Bursting the Bubble

EU Dumping Policy 1: The Fairness of the Analogue Country Method

20 September 2016 | by

Anti-dumping legislation is based on the rhetoric of fairness. The underlying concern is that a foreign company with considerable market power in its home country could sell its products at a loss in Europe to drive out competitors and increase its prices afterwards. The goal of anti-dumping measures, therefore, is to increase import prices when these are considered unjustly low, in order to provide for a level-playing field in global trade.

This all sound very straightforward and appealing. But some aspects of EU anti-dumping policy can raise eyebrows. The use of the analogue country method, for instance, which underlies the calculation of the dumping margins of products coming from non-market economies, makes a justification in terms of fairness questionable.

World Trade Organization

The WTO envisages the possibility for members to take action against dumping. Dumping is defined as the introduction of a product “into the commerce of another country at less than its normal value”. “Normal value” means either “the comparable price, in the ordinary course of trade, for the like product when destined for the consumption in the exporting country” or, in the absence of such domestic price, “the highest comparable price for the like product for export to any third country in the ordinary course of trade, or the cost of production of the product in the country of origin plus a reasonable addition for selling cost and profit”. Dumping, in other words, is the practice of exporting a product at a price lower than the price a company normally charges on its own home market or at a price which is lower than the cost of production plus the expected profit.

The difference between the export price and normal value is called the “dumping margin,” which is the relevant factor for the calculation of the anti-dumping rate. The imposition of anti-dumping measures requires that dumping is causing or threatens to cause injury to the local industry producing the like product. If this is the case, the dumping margin is added to the export price so that its allegedly unfair competitive advantage is negated. The “ordinary course of trade” is in this regard essential. The idea behind this notion is to be able to compare two markets for the purpose of determining whether there is ‘fair’ or ‘unfair’ competition that sets the product’s price.

The economic and political reality of the world, however, exists of both market and non-market economies. Anti-dumping law therefore has to deal with situations in which imports from non-market economies are taken into account. The WTO does not pass judgment on whether ‘dumping’ is a form of unfair competition. But some governments consider unfair competition to include a situation in which prices are not determined by market forces and, with regards to determining the ‘normal value’ of a product, it is thought that it might be more appropriate to use another benchmark for countries that are characterized by state intervention.

The WTO recognizes that certain difficulties may exist in determining the ‘normal price’ where market conditions do not prevail. This has opened up the possibility to determine normal value and calculate dumping margins by using a methodology that is considered appropriate by the investigating country. A number of WTO members, including the EU, consequently use a fourth definition for countries classified as ‘non-market economies’. In these cases, dumping is defined as selling below either price or costs of production in an “analogue” or “third country market”. Importing countries thus use the “analogue country method” to determine the normal value of products imported from a non-market economy and compare this to the actual export price being charged.

 

Analogue Country Method

Several approaches of calculating ‘fair’ prices are allowed by the WTO. When considering the approach of the EU towards anti-dumping, we see it is characterized by a peculiar trait, namely, that the only requirement for the choice of an analogue country is that it is not chosen in an “unreasonable manner”. This has an unequivocal impact on the choice of analogue country. As it turns out, the most often chosen analogue country to China, for example, is the United States.

The frequent use of the US as an analogue country to China is striking because there are deep differences in cost structures and level of sectorial development. Unsurprisingly, this results in the imposition of a higher dumping margin on the original export price of Chinese products. But comparisons to other countries, too, can lead to a distortion of figures. The selection of Brazil in the case Certain Footwear from China serves as illustration. While China has a higher GDP than Brazil, in many ways Brazil is a richer state at a different stage of economic development. Brazil’s GDP per capita in 2008-12 was double that of China, energy costs are significantly higher, and the cost of doing international business in Brazil is similar to that of mature economies such as the US.

The selection of such analogue countries by the EU indicates a preference for markets that are at a different stage of economic development than the respondent country. This can hardly be called fair. If the objective is to provide a level-playing field in international trade, the dumping margin should be calculated on the basis of a comparison to countries which are economically similar.

 

Fairness

A closer look at EU dumping policy reveals that the fairness rhetoric is not entirely justified. Indeed, the analogue country method can actually result in an unwarranted increase of the dumping margin. It can of course be argued that a higher margin is meant to dissuade countries from continuing their perceived unfair trading behaviour. And this argument is perfectly reasonable. But then one has to recognise as well that anti-dumping measures themselves can create unfair barriers to entry, which distort international trade rather than providing for the much praised level-playing field.

What do you think?