Market-economy status for China is not automatic

Bernard O’Connor 27 November 2011

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In EU trade-defence law (antidumping and anti-subsidies), there is provision for different treatment between those exporting countries which are considered to have the status of being a market economy and those which are not. If a country does not have market-economy status it is easier to construct the normal value of the exported goods. The constructed normal value will normally be based on costs and prices from outside the exporting country and thus are likely to be higher. This means that when the comparison is made between the normal value and the export price the level of dumping is likely to be higher.

China therefore has a strong interest in arguing that it is a market economy. However China goes further. It argues that it is automatically entitled to market-economy status on the basis of the protocol it signed to become a member of the WTO.

There is nothing in the WTO rules, or elsewhere, to provide that China automatically gets market-economy status in 2016. The idea that it will is a misunderstanding shared by many in China, the EU and the US.

Chinese premier Wen Jiabao, speaking at the September 2011 World Economic Forum at Dalian mentioned the “2016 deadline” when he asked, once again, the EU to grant China market-economy status. The supposed deadline is repeated by most Chinese trade and commerce officials. Last month, Business Europe, the European confederation of industries, stated with concern in a report on ‘Rising to the China Challenge’ that China will automatically be granted market-economy status in 2016. The participants in the China-US Strategic and Economic Dialogue seem to accept that there is a deadline as does one of the leading EU books on trade law (Van Bael and Bellis 2011). Every one seems to agree.

But despite all these affirmations, there is no deadline. There is no provision setting any date in the WTO agreements themselves and there is no deadline in the protocol signed by China when it acceded to the WTO. The idea that there is a deadline is an urban myth that seems to have gone global. It has gone viral even in a world were the underlying agreements are freely available to all on the Internet.

China is not considered a market economy in many countries. This allows countries importing Chinese goods to adjust or disregard Chinese prices and costs when determining whether the imported goods are being dumped onto their markets. Clear and longstanding WTO rules, and agreed by all 153 WTO members, allow national authorities to take into consideration the non-comparability of costs and prices when the exporting country is not a market economy or where the exporting economy is distorted in some way.

China seeks to get market-economy status in the hope that the impact of antidumping duties on its exports will be diminished. Some interests in Europe argue that if China is going to get this status anyway, the EU should give it early and get some benefit, such as support for the euro, in return. These are political considerations based on a misunderstanding of the law.

There is one provision of the Chinese WTO Accession Protocol dealing with dumping. This is Article 15. It addresses techniques in the comparison of costs and prices in antidumping procedures. There is nothing providing that market-economy status can be automatic.

The 2016 myth seems to have been born in paragraph (d) of Article 15. This paragraph provides that China must establish whether it is a market economy according to the law of the importing WTO member. If it can establish that it is a market economy then some of the transitional provisions on comparison methodologies will terminate. However, there are no dates in relation to China establishing that it is a market economy.

The paragraph further provides that one specific comparison methodology set out in one subparagraph of the Article will expire, in any event, fifteen years after Chinese accession. China became a WTO member in Doha in December 2001. Add fifteen years and you get 2016.

This provision does not say that China will get market-economy status. It just says that a very specific provision of Article 15 will cease to apply. The other parts of Article 15 continue to apply. And to interpret the expiry of one subparagraph as a deadline for the granting of market-economy status is not only to read into the Article something that is not there, but it is also to negate all the other provisions, something that international treaty interpretation simply does not allow. The expiry of one subparagraph does not change the rest of the law.

As Karel De Gucht, the current EU commissioner for trade, recently stated, whether China is or is not a market economy is a technical question under EU law. The EU assesses the existence of a market environment using five criteria set out in the EU antidumping regulation. Such conditions can be summarised in the following questions:

  • Does the government influence the operative decisions of firms or are they made in response to market signals? 
  • Does the legacy of the command economy, in terms of public ownership, barter trade and so on, affect firms' operations?
  • Do firms have effective accounting standards?
  • Do firms operate under an effective framework of bankruptcy regulation and property-rights protection?
  • Do firms convert currency at standard market rates?

Does China as a whole meet these criteria? This is an open question. Both the US Department of Commerce and the EU Commission have found, during the course of investigations into companies in antidumping investigations that firms in China do not comply with international accounting standards, and in anti-subsidy investigations, that many market sectors operate within the framework of the five-year plans which encourage some sectors and discourage others. For example, companies in the encouraged sectors receive funding from state-owned banks without any regard to the risks which such funding might incur. In addition, many countries have questioned whether China allows its currency to float. Brazil has raised this issue in the WTO referring to the concept of monetary dumping.

On the basis of analysis carried out in the US and in the EU it is unlikely that China would be considered a market economy according to the normal standards applicable in EU law. And Article 15 of the China WTO accession protocol requires that the evaluation be carried out on the basis of the law of the importing WTO member.

If China wants to be treated as a market economy it has to prove to the EU that it is one by satisfying the five criteria. The granting of market-economy status to China is not automatic now or in 2016 or afterwards.

References

Van Bael & Bellis (2011) “Antidumping & Other Trade Protection Laws of the EC”, 5th edition.  Rijnland: Kluwer Law International.

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Topics:  Global governance International trade

Tags:  China, WTO, antidumping