Conference: “WTO Law in the Legal System of the Russian Federation ” Russian Gas, Argentine soy beans and Indonesian palm oil: EU cost adjustment methodologies under the WTO Anti-dumping agreement: Jan Bohanes Senior Counsel, Advisory Centre on WTO Law, Geneva Conference: “WTO Law in the Legal System of the Russian Federation ” Financial University, Moscow, 19-20 May 2015 Jan.Bohanes@acwl.ch

Participation of Russia in the WTO dispute settlement system Russia has been a member of the WTO since August 2012 Russia has so far been involved in 7 (9) disputes so far at the WTO 2 (4) as complainant 5 as defendant No judgments yet; some of these disputes may not go ahead

DS 474 – Russia challenges the EU’s anti-dumping determinations (1) DS474: European Union — Cost Adjustment Methodologies and Certain Anti-Dumping Measures on Imports from Russia Russia challenges a series of EU’s anti-dumping determinations concerning imports of steel and ammonium nitrate These products were produced, inter alia, by using natural gas as energy source. The EU argues that the price of gas on the Russian market is artificially low The “adjustment” for the allegedly low price by the EU in its dumping calculations has increased the dumping margin and the duties that importers have to pay

DS 474 – Russia challenges the EU’s anti-dumping determinations (2) DS474: European Union — Cost Adjustment Methodologies and Certain Anti-Dumping Measures on Imports from Russia Is it permitted under the Anti-dumping Agreement to make such adjustments? Can an investigating authority (here the EU) change the cost of an input? Very interesting systemic issue Similar disputes are pending in the WTO, brought by Argentina and Indonesia, both against the EU

Overview General principles of anti-dumping determinations EU's anti-dumping cost adjustment methodologies - what is the issue? Examples of application by the EU DS474: challenge to several EU investigations involving Russian exporters and practices as such DS459 and 480: biodiesel from Argentina & Indonesia DS494: new dispute brought by Russian Federation WTO legal and systemic considerations Legal provisions Systemic considerations

The basics of anti-dumping (1) Same company sells on the domestic and export market Export Price Normal Value: Sales price or a cost benchmark Export market Domestic market

The basics of anti-dumping (2) No dumping in this scenario, because NV and EP equal Export Price Normal Value: Sales price or a cost benchmark Export market Domestic market

The basics of anti-dumping (3) No dumping in this scenario, because EP higher than NV Export Price Normal Value: Sales price or a cost benchmark Export market Domestic market

The basics of anti-dumping (4) Dumping, because EP lower than NV Normal Value: Sales price or a cost benchmark Export Price Export market Domestic market

The basics of anti-dumping (5) Dumping, because EP lower than NV Dumping margin Normal Value: Sales price or a cost benchmark Export Price Export market Domestic market

The basics of anti-dumping (6) How is normal value determined? Export Price Export market Normal Value: Sales price or a cost benchmark Domestic market

What is the practice at issue? (1) Background: When determining normal value, anti-dumping investigating authorities (IAs) construct a cost-of-production benchmark To determine sales below cost and thus not in the ordinary course of trade; and If below cost, to “construct” normal value Profits, SG&A Labor Raw Inputs and overhead Cost Benchmark Domestic price 1 Domestic price 2

What is the practice at issue? (2) Where are costs of production derived from? Article 2.2.1.1: In principle, take figures from the investigated companies financial accounts As long as they are in conformity with the home country’s GAAP and “reasonably reflect” costs of production Typical issue: how have (overhead) costs been allocated to different products? Or, related party purchases?

What is the practice at issue? (3) Where are costs of production derived from? Profits, SG&A Labor Raw Inputs and overhead Cost Benchmark, as per company records Cost Benchmark, as recalculated by the IA

What is the practice at issue? (4) Background: When determining normal value, anti-dumping investigating authorities (IAs) construct a cost-of-production benchmark To determine sales below cost and thus not in the ordinary course of trade; and If below cost, to “construct” normal value Profits, SG&A Labor Raw Inputs and overhead Cost Benchmark Domestic price 1 Domestic price 2

What is the practice at issue? (4) Background: When determining normal value, anti-dumping investigating authorities (IAs) construct a cost-of-production benchmark To determine sales below cost and thus not in the ordinary course of trade; and If below cost, to “construct” normal value Profits, SG&A Labor Raw Inputs and overhead Cost Benchmark Domestic price 1 Domestic price 2

The basics of anti-dumping No dumping, because NV and EP equal Export Price Normal Value: Sales price or a cost benchmark Export market Domestic market

The basics of anti-dumping No dumping, because NV and EP equal Export Price Export market Domestic market

The basics of anti-dumping Dumping, because NV higher than EP, due to cost adjustment Export Price Export market Domestic market

What is the practice at issue? (5) Some investigating authories have created a practice whereby they reject correctly recorded costs of an input on the grounds that the domestic market for that input is distorted, such that the domestic price is deemed not acceptable/representative In essence, the IA does not determine what the real costs were, but what they should have been “Real costs” as determined by the domestic market ceases to be the benchmark

What is the practice at issue? (6) The EU Commission has done so e.g. with Price of gas on the Russian domestic market, as an input for the production of steel products or ammonium nitrate (DS474) GAS GAS Cost of production of steel pipe, as in producers’ records Cost of production of steel pipe, as recalculated by the Commission

What is the practice at issue? (7) The EU Commission has done so e.g. with Price of soybean oil or palm oil on the Argentine and Indonesian domestic markets, as input for the production of biodiesel (DS473 and DS480) Soybean or palm oil Soybean or palm oil Cost of production of biodiesel, as in producers’ records Cost of production of biodiesel, as recalculated by the Commission

What is the practice at issue? (8) What is the detailed justification? DS474: various investigations claim that domestic price of gas is regulated by the government and is only a fraction of the international (export) price (approx. 25%)

What is the practice at issue? (9) What is the detailed justification? DS473 and DS480: domestic price of input soybean or palm oil is distorted, because the government imposes an export tax on its exportation (but not on the exportation of the processed product), thereby artifically lowering the input price for biodiesel producers

What is the practice at issue? (10) Consequence in the eyes of the IA of these perceived market distortions: the recorded costs (for this item) do not “reasonably reflect” the production costs Replace the recorded costs for the input with another (higher) price International benchmark (DS473 and DS480) Price of exports from the country of production (DS474) “Waidhaus” price – price at which gas is sold to the (Western) EU

Considerations under WTO law (1) No case law to date on this issue under the ADA Can you invoke Article 2.2.1.1 of the ADA to justify this practice? EU Commission invokes the EU law equivalent of that provision Do records “reasonably reflect the costs associated with the production and sale of the product under consideration"?

Considerations under WTO law (2) Can you invoke Article 2.2.1.1 of the ADA to justify this practice? This provision appears to be primarily intended to assess the quality of the company’s book-keeping, rather than systemic market issues E.g. cost allocations E.g. transfer pricing (related companies) Arguably, 2.2.1.1 requires taking the market price as a given

Article 2.2.1.1 For the purpose of paragraph 2, costs shall normally be calculated on the basis of records kept by the exporter or producer under investigation, provided that such records are in accordance with the generally accepted accounting principles of the exporting country and reasonably reflect the costs associated with the production and sale of the product under consideration. …

Article 2.2.1.1 … Authorities shall consider all available evidence on the proper allocation of costs, including that which is made available by the exporter or producer in the course of the investigation provided that such allocations have been historically utilized by the exporter or producer, in particular in relation to establishing appropriate amortization and depreciation periods and allowances for capital expenditures and other development costs.

Article 2.2.1.1 … Unless already reflected in the cost allocations under this sub‑paragraph, costs shall be adjusted appropriately for those non‑recurring items of cost which benefit future and/or current production, or for circumstances in which costs during the period of investigation are affected by start‑up operations

Article 2.5 of the EU’s Basic Anti-dumping Regulation … If costs associated with the production and sale of the product under investigation are not reasonably reflected in the records of the party concerned, they shall be adjusted or established on the basis of the costs of other producers or exporters in the same country or, where such information is not available or cannot be used, on any other reasonable basis, including information from other representative markets. ….

Considerations under WTO law (3) Can you invoke Article 2.2 to justify the EU’s practice? "When there are no sales of the like product in the ordinary course of trade in the domestic market of the exporting country or when, because of the particular market situation or the low volume of the sales in the domestic market of the exporting country, such sales do not permit a proper comparison … " What is the meaning of the phrase “particular market situation”?

Considerations under WTO law (4) Can you invoke Article 2.2? Used by some IAs for former NME countries, e.g. Australia uses this concept against China E.g. market affected by subsidies or existence of state-trading enterprises (Australia) “governmental control over pricing” (US) or “artificially low prices (EU) A single sale represents 5 percent of all transactions (US) Different patterns of demand (US) Barter trade or non-commercial processing arrangements (EU) “when … such sales do not permit a proper comparison” What does "such sales" refer to? Only to the product under investigation, or can it refer also to an input?

Considerations under WTO law (5) Relationship Anti-dumping Agreement vs. SCM Agreement Anti-dumping is, in principle, a policy to address individual firm pricing behaviour CVDs as a policy to address distortions created by the government that qualify as subsidies

Considerations under WTO law (6) Relationship Anti-dumping Agreement vs. SCM Agreement Can you use AD to address issues that Have nothing to do with an individual firm’s pricing behaviour? May not even qualify as a subsidy?

Considerations under WTO law (7) Relationship Anti-dumping Agreement vs. SCM Agreement US – Export Restraints (DS194): Canada imposes export restrictions on inputs, which lowers the domestic price, for the benefit of the industry that uses these inputs US countervails the final product WTO panel rules that that governmental measures that impact the market, but are not a "financial contribution" under the SCM Agreement, cannot be countervailed Biodiesel – EU Commission rejected requests to impose CVDs Russian gas?

Considerations under WTO law (8) 1984 GATT Anti-dumping Committee Draft Recommendation (ADP/W/83/Rev.2) “Input dumping” IAs may not determine dumping on the basis that inputs purchased internationally or domestically are “dumped” – no provision in the ADA that authorizes such an approach Only permissible adjustment scenario is when the seller and purchaser of the raw input are related Appears to take us back to the Article 2.2.1.1 situation “I will give you a special price for the input …”

Considerations under WTO law (9) If this methodology is permitted as a matter of principle, what should be the parameters? When is a difference between the international and the domestic price merely a reflection of the country’s comparative advantage and when should it be grounds for rejecting the domestic price? What are the government policies that should trigger legitimate adjustment? What kind of surrogate value should be used? No doubt WTO panels and the Appellate Body would say “case-by-case approach”, but guidance would be useful

Literature J. Bohanes, A. Markitanova A Few Reflections on DS474 and The Intersection of Russia’s Domestic Energy Policies and The EU’s Anti-Dumping Cost Replacement Methodology (St. Petersburg State University Vestnik)

Thank you