Chinese Shoe “Dumping” and European Retaliation

What Does “Dumping” Mean?

In economic terms, “dumping” is used to describe any type of predatory pricing, especially when dealing with international trade. In particular, when manufacturers export a product to another country at a price either below the price charged in its home market, or in quantities that are not justified through normal market competition. Dumping is when a good is charged a lower price in a foreign market than what one would usually charge for the same good in a domestic market. Economists often refer to this as selling at less than “fair value”. Under the World Trade Organization (WTO) Agreement, dumping is condemned if it causes or threatens to cause material injury to a domestic industry in the importing country. The term has a negative connotation as advocates of free markets see “dumping” as a form of protectionism. Furthermore, advocates for workers and laborers believe that safeguarding businesses against predatory practices, such as dumping, help alleviate some of the harsher consequences of such practices between economies at different stages of development.

Fear of China

Today, according to the Worlds Federation of the Sporting Goods Industry (WFSGI) many domestic producers are turning to their national governments for protection against Chinese and other Asian footwear exporters, in hopes of diminishing global consumer demand for footwear and their inability to adapt to leaner manufacturing and incorporate new technology. Many domestic producers fear the competition and economies of scale of Chinese manufacturing, and specifically, in this case, their footwear. In response, they are calling for trade defense and other protectionist measures to shield themselves from China and other Asian footwear imports.

From 1995 to 2005, the EU controversially imposed a 10-year quota restriction on footwear imports from China and began implementing anti-dumping measures against footwear imports from China for the following two years starting in October 2006, according to a BBC article from June 2005. After these anti-dumping measures expired in 2008, the EU reviewed the policies and extended such measures for another 15 months, despite China’s objections. China referred the dispute to the WTO in February last year and, after receiving the complaint, the WTO established a team on May 18th of last year to investigate the case. This is the second case brought by China against the EU with the WTO. In July, China won a victory on a similar complaint against EU duties on what Europe said were unfairly cheap Chinese screws and bolts. In this case, a panel condemned the way Europe assessed duties against countries it deems not to be market economies, such as China, Vietnam and Cuba.

The EU’s controversial launch of duties on Chinese and Vietnamese-made leather shoes in 2006 created vast divisions between North and South Europe. Spanish and Italian shoemakers said they could not compete against cheap Asian shoes while importers and retailers argued high-street shoppers would end up paying more for shoes.

When countries implement trade defense measures (in this case for footwear), other countries typically follow suit as they rush to prevent Chinese manufactured footwear potentially being diverted to their national markets. This domino effect already materialized after the EU imposed anti-dumping duties on leather footwear from China and Vietnam in October 2006. Following the EU measure, Argentina, Brazil and Taiwan all started similar anti-dumping cases against China. Turkey in turn imposed safeguard measures; Ecuador imposed additional duties on footwear for alleged balance of payments’ reasons and Russia has also started to apply customs valuation rules.

China Fights Back

In response to the EU extension of anti-dumping duties on footwear, in February 2010 China requested WTO consultations with the EU on both the 2006 and the 2009 protectionist measures. The two sides had 60 days to try to resolve the matter through consultations. As these meetings failed, China, on the 8th of April 2010, requested the establishment of a WTO panel. This request initiated a WTO dispute settlement procedure. The panel request was discussed at the meeting of the WTO Dispute Settlement Body (DSB) in April 2010. At this first DSB meeting, the EU had the right to block the establishment of a panel. However, at the subsequent meeting, the EU subsequently had forfeited this right. A WTO panel was then appointed to deliberate on China’s claims against the EU’s anti-dumping measures against Chinese and Vietnamese footwear.

Recent Developments

China recently welcomed a WTO panel ruling that rejected anti-dumping measures imposed by the EU on leather shoes imported from China, as reported in a recent Reuters report. China’s complaint had already been filed back in February 2010 after the EU said it would prolong levies on leather shoes from China and Vietnam for 15 months to help southern producers compete against lower-cost footwear imported by companies such as Nike Inc. and Adidas AG. The EU slapped duties as high as 16.5% on 9.7 billion Euros worth (US $13.7 billion) of Chinese and Vietnamese leather shoes in 2006 to counter “dumped” imports. Britain and Northern European countries were largely against the anti-dumping measure, calling for free trade to the benefits of consumers, while Italy, Spain and other Southern European countries, home to small and less competitive shoe makers which lodged the complaint, were in favor of it.

Europe effectively applies a single anti-dumping duty to a country rather than to individual firms if it doesn’t consider that country to be a market economy, unless the firms can prove that they are independent of the state. A spokesman for the Ministry of Commerce (MOC), as quoted in the China Daily, said China urges the EU to respect the WTO’s ruling and remove discriminatory practices and legislation inconsistent with WTO rules. They demand fair treatment to Chinese exporters to be able to maintain normal trade activities with China. In the ruling, the WTO panel told the EU it must update its methods on calculating anti-dumping duties and assure their conformity according to WTO rules since the EU anti-dumping moves had violated WTO law. The WTO panel said the EU falsely applied WTO clauses concerning anti-dumping during its investigation of imported footwear from China and acted against WTO rules on transparency.

Is China Being Discriminated Against?

Recently, the European Footwear Alliance, which represents sporting goods giants such as Adidas, Puma, Ecco and Hush Puppies, demanded EU compensation payments. Many are complaining that the EU imposed the anti-dumping duties in such a way as to discriminate against the significant majority of Chinese suppliers only because they were Chinese, and by doing so violated the non-discrimination policies of the WTO Agreements. This is interpreted as a lack of transparency from the EU, and importers are requesting the EU reimburses the anti-dumping duties collected over the past five years.
China expects full compliance of the Panel’s recommendation by the European Union with regard to the Individual Treatment practice and that the European Union makes sure to avoid a repetition of theses violations of the Anti-Dumping Agreement found by the Panel.

What are the Consequences?

Although according to an article from Fashion Net Asia, WTO Rules on China Shoe Dumping Dispute, anti-dumping duties on leather shoe imports into the EU from China and Vietnam officially expired on 31 March this year, and the WTO panel says the EU bloc must still bring its method for calculating anti-dumping duties into line with WTO rules.

In conclusion we can say that the EU industry suffers from a decline in production, sales volume and turnover, it is not incorrect to state that these injuries are necessarily caused by Chinese dumped imports, but we all know there are many other factors to blame. The increasing volume and market share of these imports correspond to the loss of market share and the declining financial situation of the European Industry. Dumped imports undercut European prices, leading to price pressure which could be said is also linked to Europe’s deteriorating situation. The EU market should have focused more on internal competition as one of its driving forces to avoid today’s decline. Low priced, dumped footwear products is merely one of the many factors that has contributed to Europe’s footwear industry and China’s gain of almost half of the EU market. A lack of intervention could worsen Europe’s position and ultimately the whole industry would be at risk, causing more factory closures and job losses. Using China (and its cheap shoes) as its capro espiatorio is not the solution.

*Image: Suat Eman / FreeDigitalPhotos.net
**Image: Suat Eman / FreeDigitalPhotos.net

• Melanie Hirsch- CPG Marketing Intern