EU Anti-Dumping Decision on Optical Fibre Cables Discusses Role of CCP in Company Management

The European Commission has adopted definitive anti-dumping measures on imports of optical fibre cables from China. The level of the anti-dumping duties ranges from 19.7% to 44%. One interesting aspect of the Commission's reasoning relates to the involvement of the Chinese Communist Party (CCP) in the management of several of the companies under investigation, an issue we have noted in several recent pieces (here, here, and here). We set out the reasoning on this point in the optical fibre cables case below.

The basic EU anti-dumping regulation explains that there are situations where domestic prices and costs in the exporting country cannot be used in the normal value calculation due to the existence in that country of "significant distortions," and describes one element that should be taken into account in this context as "state presence in firms allowing the state to interfere with respect to prices or costs":

6a.

(a) In case it is determined, when applying this or any other relevant provision of this Regulation, that it is not appropriate to use domestic prices and costs in the exporting country due to the existence in that country of significant distortions within the meaning of point (b), the normal value shall be constructed exclusively on the basis of costs of production and sale reflecting undistorted prices or benchmarks, subject to the following rules.

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(b) 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. In assessing the existence of significant distortions regard shall be had, inter alia, to the potential impact of one or more of the following elements:

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— state presence in firms allowing the state to interfere with respect to prices or costs;

This element came up as part of the Commission's reasoning in the optical fibre cables case as follows. In the decision adopting definitive measures in this case, the Commission first set out its general view of the role the CCP plays in company management:

(93) Apart from exercising control over the economy by means of ownership of SOEs and other tools, the GOC is in a position to interfere with prices and costs through State presence in firms. While the right to appoint and to remove key management personnel in SOEs by the relevant State authorities, as provided for in the Chinese legislation, can be considered to reflect the corresponding ownership rights ( 41), CCP cells in enterprises, state owned and private alike, represent another important channel through which the State can interfere with business decisions. According to the PRC’s company law, a CCP organisation is to be established in every company (with at least three CCP members as specified in the CCP Constitution ( 42)) and the company shall provide the necessary conditions for the activities of the party organisation. In the past, this requirement appears not to have always been followed or strictly enforced. However, since at least 2016 the CCP has reinforced its claims to control business decisions in SOEs as a matter of political principle. The CCP is also reported to exercise pressure on private companies to put ‘patriotism’ first and to follow party discipline ( 43). In 2017, it was reported that party cells existed in 70 % of some 1,86 million privately owned companies, with growing pressure for the CCP organisations to have a final say over the business decisions within their respective companies ( 44). These rules are of general application throughout the Chinese economy, across all sectors, including to the producers of OFC and the suppliers of their inputs.

(94) In addition, on 15 September 2020 a document titled ‘General Office of CCP Central Committee’s Guidelines on stepping up the United Front work in the private sector for the new era’ ( 45) was released, which further expanded the role of the party committees in private enterprises. Section II.4 of the Guidelines state: ‘[w]e must raise the Party’s overall capacity to lead private-sector United Front work and effectively step up the work in this area’; and section III.6 states: ‘[w]e must further step up Party building in private enterprises and enable the Party cells to play their role effectively as a fortress and enable Party members to play their parts as vanguards and pioneers.’ The Guidelines thus emphasise and seeks to increase the role of the CCP in companies and other private sector entities ( 46).

The Commission then set out a number of specific examples of CCP involvement in the management of the companies at issue, including the following:

(101) The company ZTT praises itself of the interest in the enterprise of the CCP and the authorities: ‘ZTT has attracted the attention of the Communist Party and state leaders for its cross-domain development. The central, provincial and municipal leaders have inspected and given affirmation and encouragement to ZTT.’ ( 52) Additionally, the company’s website gives accounts of its party-building activities and achievements, as well as the interactions with the CCP and authorities in that respect. For example, the company describes an inspection of the company’s party-building work by provincial and municipal party and government leaders: ‘Xue Jiping [Secretary of the Party Committee and Chairman of ZTT], said that Zhongtian Technology is a key manufacturing enterprise in Nantong, and that today's development is inseparable from the care and support of Party committees and government leaders at all levels, as well as that the Party committee of Zhongtian Technology Group, under the guidance of the superior Party organization, carefully set up the stage to foster mutual promotion, common progress and win-win of Party building together with enterprise development. He highlighted the two specific practices that Zhongtian Technology summarized and formed under the leadership of the Party flag. The first is the working system of the advanced spiritual homeland engineers. […]; The second is the advanced intellectual property bank enhancing the enterprise’s core competitiveness by involving the backbone of party members’ initiatives, truly transforming the advantages of Party building into development advantages, and transforming the wisdom of the Party and the masses into development efficiency.’ ( 53) The company also stresses the prominence of its party-related activities and the importance of their integration in the company’s operations: ‘The Party Committee of Jiangsu Zhongtian Technology Co., Ltd. was awarded the honorary title of “Advanced Grassroot Party Organization of Jiangsu Province” and became the only enterprise in Nantong area to receive this honor. In recent years, under the leadership of Xue Jiping, a national model worker, party secretary, and chairman of the board of directors, the Zhongtian Technology Party Committee has always adhered to the guiding ideology of “focusing on Party building around development and promoting development through Party building”, and actively explored standardized and integrated party building models, focussing on the integration of Party building work with enterprise production and business, detailed management, and culture development.’ ( 54)

The Commission also referred to the state's role in the financial markets and the provision of raw materials and inputs, which "have an additional distorting effect on the market."

The Commission then concluded as follows:

Thus, the State presence in firms, including SOEs, in the OFC sector and other related sectors (such as the financial and input sectors) allows the GOC to interfere with respect to prices and costs.

On this basis, the Commission "proceeded to construct the normal value exclusively on the basis of costs of production and sale reflecting undistorted prices or benchmarks, that is, in this case, on the basis of corresponding costs of production and sale in an appropriate representative country, in accordance with Article 2(6a)(a) of the basic Regulation."

In response to these findings, some of the interested parties offered comments:

the ZTT Group claimed that it is not proven that the group is subject to significant distortions since, on the one hand, the ordinary political activities of the party within the company or membership of the company managers in the CCP are not indicative of direct influence of the CCP over the group and, on the other hand, the ZTT Group being a private and publicly listed company, it is subject to market oriented corporate governance and listing requirements. In this connection, the ZTT Group noted that existence of state intervention does not amount to significant distortions since governmental intervention could also serve to correct market failure, such as in the broadband sector where the product under investigation is widely used.

FTT, referring also explicitly to the comments by CCCME, submitted that the allegations on market distortions are not substantiated. In FTT’s view, instead of relying on factual evidence, the complainant merely recites previous Commission findings and refers to the Report which in turn deals with China’s market and economic structures ‘in broader spheres’ and without specific evidence pertaining to the OFC sector. FTT therefore fails to see how elements such as state ownership, the structure of the chemical industry, policy objectives or role of CCP in a company have proved that commercial activities of the OFC sector are distorted.

The Commission responded as follows:

... While it is not entirely clear from the ZTT Group’s submission whether it suggests itself that the broadband sector in China is characterised by market failures, its general remarks, not supported by evidence, that CCP’s activities in the company are not indicative of CCP’s influence or that state interventions do not amount to significant distortions cannot reverse the Commission’s conclusions based on investigating various elements pointing to the existence of significant distortions in the sector, as demonstrated in sections 3.3.1.2 to 3.3.1.9. The Commission therefore rejected the arguments brought forward by the ZTT Group.

FTTs arguments are misplaced. As already explained in recital (152), far from being unspecific and dealing with the economics structure in China in ‘broader spheres’, the Report describes various types of distortions, cross-cutting in nature, present throughout the Chinese economy and affecting the prices and/or the raw materials and costs of production of the product concerned. The Commission noted furthermore that the Report is not the only source of evidence used by the Commission for its determination concerning the existence of significant distortions. The additional probationary elements used by the Commission and the conclusions at which the Commission arrived on the basis of that evidence are laid out in sections 3.3.1.2 to 3.3.1.9. Consequently, while the elements referred to by FTT, such as State ownership or the role of CCP in companies are among the relevant factors indicative of significant distortions, the Commission’s overall determination as to the existence of significant distortions in the sense of Article 2(6a) of the basic Regulation is based on a substantially broader range of evidence. Consequently, the Commission dismissed FTT’s arguments.