On October 26, a WTO panel was established to hear Australia’s complaint (DS602) about China’s anti-dumping measures on Australian wine.

As background, China launched an anti-dumping investigation and a countervailing duty investigation on Australian wine on August 18 and August 31 of 2020, respectively. It issued the preliminary rulings in November 2021 and final determinations on March 26, 2021, with 116.2% - 218.4% as the dumping margin and 6.3% -6.4% as the subsidy rate. MOFCOM determined that it would impose anti-dumping duties ranging between 116.2% and 218.4%, starting on March 28 of 2021. It also decided not to impose countervailing duties on the same products “in order to avoid double taxation.”

The product under investigation was wines in containers holding 2 liters or less, falling under the tariff code 22042100.

The petitioner in the investigations was China Alcoholic Drinks Association, representing 122 wine manufacturers, including four major companies: Tonghua Grape Wine Co., Ltd., Yantai Changyu Pioneer Wine Co., Ltd., CITIC Guoan Wine Co., Ltd., and Wei Long Grape Wine Co., Ltd.

This piece goes briefly through several key legal issues that Australia raised in its panel request and provides an unofficial translation of potentially relevant parts of the MOFCOM ruling. (Australia’s consultation request made claims against both the anti-dumping and countervailing duties, but because of MOFCOM’s decision not to impose the countervailing duties, Australia did include any claims on countervailing duties in its panel request.) A more detailed elaboration of the claims will have to wait for the parties' written submissions in the case. Australia typically posts its submissions online.

Domestic industry

In its panel request, Australia contended that China erred in the interpretation and application of “domestic industry” “by, inter alia, failing to establish the quantitative and qualitative elements of a major proportion of the total domestic production of the like products.”

With regard to the issue of “like products,” in its determination, MOFCOM noted that the Australian Grape and Wine Association argued that:

The product under investigation is not a "bulk commodity", because every wine product is unique and distinctive based on the grape variety, blending, grape picking year, grape producing area, quality, brand, etc., and therefore they should not be used as a “bulk commodity” to compare with Chinese wines, which is used as the basis for the determination of like-products, material injury and causation.

MOFCOM ruled that because all wine products involve similar physical characteristics, raw materials, production technology, manufacturing equipment, usage, sales channels, and consumer groups, “although imported wines from Australia have different specifications and models, they all belong to the same category.”

Secondly, it stated that “the products under investigation have different price levels and different qualities; like domestic products are also subdivided into high-end wines and low-to-medium-grade wines.” Furthermore, “the domestic wine consumption market is a competitive and open market, the products under investigation and like domestic products are both sold in the Chinese market, and the price of foreign high-end wines have direct impact on consumers’ choices on domestic high-end or mid-to-low-end wine. Products under investigation and like domestic products are usually sold through direct sales and agency sales. They share a common customer group, with no obvious time and geographic preference.” Therefore, products under investigation are in direct competition with domestic like products in terms of quality, price, sales channels, consumer groups and usage.

With regard to the scope of “domestic industry,” MOFCOM decided to calculate the total output of domestic wine production through planting area of wine grapes, the yield of wine grapes per acre, the yield rate, the quantity and loss rate of finished wine produced by the imported raw wine, and the ratio of different finished wines. It reached the conclusion that “the like domestic products produced by the domestic companies participating in the survey accounted for 66.95%, 68.27%, 60.75%, 62.76 and 60.72% of the total output of relevant domestic wine industry.”

“Normal value” and calculation of dumping

In its panel request, Australia made a number of claims related to the dumping determination. One key claim of violation was the following:

Articles 2.2, 2.2.1, 2.2.1.1 and 2.2.2 of the Anti-Dumping Agreement because, inter alia, China (i) improperly and without proper justification disregarded sales of the like product in the Australian domestic market in determining normal value, without establishing that either there were no sales of the like product in the ordinary course of trade in the Australian domestic market, or that, because of the particular market situation or the low volume of the sales in the domestic market of the exporting country, such sales did not permit a proper comparison; and because China failed to give reasons and adequate explanations of its methodology and calculations for determining normal value; (ii) failed to base its calculation of costs on the records kept by the exporter or producer under investigation (in whole or in part); and (iii) failed to base the amounts for administrative, selling and general costs and for profits on actual data or any other reasonable basis (in whole or in part).

In its determination, MOFCOM went into the details of its calculation of the dumping margin for three companies. Taking Treasury Wine Estates Vintners Limited as an example, it found that:

... After review, [the agency found that] during the dumping investigation period, the company’s domestic sales in Australia accounted for more than 5% of the exports of products under investigation to China during the same period. The investigating agency further reviewed different product models. The domestic sales of some models of like products in Australia accounted for more than 5% of the exports of products under investigation to China during the same period, which made them meet the quantitative requirements for normal value determination. The quantity of some models of like products [in domestic sales] is less than 5% of the export volume of products under investigation to China. In addition, there are some models of the products under investigation that are not sold in Australia. The investigating agency decided to use constructed normal value to determine the normal value for the latter two scenarios. ... The investigating agency decided to sustain this finding in the final determination.

…

... After comparison, the investigating authority temporarily decided to use the data of certain product models reported by the company to determine the production costs and expenses of the products under investigation and like products. The investigating authority conducted a preliminary review of whether the domestic sales of like products of the company's related models occurred below cost. After investigation, [it found that] during the dumping investigation period, the ratio of sales below cost to domestic sales is lower than 20% for some models of products, and over 20% of some other models. Some models have all of their products sold at a price below cost. According to Article 4 of the Anti-dumping Regulations, the investigating authority decided to use domestic transactions as the basis of normal value for the models with ratios less than 20%; use transactions excluding the ones below cost as the basis of normal value for the models with ratios higher than 20%; use constructed value to calculate normal value for models with all sales below cost. When constructing the value, the investigating agency decided to use production costs determined by the agency plus cost and reasonable profits.

…

Regarding the “below cost test”, the company claimed in its comments after the preliminary ruling that at the level of the specific product model, if the quantity of sales at a price below cost is less than 20% of the total sales, this part of sales shall not be considered as transactions during normal trade, and therefore should not be considered as the basis for calculating normal value. This company further claimed in its comments after the disclosure of the final determination that it did not have to prove it and this is consistent with long-term practice of the investigating agency and other WTO Members. After review, the investigating agency believes that the company’s claims have no legal basis, and there is no evidence to prove that this part of the sales does not belong to normal transactions. The investigating agency decided to maintain the same practices as in the initial ruling.

For Casella Wines Pty. Limited, MOFCOM found that the information submitted was inconsistent and incomplete, and as a result:

... After comparatively considering factors such as the physical characteristics of the products under investigation, the cost differences among different models, and intermediate links in trade, the investigating agency believed that the adjusted information based on the weighted average price of domestic sales of other respondents can reasonably reflect the normal value that is consistent with the market condition. Hence, the investigating agency decided to use such information as the obtained facts and the best information available, and to determine the normal value of the company in the final determination. ...

For Australia Swan Vintage Pty Ltd, MOFCOM stated that:

In the preliminary ruling, the investigating agency reviewed the company’s domestic sales in Australia. It found that during the dumping investigation period, the company’s domestic sales of investigated products in Australia accounted for less than 5% of exports to China during the same period. According to Article 4 of the Anti-dumping Regulations, the investigating agency believes that the volume of the company’s domestic sales cannot be used for fair comparison. Therefore, in the preliminary ruling, the investigating agency decided not to use the company’s domestic sales data to determine the normal value. ... After further investigation, the investigating agency decided to maintain the determination of the preliminary ruling in the final ruling.

…

The company did not provide information on costs and expenses of the products under investigation and like products as required by the questionnaire. The investigating agency was unable to obtain accurate data on the cost data based on the information submitted. Therefore, the investigating agency was unable to rely on the company’s reported cost and expenses to calculate the constructed normal value. In the final determination, the investigating agency decided to use obtained information and the best facts available to determine the normal value of the company.

After the preliminary ruling, the investigating agency further compared the information obtained during the investigation. After comparatively considering factors such as the physical characteristics of the products under investigation, the cost differences among different models, and intermediate links in trade, the investigating agency decided to use the weighted average price in domestic sales of the products under investigation of other respondents as the obtained facts and the best information available, and to determine the normal value for the company. ...

For all other companies, MOFCOM decided in the preliminary ruling that there is a portion of manufacturers and exporters that did not participate in the investigation, and for those companies, the agency “believed that the information submitted by the companies that cooperated in the questionnaires can accurately and reasonably reflect other Australian companies’ exports of products under investigations to China, and such information has been verified by the investigating agency. Therefore, the investigating agency decided to determine to use such information to determine the dumping margin of other Australian companies.” This decision was sustained by the final determination.

Injury

With regard to injury, Australia made a number of claims of violation, including the following:

Articles 3.1 and 3.2 of the Anti-Dumping Agreement because China's consideration of the effect of the subject imports on the prices of like products in the domestic market: (a) did not involve an objective analysis based on positive evidence; (b) did not consider whether there had been significant price undercutting or price depression; and (c) did not properly consider whether the effect of subject imports was to prevent price increases, which otherwise would have occurred, to a significant degree. In this regard, China has, inter alia: (i) failed to give reasons and adequate explanations of the methodology used for calculating prices for subject imports, non-subject imports and domestic like products; (ii) failed to consider all the positive evidence available on the record relating to price undercutting and price depression; (iii) failed to conduct a counterfactual analysis in the context of making a price suppression finding; and (iv) compared volumes and prices of subject imports to domestic like product that are not comparable and failed to ensure price comparability in its analysis of price effects.

In its determination, MOFCOM had ruled that the dumped imported products suppressed the prices of the domestic like products during the injury investigation period, as follows:

... During the injury investigation period, the dumped imported products continued to increase substantially in both absolute import quantity or the relative import quantity; the market share of the volume of dumped imports continues to grow; the prices of dumped imported products are on a downward trend; there is a direct competition relationship between dumped imported products and like products in the domestic industry. Therefore, the dumped imports with an increase in product volume and a decrease in price are enough to cause a substantial negative impact on the prices of like products in the domestic industry. Second, price suppression means that the price of like domestic products did not reach a reasonable level due to the impact of dumped imports. Even though the prices of dumped imported products are higher than the price of like products in the domestic industry, the number of dumped imported products increased by 113.05% with the price falling by 15.91%. This directly inhibits the price increase of like products in the domestic industry corresponding to the rising costs. ...

It further ruled that the dumped imports resulted in substantial injury to the domestic market. The agency found that average salary and sales price increased during the period, while domestic sales, output, market share, revenue, pre-tax profits, return on investment, operating rate, employment, labor productivity all declined.

The agency noted Australian Grape and Wine Association's argument that the investigation authority did not determine that the products under investigation were dumped between 2015 and 2018, and therefore the injury of domestic industry during this period cannot be considered as caused by dumping. In the meantime, the domestic industry was not injured in 2019. Hence, it cannot be determined that the domestic industry was injured by the dumping, according to the Association.

On this point, MOFCOM ruled that:

... First of all, in accordance with Article 18 of China's Provisions on the Antidumping Investigation of Industry Injury, the investigation period for industry injury in anti-dumping cases is usually three to five years prior to the launch of the investigation. The investigation period for industry injury in the wine anti-dumping cases is January 1, 2015 to December 31, 2019, which is compliant with the relevant regulations. Second, the investigation of the dumped products’ impact on the domestic market includes evaluation of the development trend of all relevant economic factors and indicators related to the industry during the whole injury investigation period. The determination of whether the domestic industry has suffered from material injury is not solely based on the economic indicators of the domestic industry during one specific session of the injury investigation period. Instead, it should be a comprehensive evaluation of the trend of all economic indicators in the domestic industry during the injury investigation period. Therefore, the Australian Wine Industry Association's argument that the domestic industry was not injured because it was not injured in 2019 does not stand.

Causation

On the issue of causation, in its panel request Australia claimed that:

China failed to: (a) demonstrate that the allegedly dumped imports of bottled wine from Australia, through the effects of the alleged dumping, caused injury to the domestic industry; (b) base its purported demonstration of the causal relationship on an objective examination of all relevant evidence on the record; (c) objectively examine other known factors that injured the domestic industry, including, inter alia, non-subject imports from other countries, contraction in demand or changes in the patterns of consumption, tariff reductions for subject imports of bottled wine from Australia during the injury period of investigation; and (d) not attribute the injuries caused by those other factors to the imports of bottled wine from Australia. Moreover, China improperly based its assessment of causation on flawed considerations, examinations, and evaluations under Articles 3.2 and 3.4 of the Anti-Dumping Agreement, including, inter alia, a flawed determination of price suppression.

On this issue, MOFCOM had ruled that:

... The cumulative decline in market share [of domestic products] during the injury investigation period was 7.01 percentage points. At the same time, the market share of dumped imports has increased cumulatively by 8.90 percentage points, which is opposite to the decline of like domestic products' market share. The dumped imported products have clearly squeezed the market for like products in the domestic industry share.

…

During the injury investigation period, the prices of dumped imports declined continuously. The sales price only increased 20.54% compared to the 21.59% increase of the overall cost of like products in the domestic industry and 30.24% increase of the unit cost. The price rise is lower than the increase in cost over the same period, indicating that the rising cost did not transmit to the sales price of the like products in domestic industries. The sales price failed to increase to a reasonable level, the prices of domestic like products were suppressed. These have led to ... a decline of output, sales volume, pre-tax profits, investment rate of return, operating rate, and number of employees of the like products in the domestic industry continued to decline year by year; the market share, revenue, labor productivity, and the net cash flow from operating activities showed an overall downward trend. Dumped imports have caused serious injury to the production and operation of the domestic industry.

As part of the MOFCOM investigation, the Australian Department of Foreign Affairs and Trade argued that the zero tariffs under the China-Australia FTA, the exchange rate of Australian dollars, the lower value added tax in China, other nations’ exports of like products, and the Chinese government’s other policy documents were all other factors that could cause  material injury to the domestic industry.

The Australian Grape and Wine Association also argued that similar products from other nations take up a large proportion of China’s total imports, and that the prices of products under investigation are noticeably higher than like products from other nations. Therefore, the injury to China’s domestic industry was caused by other imports. The Association also argued in the comments on the preliminary ruling that the injury to the domestic market is caused by other economic factors such as the structural problems of the national industry.

In rebutting these arguments, MOFCOM stated that “the price of dumped imports is price in yuan based on the CIF price provided by China Customs, after considering the exchange rate, tariff rate and customs clearance fee during the injury investigation period.”

Regarding the value-added tax, the agency noted that the Australian Department of Foreign Affairs and Trade did not provide any direct evidence on the possible impact of value-added tax on the domestic industry. In addition, “when the investigating agency compares the prices of dumped imports with the prices of like products in the domestic industry, neither of the two includes Value-added tax, inland transportation costs, insurance costs, and secondary sales channel costs.”

Commenting on the impact of imports of other nations and regions, the agency said the import volume of other imports declined between 2015 and 2019. “Compared with imports from other countries, dumped imports have not only continued to increase in quantity, but also witnessed a sharper price drop. Meanwhile, there is no evidence of dumping of imports from other nations.”

Regarding the structural problems of the industry, the agency noted that the problems happened between 1990 and 2000, which does not fall into the injury investigation period. Rather, during the investigation period, “the quality of like products in the domestic industry is stable, in line with China's National Wine Standard. There was mostly modern large-scale production equipment, well managed enterprises, and various product specifications and models, which can meet the demands of different consumer groups. Therefore, the association’s claim that there are structural problems in like products in the industry, which led to a long-term decline in quality and a poor image cannot stand.”