For a subject that is as intensely practical as trade law, it never ceases to amaze me how the global and general nature of the subject often completely submerges the highly practical and commercially critical aspects of a given development or decision. This failing might best be described as getting bogged down in the general. Not perhaps a failing alone of those reporting on the subject, it appears increasingly to be a problem for decision makers and legislators. Our aim in this article is to report for you on a couple of issues which we at Eversheds ITC Group see in our practices as issues which deserve your close attention for commercial reasons alone.
We will report on three topics:
- the evolution of EU policy in relation to trade defence investigations
- the EU and China, and finally
- the implementation of reforms to the EU Customs regime.
There are strong indications that the European Union (EU)'s use of trade defence instruments (TDI)1 has been undergoing something of a transformation. This transformation makes it increasingly difficult for even experienced trade practitioners to judge with any degree of confidence the likely outcome of EU TDI investigations. This contrasts with the decade following the creation of the WTO in 1994, when the EU's investigative service sought to develop and use increasingly well-defined methodologies based on documented prior practice. Indeed, it was unusual to see any change in approach that was not forced on the TDI services following legal challenges to their methods.
The catalyst for change came in 2004 with the departure of Pascal Lamy, ultimately to the post of Director-General of the WTO, and his replacement as EU Commissioner for External Trade by Peter Mandelson. The approach adopted by Commissioner Mandelson to TDI cases has been more openly concerned with the geo-political implications of whether or not to impose trade defence measures than the pure technical approach favoured by former Commissioner Lamy. If uncertainty is the enemy of trade, then the EU's TDI decisions since May 2004 have had a significant and negative impact. Let's consider two specific and current EU TDI issues by way of example.
Firstly, a case specific proposal for imposing anti-dumping measures on footwear with uppers of leather originating in the People's Republic of China and Vietnam. At the time of writing, the EU is yet to take a formal decision on the result of the investigation which calls for duties to be imposed. However, there are a number of innovative findings in the Commission's analysis of the case which will undoubtedly impact future investigations:
Refusal of the investigation authorities to disclose the identity of the complainants for fear of economic reprisals.
For the first time, no individual assessment of claims for market economy treatment is made for co-operating companies who fall outside the sample.
Submissions from non-sampled companies were not taken into account when reaching the final determinations.
A willingness to consider, if not implement, a split in the product scope on Community interest grounds.
The use of a so-called "non-materially injurious value amount" to reduce the level of duties on the basis of a notional import volume considered not to have caused injury.
It is still not certain that the 25 EU Member States will adopt the proposal. Nevertheless it is clear that the investigating authorities are prepared to employ ever more inventive techniques to arrive at a politically acceptable solution.
Secondly, on a proposal of Commissioner Mandelson, a full review of the way in which the EU undertakes TDI investigations is underway. Part of this review includes public consultation and the opportunity for interested parties to submit their comments. Two principal themes are emerging; the need for greater transparency, and a desire to see greater flexibility under the Community interest test. Both suggested changes could lead to improvements in investigation. Any increased transparency should improve the confidence in the investigation findings and is to be welcomed. A refinement in the analysis of Community interest has similar potential; although a note of warning should be sounded. Any refinement in analysis should have clear aims underpinned by statutory guidelines if it is not to be subverted in the name of political expediency. Not only should TDI measures only be taken to off-set unfair trade practices, and then only to the level necessary to achieve this; they should also be seen to achieve that end.
In summary, whereas for the last ten years the path through the woods of a TDI investigation in the EU may have meandered, it was at least possible to navigate the way with care. Recent experience shows that this can no longer be relied upon, and the services of a knowledgeable guide are more important than ever.
China continues to dominate the agenda for much (but not all) trade law.
At the top level the EU Commission is still pushing to seek maximum benefit from China's accession of the WTO. The latest development here is a further request to establish a dispute settlement panel based on China's customs treatment of spare parts for cars.
Although not strictly part of the usually understood scope of trade law, recent developments within China to adopt more wide-ranging rules on anti-trust compliance will likely have as direct and significant an impact on the way in which foreign companies do business in China as the growing use of TDI by China itself.
China has had some form of anti-trust rules in force for a number of years (notably through a Law on Prices of 1998 outlawing price fixing) but these rules fall far short in scope and implementation of what a modern WTO based economy requires. In particular the existing rules had little or no application to the activities of Chinese State Owned Enterprises. Following a period of reflection and internal debate accompanied by much consideration of other systems of anti-trust control used around the globe, China brought forward a series of proposals for a new Anti-Monopoly Law, the latest draft of which is dated 7 June 2006.
This draft is clearly closely inspired not by U.S. rules but by EU anti-trust rules and procedures. These rules will however clearly be applied in a very different market environment to the EU and will be quite rightly adapted to suit China's needs.
As with all anti-trust regimes, the legislation of itself will tell us little about how the rules will be applied in practice. Firstly a lot of work will be needed to develop the implementing rules and the policy guidelines. Secondly how the rules are used will depend significantly on the chosen enforcement practices.
A key issue will be the extent to which the new laws are directed at and apply to regulate the activities of State-owned enterprises and correspondingly the degree to which the application of the laws is focussed more on the activities of foreign owned companies in China - whether through joint venture activity or through direct intervention in the local market.
The danger for companies with presence in China, joint ventures or merely trading within the Chinese market is not their inability to understand how anti-trust rules apply to their activities but to remember that the same types of rules which have such a significant impact on the way they organise and implement their businesses at home will now also start to be applied to their businesses in China. Whether or not China chooses to focus initial high profile implementation against foreign-owned businesses or not, it is time to reflect and review not why but how you do business in China.
European customs legislation is in the midst of the single most significant overhaul in its history. The amalgamation of the vast number of pre-existing customs regulations into the Community Customs Code and its implementing regulation in the early nineties was just that, an amalgamation. The modernisation of the Customs Code is designed to increase the facilitation of international trade, bring legislation up to date with technological advances and implement a security management regime to improve security in relation to goods crossing international borders; a similar concept to the C-TPAT (Customs-Trade Partnership Against Terrorism) programme in the U.S. Whilst a U.S. audience may have clear ideas about the benefits and burdens of C-TPAT, the equivalent audience in the EU will generally not.
The major components of the changes to the Customs Code are:
To simplify the structure and provide for more coherent terminology, with fewer provisions and simpler rules;
To provide for radical reform of customs import and export procedures to reduce their number and make it easier to keep track of goods;
To rationalise the customs guarantee system;
To extend the use of single authorisations (an authorisation issued by one Member State would be valid throughout the Community);
To require traders to provide customs authorities with information on goods prior to import to, or export from, the EU;
To provide reliable traders with trade facilitation measures (the Authorized Economic Operator (AEO)) concept; and
To introduce a mechanism for a common platform for Community risk-selection criteria for controls, supported by computerised systems.
The final three elements will be supported by traders becoming AEOs and are being developed through the implementing provisions to the Security Amendment to the Customs Code, which have just been subject to a trade consultation exercise completed by the EC Commission which finished on 15 September 2006.
Of these items the most important practical change will be that relating to the introduction of AEO. The concept and status of AEO will almost certainly be at the heart of the new facilitation and security measures. There are still a significant number of not insubstantial issues that will need clarifying sooner rather than later. Amongst them will be the level of scrutiny an organisation will be subject to during the approval stage which includes the need to prove the business' ongoing financial stability and, despite assurances from EC Commission, the apparent lack of any clear benefits or advantages of gaining AEO status.
For example, under the current security proposals the AEO in a supply chain will become liable for the security of that entire supply chain; with the trade off of a reduction in the amount of data an AEO would be required to submit as part of the pre-arrival or pre-departure declarations being seen as insufficient incentive. It has been reported that a number of organisations are questioning whether the significant investment required to satisfy the security criteria is justifiable.
A trial programme is currently underway in 11 EU Member States, covering all aspects of the international supply chain from manufacturer to importer. The report of the initial trial was published on 26 August 2006, and it has confirmed there is much work to be done to make the move to AEO status easier to use and to provide the benefits the trade would expect.
In each of these areas, the pursuit of legitimate overall aims masks the need for close and detailed consideration and sometimes judicial challenge to detailed rules on implementation. As ever the consequences for companies who fall on the wrong side of the trade fence are as significant and draconian as ever. 1 Trade Defence Investigations comprise anti-dumping, anti-subsidy, safeguard and various duty avoidance investigations.
Published October 1, 2006.