Looming US-China Trade Battles?: Market Economy Status (Part II)

March 9, 2015 10:45 AM

A previous post outlined how the pending debate over trade in Congress is setting the stage for two potential global megabattles over trade rules that could reach the World Trade Organization (WTO) in 2016. The first such battle over currency manipulation was discussed in the previous post; in this post the second battle is discussed. While different in substance, the two battles are enveloped by the same political atmosphere in the US Congress: a pervasive belief that China does not play fair. On their current course, these battles could play out until 2018 or longer before the WTO Appellate Body issues dispositive rulings.

Market Economy Status

By way of background, Article 15 of China’s Protocol of Accession to the WTO, dated November 10, 2001, generally allowed other WTO members to disregard Chinese prices and costs in antidumping (AD) cases and instead base the calculation of dumping margins using external benchmarks.1 An exception was made if Chinese producers could “clearly show” that market economy conditions prevailed in the industry. Article 15 essentially authorized “nonmarket economy” (NME) methodologies long used by the United States and the European Union in AD cases against imports from communist countries.

Taking advantage of this provision, authorities in the United States, European Union, Japan, and Canada, among others, almost always use surrogate prices and costs to calculate Chinese dumping margins. Rarely are the authorities satisfied that market economy conditions prevail in Chinese industries.

The comparison of Chinese export prices with surrogate prices and costs, rather than Chinese prices and costs, typically leads to much higher dumping margins. Since China is a leading target of dumping cases worldwide,2 the NME methodology is a sore point with Chinese officials. In fact, more than 10 years ago, China mounted a vigorous diplomatic campaign asking trade partners to accord China market economy status (MES). The campaign succeeded with New Zealand (April 16, 2004), Singapore (May 15, 2004), Malaysia (May 29, 2004), Australia (April 20, 2005), and other countries, but not with the United States, the European Union, Japan, Canada, and several others.

Which brings us to the looming WTO litigation. Article 15(a)(ii) of the Protocol states:

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….

However, buried in Article 15(d) is the critical sentence:

In any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession.

Chinese officials strongly argue that this sentence requires all countries to accord China market economy status on December 11, 2016, 15 years after China’s accession, and that WTO members can no longer use surrogate costs and prices in AD cases.

Some US and EU lawyers read the text differently. While they agree that Article 15(a)(ii) effectively disappears on December 11, 2016, they do not agree that the Protocol confines WTO members to a binary choice between MES (strict comparison of export prices with Chinese prices or costs) and NME (comparison with surrogate prices or costs). They point to the opening language in Article 15(a), which states:

…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….

To be sure, under Article 15(d), the whole of Article 15(a) disappears:

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….

The United States and European Union might well argue, come December 11, 2016, that China has not established that it is a market economy. They could modify their current surrogate practices and instead use “mix-and-match” approaches—claiming that some Chinese prices or costs reflect market conditions and others do not. For the prices or costs that do not reflect market conditions, they could use surrogate prices or costs.

Whether the United States takes a hard-line “mix-and-match” approach, rather than grant China market economy status, will turn primarily on policy considerations, not legal parsing. The policy decision will reflect the general atmosphere of commercial relations with China in 2015 and 2016, including the evolution of the renminbi exchange rate (devaluation would inspire a hard line) and the outcome of US-China Bilateral Investment Treaty (BIT) negotiations (success would have the opposite effect).

Assuming the hard line prevails, the stage will be set for China to initiate WTO litigation, which could well overlap with a currency case. Our speculation about the currency timeline applies equally to an MES dispute: The year 2018 seems the earliest date for a final decision by the WTO Appellate Body. Again, as in the hypothetical currency countervailing duty case, even if the Appellate Body rules against the United States, China would not receive retroactive refunds for antidumping duties collected prior to the ruling.

Notes

1. As external benchmarks, the United States values Chinese factors of production (labor of different qualities, energy, materials, etc.) at prices published by the World Bank or another reliable source for conditions in a market economy. The European Union instead uses the costs of a surrogate firm in another country that makes the same product. Using such external benchmarks for normal value in an AD case actually compensates automatically for any undervaluation of the Chinese currency, since the values are expressed (and come from) currencies of market economy countries.

2. In the first half of 2014, 11 AD cases were filed against China, out of a total of 122 initiated worldwide. For more detail, see www.antidumpingpublishing.com/statistics/ (accessed on February 25, 2015).

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