A ruling in Europe gives cheer to China

Herbicide case victory is likely to have far-reaching effects

A recent ruling by the European Court of Justice will be a great fillip for companies exporting goods from countries like China to the European Union.

On July 19 the court's Grand Chamber in Luxembourg ruled in favor of a Chinese exporter of glyphosate, a basic herbicide widely used in farming.

Advocate General Juliane Kokott described the ruling as "of fundamental importance for future trade relations between the European Union and a number of dynamic emerging countries, such as (China)". In its ruling the court dismissed an appeal by the EU Council challenging a ruling by the General Court of the EU in 2009 that annulled anti-dumping duties imposed on Zhejiang Xinan Chemical Industrial Group (Xinanchem).

Xinanchem, represented by the international law firm Holman Fenwick Willan, convinced the European Court of Justice that it should uphold the General Courts's ruling that the EU's 2004 decision to maintain the imposition of anti-dumping duties was flawed.

The case hinged on whether or not the EU was justified in regarding State control of Xinanchem as a company shareholder as evidence of significant State interference to the extent that the Chinese government was able to manipulate the company's prices, costs and inputs. For many, the subtle difference between State control and State interference may appear trifling, but the commercial implications of this distinction for exporters of goods to the EU can be enormous, and the impact this ruling will have on the future of economic relations between the world's two biggest trading partners should not be underestimated.

Xinanchem's exports of glyphosate, with all other exports of the same product from the Chinese mainland, Malaysia and Taiwan, were subject to the imposition of anti-dumping duties on entry to the EU market at 29.9 percent. The EU applies such duties where it finds evidence that exporting producers are damaging its domestic market by selling at artificially low prices.

These duties are calculated by deducting the exporters' price of the product on the EU market from the product's price on the exporting producers' home market to generate the "dumping margin". For countries such as China which are considered "non-market economies" for the purposes of international trade law, the EU does not consider prices on the exporters' domestic market valid for these calculations, on the basis that governments in these countries exercise a distorting influence over their national economies.

Therefore, in order to obtain a price that it considers valid for the dumping margin, the EU refers to prices of the product on the market of an analogous third country, in Xinanchem's case, Brazil. However, individual exporters have the opportunity to submit an application for "market economy treatment" which, if successful, ensures their exports will be treated as having originated in a market economy country and precludes the recourse to pricing data from a third country in which the product is invariably more expensive, relying instead on the company's own (lower) pricing data, which will lead to a smaller dumping margin, if any.

During the course of the original investigation that led to the duties of 29.9 percent, Xinanchem applied for market economy treatment. The EU rejected its application, citing "significant State interference" in the company, which under EU law precludes a grant of market economy treatment. Its ruling was based on the Chinese government's shareholding in Xinanchem, which the EU considered to amount to State control of the company, which in itself the EU concluded constituted significant interference.

This was central to the case argued before the European Court of Justice by Xinanchem's lawyers, led by me and my colleagues Folkert Graafsma and Anthony Woolich. We successfully persuaded the court to uphold the General Court's finding that "significant State control" does not automatically amount to the "significant State interference" that will vitiate an application for market economy treatment, thereby requiring the EU to dramatically reassess its approach to deciding such applications. I believe the ruling heralds a highly significant liberalizing step toward improved commercial prospects for Chinese exporters of goods to the EU.

The judgment sets a precedent that the investigating authorities in the EU are obliged to follow, and which will lead to an increase in the frequency with which Chinese exporters are granted market economy treatment in anti-dumping investigations. Furthermore, in the longer term if this trend continues, the decision of the European Court of Justice may be a decisive step on the road to permanently changing China's status from non-market economy to market economy.

The commercial consequences of market economy treatment are invariably huge and cannot be exaggerated. Some recent examples from other EU anti-dumping investigations show a 10-20 percent difference between the duties imposed on exporters which had been granted market economy treatment and those that had not. So the exporters granted market economy treatment benefit from a considerable cost saving that might otherwise discourage them from continuing to trade in the EU. For countries like China that historically rely on exports to the EU to grow their economies, the consequences of this are commercially vital.

It will become more difficult for the commission to reject claims for market economy treatment by Chinese State-owned entities since mere State-ownership or State-control can no longer in itself constitute a reason for rejecting such claims.