Building stable and competitive supply chains is a challenging task for companies – and governments sometimes intervene (e.g. by increasing domestic supply via taxation and restrictions on exports of raw materials, or by fixing domestic prices of raw materials) to secure access to key raw materials for their domestic industries. Doing so may increase domestic industries’ competitiveness overseas but does not come without risks: the EU considers that state support to companies purchasing raw materials is unfair. Therefore, end products incorporating state-supported raw materials risk increased scrutiny by the EU.
The most recent example of this is the complaint by Saudi Arabia against the EU before the World Trade Organization (WTO) concerning the provisional anti-dumping duties imposed by the EU on imports of mono ethylene glycol (MEG) from Saudi Arabia.
1. What is Saudi Arabia’s complaint about?
In June, an EU anti-dumping investigation reached an interim finding (to be confirmed by December 2021) that Saudi Arabian MEG was exported to the EU at prices lower than those in Saudi Arabia, and that those imports caused financial distress to the European MEG producers – a practice referred to by the EU as injurious dumping.
Under WTO rules, governments can react to injurious dumping by raising import prices by means of anti-dumping duties. Anti-dumping duties can only be imposed if an investigation by the importing WTO member reveals, based on objective evidence, the existence of injurious dumping. WTO members are also allowed to impose provisional anti-dumping duties while the investigation is ongoing (as did the EU in this case) – however, this is possible only if (i) there is an interim finding as to the existence of injurious dumping, and (ii) the provisional anti-dumping duties are necessary to prevent further financial harm being caused to domestic producers during the investigation.
Saudi Arabia’s complaint concerns the decision by the EU to impose provisional anti-dumping duties on imports of MEG from Saudi Arabia.
2. What is dumping and how is it determined?
In order to establish that a product is being dumped on their markets, governments must determine whether the export price of that product to the country of import is lower than its domestic market price in the country of origin. In order to ensure that this calculation is reliable, the WTO rules set out a fundamental principle: the domestic market price that is used for the comparison must on average be higher than the production cost of the product. This is to prevent exporters from charging below-cost prices on their domestic markets while making up for such losses in lucrative export markets (and technically not dumping their products thus avoiding the risk of anti-dumping duties).
3. How is state intervention in raw materials relevant for anti-dumping duties?
In the anti-dumping investigation concerning imports of MEG from Saudi Arabia, the EU considered that the price of propane, a raw material used for the production of MEG in Saudi Arabia, was distorted due to state intervention: the exporter bought propane from a related company at a price fixed by the government at 20% below the benchmark price charged by the Japanese producers.
Such state intervention can reduce production costs, and this cost advantage may increase the domestic industry’s competitiveness. The EU’s position is that, in those circumstances, production costs should be adjusted upwards to reflect the state intervention’s allegedly distorting impact. In fact, in several cases concerning imports from Russia (e.g. the investigation into imports of urea and ammonium nitrate), the EU adjusted upwards the price of natural gas because it was considered to be fixed at an artificially low level by the state.
The EU followed the same principle in the anti-dumping investigation into imports of Saudi Arabian MEG, and adjusted the production costs upwards in order to account for the impact of non-market forces. However, unlike the previous investigations concerning imports from Russia, where the EU asserted a country-wide distortion with respect to natural gas prices, the alleged distortion in the case brought forward by Saudi Arabia relate to transactions between two related companies – this might be the key issue in the dispute.
4. The scales of justice: on whose side is the law?
The EU’s practice of adjusting state-fixed raw material prices has been contested in the WTO in the past. The WTO Appellate Body concluded that WTO rules do not allow a ‘reasonableness’ test with respect to the production costs of the exporting producers – in other words, the EU should normally take at face value those costs if they are in line with the costs the companies actually incurred.
However, it is not as straightforward as it seems:
- According to the Appellate Body’s ruling in EU - Biodiesel (Argentina) which was followed by the Panel in EU - Cost Adjustment Methodologies II (Russia), the EU should provide a reasoned and adequate explanation of whether and how the adjusted cost used in its calculations was adapted to ensure that it represented the cost of production of MEG in Saudi Arabia. The EU’s regulation imposing provisional anti-dumping duties on imports of Saudi Arabian MEG does not include such an explanation – however, the EU could still develop this reasoned and adequate explanation at the definitive findings stage towards December 2021, and try to rely on it in the context of the WTO dispute to argue for the consistency of its measures with WTO rules.
- Further, while according to previous WTO jurisprudence the EU must rely on the cost records of the Saudi Arabian producers, there is an exception for costs between related companies: the Appellate Body’s ruling in EU - Biodiesel (Argentina) established that governments may adjust an exporter’s production input price when the input is acquired from related companies, provided that the price is not at arm’s length. Again, the EU’s provisional decision does not include an assessment of whether the raw material prices charged to Saudi Arabian MEG producers by their related suppliers were at arm’s length. However – and again – the EU could still include this assessment in its final decision and try to assert it as a defence in the framework of the WTO dispute.
5. Next steps
Saudi Arabia and the EU have 60 days to solve the dispute by means of consultations. If no mutually satisfactory solution is found, Saudi Arabia may request adjudication of the matter by a panel which, after its establishment, should deliver its ruling within 9 months (though reported to take an average of 18 months in practice).
The panel’s ruling can be further appealed to the Appellate Body – extending the process by at least another 3 months (though reported by the WTO to take an average of 13 months in practice).
However, the Appellate Body is currently non-functional due to the crisis regarding the appointment of members to the Appellate Body. While the EU and 15 other WTO members agreed on an interim arrangement (Multiparty Interim Appeal Arbitration Arrangement) that allow them to bring appeals among them despite the current crisis, Saudi Arabia is not a party to this arrangement. Therefore, if Saudi Arabia appeals the panel report in this dispute, it will be an “appeal into the void” – i.e. the appeal cannot be dealt with and the dispute cannot be definitively resolved until the Appellate Body crisis is resolved.
In the meantime, the EU is to confirm by mid-December 2021 whether the provisional duties should become definitive and remain applicable for the next five (or possibly more) years. If the EU confirms its findings – and Saudi Arabia and the EU do not solve the dispute via consultations by then – Saudi Arabia would be able to include those final findings in its WTO challenge. If the EU decides to revoke the anti-dumping duties (which is unlikely), Saudi Arabia would still have the possibility to push forward its complaint (which is also unlikely given that Saudi Arabia has not been a frequent user of the WTO dispute settlement process) in order to have a ruling on whether the EU’s practice of adjusting state-fixed raw material prices is consistent with WTO rules.