A Complete Victory?

By Lan Xinzhen

The European Court of Justice (ECJ) on November 18 ruled in favor of Zhejiang-based shoe manufacturer Aokang against anti-dumping claims by the European Union (EU), ending a six-year long battle.

Following the verdict, some in the media said that since the EU is Chinas second largest export destination for shoes, the victory has provided a legal precedent for Chinese shoemaking enterprises in future anti-dumping cases and other trade disputes.

For the media, the win provided hope for Chinese manufacturers confronted with protectionism.

Zhang Li, associate researcher at the Chinese Academy of International Trade and Economic Cooperation (CAITEC), said she could understand the medias ecstatic tone. Because the United States and the EU adopt frequent trade protectionism measures against Chinese products, every victory on the Chinese side is worthy of celebration.

Now that the partys over, the media should reflect on whether some Chinese industries can sustain their competitive edge and seize the capacity to advance their industrial development.

Aokangs victory

Since the 1980s, Chinese-made leather shoes have been sold to EU countries, and their sales volume has been increasing. In 1995, some European countries came together to impose an “import quota” on Chinese-made shoes in the name of protecting their domestic shoemakers and safeguarding prices.

After Chinas accession to the WTO in 2001, the quota limit was dropped since no import limits could apply to member nations. The EU then readjusted its policy and launched anti-dumping investigations against Chinese-made shoes.

In October 2006 the European Commission (EC) began to impose a two-year 16.5-percent duty on leather shoes originating from China.

Wang Zhentao, President of Aokang Group Co., said the anti-dumping duty had led to unprofitable outcomes for Chinese shoemakers in the EU market. Most of the 1,200 affected Chinese companies pulled out of the EU market. Five Chinese shoe manufacturers, headed by Aokang, brought the EC to the European General Court (EGC).

In April 2010, the EGC dismissed the case. Four of the companies felt it would be too difficult to win on appeal and pulled out. Only Aokang decided to appeal to the ECJ.

After the anti-dumping duty expired in 2009, the EU launched its “sunset review”and decided to extend the anti-dumping duty for another 15 months until March 31, 2011.

According to figures from the Ministry of Commerce (MOFCOM), from 2006 to the expiration of the EUs anti-dumping duty, exports of Chinese shoes to Europe declined by more than 20 percent, resulting in a direct loss of 20,000 jobs.

The ECJs verdict, which overturns the EGCs earlier ruling, says Aokang will receive 5 million yuan ($794,913) in legal fees from the EC. Aokangs export and import partners can also receive a refund of duties collected by the EU over the last six years.

Wang Hailong, an Aokang spokesman, said at a press conference the day after the ruling that the companys litigation expenses during the past six years amounted to 3 million-4 million yuan ($476,948-635,930). The amount of duty refunded to European importers is not yet clear and requires further clarification.

Wang added that the anti-dumping lawsuit against the EU has enhanced Aokangs legal knowledge of international trade and has helped the company learn how to resolve international trade disputes. Overall, the victory boosts the companys international aspirations.

Shen Danyang, a MOFCOM spokes- man, said the case should be an impetus for Chinese enterprises to protect their own rights through legal action.

Industrial competitiveness

“Is Aokangs victory enough?” Zhang asked in a blog post after the ruling from CAITEC was handed down.

Chinese companies, she said, should be vigilant when celebrating Aokangs victory. She derides the litigation expenses awarded to Aokang, saying it does little to make up for what Chinese shoemakers have lost in the past six years in terms of EU market share and opportunities for growth.

When China became the worlds second largest economy and biggest exporter, it also became entangled in numerous global trade disputes.

Over the past 17 years, China has encountered more anti-dumping investigations than any other country. In the first three quarters of this year alone, China faced 55 trade remedy investigations of its exports, a year-on-year increase of 38 percent, involving $24.3 billion worth of goods, or an eight-fold increase, according to MOFCOM figures.

According to Global Trade Alert by the Center for Economic Policy Research, 40 percent of the worlds trade protectionist mea- sures have been against China since the start of the 2008 global financial crisis.

Since its WTO entry, China has encountered 758 trade remedy cases launched by foreign countries. Meanwhile, China has launched a mere 11 cases.

Zhang said China has obvious advantages when it comes to economies of scale and has benefited from countries around the world transferring production to its shores, stimulating the continuous growth of exports. As the worlds manufacturing center, China is more likely to encounter hostilities in trade.

“This rapidly growing competitive advantage in export will inevitably be followed by discontent from major world economies and big trading nations. Therefore, in many trade friction cases China has encountered, there is obvious trade protectionism,” Zhang said.

Developed economies intend to curb Chinas development through trade protectionism, Zhang said, and their protectionist measures have shifted from the traditional tariff, quota and license limits to protection of intellectual property rights, exchange rate mechanisms and the investment environment for foreign-invested enterprises.

“The lawsuit between Aokang and the EU, as well as the anti-dumping investigations against Chinas photovoltaic industry by the United States and Europe, has alerted the whole world that China needs a fair and free environment for competition, and the world also needs to formulate new rules to fight against trade protectionism and reduce trade frictions,” Zhang said.

One of the major reasons for the antidumping and anti-subsidy investigations against Chinese photovoltaic products by the United States and Europe has to do with the mere fact that Chinese photovoltaic companies have nabbed half of the global market while U.S. and European companies have seen their share shrink, said Zhang.

For example, the U.S. market share declined from 47 percent in the 1990s to 7 percent today. Unable to make breakthroughs in technology to compete with Chinese companies in terms of product costs, the United States has resorted to trade protectionism.

Nevertheless, Chinese entrepreneurs should recognize that although trade protectionism and other external factors have impeded Chinas international expansion somewhat, their products still lag behind those of developed countries in terms of quality and technology. The most effective way to ease trade frictions is to move up the industrial food chain. Otherwise, the anti-dumping probes will continue.

Although Aokang won its battle against the EC, its industrial development has seen little improvement. It is still a labor-intensive shoemaking company and its industrial competitiveness is not yet strong. In the future, it is likely to encounter more trade disputes.

China is still faced with trade protectionism. Instead of simply tackling anti-dumping investigations and other allegations of unfair trade, companies must work to establish an advantage in technology, brand development, as well as quality and service.