TDIs and EU-FTAs – Is Past Experience an Indication for the Future? Implications for Brexit

1. TDIs and EU-FTAs – Is Past Experience an Indication for the Future?Implications for Brexit Till Müller-Ibold – Senior Counsel, Cleary Gottlieb Steen & Hamilton LLP Brussels, March 31, 2017

2. My presentation today • WTO and EU rules disapprove of injurious dumping and subsidization. The main “cure” to these practices is a compensatory special duty. • The EU has also agreed to some special rules in the various customs union and free trade agreements. I will discuss: • What is the socio-economic background and cause of such practices? • What can the FTAs do to combat the root causes of such practices, that Anti-dumping (“AD”) and countervailing duties (“CVD”) cannot? • I will look at some examples and show that if the root cause has been addressed, both substantively and procedurally, the EU has agreed not to impose AD or CVD measures (or only very rarely). • I’ll explain that such differentiated elimination of AD and CVD application is WTO compliant. • And finally, I’ll briefly lead into our last presentation, by explaining why some of what I found may be difficult news for those hoping to see that in a Brexit deal AD and CVD may be avoided.

3. Economic background Dumping practices – When do they make economic sense (1) • Dumping is characterized by a form of price discrimination: the price “in the ordinary course of trade” in the home market is higher than the export price. • Price discrimination may simply be the result of market forces. Moreover, dumping practices usually lead to a resource transfer to the country to which the “cheap” products are being delivered. Hence, WTO rules do not prohibit all dumping. Rather they allow the imposition of countermeasures only if injury is caused by such dumping. • For undertakings, dumping may make sense when there is asymmetry in market access, i.e.,when their home market is not freely accessible to imports of the products in question. Otherwise price differentiation is subject to arbitrage by trading companies, which would nullify the benefit for the “dumper”. • If market access to the home market of a producer is restricted, it may be able to maintain higher prices in its home market and thus compensate for lower export prices. If it can cover fixed and variable costs at home, it is economically rational to accept any price above marginal costs in export markets.

4. Economic background Dumping practices – When do they make economic sense (2) • Market access limitations can be the result of: • Private action, e.g., unilateral conduct (usually only of undertakings with significant market power), market sharing agreements, export bans, and even consumer preferences, whether or not “state-sponsored” (“Buy-Irish”). • State action, e.g., customs rules, need to comply with technical specifications, administrative delay, etc. • Anti-dumping measures are relatively crude measures, aimed at compensating for the injurious effects of dumping; they do not directly address the root cause of dumping practices. • Customs unions and FTAs, by contrast, can address root causes, by combatting market segregation resulting from (i) private action (through the application of competition rules), and (ii) state action (through market integration (free movement of goods and capital) and other trade facilitation measures). • Customs unions and FTAs can therefore reduce, if not eliminate, the need for AD measures.

5. Economic background Subsidization – Policy concerns and economic effects • Subsidization is usually an expression of public policy objectives pursued by a given country or territory. It will always have the effect of reducing the beneficiaries’ costs and hence affect competition. • At issue is the difference in public policy objectives between countries. The export of subsidized goods usually leads to a resource transfer to the country of import. Hence, subsidies (other than pure export subsidies) are not per se illegal under WTO rules. They are illegal only if they cause injury in the importing country. • Countervailing duties are relatively crude measures, aimed at compensating for the injurious effects of subsidization. They do not directly address the root cause, namely the diverging economic policy of different countries. • Customs unions and FTAs, by contrast, can address the root cause by harmonizing the policies pursued in acceptable subsidization. Customs unions and FTAs can therefore reduce, if not eliminate, the need for CVD measures.

6. Past experience:Some examples: What agreements did we look at: • Treatment of TDIs in the EU’s customs unions • The EU itself • The Customs Union with Turkey • Treatment of TDIs in the Free Trade Areas in which the EU is a member • The early FTAs (e.g., EC Switzerland Free Trade Agreement 1972) • The Europe Agreements (e.g., with Poland in 1994) • The third generation of agreements (such as the Stabilisation and Association Agreement with Serbia or the Euromed Agreement with Israel) • The FTAs with Singapore and Canada • EEA Agreement

7. Customs UnionsThe European Union itself • The European Union is itself a customs union. • Anti-dumping measures within the EU are no longer possible. • Originally Article 91(1) of the EC Treaty provided for the possibility of the Commission authorizing anti-dumping measures between Member States, until the end of the transitional period on December 31, 1969; • The provision was never used; • The provision was repealed by the Treaty of Amsterdam; • Today the TFEU prohibits all duties (incl. AD and CVD) as between Member States. • By contrast there never was a treaty rule that would have permitted the imposition of CVD, because State aid rules (prohibiting subsidies, except those granted with the approval of the Commission) provide for an entirely different enforcement mechanism.

8. Customs Unions The Customs Union with Turkey (1963 and 1995 revision) • Turkey and EU agree on: • Fairly wide ranging harmonization of customs and free movement rules; • Application in Turkey of competition rules broadly similar to those in the EU; • Application in Turkey of State aid rules broadly similar to those in the EU; • Enforcement: No special rules, matters of dispute can be referred to the Association Council (who decides by consensus, hence veto right of either party). • Result - 1963 Agreement: EU (and Turkey) retain the possibility to adopt AD and CVD measures. Procedural safeguard: notification of Association Council, right to proceed with measures if no action after three months. • Result - 1995 Revision: EU (and Turkey) retain the possibility to adopt AD and CVD measures. But: • The EU will offer information to Turkey before the initiation of proceedings; • “The Community will give, on a case by case basis, where appropriate, a clear preference to price undertakings rather than duties in order to conclude anti-dumping cases where injury is found”; • Possibility for the Association Council to suspend the use of anti-dumping and countervailing instruments between the Parties, provided that Turkey has implemented competition, State aid control, and other relevant parts of the acquiscommunautairethat are related to the internal market and ensured their effective enforcement.

9. Free Trade Areas EEA Agreement • Allows the EFTA countries unrestricted access to the EU’s Single Market and vice versa. In return, they must adopt the same Single Market-related legislation as EU Member States, which includes: • Full implementation of the four freedoms and other areas of the acquis (except for agriculture and fisheries); • Identical provisions on competition (both in the EU and EFTA States); • Identical provisions on State aid (both in the EU and EFTA States); • Identical enforcement structure (EU Commission, EFTA Surveillance Authority, EU Courts, EFTA Court) with, in essence, an obligation to follow the ECJ’s precedents. • Result: • “Anti-dumping measures, countervailing duties and measures against illicit commercial practices attributable to third countries shall not be applied in relations between Contracting Partiesunless otherwise specified in the agreement.” • TDI measures can be imposed as regards products where the partner country is not bound by the acquiscommunautaire, e.g., see the Norwegian Salmoncase.

10. Free Trade AreasFTAs leading up to eventual EU membership • Candidate countries and the EU agree on: • Fairly wide ranging harmonization of customs and free movement rules; • Application in the Candidate Country of competition rules broadly similar to rules in the EU (generally speaking, the more recent the agreement, the more detailed the rules, including Association Council decisions implementing the rules by reference to more recent EU implementing legislation); • Application in the Candidate Countryof State aid rules broadly similar to rules in the EU (generally speaking, the more recent the agreement, the more detailed the rules, including Association Council decisions implementing the rules by reference to more recent EU implementing legislation); • Enforcement: Creation of independent competition and State aid authorities, matters of dispute can be referred to the Association Council (who decides by consensus, hence veto right of either party). • Result: The EU (and the Candidate Country) retain the possibility to adopt AD and CVD measures, and other measures (withdrawal of tariff concessions) in response to non-compliance with substantive rules in the agreement. Procedural safeguards vary: typically notification and/or consultation of the Association Council, right to proceed with measures if no action after one to three months, and preference for the adoption of undertakings.

11. Free Trade AreasOther third countries • Third countries and the EU typically agree on: • Fairly wide ranging free movement and market access rules, and elimination of customs duties; • Application in the Third Country of certain competition rules (in some cases by reference to EU rules) (but generally speaking generic rules, without the possibility of being adopted in the framework of an Association Council implementing measures); • In most cases no specific State aid rules; • Enforcement: No specific institutional framework for free movement or competition enforcement, in the absence of State aid rules nothing on State aid enforcement, but increasingly (in particular Singapore and Canada) Government to Government dispute settlement through an institutional Arbitration Court. • Result: The EU (and the Third Country) retain the possibility to adopt AD and CVD measures. Usually no special procedural safeguards (other than by reiterating what the WTO AD Agreement and ASCM provide anyway).

12. Past experience – Conclusions • Trade defense measures between EU Member States have been abolished: • Anti-dumping measures were abolished because there is no longer a need for these rules. The root cause for dumping practices is addressed by other means (free movement of goods and capital, competition law, and the corresponding enforcement mechanisms). • Countervailing duties cannot be imposed, all subsidization issues are addressed through the State aid rules and the corresponding enforcement mechanisms. • Trade defense measures in intra-EEA trade have been abolished because the EEA mirrors exactly the EU internal rules and has equivalent enforcement mechanisms (only insofar as the acquiscommunautaire is fully applicable).

13. Past experience – Conclusions (cont.) • Customs Union with Turkey: • Presently TDIs are possible but are subject to procedural benefits: information prior to initiation of the proceeding, discussion of the matter in the Association Council, and preference for undertakings. • Review of applicability of the TDI contemplated, possibility to abolish TDIs by a decision of the Association Council if Turkey had fully implemented (i) internal market, (ii) competition, and (iii) State aid rules, and ensured their effective enforcement. Not yet done; lack of confidence in compliance and lack of equivalent enforcement mechanism. • Other FTAs: • TDIs can be adopted and in many cases require compliance with additional procedural safeguards(compared to WTO minimum standards). The absence of effective enforcement mechanisms seems to be a key factor for the EU in reserving the right to apply TDIs. • Abolition of anti-dumping instruments can be expected only vis-a-vis countries where (i) the free movement of goods and capital is ensured, (ii) effective competition is ensured, and (iii) effective enforcement mechanisms are in place. • Abolition of CVD instruments can be expected only vis-a-vis countries where (i) subsidization rules are aligned, and (ii) effective enforcement mechanisms are in place.

14. Is the elimination of trade defence instruments vis-a-vis some, but not all, countries consistent with WTO law? • Some authors suggests that WTO Members, in applying anti-dumping and countervailing duties, are bound by the MFN principle, or a general non-discrimination requirement. • Others view Art. VI GATT, the ADA and the ASCM (which permit the adoption of AD and CVD) as lexspecialisto the MFN principle of Article I:1 GATT. • My own view is: • The MFN principle (which requires indiscriminate application of the same rules) would conflict with Art. VI et al., which I view as lexspecialis. • Art. 9.2. of the ADA and Art. 19.2 ASCM require non-discrimination once the existence of dumping (subsidization) and injury have been established. These rules are not directly applicable to the question whether the instrument will not be used and investigations will never be initiated. • But there may well be a more general non-discrimination requirement. Non-discrimination rules require matters to be treated in the same way if they are alike but to treat them differently if they are different. If within a customs union or an FTA, members have (i) free movement, (ii) common competition rules, (iii) common State aid rules, and (iv) enforcement mechanisms to combat the root cause for injurious dumping and subsidization, then that is a material difference that allows these countries to be differentiated from third countries in the application of AD and CVD rules. • Hence, the elimination of TDIs between the EU Member States within a customs union, and the elimination of TDIs for the majority of products covered by the EEA agreement are justified.

15. Implications for Brexit • Presently the United Kingdom is a Member State, and will (likely) remain a MS until March 29, 2019. During that time, no TDI can be adopted between the UK and the other EU Member States. • In connection with the possible interim arrangements for Brexit, there is one element that distinguishes the UK from other third countries: at the point of departure, the free movement of goods and capital and competition and State aid rules will be perfectly aligned. However, the UK Government has indicated that it is not willing to accept existing enforcement mechanisms. The jurisdiction of the Commission and the EU courts in Luxemburg is viewed as a red line. • For a longer term free trade agreement, the same is true: the substantive alignment may be possible to achieve, but the UK’s sovereignty may stand in the way of effective enforcement due to its unwillingness to be bound by external enforcers and judges. • In addition, the UK Government has suggested that it may create tax incentives to keep business interested in coming to or staying in the UK. That may be a first step away from common subsidization rules. It would be hard to see why the EU would waive one effective remedy against such an approach taken by the UK. • If history is a guide, there is a significant risk that once the UK is no longer a Member State, TDIs will reappear in the bilateral relationship, unless (i) the substantive alignment of the rules is maintained, and (ii) an enforcement mechanism for such rules can be found, which will be considered sufficiently “effective” by the EU without infringing the UK’s strengthened sense of sovereignty.