By Srishti Bose
There has been worldwide conjecture regarding China’s attainment of Market Economy Status (MES) for trade purposes post-December 11, 2016, when its interim Non-Market Economy (NME) status expires as per the Chinese Accession Protocol (CAP) to the WTO.
MES has a conditional relationship with price comparability and antidumping (AD) investigations among WTO members. The general rule for price determination in AD cases is the presence of market economy conditions (MEC). MEC is based on the presence of free-market forces and is rendered inappropriate for NME exporters because prices are largely determined by the State instead of the free-market forces of demand and supply.
China has been considered an NME by a number of WTO members since its accession in 2001 owing to the intensive government control under which Chinese industries operate. WTO law enunciates a two-pronged methodology for dealing with NMEs, providing legal recourse for countries unwilling to grant MES to China.
The first situation is described in the second Ad Note to Article VI:1 of the GATT 1994, whereby deviation from strict comparison with domestic prices is allowed if a member country completely monopolizes its trade. The problem is the very high threshold of demonstrating that the exporting State sets all domestic prices.
The second situation is given under Article 2.2 of the Anti-Dumping Agreement, allowing countries to construct values of dumped products by using third-country prices where the domestic prices of NMEs cannot be used for comparison because of disparate sales, non-existence of like products, lack of free markets in the economy, etc.
At present, whether MEC exists under each WTO member’s domestic law rests on China. The expiry of the stipulated 15-year term does not automatically imply attainment of MES for China. If Chinese producers fail to provide definite proof of MES, the Chapeau of Article 15 will still be applicable and treaty interpretation may oblige China to continue adhering to the alternative price mechanism.
India had not yet disclosed its disposition on the matter and had declared that it would delve into the debate proactively. The European Union declared that it would omit the very concept of MES from its legislation and reconstructed its AD instruments to implicitly shut down debate about granting MES within the EU.
China has been arguing the MES debate predominantly through legal rhetoric. Usage of Chinese prices is subject to proof of MEC by Chinese producers. Conversely, if Chinese producers cannot show that MECs prevail, importing members can use methodologies not based on a strict comparison with Chinese prices.
The alternative methodology based on surrogate-country prices did not specify guidelines for determination of an appropriate surrogate country for China. A bare reading of CAP depicts that it contains special rules for determination of normal value in AD investigations against China.
China contemplates that the actual effects of expiry of subparagraph 15(a)(i) in 2016 will be clearance of the burden of proof which Chinese producers had regarding demonstration of MEC. Even in the absence of counter-evidence, application of alternative methodologies by an importing member would be disallowed without that member meeting its own burden of proof under the Ad Note.
In the past twenty years, China increasingly integrated with the world economy and made colossal contributions to sustained growth in international trade. It diversified its exports while systematically penetrating international markets. China is also the biggest recipient of AD measures and investigations among WTO members since 1990.
Members have contested that China’s domestic costs are artificially lowered by a suite of government subsidies. Thus, while Chinese export prices might not be below cost, the cost of production may be far below owing to State intervention.
Since WTO member states are divided on the issue, the 2016 deadline raises speculation regarding strategies China may pursue. It may advocate hard automatism by aggressively defending AD measures or take recourse to the WTO Dispute Settlement Mechanism to instigate retaliatory actions.
A reasonable resolution proposed is extension of the stipulated transition period of 15 years by another five years. During this period, China could demonstrate industry-specific market-economy conditions, according to which Member States could treat particular sectors as either NME or ME. Standard WTO guidelines for demonstration of MEC could apply along with assessment of tax credits, land grants, cheap credit, subsidized raw materials and other measures.
Alternatively, the five-year extended period could be treated as a period for a final referendum amongst WTO members for grant of MES to China. While grant of MES is a political decision directly linked to inter-country dynamics and development concerns, implementation of ME treatment is an entirely technical matter. The pivot of automaticity rests in the mandate of an individual WTO member’s interpretation of CAP.