Defending Hong Kong's Interests Against EU Protectionist Anti-Dumping Measures

The European Union has made much of its desire to promote trade liberalisation throughout the world. This professed intention, however, seems to be almost completely absent in the way that the European Union conducts its trade relations with Hong Kong and China, particularly as far as anti-dumping measures are concerned. On the contrary, the volume of protectionist measures adopted by the EU mainly against China, but also often indirectly against Hong Kong-based companies, suggest that both are considered as a soft target.

The evidence that can be adduced to support this accusation is substantial. Presently the EU applies anti-dumping duties to over 40 different products manufactured, distributed or exported from Hong Kong and China. These measures cover a whole range of manufacturing sectors, from electronics products, through chemicals and metals, to leather handbags and even hairbrushes. New EU anti-dumping investigations against Hong Kong and Chinese products are running at the rate of five fresh cases each year. Furthermore, anti-dumping duties imposed, mainly against products made in Chinese factories, average the highest rates, often exceeding 50%.

The EU would respond to these statistics by pointing out that most anti-dumping measures are directed against products of Chinese, not Hong Kong, origin. So, the argument goes, Hong Kong has little interest in these cases. Anyone remotely acquainted with the realities of business in Hong Kong would know, of course, that this is far from true. For cost reasons, production of many goods has largely moved out of Hong Kong and onto the mainland. Much of the capital investment in these factories and plants has come from Hong Kong business. The profit centres for these operations are often in Hong Kong, as are the administrative headquarters. At the end of the day, anti-dumping measures imposed on Chinese-produced goods can hurt Hong Kong's commercial interests as much as those of China.

Moreover, there is little doubt that when the EU imposes anti-dumping measures, harm is done to these companies. European customers will rarely pay for products that are more expensive because of the additional costs of paying anti-dumping duties. Frequently export channels to Europe dry up as a result. Volumes of trade in such products can dwindle to negligible levels. Since the EU applies anti-dumping duties for five-year periods, long-standing commercial relationships can be destroyed. The economic effect for Hong Kong businesses can be quite simply devastating.

Why are Hong Kong and China the main targets for EU anti-dumping measures?

There are two main reasons why the EU has been able to successfully erect a protectionist fence of anti-dumping duties to block exports from Hong Kong and China and to disrupt normal patterns of trade.

First, on the one hand, China is not a member of the WTO, while on the other hand, the policy of the Hong Kong government towards trade relationships has been far more passive than that of many of the EU's other trading partners. True, China is in the course of agreeing terms of WTO membership with the European Union, having apparently successfully done so with the United States. With these obstacles out of the way, the Chinese governments stated goal of WTO membership will have progressed a long way. That said, there is nothing to suggest that, after accession, China will pursue a policy of aggressively defending the interests of its economic operators. On the contrary, it is far more likely that China will maintain a low-profile as its officials acclimatise themselves to the hostile environment of the international trade negotiation process of the WTO.

Second, there seems to be a general lack of understanding among businesses of the devastating effect that EU anti-dumping duties can have on future business, as well as the procedures available for defending their interests. Naturally, this level of awareness varies according to the sophistication of the particular economic sector involved and its international exposure. But, statistically speaking, anti-dumping investigations against Hong Kong and Chinese products are defended by the least number of manufacturers and exporters. The recent Leather Handbags Case illustrates this point. When the European Commission announced its intention to open an anti-dumping investigation into leather handbags made in China, mainly by Hong Kong-based companies, only two companies came forward to make representations. These represented 1.28% of total exports of these products to European customers. Because of this low level of representation, the European Commission used other sources of data to reach a finding of 38% anti-dumping duties for all Hong Kong/Chinese exporters of these products.

Four business-related factors make this situation worse:

• The difficulties of responding in time to the tight time limits imposed by the Commission when conducting these investigations.
• The complexities and time-consuming effort required to participate in anti-dumping investigations.
• A belief that, if exports to the EU are blocked, other customers will be found, for example, in the United States.
• A perception that the cost of instructing lawyers to defend against such actions outweighs the benefits that would accrue.

A cost-benefit analysis reveals the benefits of defending EU anti-dumping cases

A rudimentary cost benefit reveals that efforts expended in properly defending an EU anti-dumping investigation are more than compensation by the advantages gained by a successful defence.

Quantifying the costs of not defending a company's interests is a relatively simple process. The starting point is to acknowledge that non-participation in an anti-dumping investigation means that the duties that will be imposed on a non-co-operating company will be the maximum levels found in the investigation. Co-operating producers with lower dumping margins will have individual anti-dumping duty rates allocated to them. So, for example, after an investigation, the following spread of duty rates could apply:

Company - A/D Duty Rate
Company A - 0%
Company B - 5%
Company C - 10%
Company D - 20%
Company E - 30%

The duty rate for companies not participating in the investigation is set at the residual level, in this case, 30%. The cost of non-co-operation is therefore 30% multiplied by the total cif export value of sales to European customers for five years. In practice, this cost will be lower because of lost sales since European customers are reluctant to buy exports subject to anti-dumping duties. In normal circumstances, companies will therefore also see their gross turnover sliced as European sales decline.

If a company chooses to defend its interests, then the benefits that can accrue are usually significant, measured only in terms of cost savings (achieved by obtaining a lower or 0% individual anti-dumping duty rate) and higher sales volumes (by avoiding higher duties). Taking the above example, since Company A decided to co-operate, and obtained a 0% individual anti-dumping duty rate, it will have a competitive advantage over all other producers and exporters in Hong Kong or China. All other things being equal, its products will be more attractive to European customers because no additional charges will be payable. Ultimately, it will have a 30% competitive advantage over those companies that did not co-operate. Since invariably the majority of Hong Kong and Chinese companies do not defend their interests, this advantage becomes very valuable indeed.

How to defend against new EU anti-dumping actions

It is important to bear in mind at the outset what exactly dumping is. Dumping is selling products to European customers at prices that are below those at which the identical products are sold on the domestic market. Taking a simple example, this means that, if product sold in Hong Kong for US$150, and the same product is sold on a cif basis to a European customer for US$100, the product is being dumped by US$50. To calculate a dumping margin, the margin of dumping is expressed as a percentage of the products cif value. In the above case, the anti-dumping duty imposed would be 50%.

There are a number of misconceptions that dumping is selling at prices below the cost of production of a particular good. This is a myth. The definition of dumping is prescribed by WTO law and the definition applied by the European Union is the same as that applied by the United States, Canada and all the other WTO member countries.

In the case of products made in China (not Hong Kong), there is an additional problematic issue. Since China was, until recently, treated by the EU as a non-market economy country, a special approach was adopted. Since often products manufactured in China were exported, there was no Chinese domestic price on which to based the comparison. Even if there was such prices, these were disregarded as being unreliable. Instead, so-called "analogue prices" were used. Analogue prices are prices charged in other countries for similar products. These analogue prices are substituted for Chinese domestic prices to facilitate the anti-dumping margin calculation. This had three effects:

• The substitute domestic prices were invariably higher than the real prices in the Chinese market and, as a result, dumping was almost invariably found even when it might not exist.
• The inflation of the domestic prices resulted in very high dumping margins, averaging around 35-50%
• Unless a Chinese manufacturer could establish that it was totally independent from the Chinese authorities, dumping margins were set at the same level for all Chinese producers.

The EU has since changed its policy in this respect. Since 1 July, 1998, both Hong Kong and Chinese companies manufacturing in China have been allowed to use domestic prices as long as they can demonstrate that their manufacturing operations are conducted on market economy principles. The complexities of the new system seem, however, to have discouraged extensive use of this new approach.

There are six steps to be taken to properly defend an EU anti-dumping action. These are outlined below.

Step 1: Notify an interest to defend to the European Commission

An EU anti-dumping investigation is started by the publication of a Notice of Initiation in the EU's Official Journal. Exporting producers must notify their intention to defend within 15 days of the publication of the Notice and request an exporters questionnaire from the European Commission if they wish to participate in the investigation. These questionnaires must be completed and filed with the Commission within 40 days, i.e. within 25 days of the last day for requesting a questionnaire. These deadlines are rigorously enforced, although in exceptional circumstances the Commission will give limited time extensions to allow the completion of the questionnaires.

Step 2: Completion of questionnaires

The exporter questionnaires must be completed by those companies wishing to defend their interests and to obtain an individual dumping margin. Details of all export transactions to EU customers within a prescribed investigation period must be provided. In addition, an extensive amount of detailed information about the company's commercial and manufacturing activities is requested.

Where a claim for market economy treatment is made, an additional questionnaire must be completed to show that the Chinese manufacturing operation is completely independent from the Chinese authorities. Extensive information is also requested in relation to the corporate structure of the applicant, business decisions, costs of production, raw material costs, employment policy and the accounting principles behind its record-keeping. This questionnaire must, of course, be consistent with the information provided in the general exporters questionnaire.

Completing these questionnaires is a complex and time-consuming process. However, it is absolutely essential that the information and data is provided because it will be subsequently checked by the Commission. Where possible, an approximate individual dumping calculation should be made to ensure that a good result will be obtained.

Step 3: Submitting to an on-the-spot investigation

The Commission will thereafter check the truth of the submissions made in the questionnaire by coming to the business offices of the Hong Kong or Chinese exporting producers to conduct an on-the-spot investigation at their factory or premises. In this connection, it is important to note:

- All official documents have to be translated into English

- The Commission officials will bring an interpreter to ask particular questions to specific members of staff

- False or inaccurate information will result in the Commission rejecting the application

- Companies are entitled to have their legal representatives present at the meeting to protect their legal rights under EU law.

Step 4: Imposition of provisional anti-dumping duties

After a preliminary investigations, provisional anti-dumping duties are imposed, normally 6-9 months after the investigation has been opened. These duties apply for a maximum period of 9 months until definitive duties are imposed or, alternatively, the investigation is closed without the adoption of definitive measures.

Companies defending their interests have a legal right to be advised on the Commission's preliminary findings and this is made available through a process known as "provisional disclosure". This allows a double-checking of the Commission's calculations to make sure the individual dumping margin has been correctly calculated. In addition, co-operating companies have the right to a hearing before the Commission's officials to present their views.

Step 5: Further investigation

Between the adoption of provisional duties and the imposition of definitive ones, an adjustment is made of the Commission's provisional calculations and determinations. This is based on evidence that has been gathered during the on-the-spot investigation and through other enquiries made by the Commission in relation to the submissions made by the EU complaining industry.

Step 6: Definitive anti-dumping measures

Anti-dumping investigations are normally conducted within one year of the date of the Notice of Initiation being published. Definitive duties are imposed after the end of the full investigation normally for a period of five years. An extension of the period these duties apply, again for a five year period, may be authorised if at the end of the original five year period, sufficient circumstances are found to justify such an extension.

After the investigation is concluded, co-operating companies are entitled to their own individual dumping margins as long as they have satisfied the Commission that the relevant conditions are available. The exports of non-co-operating companies will be subject to the residual duty levels, i.e. the highest dumping duty rate found by the Commission to exist.

How to reduce or eliminate existing anti-dumping measures on products of Hong Kong or Chinese origin

Procedures are also available to challenge existing EU anti-dumping measures that are already in place against the forty or so different products originating in Hong Kong and China.

A Hong Kong or Chinese manufacturer can request a so-called "interim review" of such duties after a period of one year has passed. To make such an application, the following conditions must be shown to exist:

- Higher export prices exist than previously were the case in the original investigation

- Lower domestic prices than before are being charged

- There is sufficient evidence in the application to support these two statements of fact

Once these preliminary factors have been proved to the Commission, a Notice of Initiation of an interim review is published in the EU's Official Journal. Thereafter, the investigation proceeds in the same way as a normal anti-dumping investigation (Steps 1 to 6 above) except that provisional duties are not imposed. Instead, the review results in an amendment to the definitive measures.

The benefits of requesting and participating in a review are three-fold. First, significantly reducing the amount of anti-dumping duties presently payable when importing this product into the EU. This cost saving can be measured according to the following formula:

(existing duty level - individual dumping margin) x cif value of exports

Second, there is the possibility of achieving much larger volumes of imports into the Community due to lower anti-dumping duty levels and, in turn, lower average prices. Third, it is possible to achieve a comparative advantage by applying for a review vis-à-vis other Hong Kong or Chinese producers liable to higher anti-dumping duties

The other option is a so-called "newcomer review". The EU's anti-dumping laws also permit the possibility of Hong Kong or Chinese producers, who have not exported before to European customers, to apply for a newcomer review. To be eligible to make such an application, the company must not have exported during the period used for the original assessment of anti-dumping duties. Other than this, the procedure is broadly the same as for an interim review.

Again when applying for newcomer treatment, a Hong Kong or Chinese producer can request that the margins of dumping, if any, are based on actual prices and not on prices in the analogue or surrogate country. This approach may have a significant impact on the dumping duty levels found to exist in each particular case.

Some practical points

Hong Kong or Chinese exporting producers are at a slight disadvantage from the outset of the opening of an anti-dumping investigation for three reasons:

• Notices of Initiation are published in the EU's Official Journal which has a very limited circulation. Unless the exporting producers are expressly identified in the complaint, they will, generally speaking, be unaware that the investigation has been opened. Questionnaires are rarely automatically sent to them.
• Small and medium sized companies often have little knowledge or experience of this type of investigation. They may even not take the investigation seriously and end up being subject to the large anti-dumping duty rates set for non-co-operating companies.
• It is frequently difficult for exporting producers to respond within the tight deadlines applied in these investigations. Completing exhaustive questionnaires within 40 days, and having these delivered to the Commission's offices in Brussels, is often too much for these companies to handle.

Despite these difficulties, it must be made absolutely clear that failing to participate in the investigation will have severe consequences for future exporting prospects.

Completing the questionnaire is normally the most time-consuming aspect for companies simply because of the amount of detailed information normally required and the need for this information to be completely accurate. A large volume of documentation must be translated into English if it is to be submitted to the European Commission. Once a decision has been made to defend its interests, a company must make the effort to see the whole process through to the end.

Full co-operation must be extended to the Commission's investigators at all time. Failure to do so will result in the application being disqualified and individual treatment being denied. At the same time, the Commission's investigation should be confined to the period of investigation. The Commission is not at liberty to request unrelated documents. This is a matter for legal advisers to regulate.

Finally, it is important to appoint legal representatives to ensure that completed questionnaires and other representations do not compromise these interests. If information is incorrectly or inadequately presented, a co-operating company may end up with a substantially higher dumping margin than would be the case if the application had been properly prepared by a qualified lawyer.

For further information on this topic, please contact David Marks on 020 7367 2136 or by email at david.marks@cms-cmck.com