China's WTO Complaint Against Various Australian AD/CVD Measures

Australia has been pressing forward recently with two WTO complaints against Chinese AD/CVD measures. It requested a panel on AD/CVD measures against barley (that panel was established on May 28, but is not yet composed); and on June 22 it requested consultations on AD/CVD measures against wine. Perhaps triggered by these actions, on June 24 China requested consultations on some older AD/CVD measures by Australia against several Chinese products: wind towers, stainless steels sinks, and railway wheels (WT/DS603). The legal complaint is broad, covering a wide range of obligations in the AD and SCM Agreements. Consideration of these issues by a WTO panel will focus on the reasoning of the Australian investigating authority (the Anti-Dumping Commission). As the Appellate Body has explained, "panels should test whether the conclusions reached by the investigating authority are reasoned and adequate in the light of the explanations provided by the investigating authority in its written determination." (See China - HP-SSST, para. 5.55) To help illustrate the nature of the legal claims at issue, this post examines one aspect of China's WTO complaint related to the calculation of normal value in the underlying Australian AD/CVD decisions.

An appendix to the Chinese consultations request specifies the Australian actions at issue as follows (we have added links to the relevant Australian documents for each case):

A. Wind Towers

B. Deep Drawn Stainless Steel Sinks

C. Railway Wheels

As an example of the types of claims in this dispute related to the investigating authority's reasoning, for all three products China made the following claims:

The anti-dumping measures on wind towers, deep drawn stainless steel sinks and railway wheels appear to be inconsistent with Australia's obligations under the following provisions of the GATT 1994 and the Anti-Dumping Agreement:

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2. Article 2.1 and 2.2 of the Anti-Dumping Agreement and Article VI:1 of the GATT 1994, because in constructing the normal value, Australia did not use the production cost in the country of origin;

At this stage, no additional detail on these Chinese claims is available, and the consultations request is brief.

To illustrate how the Australian investigating authority approached these issues, we look at the reasoning in the wind towers and railway wheels cases. For wind towers, the Australian Anti-Dumping Commission's final report is here. Its reasoning on this issue was as follows:

5. Market situation and raw material costs in China

5.1 Finding

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In addition the Commission finds the conditions under Regulation 180 of the Customs Regulations 1926 have not been met as the raw material costs for plate steel and flanges do not reasonably reflect competitive market costs associated with the production or manufacture of like goods. The Commission has therefore uplifted the prices of steel plate and flanges used in the constructed normal value for China using available information from previous and present investigations into steel and plate steel.

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5.2.1 Application

The applicants stated that selling prices within the domestic Chinese wind towers market are artificially low due to government influence on raw material prices, in particular, plate product produced from hot rolled coil, coking coal and/or coke and scrap metal. As plate steel is the major raw material input into the production of wind towers, and contributes to at least 50% of the cost to make the goods, the applicants considered that domestic selling prices for wind towers are unsuitable for establishing normal values (under s.269TAC(1)) for the products exported from China, as a “particular market situation” exists in these markets.

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5.4 The Commission’s assessment – market situation

The Commission notes that wind towers are unique capital equipment that are project driven and differ in their technical properties between projects. The Commission considers that the identified differences between the exported goods and like goods sold domestically are so complex and significant in terms of specifications and inclusions and exclusions that adjustments could not reasonably be undertaken to ensure proper comparison.

Therefore, the Commission finds that domestic sales of like goods in China and Korea are not relevant and suitable to compare to export sales. Accordingly, normal values cannot be established under s.269TAC(1) and must be determined under one of the alternative methods provided for in the Act.

Given the finding that normal values cannot be determined under s.269TAC(1), the Commission considers that the assessment of whether a market situation exists in the Chinese domestic market to be redundant. However, the Commission regards information gathered and assessed as part of the market situation claims to be directly relevant to the determination of costs for the purposes of constructing normal values under s.269TAC(2)(c)

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5.5 Raw material costs

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In determining the cost of production and the administrative, selling and general costs associated with the sale of those goods, the Parliamentary Secretary must have regard to factors provided for in Regulation 180. The regulation requires that if an exporter keeps records relating to like goods that are in accordance with generally accepted accounting principles (GAAP) in the country of export, and reasonably reflect competitive market costs associated with the production or manufacture of like goods, the Parliamentary Secretary must work out the cost of production using information set out in the exporter’s records.

In its examination of the exporter’s records, the Commission found that TSP maintained records that complied with the GAAP of the country. In examining whether the second of the conditions was satisfied, the Commission considered the GOC’s distorting effect on the production costs and selling prices of plate steel. The Commission finds that sufficient evidence exists to consider that the cost of plate steel and flanges reflected in the records of TSP do not reasonably reflect a competitive market cost.

Given that the conditions of Regulation 180(2) have not been fulfilled, the Commission is not required to use information relating to the cost of plate steel and flanges set out in the records of TSP. Therefore, for the purposes of constructing a normal value, the Commission considers it appropriate to determine the cost of production for wind towers sold domestically by replacing the cost of plate steel and flanges with a competitive market cost.

The Commission constructed a normal value with plate steel purchase costs adjusted using information from REP198 that the Commission considers reflects competitive market costs.

A competitive market cost for plate steel was established using verified domestic selling prices in China for plate steel from INV198. These prices were then compared to the unadjusted normal values established in INV198. The difference in these prices was then applied to the purchase cost of plate steel as reflected in TSP’s records.

Along the same lines, with regard to railway wheels, a key part of the Anti-Dumping Commission's reasoning on this same issue was as follows:

Cost of production

In constructing a normal value under 269TAC(2)(c), the Minister needs to determine the cost of production or manufacture of the goods in the country of export.

Subsection 43(2) of the Regulation requires that, if an exporter keeps records relating to the like goods which are in accordance with generally accepted accounting principles (GAAP) in the country of export, and those records reasonably reflect competitive market costs associated with the production or manufacture of like goods, the cost of production must be worked out using the exporter’s records.

The Commission considers that the government influence by GOC in the steel and steel input markets in China is such that the costs incurred by Masteel in the production of railway wheels were not determined in a competitive market. These circumstances are not normal and ordinary because the records of Masteel reflect the government influence by the GOC which distorts the costs in the steel and steel input markets in China. As such, they are not suitable to use to work out an amount for the cost of production to use in the constructed normal value which would be an appropriate proxy for the price had there been goods sold in the ordinary course of trade in China in arms length transactions, had there not been an absence of sales in the Chinese domestic market.

Therefore, Masteel’s records relating to the production of steel billet used to produce railway wheels do not reasonably reflect competitive market costs.

Details of the Commission’s consideration of whether Masteel's records reasonably reflect competitive market costs is at Non-confidential Appendix 2.

In these circumstances, the Commission is not required to work out an amount for the cost of production using the information set out in Masteel's records. The Commission has determined a suitable benchmark for steel billet used in production of railway wheels to use in the constructed normal value in order to establish an appropriate proxy for the price of railway wheels sold in the ordinary course of trade in China, had there not been an absence of sales in the Chinese domestic market.

The Commission considers that the suitable benchmark is to uplift Masteel’s steel billet input costs to reflect the difference between these costs and the costs incurred by Valdunes, as adjusted for SG&A expenses that Masteel would not have incurred in the production of railway wheels in China.

The Commission's discussion of a suitable benchmark is at Non-Confidential Appendix 3.

For now, with only a consultations request to refer to, it is difficult to examine the legal claims in depth. As the litigation proceeds, and the submissions of Australia and some third parties become public, we will look more closely at the case.