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Is China a Non-Market Economy, and Why Does It Matter?

By Joel Trachtman·April 12
Fletcher School, Tufts University

The Issue:

Under the legal structure of the World Trade Organization, the designation of China as a "non-market economy" allows its trading partners, including the United States, to use a special framework to determine whether China's exports are being sold at unfairly low prices and, if that is found to be the case, to apply additional anti-dumping duties. Since 2001, China has been subject to a special presumption that it is a non-market economy (NME) under Article 15 of the protocol by which China joined the World Trade Organization (WTO). This presumption expired on December 11, 2016, and China believes that it must now be accorded market economy status. The U.S. argues that China is not automatically eligible for market economy status and has commenced a procedure to determine, under U.S. domestic law, whether China is still a non-market economy.
At the core of the issue is whether China may be subjected to more stringent treatment than other countries in calculating anti-dumping duties.

The Facts:

  • International trade law allows countries to apply special anti-dumping duties, above normal tariffs, to imports that are sold at less than the price in the exporting country, less than the cost of production, or, in certain circumstances, less than third country prices. The purported goal of anti-dumping duties is to reduce the impact of artificially low pricing of exported goods on firms in the importing economy.
  • For purposes of calculating anti-dumping duties, prices in the exporting country are used as benchmarks for exporters from countries that are market economies. In a NME, prices may be controlled by the state and therefore are not necessarily a reliable benchmark. For this reason, WTO law allows consideration of third-country prices when attempting to determine whether a NME is dumping its goods in an importing country. For example, as Chad Bown has noted, when United States manufacturers of hydrofluorocarbons complained that imports from China were being sold in the United States at unfairly low prices, United States authorities were able to use information from Mexico to estimate Chinese production costs and set anti-dumping duties of more than 100 percent on imports from China.
  • An importing country has greater flexibility to use arbitrarily-selected high third country prices as a reference for determining dumping by exporters from NMEs than it does for exporters from market economies. This greater flexibility makes the comparison with import prices more likely to result in a higher dumping margin and, consequently, allow for a higher anti-dumping duty.
  • China was subject to a special NME regime from its accession to the WTO in 2001. Under that regime, the burden of proof was on Chinese producers to show that market economy conditions prevailed in their industry. This aspect of the regime expired on December 11, 2016. The next day, China began a WTO dispute settlement proceeding against the United States and European Union practice of applying NME methodology to China in anti-dumping cases. The question raised by the dispute is whether the expiration of the provision means that Chinese enterprises are conclusively entitled to market economy status, or whether they remain subject to a determination of NME status by the administering authority of the importing state—in the case of the United States, the Department of Commerce. On April 3, 2017, the U.S. Department of Commerce announced that it is reviewing China’s NME status. If the U.S. continues to classify China as a NME, it will be permitted to disregard Chinese prices and costs and instead use third country prices to calculate dumping margins.
  • Even if China is not, as it argues, conclusively entitled to market economy status, it may not meet the requirements for NME treatment. The WTO Appellate Body, in its 2011 decision on EC—Fasteners, noted that the test for NME status under an addendum to Article VI of the WTO’s General Agreement on Tariffs and Trade (GATT) requires a very high level of state control. It refers to a "country which has a complete or substantially complete monopoly of its trade" and "where all domestic prices are fixed by the State.” Under these conditions, China does not appear to meet the standard for NME treatment. The United States argues that importing countries have broader leverage to assign NME treatment to exporting countries.

What this Means:

At the core of this issue is whether China may be subjected to more stringent treatment than other countries in calculating anti-dumping duties. It is difficult to determine that a price is “artificially low” without a market benchmark, and the control exercised by the Chinese government over the Chinese economy suggests that domestic prices are not pervasively set by market forces. When China entered the WTO in 2001, it was expected that its economy would be further liberalized by now. But even though China’s control of prices is still significant, the WTO definition of NME, allowing use of a different benchmark, seems to depend on whether prices are pervasively set by the government. Therefore, even if China loses its argument that the Protocol of Accession now conclusively prohibits NME treatment of China, it would not be likely to be found to be a NME. Regardless of how this litigation turns out, and it is likely to drag on for years, this is an instance in which a special regime applied to China would continue to make sense, assuming an antidumping regime is desired. The treatment accorded China should be carefully designed to address the special nature of the Chinese economy, without further disadvantaging China. As the WTO Appellate Body more recently noted in a 2016 iteration of the EC—Fasteners decision, anti-dumping duty calculation requires a “fair comparison” of prices. But it should also be noted that the calculation of anti-dumping margins always has an element of arbitrariness, especially for countries with NME status, and worldwide price variation may be perfectly justified from a business standpoint.

Topics:

China / International Trade / World Trade Organization
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