Since 2003 I motivated Philips to lead European industry to oppose punitive anti-dumping tariffs imposed on energy-saving Compact Fluorescent lamps made in China.
I will summarise what I learned in case it is helpful for others. The European Commission has a "trade defence" regime which is necessarily compatible with WTO requirements, and many developing economies copy the European way-of-working.
- First, I will summarise the technical process,
- and then the European political decision making process.
- Finally, I will discuss the lobbying effort I conducted inside Philips, how we structured the project team and how we worked with competitors and NGOs. It is a case study of the modern role of Finance leadership.
Part 1: Key players
The Anti-Dumping Advisory Committee (ADAC) is a technical sub-committee of the European Commission. It advises the Council of Commissioners. The ADAC is made up of one representative from each member state; the representatives are typically members of the member state's public service, reporting to the relevant minister at home. If a vote is necessary, simple majority voting applies.
The Commissioner responsible for Trade Defence is the Commissioner for External Trade (currently Peter Mandelson).
Directorate General Trade, headed by the Commissioner for External Trade, provides the technical support for anti-dumping investigations.
Anti-dumping actions are made legal by order of the European Council, as a Regulation.
Part 2: The Technical Process of Trade Protection Instruments in Europe
The Trade Protection weapons are quotas and duties. They exist to protect European industry from unfair competition. Consumer interests, or broader interests, are not recognised in the technical process. The technical process is an investigation of how unfair the foreign competition is and what harm is caused to European industry. At many steps in the process, the outcome is biased in favour of the European plaintiff.
Initially, a sufficiently representative section of "Community Industry" registers a complaint with the Directorate General Trade ("DG Trade") in Brussels. If there is a prima-facie case for dumping, and if the complaining party is sufficiently representative of Community industry, DG Trade will recommend an investigation. Evidence that persuades DG Trade that dumping is occurring can be import statistics showing a significant increase in import volumes, or facotry closures in Europe. Often, the initial complaint to DG Trade is made via an industry body (even one that is created soley for the purpose).
"Sufficiently representative" is interpreted with a bias to give the complaint standing. Community manufacturers that don't respond are assumed to support the investigation. In the highly unusual situation where a significant part of industry is actually opposed to trade protection, three rules are invoked to test who really is a Community manufacturer. After respondents are processed, 50% of the industry needs to support the request to investigate alleged dumping. The recent CFLi case was a rare case when the majority of industry opposed the continuation of anti-dumping duties. This lead to one of the controversial and interesting aspects of the proceeding: how DG Trade tests the European bona-fides of respondents claiming to be European manufacturers. We will come back to this. The commission weighted manufactures by volume produced.
The investigation begins
The Commission invites interested parties to respond, including exporters from the country alleging to be dumping. Note that generally, it is not individual firms which "dump", but entire countries are held to be responsible.
Interested parties must submit extensive questionnaires. There are three categories of submitters: exporters from the country concerned, traders in the European Union, and manufacturers in the European Union ("Community Industry"). The burden of documentation is seriously onerous. Comapanies exporting the EU from a country which is the subject of an investigation should as soon as possible get expert advice from trade lawyers, and be prepared to dedicate F&A resources to the questionnaire. Exporters should aim to have their company treated as "market economy status".
Many large companies will probably be both traders and manufacturers (low-end products are imported, higher-value products are made in Europe). This complexity is not recognised by the Commission: two questionnaires will be required.
The intent of the investigation
Dumping is selling a product in Europe below the domestic price. You need two numbers to determine this: the domestic price of the product concerned, and the European price of the product concerned.
The analog country
Some economies are not given "Market Economy Status" by the European Union. China is such an economy. By default, if a country is not MES, then its domestic prices can not be used as domestic prices for the purpose of anti-dumping. The DG Trade investigators choose an "analog" country, which takes the place of China. In the case of the shoe investigation, it was Brazil. For the CFLi investigation, it was initially Mexico, and then South Korea. So this means that the average price of shoes on the Brazillian market is taken as the true fair cost of Chinese shoes on the Chinese market, regardless of differences in the market. Also, DG Trade relies basically on voluntary co-operation from producers in the analog country. Of course, Brazillian shoe manufacturers are not very enthusisastic about filling in large EU questionnaires at their own expense, so the response rate is poor. Often, DG Trade gets assistance from the European manufacturers making the complaint. The "analog country" seems a very dubious approach, but it is a powerful bias against China and the power it gives the protectionist lobby means the the award of Market Economy Status to China has so far been blocked.
So much for the domestic price.
Remaining steps in the investigation
Next, the European price for the product concerned is calculated. Here, the invoice data from European importers is used, or invoice data from co-operating exporters. However, the invoice price is subject to a number of adjustments. If the European importer and Chinese producer are "related parties", the DG Trade investigators assumes that profit-shifting intercompany pricing tricks could be applied, and it does not treat the invoice price as fair. The conditions for an importer and exporter to be related are broad. For example, even a 5% holding in a Chinese producer will make the two parties related. In this case, the DG Trade investigators reconstruct a European price, applying estimates of shipping costs etc etc.
So finally, a domestic price and a European price are compared. In the case of Chinese anti-dumping cases, this is a comparison of a price in an unrelated country against often an artificial European price. In one case, it meant that the cost of Mexican producers of CFLi lamps where used to show that Chinese industry was dumping in Europe. In a business where economy of scale and access to cheap commodity electronics are crucial, Mexico had a tiny and uncompetitive industry which did not survive (the concept of comparing Mexican production with Chinese production was greeted with incredulity by industry experts). It should be no surprise that incredibly large dumping margins are discovered. In the case of CFLi lamps, the margin was 66%, meaning that DG Trade in effect proposed a huge, systematic and state-funded campaign to undercut the European manufacturing of Compact Fluorescent lamps, a fantastic concept. I have labored this point to clearly demonstrate that the process is biased against exporters, and exporters need to take serious steps to limit the damage if Europe is an important market.
The good news for individual exporters is that if they can win special, favourable tariffs. The first objective is to be treated as Market Economy or semi-Market Economy status. A history of accounts audited externally to international accounting standards is necessary (obviously difficult for small firms), and there should be no links to any government bodies. Buildings should not be rented from the local government, there should be no subsidies received for electricity. Financing should not come from state-owned banks, and of course there should be no state-owned equity share. If DG Trade gets a sufficiently high quality response, and if its audit is ok, then the dumping margin calculations are repeated just for that exporter.
Tip: One Chinese producer of CFLi lamps was structured in such a way that it had no domestic sales. This automatically guarantees 0% dumping margins, since if there are no domestic sales, there can be no dumping.
Who decides what and how?
(work in progress)
This is a summary of the decision making process
DG Trade provides a technical report to the ADAC (Anti-Dumping Advisory Committee).The ADAC can theoretically vote, and simple majority rules apply, although they prefer to support the finding of DG Trade: the ADAC sees themselves as technical rather than political.
The Commissioner for Trade will then make a proposal to the Council of Ministers. However, before the vote, the Commisioner for Trade circulates his/her proposed position to other Commissioners. The other Commissioners have an informal but actual veto if they don't agree.
The Council of Ministers votes (although in EU style, they usually try to avoid actually having to vote). To overturn the proposal put before them, a qualified majority is required. This is a "super majority", and it is difficult to get. On trade matters, where the European Union is approsimately split 60% protectionist and 40% free trade, a qualified majority to overturn a Council recommendation to impose tariffs is not going to happen.
How to defeat a protectionist attempt?
This is difficult, and really only possible for a European-based multinational.
It is most unlikely to defeat a protectionist measure on the grounds of enviornment or consumer interest. At the moment, environmental reasons have no specific legal standing in the trade protection process, and neither do consumer interests. There is a catch-all possibilty of "community interest", although it is rately used. It is meant to protect free trade interests, but in the CFLi case, it was actually used to justify the continuation of tariffs, since technically DG Trade found that >50% of Community manufacturing was opposed to the continuation of tariffs, which legally means there is no basis to continue them.
1. Get 50% of more of Community industry on your side
2. Get a lobby structure in place to reach out to the trade minister of every memberstate that is "greeen" (free trade) or "yellow" (wavering).
Remaing parts of this article are still to be completed.