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. Last Updated: 07/27/2016

Free Trade?

CHEREPOVETS, Central Russia -- The people of Cherepovets, a grey city in provincial Russia, are not rich but they had been starting to feel a sense of hope.

The Severstal Metals Plant, which employs one out of every six residents here, has responded to the collapse of the Russian economy by looking for markets off shore. More than 60 percent of its production is now exported.

"I am getting by," said Dmitry Maximov as he stacked up rolls of steel to be shipped to Turkey. Like most of Severstal's workers, who earn on average less than 2 million rubles ($350) a month, he gets paid more or less on time, a rarity these days in Russia where millions have gone for months without pay.

"It is enough for me now, but I am getting married and it will be difficult to support a family," he explained.

Severstal has kept its head above water thanks to exports, but now the plant is being accused of dumping steel abroad at unfairly low prices. The enterprise's young dynamic management team is worried that its hard-won export markets will dry up under a chain of anti-dumping cases, a prospect which could have dire consequences for the town's 300,000 inhabitants who rely on the mill's meager but steady salaries.

"We turned to exports for survival," said Vladimir Krainov, 32, deputy head of Severstal's Export Division. "They are our lifeline."

Last month the United States slapped provisional anti-dumping duties of 61 percent on carbon steel plate from Severstal, a move which Krainov said shut its product out of the U.S. market. Canada and Mexico, which have similar suits pending against carbon steel plate, are expected to follow the U.S. lead.

"This case will be a great problem for us," Krainov said. "It could force us to lay off workers.

"I don't understand how the U.S. government could allow this anti-dumping case when the U.S. economy is doing so well," he added.

In Cherepovets, 600 kilometers north of Moscow, few people know that Severstal is facing dumping complaints. But they are keenly aware that the fate of this bleak industrial town is linked to the local steel mill's success in staying afloat.

Severstal is not alone. Some 46 anti-dumping cases or complaints have been lodged against Russia, mainly against various forms of metal and chemical exports. The Russian Trade Ministry has estimated that the economy loses at least $1 billion annually due to anti-dumping duties.

Dumping, by definition, is selling production below cost or below that charged in the domestic market as a way of getting rid of surplus or as a predatory means of gaining market share.

"There has been a surge in anti-dumping cases against Russia over the last couple of years," said Alexei Ruzhin, who heads the Trade Ministry's division on dispute settlement. "We view this as protectionism."

The sense of outrage in Russia is sharpened by a perception that the West's case is both self-serving and hypocritical. The West has lectured Russia for years on the value of free trade and Russia has more or less opened its markets to Western goods. But Russia complains that when it wants to export, the West closes the door.

Both Prime Minister Viktor Chernomyrdin and First Deputy Prime Minister Anatoly Chubais complained publicly during their recent trips to the United States that the West is practicing discriminatory trade policies toward Russia.

First Deputy Prime Minister Boris Nemtsov even refused to meet with the European Union's top trade official, Sir Leon Brittan, during his visit to Moscow earlier this month. Nemtsov sharply criticized a recent EU decision to impose provisional anti-dumping duties on Russian iron and steel pipes and said Brittan had shown his unwillingness to compromise on trade policies. The EU alone has anti-dumping duties against 14 Russian products, ranging from unwrought unalloyed zinc to unwrought magnesium. The anti-dumping cases have provoked the ire of senior Russian politicians not only because defending domestic industry makes for good politics at home, but because exports have been one of the few bright spots in Russia's flagging economy.

Faced with a collapse in domestic demand, many enterprises have turned to exports to stay on their feet. Russian exports, which totalled $87 billion last year, have grown by more than 50 percent over the last few years. Almost one-quarter of Russia's 1996 exports were metals and chemicals, which have attracted the most dumping complaints.

Russia's chief grievance is that it is not treated as a market economy in anti-dumping investigations. In most cases, a local industry lodges an anti-dumping complaint against a foreign country through its own government. The government, in turn, examines production costs in the exporter's home market to determine whether products were sold below cost and dumping has occurred.

Most countries around the world, however, treat Russia as a non-market economy and refuse to accept Russian data in setting dumping margins, which are used to determine the size of duties.

Instead, the size of the dumping margins and duties is decided based on data from similar "surrogate" countries, a method which Russian officials say does not accurately reflect domestic production costs. In the case of Severstal, the U.S. Commerce Department used Brazilian prices to estimate how much the Russian plant was selling below cost. Opponents charge that this method allows investigators extensive leeway to select data that helps prove their case.

"There are all kinds of games. This is not a science by any means," said Peter Suchman, a Washington-based attorney defending Severstal.

Ruzhin said anti-dumping margins against Russia are often higher than those against other countries because they are based on surrogate data.

"These are mad figures which no sober man can believe," he said.

Defendants of Western trade policy argue that the anti-dumping cases are marginal and they have not stopped a huge growth in exports.

After Nemtsov stood him up, Brittan argued that the anti-dumping duties affect only 1 percent of Russian exports to the EU. "The Russian balance of trade has been extremely good," he said.

The West charges that Russian enterprises engage in dumping to earn quick cash rather than sell domestically and face long delays getting paid. Alternatively, Western companies argue that Russian firms do not factor in the costs of plant depreciation.

But because Russia is considered a non-market economy, it is difficult to separate unfair charges from genuine instances of dumping.

Some trade experts maintain that enterprises like Severstal, which rely so heavily on exports and receive no subsidies, would not be able to dump production and survive given the weak domestic market.

"There are no economic conditions for dumping," said Maxim Medvedkov, a former Trade Ministry official who now works for the Center for Trade Policy and Law, an independent think tank. "No one will sell in a way that will cause losses."

Medvedkov said that Russia is able to produce goods such as steel at relatively low prices because of the country's rich energy resources, abundance of raw materials and access to cheap labor. But by not considering Russian production costs, he said, "Western countries are denying Russia's competitive advantages."

Russia believes that winning the status of a market economy will enable it to better defend enterprises in such investigations because it will exert greater control over the data used to set anti-dumping duties. Without it, Russian enterprises are vulnerable to attack.

The United States and European Union treat Russia as a non-market economy because of what they say are distorted domestic cost structures and accounting methods, which make it difficult to determine real production costs -- for instance, the widespread use of barter and promissory notes as payment between enterprises.

Roger Schagrin, a lawyer representing the U.S. steel companies in the case against Severstal, argued that Russia does not deserve the status of market economy because of continued state intervention in the economy. "There is too much government influence," he said, arguing that the state still sets rail and energy prices.

Indonesia is the only country that has accepted Russia as a market economy. Earlier this year, it imposed temporary anti-dumping duties of nearly 40 percent on hot-rolled coil steel produced by Novolipetsk Metallurgical Combine, another big Russian plant. But it based its calculations on Russian production costs. Despite the decision to impose duties, Ruzhin called the case "a step forward in our efforts to be accepted as a market economy."

Many commentators view the continued treatment of Russia as a non-market economy -- effectively lumping it together with countries such as China and North Korea -- as pure protectionism.

"It is obvious that Russia does not qualify as a non-market economy any more," said Vladimir Drebentsov, a trade expert at the World Bank's Moscow mission. "No one is in a hurry to get rid of this term because it helps to protect domestic producers."

With more than 70 percent of gross domestic product generated by the private sector, Russia fully meets U.S. criteria for being treated as a market economy, Drebentsov added.

Brittan, during his recent visit, held out an olive branch by promising that the EU would begin considering Russia a market economy as soon as Moscow enters the World Trade Organization. But Russia wants access to European markets now.

Russia hopes to join the WTO by the end of 1998 but it could take much longer. Once Russia enters the WTO, Moscow could have a better chance of fending off anti-dumping claims through access to the trade club's dispute settlement body.

Many Russian officials have said U.S. and EU trade policies are hypocritical. Chernomyrdin has suggested that the West should stop providing technical assistance and instead give Russia better access to its markets.

Western governments have been caught in a delicate balancing act, trying to satisfy their own industries' demands for protection and Russia's need for market access to help struggling domestic enterprises.

"Many industries in the EU use anti-dumping measures merely to eliminate powerful competitors, not to eliminate dumping," Medvedkov said.

The number of anti-dumping cases worldwide has jumped alongside the push for greater liberalization of international trade. As countries have decreased import tariffs and eliminated safeguard measures such as quotas, they are more widely using anti-dumping procedures to protect domestic markets.

According to Geneva-based trade officials, there were 123 new anti-dumping investigations across the globe in 1995, the latest year for which figures are available. By the end of 1995, there were 781 anti-dumping duties in force, 70 percent of which were imposed by the United States, EU and Canada.

By some accounts, Russia was among the top 10 countries facing anti-dumping duties at the end of 1995. The United States and the EU lead in the number of dumping investigations against Russia, although an increasing number of Third World countries are following suit.

While the Russian side maintains it is being singled out, others believe the large number of cases is a sign that Russia is really guilty of dumping. Brittan said the Russian steel sector is facing 14 anti-dumping cases from countries around the world, which he said proved that the EU was not alone in its dumping claims.

But Russian trade officials complain that many countries copy the United States and the EU on dumping cases, filing charges against the same products that Washington and Brussels have decided to investigate. "Everyone looks to the U.S.," Ruzhin said.

US. dominance in dumping investigations has made the case against Severstal a high-profile one, with many predicting other countries will follow Washington's lead.

Canada and Mexico's decision to launch investigations into Russian carbon steel plate created the appearance of united front among North American Free Trade Agreement countries. The steel industries in these three countries, which often lodge dumping complaints against one another, formed a rare alliance earlier this year when they issued a joint statement calling on their governments to halt the flood of cheap Russian and Chinese steel into their markets.

Severstal's management said the U.S. case alone would not have a major impact on the mill's operations, but said about $60 million worth of exports would be blocked by the duties. They noted, however, that the ruling could be a harbinger of difficulties ahead.

"This could potentially mean the beginning of a whole wave of new anti-dumping cases," said Alexei Mordashov, Severstal's energetic 31-year-old general director. "It could set a precedent."

Suchman, Severstal's lawyer, said he is hopeful that the duties will be reduced or thrown out altogether when the U.S. Commerce Department makes its final ruling in mid-August. He said he was trying to reach a so-called suspension agreement that would avoid anti-dumping duties altogether by imposing quantitative limits on Severstal's imports to the United States.

But the U.S. mills have no intention of settling. "Our clients have been severely constrained by the surge in imports. They have severely undercut our prices and sales volume," Schagrin said.

Russia shipped 250,000 tons of steel plate to the United States in 1996, up from almost zero in 1992, Schagrin said.

Severstal is just one of Russia's metallurgical enterprises, along with Novolipetsk, Magnitogorsk, Nizhny Tagil, that has been targeted by anti-dumping duties on various steel products. Chile, Mexico, Thailand and South Korea are just some of the countries that have lodged the complaints.

"Steel is our main headache," the Trade Ministry's Ruzhin said. One-fifth of Russia's export earnings are from steel. Like Severstal, many enterprises export nearly two-thirds of their output.

The Trade Ministry has only a handful of people working on dumping cases because many of its multilingual staff have left for higher paying jobs in the private sector.

One defense for Russia will be drawing up anti-dumping legislation of its own, which could allow it to go on the offensive against foreign imports of textiles and agricultural goods.

"In the future you will see Russia not just as country that tries to defend itself against dumping claims," Ruzhin said, "but as a country that investigates dumping as well."