U.S. and Mainland China Disagree over Market Economy Status for Mainland Chinese Goods
22 January 2016
Nearly a year ahead of a change that could affect the calculation of antidumping duties on U.S. imports of mainland Chinese goods, the two sides are already disputing what the change will mean in practical terms. Observers say the issue may only be resolved through litigation at the World Trade Organisation, which could take several years to conclude.
A provision in mainland China’s protocol of accession to the WTO allows members of that organisation to use calculations in AD proceedings that are not based on the actual costs of mainland Chinese producers if the producers cannot demonstrate that market economy conditions prevail in their industry. Specifically, Section 15 of the protocol of accession allows importing parties when determining price comparability under Article VI of the General Agreement on Tariffs and Trade 1994 and the WTO Anti-Dumping Agreement to use either mainland 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 the mainland, based on the following rules:
- 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 member must use mainland Chinese prices or costs for the industry under investigation in determining price comparability; and
- the importing member may use a methodology that is not based on a strict comparison with domestic prices or costs in mainland 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.
The United States has used this provision to automatically assign non-market economy status to goods imported from mainland China, which typically results in higher AD duties than would otherwise be the case. However, the protocol of accession provides for the expiration of the rule outlined in point 2 above on 11 December 2016, although there is no agreement on what effect that will have. Mainland China asserts that WTO members will have to stop using NME-type methodologies altogether with respect to mainland Chinese goods as of that date, and a mainland Chinese official recently said that no party to mainland China’s WTO accession “can evade its obligations under international treaties by citing domestic laws as an excuse, and treat Chinese enterprises in an unfair, unjust, unreasonable and discriminatory manner.”
The United States and others reject Beijing’s characterisation and say they will continue to be allowed to use such methodologies after 11 December if the petitioners can clearly show that market economy conditions do not prevail in the industry at issue. Private-sector supporters of this position argue that mainland China’s central government still wields significant control over the national economy, often to the detriment of foreign competitors, and that a broad grant of market economy status would further exacerbate the harm caused by government policies.
The U.S. Department of Commerce has taken the latter position and said there is no provision in U.S. law requiring mainland China to be treated as a market economy country for AD purposes after 11 December. Instead, the DOC plans to consider market economy status for mainland China on a case-by-case basis within the context of individual AD proceedings.
The European Union is considering whether to grant market economy status to mainland China, a move ostensibly opposed by various members of the regional bloc. An in-depth analysis issued in December 2015 by the European Parliament’s Directorate-General for External Policies Policy Department indicates that while “specialised trade literature contains many different interpretations of Section 15 of China’s Accession Protocol […] most experts assume that, to obtain MES, China will continue to bear the burden of proof in demonstrating that it has met the market economy criteria of importing WTO members.” Nonetheless, the report adds that the expiration of the provision noted above “creates uncertainties as to how imports from China should be treated at the end of 2016 to comply with WTO rules.”
The report lays out four possible scenarios: (i) mainland China does not automatically acquire market economy status and methodological changes will not be required; (ii) mainland China does not automatically acquire market economy status but methodological changes will be required; (iii) mainland China is granted market economy status; or (iv) mainland China’s market economy status would be determined on a case-by-case basis, although NME treatment would not be possible as a general rule.
Mainland China is threatening litigation at the WTO against the United States and other members that do not amend their laws and regulations to reflect its interpretation on this matter. Such a case could be the only way to obtain a definitive answer, but given the track record of the WTO Dispute Settlement Body, that answer could take years. The United States is likely to maintain its existing policies in the meantime.
- Mainland China
- North America