Myth or Reality? China's Market Economy Status under WTO Anti ...

Policy Papers on Transnational Economic Law No. 34Policy Papers onTransnational Economic LawNo. 34Myth or Reality?China’s Market EconomyStatus under WTOAnti-Dumping Law after 2016Christian Tietje/Karsten NowrotT RANSNATIONALE CONOMIC LAWRESEARCH CENTERSchool of LawMartin-Luther-UniversityHalle-WittenbergUniversitätsplatz 506099 Halle (Saale)GermanyTel.: +49 345 / 55 23149/ 55 23180Fax: +49 345 / 55 27201E-Mail:telc@jura.uni-halle.dewww.telc.uni-halle.deDecember 2011

Policy Papers on Transnational Economic Law No. 34Myth or Reality? China’s MarketEconomy Status under WTOAnti-Dumping Law after 2016I. IntroductionCurrently, a considerable number ofWTO members still categorize thePeople’s Republic of China politicallyand legally as a so called Non-Market Economy (NME) becauseupon its WTO accession on 11 December2001 and still as of today,these members perceived and perceivethat the Chinese economy operatesunder intensive governmentalcontrol. China’s status as a NMEcauses regularly political tension betweenChina and its main tradingpartners. Indeed, the NMEquestionis – next to the arms embargothat was imposed on Chinaafter the events of 1989 – the singlemost important issue in the traderelations of China and with China.This is somehow surprising from astrict legal perspective because thereis only one area of trade law inwhich the NME-status has theoreticaland practical significance: antidumpinglaw. However, once onerealizes that in the last five yearsmore than one-third of all newlyinitiated antidumping investigationsaround the world have importsfrom China as a target (see, e.g.,WTO Statistics on Antidumping2011), one gets an idea on whyChina is so keen on having changedits WTO status from NME to marketeconomy (MES).In light of the fact that in particularalso the US and the EU are currentlynot willing to grant China MES,a lot of attention is paid to somespecific provisions in the accessionprotocol of China to the WTOdealing with, as it seems, an automaticexpiry of the NME-status ofChina in 2016. Until recently, the“automatic” shift of China fromNME to MES in 2016 was taken asgranted by scholars and governmentsaround the world (see, e.g.,Andersen, 2009: 294 et seq.; Cornelis,2007: 105 et seq.; Detlof/Fridh,2007: 279). This overwhelminglyshared perception has more recentlybeen challenged by Bernard O’Connor(O’Connor, 2011) arguing that“[t]here is no provision setting anydate in the WTO agreements themselvesand there is no deadline in theprotocol signed by China when itacceded to the WTO. The idea thatthere is a deadline is an urban myththat seems to have gone global. ItPage 2

Policy Papers on Transnational Economic Law No. 34has gone viral even in a world werethe underlying agreements are freelyavailable to all on the Internet”.Against this background, the presentanalysis takes up the discussionon the NME-status of China andthe “myth” of 2016. The main purposeof this contribution is to leavepolitical rhetoric aside and to analyzethe situation from a legal perspectivein order to make the entireproblem more transparent to thosenot so familiar with antidumpinglaw. In this connection, the authorswill first discuss the characteristicsof NME-status of a WTO memberin antidumping law in general. Second,the specific provisions of China’saccession protocol concerningNME-status and the “myth” of2016 will be analyzed. Third, consequencesand options for the timeafter 11 December 2016 will behighlighted.II. Background: MES andNME-Status in WTO LawWTO law does not know any provisionthat contains the notion ofMES or NME-status. However, therationale for classifying a WTOmember as a market economy or anon-market economy becomes clearif one recalls some basic facts aboutantidumping law. According to Art.2.1 Antidumping Agreement(WTO ADA), “dumping” meansthe introduction of a product “intothe commerce of another country atless than its normal value”. “Normalvalue” in this regard is defined as“the comparable price, in the ordinarycourse of trade, for the likeproduct when destined for consumptionin the exporting country”.Thus, the “ordinary course of trade”is essential for the entire concept ofdumping and antidumping duties.The idea behind the notion of“ordinary course of trade” is to beactually able to compare two markets/countriesin order to determinewhether there is “fair” or “unfair”competition between imported anddomestic products. In this sense,comparability in the sense of an“ordinary course of trade” in theexporting and the importing countryrequires that both countries aremarket economies. However, aseconomic and political realityaround the world is more diverse inthe sense that there are both marketand non-market economies, antidumpinglaw has to deal with situationsin which imports from a nonmarketeconomy are at stake.Page 3

Policy Papers on Transnational Economic Law No. 34WTO law knows two different waysof how to deal with non-marketeconomies in antidumping law. Thefirst situation is described in the secondAd Note to Art. VI:1 of theGATT 1994:“It is recognized that, in thecase of imports from a countrywhich has a complete orsubstantially complete monopolyof its trade and whereall domestic prices are fixedby the State, special difficultiesmay exist in determiningprice comparability for thepurposes of paragraph 1, andin such cases importing contractingparties may find itnecessary to take into accountthe possibility that astrict comparison with domesticprices in such a countrymay not always be appropriate”.This provision, which was introducedinto the GATT 1947 in theyear 1955 (BISD 3S/222, at 223,para. 6; see also, e.g., Snyder, 2001:380 et seq.; Polouektov, 2002: 6 etseq.), essentially opens up the possibilitiesto determine normal value ofproducts by using methodology asdeemed appropriate by the investigatingcountry. Usually, importingcountries use the “surrogate” or“analogue” country method in orderto determine normal value concerningimports from a non-marketeconomy (see, e.g., Art. 2 (7) (a) EUBasic Antidumping Regulation1225/2009; and thereto EU – Anti-Dumping Measures on Certain Footwearfrom China, Panel Report of28 October 2011, WT/DS405/R,paras. 7.227 et seq.). This possibilityprovided for by the second Ad Noteto Art. VI:1 of the GATT 1994 hasbeen incorporated in the WTOADA (see Art. 2 (7) ADA) (EC –Definitive Anti-Dumping Measureson Certain Iron or Steel Fastenersfrom China, AB Report of 15 July2011, WT/DS397/AB/R, para.285).It is important to draw attention tothe fact that the wide discretion enjoyedby the importing country onhow to determine normal valuewith regard to imports from a nonmarketeconomy essentially dependson a general determination that therespective exporting country is notentitled to legal treatment as laiddown in Art. 2 (1) WTO ADA.This is possible only by either makinga general determination of a non-market economy in the sense of thesecond Ad Note to Art. VI:1 GATT1994 or by having a specific provisionin this regard in a respectiveWTO accession protocol. If none ofPage 4

Policy Papers on Transnational Economic Law No. 34these two options is available or given,the only remaining deviationfrom a “normal” determination ofnormal value is provided for in Art.2.2. WTO ADA. Making a respectiveassessment on the existence of aparticular market situation underthis provision, however, is only possiblewith regard to a specific antidumpinginvestigation and thus requiresan evaluation on a case-bycasebasis.III.“Let there be Light”: Evaluatingthe Relevant Provisionsin China’s WTOAccession ProtocolIn principle, Art. VI of GATT 1994as well as the provisions of theWTO ADA are also currently applicableto antidumping proceedingsinitiated by WTO members againstimports from China. Nevertheless,the respective general legal regime issubject to important modificationson the basis of the relevant stipulationsenshrined in China’s accessionprotocol that constitutes an integralpart of the WTO Agreement (seeParagraph 1(2) of the AccessionProtocol; China – Measures Relatedto the Exportation of Various RawMaterials, Panel Report of 5 July2011, WT/DS394/R, WT/DS395/R, WT/DS398/R, paras. 7.113 etseq.). Reflecting concerns voiced byseveral members of the working partyon the accession of China(Report of the Working Party, para.150), paragraph 15(a) of the accessionprotocol reads as follows:“15. Price Comparability inDetermining Subsidies andDumpingArticle VI of the GATT1994, the Agreement on Implementationof Article VI ofthe General Agreement onTariffs and Trade 1994("Anti-Dumping Agreement")and the SCM Agreementshall apply in proceedingsinvolving imports ofChinese origin into a WTOMember consistent with thefollowing:(a) In determining pricecomparability under ArticleVI of the GATT 1994 andthe Anti-Dumping Agreement,the importing WTOMember shall use either Chineseprices or costs for theindustry under investigationor a methodology that is notbased on a strict comparisonwith domestic prices or costsin China based on the followingrules:(i) If the producers underinvestigation can clearlyshow that market economyconditions prevail in the industryproducing the likePage 5

Policy Papers on Transnational Economic Law No. 34product with regard to themanufacture, productionand sale of that product, theimporting WTO Membershall use Chinese prices orcosts for the industry underinvestigation in determiningprice comparability;(ii) The importing WTOMember may use a methodologythat is not based on astrict comparison with domesticprices or costs in Chinaif the producers underinvestigation cannot clearlyshow that market economyconditions prevail in the industryproducing the likeproduct with regard to manufacture,production and saleof that product.”This provision itself does not explicitlybestow NME-status on China.Nevertheless, it is precisely this regulationthat, at present, essentiallypermits other WTO members todeviate from the requirements ofArt. 2 (1) WTO ADA when determiningthe normal value of importedproducts. Thus, it basically subjectsgoods of Chinese origin to thesame treatment as imports fromNME countries in the sense of thealready mentioned second Ad Noteto Art. VI:1 GATT 1994 (see alsoEC – Definitive Anti-DumpingMeasures on Certain Iron or SteelFasteners from China, AB Report of15 July 2011, WT/DS397/AB/R,para. 287). Compared to this generalprovision, however, the accessionprotocol grants already currentlyChinese producers insofar a morefavorable status as paragraph 15(a)(i) provides them with the option ofproving that market economy conditionsprevail in the respective industry,thereby potentially givingrise to a valid claim for industrywidemarket economy treatment; aprocedure to be distinguished fromindividual market economy treatment(MET) such as for exampleprovided for in Art. 2 (7) (b) EUBasic Antidumping Regulation1225/2009 (see also EU – Anti-Dumping Measures on Certain Footwearfrom China, Panel Report of28 October 2011, WT/DS405/R,para. 7.194).Aside from this surely notable variation,the finding that China can underparagraph 15(a) of the accessionprotocol essentially be regarded as aNME is further confirmed by thewording of the first and the thirdsentence of paragraph 15(d) thatreads as follows:“(d) Once China has established,under the nationallaw of the importing WTOMember, that it is a marketPage 6

Policy Papers on Transnational Economic Law No. 34economy, the provisions ofsubparagraph (a) shall be terminatedprovided that theimporting Member's nationallaw contains market economycriteria as of the date ofaccession. In any event, theprovisions of subparagraph(a)(ii) shall expire 15 yearsafter the date of accession. Inaddition, should China establish,pursuant to the nationallaw of the importingWTO Member, that marketeconomy conditions prevailin a particular industry orsector, the non-market economyprovisions of subparagraph(a) shall no longer applyto that industry or sector.”This last mentioned provision leadsalso already to the issue of China’sstatus under WTO antidumpinglaw from 11 December 2016 onwards.The second sentence of paragraph15(d), stipulating that “theprovisions of subparagraph (a)(ii)shall expire 15 years after the date ofaccession”, has so far conventionallybeen interpreted as resulting in thealready mentioned “automatic” shiftof China from MNE to MES on 11December 2016. Verifying or falsifyingthis perception requires a verycareful reading of the respective provisionswith due regard to the overarchingsystematic conception ofWTO antidumping law as a whole.Again, this second sentence of paragraph15(d) of the accession protocolitself does not explicitly grantChina MES from that “magic” dateonwards. However, with paragraph15(a)(ii) expiring, it essentially createsa situation where other WTOmembers are no longer permitted to“use a methodology that is notbased on a strict comparison withdomestic prices or costs in China”when determining the normal valueof imports of Chinese origin andthus to deviate from the requirementsof Art. 2 (1) WTO ADA bytaking recourse to China’s accessionprotocol. Consequently, from 11December 2016 onwards it is moreor less exclusively the general regimeon WTO antidumping law, as laiddown in Art. VI of GATT 1994and the WTO ADA, that applies toChina and imports originating fromit.This finding, however, should notprematurely lead to the conclusionthat from this date onwards Chinais from a legal perspective quasi automaticallyand necessarily enjoyingthe benefits of MES for an indefiniteperiod of time or even permanently.Quite to the contrary, al-Page 7

Policy Papers on Transnational Economic Law No. 34ready a careful reading of the accessionprotocol itself reveals that thepossibility of China being qualifiedby some WTO members as a NMEafter 11 December 2016 has alreadybeen anticipated and addressed atthe time of accession.What is frequently overlooked ordisregarded (see, e.g., EC – DefinitiveAnti-Dumping Measures on CertainIron or Steel Fasteners from China,AB Report of 15 July 2011,WT/DS397/AB/R, para. 290) is theimportant fact that the second sentenceof paragraph 15(d) only stipulatesthe expiring of “the provisionsof subparagraph (a)(ii)”, thus retainingthe applicability of subparagraph(a)(i) even after 11 December2016. With regard to its materialscope of application, however, thisparagraph 15(a)(i), providing thebasis for a claim by Chinese producersto industry-wide market economytreatment, exclusively addressesa situation where China is by atleast one other WTO member qualifiedas a NME. Considering thewell-recognized rule that the interpretationof a treaty must givemeaning and effect to all of itsclauses and is, thus, not free to reduceindividual provisions to inutility(see, e.g., US – Standards of Reformulatedand Conventional Gasoline,AB Report of 29 April 1996,WT/DS2/AB/R, 23; Japan – Taxeson Alcoholic Beverages, AB Report of4 October 1996, WT/DS8/AB/R,WT/DS10/AB/R, WT/DS11/AB/R, 12; Van Damme, 2009: 275 etseq.), the only legally sound conclusionpossibly to be drawn from thecontinued validity of paragraph 15(a)(i) after 11 December 2016 is theat least theoretical possibility ofChina being considered as a NMEby some other WTO members afterthis “magic” date.This finding is further supported bya comparative evaluation of the secondsentence of paragraph 15(d)on one side and the first as well asthe third sentence of this provisionon the other. Whereas the two lastmentioned stipulations rightly andconsequently provide for a terminationof the “non-market economyprovisions of subparagraph (a)” as awhole once China has establishedthat it is a market economy (firstsentence) or that market economyconditions prevail at least with regardto a particular industry or sector(third sentence), the more limitedtermination under the secondsentence has to be understood asintentionally retaining a more favor-Page 8

Policy Papers on Transnational Economic Law No. 34able status for Chinese producers inthe case that China will again beconsidered by some other WTOmembers as a NME after 11 December2016.In light of these findings, it thus appears– at least from a theoreticallegal perspective – in principle verywell admissible that some otherWTO members qualify China as aNME even after the date providedfor in the second sentence of paragraph15(d) of the accession protocol.However, three legal aspects areworth drawing attention to in thisconnection.First, the second sentence of paragraph15(d) incontrovertibly illustratesthat such a qualification as anNME can no longer find its legalbasis in China’s accession protocolafter 11 December 2016.Second, in light of the overarchingsystematic approach adopted bygeneral WTO antidumping law,being from that date onwards themore or less exclusive legal regimeapplicable to China, it is – in thesame way as all other WTO members– presumed to have acquiredMES. Consequently, it might verywell be argued that, at least for a socalled“logical” or “juridical” second,China has on 11 December2016 to be regarded as havingachieved MES erga omnes. Thus, ifonly in this limited sense, there isindeed a certain automatism involvedin this regard.Third, a subsequent – renewed –qualification of China as a NME byother WTO members, in order tobe legally sustainable, has to find itsbasis in the general regime on WTOantidumping law as laid down inArt. VI of GATT 1994 and theWTO ADA. In light of the backgroundobservations as outlined inthe previous section, this essentiallyrequires that the WTO member inquestion has to argue and prove thatthe requirements stipulated in thesecond Ad Note to Art. VI:1 GATT1994 are fulfilled with regard toeconomic conditions prevailing inChina at the time when respectiveantidumping proceedings are initiated.IV. Consequences for the Statusof China after 11 December2016: Two Possible ScenariosThe main consequence of the legalsituation described is clear. Until 11December 2016, WTO MembersPage 9

Policy Papers on Transnational Economic Law No. 34may treat China with regard to thedetermination of normal value inantidumping proceedings as a nonmarketeconomy without any furtherjustification. However, this willchange after 11 December 2016. AsChina will, at least for a logical second,enjoy MES on 11 December2016, the burden of proof shifts toother WTO members to establishthat – as an exception – the prerequisitesof the second Ad Note toArt. VI:1 GATT 1994 are fulfilled.This, however, will probably be almostimpossible to prove in practice.It is worth recalling in this regardwhat the Appellate Body recentlysaid in EC – Fasteners (WT/DS397/AB/R):We observe that the secondAd Note to Article VI:1 refersto a “country which hasa complete or substantiallycomplete monopoly of itstrade" and "where all domesticprices are fixed by theState". This appears to describea certain type ofNME, where the State monopolizestrade and sets alldomestic prices. The secondAd Note to Article VI:1would thus not on its face beapplicable to lesser forms ofNMEs that do not fulfilboth conditions, that is, thecomplete or substantiallycomplete monopoly of tradeand the fixing of all prices bythe State. (para. 285, footnote460).This statement of the AppellateBody, even though obiter dictumand merely included in a footnote,underlines what follows alreadyfrom the clear wording of the secondAd Note to Article VI:1GATT 1994: the provision can onlybe invoked concerning a WTOMember that monopolizes trade intotal and where all prices are set bythe government. It seems doubtfulwhether this high threshold couldever be proven with regard to anycurrent and future WTO member(see also, e.g., Yan, 2010: 162 etseq.; Hoogmartens, 2004: 145).Nevertheless, should, e.g., the EUor the US with effect on 11 December2016 make a determination accordingto the second Ad Note toArt. VI:1 GATT 1994, the industry-wide market economy treatmentprovided for in paragraph 15(a)(i)of the accession protocol remainsvalid. As already indicated, this provisiondoes not expire on 11 December2016.If no determination in the sense ofthe second Ad Note to Art. VI:1Page 10

Policy Papers on Transnational Economic Law No. 34GATT 1994 is made, the only remainingpossibility to treat importsfrom China different than thosefrom other WTO Members in antidumpingproceeding concerning thedetermination of normal value is torefer to and prove a “particular marketsituation” in the sense of Art.2.2. WTO ADA.V. ConclusionFor lawyers and governmental officialsdealing with anti-dumping lawand practice, the 11 December2016 is certainly not a myth – it isreality. From that date onwards, itwill be almost impossible – at leastfrom the perspective of WTO law –to make a determination of the normalvalue of products targeted by anantidumping proceeding on the basesof analogous third countrymethodology. The only possibilityto do so would be to make a positive,explicit determination of China’sNME-status based on the secondAd Note to Art. VI:1 GATT1994. However, taking into accountthe high threshold stipulated in thesecond Ad Note to Art. VI:1 GATT1994, chances to convincingly andthus successfully do so are almostnon-existing. Therefore, from 11December 2016 onwards Chineseimports have to be treated with regardto a determination of normalvalue in the same way as importsfrom any other WTO member.ReferencesAndersen, Henrik, EU DumpingDeterminations and WTOLaw, Alphen aan den Rijn etal. 2009.Cornelis, Joris, China’s Quest forMarket Economy Status andits Impact on the Use of TradeRemedies by the EuropeanCommunities and the UnitedStates, Global Trade and CustomsJournal 2 (2007), 105-115.Detlof, Helena/Fridh, Hilda, TheEU Treatment of Non-MarketEconomy Countries in Anti-Dumping Proceedings, GlobalTrade and Customs Journal 2(2007), 265-281.Hoogmartens, Jan, EC Trade Lawfollowing China’s Accession tothe WTO, The Hague 2004.O’Connor, Bernard, Market-Economy Status for China isnot Automatic, 27 November2011, available under: .Polouektov, Alexander, Non-MarketEconomy Issues in the WTOAnti-Dumping Law and AccessionNegotiations – Revivalof a Two-tier Membership?,Journal of World Trade 36(2002), 1-37.Snyder, Francis, The Origins of thePage 11

Policy Papers on Transnational Economic Law No. 34‘Nonmarket Economy’: Ideas,Pluralism and Power in ECAnti-Dumping Law aboutChina, European Law Journal7 (2001), 369-434.Van Damme, Isabelle, Treaty Interpretationby the WTO AppellateBody, Oxford/New York2009.WTO, Statistics on Anti-DumpingInitiations 1995 to 2010,available under: .WTO, European Union – Anti-Dumping Measures on CertainFootwear from China, PanelReport of 28 October 2011,WT/DS405/R.WTO, European Communities – DefinitiveAnti-DumpingMeasures on Certain Iron orSteel Fasteners from China, ABReport of 15 July 2011, WT/DS397/AB/R.WTO, China – Measures Related tothe Exportation of Various RawMaterials, Panel Report of 5July 2011, WT/DS394/R,WT/DS395/R, WT/DS398/R.WTO, Accession of the People’sRepublic of China, Decisionof 10 November 2001, WTODoc. WT/L/432 of 23 November2001.WTO, Report of the Working Partyon the Accession of China,WTO Doc. WT/ACC/CHN/49 of 1 October 2001.WTO, Japan – Taxes on AlcoholicBeverages, AB Report of 4 October1996, WT/DS8/AB/R,WT/DS10/AB/R, WT/DS11/AB/R.WTO, United States – Standards ofReformulated and ConventionalGasoline, AB Report of 29April 1996, WT/DS2/AB/R.Yan, Luo, Anti-Dumping in theWTO, the EU and China,Austin et al. 2010.Prof. Dr. Christian Tietje, LL.M.(Michigan) is Director of the Instituteof Economic Law as well as of theTransnational Economic Law ResearchCenter (TELC) and holds theChair for Public Law, European Lawand International Economic Law atthe Faculty of Law, Economics andBusiness of the Martin Luther UniversityHalle-Wittenberg.Dr. Karsten Nowrot, LL.M.(Indiana) is senior lecturer and researcherat the Transnational EconomicLaw Research Center (TELC)at the Faculty of Law, Economics andBusiness of the Martin Luther UniversityHalle-Wittenberg.The authors would like to thank ValerieA. Davis for her support and veryvaluable comments on earlier versionsof this paper.Page 12