C-337/09 P Zhejiang Xinan Chemical Industrial Group (Xinanchem)

One of the most interesting and complex issues in international trade over the past decade has been how to deal with the opening Chinese market. As China has become more integrated into international markets and has joined the WTO, its trading partners have sometimes struggled with the non-market aspects of its economy. Industries hard hit by Chinese competition have argued that Chinese interference with its internal market and support for domestic companies amount to unfair trading practices, and that they should consequently be compensated or controlled. Regulators have had sympathy for these concerns, applying trade remedies like countervailing measures and anti-dumping duties to Chinese products. However, this practice has led to counter-accusations of protectionism and discrimination. The recent spate of complaints both by and against China in the WTO is evidence of this struggle.

Last week’s Xinanchem judgment, however, is a significant step along the path toward normalized trade relations between China and the EU. In this case, which Advocate General Kokott called “of fundamental importance for future trade relations between the European Union and a number of dynamic emerging countries, such as the People’s Republic of China” (AG para. 1), the Grand Chamber of the ECJ dismissed the Council’s appeal of a General Court judgment in favor of the Chinese company.

Zhejiang Xinan Chemical Industrial Group (Xinanchem) is a Chinese company that produces, among other things, glyphosate: an herbicide used by farmers all over the world, including in Europe (para. 8).

The Council has imposed anti-dumping duties on glyphosate from China since 1998. Under EU anti-dumping law, there is a special rule for determining the ‘normal value’ (the price to which the ‘dumped’ product will be compared) for imports from non-market economies (NMEs). For NMEs, normal value is generally determined by looking at prices in a market economy third country (the ‘analogue country’ method). However, a producer from an NME can apply for market economy treatment (MET) if it can demonstrate that it actually operates under market economy conditions with respect to the manufacture and sale of the product concerned (paras. 2-4).

Xinanchem applied for MET in 2003, but was denied because the Commission found that it was not sufficiently independent from Chinese State control (paras. 11-13). Therefore, Council Regulation EC 1683/2004 set a normal price using the analogue country method (in this case by looking at prices in Brazil), and imposed a definitive anti-dumping duty of 29.9% (para. 14).

Xinanchem brought an action for the annulment of the Regulation. The General Court found in favor of Xinanchem, annulling the action insofar as that company was concerned, in 2009.  In the General Court’s opinion, the Commission and the Council had made their decision to refuse MET status without sufficient investigation into whether the fact that the State was a substantial shareholder in Xinanchem and had influenced the appointment and composition of the board of directors necessarily amounted to State control over decisions regarding production and pricing (para. 19). As the General Court put it:

[T]he concept of ‘significant State interference’ cannot be equated to just any influence on the activities of an undertaking or to just any influence in its decision-making process, but must be understood as meaning action by the State which is such as to render the undertaking’s decisions incompatible with market economy conditions (para. 20).

Accordingly, the General Court held that the Council and Commission had erred in the process of making the decision not to grant MET status to Xinanchem.

The Council appealed the judgment, arguing, first, that “State control such as that described [for Xinanchem] … automatically amounts to ‘significant State interference’ ” (para. 75); and second, that the State interfered in setting Xinanchem’s export prices (paras. 95-96).

The Grand Chamber of the ECJ dismissed the appeal in its entirety. It began by noting that in order for a company to be granted MET status, a producer must show two things regarding its production decisions: first, “that its decisions regarding prices, costs and inputs, including for instance raw materials, cost of technology and labour, output, sales and investment, are taken in response to market signals reflecting supply and demand”; and second, that there is no “significant State interference in that regard” (para. 72). The Court, agreeing essentially with the General Court and the Advocate General, found that the presence of State parties on the board of directors and State ownership of shares did not automatically equate to a violation of these criteria:

In the present case, it must be found that State control, such as that found by the institutions … is not, by its nature, incompatible with market economy conditions. In addition, although the fact that the distribution of the shares enabling the State shareholders – even though minority shareholders – to control de facto the general meeting of Xinanchem’s shareholders, and thereby appoint the board of directors, does give the State a certain influence over that company, it does not, however, follow that the State actually interferes – still less significantly – in the company’s decisions regarding prices, costs and inputs. Nor does such interference automatically follow either from the fact that some of the directors of that company are connected to it by employment contracts or by a contract for the supply of services (para. 83).

The Council and Commission therefore had an obligation “to take into account the evidence, submitted by the producer concerned, of the real factual, legal and economic context in which it operates” (para. 78).

Moreover, with regard to the second ground of appeal, the ECJ found that the Council and Commission had again failed to perform an adequate assessment of the evidence in the case: “the institutions cannot restrict their assessment to an analysis of the ‘prima facie’ situation if the producer furnishes evidence which is capable of rebutting that analysis” (para. 102). The EU institutions, according to the Court, are “required, under the principle of sound administration, to examine with all due care and impartiality the evidence provided by the producer and to take due account of all relevant evidence when assessing the effects of that mechanism on that producer’s decisions concerning export prices” (para. 104).

Following the news of the victory, China’s Ministry of Commerce issued a statement in which it claimed the Xinanchem decision as proof that the EU had been misusing trade remedies against Chinese companies.

What does this mean for the future? To begin with, it means that EU officials must make more nuanced and context-sensitive investigations into whether or not a particular producer is operating under market or non-market conditions. The simple fact of State presence or State shareholding is not enough on its own to lead to a refusal of MET status.

More broadly, however, the case is another sign that the EU and other big economies will no longer be able to single out China and Chinese companies per se for special treatment under trade rules. Instead, they must recognize and respond to the unique position of Chinese businesses in the international market, and adjust their rules accordingly.

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