Trade defence as extractivist policy tools? A closer look at the European Union’s practice
The European Union (EU) has been in the spotlight over the last few months for trying to strong-arm its trade partners into agreeing to continue to supply European factories with raw materials. This has led to spats with Chile over exports of lithium and with Indonesia over its restrictions on exports of nickel ore. Indeed, these countries would much prefer that these raw materials be processed into finished goods by factories in their territories, rather than in the EU.
International trade rules have often been criticized by their detractors[i] as extractivist, meaning that they limit developing countries’ ability to develop manufacturing industries by encouraging extraction and exports of raw materials while discouraging exports of manufactured goods. According to these detractors, the rules of the World Trade Organization (WTO) prevent developing countries from reaping the benefit of their natural wealth endowment through several mechanisms. First, they limit developing countries’ options to impose restrictions on exporting raw materials,[ii] thus ensuring that raw materials valuable to developed countries cannot be confined to the country where they are extracted. Second, WTO rules limit developing countries’ ability to provide subsidies that would encourage the consumption of domestic raw materials (import substitution subsidies) and/or promote exports of finished goods (export subsidies).[iii] Third, through their WTO Schedules of concessions on goods, developed countries have placed higher tariffs on manufactured goods than on raw materials (a process known as tariff escalation),[iv] making it more profitable for developing countries to export raw materials rather than process them domestically before exporting. Free trade agreements negotiated by developed countries may exacerbate these issues.
On the other hand, while trade defence instruments, and anti-dumping measures in particular, are often condemned by economists for not being economically sound,[v] they have rarely been described as extractivist trade instruments.[vi] This should not be the case any longer. Several recent developments in the EU’s use of trade defence instruments show how the EU now also uses its trade defence instruments as a new form of tariff escalation to impose higher trade defence duties on finished goods when a developing country adopts policies to ensure that raw materials extracted therein are processed domestically.
First, since 2018, the European Commission (Commission) may waive the lesser duty rule if the product concerned is affected by “distortions on raw materials” accounting for at least 17% of the cost of production of the product being investigated. These distortions include “dual pricing schemes, export taxes, export surtax, export quota, export prohibition, fiscal tax on exports, licensing requirements, minimum export price, value added tax (VAT) refund reduction or withdrawal, restriction on customs clearance point for exporters, qualified exporters list, domestic market obligation, captive mining”.[vii] As a result, the Commission can impose much higher duties at the level of the dumping margin in cases where the country of the exporting producer has policies in place ensuring that raw materials extracted in its territory are used for processing in its territory. This has, for example, been used by the Commission to impose higher anti-dumping measures on UAN (a fertilizer) from Russia as it has in place a dual pricing system for gas, one of the main raw materials to produce UAN.[viii]
Second, over the last decade, the Commission has used Article 2(5) of the EU Basic Anti-Dumping Regulation, which mirrors Article 22.214.171.124 of the WTO Anti-Dumping Agreement, to adjust upwards the costs of production of exporting producers in anti-dumping investigations when it considers that one of the costs of the raw materials is distorted because of dual pricing schemes or export restrictions.[ix] This upward adjustment to the costs of production of exporting producers leads to much higher dumping margins as it increases the constructed normal value and decrease the number of profitable transactions taken into account to establish the normal value. Although this practice has repeatedly been condemned by the WTO panels and the WTO Appellate Body,[x] the Commission has not amended its practice. The EU also appealed “into the void” the last panel report condemning the EU for this practice in a dispute brought by Russia.[xi]
Coupled with the first development discussed above, this means that, when a country has policies in place that ensure that its raw materials are processed domestically, the Commission can, in anti-dumping investigations, first waive the lesser duty rule before, in turn, imposing duties based on an inflated dumping margin.
Third, in anti-subsidy investigations, the Commission now considers that the provision of raw materials to investigated producers by unrelated private parties can constitute subsidies even without direct government involvement. In E-bikes, the Commission concluded that all producers of engines and batteries in China were “entrusted” and “directed” by the Chinese government to sell at low prices to Chinese e-bike producers because they sold at lower prices domestically than abroad.[xii] Similarly, in Biodiesel, the Commission concluded that all producers of soybeans were ‘“entrusted” and “directed” to sell soybeans to biodiesel producers at less than adequate remuneration as the Government of Argentina sought to reduce the domestic price of soybeans through export taxes and export quotas.[xiii] In this case, the Commission also added that the measures qualified as “any form of income or price support” as they amounted to regulatory conditions which artificially allowed producers to obtain soybeans at lower prices than those available internationally.[xiv] Although these approaches appear to directly contradict past WTO panel and Appellate Body reports,[xv] they will continue to be a tool for the Commission to limit exports to the EU of finished goods using domestic raw materials which are also needed by European factories.
These three developments are worrying. They all address the same legitimate factual situation, that of a developing country wishing to take advantage of its natural resources to further its development but ends up with much higher anti-dumping and countervailing duties against its exports of finished goods. These higher import duties have similar effects to the process of tariff escalation for developing countries: past a certain point, it becomes more profitable for developing countries to export only raw materials without any processing. This seriously limits developing countries’ ability to industrialize and, hence, develop.[xvi]
Thus, while the EU’s extractivist trade policies grab much of the news’ attention when they occur over free trade agreement negotiations or WTO disputes, readers interested in ensuring that developing countries can reap the benefits of the natural resources they were endowed with should also keep a close eye on developed countries’ uses of trade defence instruments.
[i] Joseph Stiglitz, Making Globalization Work (Penguin Books 2006); Dani Rodrik, The Globalization Paradox (Oxford University Press 2010). [ii] General Agreement on Tariffs and Trade 1994 (15 April 1994) LT/UR/A-1A/1/GATT/1 art XI <https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=Q:/UR/FA/06-gatt.pdf&Open=True>; GATT Art XI forbids export restrictions. Also note that the Protocol of Accession of several WTO Members goes further than this by forbidding export licensing and taxes as well; Accession of The People's Republic of China (23 November 2001) WT/L/432 Paras. 8,11 < https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=q:/WT/L/432.pdf&Open=True> [iii] Agreement on Subsidies and Countervailing Measures (15 April 1994) LT/UR/A-1A/9 art 3 < https://docs.wto.org/dol2fe/Pages/SS/directdoc.aspx?filename=Q:/UR/FA/24-scm.pdf&Open=True> [iv] WTO Glossary, “Tariff Escalation” (WTO) <https://www.wto.org/english/thewto_e/glossary_e/tariff_escalation_e.htm#:~:text=Higher%20import%20duties%20on%20semi,countries%20where%20raw%20materials%20originate.> accessed May 5, 2021 [v] John Jackson, The World Trading System: Law and Policy of International Economic Relations (MIT Press 1997) [vi] Dani Rodrik, Straight Talk on Trade: Ideas for a Sane World Economy (Princeton University Press 2017) which criticizes trade defence instruments in many ways but not as extractivist tools. [vii] Regulation (EU) 2016/1036 of 8 June 2016 on protection against dumped imports from countries not members of the European Union  OJ L 176/21, Article 7(2a) [viii] Commission Implementing Regulation (EU) 2019/1688 of 8 October 2019 imposing a definitive anti-dumping duty and definitively collecting the provisional duty imposed on imports of mixtures of urea and ammonium nitrate originating in Russia, Trinidad and Tobago and the United States of America,  O.J. L 258/21. [ix] See for example, Council Implementing Regulation (EU) No 1194/2013 of 19 November 2013 imposing a definitive anti-dumping duty and collecting definitively the provisional duty imposed on imports of biodiesel originating in Argentina and Indonesia, 2013 O.J. L 315/2 [x] WTO, European Union – Anti-Dumping Measures on Biodiesel from Argentina- Report of the Appellate Body (6 October 2016) WT/DS473/AB/R; WTO, European Union – Anti-Dumping Measures on Biodiesel from Argentina - Report of the Panel (29 March 2016) WT/DS473/R and Add.1; WTO, European Union – Anti-Dumping Measures on Biodiesel from Indonesia – Report of the Panel (25 January 2018) WT/DS480/R and Add.1; WTO, European Union – Cost Adjustment Methodologies and Certain Anti-Dumping Measures on Imports from Russia (Second Complaint) – Report of the Panel (24 July 2020) WT/DS494/R and Add.1; WTO, Australia – Anti-Dumping Measures on A4 Copy Paper – Report of the Panel (4 December 2019) WT/DS529/R and Add.1 [xi] WTO, ‘EU Appeals Panel Report on EU Dumping Methodologies, Duties on Russian Imports’ (WTO, August 28, 2020) <https://www.wto.org/english/news_e/news20_e/ds494apl_28aug20_e.htm> accessed May 5, 2021 [xii] Commission Implementing Regulation (EU) 2019/72 of 17 January 2019 imposing a definitive countervailing duty on imports of electric bicycles originating in the People's Republic of China,  O.J. L 16/5, at recitals 379-425 and 443-488. [xiii] Commission Implementing Regulation (EU) 2019/244 of 11 February 2019 imposing a definitive countervailing duty on imports of biodiesel originating in Argentina,  O.J. L 40/1, at recitals 84-135. [xiv] Commission Implementing Regulation (EU) 2019/244 of 11 February 2019 imposing a definitive countervailing duty on imports of biodiesel originating in Argentina,  O.J. L 40/1, at recitals 186-207. [xv] WTO, China – Countervailing and Anti-Dumping Duties on Grain Oriented Flat-Rolled Electrical Steel from the United States – Report of the Panel (15 June 2012) WT/DS414/R and Add.1 [7.86]; WTO, United States – Countervailing Duty Investigation on Dynamic Random Access Memory Semiconductors (DRAMS) from Korea - Report of the Appellate Body (27 June 2005) WT/DS296/AB/R  [xvi] Joseph Stiglitz, Making Globalization Work (Penguin Books 2006)