This is a guest post by Victor Crochet* (trade lawyer and PhD candidate at Cambridge University) & Vineet Hegde (Doctoral Researcher at the Leuven Centre for Global Governance Studies, KU Leuven)
Over the past few years, Western countries, and in particular, the European Union (“EU”), have been trying to rein in the foreign expansion of Chinese manufacturing entities under the Belt and Road Initiative (“BRI”) through the use of trade defence instruments. In this regard, several interesting developments have taken place since we last reported on the issue.
Today, the European Commission (“Commission”) adopted a regulation countervailing, yet again, cross-border subsidies granted by Chinese public bodies to producing entities located in another country. This time targeting stainless steel cold-rolled flat products from Indonesia. The Commission followed a similar reasoning as it did in two prior investigations (Regulations 2020/776 and 2020/870) where it decided that financial contributions granted by Chinese public bodies to the subsidiaries of Chinese State-owned enterprises in Egypt could be attributed to the Government of Egypt. While these two regulations are currently being challenged before the EU Courts, in Regulation 2022/433, the Commission similarly decided to interpret the terms a financial contribution by the “government in the country of origin or export,” found in the EU Basic Anti-Subsidy Regulation, in light of Article 1.1 of the SCM Agreement, with the latter interpreted in accordance with Article 11 of the ILC Articles on State Responsibility. Based on this reasoning, the Commission concluded that the terms “government in the country of origin or export” should also cover situations where the government of the country of origin or export “acknowledges and adopts” financial contributions granted by governments or public bodies of third countries.
The Commission’s reasoning seems to have inspired the United States (“US”) to follow suit. Since the 1980s, the US excludes transnational subsidies from the ambit of its countervailing duty law. However, in April 2021, a bill was introduced in the US Senate to, among other things, countervail transnational subsidies. The bill aims to extend the scope of countervailable financial contributions to also include contributions by a third country’s government. The bill provides that, if the government of the subsidized country “allows, implicitly or otherwise, another authority provide a financial contribution”, the US authorities can countervail the financial contribution provided by the third country. A companion bill was introduced in the House of Representatives in December 2021, which uses a similar language. The bill aims to treat a financial contribution by a third country government as the subsidized country’s own subsidy if the latter “facilitates the provision of such subsidy”. Although similar in spirit, these standards may be looser than that of “adoption and acknowledgment” used by the Commission.
Another interesting development is the increasing use of the anti-circumvention instrument by the Commission to target foreign subsidiaries of Chinese producers using inputs from China when the final products originating in China are covered by trade defence duties. The Commission’s use of the anti-circumvention instrument to target companies attempting to dodge trade defence duties through slight modifications of a product or assembly of parts in a third country is not new. However, the Commission has recently used the instrument to go a step further. It now targets entirely new production plants established by Chinese companies abroad when such plants use inputs originating from China even when these inputs are not only mere parts or intermediate products. For example, the Commission extended the duties on imports of aluminium foil from China to imports from Thailand after a Chinese producer built a rolling plant there using imported aluminium foil stock from China. Similarly, it extended the trade defence duties on imports of glass fibre fabrics from China to imports from Morocco, after a Chinese producer set up a new plant in Morocco but imported the necessary glass fibre rovings (which have been targeted by separate trade defence investigations by the Commission in the past as a distinct product from the fabrics) from China. In this regard, two years ago, we warned that Egyptian workers might be the ones paying the price for the countervailing duties imposed on Egyptian subsidiaries of Chinese fabrics producers as the producers in Egypt might simply decide to move shop somewhere else along the BRI. This prediction seems to have become a reality as these producers appear to have now built plants in Turkey. Indeed, in a recently initiated anti-circumvention investigation, the Commission now targets a new glass fibre fabric production line established in Turkey owned by the same group as that targeted by the Commission in Egypt.
The US may be following a similar path to that of the Commission. In 2021, the US extended trade defence duties on import of oil country tubular goods (“OCTG”) from China to imports from the Philippines and Brunei. The US authorities found out that the main input, hot-rolled steel sheet and strip, is manufactured in, and exported from, China to these countries to be processed into OCTG. As a result, the US concluded that the exports from the Philippines and Brunei were circumventing the US duties on exports of OCTG from China and, thus, extended the duties to exports from these countries. A similar pattern can be seen in the case of corrosion-resistant steel products from BRI countries, like Malaysia. Furthermore, in February 2022, a US producer requested the US authorities to investigate solar cells and modules manufactured in Malaysia, Thailand, Vietnam and Cambodia using inputs from China. The petition states that the production process was shifted to these countries with all the inputs, including research & development as well capital investment, coming from China. The US authorities now have until 25 March 2022 to decide whether to initiate an investigation or not.
Using the anti-circumvention instrument to target production subsidiaries of Chinese companies abroad using inputs originating in China is tempting for investigating authorities. The investigation is shorter and less complex than conducting a fully-fledged anti-dumping or anti-subsidy investigation. Furthermore, it may lead to the extension of the typically higher duties imposed on Chinese products as compared to the duties that could be imposed in an initial anti-dumping or anti-subsidy investigation against the new plant in a “market economy” country.
As Western governments grapple with how to address the going out of Chinese manufacturing entities, it seems that the practices of the US and the EU are converging to a certain degree. While the US seems to be walking in the footsteps of the EU with respect to transnational subsidies, the EU and the US may be moving in parallel when it comes to using the anti-circumvention instrument.
* Victor regularly works for governments, exporting producers, importers and users in investigations initiated by the Commission, including in some of the proceedings mentioned in this post. All opinions expressed are personal.
