China: NME or ME?

Recent WTO discussions have centered on the question of China’s entitlement to Market Economy status (MES) post 11 December, 2016. China has always interpreted the clause to mean that post-2016, it would automatically be accorded MES. The Members of the WTO appear to be divided on the issue, with Brazil [see end note 1],Japan [see end note 2] and EU leaning towards granting MES to China and the US, Canada, Mexico and India opposed to it. Some Members have already granted MES to China long ago.

The controversial Section 15 of the Chinese Protocol of Accession provides:

“15. Price Comparability in Determining Subsidies and Dumping
        Article VI of the GATT 1994, the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 ("Anti-Dumping Agreement") and the SCM Agreement shall apply in proceedings involving imports of Chinese origin into a WTO Member consistent with the following:
(a) In determining price comparability under Article VI of the GATT 1994 and the Anti-Dumping Agreement, the importing WTO Member shall use either Chinese prices or costs for the industry under investigation or a methodology that is not based on a strict comparison with domestic prices or costs in China based on the following rules:
(i)         If the producers under investigation can clearly show 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;
(ii)        The importing WTO Member may use a methodology that is not based on a strict comparison with domestic prices or costs in China if the producers under investigation cannot clearly show that market economy conditions prevail in the industry producing the like product with regard to manufacture, production and sale of that product.
…
(d)        Once China has established, under the national law of the importing WTO Member, that it is a market economy, the provisions of subparagraph (a) shall be terminated provided that the importing Member's national law contains market economy criteria as of the date of accession.  In any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession.  In addition, should China establish, pursuant to the national law of the importing WTO Member, that market economy conditions prevail in a particular industry or sector, the non market economy provisions of subparagraph (a) shall no longer apply to that industry or sector.”

Thus, if China establishes, pursuant to the national law of the importing WTO member, that market economy conditions prevail in a particular industry or sector, the non-market economy provisions of sub paragraph (a) shall no longer apply to that industry or sector. Further, in terms of Section 15(d), the provisions of sub paragraph (a) (ii) shall expire 15 years after the date of China’s accession to the WTO. However, while the provisions of section 15(a)(ii) shall expire in December, 2016, provisions of Section 15(a)(i) continue to be available and cannot be read out of China’s Protocol of Accession. The latter provision places the initial burden on the producers to show that the market economy conditions prevail in the industry producing the like product and in case the Investigating Authority (IA) disregards the same, the burden of proof shifts to the IA. The IA would then be required to inform the reasons for not accepting that the industry of China is functioning under market economy conditions. As of now, the practical consequences of Non-MES to China are that an IA ignores Chinese producers’ own costs and domestic prices when investigating whether to impose antidumping duties. The practice results in higher margins and more uncertainty for both Chinese producers and investigating countries’ domestic importers.

This interpretational conundrum leads to two questions, firstly, whether China can be treated as a Non-Market Economy at all post December, 2016 and secondly, whether China will be treated as a Market Economy post December, 2016 by leading users of the Anti-Dumping (AD) provisions.
Regarding whether China can be treated as a Non-Market Economy at all post December, 2016, an understanding of the framework within which the deletion of Section 15(a)(ii) occurs is necessary. The provision is succeeded by the chapeau of paragraph 15(a) and subparagraph 15(a)(i).  The chapeau refers to an “alternative methodology” whereas the alternative methodology provision stated in Section 15(a)(ii) will be deleted from December, 2016. Thus, if the domestic producers voluntarily provide enough evidence, subparagraph 15(a)(i) will come into play. Recalling that subparagraph 15(a)(i) uses the word “shall”, the importing Member under such circumstances has the obligation to use domestic prices or costs. Hence, this remaining subparagraph will not be reduced to inutility after 2016. On the other hand, if domestic producers do not provide such evidence, it will be left to legal interpretation [see end note 3] of the value of the continuing phrase in the chapeau permitting the usage of an alternative methodology but without the benefit of a prescribed ‘alternate methodology’.

The IA could resort to either the Second Ad Note of Article VI of GATT or Article 2.2 of the AD Agreement which provide an alternative to Members unwilling to grant China MES. The Second Ad Note to Article VI of GATT can only be used in case of complete monopolization of trade by a Member [see end note 4] and the case of China may not always meet this high threshold. However, Article 2.2 of the AD Agreement provides for using “third country prices” or “constructed values” where domestic sales do not permit a proper comparison for any of the reasons listed, such as there are no sales of the like product in the ordinary course of trade in the domestic market of the exporting country or when, because of the particular market situation or the low volume of sales in the domestic market of the exporting country. In fact, US DOC considered this approach in 2002 [when Russia graduated from its NME status], even mentioning the same in Magnesium Metal from Russia when US DOC considered ignoring the actual price paid for energy by a Russian firm on the ground that the Russian energy market was overly regulated and insufficiently competitive [see end note 5].

Regarding whether China will be treated as a Market Economy by leading users of the AD provisions, Members and industries remain divided. In the end, granting or not granting China MES is a politico-legal issue.

EU has been facing a sensitive period for its Steel industry, and will look to safeguard the same but is required to counter balance the potential influx of foreign investment expected from China. More importantly, the granting of MES spells prosperity for the bilateral relationship with China that every Member is looking to protect and the promise of which has been an effective incentive for China’s progress towards being a Market Economy [see end note 6].
US has conducted a hearing [see end note 7] before the US-China Economic and Security Review Commission to review the national security implications of trade and economic ties between the United States and the People's Republic of China by the granting or not granting of MES to China. The Fourth Panel therein was concerned with the Evaluation of China’s Non Market Economy Status and received testimonies. The trend of the testimonies advises against granting MES to China for a variety of reasons. It is foreseen that once the status is granted, China will be under no pressure to continue to move towards MES and Investigating Authorities around the world will have no mechanism with which to genuinely measure the differences in the markets in China and another country. Gary Claude Hufbauer [see end note 8] makes a very valid counter argument, that the United States would lose more than it gains from withholding full-fledged MES, it would ruin bilateral relations with China with negligible profits to select industries that initiate AD proceedings only.

India cannot withhold the grant of MES from China for very long either, especially considering the geopolitical tensions that arise from its territorial proximity with China and also its competitive relation with the country.

On an overall balance, it appears that countries will continue the practice of using non-market economy methodology on a case by case basis, while prima facie granting MES to China.

 [The author is a Senior Associate, International Trade Practice,  Lakshmikumaran & Sridharan, Delhi]