Why should buyers of handbags in Frankfurt care about the price of an obscure agricultural chemical in Xi'an?
The answer lies in the complex web of anti-dumping legislation that many OECD countries have constructed to protect themselves against supposedly subsidised imports from developing countries. A recent test case involving glyphosate acid has changed the way that Australia handles anti-dumping cases from China. This may have a knock-on effect in other developed countries' policies towards anti-dumping from transitional economies. Domestic pressures within developed countries are also pushing outdated and often ineffective anti-dumping practices towards reform.
New era tariffs
Anti-dumping cases are being brought increasingly by companies in Europe, North America and Japan against Chinese exporters bombarding these markets with cheap goods. More than 200 petitions have been brought against Chinese companies in recent years, over half of them by European and US manufacturers. Recent cases have involved shoes, ring binder mechanisms, handbags and fax machines.
To date, the level of trade affected by anti-dumping cases is small, with less than one per cent of the European Union's (EU's) US$49bn trade with China being involved, for example. However trade tensions are likely to increase if a combination of technology transfer and lower import tariffs brings Chinese export goods increasingly into competition with the sort of goods produced by firms within the OECD. China's imminent entry into the World Trade Organisation (WTO) may also in itself help to change the basis on which these cases are calculated in China's favour.
The General Agreement on Trade and Tariffs (GATT) talks during the 1980s established a set of rules which forbade many forms of protectionism. While the overall level of tariffs has been brought down, these agreements which led to the formation of the WTO in 1995 still permit countries to combat unfair trade strategies with anti-dumping duties. With other forms of protectionism ruled out, dumping cases are on rise all over the world. Even China is adapting to the new game. While in the name of WTO entry, Beijing has lowered its average import tariff to 23 per cent it is now looking at activating its own anti-dumping legislation.
But generally the rise of anti-dumping does not favour China. Instead of promoting fair competition, anti-dumping cases can result in the natural competitive advantages available to firms that manufacture in China being wiped out when they attempt to export to developed markets. Typically, manufacturers' associations in these markets launch anti-dumping complaints, saying that jobs in local industries are being lost because of subsidised Chinese imports.
The EU, for example, has a basic definition of dumping which looks out for goods exported at less than the domestic price of the good in the country where it is produced. Anti-dumping duties which may be imposed are based on the amount by which the exports are cheaper than the domestic price.
Doomed to dump
On the face of it, firms located in China, with the advantage of huge natural resources and cheap labour, can produce low-end, labour-intensive goods cheaply for the domestic market and thereby justify low export prices.
Unfortunately for China this natural cost advantage is all but disregarded by the EU in anti-dumping cases. The EU argues that costs and prices in what it terms 'non market economies' (NMEs) are determined less by the marketplace than by levels of state subsidies. Therefore they do not permit the Chinese domestic price to be used as a marker.
Instead, the 'normal' price used to determine whether dumping is taking place is based on the domestic price of a similarly developed market economy. In an extreme case, the cost of production in China may be compared with the cost base of a country such as the US. But even more commonly, selected 'analogue' or 'reference' markets such as Indonesia, India, Malaysia or Thailand often have considerably higher costs than China. Of the 13 EU cases brought against China in 1995, not one was terminated without anti-dumping tariffs being imposed. In a recent case involving ring binder mechanisms, Malaysia was used as an analogue market. A complaint by Chinese producers that their
labour costs were lower than Malaysian ones was rejected as irrelevant by the European Commission. China seems doomed to be labelled as a dumper.
Not surprisingly, the Chinese complain bitterly about these comparisons. "There are no comparable markets," said a Chinese trade official recently. "Nothing is the same between two countries. Our workers earn less in a year than they do in America or the EU in a month." The official added that the Chinese government simply does not have the money to subsidise exporters and low export prices were in fact a result of competition between exporters.
The choice of analogue country is one of the most controversial and complex aspects of dumping cases. In a recent anti-dumping dispute involving exports of Chinese handbags to the EU, both Taiwan and India were rejected for cost comparison before Indonesia was finally selected. Regarding Taiwan, the many commercial and ownership linkages with mainland Chinese manufacturing was deemed to be too much of a distorting factor on prices. India was rejected on the rather more spurious grounds of lack of cooperation from Indian manufacturers.
One of the decisive factors in choosing Indonesia was the cooperation of two large Indonesian handbag manufacturers which exported to Europe. But the difficulty of finding an Indonesian domestic price for handbags was hampered by lack of assistance from local sellers of bags and the fact that Indonesian export prices were thought to have been already lowered as a result of Chinese competition. In the end the EU based its marker price on informed guesses, constructing an Indonesian price by adding a 'reasonable' profit margin to estimates of production costs.
The complaints are not limited to Chinese companies. Foreign-owned enterprises in China are also affected. If anti-dumping duties are imposed, then the rationale for locating in China in the first place may no longer apply. At the core of the problem is the outdated nature of anti-dumping as a trade device. While, for example, South Korea and Japan, two original targets of the anti-dumping lobby, are now manufacturing within Europe, European firms have shifted production to countries such as Indonesia and China. Protecting jobs in Europe may now come at the expense of the profits of European-based companies manufacturing in Asia.
What is particularly dangerous for foreign-invested exporters is the indiscriminate blanket nature of duties imposed. The EU tends to regard China as a vast, monolithic state-controlled economy. To this effect, calculating individual dumping duties for each exporter would be futile, it is argued. The state would merely channel its exports through the firm with the lowest duty rate. Instead, a sample of exporters is taken with an average dumping margin being applied to all companies.
Avoiding blanket treatment
But here at least there has been some shift. "There is a move towards making it easier for non-state-owned companies to have individual treatment," says Mr Simon Holmes, trade lawyer at SJ Burwin in London, who has been involved in many anti-dumping cases. "The intention is to make it easier for joint ventures and wholly foreign-owned enterprises to avoid the maximum impact of anti-dumping duties." To qualify for individual treatment, a firm has to argue that it is a commercial company independent from the state.
A recent example occurred in an anti-dumping complaint lodged by the European Committee for the Leather Goods Industry last year. In this case two Hong Kong-based firms Jane Shilton (Pacific) and Lee & Man Handbags applied for and were granted individual treatment. Neither firm had even as much as a legal establishment in the mainland and the capital goods physically present in China were included in the assets of the Hong Kong companies. While the factory premises were leased from local
Chinese authorities, the workers in these enterprises were employed and paid by the Hong Kong companies. In the end, while a blanket duty of 39.2 per cent was imposed on Chinese firms, Lee & Man was granted a lower rate of 30.7 per cent. Shilton escaped the imposition of anti-dumping duty entirely. "One thing is clear is that Hong Kong will remain classified as a market economy after June. That's a positive thing. It would be typical of the European Commission to take that away," says Holmes.
Individual treatment criteria are strict and in the past some foreign-invested enterprises in China may have had difficulty in meeting them. But a recent internal memo from the European Commission to interpret the criteria more liberally may be designed to make it easier for foreign-owned manufacturing firms in China to get such treatment. According to one source, the rules were changed to enable Whirlpool, an American electrical goods manufacturer with joint ventures in China, to obtain individual treatment. In the short-term, however, many of the beneficiaries will be Japanese companies with production in China. Ms Noreen Doyle of the Anti-Dumping Service Division of the European Commission denies that the rules have been made more liberal, stressing that "it would still remain the exception that we would grant individual treatment". However, when asked whether joint ventures and wholly foreign-owned enterprises would be granted individual treatment if they applied for it, she replied that it would be "more than likely".
But some continue to stress that even foreign-funded firms in China are not entirely clear of the penumbra of state-subsidy. "Joint ventures might have full fire regulations, for example, to please the International Labour Organisation inspectors but they source from wholesalers which are 100 per cent Chinese-owned and not subject to the full economic forces on footwear production," says Mr Denis Bowen of the British Footwear Manufacturers Federation (BFMF). The BFMF recently supported an anti-dumping complaint by the European Confederation of the Footwear Industry against imports of footwear with textile uppers from China and Indonesia. As a result of the case, in which 30 Chinese producer-exporters were refused requests for individual treatment, a blanket duty of 94.1 'per cent was imposed on China.
As far as individual treatment goes, the Americans seem to be slightly further ahead and in a recent case involving silicon carbide, a US government agency granted individual treatment to three Chinese state-owned firms.
But individual treatment still means that a joint venture will be assessed on the basis of a third-country price. Many are now arguing that the Chinese domestic price of a commodity should be taken seriously in anti-dumping cases. ' The Australians have taken a lead here.
New Australian rules
A recent test case was brought by chemicals firm Monsanto against alleged dumping of Chinese-produced glyphosate acid on the Australian market. Australian customs officials used the Chinese domestic price of the chemical ? an ingredient in fertiliser manufacturing ? as a reference price. Consequently, Monsanto lost the case. This took on added significance when Australian prime minister John Howard explained during a visit to China in March that if China could show a good against which a dumping claim had been made in Australia was not subject to state subsidy, then Australia would take the Chinese domestic price as the marker for dumping purposes.
In the same month, an official Australian trade report said that "for the purposes of the Customs Act, China can no longer be regarded as an economy in which the government substantially influences the domestic price of goods or substantially monopolises foreign trade". The study quoted the Chinese Ministry of Internal Trade as saying that by 1994, some 90 per cent of retail prices were determined by the market.
An Australian trade official stressed that, "Australian companies still have the provision for launching anti-dumping cases". He admitted that, "while indirect subsidies certainly exist [in China], electricity tariffs, for example, are gradually rising". Another official confirmed that Australia was in the process of developing detailed criteria to determine whether the Chinese domestic price in individual cases was in fact a market price and that legislation would be introduced in Australia at the end of this year.
An article in Inside Canberra newsletter explored the wider ramifications. The price of peaches in Australia, for instance, could be cut by as much as two-thirds it speculated. Chinese peaches could be landed in Australia at A$0.45 (US$0.35) a tin ? at least one Australian dollar less than the current price. Furthermore, as the Chinese domestic price of Ae.40 would set the 'dumping floor', the door would be opened to imports of peaches from third countries at any price above this.
Link to WTO
The Australians, by treating the status of China in anti-dumping cases as a bilateral trade issue, appear to have broken ranks with other OECD countries which are linking the question to China's WTO accession. "China's classification is linked to WTO accession and its status will have to be reviewed at that stage," says Doyle. "But in the WTO, each country is free to make its own classifications and it does not automatically follow that just because a country is a member of the WTO it should be classified as a market economy. The decision on that will be partly political."
Mr Peter Holmes of Sussex University in the UK points out that countries such as Romania, Poland and Cuba were in GATT, while retaining NME classification. "In my opinion it seems lilwly that many EU member states, especially France, would be unwilling to see the two steps in one go. They'd be likely to wait and see if China respected WTO rules," he says.
But others point out that there is a liberal school of thought within the European Commission favouring flexibility in anti-dumping cases involving NMEs. Where exporters can demonstrate a natural competitive advantage in comparison with the analogue country, allowance should be made they argue. A British trade official highlighted perhaps the only certainty in all this. "If China gets into the WTO it will have some means of appealing anti-dumping actions, but the process is very long-winded and laborious," she says.
A commercial weapon
But the calculation of dumping margins and duties is not the whole story. Before duties are imposed by the European Commission, the case has to clear two further hurdles. The first concerns the proportion of the industry which is affected by the imports and whether material injury is being caused. Increasingly, manufacturers are also importers and may have mixed feelings about anti-dumping duties. These misgivings are particularly strong in cases where manufacturers have. relocated part of or the whole of their production to China.
Peter Holmes points out that EU firms relocating to China are often the same ones that bring anti-dumping actions. "I suspect they anticipate the possibility of anti-dumping in advance in planning their investment. They'll try to ensure they gain the most and lose least," he says. "A complex game occurs with Philips and Thomson often bringing anti-dumping complaints against each other's Asian plants.
"The ideal strategy is to ensure that your. stuff comes in duty free but your rivals get hit by duties. Next best is if Chinese-owned firms apply de facto price restraint. So EU firms will invest in China with enthusiasm if they can find a way to profit from low costs without all Chinese enterprises being able to follow this with low-price competition. Clearly, EU firms will seek to avoid anti-dumping actions by selling back into the EU at prices comparable to EU production, thus preserving the benefits of low costs for their own profits and also encouraging Chinese firms to price 'to market'."
But strategies can come adrift, according to Mr Hendrik Abma who specialises in anti-dumping cases for the Foreign Trade Association ? a body which represents European retailers of clothing and consumer goods. He citesone case where "one of our members, a retailer with associated production, spent a lot of effort and money setting up in China only to have anti-dumping duties slapped on".
The quality issue
Another contentious issue is the extent to which high quality goods can be bracketed together with cheaper, lower quality manufactures. Do Chinese imports of plastic handbags really impact on sales of European-made leather handbags? Would blocking imports of plastic handbags create jobs in Europe by allowing European manufacturers to move into this market sector? Snead of the British Luggage and Leather Goods Association comments: "British manufacturers are not interested in this part of the market [low-end handbags]. If they were, they would already be doing it." She points out that considerable investment would be required to install the manufacturing equipment and train the workers needed for this type of manufacturing. Many of the plastics and zip raw materials would need to be sourced from Asia in any case, she adds.
The second hurdle is whether imposing anti-dumping duties would be in the interests of the community as a whole. At this level the interests of importers, retailers and consumer groups are increasingly making themselves felt. "There is quite a radical shift going onin that the Commission is trying to look out for all organisations that might be interested [in anti-dumping cases]. We are starting to see countervailing forces such as retailers, importers and consumer groups such as ours taking an interest," says Philip Evans of the UK-based Consumers Association.
"The Commission is quite reluctant to give transparency in general. Although the position of European importers is getting better, we have to fight a hard battle," says Abma.
"One poor chap ordered a container-load of goods including some handbags which he hoped would arrive before a provisional duty was imposed," says Snead. "But it missed the deadline and he had to pay the duty. He has not sold one bag." Another importing firm was due to close with the loss of 15 jobs. "Why are their jobs less important than manufacturing jobs?" she asks.
?Raw deal? for consumers
Consumer groups are also concerned that the imposition of anti-dumping duties may raise the price of the affected goods. In . me cases where imports of low-end goods are blocked, there may be no European manufacturer willing or able to fill the gap in the market. So, effectively, consumer choice may be reduced. "Its pretty clear that we are getting a raw deal," says Evans.
Ms Catherine Schwerin, economic advisor at the Bureau Europeen des Unions de Consommateurs (BEUC), a European umbrella group for national consumer organisations, says that "we don't have the impression that the Commission has a methodology for assessing the impact on consumers in anti-dumping cases". They are taking the Commission to task for saying that consumer interest does not apply in cases involving non-finished goods. In February this year, the Commission ruled that there was no consumer interest in an anti-dumping case involving unbleached cotton fabric imports from various countries including China. A recent BEUC position paper calls for clearer criteria to be adopted for assessing consumer interest in terms of price, consumer choice and quality.
Dumping on the mainland
The export sector is not the only area where China feels its firms may be losing .out. Recently, officials have begun to focus on the possible dumping of foreign goods on the domestic market. To combat this, China has recently introduced its own anti-dumping regime.
According to a recent estimate, the dumping of foreign products on the Chinese market cost the country nearly US$1.2bn last year. The true amount may be even higher after factoring in unemployment and the hampering of the development of new production sectors.
The Liberation Daily stated recently that foreign dumping was occurring in the chemical, metallurgy, pharmaceutical and construction materials industries. It claimed that, the dumping of foreign colour film had forced Shanghai Photo Materials to halt production while Shanghai Sheet Glass Plant had stopped manufacture of centrifugal glass cottonfor similar reasons.
According to a 42-point set of anti-dumping rules issued in March by the Ministry of Foreign Trade and Economic Cooperation (Moftec), prices in exporting countries or in
relevant third countries will now be used to determine whether dumping is occurring. Duties will be imposed to remedy any damage being done to Chinese industry.
On the face of it, the Chinese do have some justification. Many foreign companies, particularly the multinationals, are willing to sell below cost in China in order to establish market share ? or at least at below the price in their home market. The price of a roll of Kodak Gold 24-exposure colour film is about US$4.95 in Australia where much of the film sold to China is manufactured, but retails for only Yn17 (US$2.05) in China. "We don't agree that we are dumping, rather we want to access the local market," says a company spokesperson. "The living standard is not so high in China so we operate a different pricing system. The price of Kodak film is still higher than local brands and even exceeds the price of some competing imported brands such as Fuji".
Could China hit back?
But many believe that the distance between regulators and state-owned entities whose complaints they are supposed to be investigating, will always be insufficient. Will these regulators be able to differentiate between injuries due to foreign dumping and those which are self-inflicted as a result of poor management?
The first cases are already being prepared. China's steel industry is said to be poised to petition for anti-dumping duties to be levied on South Korean and Russian imports. Mr Cole Capener of law firm Baker & Mackenzie in Hong Kong says that China's anti-dumping legislation may have unexpected results. "We have just advised a multinational with a joint venture in China whose product sales are impaired by Japanese products being dumped," he says. Although he feels that it is too early to judge how the regulations will be implemented, he does not expect there to be nearly so many cases as those brought against Chinese companies abroad.