Indonesia was last week successful in its World Trade Organisation (WTO) appeal against dumping duties imposed by Australia on Indonesian A4 copy paper. Australia was found to have imposed dumping duties that were inconsistent with its obligations as a WTO member. The outcome flowed from the approach adopted by the Anti-Dumping Commission (ADC) – importantly, it is the same approach adopted in respect of most dumping duties imposed on Chinese steel and aluminium products. This means that the decision could result in Australia having to alter or re-investigate a wide range of duties.
What is dumping and why is the WTO involved?
Dumping is said to occur when an exporter exports products to Australia at prices that are lower than the “normal value”. The “normal value” is usually the sale price of the same good in the exporter’s domestic market. Dumping is not illegal. However, where dumping causes material injury to an Australian industry, Australia is permitted under the rules of the WTO to impose dumping duties.
It is important that the requirements of the WTO are met as otherwise the imposition of dumping duties is in breach of the basic WTO principle that all WTO members are afforded the same duty rates (with the main exception being free trade agreements).
Australia has been a very active user of the anti-dumping system to impose dumping duties on a range of products, with the largest category being steel and aluminium products from China. Those duties can exceed 100% of the value of the goods.
The WTO becomes involved where a country that is the target of dumping duties complains that the duties were imposed outside of the WTO rules.
How did Australia breach the WTO rules?
General approach by the ADC
When calculating dumping duties, the normal comparison is between domestic sale prices and export prices. The idea is to identify international price discrimination. However, where there is a “particular market situation” in the exporter’s country, the Australian Anti-Dumping Commission (ADC) adopts a different approach. An example of a “particular market situation” is Government interference in the market for the goods, or materials used to produce the goods. In respect to Indonesia, the ADC found that the A4 copy paper prices in Indonesia were artificially low due to Government influence on raw materials (pulp) and the provision of subsidies.
Where a particular market situation is identified, the ADC constructs a “normal value” (the comparison value) and instead of using the real cost of production, it substitutes the manufacturer’s actual material costs with what it considers to be a benchmark fair market price. Usually this is a price based on an international index. However, it only does this with the “normal value” and not the export price. The export price is still the actual sale price which was naturally based on the low actual material costs.
Under this approach it is easy to find dumping, even if the real domestic sale prices and export prices are identical. This is because half of the equation, the real domestic sale price, is replaced with a higher price based on the benchmark material costs, not the actual material costs.
Why is this in breach of WTO Rules?
Exporters are very aggrieved by this approach as they argue that if there is a Government influenced low material cost, that influence affects domestic sales and export sales identically. As a result it is argued that it is still appropriate to compare actual sale figures and not construct an artificial, and higher, “normal value”.
The WTO held that while a low cost input can constitute a “particular market situation” and justify the use of a constructed value, this outcome is not automatic. In each case, the ADC needs to investigate the effect of the particular market situation on the domestic price in comparison to the effect on the export price. The WTO Panel noted that the low cost input may have a different impact in different markets. For instance, tight competition in an export market may mean that the manufacturing saving is fully passed on, while lesser competition in the domestic market, may mean that manufacturing profits are increased.
Importantly, the WTO Panel held that if the investigating authority finds that a proper comparison between domestic and export sales is not possible, it is required to give a reasoned and adequate explanation of its conclusion.
In the Indonesian A4 paper case, the ADC didn’t even review whether a proper comparison was possible, let alone provide an explanation for its conclusion.
Implications for Indonesian A4 copy paper
The Indonesian Government has reported that Australia will not appeal the decision. As a result, Australia now has a reasonable time to correct the dumping measures and bring them into line with the WTO Panel finding. If Australia does not do this, Indonesia can impose retaliatory tariffs.
Implications for other dumping duties
Impact is wide
The impact of this decision will extend beyond Indonesian copy paper to all cases where the ADC has identified a particular market situation and used this finding, without further examination, to construct an inflated comparison value. This is the case with Chinese steel and aluminium products. Australia has for many years found that Chinese Government interference in the market for materials used for the manufacture steel and aluminium products constituted a particular market situation. Australia has then disregarded actual Chinese domestic prices and calculated dumping margins by reference to various commodity indexes.
When doing this, the ADC has not investigated whether the low cost inputs impact Chinese domestic and export sales equally. It may well be that the impact is equal as the competition in both markets may consist predominately of Chinese suppliers, all with access to the low cost input. The more generic the product and the greater number of Chinese exporters, the greater the argument will be that the domestic and export prices remain comparable and dumping duties incorrectly imposed.
If Australia accepts the finding of the WTO Panel, and wishes to be a compliant WTO member, it should voluntarily review all past investigations that have used a constructed normal value and assess whether that approach was in accordance with WTO requirements. This could result in the assessment of reduced dumping margins, or even the finding that there was no dumping.
China was a third party to the WTO proceeding and would be keenly aware of the outcome. Australia will know that if China is so minded, it will have the ability to bring a successful WTO proceeding. In this context, it is considered likely that China and Australia will reach a resolution regarding how Australia can bring its existing measures relating to Chinese exports in-line with WTO requirements.
Future reviews and investigations
Exporters and importers involved in future investigations need to fully understand the impact of this case and what is now required of the ADC.
Exporters faced with a finding of a particular market situation should, where appropriate, make a submission regarding the extent to which that situation impacts domestic sales and exports equally. Doing this in a convincing manner could be the difference between an investigation being terminated with no duties, or the imposition of significant, supply chain ending, dumping duties.
To discuss the impact of this WTO Panel decision and any other dumping or countervailing duty matters, please contact us.