Thursday, July 16, 2009

Zhejiang Xinan Chemical Industrial Group v. Council (EU) - Dumping - Imports of glyphosate originating in China - Market Economy conditions

by M. Ulric Killion 

Photo: Zhejing Xinan Chemcial Industrial Group - Introduction - Silicone Factory - Xinanchem-Corporate Culture.

On June 17, 2009, the Court of First Instance of the European Union rendered a decision, in the case of Zhejiang Xinan Chemical Industrial Group Co. Ltd v Council of the European Union (Case T‑498/04), setting aside a Council Regulation, being Article 2(7)(b) and (c) of Regulation (EC) No 384/96, denying Market Economy Treatment (MET) to Zhejiang Xinan. In this respect, the judgment established a landmark decision. This is because the court's decision is the first instance of a Community Court annulling a Council Regulation due to a manifest error of assessment on the part of the Community Institutions; namely, both the Commission and the Council of the EU, as concerns the controversial subject-matter of MET.

The relevant legal text, being Article 2(1) to (7) reads:
2. Article 2(7) of the basic regulation lays down a special rule for imports from non-market economy countries. . .
The requisites for the granting of MET essentially necessitated a mainland Chinese company demonstrating five (5) criteria. MET is typically denied to companies unable to demonstrate that business decisions (i.e., prices, costs, etc.) are reached free of what is characterized as "significant State inference." In this respect, Community Institutions demonstrate a reluctant to grant MET to those companies evidencing significant (and even in some cases only significant minority) State shareholdings.

In regard to the issue of "significance State interference", the Court of First Instance wrote:
67. The Council contends that 'significant State interference' within the meaning of the first indent of Article 2(7)(c) of the basic regulation does not require the institutions to assess whether the State has interfered in individual business decisions if the State itself takes such decisions or prevents them from being taken. It is sufficient to establish that the State exercises significant control over the exporter in the PRC.

68. In that regard, the Council states that the PRC is still a non-market economy country in which only a few companies operate according to market economy conditions. It therefore submits that it is sufficient, in order to establish that the State participates in business decisions, to establish that the State participates with a significant weight in the overall decision-making of the company. That may take various forms, including participation in shareholder and board meetings.

69. In the Council's view, if the State controls a company, it also interferes with its decisions, even if it does not 'meddle' or 'tamper' with individual decisions or 'contaminate' them, as Audace requires. In that case, the decisions of the company are State decisions taken by virtue of the general control it exercises and that will necessarily apply to the categories of decisions covered by the first indent of Article 2(7)(c) of the basic regulation. Thus, in the Council's submission, if the holding of shares by the State gives rise to State control, it also leads to State interference which is, by definition, significant.

70. The Council contends that, under the first indent of Article 2(7)(c) of the basic regulation, State interference and arm's length prices are two different issues and the verification that prices and costs reflect market values is not the sole aim of the MES determination. As is apparent from the use of the conjunction 'and' in the wording of the first indent of Article 2(7)(c) of the basic regulation, an exporter must demonstrate two separate facts: first, that its decisions are made in response to market signals and, second, that its decisions are taken without significant State interference. The Council argues, consequently, that evidence of the prices of particular transactions is irrelevant to the question of State influence and declines to address the arguments that the applicant has devoted to that question in its application.
In other words, in the case of Zhejiang Xinan Chemical Industrial Group Co. Ltd v Council, during anti-dumping proceedings involving glyphosate, pursuant to Regulation 1683/2004, the Council rejected the MET claim of Zhejiang Xinan, a Mainland Chinese agrochemical producer. The Council specifically rejected the MET claim of Zhejiang Xinan because it found that the company was under State control (i.e., "significant State interference"). The rationale of the Council is Zhejiang Xinan's wide dispersion of majority non-State owned shares, in conjunction with State actually owning the largest block of shares. Adding to the consensus of Zhejiang Xinan being under State control is a board of directors appointed by the State's shareholders with the majority of those directors being either State officials or officials of State-owned Enterprises (SOEs). Thus, the Council found that Zhejiang Xinan was subject to "significant State interference", and denied its eligibility for MET. Notwithstanding a finding of "significant State interference", the Council also announced that it could deny MET by virtue alone of the State being "able to take such decisions or prevent them from being taken."

A problematic of the Council's decision is that it effectually denied MET eligibility to all State-controlled companies. In the context of Mainland China, the decision of the Council, in practice, excludes MET eligibility to "state-owned enterprises (Guoyou qiye) (SOEs), such as, joint state-state enterprises (Guoyou lian ying qiye), enterprises directly under Central Government (Zhongyang zhi shu qiye), and urban collective-owned enterprises (Chengzhen jiti qiye)" (Killion, 2006).

The Court of First Instance did not agree with the Council and wrote:
90. Thus, more particularly, in the context of a non-market economy country, the fact that a company established in that country is State-controlled may raise doubts as regards the question of whether the State exceeds the role of a normal shareholder which respects the rules of the market and whether the company's management is sufficiently independent of the State to be able to make decisions concerning prices, costs and inputs autonomously and in response to market signals reflecting supply and demand. In addition, it is clear from the first indent of Article 2(7)(c) of the basic regulation, in the words of which decisions of firms are 'made', that the Community legislature specifically required that the concerned undertaking's decision-making process be free from any significant State interference. Thus, it is for the company to show that its decisions on prices, costs and inputs are made independently, based on considerations typical of a market economy, namely, in particular, the maximising of profit, and that they are not influenced by considerations peculiar to the State. The taking of independent decisions on commercial grounds is, generally, a characteristic of the private sector and, consequently, it is legitimate for the Community institutions, in the exercise of the wide discretion they enjoy in that domain, to take account, in their examination of the evidence produced by the exporter concerned, of the fact that the undertaking concerned is State-controlled.

91. However, State control, as established in this case, is not, as such, incompatible with the taking of commercial decisions by the undertaking concerned in keeping with market economy conditions and, in particular, does not mean that its decisions on prices, costs and inputs are based on considerations unrelated to an undertaking operating under such conditions.
Then there is the June 27, 2009 landmark decision of the Court of First Instance of the European Union, which wholly rejected the Council's findings and rationale. This is because, according to the Court of First Instance, the litmus test of "significant State interference" must premise on action by the State that is such as to render a company's decision, ultimately, incompatible with market economy conditions.

The Court took issue with the effect of the Council's decision, which would have effectually presented a blanket denial of all State-own companies to MET. In other words, the single factor of State control is insufficient to demonstrate "significant State inference." The Community Institutions when considering cases (i.e., on a case by case basis) must consider actual business practices, such as on a case by case basis decisions such as price, costs, etc. The Court went as far as to rule that there would be significant State interference, when and only when the State exceeded the role of a normal shareholder in a market economy. The Court is drawing a line between those business decisions promoting government objectives, as opposed to those decisions pursuing profit maximization. Given these criteria and standards, a company cannot be denied MET solely because it is State-controlled.

The Court also denied the Council the means to circumvent its decision by employing the vehicle of export restrictions. According to the Court of Fist Instance:
(14) Moreover, it was established that the Government of the PRC had entrusted the China Chamber of Commerce Metals, Minerals & Chemicals Importers and Exporters (CCCMC) with the right of contract stamping and verifying export prices for customs clearance. This system included the setting of a minimum price for glyphosate exports and it allowed the CCCMC to veto exports that did not respect these prices.

(15) Consequently, after consulting the Advisory Committee, it was decided not to grant [MES] to [the applicant] on the basis that the company did not meet all the criteria set in Article 2(7)(c) of the basic regulation.'
A problem in this case is the Council not taking into consideration evidence that the company presented, which shows, as a practice, that no exports of glyphosate have actually been vetoed, nor even vetoed when prices were below the minimum price. For this reason, the Court also specifically found that the Community Institutions wrongfully disregarding this evidence relating to exports restrictions; thus, the Community Institutions made a manifest error of assessment. Zhejiang Xinan, more specifically, presented evidence demonstrating that the mechanism in question was not actually imposed by the State, but rather constituted prices set by glyphosate producers, who were members of the CCCMC; a consequence, at least according to the Court, that did not entail any actual restrictions on the applicant's exports.

[According to the Hong Kong Trader, (European Court judgment invites radical overhaul of "market economy" treatment process, July 10, 2009)]: "The Court of First Instance's judgment is novel insofar as it has made some inroads into the hitherto unassailable margin of discretion afforded to the Community Institutions by the Community courts as concerns the determination of MET. The practical implications of the judgment for exporting producers in mainland China (and interested parties in Hong Kong) will be significant. The Commission will have to undertake a revision of its existing fact-finding practices and thus a considerably greater assessment of how a company's decisions on prices, costs and inputs are taken. Paradoxically, this could mean a far more burdensome (though fairer) fact-finding procedure to be conducted at the on-the-spot verifications of MET claims at exporting producers' premises in mainland China.

In view of the judgment's radical stance on the Community Institutions' fact-finding process in comparison with the Community courts' hitherto more conservative decisions on MET-related appeals (for example, Shanghai Excell M&E Enterprise Co. Ltd v Council reported in Business Alert-EU Issue 08/2009), Hong Kong's business community may question whether this decision at first instance will be allowed to stand or whether the Community Institutions are currently mulling over the possibilities of an appeal. In any event, as noted above, the judgment is all but certain to provoke a more burdensome MET process for exporting producers in order that future MET determinations by the Community Institutions can withstand the heightened Court scrutiny."


Official Journal of the European Union, C 057, Volume 48, 5 March 2005; 2005/C 57/60, Case T-498/04: Action brought on 23 December 2004 by Zhejiang Xinan Chemical Industrial Group Co., Ltd against the Council of the European Union, 35.

Ulric Killion, Modern Chinese Journey to the West: Economic Globalization and Dualism (2006).

Copyright© Protected - All Rights Reserved M. Ulric Killion, 2009.

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