Previously, we reported that the European Commission has discussed the role of the Chinese Communist Party (CCP) in Chinese companies in several of its recent anti-dumping rulings (see here, here, and here), considering it as one of the factors as part of its conclusion that there are “significant distortions affecting the domestic prices and costs in China.” China Trade Monitor reached out to four trade law experts with knowledge of the Chinese political system for their view of the Commission’s reasoning and determinations on the issue. The four experts are: Henry GAO, Associate Professor at Singapore Management University; Jian GUAN, partner at Globe-Law Lawfirm (Beijing); Zhiguo YU, partner at Zhong Lun Lawfirm (Beijing); and Weihuan ZHOU, Associate Professor at University of New South Wales. The exchanges with the experts are shown as follows, with each CTM question followed by the response from the experts.

CTM: Do you agree with the Commission’s assessment of the CCP's role in private firms?

GAO:

I don't really agree with [the determination that companies can expect] "more favourable treatment and support from the authorities", but I do agree [that the] CCP is influencing the decision-making process in the firms, for reasons explained in my paper published in International & Comparative Law Quarterly in 2019."

GUAN:

Paragraph (b) of Article 2.6(a) of the [EU] anti-dumping regulation states that “Significant distortions are those distortions which occur when reported prices or costs, including the costs of raw materials and energy, are not the result of free-market forces because they are affected by substantial government intervention.” Based on this definition, at least three legal elements have to be demonstrated by the Commission for a finding of significant distortion. First, there are substantial government interventions; second, the costs of raw materials and energy are not the result of free market forces; third, there is a causal link between the first and the second elements.

Unfortunately, nowhere in the determinations [at issue is it] demonstrate[d that] the costs of raw materials and energy are actually not the result of free-market forces.

Taking the CCP’s leadership as an example, the party building activities, collective studying of the leader’s speeches, carrying forward the “Yan’an Spirit” etc., certainly have nothing to do with how the prices and costs of the state-owned or privately owned enterprises are determined. Even for those activities that might have an indirect impact on the prices and costs, whether these prices and costs reflect free market forces must be demonstrated through adequate explanation based on evidence. The most critical question to the Commission would be how and to what extent the CCP’s leadership indeed results in distortion.

In conclusion, while it is still controversial whether the EU’s new methodology is WTO consistent, it appears that the Commission’s determinations of significant distortions are, to a large extent, flawed.

YU:

I respectfully disagree with the decisions of the European Commission in this case on the issue. I think several major logic gaps need to be crossed when equating CCP members with the State Presence in companies.

The issue to be analyzed here is whether state presence in firms allows the state to interfere with respect to prices or costs, as required by its basic regulation, [and] there are three things to be done: first, equate CCP member to CCP party, then link the Party with the State, and third state presence means state interference.

The first logic gap to overcome is how to equate CCP members to the CCP as a party. When having a conclusion in mind that CCP members serving in management is enough to reach a conclusion [on this issue], the reasonable extrapolations are, either some members whose responsibility to carry out party solutions are different from others, or all party members are obliged to cater to party solutions with respect to costs and prices in their company. The Commission answered neither of these two questions.

This immediately leads to another question: Whether a party member or a specific group of party members bears the obligation to realise party interference with respect to costs and prices. A member belonging to a political or religious group does not have to follow all the solutions or requirements issued by the group. So, the mere presence of party members in the management does not automatically render the conclusion that the party interferes with the operation and, particularly, costs and prices.

[The Xiamen respondent] explained that entertainment and learning sessions of policies are typical party building activities. While the Commission responded that the goal of the activities is to “strengthen the party spirit in the company’, or ‘development of party-related activities to ensure party overall leadership”, the Commission did not provide a concrete reason why members' presence equals party presence with respect to cost and prices.

ZHOU:

The Commission relied on its Market Distortion Report on China issued in 2017, which was essentially aimed at providing the evidentiary basis for the continued application of the NME assumption contemplated under Section 15 of China’s WTO Accession Protocol. This report formed the basis for these investigations, and the CCP cell is only one of the factors. I don’t think the CCP cell by itself constitutes sufficient evidence that directly shows price distortions. Nevertheless, if you consider all the factors and evidence as a whole, there can be a prima facie case, which shifts the burden of proof to China. The CCP cell is a more recent development as the party’s role is being increasingly strengthened. Given these recent developments, I don’t disagree that all the factors taking together can create a prima facie case of price distortion.

CTM: The reasoning in the Commission’s determinations has the potential to apply to almost all Chinese companies, considering the wide presence of the CCP. What do you think of its potential impact on future AD rulings?

GAO:

This is a very interesting development. In a way, it confirms the view in my 2019 ICLQ paper that China’s current SOE reform has provided sufficient evidence for an affirmative finding of ‘public bodies’ (see excerpts below). The paper states that “First, the Party controls SOEs, and second, the Party uses such control to ensure the SOEs support achievement of various State policies. One might argue that the Party is not the same as the government or the State. However, any lingering doubts one might have about the separation between the Party and the State should be dispelled by the 2018 amendment to China’s Constitution with this addition in paragraph 2 of Article 1: ‘[t]he defining feature of socialism with Chinese characteristics is the leadership of the Communist Party of China’. With the Party leading the State, the control of the Party is equivalent to the control of the State.”

In other words, the "public body" jurisprudence of the AB is no longer a major hurdle when it comes to subsidy determination involving Chinese SOEs, and even private firms with Party committees. I think this also confirms our larger point on the potential of existing WTO rules in building the market economy in China.

YU:

The impact may be enormous due to the large number of CCP members. The Commission’s reasoning will inevitably cover almost all enterprises in China, including foreign-invested ones, as a proxy to demonstrate the state presence to allow interference with respect to costs and prices, further to nail down a ruling of substantial government intervention. That may sometimes run into ridiculous conclusions. And for the AD rules, when all domestic sales, costs and expenses, and possibly export sales are discarded because of the finding of this substantial government intervention, such an approach will cause havoc to the AD rule itself: on what grounds, AD rules could be used this way? I think it is beyond the original design of international AD rules. And for AD practices, as the EU’s AD practice has enormous influence among WTO members, its practices, including such determinations, may be studied by other investigating authorities. A spread of such determinations could hardly be good news for the good of the international AD community as a whole. It may spark more DSB proceedings. And moreover, we must now take CVD into account because such dealing may have mirror images in CVD proceedings, for example, in findings of a public body.

ZHOU:

I think the Commission will continue to rely on this prima facie case. However, I don’t think it is impossible for private entities to rebut, at least in relation to the factor re: CCP cell. For example, if the industry under investigation and the relevant upstream industries involve mainly private actors, a private firm may argue that there is no price distortion. Party building activities do not mean that the CCP cell is involved in decision-making. Maintaining a good relation with the local government does not mean the government can influence prices. Aligning with government policies serves many other purposes, such as technological advancement and global competitiveness, that does not lead to price distortion. In short, you need more direct evidence to show price distortion. However, even if you can rebut the CCP cell finding, the EU may still find price distortion based on other factors. It said clearly that not all factors need to be present cumulatively for a finding of price distortions.

Whether these activities may enhance the opportunity for a firm to receive subsidies and preferential treatment is a different question that also requires more direct evidence. A firm that receives subsidies may simply rely on the policies that grant the subsidies. To avoid a double remedy, you should deal with subsidies via CVD. If you wish to deal with subsidies via ADD, then you will need to quantify the magnitude of the price distortion and show why a domestic subsidy does not affect domestic and export prices to the same degree.

CTM: How do you think that China will respond?

YU: I think China will pose objections to such determinations. The objections could be presented in the course of investigations, or expressed in governmental bilateral communications, or filed in complaints in multilateral forums.

ZHOU: As discussed in my recent article, China has already engaged in a retaliatory practice by finding that a particular market situation exists in the US and Australia:  China has not done so re: EU but may well do so in future investigations particularly given the EU’s approach. In many of these EU investigations, the Chinese government refused to respond to the government questionnaire, knowing that it will be nearly impossible to change the findings. This makes it even more likely that China will ‘reciprocate’ the EU’s approach in its own AD action.