China’s Market Economy Status after 2016?

Over the last years, most WTO Members have categorized China as a Non-Market Economy (“NME”) during antidumping investigations (“AD investigations”). For this reason, China and Chinese companies have been subject to methodologies that deviate from the strict comparison with domestic prices or costs required by the GATT 1994 and the Antidumping Agreement (“ADA”). Inevitably, China’s categorization as a NME has soundly affected Chinese industries due to the imposition of high antidumping duties during AD investigations.

This differential treatment is based on paragraph 15(a) of China’s Accession Protocol, which allows importing Members to use an alternative methodology when Chinese producers cannot clearly show that market economy conditions prevail in the industry in question. However, paragraph (d) of Article 15 contains an expiration clause stating that the provisions of subparagraph 15(a)(ii) will expire 15 years after the date of China’s accession, namely after December 11 of 2016.

The purpose of this entry is to discuss China’s potential recognition as a Market Economy (“ME”) after 2016, the effects of granting Market Economy Status (“MES”) to this country in antidumping investigations, and hopefully discuss how your corresponding jurisdictions would address this matter.

Market Economy Status and Non-Market Economy Status

Pursuant to the provisions set forth in Article VI of the GATT 1994 and the ADA, dumping occurs when products of one country are introduced into the market of another country at a value lower than the normal value of the products in the market of origin, and causes or threats to cause material injury to an established industry or materially delays the establishment of a domestic industry of like products. In such circumstances, the importing country is authorized to levy on the dumped product an antidumping duty up to the margin of dumping (the normal value minus the export price).

According to subparagraph 1 of Article VI, the general rule is that normal value is the comparable price, in the “ordinary course of trade, for the like product when destined for consumption in the exporting country”. The comparability in the “ordinary course of trade” requires that both countries have ME. Therefore, when an importing country initiates an antidumping investigation over an exporting Member with MES, it is obliged to use domestic prices or costs when determining the normal value of the products.

Nevertheless, for NME exporters, as it is the case of Chinese companies, the general rule may not be applied as it is deemed that domestic prices are largely determined by the State, and not by the market. Thus, for WTO Members who are subject to a specific provision in a WTO Accession Protocol, the importing Member may adopt an alternative methodology instead, such as the use of surrogate prices in a third ME country (analogous third country methodology).

In this regard, Section 15 of China’s Accession Protocol established a NME clause providing that, if Chinese producers under investigation can clearly demonstrate that market economy conditions prevail in the industry producing the like product with regard to the manufacture, production and sale of that product, the importing WTO Member shall use Chinese prices or costs for the industry under investigation in determining price comparability (Section 15(a)(i)). However, if producers under investigation cannot clearly demonstrate that market economy conditions prevail, the importing WTO Member may use a methodology that is not based on a strict comparison with domestic prices or costs in China, such as the analogous third country methodology (Section 15(a)(ii)).

This NME clause is critical to Chinese domestic industries since exporters have suffered significant financial losses due to the implementation of alternative methodologies used to calculate antidumping duties.

For instance, we draw attention to the U.S antidumping cases against color televisions originating in China and Malaysia in 2004. In these cases, the U.S Commerce Department initiated AD investigations against televisions manufactured in China and Malaysia which were essentially identical and used the same internationally available parts and components. In spite of this fact, the U.S. found no dumping in the proceeding against Malaysia, but found dumping margins of up to 78% in the proceeding against Chinese producers. This discrepancy occurred mainly because the U.S. Commerce Department treated China as a NME in the investigation and used India as a surrogate country when determining the normal value of the products.

It is important to recall that China has been the principal target in AD investigations over the last years. According to the WTO Antidumping Statistics, between January 1, 1995 and June 30, 2014, 1022 AD investigations were initiated against China, 185 against Japan, 181 against India and 119 against Malaysia. 73% of the initiated investigations were successful in levying antidumping duties to Chinese producers. While 69%, 57%, and 56% of the investigations against ME such as Japan, India and Malaysia were successful.

Expiration of the NME clause

According to paragraph 15(d) of China’s Accession Protocol, the NME clause (Section 15(a)(ii)) will expire on December 11, 2016. As from that date, importing Members will be obliged to treat China the same as other Members during AD investigations, since there will be no longer a legal basis in the Accession Protocol to treat China as a NME.

This means that the importing country will have to calculate the normal value of Chinese product according to the general rule embedded in subparagraph 1 of Article VI, and use domestic prices and costs in China to perform the comparison.

Nonetheless, a methodology not based on a strict comparison with domestic prices or costs in China is still applicable according to the Ad Note to Art. VI.1 GATT 1994 (the “Ad Note”). The Ad Note recognizes that, in the cases of imports from countries where the State has a complete or substantially complete monopoly of trade and where all domestic prices are fixed by the State, importing Members may determine that a comparison with domestic prices may not be appropriate due to special difficulties in determining price comparability.

However, the application of the Ad Note requires the investigating authority to demonstrate that the exporting State monopolizes trade and sets all domestic prices. Thus, if importing Members continue to apply alternative methodologies based on the categorization of China as a NME after 2016, without invoking the Ad Note, the affected producers may resort to the WTO dispute settlement system and request the restoration of their rights to the use of domestic prices or costs.

Implementation issues

While a significant share of China’s economy is thought to be driven by market forces, allegedly the Chinese government continues to play a major role in economic decision-making, possibly distorting trade and investment flows.

According to the U.S China Economic and Security Review Commission, the Chinese government maintains policies to bolster domestic enterprises such as subsidies, tax breaks, preferential loans, trade barriers, foreign direct investment restrictions, discriminatory regulations and standards, export restrictions on raw materials (such as rare earths), technology transfer requirements imposed on foreign firms, public procurement rules that give preferences to domestic firms, and weak enforcement of Intellectual Property Rights laws (“IPR”). Furthermore, the Chinese government has taken quick steps to take full control of industries such as, autos, aviation, banking, coal, construction, environmental technology, information technology, insurance, media, metals (such as steel), oil and gas, power, railways, shipping, telecommunications, and tobacco.

Recently, U.S. policy makers and stakeholders have expressed their concern for these issues, as well as for the widespread cyber economic espionage against U.S. firms by Chinese government entities, the increasing pressure over foreign-invested firms to transfer technology in exchange for market access, and China’s inconsistent record on implementing its WTO obligations.

These control-based policies have placed China’s recognition as a ME on 2016 in the tightrope. For instance, the EU and U.S have expressed their reluctance to treat China as a ME until it demonstrates that it operates under market policies. In fact, in 2012, President Obama created a new Trade Enforcement Unit “charged with investigating unfair trade practices in countries like China.”

Currently, the U.S China Strategic and Economic Dialogue is exploring the possibility of cooperating to enable the U.S to treat China as a market economy, and treat certain Chinese firms as market-oriented industries, for the purpose of U.S. trade remedy laws.

Thus, it is still not clear whether in practice China will start to enjoy MES for the purpose of AD investigations, along with the expiry of the NME clause in December 11, 2016.

What are your views and your prediction on this issue? How do you foresee that your jurisdiction will treat China and Chinese companies for purpose of trade remedies investigation after 2016?