To Reject or Not to Reject: Panel Report in EU- Cost Adjustment Methodologies
On 24th July 2020, a dispute panel report was circulated in “European Union- Cost Adjustment Methodologies and Certain Anti-Dumping Measures on Imports from Russia — (Second complaint)” (DS494). Russia had filed a dispute on the following grounds:
1) Russia challenged (i) the first and second sub-paragraph of Article 2(3); and (ii) the second sub-paragraph of Article 2(5) of the Basic Anti-Dumping Regulation;
2) Russia challenged the Cost Adjustment Methodology followed by the European Commissions;
3) Russia challenged certain aspects of the expiry review of the anti-dumping duties on the imports of certain welded tubes and pipes of iron or non-alloy steel originating in Russia (Regulation 2015/110 of 26th January 2015); and
4) Russia challenged certain aspects of the third expiry review of the anti-dumping duties on imports of AN originating in Russia (Regulation 999/2014 of 23rd September 2014; Regulation 2018/1722 of 14th November 2018).
This blog post is dedicated to the Russia’s second claim, i.e. the challenge to the Cost Adjustment Methodology followed by the European Commission. The other claims shall be addressed briefly through the course of this blog post.
Q1. What is the Cost Adjustment Methodology followed by the European Commission?
Under the Cost-Adjustment Methodology, the European Commission rejects the recorded costs of the exporting producers on the ground that the costs are ‘artificially or abnormally low’ due to ‘market distortions’ and/or ‘market impediments’. The European Commission relies on out-of-country benchmarks instead. The Cost Adjustment Methodology is mostly applied when the government regulates the prices of the inputs used in some manner, for example, export duties, government price regulation, etc. This methodology is used as ‘practice’ by the European Commission, and is not codified as a part of any of the relevant legislations.
Q2. Can a measure which is ‘unwritten’ face an ‘as such’ challenge in the WTO?
In this dispute, Russia made an ‘as such’ claim against an unwritten method adopted by the European Commission as a practice. In this regard, it had to prove (a) the existence of such a method; and (b) the ‘general and prospective application’ of the method.
To substantiate its claim with regard to the existence of the said practice, Russia gave a list of all the investigations conducted by the European Commission in the past 15 years, in which the Cost Adjustment Methodology was adopted. It must be noted that most of such investigations were concerning imports of products which used ‘gas’ as an input. Some examples of such products are potassium chloride, solutions of urea and ammonium nitrate, biodiesel, urea, etc.
Apart from the existence of such a measure, the Panel also had to determine if the existence of the measure was such that it was intended to have ‘general and prospective application’. To elaborate, the Panel had to assess if the methodology was applied only in particular instances or would apply in future situations as well. As stated by the Appellate Body in US-Oil Country Tubular Goods Sunset Reviews (DS268), the point of an ‘as such’ challenge is to prevent Member ex ante from engaging in certain conduct.
While the Panel agreed with the European Commission that a ‘string of cases’ is not sufficient to prove general and prospective application, it noted that the European Commission has engaged in the same conduct for the past 15 years, and has covered a range of products from various countries. In fact, in 2013, the General Court of the European Union held that the costs adjustments implemented by the European Commission in four anti-dumping proceedings were consistent with Article 2(5) of the Basic Anti Dumping Regulation. In recent determinations, the European Commission has relied on the said judgement as a ‘principle of law’ to support the application of the Methodology in question. The Panel also noted that the European Commission was unable to provide any instance of ‘non-application’.
The Panel finally held that that the Cost Adjustment Methodology exists and has ‘general and prospective application’, which is attributable to the European Union.
TL;DR: The Panel held that even though the Cost-Adjustment Methodology was ‘unwritten’, there was sufficient evidence of its existence and its ‘general and prospective application’, and therefore could merit an ‘as such’ challenge at the WTO.
Q3. Is the Cost Adjustment Methodology inconsistent with Article 184.108.40.206 and Article 2.2 of the Anti-Dumping Agreement?
The Panel’s findings in this dispute run parallel to what was found in EU-Biodiesel (Argentina) and Ukraine-Ammonium Nitrate. The Cost Adjustment Methodology requires an assessment of whether the costs are ‘reasonable’ or not, which is not warranted by Article 220.127.116.11 of the Anti-Dumping Agreement. No reasoned explanation of whether the input prices were State-Regulated and whether the situations constituted an ‘abnormal circumstance’. Therefore, the Methodology is inconsistent with Article 18.104.22.168.
At this juncture, it is important to draw notice to the Panel report in Australia- Anti Dumping Measures on A4 Copy Paper. In the Panel Report, it was also noted that a mere ‘Particular Market Situation’ in a country is not sufficient to reject domestic prices. Particular Market Situation is when a ‘unique set of circumstances’ exists in the market, therefore making them abnormal. In the existence of a Particular Market Situation, the investigating authority must note if a proper comparison of the export price and domestic price can exist. While this may seem confusing at first glance, it must be noted that there are two important steps subtly envisaged in Article 22.214.171.124:
In the current dispute (along with EU-Biodiesel and Ukraine-Ammonium Nitrate), the investigating Authority depended on Step 2 to reject costs, or did not give enough evidence to establish ‘abnormal circumstances’. In Australia- Anti Dumping Measures on A4 Copy Paper, the Panel Report reinforced the two steps under Article 126.96.36.199.
To summarize, the position on Article 188.8.131.52 is as follows:
The question which then arises is that how can an investigating authority determine if the records do not reasonably reflect the costs associated with the production and sale of the PUC?
TL;DR: The Cost Adjustment Methodology is inconsistent with Article 184.108.40.206 of the Anti-Dumping Agreement.
Q4. Is the Cost Adjustment Methodology is inconsistent with Article 2.2. of the Anti-Dumping Agreement by relying on out-of-country benchmarks that are not adapted to represent the costs of production in the country of origin?
While the Panel acknowledged that the Anti-dumping Agreement does not require that the cost of production must only be calculated on the basis of sources within the country of origin, it stated that an investigating authority is bound by the obligation to ‘adapt’ any out-of-country information with the circumstances prevailing within the country of origin. All adjustments must be made to arrive at the cost of production ‘in the country of origin’.
TL;DR: The Cost Adjustment Methodology is also inconsistent with Article 2.2 of the Anti Dumping Agreement since it does not adjust out-of-country benchmarks to represent the costs of production in the country of origin.
Q5. What were the other issues in this Panel Report? How did the Panel decide?
Q6. What now?
EU may file for an appeal with the defunct Appellate Body, in which case the Dispute Settlement Body will not be able to adopt the Panel Report’s recommendations till an appeal has been completed. However, with the Appellate Body crisis looming over our head, it is indeed possible that the Panel Report is not adopted for a rather long period of time.