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February 2016

Market economy status to China – Debate continues

by Elaine Tan


The EU Commission recently held a debate on the sensitive issue of granting ‘market economy status’ to China. Considering China’s Accession Protocol, it may be noted that the final decision will have to be made by the European Parliament and EU Member States later this year.

Since 2001 when China joined the WTO, it has been treated as a non-market economy country. Because of the non-market economy treatment, in most anti-dumping investigations, China’s domestic cost and selling price is not considered by the investigating authorities. Instead, the authorities take surrogate third country’s cost and price as the benchmark to compare with China’s export price, leading to extremely high dumping margins. For example, in the preliminary determination of certain Corrosion-Resistant Steel Products from China, India, Italy, Korea and Taiwan, dumping margin of Chinese producers, as determined by the USDOC, was 255.80%, while in respect of producers from other subject countries, the same was only 6.92% maximum [see end note1]. In another case, pertaining to imports of certain Polyethylene Terephthalate Resin from Canada, China, India and Oman, dumping margin in case of Chinese producers was above 120%, while in case of producers from other subject countries it was found to be no more than 20% [see end note 2].

According to China such practice of treating it as a non-market economy has to come to an end by December 2016. Some voices across the globe however are of the view that China can still be treated as a non-market economy after 2016 [see end note 3]. Here, it may be necessary to have a look at the relevant WTO Rules. This issue of Market Economy Treatment (MET) arises from Article 15 of China’s Accession Protocol, which reads as:

“15. Price Comparability in Determining Subsidies and Dumping

Article VI of the GATT 1994, the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (“Anti-dumping Agreement”) and the SCM Agreement shall apply in proceedings involving imports of Chinese origin into a WTO Member consistent with the following:
(a) In determining price comparability under Article VI of the GATT 1994 and the Anti-dumping Agreement, the importing WTO Member shall use either 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 China based on the following rules:
(i) 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 WTO Member shall use Chinese prices or costs for the industry under investigation in determining price comparability;
(ii) The importing WTO Member may use a methodology that is not based on a strict comparison with domestic prices or costs in 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 sales of that product.

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(d) Once China has established, under the national law of the importing WTO Member, that it is a market economy, the provisions of subparagraph (a) shall be terminated provided that the importing Member’s national law contains market economy criteria as of the date of accession. In any event, the provisions of subparagraph (a) (ii) shall expire 15 years after the date of accession. In addition, should China establish, pursuant to the national law of the importing WTO Member, that market economy conditions prevail in a particular industry or sector, the non-market economy provisions of subparagraph (a) shall no longer apply to that industry or sector.”

           
Article 15(a) stipulates the general principle of the methodologies applied to Chinese exporters in anti-dumping investigations. Firstly, it provides two methodologies to determine normal value in principle, i.e. (1) Chinese prices or costs for the industry under investigation, and (2) a methodology that is not based on a strict comparison with domestic prices or costs in China. Then the rule provides (i) and (ii) to clarify under which condition what methodology is applied. According to Article 15(a)(i), if Chinese industry is able to establish that it is operating under market economy conditions, the investigating authority shall use Chinese prices or costs. Otherwise, Article 15(a)(ii) may be applied.

Article 15(d) provides three levels of limits when applying Article 15(a). First of all, importing WTO Member has to define ‘market economy criteria’ under the national law so that China is able to establish whether it has met all the relevant criteria. It may be noted that China is required to establish market economy conditions, as a whole, according to national law of the importing WTO Member, and such understanding is not automatically granted to China. It also requires WTO Member to pass national law to accept China’s market economy status. Only then, sub-paragraph (a) shall be terminated.

Second level of Article 15(d) clearly stipulates the timeline for applying Article 15(a)(ii), i.e. after 11 December 2016, the importing WTO Members are not allowed to use a methodology that is not based on a strict comparison with domestic prices or costs in China.
According to the third sentence of Article 15(d), once a particular industry or sector establishes that market economy conditions prevail in the industry according to the national law of the importing WTO Member, it is not required for the industry or sector to establish the same again in anti-dumping investigations initiated by such Member. It may be noted that grant of market economy status will only apply to this industry/sector and not to any other industry/sector.

Since China itself may not be accepted by some WTO Members as a market economy country after 11 December 2016, Article 15(a) will still be in force while sub-para (ii) thereof will expire. It will still be a burden on Chinese exporters to show that market economy conditions prevail in the industry and there seems to be no clear answer as to the methodology to be used if a particular industry or sector is  not able to establish that market economy conditions prevail in that industry/sector.

In any event, grant of market economy status to China by the USA or the EU is not only a legal issue. It may be noted that in anti-dumping investigation initiated by the EU against China in respect of zinc oxide, although three companies were granted market economy status, the EU authority still did not accept raw material cost of Chinese exporters because it was considered that price of zinc  in China was lower than market price. Similarly it may also be noted that though Russia has been granted market economy status by the EU, in some anti-dumping cases the EU authorities still consider Russia’s cost of energy as distorted.

In addition, maintenance of proper accounting records is also a challenge for Chinese enterprises. If due to some reasons, a Chinese company is not able to demonstrate that they have a clear set of accounting records that are independently audited and in line with international accounting standards, its taxable income is taken as not correctly disclosed in the financial statements.

 

Conclusion

Since the European Union has postponed its decision on China’s full market economy status, the answer to the question as to whether China would be recognized as market economy country, is blurred. However, there is no doubt that with the termination of the provision allowing application of surrogate price, industries may have better standing to be recognized as if working under market economy conditions. Since the deadline is approaching fast, producers in chemical, ceramic and textile industries who have been slapped with high anti-dumping duties, can start preparations so as to be able to establish that they are operating under market economy principles.

[The author is an Attorney, Lakshmikumaran & Sridharan, and she is based in Shanghai, China]
 

End Notes:

  1. [A–570–026] issued on Federal Register / Vol.81, No.1, dated 4-1-2016.
  2. [A–570–024] issued on Federal Register / Vol.80, No.199, dated 15-10-2015.
  3. http://www.wileyrein.com/media/publication/159_China-Can-Still-Be-Treated-As-A-Nonmarket-Economy-After-2016.pdf

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