China trade tests UK’s clout in Europe post-Brexit

Britain leads resistance in the EU to hitting China with U.S.-style tariffs on dumped goods.

The European Union will this week make its highest-level push to toughen trade defenses against China with reforms that will set Brussels on a collision course with Beijing’s top EU ally: Britain.

European Commission President Jean-Claude Juncker is displaying increasing frustration with a stubborn caucus of British-led northern European countries that are blocking the EU from hitting China with the sky-high tariffs that the U.S. slaps on dumped goods. In last month’s State of the Union address, Juncker praised America’s 265 percent duties on ultra-cheap Chinese steel imports and insisted that the EU had to “be able to respond as forcefully to dumping as the United States.”

The pressure to create a new arsenal of trade defenses is intensifying as China moves to style itself as a “market economy” in the World Trade Organization from December 11, meaning that the EU will find it harder to impose even its current relatively modest duty levels on any goods — from forks to bespoke steels — that it argues are priced beneath the cost of production.

This is a huge political challenge when Europe’s domestic manufacturers of metals, textiles and ceramics protest that they are hemorrhaging tens of thousands of jobs because of subsidized, state-supported overproduction in China. Last week, 58 steel executives from companies including ArcelorMittal, Tata Steel and UK Steel called for U.S.-style tariffs.

European Commissioner for Trade Cecilia Malmström is expected to make a formal proposal on revamped trade defenses early next month but Brussels is already testing the appetite for a new approach. The Commission is circulating informal proposals ahead of a summit of national leaders in Brussels on Thursday in order to stake out the battlelines in a trade conflict that is likely to test Britain’s diplomatic clout and readiness to defend Beijing in the post-Brexit era.

A draft communication seen by POLITICO, which sources say should be adopted by the College of Commissioners this week before the summit, shows the Commission stressing that “the proposal will … ensure that the EU’s trade defense instruments are adapted to face new challenges and legal and economic realities, while maintaining an equivalent level of protection.”

‘Lesser duty rule’

But the proposals become more contentious when they touch upon one of the more eccentric features of EU trade defense — the “lesser duty rule,” which is the single biggest reason why European tariffs are so much lower than those in the U.S.

Under the complex requirements of the lesser duty rule, the EU does not usually impose duties to recoup the full sum by which dumped imports undercut production prices. Instead, the EU normally hits dumping companies with a far lower penalty, calculated only to counter any actual harm to European businesses.

Heavyweights such as France, Germany, Italy and Poland are pushing for the lesser duty rule to be axed, but Britain has blocked those reforms since 2013, leading countries such as Sweden and the Netherlands in opposition. The Commission now shows every sign of looking to smash down the British resistance.

The communication says: “The Commission has proposed possible compromises in which the lesser duty rule would not apply in some specific and carefully defined cases where there are massive overcapacities and/or raw material distortions,” and concludes that “finding an agreement on this proposal has become critical.”

However, even that approach arouses suspicion among British trade officials, who argue that punitive tariffs on raw materials can create even greater problems for higher value-added manufacturing businesses, which benefit from cheap parts and components. It is likely to be the U.K.’s first big European policy clash after Brexit.

The Commission’s informal proposal paper also looks to speed up trade defense investigations by two months and mentions that it will change the methodology for calculating “target profit” in dumping cases.

The issue of the “target profit [margin]” that the Commission will be prepared to defend in trade battles is closely watched by industry. The EU will be able to hit Chinese imports harder if the EU lifts the margin to be defended in its calculations of European industry.

Lessons from Argentina

The EU’s new anti-dumping proposal has been long in the making but it has now come to a crunch. France and Germany have tried in vain to force Britain to let them scrap the lesser duty rule, in line with the Commission’s reform proposed in 2013. People following the dossier now argue that something has to give. Either Malmström’s reforms are agreed by the member countries, or the original 2013 plans to scrap the lesser duty rule outright will come back to the fore.

In July, Malmström said that her new trade defense methodology would scrap the “existing list of non-market economy countries” and take into account “the distortions provoked by state intervention in a given country or in a given sector,” with the ultimate goal of retaining “approximately the same level of anti-dumping duties as we have today.”

“With this approach China won’t feel singled out or shamed in public through a list,” said a Commission source.

But the road ahead is bumpy.

Problem number one is China’s reaction. Over the past months Beijing has abstained from any strong public statements on the issue, but it is unlikely to roll over and accept the new methodology. Lawyers said they expected Beijing to challenge the EU at the WTO, at the least.

The more pessimistic fear China will retaliate by imposing higher duties on EU products entering the country, withdrawing promised investments to EU countries and threatening a potential trade war.

In further evidence of Chinese leverage, Beijing is expected to contribute €10 billion to Juncker’s much-touted €315 billion investment plan to boost the EU’s growth. The money is yet to arrive.

The second problem is legal. On October 6, the WTO ruled that the anti-dumping duties the EU imposed on Argentinian biodiesel on the basis of alleged “distortions” in the country’s market were illegal.

Brussels had justified its tariffs on the basis of the Argentine price of soybean oil, biodiesel’s primary input, being kept artificially low by government regulations. The WTO anti-dumping regulation says that, when deciding on a tariff, the price of the country where the product originates needs to be used, but the EU argued that these numbers were artificially low and that it was entitled to substitute them with what it deemed more realistic prices.

“The EU is thinking of using a similar methodology to address China,” Philippe De Baere, a trade lawyer at Van Bael & Bellis, the law firm that represented Argentina at the WTO, told POLITICO. “Last week’s decision closed a big door to the EU.”

Alessia Mosca, an EU lawmaker from the Socialists and Democrats group, and the European Parliament’s shadow rapporteur on China, disagrees. “Every WTO case is different. Sure, the Commission’s proposal won’t be perfect, maybe the WTO court will find some minor inconsistencies in it, but those can be fixed. What is important is that the new EU anti-dumping framework is sound.”

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