Subsidisation of agricultural products is a globally sensitive issue. The subsidies debate was a major reason for the failure of the World Trade Organization (WTO) Doha Development Round in Cancun last year. Agricultural subsidies and how to counteract them is high on the agenda of many countries, in particular those who are members of the Cairns Group and the G21. The expiry of the protection afforded by the so-called 'Peace Clause', which permitted members to maintain a certain level of subsidies and exempted them from action under the WTO's dispute settlement system, has brought these issues into sharp focus.
On 24 May 2004 the Australian Customs Service (Customs) terminated investigations into the alleged subsidisation of olive oil exported from Greece, Italy and Spain and the alleged dumping of olive oil from Italy and Spain. In the context of Australia's political complaints about subsidies granted under Europe's Common Agricultural Policy, and Australia's maintenance of a countervailing system which is aimed at counteracting foreign subsidies (and which has successfully achieved this purpose in the past), the failure of the Australian industry's complaint in this case deserves close analysis.
Australian industry alleged injury from European imports
The investigations were initiated in November 2003 following applications by an Australian producer of olive oil, Inglewood Olive Processors Ltd (Inglewood). Inglewood claimed that injury was being caused to the Australian olive oil industry by allegedly subsidised and dumped olive oil from Greece, Italy and Spain. The product complained of was extra virgin and blended olive oil in container sizes of 250 ml, 500 ml, 1 litre, 2 litre, 3 litre and 4 litre for retail sale. Olives themselves were not part of the complaint. Inglewood claimed that there were dumping margins of up to 62 per cent. The subsidies paid were said to be up to 130.4 euros per kg of olive oil.
What is 'dumping' and 'subsidisation'?
'Dumping' occurs where the 'normal value' of a product exported from a country is more than the 'export price' of that product. The difference is called the 'dumping margin'. The normal value is the domestic selling price of the product in the exporter's home market. The export price is normally the free-on-board invoice price of the same product when destined for the importing country's market. If 'dumping' is detected by the investigating authorities, and if it is demonstrated that the dumping has caused material injury to an industry in the importing country which produces the same product, the authorities of the importing country may impose a duty on the dumped imports to offset the margin of dumping.
Subsidisation occurs where a government or public body grants a 'financial contribution' that is 'specific' and which confers a 'benefit' on an enterprise. If the investigating body in the country of importation establishes that material injury has been caused or is threatened to the domestic industry by reason of such a subsidy, the importing country may impose what is called a 'countervailing duty' on the imports of the product which have benefited from that subsidy. The duty is normally imposed in an amount which is equivalent to the subsidy, in order to counteract its effects.
European 'production aid' subsidy
Inglewood claimed that a 'production aid' was paid to olive growers in Greece, Italy and Spain. Inglewood submitted that this 'aid' had a consequential price effect on olive oil through the production stage in that it lowered the price of olive oil sold to Australia. Inglewood argued that the production aid was a 'countervailable subsidy'. Inglewood claimed that irrespective of whether the olive growers were producers of olive oil through independent mills or by cooperatives, the production aid subsidy involved a direct transfer of funds from a government to an enterprise by whom the goods exported to Australia are produced. Where olive growers were not also olive oil producers, Inglewood said that the producers paid a much lower price for the olives used to produce the oil, thereby reducing the price of the oil, and that Customs should consider what the price of olive oil would be in the Australian market if the benefit of the production aid did not exist.
In its investigation, Customs established that the European Commission (EC) administered the production aid scheme through producer organisations in various countries. Nearly all olive growers in Greece and Italy, and 80 per cent of olive growers in Spain, were found to belong to producer organisations. Consistent with previous cases, Customs considered the production aid to be a subsidy paid to olive growers in the countries concerned. It was also established that the subsidy was calculated and paid on the basis of the amount of olive oil extracted from the olives grown by the olive growers. Customs also considered that the result of the scheme, whether intended or not, had been to increase olive oil production in European Union (EU) countries.
A subsidy, but where is the proof of a benefit to olive oil producers?
Customs recognised that just because 'subsidies' were paid to olive growers was not determinative of the question of whether the subsidy was countervailable in respect of olive oil exported to Australia. The legal question depends on specificity, and whether or not the subsidy confers a benefit.
In relation to specificity, Customs concluded the subsidy was specific, because it was specifically limited to particular enterprises (namely olive growers), and because access to the subsidy was established by objective criteria set out in EC regulations that stipulated that production aid was limited to olive growers.
However, the Australian industry's complaint failed on the question of the 'benefit' of the subsidy. The EU, and various exporters and importers, provided submissions to Customs concerning the question of whether a benefit was conferred. They argued that the subsidies were paid at the grower level, which was the first stage of a long chain in the production of olive oil. In their view, any price paid by the ultimate customer would be the result of market forces of supply and demand only. They also argued that the existence of a benefit to exporters of olive oil would need to be demonstrated by positive evidence. Accordingly, they said that the amount of the alleged subsidy which passed through from olive growers to eventually benefit the exported product must be determined, in order to determine whether it is countervailable and, if so, the degree which it is countervailable.
Citing recent WTO authority (the panel report in United States – Final Countervailing Duty Determination with respect to Certain Softwood Lumber from Canada), it was argued that Customs must not simply assume that a benefit had 'passed through' from olive growers to the olive oil, and that without any evidence to the contrary it must be presumed that aid granted to olive growers does not benefit producers and exporters.
In response, Inglewood offered the opinions of a Senior Counsel and an economist. The Senior Counsel argued that a finding by Customs that the production aid provided a stimulus to production, which in turn resulted in a drop in world prices for olive oil, must lead to a conclusion that the benefit of the production aid was 'passed through' to the olive oil exported to Australia. The economist concluded:
'I have no doubt that there is significant pass through of the olive oil subsidy to consumers, both in the EU and elsewhere in the world …
I have also been asked whether the pass through of benefit of the subsidy is significantly affected according to whether the subsidy is paid to the grower (as is the case) or to the processor. In my view the dynamics of the entire supply chain are not affected. The benefit of the subsidy travels with the product, ie the olive oil, and it should make no difference where in the chain the subsidy is injected.'
Despite these opinions, Customs concluded that there was insufficient evidence to demonstrate that a benefit had been conferred. In its report, Customs stated:
'After the sale by the olive grower, market forces drive the price of each transaction in the selling chain in a (generally) non-vertically integrated industry. The pass through of the benefit of the subsidy from the recipient to the exporter has not been established.'
Accordingly, Customs determined that the production aid was not a subsidy against which a countervailing duty could be imposed, and the investigation was terminated.
Minimal dumping detected
In relation to the alleged dumping, Customs calculated weighted averages of export prices and corresponding normal values for each exporter. Using these 'variable factors', Customs was able to calculate the dumping margin for each exporter. Customs found that two exporters did not dump; that the dumping margin for one exporter was negligible (ie less than two per cent); and that the dumping margins for the other three exporters ranged between two and 10 per cent.
Customs accepted that Inglewood had suffered price-related injury in the form of price undercutting, price depression and price suppression during the period of investigation. However, Customs considered that a number of factors would have affected the Australian industry regardless of dumping. Customs said that the price of olive oil was relatively high when Inglewood established itself in the Australian market and the subsequent lowering of world olive oil prices was part of the supply and demand cycle. Customs found that Inglewood had significant start-up costs. Also, Customs decided that Inglewood bought market share in an established market and had lowered its price to maintain that market share, and that both it and importers had been affected by the dominance and buying power of Australian supermarket chains. Lastly, Customs said that in comparison with major exporters, Inglewood was not a large-scale producer and so would incur a greater per unit cost, resulting in higher prices needed to recover these costs.
Accordingly, Customs was not satisfied that the dumped imports caused the injury. In the absence of any countervailable subsidies, and because there was no causal link found between the dumping and the injury, the investigation was terminated.
The Australian industry may appeal to the Trade Measures Review Officer. Whether or not there is an appeal, the case will have important reverberations.
Inglewood's case preparation was found to be lacking on a critical evidentiary point, namely establishing whether or not a benefit had been conferred on olive oil producers by way of the payment of a subsidy to olive growers. Inglewood's dilemma is not a new one, in that it can be difficult to present economic evidence to prove such a proposition. However, it is not impossible to do so, if the facts are available and the expert opinions needed to interpret the facts are carefully prepared and presented. The case is not authority for the proposition that countervailing duties cannot be imposed in respect of downstream products where the subsidy is paid in respect of the upstream product. As agricultural subsidies are usually paid to growers, complaints levelled against imports of processed agricultural products need to take particular care in addressing this issue.
An apparently contradictory finding by Customs, in its April 2003 report Canned Tomatoes from Italy (Trade Measures Branch Report No 66), illustrates the importance of legal and factual argumentation, and an investigating authority's approach to evidentiary issues and the 'burden of proof'. The underlying facts in the canned tomatoes case, which was a continuation inquiry (or 'sunset review'), were similar to those in the olive oil case. It was found that a production aid was paid to tomato growers, and that it was calculated on an end-use basis depending on whether the tomatoes were processed or not. Customs decided that tomato processors were being provided with fresh tomatoes at less than fair market value. Exporters did not participate in the investigation. Customs was required to make decisions on the basis of the available evidence, and claimed that it was entitled to use adverse inferences against exporters by reason of their non-cooperation. In the end result, full 'pass through' of the tomato subsidy was accepted by Customs. (The countervailing measures against the canned tomatoes were terminated, on other grounds.)
The olive oil report also indicates a more open and balanced approach on the part of Customs to the assessment of whether or not the dumping of imports can be said to have caused 'material injury' to an Australian industry. For example, Customs found that the Australian industry's own start up costs, and its small size relative to international competitors, counteracted the proposition that dumped imports had caused injury. Customs also considered that supermarket buying power had been causative of injury, taking into account that most undercutting had taken place at the 'house brand' market sector, and found that this was a factor unrelated to dumping. The consideration by Customs of wider issues of industry efficiency, scale and competitive factors, and the elevated relevance of these factors as signalled by the olive oil report, is likely to lead to more active argumentation about injury and causation in future cases.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.