China’s market economy status in WTO: In a state of abeyance

Published: July 8, 2019 11:38:14 AM

Dispute settlement proceedings under WTO are confidential. Some commentators have said that China has lost the dispute so badly that it does not want the world to see the final finding.

China, economy status, WTO, European Union, World Trade Organization, economy news, China US trade war, China, US, WTO agreementChina joined the WTO in December 2001 after some hard-fought and frustrating accession negotiations which spanned almost 13 years. (Reuters)

By James J. Nedumpara

On June 17, based on a request from China, the WTO dispute settlement body decided to suspend proceedings on a trade dispute that China had initiated against the European Union concerning China’s non-market economy treatment in anti-dumping. More than US $100 bn of Chinese goods have been targeted with anti-dumping duties in the U.S. alone. The international trade community was eagerly waiting for the final dispute ruling. It was considered to be the dispute that could make or break the future of the WTO. Now, it is almost certain that the final outcome in this case may not come out any time soon; most probably, it could be shelved. What happened?

Dispute settlement proceedings under WTO are confidential. Some commentators have said that China has lost the dispute so badly that it does not want the world to see the final finding. It is also possible that China’s market economy status could be part of a deal that can emerge from the ongoing China – U.S. trade war. By the way, China had initiated a similar dispute against the United States although this dispute is yet to move on to the hearing stage.

China joined the World Trade Organization (WTO) in December 2001 after some hard-fought and frustrating accession negotiations which spanned almost 13 years. China was a mid-sized economy in the late 1990s and several WTO members and, most notably the United States, made China’s attempt to join the multilateral body, perhaps, the toughest accession bargain in the history of the GATT/WTO. During the accession negotiations, the most debated issue was the treatment of China as a non-market economy (NME) post its WTO entry. The WTO agreements are expected to enforce the key principles of supply and demand in the market place on goods and services without being bridled by government interference.

In international trade parlance, NME is generally a country where the various factors of production including costs of inputs, raw materials, technology, labour, and investments are not made in response to market signals but are often regulated or controlled by the government. Joining the WTO entails significant reforms in the domestic and external commercial policies of the acceding country. China should have received the market economy treatment almost as a matter of fact in December 2001 itself, but the WTO members were successful in treating China as an NME at least until December 2016. China’s protocol of accession allowed the WTO members treat China differently from other WTO members in antidumping investigations based on its NME status. It was also widely thought that the role of the Chinese State in driving in economic and business decisions would have diminished considerably in the transition period provided until the end of 2016.

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Fifteen years—that was what the WTO members expressly demanded from China for delaying its market economy treatment under the protocol of accession. The NME methodology is a useful artifact in antidumping cases and provides the users of antidumping with an added flexibility of ignoring the domestic (Chinese) costs and prices. This methodology was used indiscriminately against China for the last several decades. It is important to remember that comparison between home market and export prices lies at the heart of dumping calculations and the cost of production in the exporting country is used in determining whether the home market sales are made in the normal course of trade and therefore viable for comparison purposes. The cost and sales data are also used in constructing the home market prices when the domestic sales are determined as unreliable or abnormal. Based on the unique treatment of NMEs, the Chinese costs and prices have been consistently rejected or disregarded in most antidumping cases and a majority of antidumping agencies have often looked at ‘surrogate’ or third country data in reconstructing the Chinese costs and prices. There is no doubt that the NME methodology is an arbitrary and punitive instrument, but this is the way the antidumping cases have been conducted against China.

The European Union and the United States are not the only countries that have used the NME methodology against China. Several antidumping agencies are still using the NME methodology against China. Some sloppy drafting of China’s WTO accession protocol gave the possibility that the China’s market economy status was not easy; some legal interpretations rejected an automatic market economy treatment at the end of the 15-year transition period.

There is a strong view among several WTO members that China has not made market reforms consistent with its WTO obligations. Chinese government has substantial ownership and control over allocation of resources and regularly interferes in business planning, and even management decisions. This is a problem particularly true with Chinese state owned enterprises (SOEs). In 2017, the U.S. Department of Commerce came out with report as to why China should still be treated as an NME. Across the Atlantic, the position is not very dissimilar. In 2017, the EU Parliament, brought the “significant distortion” test to keep China’s market economy status at bay. India’s stance on China NME status India is also major user of antidumping cases against China—181 as of December, 2018. The Government of India has not formally announced a decision concerning China’s NME status. In the past, India’ antidumping agency was reluctant to provide Chinese producers with market economy treatment citing high governmental influence in domestic production and allocation of resources.

The China – EU NME dispute could have lent some clarity on the treatment of China as a market economy in antidumping investigations. Given the fact that the WTO dispute has been suspended, there is no major incentive or compulsion for other anti-dumping users to change their approach immediately. This could be a welcome relief for the industries seeking antidumping relief against Chinese imports.

(James J. Nedumpara is Professor and Head, Centre for Trade and Investment Law, Indian Institute of Foreign Trade)

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