main points:

In foreign trade investigations with China,the discriminatory treatment originally targeted at state-owned enterprises has extended to the entire industry under investigation or downstream industries.In this regard,Chinese enterprises and the government should be prepared for a long-term and arduous game.

In foreign anti-dumping and countervailing investigations against China(hereinafter referred to as"double counter investigations"),even if Chinese state-owned enterprises respond to lawsuits,their applicable double counter tax rates may generally be higher than those of similar private enterprises.The reasons for this result are manifold.The author intends to analyze the evolution of foreign trade policies towards China and relevant cases,and propose corresponding countermeasures based on the basic position and jurisprudence of WTO on state-owned enterprises,for reference by state-owned enterprises.

Anti dumping investigation on differential treatment of Chinese enterprises

In anti-dumping investigations,investigation authorities in Europe and the United States and other regions have adopted special investigation methods against Chinese state-owned enterprises,artificially raising the dumping margin of state-owned enterprises.Legislation and practice vary from country to country.Among them,the EU's approach is highly representative and has been emulated by many countries,reflecting to some extent the overall trend of foreign trade policies towards China.According to relevant EU legislation and practice,the differential treatment that Chinese state-owned enterprises receive in anti-dumping investigations mainly includes:"one country,one tax/separate tax rate","market economy treatment",and the legislation on"cost substitution"promulgated at the end of 2017.

One country,one tax/separate tax rate

In the EU anti-dumping investigation against China launched before September 2012,if Chinese enterprises want to obtain their own dumping margin and tax rate,that is,calculate the dumping margin using their own export prices,they must apply to the European Commission to prove that their exports and pricing are independent of the government in order to obtain a separate tax rate(also known as"individual treatment").Otherwise,the European Commission will impose a nationally uniform maximum tax rate on the investigated products exported by the enterprise to the EU,namely,the"one country,one tax"system.

Among the five conditions that must be met simultaneously for an enterprise to obtain a separate tax rate in the original Article 9.5 of the EU's Basic Regulations on Anti dumping,one of them is that the overwhelming majority of the shares of the enterprise are held by private individuals,there is a significant minority of government officials in the board of directors or key management positions,or it is necessary to prove that it is completely independent of the government.Based on this provision,the European Commission often considers that state-owned enterprises do not have the autonomy to be independent of government influence and rejects their application for a separate tax rate,thereby imposing the highest national anti-dumping duty on the investigated products produced and/or exported by state-owned enterprises.

In July 2009,the Chinese government filed a lawsuit against the WTO(Dispute Case No.:DS397)regarding EU legislation on individual treatment and anti-dumping measures applicable to the law(EU anti-dumping measures against Chinese fasteners).On July 15,2011,the WTO Appellate Body ruled that the EU's legislation on individual treatment of China and its applicable measures violated WTO rules.In order to implement the WTO ruling,the EU amended its legislation on individual treatment on September 3,2012,and automatically calculated individual tax rates for Chinese enterprises in subsequent anti-dumping investigations.

The United States has also adopted a similar approach to EU individual treatment in anti-dumping investigations.Enterprises need to submit a written application to obtain a separate tax rate.In addition,the practice of the United States Department of Commerce has shown that as long as the responding enterprise is a state-owned enterprise,regardless of the proportion of state-owned shares,it cannot obtain separate tax rates.In December 2013,the Chinese government filed a lawsuit with the WTO(Dispute Case No.:DS471)against the relevant measures taken by the United States.In October 2016,the WTO expert group determined that the discriminatory refusal of the United States to grant separate tax rates to Chinese export enterprises violated WTO rules,and the United States did not file an appeal.Despite this,the US Department of Commerce has not stopped the practice of separate tax rates in recent anti-dumping investigations,and continues to require responding Chinese enterprises to submit separate tax rate applications.In individual cases,it has refused to grant separate tax rate treatment to enterprises solely because of their status as state-owned enterprises.Therefore,state-owned enterprises have also been ruled by the investigating authorities to apply higher anti-dumping duties.

Market economy treatment

In some foreign anti-dumping investigations against China,the differential treatment suffered by state-owned enterprises also includes market economy treatment,which means that Chinese enterprises must apply to prove that they operate under market economy conditions before using their own domestic sales or cost data to calculate normal value.The application conditions for market economy treatment are more stringent than individual treatment:individual treatment mainly requires enterprises to prove that their export prices are not subject to government intervention;For market economy treatment applications,enterprises also need to prove that their decisions on prices,costs,and inputs,including raw materials,technology costs,labor costs,output,sales,and investment,are made based on information that reflects market supply and demand,without significant government interference.In practice,state-owned enterprises are often considered to be subject to government intervention due to ownership issues,making it difficult to obtain market economy treatment.

On December 11,2016,after the expiration of Article 15 of the Protocol on China's Accession to the WTO(which allows importing countries to use the"surrogate country"approach in anti-dumping investigations against China),some countries and regions amended their anti-dumping legislation,literally removing discriminatory provisions against China.However,this formal legislative amendment does not eliminate the differential treatment that state-owned enterprises receive in anti-dumping investigations,but instead extends discriminatory provisions to the entire industry under investigation or downstream industries where state-owned enterprises dominate.

Cost substitution method

As mentioned earlier,in accordance with Article 15 of the Protocol on China's Accession to the WTO,all WTO members must cease the practice of using"substitute countries"in anti-dumping investigations against China after December 11,2016.In response to this obligation,the EU has revised its original market economy treatment legislation and announced new anti-dumping investigation regulations on December 19,2017.The new regulations introduce a"cost substitution"approach,allowing the European Commission to abandon the prices or costs of exporting countries and continue to use third country or international market prices to determine the normal value of Chinese products in the context of so-called"significant distortions(i.e.,significant distortions in prices or costs,including raw materials and energy costs,caused by significant government intervention).".According to the new regulations on anti-dumping investigations,when determining whether there is a"serious distortion",the following factors can be considered,and as long as any one of them is met,it constitutes a serious distortion:(1)Whether many enterprises in the relevant market of the exporting country are owned,controlled,supervised,or guided by the government;(2)The state-owned component of enterprises allows the government to intervene in prices or costs;(3)Public policies or measures that allow domestic suppliers to receive differential preferential treatment or are sufficient to affect market freedom;(4)The absence,differential application,or incomplete enforcement of bankruptcy,company,or property laws;(5)Wage costs are distorted;(6)Obtain funding from institutions that implement public policies or rely on government.Among the above conditions,items(1)and(2)both involve the issue of ownership of enterprises.If the industry under investigation or the majority of enterprises in its upstream industry are owned by the government,the European Commission can conclude that there is a"serious distortion"and then use cost data from alternative countries to calculate the normal value of Chinese products.

According to the new EU regulations,the burden of proof for"market distortions"rests with the complainant,proving that there is market distortion in the accused exporting country or an industry in that country.In order to assist the complainant in adducing evidence,the European Commission released a national report on China on the day the new regulations came into force,analyzing factors of production such as land,energy,capital,raw materials,and labor,and determining that there are serious market distortions in the Chinese economy,especially in the steel,aluminum,chemical,and ceramic industries.The EU industry can request the use of new methods in anti-dumping investigations based on the country report.

For Chinese companies,the challenges posed by the new regulations are even more severe.The application of the original anti-dumping investigation method may lead to discriminatory treatment for responding state-owned enterprises,but there is still a glimmer of hope for responding private enterprises to use their own domestic sales or cost data to calculate normal value;The application of the new regulations may extend discriminatory treatment to the entire investigated industry dominated by state-owned enterprises or downstream industries dominated by state-owned enterprises,resulting in higher normal value and dumping margins.If there are a large number of state-owned enterprises producing the investigated products or raw materials,then all responding enterprises(regardless of their ownership form),Will be used to calculate normal value using third-party data.Obviously,the application of the new regulations will be more detrimental to responding Chinese enterprises,and further increase the difficulty of defense,as responding enterprises will have difficulty collecting evidence at the macro level to overturn the EU's allegations of market distortions.

Anti subsidy investigation on differential treatment received by Chinese enterprises

Countervailing investigations mainly examine whether export enterprises receive subsidies and whether subsidies cause harm to the domestic industry of the importing country.If a positive conclusion is reached on the aforementioned issues,the importing country should adopt countervailing measures to increase the import price of the investigated product,in order to offset the adverse impact of such imported products on the domestic industry.

Conventional survey items

Common subsidy programs include government grants,preferential loans and financing,tax incentives,and the provision of goods or services at low prices."Providing goods at a low price usually refers to the investigation organ treating the state-owned enterprise supplying raw materials as a public institution,and then treating the raw materials provided by the state-owned enterprise to the responding enterprise as subsidies.Then,using a higher external benchmark(i.e.,the price of similar raw materials in a third country),the difference between the two is considered a subsidy benefit.".According to this investigation method,the more raw materials the responding enterprise purchases from state-owned enterprises,or the higher the proportion of state-owned enterprises in the upstream industry of the product involved,the higher the benefits and subsidies the responding enterprise obtains.In this case,in order to avoid being subject to high countervailing duties in the future,export enterprises may tend to purchase raw materials from non-state owned enterprises,resulting in differential treatment for state-owned enterprises as raw material suppliers.

Emerging survey items

In addition to traditional subsidy projects,some foreign investment projects are also considered subsidies by the investigation authorities.In the EU's countervailing investigation on Huaka/passenger car tires launched at the end of 2017,the European Commission regarded the equity investment funds of the the Silk Road Fund in European enterprises as the grants obtained by Chinese enterprises and included them in the subsidy range.The background of this survey is that in 2015,the the Silk Road Fund cooperated with China National Chemical Corporation(the parent company of a sample enterprise in the EU's countervailing investigation on Huaka/passenger car tires)to jointly fund the acquisition of the equity of Pirelli,an Italian tire manufacturer.After the completion of the transaction,both the Silk Road Fund and ChemChina are shareholders of Pirelli Italy,holding different proportions of the company's equity.However,in the EU's anti subsidy investigation on China's tires,the contribution of the the Silk Road Fund to equity mergers and acquisitions was regarded as the government grant obtained by the responding affiliated companies of China National Chemical Corporation,and the European Commission calculated the subsidy rate of 18%.

This conclusion of the EU is lack of evidence in fact and law,because the the Silk Road Fund invests in Italian enterprises.Even if the investment constitutes a subsidy,the beneficiary of the subsidy is also Italian enterprises,which has nothing to do with ChemChina.In response,although the Chinese government and responding enterprises have submitted a large number of defense opinions,the EU still maintains its investigation conclusions.In the future,the above practices of the European Union will become a precedent,or will affect future countervailing investigations against other Chinese products.That is,as long as the investigation authority finds that the responding Chinese enterprise and the government fund jointly form an entity to invest abroad,the investment funds of the government fund may be recognized as subsidies received by the responding enterprise.In this situation,the risks faced by state-owned enterprises are particularly severe,as the investigation authorities often presume that state-owned enterprises do not have the autonomy to be independent of government influence,leading to the conclusion that relevant projects constitute actionable subsidies.

WTO's stance on state-owned enterprises

The WTO provides the basic principles and legal framework for member states'dual anti investigation legislation,and member states are obligated to abide by WTO trade rules.Therefore,it is necessary to study WTO regulations and precedents related to state-owned enterprises,and judge the legitimacy of foreign trade policies and measures towards China based on them,so as to formulate effective countermeasures.

Provisions of the WTO on state-owned enterprises

Under the legal framework of the WTO,Article 6(Anti dumping and Countervailing Duties),Article 16(Subsidies),Article 17(State Trade Enterprises)of the General Agreement on Tariffs and Trade(GATT)and the WTO Countervailing Agreement all refer to state-owned enterprises.These provisions indicate that the WTO does not discriminate against state-owned enterprises or oppose their participation in international trade.However,they also indicate that state-owned enterprises that enjoy special treatment in certain aspects may disrupt the normal market order.In view of this,WTO requires member countries to comply with WTO rules.If the special treatment enjoyed by state-owned enterprises leads to distortions in the domestic market and export trade,then importing countries can take necessary measures to offset the adverse effects of imported products on domestic industries.

WTO Cases Concerning State Owned Enterprises

In the dispute between China and the United States over anti-dumping and countervailing measures(Dispute Case No.:DS379),the countervailing enterprises involved in the case purchased raw materials from state-owned enterprises.The US Department of Commerce identifies state-owned enterprises as"public institutions"and identifies the raw materials purchased by responding enterprises from state-owned enterprises as actionable subsidies.

In response,the WTO expert group(equivalent to the court of first instance)supported the United States'determination of"public institutions"on the grounds that the majority of shares in state-owned enterprises are held by the government and their operations are subject to government intervention;However,the WTO Appellate Body(equivalent to the court of second instance)believes that the expert group's interpretation of"public institutions"lacks appropriate legal basis.The Appellate Body stated that a public institution must be an entity that owns,exercises,or is granted government power.Therefore,the fact that the government holds shares in enterprises is not sufficient to identify state-owned enterprises as"public institutions".Only when the government exercises multiple controls over the enterprise and grants government power to the entity can the enterprise meet the characteristics of a"public institution".According to this,the Appellate Body ruled that the US Department of Commerce's practice of directly treating state-owned enterprises as the subject of subsidies violates WTO rules.In another similar dispute(Dispute Case No.:DS437),the WTO Appellate Body reiterated its position regarding state-owned enterprises and public institutions in the DS379 case,and ruled that the practice of"providing subsidies for raw materials at low prices"by the United States Department of Commerce in its countervailing investigation against China violated WTO rules.

Response suggestions

The recent amendments to EU anti-dumping legislation and the recent practice of countervailing investigations against China have to some extent reflected the methods and trends of future dual anti-dumping investigations against China by foreign countries.The potential impact is:(1)The differential treatment received by state-owned enterprises in the double counter investigation has already and will continue to extend to private enterprises that participate in the response to the lawsuit together.In many current double counter investigations,if the investigated product or raw materials used in production are mainly supplied by state-owned enterprises,then even if the responding enterprise is not a state-owned enterprise,the investigation authority may still use third-party data to calculate the dumping/subsidy tax rate of the responding enterprise(2)Although there are significant differences between foreign trade and foreign investment,when foreign governments take trade measures,they may confuse the two,treating government investment payments as subsidies received by responding enterprises,artificially raising the countervailing tax rate.

China should be prepared for a long-term and arduous game against discriminatory practices in trade investigations by countries such as the European Union.In addition to actively defending in individual cases,the Chinese government should also bring relevant legislation and measures to the WTO.In addition,it should be emphasized that due to the specific procedures followed by the WTO dispute settlement mechanism,illegal measures may take several years to be corrected.Therefore,in order to avoid encountering discriminatory investigation methods in the dual counter investigation,Chinese enterprises should take adequate response measures before the investigation is launched,rather than passively responding to the lawsuit after filing the case.

From the perspective of the legislative spirit and jurisprudence of the WTO,the WTO does not discriminate against state-owned enterprises,but emphasizes that they should operate in accordance with market rules and compete fairly with enterprises under other ownership systems;Otherwise,importing countries can adopt special rules to offset the adverse effects of state-owned enterprise advantages on importing countries.Accordingly,in order to get rid of the differential treatment received by state-owned enterprises in foreign trade and investment,state-owned enterprises should follow market rules in their daily operations,conduct market-oriented operations,and make decisions and transactions in accordance with the procedures prescribed by the Company Law.Only in this way can the WTO trade rules be effectively used for defense in future litigation or dispute settlement procedures.

In terms of external investment,if state-owned enterprises encounter the participation of government funds during the investment process,in order to avoid being subject to high tariffs in countervailing investigations,state-owned enterprises should try to maintain their independent investment entity status,avoid joint bidding with government funds after forming entities,and it is not appropriate to overstate the role of government funds in the external investment process in order to raise funds.

Finally,it is particularly important to note that state-owned enterprises should not publish the government subsidies they receive as good news when promoting to the outside world.Although listed companies need to truthfully disclose information in accordance with the requirements of the CSRC,it is not appropriate to vigorously promote subsidies,let alone exaggerate the support provided by the government;Otherwise,this information may become evidence against companies in future trade investigations.

(This article is translated by software translator for reference only.)