Paper by. Matthew R. Nicely, Partner, Thompson Hine LLP

Transcription

1 Paper by Matthew R. Nicely, Partner, Thompson Hine LLP "Counteracting Distortive Export Tax and VAT Rebate Policies at the WTO: A Downstream Industry Perspective" for Trade and Raw Materials Looking Ahead Conference on the EU's Trade Policy and Raw Materials Brussels, 29 September 2008 Abstract: As the EC has identified during the course of the Doha Development Agenda's Non-Agricultural Market Access ("NAMA") negotiations, proliferation of export restraints is replacing other forms of distortive trade restraints, presumably due to a perception that such measures are difficult to challenge at the WTO. Although quantitative restrictions on exports are more limited since the Uruguay Round, export taxes are technically permitted under WTO rules, excepting those countries that have agreed to limit such taxes as part of their accession agreements. Meanwhile, Members have thus far been reluctant to challenge certain Value Added Tax ("VAT") rebate systems that have the same pernicious effect as other export restraints. Specifically, imposition of export duties and/or cancellation of VAT rebates are being used to limit the export of various upstream inputs, in turn reducing their cost on the domestic market and promoting export of downstream items that are not subject to export taxes and otherwise maintain VAT rebate privileges. Absent adoption of a more aggressive stance on the issue, continuation of these distortive trade measures will only beget retaliatory measures. Mr. Nicely will discuss examples identified in his practice in the United States, with an eye toward fashioning both policy and legal arguments for eliminating these practices. The EC has done a fine job during the Doha Agenda's NAMA negotiations in shedding light on the pernicious effects of export taxes, both with respect to global access to raw materials and promotion of downstream industries. The latest proposals on this topic, however, appear to have been watered down to the point of merely seeking to improve the transparency and predictability in Members' use of these measures. While it is understood that sensitivity toward developing nations may be required both as a matter of policy and geopolitical necessity the effect of these measures calls for more aggressive action. Furthermore, it is important to expand the discussion to include other industrial policy mechanisms that are used to reach the same goal as export taxes. Namely, a Member's differentiated application of VAT rebates among products has the same effect as export taxes,

2 but seems to remain "off limits" for many observers due to the special status afforded VAT systems under the WTO. The purpose of this paper is to shed light on how these measures are used in practice to promote exports, and why WTO Members must take more aggressive action not only in pending or future NAMA negotiations, but also through dispute settlement. The Problem, In Practice There are multiple examples of countries using export taxes and/or differentiated VAT rebate rates aimed at promoting downstream industries. Among the promoted industries identified by me and my colleagues in the U.S. trade bar are: aluminum foil in China, processed foods in Argentina, and apparel in India. With each, trade restrictions in the form of export taxes and/or reduction/elimination of VAT rebates on raw materials are used to reduce input prices and promote exports for downstream manufacturers. Our client Norandal USA, Inc. is currently experiencing the effects of these kinds of Chinese raw material export policies in the aluminum foil market, a review of which is provided below. Case Study: China Policies Successfully Promote Export of Aluminum Foil The primary means by which the Chinese government is supporting and expanding its aluminum foil exports is through manipulation of its VAT export rebates and its taxes on exports. For many years, China provided a 15 percent rebate on the export of primary aluminum products, a policy that encouraged development of China's aluminum industry and exports of aluminum products. In 2003, China began a policy shift designed to promote exports of downstream aluminum products by phasing-out the rebate and replacing it with a 15 percent export tax on primary aluminum products. At the same time, China maintains a 13 percent VAT rebate on exports of aluminum foil. In China's most recent policy shift in July 2007 it eliminated the VAT rebate for valueadded aluminum products such as bars, rod and wire, and replaced it with an export tax of 15 percent. Aluminum foil continues to receive the 13 percent VAT rebate, the highest rebate provided to any aluminum product. In 2007 alone, China experienced a drop in primary aluminum exports of approximately 50 percent. Yet, China's production -- and imports -- of primary aluminum have not slowed since the July 2007 policy shift. Page 2 of 5

3 The continued volume of primary aluminum production and imports, together with the slow down in exports of the same products, indicates a growing stock pile of cheap inputs for China's foil producers. Removal or lowering of the 13 percent VAT rebate for other downstream products creates strong incentives for Chinese producers to shift production from bars, rods, extrusion, profiles, and wire to aluminum foil. All signs indicate that China intends to continue to manipulate tax policies to promote its foil industry. For example, recent reports indicate that China is considering further reducing its VAT export rebate on tubes, plate, strip and other higher-value added aluminum products. The foil rebate will continue to be maintained a levels above that given to other products. China's industrial policy disrupts normal market flows on multiple fronts. The 13 percent VAT rebate for foil exports encourages exports of foil. The 15 percent export tax on primary aluminum effectively subsidizes foil production by discouraging the export of the primary input to foil production and thereby ensuring low input costs for foil producers. This policy has worked remarkably well. Consider the following: Between 2000 and 2006, China's aluminum foil production grew from 242,000 metric tons ("MT") to 760,000 MT. In that same period, China's exports have grown from 24,000 to 186,000 MT. In 2007, they reached 325,000 MT. China is now the largest global producer of aluminum foil and the second largest exporter. China's foil industry and its foil exports will continue growing in coming years. o China's aluminum foil production capacity increased from 275,000 MT to 1,150,000 MT between 2002 and 2006, giving China excess capacity of 390,000 MT. This significant excess capacity will enable rapid growth in China's exports in coming years. o China is expected to continue to rapidly grow its production capacity by more than 12 percent annually, resulting in total capacity of more than 1,800,000 MT by o Recent announcement by Aluminum Corporation of China (Chinalco) of an investment of $520 million in a new foil plant in Sichuan province with annual production capacity of 100,000 MT further demonstrates the rapid growth expected for the Chinese foil industry. o The expanding Chinese foil production is aimed at increasing China's exports to the global market. There is already an oversupply of foil in the Chinese market the new production (and much of the existing capacity) will be dedicated to capturing the global export market. Page 3 of 5

4 o As a result of Chinese policies and the capacity build up they have fawned, by 2010 exports of aluminum foil from China are expected to be triple what they were in China's rapid increase in foil exports are disrupting markets around the world. Multinational companies, often with operations in multiple countries (at least 37 countries produce foil), compete in a world-wide market for foil. China's rapidly expanding exports of subsidized aluminum foil threaten to overwhelm and disrupt those markets. In 2007, the EU market saw a more than 250 percent increase in the volume of imports of Chinese foil over The volume of imports from China increased by more than 2000 percent between 2004 and South Korea experienced a nearly 40 percent increase in foil imports from China between 2006 and 2007 and over a 1000 percent increase since In the United States, imports of Chinese foil grew from 1.5 million kg in 2004 to 30.2 million kg in more than a 1800 percent increase. In 2007 alone, the United States saw a 47 percent increase in foil imports from China. Overall, the United States, the European Union, Canada, South Korea, India, Russia, Japan and Brazil have all experienced triple digit increases in foil import volumes from China since China's rapidly expanding exports are driving down global prices and seizing market share from other global exporters, including the United States, Brazil, Canada, the EU and Japan. Solutions Solving the problems illustrated above requires aggressive action in both ongoing multilateral negotiations and in dispute settlement. Unless something is done to police these measures, they will continue to be used in countries like China and be duplicated in other countries, thus creating the same effects in other global markets, and/or give rise to various protective devices, including enforcement of trade remedy laws. While the trade remedy laws are permitted under the WTO, they have their own distortive effects particularly antidumping actions. WTO Members should therefore reassess their positions on this important topic during the course of ongoing NAMA negotiations. Procedural arguments about these measures being outside the Doha Development Agenda are a waste of time; Members need to address this issue now. Developing countries who currently oppose taking such action must realize the disadvantages these measures have for their own economies. That being said, exceptions can be drawn up that could meet the concerns of developing countries. In any event, as is the case with other measures, even if export taxes were fully prohibited, they would be permitted if they meet a general exceptions under GATT Article XX. Page 4 of 5

5 Meanwhile, until these measures are eliminated through the negotiation process, Members should consider attacking these policies as subsidies through dispute settlement and/or countervailing duty actions. These measures can and should be policed by the Agreement on Subsidies and Countervailing Measures ("SCM Agreement"). The question is not whether the VAT rebate is excessive, which is the context in which such rebates are typically analyzed under the SCM Agreement. Rather, the question is whether the differentiated application of VAT rebates among products along the vertical chain of production, combined with similarly differentiated collection of export taxes, together constitute a subsidy to the downstream industry. After all, the purpose and effect of these policies is to reduce costs for the Chinese foil industry. The policies, in other words, are effectively putting money in the pockets of foil manufacturers, permitting them to sell at lower prices globally, while also building additional capacity. In its 2006 Trade Policy Review of China, the WTO Secretariat on the People's Republic of China has not shied away from calling a spade a spade, stating that such practices can "implicitly subsidize domestic downstream processing." WT/TPR/S/161/Rev/1, at 99 (26 June 2006). The panel report in U.S. Measures Treating Export Restraints as Subsidies (DS194) is often cited for the proposition that measures that restrain exports cannot be challenged as subsidies. However, decisions by the Appellate Body particularly the cases involving the private bank bail out of Hynix Semiconductor Inc. set forth a broader interpretation of how governments can entrust or direct private parties to transfer funds or provide goods to another private party. See, e.g., United States Countervailing Duty Investigation on Dynamic Random Access Memory Semiconductors (DRAMS) from Korea (DS296). Indeed, mere circumstantial evidence of the Korean Government inducing private banks to lend to Hynix was sufficient for the Appellate Body to trigger the "entrust or direct" language of Article 1.1(a)(1)(iv) of the SCM Agreement. Certainly, then, the application of a Chinese Government policy that is aimed at and succeeds in inducing domestic sales (in lieu of exports) must trigger the language as well. Once the requisite entrusted or directed financial contribution established, the presence of a benefit lower domestic prices for the raw material is clearly evident. Conclusion The manipulation of export taxes and VAT rebates may be the new frontier of industrial policies that seek to prop up export-oriented industries. The impact on the global aluminum foil market is a good example, and there are plenty of others. If the WTO is serious about liberalizing trade, this is an area that requires attention. Page 5 of 5