[Mr Bhatnagar is a Professor at the Centre for WTO Studies.]
The EU is going all out to counteract Chinese advances through the latter’s Belt and Road initiatives in Africa. EU went to the extent of stretching the WTO subsidies' rules to find a subsidy provided by China for its enterprises operating in Egypt. The alleged subsidization in Egypt concerns two related companies in the China-Egypt Suez Economic and Trade Cooperation Zone (SETC-Zone). In a recent countervailing duty investigation order issued on 12 June 2020 involving exports of Glass Fibre Fabric (GFF) from Egypt to the EU, the EC held that the two entities Jushi Egypt and Hengshi Egypt operating in the SETC-Zone in Egypt were beneficiaries of preferential finance from China which could be attributed to Egypt.
The findings of EC record that in December 2015, Egyptian President paid a visit to China where he declared Egypt’s acceptance of China’s offer to cooperate in the ‘One Belt, One Road’ initiative and to further develop projects in Egypt. On 21 January 2016, the two Presidents officially inaugurated the SETC-Zone expansion project. During the state visit of Chinese President in Egypt, the two governments also signed the ‘Agreement between the Ministry of Commerce of the People’s Republic of China and the General Authority for the Suez Canal Economic Zone of the Arab Republic of Egypt on the Suez Economic and Trade Cooperation Zone’ (Cooperation Agreement).
According to the Cooperation Agreement, the governments jointly develop the SETC-Zone. They do so in line with their respective national strategies (Belt and Road Initiative for China on the one hand, and the Suez Canal Corridor Development Plan for Egypt on the other).
The GFF producers operating in the SETC-Zone, Jushi Egypt and Hengshi Egypt, are incorporated under Egyptian law and have been established by Chinese parent companies (Jushi China and Hengshi China). The parent companies of the GFF producers are related and the ultimate parent company of these two companies is owned by the Chinese state-owned assets Supervision and Administration Commission.
The Egyptian government was expecting and welcoming Chinese financing for close cooperation within the SETC-Zone in order to boost the development of one of its poorest regions. The Chinese government was hoping that Chinese companies could operate outside Chinese territories and expand their exports under the ‘One Belt, One Road’ initiative and also possibly avoid being caught by trade defence measures.
Under the WTO subsidies rules, a subsidy normally exists where there is a financial contribution by a government – or a public body – within the territory of the WTO member. The Chinese position in this case was that any alleged direct transfer of funds by a financial institution operating in China to producers/exporters of GFF in third countries cannot be attributed to China or considered a financial contribution given by the Government of China. However, EC rejected this argument and went on to establish that under the circumstances of the case, the subsidies should include not only measures directly emanating from the Government of Egypt but also those measures by the Government of China which can be attributed to Egypt on the basis of the available evidence. The commission went on to record in the findings that “As the Presidents of Egypt were no doubt aware that the Chinese ‘One Belt and One Road’ initiative involves heavy State financing through preferential financing and other financial instruments, there was hence a clear act of acknowledgment and adoption at the highest political level of such financing support from the GOC by jointly setting up the SETC-Zone with China.”
Thus, the preferential financing from Chinese public bodies to Jushi and Hengshi Egypt can be attributed to the Government of Egypt from where exports took place. The evidence showed that the Government of Egypt endorsed the preferential financial support to the GFF producers in the zone by China in line with the agreed commitments to develop and support the economic activities within the zone.
The EC has gone ahead to impose countervailing duty treating this as a subsidy having been granted by Egypt. This is very important departure from the established norms of establishing subsidy while conducting investigations to impose countervailing duty. The move is clearly aimed to target China’s subsidy programmes in third countries. This move of EU can open gateway for other nations to target exports from those countries which are aided by China’s subsidies. In all likelihood, China will contest this move of the EU in a dispute forum of the WTO. An interesting battle is on the cards, which needs to be watched closely by policy makers.