China’s Status as a Non-market Economy
Whether it was induction of China at the WTO in 2001 or its determination of anti-dumping duties as a non-market economy (‘NME’) post induction, China has been on a rough tide.
Under Article 15,[1] Chinese producers have the burden of proving whether market economy conditions prevail, under the national law of the importing country. Failing this, the importing member is permitted to employ alternative normal value calculation methodologies. The most controversial of these provisions is contained in subparagraph (d), which provides for the expiry of subparagraph (a) (ii)on 11 December 2016. Subparagraph (a) (ii) grants permission to importing WTO members to use alternative methodologies, if the Chinese producers cannot clearly show market economy conditions prevailing. The expiry of the subparagraph in December, 2016 has sparked an academic debate across the globe regarding the implications.
Following the expiry of Article 15 (a)(ii) investigating authorities can no longer find a legal basis in China’s Protocol for determining normal value according to NME methodologies. Consequently, they will have to rely exclusively on the provisions of the Anti-Dumping Agreement when investigating imports from China[2].
Therefore, upon expiry of second paragraph of Article 15(a), China was quick to request consultations with the US and the EU[3], respectively, with regard to their price comparison methodologies for determining the normal value of Chinese imports[4]. It stated that the construction of normal value was inconsistent, inter alia, with Articles 2.1 and 2.2 of the Anti-Dumping Agreement (“ADA”), and with Articles I:1 and VI:1 of the GATT 1994. Subsequently, China requested the establishment of a panel to hear its case against the EU.[5]
The question that arises is whether the generally applicable provisions of Article 2.2 of the ADA allow for any flexibility with regard to determining normal value on the basis of out-of-country prices or costs of production. Certain scholars have advanced the argument that Article 2.2 indeed contains such flexibility as taken in US – Softwood Lumber IV[6].
In anticipation of the expiry of Article 15(a)(ii), on 11 December 2016, the EC put forward a proposal to amend the EU’s Anti-Dumping Regulations (“AD Regulations”), following the termination of section 15(a)(ii)[7]. Slightly more than one year later, the amendments proposed by the EC were finally adopted by the EU’s legislature and entered into force on 20 December 2017[8].
The generally applicable rules of Article VI:1(a) of the GATT 1994 and of Article 2.1 of the ADA define normal value as the price of the “like product” which is identical, i.e. alike, in all respects to the product under consideration, or in the absence of such a product, another product which, although not alike in all respects, has characteristics closely resembling those of the product under consideration’ when destined for consumption in the exporting country. Where such a price is unavailable or cannot be used then Article VI:1(b)(i) of the GATT 1994 and Article 2.2 of ADA allow for normal value to be established by reference to the price of the like product when exported from the country of origin to a third country. Alternatively, the national authority may construct normal value on the basis of the cost of production in the country of origin plus a reasonable amount for administrative, selling and general costs and for profits. Neither the ADA, nor Article VI:1 of the GATT 1994, provide for any other method of determining normal value, except where the country concerned is one which “has a complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the state”. In the case of such a country, the Second Supplementary Provision to Article VI:1 of the GATT 1994 allows for normal value to be determined by methods that do not entail the use of prices or costs in the country of origin. This was the legal basis to grant “non-market economy treatment” to certain GATT Contracting Parties whose economies were of the centrally planned variety.
Therefore, post the expiry of Article 15(a)(ii), China should be treated as a market economy doing away with unfair construction of normal value for China. WTO members adopt the flexibility provided under Article 2.2 of ADA.
Decades ago, as mentioned in the foregoing paragraphs, when China first attempted to join the international rule-based trade organization then organized under the name of GATT, contracting parties fiercely debated how China’s status could be accommodated by the system without undermining the goals of the same system. Even after the accession of China to the WTO in 2001, WTO Members were still skeptical of Chinese economic policies and made sure that their skepticism would be captured in the protocol. Nonetheless, since acceding to the WTO, China has continued to make changes to its economy that WTO Members could not have predicted. Those changes, in conjunction with the expiration of a key provision of the protocol, gave rise to the present debate[9]. In this light, it is only fair and square if the WTO members adopt an equitable and fair approach to treat China as a Market Economy.
[1] WTO Accession Protocol of China 2001, a 15.
[2] See Folkert Graafsma and Elena Kumashova, ‘In re China’s Protocol of Accession and the Anti-Dumping Agreement: Temporary Derogation or Permanent Modification?’ (2014) 9(4) Global Trade and Customs Journal 154; Christian Tietje and Karsten Nowrot, ‘Myth or Reality? China’s Market Economy Status under WTO Anti-Dumping Law after 2016’ in Policy Papers on Transnational Economic Law, No. 34 (Transnational Economic Law Research Center, Martin Luther University 2011); Brian Gatta, ‘Between Automatic Market Economy Status and Status Quo: A Commentary on Interpreting Paragraph 12 of China’s Protocol of Accession’ (2014) 9(4) Global Trade and Customs Journal 165; Mathew R. Nicely, ‘Time to Eliminate Outdated Non-market Economy Methodologies’ (2014) 9(4) Global Trade and Customs Journal 160; Rao Weijia, ‘China’s Market Economy Status under WTO Antidumping Law after 2016’ (2013) 5(2) Tsinghua China Law Review 151; K. William Watson, ‘Will Nonmarket Economy Methodology Go Quietly into the Night: U.S. Antidumping Policy toward China after 2016’ (Cato Policy Analysis No. 763, 2014); Edwin Vermulst, Juhi Dion Sud and Simon J. Evenett, ‘Normal Value in Anti-Dumping Proceedings against China Post-2016: Are Some Animals Less Equal than Others?’ (2016) 11(5) Global Trade and Customs Journal 212; Jockem de Kok, ‘The Future of EU Trade Defence Investigations against Imports from China’ (2016) 19(2) Journal of International Economic Law 515; Li Zhenghao, ‘Interpreting Paragraph 15 of China’s Accession Protocol in Light of the Working Party Report’(2016) 11(5) Global Trade and Customs Journal 229; Stephanie Noel, ‘Why the European Union Must Dump So-called Non-Market Economy Methodologies and Adjustments in Its Anti-dumping Investigations’, (2016) 11(7/8) Global Trade and Customs Journal 296; Minyou Yu and Jian Guan, ‘The Non-Market Economy Methodology Shall Be Terminated After 2016’, (2017) 12(1) Global Trade and Customs Journal 16.
For the opposing view, See Bernard O’Connor, ‘Much Ado About Nothing: 2016, China and Market Economy Status’ (2015) 10(5) Global Trade and Customs Journal 176; Jorge Miranda, ‘Interpreting Paragraph 15 of China’s Protocol of Accession’ (2014) 9(13) Global Trade and Customs Journal 94; Jorge Miranda, ‘More on Why Granting China Market Economy Status after December 2016 is Contingent upon whether China Has in Fact Transitioned into a Market Economy’, 11 (5) Global Trade and Customs Journal (2016) 244; Jorge Miranda, ‘A Comment of Vermulst’s Article on China in Anti-dumping Proceedings after December 2016’ (2016) 11(7/8) Global Trade and Customs Journal 306; Jorge Miranda, ‘Implementation of the Shift in the Burden of Proof Approach to Interpreting Paragraph 15 of China’s Protocol of Accession’ (2016) 11(10) Global Trade and Customs Journal 447; Terrence P. Stewart et al., ‘The Special Case of China: Why the Use of a Special Methodology Remains Applicable to China after 2016’ (2014) 9(6) Global Trade and Customs Journal 272; Laurent Ruessmann and Jochen Beck, ‘2016 and the Application of an NME Methodology to Chinese Producers in Anti-dumping Investigations’ (2014) 9(10) Global Trade and Customs Journal 457; Paul C. Rosenthal and Jeffrey S. Beckington, ‘The People’s Republic of China: A Market Economy or A Non-market Economy in Anti-dumping Proceeding Starting on December 12, 2016?’ (2014) 9(7/8) Global Trade and Customs Journal 352.
[3] Commission, ‘Impact Assessment on the Possible change in the calculation methodology of dumping regarding the People’s Republic of China (and other non-market economies)’ SWD (2016) 370 final, at 12-13. Indeed, the US Department of Commerce (USDOC) has most recently upheld its previous determination that China was not a market economy and confirmed its position that Chinese prices and costs could not be used for determining the normal value of imports from China (USDOC Memorandum, China’s Status as a Non-Market Economy, Investigation A-570-05 (26 October 2017) <https://enforcement.trade.gov/download/prc-nme-status/prc-nme-review-final-103017.pdf>.
[4] United States – Measures Related to Price Comparison Methodologies, Request for Consultations by China, WT/DS515/1; European Union – Measures Related to Price Comparison Methodologies, Request for Consultations by China, WT/DS516/1. See also China’s recent addendum (3 November 2017) to its request for consultations in the case against the US: United States – Measures Related to Price Comparison Methodologies, Request for Consultations by China, Addendum, WT/DS515/1/Add.1.
[5] European Union – Measures Related to Price Comparison Methodologies, Request for the Establishment of a Panel by China, WT/DS516/9.
[6] Appellate Body Report, US – Softwood Lumber IV (Canada), DS257.
[7] Proposal for a Regulation of the European Parliament and of the Council, amending Regulation (EU) 2016/1036 on protection against dumped imports from countries not members of the European Union and Regulation (EU) 2016/1037 on protection against subsidized imports from countries not members of the European Union, COM (2016) 721 final.
[8] Council Regulation (EU) 2017/2321 of the European Parliament and of the Council of 12 December 2017 amending Regulation (EU) 2016/1036 on protection against dumped imports from countries not members of the European Union and Regulation (EU) 2016/1037 on protection against subsidized imports from countries not members of the European Union.
[9] ‘Not so fast China: Non-Market Economy Status is not necessary for the Surrogate Country Method’ (2018) 19(1) Chicago Journal of international Law 275.