Research Note no. 38 2004–05
Anti-dumping rules and the Australia-China Free Trade Agreement
Michael
Priestley
Economics, Commerce and Industrial Relations Section
14 March 2005
Introduction
Australia and China are undertaking a joint feasibility
study into a possible Free Trade Agreement (FTA). The study is not a precursor
to the start of negotiations but rather a basis for identifying trade
barriers and finding common ground for their removal.
For China, a recurring issue affecting bilateral trade
relations is Australia’s anti-dumping rules. Over the last decade, imports
from China have been subject to more anti-dumping action than those from
any major industrialised or developing country. This Note examines Australia’s
anti-dumping rules as they apply to China and discusses the likely changes
that will result from an FTA with China.
Feasibility study
In October 2003, the Australian Trade Minister announced
that both governments would undertake a joint study into the feasibility
and benefits of an Australia-China FTA.(1) Initially the joint
feasibility study was due to be completed by October 2005 and there was
an understanding that the conclusions reached by the study would provide
a basis for deciding whether to negotiate. This timetable was later revised
and completion of the joint study was set down for the end of March 2005.
Significantly, Australia agreed that as a condition to commencing negotiations
for an FTA it would recognise China as a market economy.(2)
Later, following a meeting with the Chinese Premier Wen Jiabao, the Trade
Minister announced that he anticipated commencing formal trade talks in
March 2005 after completion of the feasibility study. In February 2005,
the Trade Minister signalled that the announcement of a decision to negotiate
an FTA would coincide with the Prime Minister’s visit to China in April
2005.(3)
Australia-China trade and anti-dumping activity
China is currently Australia’s second largest export
market and third largest source of imports. In 2003–04, trade between
the two countries totalled $25.3 billion, or 11 per cent of Australia’s
total merchandise trade, compared to $6.6 billion, or 4.7 per cent of
merchandise trade in 1994–95. Moreover, there has been a fourfold increase
in imports from China, from $3.6 billion in 1994–95 to $15.3 billion
in 2003–04.(4)
In the decade from 1994–95 to 2003–04, eighteen anti-dumping
actions were initiated by Australian industry against imports from China
(Table 1). This represents 10 per cent of the total number of anti-dumping
cases for the period. But surprisingly, anti-dumping actions involved
a narrow range of industries, particularly chemicals and petroleum, their
associated products and miscellaneous manufacturing (Table 2).
For the previous decade from 1984–85 to 1993–94, two-way
trade between Australia and China increased from $1.4 billion in 1984–85
to $5.7 billion in 1993–94, with imports from China increasing from $375
million to $3.1 billion.(5) During this period, a total of
twenty-six anti-dumping actions were brought against China.
As Table 1 shows, anti-dumping activity by Australian
firms against China has declined in spite of China’s increasing share
of merchandise trade and the growing trade imbalance in favour of China.
Although the decline is consistent with the decline in anti-dumping activity
overall, China is still a particular target for anti-dumping action (see
Figure 1).
Source: Australian Customs Service, Annual Repo
Market Economy Status
‘Market economy status’ (MES) is a term used in relation
to anti-dumping. It is not a World Trade Organization (WTO) related concept
and is derived from anti-dumping laws in the United States which establish
criteria for an exporting country to meet in order to qualify as a ‘market
economy’ in anti-dumping cases.
According to the WTO definition of dumping, dumping
occurs if a product is sold for export at a price below its normal value,
i.e. when ‘the export price of a product exported from one country to
another is less than the comparable price for the like product when destined
for consumption in the exporting country’.(6) The difference
between the export price and normal value is ‘the margin of dumping’ and
under WTO rules a member country can impose anti-dumping duties or securities
against the dumped goods to the value of the dumping margin.
Anti-dumping rules provide various methods for calculating
the ‘normal value’ of goods depending on whether the exporting country
is a market economy or a ‘non-market economy’ (NME). But dumping outcomes
tend to be less favourable for an exporting country when it is treated
as a NME.
MES can be an important concept in bilateral trade
relations and a change from NME to MES status can affect trade flows.
In the United States, the anti-dumping consequences of being denied MES
status are significant and the granting of MES status is often seen as
a prelude to support for a country’s accession to the WTO.(7)
Australia’s anti-dumping rules
In Australia, the main method for calculating normal
value is based on the exporter’s domestic price. But in non-market economies,
the price in the exporter’s home market may not be a reliable guide for
normal value as the domestic price may be subject to price controls, subsidies
or other state intervention. In these circumstances, three methods can
be used to calculate normal value. The main one is based on the domestic
price in a designated third country (or surrogate country). The other
options are – a constructed price based on the production costs in the
surrogate country, or the price in the Australian market.
Although anti-dumping legislation does not define a
NME, the term is used to describe those countries that fit subsection
269TAC(4) of the Customs Act 1901. This section allows the Minister
to use the above methods to calculate the normal value of a good where
the government of an exporting country ‘has a monopoly, or substantial
monopoly, of the trade of the country’ and ‘determines or substantially
influences the domestic price of goods in that country’.
Using surrogate country information instead of domestic
prices increases the likelihood of a positive dumping finding because
the third country is invariably a higher cost producer.
In the case of market economies, subsections 269TAC(1),
(2) and (6) narrow down the range of possible options for calculating
normal value. The preferred method is the price in the exporter’s domestic
market. When this cannot be used because there are not sufficient domestic
sales, two alternatives are available – the price charged by the exporter
in another country, or a constructed price based on the combination of
the exporter’s costs of production, selling expenses and a profit margin.
In the absence of price information or other information about the exporter’s
production costs, the last option is a calculation based on the best available
information.
For an exporting country deemed to be an ‘economy in
transition’ (EIT), there are yet again different ways of calculating normal
value. EIT status is defined by subsection 269T(5C) of the Customs
Act 1901:
A country has an economy in transition at a time
if:
(a) before the time, the Government of the country had
a monopoly, or a substantial monopoly, of the trade of that country
and determined, or substantially influenced, the domestic price of goods
in that country; and
(b) at the time, that Government does not:
(i) have a monopoly, or a substantial monopoly, of
the trade of that country; or
(ii) determine, or substantially influence, the domestic price of
goods in that country.
Australia does not maintain a list of NMEs or EITs
as such, instead the Customs Regulations (Schedule 1B) contains a list
of 134 countries that are exempt from the EIT provisions. Exporting countries
not listed in the Regulation are assessed by Customs on a case-by-case
basis to determine whether or not the goods in question are produced under
market conditions. Customs Regulation 183 sets out the criteria for assessment
for EITs.(8)
Normal value is calculated in the same way as for market
economies, but with two exceptions – if normal market conditions do not
prevail, or the exporter fails to respond to the special Exporter’s Questionnaire.
In practical terms, the onus of proof is on the exporting
country to show that market economy conditions operate in setting the
domestic price. If market conditions cannot be demonstrated, then normal
value is calculated as if the exporting country were a NME. Subsection
269TAC(5D) allows the Minister to determine normal value ‘having regard
to all relevant information’.
What makes it possible for Australia to treat China
as an EIT are provisions in China’s protocol of accession to the WTO requiring
member states to give Chinese exporters the opportunity to show that market
conditions prevail in the industry concerned. But under its accession
protocol, China also agreed that WTO member states could treat it as a
NME until 2015.
If Australia were to grant MES to China, this would
require that China no longer be treated as a NME or EIT for all products
originating in China. Procedurally it would mean that prior to an announcement
of a decision to negotiate an FTA, the Minister would add China to Schedule
1B of the Customs Regulations.
How will MES affect anti-dumping investigations?
There is not a significant difference between the way
normal values are calculated for EITs, compared to market economies except
where market economy conditions do not prevail, or if the exporter does
not respond to the special questionnaire.
Even in the case of market economies, under certain
conditions, normal value can be calculated using surrogate third country
information, or other methods unrelated to the exporter’s domestic price.
But typically these methods, which are the least favourable to the exporter,
are the last options. But in the case of EITs, if market conditions do
not prevail, or the exporter choses not co-operate with Customs, there
is only the fall-back option in subsection 269TAC(5D).(9)
In practice, Customs is not able to decide whether
an exporting country is an EIT and which method to use to calculate the
normal value until an investigation has commenced and it has received
price information from the exporter. Prior to this, it has no way of knowing
if the exporting country is an EIT. From a procedural standpoint, Customs
may only decide if a prima facie case of dumping exists on the
evidence provided in an anti-dumping application. A prima facie
finding of dumping will depend on the standard of proof of dumping. Where
an exporting country is not a market economy and EIT status has not been
determined, it becomes a question of accepting a low or high standard
of proof.
Silicon exported from China
Silicon exported from China is the most recent anti-dumping
case against China and illustrates the methodology for calculating normal
value and how China’s MES status would affect these processes.
In its anti-dumping application, Simcoa, the Australian
manufacturer of silicon, alleged that imports from China were at dumped
prices and had substantially undercut its own prices. As evidence of the
dumping, Simcoa provided two normal values – the domestic price in China
(adjusted for costs) and a constructed normal value based on the cost
of production in South Africa (substituting Simcoa’s costs for selling
and administration expenses).(10)
In assessing the application, Customs was not able
to verify the information regarding adjustments to the selling price (such
as Value Added Tax and delivery/export charges) and revised the cost estimates
in the application. Without reference to the constructed normal value
based on production costs in South Africa, the evidence of dumping (using
only the domestic price in China with the revised costs) was less clear-cut.
The application was nevertheless accepted as having demonstrated prima
facie that silicon exports were at dumped prices and an investigation
was initiated.
In the subsequent investigation and after interviews
with the exporters, Customs was able to determine that market conditions
existed and EIT provisions could be applied to China. Accordingly, normal
value for silicon was assessed by Customs on the basis of domestic prices
in China adjusted for selling costs and other expenses.(11)
Customs found evidence of dumping, with dumping margins ranging from 3.7
per cent to 8.1 per cent (much less than was alleged in the application.)
Dumping margins were just above the 2 per cent de minimis margin
required by WTO rules before anti-dumping measures can be imposed. Customs
also found material injury to Simcoa caused by the dumping (loss of sales
and profitability) and recommended the imposition of dumping securities.
EIT provisions have been in use since ministerial guidelines
were released in December 2000. Significantly, in the majority of cases,
normal values were calculated by Customs on the basis of domestic prices
in China.
If Australia were to accept MES for China, its new
status would come into play in the prima facie situation when an
industry first alleges dumping. The burden of proof of dumping would be
much higher than a calculation based on third country production costs.
Why is China seeking MES?
China is not currently recognised or categorised as
operating a market economy under WTO rules. Hence, there are few incentives
for China to pursue MES through the WTO. The trade advantages for China
in having MES come from bilateral agreements.
From a regional trade perspective, China’s status as
a market economy will make it more attractive to source product from China,
as MES status will apply to all goods originating in China. In the context
of Australia’s anti-dumping rules, MES status for China will raise the
burden of proof needed to initiate an anti-dumping investigation and result
in much less dumping found against China.
A 2002 study by the National Bureau of Economic Research
(NBER) noted that China’s trade policy was geared to improving market
access for its manufactured exports. According to the NBER study, the
imperative for China since its accession to the WTO is to negotiate regional
agreements:
China, like other large powers in the trading system
(the US and the EU) has clear incentive to commit to multilateral disciplines
like the WTO as a way of gaining non discriminatory access to large
markets and head off discrimination against her either in both these
or smaller third country markets by fellow large powers. But closer
to home (and as with the US and EU) China has equally clear incentive
to negotiate supplemental regional agreements which deal with interests
in local markets in ways which go beyond WTO disciplines. The US with
NAFTA, and the EU with accession and other agreements have encountered
similar incentives with similar results.(12)
So far China has negotiated agreements, or initial
frameworks of agreements with Hong Kong, Macao, ASEAN, Australia and New
Zealand, which granted MES status to China in April 2004. Other APEC countries
to follow New Zealand’s decision to grant MES are Malaysia, Singapore
and Thailand. Discussions on possible FTAs with India, South Africa, the
Gulf Cooperation Council countries, Chile and South Africa are already
underway.
Australia-China FTA
An FTA with China would require Australia to reduce
tariffs on Chinese goods to zero and eliminate over time all non-tariff
trade barriers restricting Chinese imports (such as quotas, local product
standards and practices).
Australia’s main merchandise exports to China are minerals
(principally iron ore), metals and farm products (wool). Meanwhile, Australia
imports a large range of manufactured goods, such as computers, electrical
goods, furniture, toys and a range of plastics. Tariffs in these industries
are already low, at 5 per cent (the general rate of tariff) or below.
The largest category of manufactured goods is textile,
clothing and footwear (TCF) products which represent one quarter of imports
from China. For the two industries with the highest tariffs (the automotive
and TCF industries), a preferential tariff rate would apply until tariffs
were phased down to zero, most likely by 2015 or 2020. But both countries
would retain their WTO rights to anti-dumping action.
A survey of Australian manufacturing by the Australian
Industry Group in 2004 revealed a strong fear of an FTA with China:
A common theme throughout the company interview process
was the disparity in cost bases between the two countries (lack of level
playing field), making competition unfair. Companies pointed out that
they believed China was not a market economy and as a result able to
keep costs artificially low. Low labor costs, low environmental protection
costs, subsidized energy inputs, subsidized infrastructure costs, subsidized
freight, lower overheads (no superannuation payments, occupational health
and safety costs etc) were all cited as key cost advantages for China.
Coupled with China’s enormous scale of manufacture and exponential growth
in production plant infrastructure and increasing sophistication of
production technology, the scene is only set to get more challenging.(13)
Conclusions
It seems certain that Australia will grant China MES
as a prelude to the start of formal trade negotiations for an FTA. Understandably,
Australia’s minerals and energy, and steel sectors, as well as farming
groups are strongly supportive of an FTA with China. Not surprisingly,
the manufacturing sector generally, the plastics and chemical industry,
and small producers remain unconvinced and fearful.(14) Accepting
China as a market economy will put the spotlight on the negotiations and
strengthen Australia’s case in arguing for the exemption of those sectors
that do not meet the market economy test and for strengthening the safeguards
regime to ensure an even playing field for Australian manufacturing.
- See Media Release, ‘Australia-China
Trade and Economic Framework‘, 24 October 2003.
- Australia-China
FTA Joint Feasibility Study 11 August 2004.
- The Weekend Australian “Dumping rules
are planned for China”, 13 February 2005.
- Composition of Trade Australia, 1994–95,
2003–04, Department of Foreign Affairs and Trade.
- Direction of Trade 1981–82 to 2001–02,
Department of Foreign Affairs and Trade.
- See Article 2, of the Agreement on
Implementation of Article VI of the General Agreement on Tariffs and
Trade 1994.
- The Economist, ‘Time to Trade’, 13 June
2002.
- See Regulation
183. The European Union, unlike the United States, re-classified
China as an ‘economy in transition’ in 1998 and uses a set of criteria
to establish if the Chinese exporter is operating within a market environment.
- There are some minor procedural differences that are referred to in
Andrew Stoler, Market
Economy Status for China: Implications for Antidumping Protection,
13 August 2004.
- See Australian Customs Service, IR No. 81, Certain silicon
exported from China, May 2004, pp. 10–11.
- See Australian Customs Service, PAD No. 81, Silicon from
the People’s Republic of China, October 2004.
- China’s New Regional
Trade Agreements, NBER Working Paper 10992, December 2004, p.
1. See also China’s Post Accession
WTO Stance, NBER Working Paper 10649, August 2004.
- Australia-China
Free Trade Agreement Feasibility Study, Australian Industry
Group (AIG), July 2004, p. 15 and Australian
Manufacturing and China, AIG, August 2004, pp. 32–36.
- See Plastics and Chemicals Industries Association, China
– Market Economy Status – Implications for Anti-Dumping Remedies,
July 2004.
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