Chinese Company Gets MET from the EU

Europe’s highest court on July 19 handed a victory to China’s Xinan Chemical Industry Group seeking to defend itself against charge of dumping. It also gave Market Economy Treatment (MET) to the company whose largest shareholder is the Chinese government.

Xinanchem is an exporting producer of glyphosate， an herbicide. The European Union had imposed an antidumping duty of 29.9% on imports of Chinese glyphosate starting September 2004. The company sued in the same year before the General Court of the EU and got a favorable ruling in May 2010， before the European Council appealed to the Court of Justice， the highest court of the European Union.

Regarding this case， China’s Foreign Trade had an interview with Vassilis Akritidis， a lawyer with Squire Sanders (UK) LLP who was involved in the Chinese company’s pleadings before the General Court of the EU.

Q: Could you please briefly introduce the case?

A: The Xinanchem judgment of the Court of Justice is one of the rare cases where the EU institutions in charge of investigating dumping (the European Commission and the Council of the EU) were found to be breaching the EU rules governing the granting of market economy treatment (MET) in anti-dumping investigations targeting non-market economies， which is the case of China in EU trade defense investigations until 2016.

It is also the first time that the Court of Justice， the highest Court in the EU， in a special grand chamber formation of thirteen judges， clarifies the meaning of the first MET criterion insofar as State shareholding is concerned.

This case is indeed a stark victory for Xinanchem， which will now be able to obtain the repayment of any antidumping duties paid between September 2004 and May 2010 (when the duties were first suspended， before being withdrawn completely in December 2011). It also gives new hopes to Chinese Stateowned companies， who could not obtain MET in the past under the practice of the Commission now declared illegal by the Court， to claim and obtain MET in the future， provided that all MET requirements are met.

However， this judgment of the Court of Justice contains certain worrying statements， which will likely allow the Commission in the future to reject MET easier. I believe that the Commission will now de-focus from State participation and will switch its focus on market distortions of upstream raw material. This is a strong trend that gets solidified in recent investigations and the Courts’ judgement in Xinanchem seems to fully justify this trend.

Q: What are the focuses of dispute in the case? How difficult is it to defend the case?

A: Zhejiang Xinanchem is a Chinese exporting producer of glyphosate， an herbicide. The Company was the only exporting producer cooperating with the European Commission. Its MET claim was rejected， which means that dumping was calculated by reference to a normal value established in another country， not in China. It is always difficult to challenge MET decisions， therefore Xinanchem’s victory has as such a big value.

In order to obtain MET， Chinese exporting producers must show that they meet all five MET criteria. The first criterion requires companies claiming MET to demonstrate that their“decisions … concerning prices， costs and input … are made in response to market signals reflecting supply and demand， and without significant State interference in this regard， and cost of major inputs substantially reflect market values”.

In the glyphosate investigation， the EU Commission rejected Xinanchem’s MET claim on two grounds， both based on a breach of the first MET criterion. The main ground for rejection， which has systemic implications for all companies owned or ultimately controlled by the Chinese State， was that the biggest shareholder of Xinanchem(a listed company) was the Chinese State， and that all directors were either State officials or officials of State-owned companies. The Commission concluded that this meant that the “company was under significant State control and influence”， and MET was rejected on this basis， without looking into whether the Chinese State was actually interfering with the company’s decisions and overall operation.

The fact that the case went before the Court of Justice on appeal by the EU shows the significance it had for the EU. It was a difficult win for Xinanchem and a tough loss for the Commission and the Council.

The Court of Justice ruled in paragraph 78 that: “It must be found that the General Court was fully entitled to hold … that State control， such as that observed in the present case， cannot be equated， as a matter of principle， to ‘significant State interference’ within the meaning of the first MET criterion and cannot therefore relieve the Council and the Commission of the obligation to take into account the evidence， submitted by the producer concerned， of the real factual， legal and economic context in which it operates.” Or， in other terms that (paragraph 83) “State control …is not， by its nature， incompatible with market economy conditions.”

These are very positive findings for State-owned companies in China. There is indeed fresh hope for these companies to obtain MET， provided that all other MET conditions are met.

However， the judgment of the Court of Justice may have a negative impact on the MET claims of all Chinese companies， State-owned or not. The thirteen judges of the Grand Chamber made certain statements that will likely reinforce the Commission’s discretion in applying the five MET criteria restrictively. The Court of Justice stressed that the Commission has large discretion when assessing MET(paragraph 91)， the burden of proof is fully upon Chinese exporting producers to demonstrate that they operate under market economy conditions and that any doubt as to whether the MET criteria are met must result in a rejection of MET (paragraph 107).

The Court also considers (paragraph 86) that although the business decisions of a State-owned or Statecontrolled company are not as such distorted， “in the context of a nonmarket economy country， the fact that a company established in that country is de facto controlled by State shareholders raises serious doubts as to whether the company’s management is sufficiently independent of the State to be able to take decisions regarding prices， costs and input autonomously an in response to market signals.” What the Court is saying is that a Chinese State-owned company is very likely not to be operating under market economy conditions， but that before rejecting MET the Commission must first examine the evidence provided by the company. The Commission did not do this in Xinanchem.

I think that attention should be paid in paragraph 90 of the judgement where the Court states that even if a company is able to demonstrate that it takes its business decisions purely in response to market signals， i.e.， it behaves as a market-driven operator without interference from the State， MET would still have to be rejected if“the State has significantly interfered with the operations of market forces.”This is worrying. In many recent investigations against China， in particular in sectors downstream to basic steel products (HRC， wire rod， etc.)， the Commission has rejected MET on the ground that Chinese prices of raw materials were lower than the relevant international prices and this showed State-induced distortion. I think that the Commission will now be more free to reject MET anytime it finds that Chinese raw materials are cheaper than the same raw material on the international markets.

For these reasons， in my view， while the Xinanchem case restores the right of State-owned or State-controlled companies to claim and obtain MET， which is excellent news， it makes it less likely for all Chinese exporting producers， State-owned or not， to meet the five MET criteria in cases where upstream raw material prices are lower than in other market economy countries.

Q: What are the implications of the case? What can Chinese companies learn from it?

A: I think that Chinese companies in which the State is a shareholder may now relax that their MET claims will not be rejected just due to State participation in their share capital. This is a significant step ahead. But they will need to be much more cautious in ensuring compliance with all MET criteria， as this judgement gives large discretion to the EU to reject MET claims even in cases of serious doubts as to non-compliance with MET criteria.

Chinese companies must brace to reject allegations of upstream distortions by the Commission by monitoring international prices in many other market economy countries. The EU tends to consider as “international prices” those applicable in the EU or in the US. This is a clearly biased view. The next step for China could perhaps be to submit that several other countries should be considered as a benchmark， such as Turkey， Latin American countries， Asian market economies， etc.， and to challenge EU dumping Regulations on this basis before the European courts.