The WTO decision against Australia – what the law on paper might mean in practice

In brief 5 min read

At a time when global powers continue to test international trade rules, a World Trade Organization decision involving Australian tariffs on Indonesian A4 copy paper highlights some of the key legal issues that caused tension between international trading partners in 2019. We analyse the domestic implications of the decision, for 2020 and beyond, in this highly technical area.

Key takeaway 

• Anti-dumping duties imposed on imports from so-called 'state-sponsored industries' are likely to require more detailed justification than the Australian Anti-Dumping Commission (the ADC) has previously given, to ensure compliance with Australia's international legal obligations.

Who in your organisation needs to know about this? 

Legal counsel and procurement teams.

Background

On 4 December 2019, the WTO Dispute Settlement Body (the WTO Panel) handed down its findings in a case concerning Australian dumping duties on imports of Indonesian A4 copy paper. Six days later, the terms of two WTO Appellate Body judges expired. The judges were not replaced, due to the United States' persistent blocking of any further judicial appointments to the Appellate Body.

Australia and Indonesia have agreed not to appeal the WTO Panel's findings, in light of the legal void the ongoing Appellate Body hiatus has created.

What is anti-dumping?

Anti-dumping law allows domestic manufacturers to apply for the imposition of tariffs on foreign goods that are either being exported at less than their local value (ie 'dumped'), or being supported materially by government subsidies. Australian manufacturers have predominantly applied for dumping duties against steel and aluminium products exported from countries such as China, Vietnam, Taiwan and South Korea.

Many of the disputes before the WTO Panel concern challenges against member states' imposition of dumping duties on particular exports from other member states. This reflects both the extent of these duties – often amounting to 25–50% of the export price – and the relative frequency with which some member states impose them.

By global standards, Australia's ADC is a diligent enforcer of the anti-dumping regime and frequently recommends to the Commonwealth Minister that dumping duties be imposed on foreign exports. Australian exporters also grapple with dumping investigations that regulators have commenced in foreign countries, which in recent times have been especially politically charged – eg the United States International Trade Commission's investigation of BlueScope's steel exports and China's Ministry of Commerce investigation into Australian barley exports.

The A4 copy paper case

What were the issues?

In determining whether or not dumping has occurred, the ADC assesses the local prices of the foreign export goods. As an alternative to using actual local prices, at least two situations allow the ADC to 'construct' a local price:

• where there is a low volume (or absence) of sales in the foreign country; and
• where there is a particular market situation in the foreign country such that local sales are not suitable for use.

In constructing a local price, the ADC must use the exporter's actual records, as long as they are kept in accordance with generally accepted accounting principles and 'reasonably reflect competitive market costs'. If the ADC is not satisfied of these things, it may use alternative sources of information to construct a local price: eg by using a third party's business costs or industry benchmark costs as a proxy for the foreign exporter's costs.

In investigations where the ADC determines that the exporter has benefited from government subsidies or there has been general market distortion, it often finds that the exporter's costs do not 'reasonably reflect competitive market costs'.¹ This is most often alleged against 'state-sponsored industries' in countries such as China and Vietnam, and it is generally regarded as a controversial practice. This is because the outcome is often the imposition of very high dumping duties, and implies that they are not competitive market economies.

In the A4 copy paper case, the ADC had used South American benchmark costs as a proxy for the Indonesian exporters' actual costs for hardwood pulp (an input in the paper production process) to construct the Indonesian local price of paper. This resulted in dumping duties of 30–33% being imposed on Indonesian paper exports.

What was the outcome?

The WTO Panel determined that the approach the ADC adopted in making findings on a 'particular market situation' in Indonesia and 'competitive market costs' was in breach of Australia's international legal obligations. In addition, it determined that the ADC's approach to constructing a local price was in breach of those obligations.

First, the WTO Panel found that in order to rely on the 'particular market situation' provision under WTO law, the ADC was required to find not only that there was a 'particular market situation' in Indonesia, but also that because of that situation, Indonesia's local sales did not permit a proper comparison with the export sales. The ADC failed to apply this latter test during its A4 copy paper investigation, which the WTO Panel found to be an error.

Second, the WTO Panel noted that WTO law does not require the investigating country to assess whether the exporter's costs were 'competitive market costs'. It requires only that the exporter's recorded costs 'were kept in accordance with generally accepted accounting principles and reasonably reflect costs associated with the production' of the export goods. The WTO Panel held that the ADC failed to ask itself these questions during the investigation, which was inconsistent with Australia's international legal obligations. Under WTO law, only after answering these questions can the ADC consider whether the exporter's actual records should not be used to construct a local price for some other reason (eg the exporter's records do not reflect competitive market costs).

Lastly, the WTO Panel determined that the ADC's use of a South American benchmark profit amount during the investigation in constructing a local price for the A4 copy paper was inconsistent with Australia's international legal obligations. The Indonesian exporter was an integrated producer (ie it produced its own pulp input), and therefore its pulp costs did not involve a profit component charged by third party suppliers. Accordingly, the ADC should have considered a downwards adjustment to the South American benchmark. It also ought to have considered adjusting the benchmark to take into account non-distorted costs such as labour and energy costs.

What does the decision mean in practice?

The practical effect of the WTO Panel's decision on future ADC investigations is complicated and remains to be seen. This is because, even though the approach the ADC adopted during its investigation in the A4 copy paper case was held to be inconsistent with Australia's international legal obligations, the WTO Panel did not criticise the ADC's substantive conclusion that there was a 'particular market situation' in Indonesia; nor did it consider the legality of the ADC's reliance on the 'competitive market costs' provision under Australian anti-dumping legislation. The ADC frequently applies these twin concepts / provisions during anti-dumping investigations that enable it to construct a local price for export goods (en route to seeking the imposition of dumping duties).

Moreover, the ADC is bound to apply Australian anti-dumping legislation that is not entirely consistent with the relevant international agreements. Eg the 'competitive market costs' terminology is unique to Australian anti-dumping legislation and is not reflected in the relevant international agreements. Therefore, despite the WTO Panel's findings, it cannot be said authoritatively that the ADC breached Australian anti-dumping legislation during the A4 copy paper investigation. Moving forward, this means that anti-dumping lawyers will scrutinise carefully ADC investigations involving 'particular market situation' findings, as a potential vehicle through which to test the WTO Panel's findings in an Australian court.²

More broadly, the WTO Panel's findings have come at a time when vocal opposition has delayed Indonesian parliamentary approval of the Indonesia–Australia bilateral free trade agreement (the FTA). It is likely that the WTO Panel's findings regarding Australia have not aided the process of Indonesian ratification (Australia having already ratified the FTA).³ In addition to the bilateral trade context, anti-dumping and industrial subsidies have been a focus of efforts for multilateral trade reform, as the United States, EU and Japan, in particular, push for more stringent global rules to curb the advantages of foreign state-sponsored industrial exporters.

These recent events exemplify the relationship between anti-dumping investigations and international trade, and also highlight the broader political framework in which Australian anti-dumping law operates.

Actions you can take now

• Consider anti-dumping/countervailing subsidy risk when reviewing your existing or potential procurement contracts.
• Assess whether dumping or countervailable subsidisation may be occurring in your market, and what the risks or opportunities may be for your business.