,  automatically  applicable  to  all  countries 

listed  as  non-market  economies.  According  to  these  provisions,  instead  of 

domestic  prices  or  costs,  prices  or  costs  in  an  analogue  market  economy  third 

country are used.  In selecting an analogue country, the Community's  approach is 

to  seek  a  market  economy  in  which  prices  and  costs  are  not  excessive  in 

comparison  with  a world  average  for  the product  concerned.  This  is  determined 

on  the  basis  of  a host  of  factors,  including  the  conditions  of  competition  in  the 

candidate  analogue  country  and the characteristics  of  its domestic  industry,  such 

as the degree of its rationalisation and modernisation and its cost-consciousness. 

4. 

In  order  to  fully  understand  the  reasoning  behind  the  treatment  of  NMEs,  it  is 

useful  to  look  at  its  origins  and  historical  development.  In  order  to  define 

dumping, Article VI of the GATT places emphasis on the concept of  transactions 

made  in  the  'ordinary  course  of  trade'.  This  means that  in  order  to be  reliable, 

prices  and  costs  must  be  determined  on  the  basis  of  market  signals  reflecting 

supply  and demand conditions. In  1955, this was clearly  not the case with regard 

to  a  number  of  command  economies  in  which  state  control  over  the  means  of 

production  and state  intervention  in the economy  were  so  substantial  that  prices 

and  costs  could  be  significantly  distorted.  In  acknowledgement  of  these 

difficulties,  an interpretative  note to Article VI of the GATT was adopted  stating 

that:  "It  is  recognised  that,  in  the  case  of  imports  from  a  country  which  has  a 

complete or substantially  complete  monopoly of its trade and where all domestic 

prices  are  fixed  by  the  State,  special  difficulties  may  exist  in  determining  price 

comparability  for  the  purposes  of  paragraph  1,  and  in  such  cases  importing 

contracting parties may find it necessary to take into account the possibility  that a 

strict  comparison  with  domestic  prices  in  such  a  country  may  not  always  be 

appropriate". 

5.  While  the  interpretative  note  highlighted  the potential  difficulties  with  price and 

cost data in NMEs, it did not suggest any alternative criteria on the basis of which 

2 

Article 2, paragraph 7 of Council Regulation (EC) No 384/96 of 22 December 1995 

normal  value  should be established.  In the absence of regulation,  a solution  had 

therefore  to  be  found,  and  the  analogue  third  country  system  was  developed  by 

the  US  after  the  end  of  the  Kennedy  round.  The  objective  of  this  system  was 

clear:  in  order  to  be  able  to  compare  prices  in  the  exporting  country  with  the 

normal  value  of  the  goods  in  the  ordinary  course  of  trade,  an  undistorted 

benchmark had to be sought outside the NME country of the exporters, and prices 

and costs in a comparable surrogate market economy third country had to be used. 

This  approach  was soon  taken  up by other signatories  to the GATT, and in  1979 

the EU introduced specific  rules codifying  its practice in this area. 

6.  Another  difference  between  the  treatment  of  NMEs  and  MEs  in  anti-dumping 

proceedings  is  the  manner  in  which  the  antidumping  duty  is  determined.  In  the 

case of MEs, individual  duties are established  for each exporter, while in the case 

of a NME a single average rate of duty is applied to all imports from  that country. 

The inability to distinguish between individual producers in a NME country stems 

from  the fact that all the means of production  and natural resources belong to one 

entity,  the  State.  All  imports  from  NMEs  are  therefore  considered  to  emanate 

from  a single producer,  and the application  of  a single  rate  is necessary  to avoid 

circumvention  of  the  duties,  that  is  the  channelling  of  exports  through  the 

exporter  with  the  lowest  duty  rate.  Current  EU  practice  allows  for  derogations 

from  this  general  rule  where  warranted  by  the  economic  circumstances  of  the 

companies involved. Individual duties may therefore  be applied in the exceptional 

cases where a company can show that it operates independently from the State.  In 

March  1997,  the  administrative  rules  on  individual  treatment  were  revised  in 

order  to  introduce  more  flexibility. 

In  order  to  qualify  for  such  treatment, 

exporters  are  now  required  to  meet  five  core criteria  (see  (i), (iv), (vi), (vii)  and 

(viii) of Annex) while a certain discretion  is left  to the Commission  regarding the 

remaining three criteria. 

7.  China  and  Russia  are  two  of  the  countries  traditionally  treated  as  non-market 

economies  under  the  antidumping  rules.  The  provisions  outlined  above  were 

designed  to  meet  the  conditions  prevailing  in  command  economies,  and  they 

reflected  the  situation  of  these  two countries  at  the  time  when  the  interpretative 

note to Article VI of the GATT was adopted. In the meantime, however, although 

both  China  and  Russia  have  clearly  moved  away  from  the  paradigm  of  a 

command or centrally-planned economy, the EU antidumping rules remained the 

same.  This  situation  has  prompted  an  internal  review  of  the  EU  antidumping 

policy with a view to determining whether any adaptations had to be made. 

B. 

Changes in Russia and China 

8. 

It is  not always easy  to measure  the precise  level  of  reform  in order to  see  if a 

country  has  evolved  'enough'  to  warrant  market  economy  treatment;  and  since 

former  non-market  economies  often  take  their  own  very  distinct  routes  in  the 

reform process, their level  of achievements will  vary in different  areas.  Different 

countries  do not therefore  easily  lend themselves  to a direct  comparison.  In the 

case of Russia and China, for example, China has pursued slow but steady reform 

since  1979, experimenting  first  on a limited basis  in the coastal  zones  and only 

then expanding the reforms to cover the whole country. Russia, on the other hand, 

has proceeded quickly since 1992. 

9.  What is clear, however, is that both countries have definitely  moved away from a 

command economy: output is no longer primarily determined by central planning; 

most  restrictions  on  import and export  trade have  been  lifted;  prices  have been 

extensively liberalised; the national currency has been made convertible under the 

current  account;  privatisation  has  proceeded  apace;  and  private  enterprise  has 

been encouraged. In parallel, legal and institutional  structures are being reformed 

and new tax laws and fiscal regimes are under elaboration. 

10.  On the microeconomic  level, the structure of enterprises  is changing.  Alongside 

the State owned enterprises, which are being encouraged to merge and restructure, 

there is an emergence of new companies which operate autonomously of the State 

and  in  increasingly  competitive  conditions.  One  noticeable  factor  is  the 

increasing number of foreign owned firms which operate in these countries on the 

basis of market economy principles.  If is clear that, for these operators, the extent 

to which their own prices and costs can be used in anti-dumping  investigations is 

increasing. 

11.  The following  facts illustrate the economic changes in Russia and China: 

Russia 

•  At  a  macroeconomic  level,  the  Russian  economy  has  stabilised  to  a  significant 

degree over the last two years. The reform  process has been further  reinforced  by 

the establishment  of  a new Cabinet  in March  1997, building  on  the  mandate  for 

reform  won  by  president  Yeltsin  in  the  1996  elections.  The  government  has 

followed  a  consistently  tight  monetary  policy:  the  exchange  rate  has  been 

stabilised; inflation  is down to between  l%-2% per month; and Russia's  growing 

ability to draw from  international  capital  markets has helped to bring  real  interest 

rates down to 24% in June  1997, compared  with  120% in June  1996. Output  may 

finally be on the upturn. 

• 

• 

The  withdrawal  of  the  state  is well  established  for  example  state  subsidies  have 

been  drastically  cut  back  and  wages  have  been  liberalised.  The  rouble  is  fully 

convertible.  The  outcome  of  the  Tax  Code  debate,  and  the  passing  of  a budget 

allowing  Russia  to  stay  within  the  IMF budget  deficit  target  of  close  to  5% of 

GDP will be key. 

Prices  were  liberalised  extensively  for  the  first  time  in  1992.  Prices  of  tradable 

goods have been brought towards market levels, and even exceeded them in some 

cases.  Prices  for  services  remain  in  most  cases  lower  than  world  levels,  though 

are rising  at a faster  rate, as they  are commercialised.  In the case of  housing and 

utilities,  for  example,  cost-recovery  ratios  are  being  adjusted  with  a  view  to 

phasing out associated price subsidies. 

• 

Privatisation  took  place  in  two  waves.  In  1992,  major  state-owned  companies 

were  obliged  to issue  shares in the form  of "vouchers" that  were  made  available 

to  the  entire  population  for  free.  Since  1994,  the  privatisation  programme  has 

focused  on  the  transfer  of  the  remaining  blocks  of  shares  to  the  private  sector 

through  auctions  or  tenders,  including  the  "shares  for  loans"  scheme  selling 

shares  in  29 leading  companies  to banks  and  consortia.  While  criticised  for  the 

extent  of  insider  dealing,  later  privatisation  programmes  have  nevertheless  been 

broadly  carried  out  on  a  commercial  basis.  By  mid-1997  the  total  of  128.000 

firms  of  all  sizes  and  in  all  sectors  have  been  privatised.  The  privatisation 

programme  is  picking  up  again  at  the  end  of  1997,  partly  in  response  to  the 

budget revenue crisis. 

Banking  and  interest  rate  regime:  Commercial  banking  and  financial  markets 

have  developed  rapidly  over  the  past  two  years, supported  by  a  much-improved 

regulatory  structure. In particular two laws of  1995 on corporations  and  securities 

markets  have  significantly  increased  protection  for  shareholders.  However,  the 

development  of  the  stock  market  is  still  at  an  early  stage,  and  regulation  and 

supervision are under preparation.  Restrictions still apply to foreign  applicants. 

• 

Trade  liberalisation:  In  line  with  its  application  to join  the  WTO,  Russia  has 

substantially  liberalised  its  foreign  trade  regime.  The  end  of  the  foreign  trade 

monopoly  was  heralded  in  1991;  and  the  reforms  of  1994  to  95  completed  the 

transition to a broadly open regime. 

In conclusion, economic  reform  at  a macroeconomic  level  is well  established  in 

Russia.  Some internal contradictions remain, however, with divergences between 

legislation  and  practice:  between  federal  intention  and  regional  application;  and 

from  company to company.  The Russian government has, this year, embarked on 

a  series  of  policy  reforms  to  translate  intentions  into  practice;  the  campaign  to 

bring  '^natural  monopolies"  under  control;  parallel  to  the  ongoing  debate  on  the 

new Tax  Code  it has intensified  efforts  to recoup arrears of payments; and  at the 

microeconomic  level,  the  nation-wide  introduction  of  accounting  and  auditing 

reform  are  evidence  of  the  government's  determined  efforts  to  accelerate  the 

reform process. 

China 

China  has  taken  significant  steps  to  liberalise  its economy  since  Deng  Xiaoping 

set  about  gradually  dismantling  the command  economy  in  1979.  The  process of 

reform  is  already  well-established,  and  the  political  will  to  sustain  it  was 

confirmed by Jiang Zemin at the  15th Party Congress last September. 

• 

By freeing  up prices, creating  a convertible  currency, removing  trade  restrictions 

and encouraging private enterprise, including through foreign  investment,  market 

principles  have  gradually  been  introduced  into  the  Chinese  economy.  In  large 

pockets of that economy, not least in the many  'special economic  zones',  foreign 

and domestic companies already operate along market lines. 

Price  liberalisation.  According  to  the  World  Bank  in  1996, 90% of  retail  prices 

and 80% of prices for agriculture and raw materials are determined  by the market. 

This  compares  to  1978  when  97%  of  retail  prices,  94.4%  of  farm  prices  and 

99.7%  of raw  material  prices  were state controlled.  In  1993, crude  oil  and  steel 

prices  were  liberalised.  State-controlled  prices  have now  been  eliminated  in  all 

areas  except  for  gas,  water  and  electricity  for  civil  use.  Even  here,  price 

liberalisation  is under way, for example  in Beijing,  where water and fuel  charges 

have increased  significantly. 

The enterprise  system.  An  effective  intenational  corporate  model  already  exists 

in  China  (World  Bank  country  study  on  China,  1997).  Where  state-owned 

enterprises  have already  been  incorporated,  it  has helped  make profits  and  losses 

more  transparent,  while establishing  book  values  for  assets  and  clarifying  rights 

over real estate. As regards private and semi-private companies, they now account 

for  over  two  thirds  of  economic  production  in  China,  and  this  percentage  is 

increasing every  year.  Furthermore, the share of foreign  companies  in  import  and 

export  jumped  from  21%  in  1991  to  47%  in  1996  (market  access  database, 

European Commission).  Foreign-funded  production  companies  now  account  for 

a large portion of China's exports to Europe. 

Currency  issues  and  capital  markets.  China  introduced  full  convertibility  for 

current  account  transactions  in  1996,  foregoing  the  right  ever  to  reimpose  any 

currency  restrictions  on  current  account  activities  without  the  approval  of  the 

International  Monetary  Fund. Inflation  has been effectively  tackled  - it  was  over 

25%  in  the  early  '90s  and  is  down  to  single  digits  today  (in  retail  price  terms 

inflation  was  on  average  1.8%  from  January  to  June  1997,  while  average 

consumer  price  inflation  was  5% in  the  same year). China's  growing  integration 

with global capital markets is reflected  by the fact that it now accounts for 40% of 

foreign  investment  flows,  10%  of  bank  lending  and  a  growing  amount  of 

portfolio  investment  in developing  countries. Furthermore, gradual  reform  across 

the  entire  financial  sector  was  launched  in  1993, and  includes  strengthening  the 

central  bank  tightening  control  on  government  lending  and  transforming  four 

specialised banks into genuinely commercial banks. 

Special economic zones.  In addition  to reforms  designed  to encourage  domestic 

private enterprise, the growth of the private sector is due to Beijing's  active policy 

of  attracting  foreign  firms  to  set  up  joint  ventures  in  China's  five  'Special 

Economic Zones', namely Shenzhen (where much of Hong Kong's outsourcing is 

located),  Zhuhai,  Shantou,  Xiamen  and  Hainan.  The  regulatory  framework, 

designed  to  attract  high  technology  and  encourage  production  for  export,  offers 

the  right  to  establish  wholly-owned  companies  and  to  export  independently 

without the obligatory  use of state trading companies, and without  prior  approval 

from  the  State.  It  also  offers  preferential  rates  on  customs  duties,  income  tax, 

product  tax and  VAT under certain  conditions.  In many cases  those  reforms  have 

taken  root,  spreading  beyond  the  bounds  of  the  zones  themselves.  The  SEZs 

enjoy  substantial  autonomy  from  the  Central  Government  and  benefit  from  the 

growth  of  an  enterprise  culture  within  them,  induced  by  foreign  investors, 

connections  with Taiwan  and Hong  Kong, and government  schemes  to  introduce 

a  modern  corporate  structure.  A  number  of  foreign  banks  already  carry  out 

substantial operations within  many of these areas. 

In  addition  to  the  SEZ,  14 major  coastal  cities  were  opened  up  to  free  enterprise 

in  1984, followed  by  a number  of  border  cities,  several  inland  provincial  capitals 

and  number  of  cities  along  the  banks  of  the  Yangtse  river.  Open  coastal  cities 

have  since  joined  together  to  create  larger  development  areas  such  as  the  Pearl 

River  Delta  in  Guangdong  and  the  Yangtse  delta  (which  includes  Shanghai). 

Many  companies  in these  zones  are effectively  operating  under  market  conditions 

already.  350  million  people  live  in  China's  coastal  zones,  where  market  reforms 

have progressed  furthest. 

• 

Trade  liberalisation.  The  Chinese  leadership  believes  that  the  gradual  removal  of 

trade  and  investment  barriers  is  a  necessary  complement  to  its  own  internal 

reform  programme,  and  China  has  already  substantially  liberalised  its  trade 

regime.  In  1979  there  were  14 state-owned  trading  corporations.  Today  there  are 

over  12,000  companies  with  foreign  trading  rights.  In  the  context  of  WTO 

accession  negotiations  China  has  already  offered  to  cut  its  import  tariffs  from  an 

average  of  17%  today  to  10%  by  2005  (in  1994  the  average  was  34%)  and  to 

remove  all remaining  quotas by 2005. 

In  conclusion,  economic  reform  has  firmly  taken  root  in  China.  The  process  of 

reform  is  not  yet  complete  everywhere  in  China,  for  instance,  in  relation  to  the 

determination  of  wages  and  working  conditions,  but  the  political  will  is  there  to 

carry  through  the  necessary  changes.  In  particular,  the  Chinese  governement  is 

making  conceited  efforts  to  spread  the benefits  of  economic  reform  to  all  regions 

and  to  accelerate  the  restructuring  of  State-owned  enterprises.  Furthermore,  the 

development  of  new  welfare  and  labour  policies  is  under  way  in  order  to  respond 

inter  alia 

to 

the  growth 

in  migrant 

labour  and 

to  a  transitional  rise 

in 

unemployment  as  the  workforce  is shifted  from  traditional  industries  to  new  areas 

ol  economic  activities. 

2.  Detailed  reflection  within  the  Commission  prompted  both  by  the  evidence  of 

substantia]  economic  reform  in  Russia  and  China  and  by  the  positive  impact  that 

the  treatment  of  the  issue  may  have  on  the relationship  between  the  EU  and  Russia 

and  China,  has  led  to  the  development  of  this  proposal.  It  represents  a move  away 

from  NME status  (whilst  still  stopping  short  of full  market economy  status) based 

on  a  more  flexible,  case  by  case  analysis  of  the  economic  conditions  relevant  to 

each anti dumping investigation. 

13.  Importantly,  such  an  approach  will  support  the  policy  initiatives  pursued  by 

governments  to  encourage  fundamental  restructuring  at  the  company  level, 

including the introduction  of modern  accounting  and  auditing  systems  and modern 

management  techniques,  effective  competition  and  bankruptcy  legislation,  and 

solutions  to  non-repayment  problems.  As  such,  this  proposal  represents  an 

incentive for  sustained  reform  in both Russia and China, a goal which  the EU will 

continue to encourage by providing appropriate assistance. 

14.  The  proposed  changes  will  bring  the  EU  antidumping  provisions  into  line  with 

those  of  some  of  our  major  trading  partners  which  already  have  the  ability  to 

adjust  their anti dumping practice to match the economic  realities  on  the  ground. 

In  this  context,  the  anti-dumping  practice  of  other  GATT  signatories  was  also 

examined. 

15.  Australia  and Canada  already  have legislative  provisions  which  allow  the  use of 

domestic  prices  and  costs  for  countries  in  a  transition  phase  should  market 

conditions  be deemed  to exist  - Australia  recently  used  such  domestic  economic 

data  in  two  cases  involving  China.  The  US  also  has  similar  provisions  in  its 

legislation and decisions are taken in accordance with a pre-defined  list of criteria 

which  can  be  applied  on  a  case-by-case  basis.  In  particular,  United  States 

legislation  permits normal  values to be based on the prices and costs  in countries 

in transition,  if  it  is shown  that  the goods  under  investigation  are  produced  by a 

"market  oriented  industry"  (MOI).  In determining  whether  a MOI  exists,  the  US 

examines to what extent  input costs are market-determined  and the degree of state 

interference  in  business  decisions  concerning  production  and  pricing.  This 

provision  has  not  been  extensively  invoked  by  the  companies  subject  to 

antidumping  investigations  in the US, and  its application  has therefore  been  very 

limited. The US is currently  re-examining  the MOI test with  a view  to  increasing 

transparency  and  understanding  in  the  application  of  the  criteria.  Furthermore, 

10 

the  US  grants  individual  treatment  in  almost  every  case.  Their  approach  in  this 

regard is pro-active and it is based on systematic on-spot visits.. 

C, 

Proposal to amend EU anti-dumping policy vis-à-vis Russia and 

China 

16. The EU antidumping system is presently unable to take account of the changes in 

the  Russian  and  Chinese  economies  because  of  the  inflexibility  of  the  analogue 

country  rule: if  a country  is listed  as a NME the EU  has no alternative  but  to use 

analogue country data, even if it can be shown that economic conditions  make this 

choice  unnecessary  or  inappropriate.  In order  to  insert  a degree  of  flexibility  into 

the  EU  practice  so  that  it  can  accommodate  instances  where  verifiable  market 

economy  conditions  prevail,  the following  adaptations  to the current  treatment  of 

these countries have been identified.  These are: 

(i)  Russia  and  China  will  be  deleted  from  the  list  of  countries  to  which  NME 

treatment applies. 

(ii)  The  EU  will  be  given  the  possibility  to  derogate  from  the  analogue  country 

method  in  those  cases  in  Russia  and  China  where  the  economic  circumstances 

justify  it. In particular: 

-  A specific  provision  will be introduced  into the basic  anti-dumping  regulation 

which  will  allow  the  EU to examine, on  a case-by-case basis, whether  one or 

more  producers  subject  to  an  antidumping  investigation  operate  in  a  manner 

which  will  make  the  use of  their  domestic  prices  and  costs  meaningful  in the 

establishment of normal  value. This determination  will  be made on the basis of 

properly  substantiated  requests  by the producer  or producers concerned  and in 

the  light  of  the  criteria  included  in  annex  I  of  the  attached  proposal  for  a 

Council Regulation  . 

3 

This will not prevent the EU industry from submitting a complaint on the basis of analogue 
country  data.  If  it  is,  however,  shown  subsequently,  in  the  course  of  the  antidumping 

II 

For  example,  in  order  to  be  able  to  use  domestic  prices  and  costs  in  anti 

dumping  proceedings,  the  accounting  records  of  the  company  should 

accurately reflect  the costs of production  for the product concerned. Moreover, 

costs  of  inputs  such as land, raw  materials,  labour  etc. should  be  valued  on a 

reasonable basis.  The same applies  to the cost  of utilities  such  as energy  and 

to the cost of technology  (including intellectual  property  rights).  In situations 

where the costs of certain inputs appear distorted, these inputs will be replaced 

by their corresponding  value in a market analogue third country.  Account  will 

be  taken  of  whether  the  company  is  financed  by  borrowings  or  properly 

acquired  capital. The company  should  also be free  to determine  its prices  and 
quantities so as to achieve the goal of maximising returns on assets.4 

The  Commission  will,  upon  initiation  of  the  case,  duly  inform  the  producers 

concerned  that  they  have  the  possibility  to  submit  such  claims.  The  onus  of 

proof  will  lie  with  the  exporting  producer  or  producers  concerned.  In  its 

examination of such claims, the Commission will use all information  available 

to it. To the extent  that  market conditions  prevail, domestic  data will be used, 

and  individual  dumping  margins  for  the  companies  concerned  will  be 

established.  This  approach  will  apply  only  to  antidumping  investigations 

initiated after the entry into force of the relevant legislative changes. 

The  additional  work  required  by  the  examination  of  market  economy  status 

will have to be completed  early  enough  in  the investigation  in  order  to  allow 

the existing  mandator}' time limits  to be met. In this respect  it  will  be  crucial 

that  an irrevocable  decision  on  the  market  economy  status of  individual  firms 

is taken at the earliest  possible stage in the proceeding ie. within one month of 

initiation. 

investigation, that  market  economy  conditions  prevail  with  regard  to  these  firms,  the  EU 
will use domestic prices or costs  of  production  as  a basis for calculating  normal value. 

,  •> 

(iii) If it cannot  be shown that market conditions prevail,  analogue country  data will 

be  used,  same  as  at  present.  However,  improvements  to  our  practice  will  be 

introduced in the following respects: 

-  Under  current  practice, 

the  Commission  examines  whether  the  "analogue 

country"  normal  value  needs  to  be  adjusted  to  take  due  account  of  overall 

natural comparative advantages that Russian or Chinese producers may have in 
comparison  to  the  producers  in  the  analogue  country5.  In  this  regard,  the 

Commission  will  in  future  take  the  initiative  to  inform  the  producers 

concerned  of  their  rights  in  this  respect,  it  will  send  questionnaires  to  them, 

and  it  will  verify  the  data  provided  by  means  of  on-spot  visits.  Adjustments 

will  be  made  where  appropriate.  The  normal  value  thus  established  will 

accurately  reflect  the  real  conditions  of  production  and  sale  in  Russia  and 

China. 

-  Finally  improvements  will  be  introduced  with  regard  to  individual  treatment, 

that  is  the  determination  of  individual  dumping  margins  which  apply  as  an 

exception  from  the  single  country-wide  margin.  Under  current  practice, 

individual treatment can be granted where a producer can show that it operates 

independently  from  the  State, on the basis of the criteria  listed  in Annex  1  of 

this Communication,  and according to the administrative  practice described in 

Paragraph  6 of this Communication.  The Commission  will continue  using the 

same criteria as before.  In this context emphasis will be put on whether or not 

there is a risk of circumvention of the duties. The Commission will examine by 

means  of  on-spot  visits,  any  evidence  submitted  to  substantiate  requests  for 

4 

5 

The  full  list  of  criteria  is  included  in  Annex  1  of  the  attached  proposal  for  a  Council 
Regulation. 

According  to the case  law  of  the  European  Courts,  in antidumping  investigation  account 
must be taken of natural comparative advantages enjoyed by producers in NME countries, 
Case  C-16/90, Detlef  Nolle  v.  Hauptzollamt  Bremen-Freihafen. Express  reference  to 
"comparative  advantages  is  made  in the Joint  Declaration  in  relation  to  Article  18 of  the 
EU  Russia  PCA. where  it was  agreed that  due account  shall  be taken  overall  of  natural 
comparative  advantages  shown  by the  manufacturers  involved  to  be  held with  regard to 
factors  such  as  access  to  raw  materials,  production  process,  proximity  of  production  to 
customers, and special characteristics of the product. 

13 

such treatment in order to be able to decide on the basis of a global  assessment 

cf the degree of independence of the company or companies concerned. 

The above adaptations provide the basis for  a balanced package  which  should 

now be implemented as an appropriate reaction to the economic changes in the 

two countries concerned. 

17.  To  the  extent  that  market  economy  conditions  prevail  with  regard  to  certain 

companies  in  Russia  or  in  China  the  proposal  will  lead  to  the  application  of 

domestic prices and costs where analogue third country data would have otherwise 

been  used.  The  impact  of  the  proposal  will  therefore  depend  on  the  extent  of  the 

reforms  realised  by  these  countries,  and  it  will  reflect  the  specific  behaviour  and 

operating conditions of individual  firms.  It will not thus weaken  in any respect  the 

effectiveness  of  the  EU  antidumping  instrument.  Obviously  antidumping  action 

will continue to be taken where justified. 

18.  This  proposal  does  not  prejudge  the  negotiations  taking  place  concerning  the 

accession  of these countries  to the WTO. While it is hoped  that  this proposal  will 

interact  positively  with  the  on-going  WTO  accession  negotiations  by  further 

stimulating  reforms,  it  will  not  ease  or  reduce  the  EU  requirements  for  WTO 

membership  of  these  countries.  As  regards  other  countries  presently  listed  as 

NMEs,  the Commission  will keep developments  in these countries  under  review, 

and  it  will  regularly  report  on  progress  made  towards  market  economy  in  the 

context of the on-going reform  processes with a view to adapting accordingly  their 

treatment in anti-dumping proceedings. 

14 

ANNEX 

CRITERIA ON INDIVIDUAL TREATMENT 

i)  The  majority  of  the  shares  should  belong  to  genuinely  private  companies  and  no 

State officials  should appear on the board or in a key management position; the fact 

that the company concerned is controlled by a foreign  investor will be considered a 

relevant indication of independence. 

ii) The land on which the facilities  of the company are built should be rented from  the 

State at conditions comparable to those in a market economy country  or purchased 

(e.g. proper contractual lease). 

iii)The company  should  have the right to hire and dismiss employees  and the right to 

fix salaries. 

iv)The company should have full control over its supply of raw materials and inputs in 

general. 

v) The  supply  of  utilities  should  be  guaranteed  on  the  basis  of  proper  contractual 

terms. 

vi)Proof  is  given  that  profit  can  be  exported  and  capital  invested  can  be  repatriated 

(only in case of foreign  investment, e.g. joint ventures). 

vii)The export prices  should be determined  freely;  the fact  that export  sales are made 

to a related party located outside the country in question will be a decisive  factor. 

viii)Freedom  to  carry  out  business  activities  should  be  guaranteed,  in  particular  in 

respect of the following : 

• 

there should be no restrictions on selling on the domestic market; 

* 

• 

the right to do business cannot be withdrawn outside proper contractual terms; 

©  quantities  produced  for  export  should  be  determined  freely  by  the company  in 

accordance with the traditional demand of its export markets. 

15 

PROPOSAL 

FOR A COUNCIL REGULATION (EEC) NO 797. 

amending Council Regulation (EC) No 384/96 on protection against 

dumped imports from countries not members of the European 

Community. 

16 

Council Regulation (EC) No/97 

amending Regulation (EC) No 384/96 on protection against dumped 

imports from countries not members of the European Community 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  establishing  the  European  Community,  and  in 

particular Article 113 thereof, 

Having regard to the proposal from the Commission6, 

Having regard to the opinion of the European Parliament7 

Whereas by Regulation (EC) No 384/968 ("the Basic Antidumping  Regulation") 

the  Council  has  adopted  common  rules 

for  protection  against  dumped 

imports from countries which are not members of the European Community; 

Whereas  by  Regulation  (EC)  No  519/949 the  Council  has  adopted  common 

rules for imports for certain third countries which are listed in its Annex I; 

6OJNo 

7OJNo 

8OJNo 

9OJNo 

I7 

Whereas  paragraph  7  of  Article  2  of  Council  Regulation  (EC)  No  384/96 

prescribes  that,  in the  case  of  imports  from  non-market  economy  countries 

and, in particular these countries to which Regulation (EC) No 519/94 applies, 

normal  value  shall  be  determined  on the  basis  of  the  price  or  constructed 

value in an analogue market economy third country; 

Whereas the process of reform in Russia and the People's Republic of China 

has fundamentally  altered their  economies  and  has  led to the  emergence  of 

firms or sectors where  market  economy  rules  prevail; both countries  have as 

a result moved away from the economic circumstances which inspired the use 

of the analogue country method; 

Whereas  is  it appropriate  to  revise  the  Community's  antidumping  practice  in 

order  to  be  able  to  take  account  of  the  changed  economic  conditions  in 

Russia and in the People's  Republic of China; in particular, it is appropriate to 

specify  that  normal  value  may  be  determined  in  accordance  with  the  rules 

applicable to market  economy countries  in cases where  it can  be shown that 

market conditions prevail for one or more producers subject to investigation in 

relation to the manufacture and sale of the product concerned; 

Whereas  it  is appropriate  to specify  that  an  examination  of  whether  market 

conditions  prevail  will  be  carried  out  on the  basis  of  properly  substantiated 

claims  by one  or  more  producers  subject  to  investigation  who  wish to  avail 

themselves of the possibility to have normal value determined on the basis of 

rules applicable to market economy countries; 

Whereas,  in  order  to  introduce  the  revised  practice  without  affecting  the 

common  rules for imports in respect  of  Russia and the  People's  Republic of 

China,  it  is  appropriate  to  remove  from  Article  2.7  of  the  Basic  Antidumping 

Regulation  the  reference  to  the  list  of  countries  attached  to  Regulation  (EC) 

No  519/94,  and to  add  instead,  in a  footnote,  the  revised  list of the  countries 

concerned; 

HAS ADOPTED  THIS  REGULATION : 

Article 1 

Article 2.7 of Regulation  (EC)  No 384/96 shall be amended as follows : 

"(a) 

In  the  case  of  imports  from  non-market  economy  countries(1),  normal 

value  shall  be  determined  on  the  basis  of  the  price  or  constructed  value  in  a 

market  economy  third  country,  or  the  price  from  such  a  third  country  to  other 

countries,  including  the  Community,  or  where  those  are  not  possible,  on  any 

other  reasonable  basis,  including  the  price  actually  paid  or  payable  in  the 

Community  for  the  like  product,  duly  adjusted  if  necessary  to  include  a 

reasonable profit margin. 

An  appropriate  market  economy  third  country  shall  be  selected  in  a  not 

unreasonable  manner,  due  account  being  taken  of  any  reliable  information 

made  available  at  the  time  of  selection.  Account  shall  also  be  taken  of  time 

limits;  where  appropriate,  a  market  economy  third  country  which  is  subject  to 

the same  investigation shall be used. 

The  parties to the  investigation  shall be informed shortly after  its initiation of the 

market  economy  third  country  envisaged  and  shall  be  given  10  days  to 

comment. 

(1)  including  Albania,  Armenia,  Azerbaijan,  Belarus,  Georgia,  Kazakhstan, 
North  Korea,  Kyrgyzstan,  Moldavia,  Mongolia,  Tajikistan,  Turkmenistan, 
Ukraine, Uzbekistan, Vietnam 

(b) 

In  anti-dumping  investigations  concerning  imports  from  the  Russian 

Federation and the People's Republic of China, normal value will be determined 

io  accordance  with  paragraphs  1 to  6,  if  it  is  shown, on  the  basis  of  properly 

substantiated claims by one or more producers subject to the investigation  and 

in the  light  of  the  criteria  contained  in  annex  I of  this  Regulation, that  market 

economy  conditions  prevail  for  this  producer  or  producers  in  respect  of  the 

manufacture and sale of the like product concerned.  When this is not the case, 

the rules set out under sub-paragraph (a) shall apply. 

Article 2 

1. This Regulation shall enter into force on 

It shall apply to alt anti-dumping 

investigations initiated after the date of its entry into force. 

This  Regulation  shall  be  binding  in  its  entirety  and  directly  applicable  in  all 

Member States. 

Done at Brussels 

20 

ANNEXI 

Criteria  to  be  applied  in  deciding  whether  domestic  prices  and  costs  should  be 

used in anti-dumping proceedings involving former NMEs 

Decisions  as to whether, or to what extent, domestic prices and costs in former  NME 

countries  can  serve  as  the  basis  for  determining  normal  value  in  anti-dumping 

investigations shall be based on the following  criteria: 

•  Decisions  of  firms  regarding  prices, costs  and  inputs, including  for  instance  raw 

materials,  cost  of  technology  and  labour,  output  and  investment,  are  made  in 

response  to  market  signals  reflecting  supply  and  demand,  and  without  significant 

State  interference  in this regard; costs of  major  inputs  substantially  reflect  market 

values. 

•  Firms  have  one  clear  set  of  basic  accounting  records  which  are  in  line  with 

adequately  supervised  international  accounting  standards  and  are  applied  for  all 

purposes. 

•  The production  costs  and  financial  situation  of  firms  are not  subject  to  significant 

distortions carried over from  the former  non-market economy  system, in particular 

in relation to depreciation  of assets, other write-offs,  barter trade and payment  via 

compensation of debts. 

•  The  firms  concerned  are  assured  of  appropriate  application  of  bankruptcy  laws 

and of property laws which guarantee legal certainty  and stability  for the operation 

of firms. 

•  Exchange rate conversions are carried out at the market rate. 

21 

ISSN 0254-1475 

COM(97) 677 final 

DOCUMENTS 

EN 

02  11  10  06 

Catalogue number  :  CB-CO-97-734-EN-C 

ISBN  92-78-29712-7 

Office  for Official  Publications of the European  Communities 

L-2985 Luxembourg