The Implications of Defining China as a Market Economy

There is a potential mega-battle brewing over trade rules and the provision of market economy standing for China that could reach the World Trade Organization (WTO) in 2016.

Whether particular countries grant The far east market economy status has important implications for the adjudication of anti-dumping cases. In international trade, dumping occurs when a country exports a product at a price below the normal cost of production or price compensated in the exporting country.

China anti-dumping case

When The far east joined the WTO in Mid 2001, Article 15 of China’s Protocol of Accession to the WTO permitted other WTO members to disregard Chinese prices and costs within anti-dumping cases and instead foundation the calculation of dumping margins using external standards. Included was an exception if Chinese producers could ‘clearly show’ that market economy conditions prevailed in the industry. Article Fifteen essentially authorised ‘nonmarket economy’ methodologies long used by the United States and the European Union in anti-dumping cases against communist nations.

Taking advantage of this provision, government bodies in the United States, the European Union, Japan and Canada, among others, usually make use of surrogate prices and costs to calculate Chinese dumping margins. Hardly ever are the authorities satisfied that market economy conditions dominate in Chinese industries.

This comparison with surrogate prices and costs usually leads to much higher dumping margins and thus much higher penalty duties imposed to bring the delivered price in the importing nation closer to ‘normal value’. Since The far east is a leading target associated with dumping cases worldwide, the actual non-market economy methodology is a sore point with Chinese officials. A decade ago, China mounted a vigorous diplomatic campaign asking industry partners to accord it market economy status. The actual campaign succeeded with New Zealand, Singapore and Malaysia in 2004 as well as Australia in 2005, among others, but it did not persuade america, the European Union, Japan, Canada and several others.

All this brings us to the prospect of controversy come December 2016. Post 15(a) (ii) associated with China’s Protocol states:

The importing WTO Member may use a strategy not based on a strict assessment with domestic prices or costs in China if the producers under investigation can’t clearly show that market economic climate conditions prevail.

However, buried in Article 15(d) is the critical sentence: ‘In any event, the actual provisions of subparagraph (a) (2) shall expire 15 years following the date of accession’.

Chinese officials highly argue that this sentence requires all countries to accord China market economy standing on 11 December 2016, Fifteen years after China’s accession, and that WTO members can no longer use surrogate costs and prices in anti-dumping cases.

Some US as well as EU lawyers read the text differently. While they agree it 15(a) (ii) will effectively disappear, they do not concur that the Protocol confines WTO people to a binary choice between marketplace economy (with its strict comparison of export prices along with Chinese prices or expenses) and non-market economy status (that allows comparison with surrogate prices or even costs). They point to the opening language in Article 15(a), which states:

[T]he importing WTO member shall use possibly Chinese prices or costs for the industry under analysis or a methodology that is not based on a strict comparison with domestic prices or costs within China.

To be sure, under Post 15(d), the whole associated with Article 15(a) possibly disappears, but only ‘once The far east has established, under the national legislation of the importing WTO Member, that it is a market economy, the provisions of subparagraph (a) shall be terminated’.

Come December 2016, the United States and European Union might well argue that China has not revealed that it is a market economy. They could modify their current surrogate practices and instead use ‘mix-and-match’ methods — claiming that some Chinese firms or industries operate under market conditions yet others do not. For those that do not, they might use surrogate prices or expenses.

Whether the United States takes a hard-liner mix-and-match approach, rather than grant China market economy status across the board, could well switch on policy considerations rather than legal parsing. Among these considerations will be the common atmosphere of commercial relations with China in 2015 and 2016, such as the evolution of the renminbi exchange price (devaluation would inspire the hard-line approach) and the outcome of the US–China Bilateral Investment Treaty negotiations (success would have the opposite impact).

With that observation from the economic text of realpolitik, we recommend that the United States should adopt a rebuttable assumption of market economy standing in post-2016 anti-dumping cases. If a US petitioner can show that the Chinese firm accused of dumping is actually state-owned or state-controlled, does not publish financial accounts in accordance with international requirements, or in other ways ignores industrial considerations in its business transactions, then the US Commerce Department could revert to surrogate costs or costs.

This approach would have two benefits: it would motivate Chinese state-owned and state-controlled firms to write financial accounts and run according to market principles, and it would answer fears by a few US firms that they are being forced to compete with the Chinese Ministry of Financial.

If adoption of this mix-and-match approach occurs, China might well initiate WTO lawsuit in response to an affirmative anti-dumping choice. However, 2018 seems the earliest day for a final decision by the WTO Appellate Physique. In addition, even if China prevails in the WTO, the targeted Chinese language firms would not receive retroactive refunds for anti-dumping duties collected prior to the ruling. Again, this hard industrial reality would encourage Chinese language firms to publish accounts as well as operate according to market principles.

Answering these questions is associated with grave importance. The politically billed belief in the United States that China does not play fair — a legacy of many years of US trade deficits, spurred the market economy battle, along with another potential battle over forex manipulation. These disputes could shape future trade guidelines, disputes and remedies for many years.

Is China a market economy? is actually republished with permission from Eastern Asia Forum