As the EU powers ahead on free trade, chems should stay alert on regulatory changes

Source: ICIS News


LONDON (ICIS)--The European petrochemical sector may be subject to important regulatory changes in the coming year, which may only surface once the Brexit dust has settled, but analysts and legal experts have pinpointed other potential developments as important for the industry as well.

In a year in which the EU has agreed to numerous free trade agreements (FTA) and taken a new approach to antidumping investigations, there are upcoming changes that could greatly affect the chemical and petrochemical industries.

Tomasz Wlostowski, managing partner of Brussels-based consultancy EUTradeDefence, has been focusing on upcoming potential FTAs the EU may sign.

The lawyer said one of the most prominent FTAs would be that of the EU with the Gulf Cooperation Council (GCC), an entity in the Middle East formed by Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE).

Although the EU and the GCC launched FTA discussions in 1990, negotiations stopped in 2008.

A European Parliament directorate general has noted that this halt in discussions was due to the unwillingness of the GCC countries to move from subsidising their energy industries and their dual pricing model for natural gas exports.

The directorate also noted how the GCC countries would have been unwilling to open their services sectors to foreign competition.

The EU, furthermore, revised the Generalised Scheme of Preferences (GSP) in 2012, under which trade between the 28-country bloc and the GCC operated beforehand.

This revision resulted in normal customs duties being applied to all products that originated from GCC countries as of January 2014.

However, in May 2017, German chancellor Angela Merkel declared her desire for a free trade agreement between both regions, according to UK’s news agency Reuters.

Meanwhile, the EU has concluded in 2017 other trade agreements like CETA with Canada or concluded the FTA negotiations with Japan.  Negotiations with Mexico or the bloc Mercosur, composed by Argentina, Brazil, Paraguay and Uruguay, are also underway.

“Therefore, they have revisited the issue of a FTA between the EU and GCC and are trying to reopen this negotiation,” said EUTradeDefence’s Wlostowski.

However, he warned that the EU cannot drop its original demands.

“If we are entering into a 'free trade' agreement, the purpose of this agreement is to establish free trade between both regions,” he said.

“We want to eliminate all government intervention – tariffs [and] most regulatory barriers – but also subsidies to ensure that our companies compete on commercial basis, with equal access to the market, raw materials, and so on.”

The lawyer focused on some countries’ system for dual pricing on carbohydrates, which effectively would be “providing a subsidy” to domestic producers and therefore contradict free trade rule as per the EU’s book.

“They are guaranteeing a low price of key raw material for domestic production of petrochemicals, while at the same time forcing a high price for the same raw material when sold to EU petrochemical producers,” Wlostowski went on to say.

“So if we are to compete on a free market, on equal terms, and the rules of competition are supposed to be the same for both parties, we cannot have at the same time one of the parties getting clear preferences and subsidies from their government,” he added.

Wlostowski also brought up what appears to be a new policy direction for the US government regarding rules of origin.

These rules establish the country of origin for imported and exported goods in order to be able to ascertain if the products need to be subjected to tariffs or not.

In September, the US Secretary of Commerce Wilbur Ross said in an article published in the The Washington Post that the “North American Free Trade Agreement [NAFTA, the FTA between Canada, US and Mexico] included ‘rules of origin’ provisions that were intended to restrict the non-NAFTA content” in final goods.

He added that these rules of origins resulted in a trade deficit for the US as imports from Canada and Mexico often had a share of content from other countries outside of the agreement.

Ross consequently explained that that is why the US was looking to increase the total NAFTA content requirement and raise the US’ share of it.

Such policy goes against what EU chemicals trade group Cefic, for instance, argues for in its Chemical Connections brochure.

“We need a simple, flexible and transparent approach to rules of origin for chemicals, to ensure corporate administrative costs do not grow, and to ensure the benefits of any deal are maximised,” the association said.

Furthermore, Wlostowski adds that Ross’ approach may have ripple effects elsewhere in the world.

“It may be harbinger of changes in approach to rules of origin in FTAs. Once [US President Donald] Trump challenges trade liberalisation and rules of origin, others will do so as well. In particular, since this is such a prominent player: the US, which has always been a champion of free trade and liberalisation,” said the lawyer at EUTradeDefence Tomasz Wlostowski.

“If Trump openly challenges the existing orthodoxy on liberal rules of origin, I think it is quite likely that other challengers [to that policy] will arise.”

Nonetheless, some substantial changes in EU trade policy did occur in 2017 – the 28 countries decided during the year that rules on antidumping cases needed altering.

In October, the European Parliament and the European Council – heads of state and government – announced that they had were changing antidumping legislation to include a new way of calculating dumping in investigations.

These adjustments were to affect imports from members of the World Trade Organization (WTO) in instances where the EU found prices and costs were distorted because of state intervention.

Under prior rules, dumping was calculated by comparing a product’s export price to the EU with its domestic value in the country of origin.

However, with this amendment the EU could calculate dumping margins for WTO members, which it has found to have distorted domestic prices and costs due to state interference, using benchmarks in a different country instead.

After the calculation reshape, law experts have expressed serious concerns about potential uncertainty caused by the “highly unclear” set of rules set up by the EU.

“First of all, key concepts and details of the proposed approach are highly unclear and thus subject to discretionary application,” said Edwin Vermulst, a trade lawyer at Brussels-based VVGB Advocaten.

“Thus, for example, the new provisions conflate domestic sales prices and costs of production and the – non-exhaustive – criteria for assessing the existence of significant distortions lack a proper definition or threshold.

“Moreover, while supposedly neutral, the proposal clearly targets China: The significant distortions criteria are basically repackaged market economy treatment (MET) criteria and reflect findings the EU made in countervailing duty (CVD) investigations against China,” he added.

The lawyer concluded saying that it remains to be seen whether this EU approach would adhere to WTO’s trade rules without discrimination principles.

Focus article by Pavle Popovic