Is China a market economy, what’s happening in 2016, and what’s written about it in China’s Protocol of Accession to the WTO? A blog posted on the VOXEU website in November 2011 addressed the misconception that market economy status for China was automatic. Since then new misconceptions have emerged. This note seeks to address them. It looks at what the issue is all about. Why it’s important. And why it’s all much ado about nothing.
The problem lies in the interpretation of Article 15 of China’s WTO Protocol of Accession. Article 15 is not very long. It can be found at the end of this note. It’s about methodologies for comparing prices and costs in trade defence (anti-dumping and anti-subsidy) cases.
Article 15 has four paragraphs. Paragraph (a) addresses price comparison methodologies in dumping investigations. Paragraph
(b) deals with the benefit calculations in subsidy investigations. Paragraph (c) is about notifications to the WTO. Paragraph (d) addresses the status or the nature of China’s market.
Article 15 was negotiated by China and the US and then accepted by all other WTO members. Negotiating drafts, available under US freedom of information rules, show that the final text of the Article was the result of compromise on many details. These details are now causing the interpretation difficulties.
However, whatever the intention of individual negotiators, what matters in WTO law is the final text. The WTO Appellate Body has found that the general rule of treaty interpretation neither requires nor condones “the imputation into a treaty of words that are not there or the importation into a treaty of concepts that were not intended.” So it’s the words in the text as it emerged from the negotiations that count.
Lawyers are having a field day in interpreting Article 15. There are those who say that it has to be interpreted as meaning that China must be considered a market economy, or have an equivalent status, in December 2016. Others talk about the expiry of a presumption that producers operate in a non-market economy. Others, that it removes the legal basis for the use of methodologies other than those applied to market economies.
This purposely not-too-legal note (by a lawyer) is written to try and clarify some basic aspects of the debate. The text is not as complex as it first seems. In fact, we’re simply faced with the old problem of what a WTO member can do when the WTO rules don't set out what must be done.
The background to the debate is the nature of the Chinese economy. Is China a market economy as understood in EU or the US and many other countries? Or is it still a socialist market economy as China declared itself to be when it joined the WTO in 2001.
What’s the difference and why is it important? It's commercially important because local companies in China, producing within the socialist market economy system as developed by China, have advantages by being based there, that companies based in the EU or the US simply don't enjoy. The advantages in the Chinese model of a socialist market economy are: state ownership and disposition of key industries and resources; restrictions on foreign ownership; restrictions on foreign investment; currency manipulation; lack of open competition; little or no enforcement of IP rights; distortions of costs and prices; government management of markets; government management of market players.
These advantages, available only in China, are spilling over into the global market and distorting competition outside China. This means that companies in normal markets, subject to the separation between the state and commerce, the enforcement of strict competition and state aid rules, bankruptcy laws, open competition in public markets and the like, suffer. They suffer by not being able to participate equally in China's market and they suffer in the global market from unfair and state-managed competition originating in a distorted market.
WTO law has nothing to say about the nature of China’s market. Nor is it defined in Article 15. However, paragraph (d) of Article 15 sets out the steps to be followed to legally change China’s classification from a non-market to market economy. There is no date or deadline. Paragraph (d) gives China the right to establish, at any time, either that the whole country is a market economy or that a particular industry or sector is operating under market economy conditions. Paragraph (d) also sets out how must China establish that it is a market economy. It must do so according to the law of the importing WTO member. In other words, for the EU, under the terms of EU law.
In the EU there are five criteria for a country to be considered a market economy. When the EU Commission last examined China's market it found that only one criterion was met. There is no indication that this situation has changed. There might even have been regression since that time. No Chinese producers have been able to show that they merit market economy treatment in any recent EU anti-dumping investigations.
There is thus a clear and simple answer to the question as to whether China is, or is not, a market economy according to EU law. It is not. It is not so because China has not established that it is a market economy. And until China is in a position to establish that it is a market economy according to the EU criteria it remains a non-market economy in relation to the EU. It's that simple.
Paragraph (d) is recognition that China accepted that it was not a market economy when it joined the WTO in 2001. It accepted it was, as it clearly stated at that time, a socialist market economy. And there is nothing in paragraph (d) or elsewhere in Article 15 making a change in the nature of China’s market automatic in 2016. Nor is there anything automatic in how the EU’s trading partners must classify China’s market either.
What happens if China can show that it is a market economy? Paragraph (d) provides that all the provisions in paragraph (a) in relation to the choice of methodologies in specific anti-dumping investigations no longer apply. In other words, if China can show it is a market economy then the price and cost methodologies used for market economies, with all the exceptions and complications, must be used in specific anti-dumping investigations in relation to imports from China.
So where do the misconceptions come in? The second sentence of paragraph (d) provides that one part of paragraph (a), namely paragraph (a)(ii), expires 15 years after China joins the WTO. China joined the WTO in December 2001 so add 15 years and you get December 2016. The other parts of paragraph (d) or the other provisions of paragraph (a) remain as they are.
The expiry of paragraph (a)(ii) has triggered confusion between status and methodologies. Paragraph (a) deals with the methodologies to be used when comparing prices and costs in the period when China is not considered a market economy. Paragraph (d) deals with status. These are two very different issues. A change in the terms of paragraph (a) in relation to methodologies is not the same as a change in the status of the Chinese economy. A change in paragraph (a) can only be in relation to the choice of methodologies when comparing prices of specific producers in anti-dumping proceedings for non- market economies. Paragraph (a) is company, or industry, specific within the context of China not having the status of a market economy. Paragraph (d), on the other hand, is country specific and allows China to change its status.
Paragraph (d) provides that if China has the status of a market economy then all of paragraph (a) no longer applies. If China does not have the status of a market economy then those remaining parts of paragraph (a) continue to determine the rights of individual companies and the obligations of investigating authorities in specific anti-dumping investigations.
Paragraph (a) has three parts: a chapeau (an introductory or explanatory section) and then two other sections numbered (i) and (ii). The chapeau is addressed directly to anti-dumping investigating authorities. It provides that, in one situation, the prices to be used are Chinese prices and costs and, in another situation, the investigating authority can use a methodology not based on a strict comparison with domestic prices and costs in China. So paragraph (a) provides the investigating authority with an unlimited choice of methodologies to use in anti-dumping investigations in the period prior to China being able to clearly show it is a market economy.
The two sub-sections are also addressed to the investigating authority but, as paragraph (a) concerns methodologies to be used
in specific investigations, the sub-sections give a role to the producers subject to the investigation. The role given to the producers is to help determine what methodology is to be used by the investigating authority. In other words, it allows producers to influence or determine how the investigating authority must exercise its choice when deciding which methodology to use when examining and comparing prices and costs.
In the first section, numbered (a)(i), the producers under investigation are given the right to show (independent of what China as a whole can show under paragraph (d)) that market economy conditions prevail in their specific industry. If the producers can show that market economy conditions prevail, then the prices and costs to be used shall be the prices and costs for the industry under investigation. A successful claim by producers under sub-section (a)(i) determines how the investigating authority must exercise the choice it is given in the chapeau of paragraph (a).
Sub-section (a)(ii) addresses the situation where the producers under investigation cannot show that market economy conditions prevail in their industry. In this situation the investigating authority can use a methodology that is not based on a strict comparison with domestic Chinese prices and costs. Paragraph (a)(ii) does not mandate any one particular methodology. It merely provides that the investigating authority can choose a methodology different from the methodology in (a)(i). Thus (a)(ii) leaves the choice of methodology to the investigating authority. And the different methodologies that can be used is, theoretically, infinite.
In December 2016 section (a)(ii) expires. So the question is: does the investigating authority still have a choice as what to do? What prices and costs methodologies should be used if China has not exercised its right under paragraph (d) to show that it is a market economy? Post 11 December 2016, WTO law will only set out what the investigating authority must do if the producers can positively show that market economy conditions prevail in their industry. The expiry of (a)(ii) means that the investigating authority has no guidance as to the methodology to use if the producers under investigation cannot positively show that market economy conditions prevail in their industry.
The expiry of (a)(ii) cannot be interpreted to mean that an investigating authority must use any one particular methodology. Or, as some argue, that the investigating authority must use the methodology for market economy producers. That would be to render paragraph (d) requiring China to show that it is a market economy inutile or without sense.
So what happens after this provision expires? In simple terms, the expiry of (a)(ii) leaves a gap in the instructions to investigating authorities. A ‘nothing’.
When there is a gap in international law, what can a sovereign state do? Under general legal principles, when there is a gap (or lacuna) the sovereign state retains the discretion to decide how to act or fill the gap, so long as the solution does not infringe general law.
As the Appellate Body said in relation to price comparison methodologies in Article 2(4) of the WTO Anti-Dumping Agreement: In the absence of any precise textual guidance in the Agreement […], and in the absence of any textual prohibition on the use of any particular methodology adopted by an investigating authority [….], we consider that an unbiased and objective authority could have applied this methodology….
The argument that China must de facto or de jure be given the status of a market economy in December 2016 because of the emergence of a gap in the detailed law in relation to price comparison methodologies does not make sense. How can a change in the guidance as to the exercise of the choice of methodologies be considered the imposition of a requirement to grant a particular status to China. This would nullify paragraph (d). How can this change impose the use of the price methodology used for market economies. This would nullify the requirement of producers to show they operate in a market economy.
Does the expiry of sub section (a)(ii) remove the legal basis for the application of methodologies different from those used for market economy producers? Again such an approach does not make sense within the terms of Article 15. Paragraph (d) sets out China’s rights. Until such time as China is in a position to demonstrate that it is a market economy, investigating authorities must be able to use methodologies different from those applicable to market economies. Arguing that the expiry of (a)(ii) removes the possibility of using non-market methodologies is to remove China’s obligation to clearly show it is a
market economy. To do that, at a minimum, Article 15 would have had to say that all of paragraph (a) expires. It does not. And, in addition, Article 15 would have had to say something about the remaining parts of paragraph (d). Arguing that the expiry of (a)(ii) removes the legal basis for non-market economy methodologies is equivalent to saying that China no longer has to clearly show that it is a market economy as provided for in paragraph (d).
There is some limited guidance in WTO law setting constraints on how anti-dumping investigating authorities can fill in the gap left by the expiry of (a)(ii).
The first guidance is that the chapeau of paragraph (a) remains. This clearly indicates that the investigating authority continues to have a choice. The expiry of (a)(ii) does not limit that choice. The fact that the chapeau to the whole of Article 15 remains does not change the fact that not all of paragraph (a) expires. Both the chapeau and (a)(i) remain as well as the chapeau of Article 15 as a whole.
The second guidance is that there is a linkage between the use of domestic Chinese prices and costs and the showing that market economy conditions prevail. Thus, in principle, these domestic costs and prices should not be used when the producers cannot show that market economy conditions prevail in their industry or when China cannot clearly show that it is a market economy. The need for these producers to show that market economy provisions apply remains as sub-section (a)(i) remains.
The third guidance is that paragraph (d) remains. To give continued meaning to this paragraph after 2016 there needs to be the possibility of treating producers from China differently from producers in market economies.
The fourth guidance can be found in the fact the sub section (a)(ii) does not mandate any particular methodology to be used. The EU has based its analogue country methodology on this provision as well as paragraphs 150 and 151 of the Working Party Report on China’s Accession to the WTO. However the commitment in the Working Party Report by WTO members in relation to China regards sub section (a)(ii) only and not in relation to paragraph (a) as a whole.
The fifth guidance can be found in paragraph (b) of Article 15. This paragraph deals with calculating the benefit of subsidies. It provides that prices and costs from outside China can be used when the prevailing terms and conditions in China may not be considered a suitable benchmark. In other words, when China is not a market economy. If Article 15 positively contemplated this solution for subsidies it chose positively not to exclude it for dumping investigations.
The sixth guidance can be found in Article 2(4) of the WTO Anti-Dumping Agreement. This provides that the comparison of prices must be fair. The WTO Appellate Body has held that there is no limit on what can be adjusted so as to ensure that the comparison is fair. Thus if export price is determined in relation to a market economy the normal value must be determined on the basis of market economy criteria.
The seventh guidance can be found in the practice of different WTO members. What do reasonable, unbiased and objective investigating authorities from different countries do? And what would be the consequences of the EU unilaterally interpreting Article 15 in one way, when the WTO might interpret it in another way in the future?
Finally there is the analysis of Article 15 by the Appellate Body from the 2011 EC-Fasteners case. The issue before the AB was whether producers from China should get a country wide dumping duty or individual treatment (paragraph 282). It was not about the consequences of the expiry of sub section (a)(ii) on the choice of methodologies. The AB concluded (paragraphs 290, 291 and 365) that the scope of application of Article 15 did not extend beyond the issue of the methodologies to be used to calculate normal value and thus was not relevant to its reasoning on the WTO legality of the EU’s basic Anti-Dumping Regulation on individual treatment. Thus the AB’s analysis is not directly directed at the consequences of the expiry of (a)(ii). In legal terms it is obiter dicta. In addition, care must be taken in reading too much into this report. The AB reads the second sentence of paragraph (d) to result in the expiry of all of paragraph (a) in 2016 and not just sub section (a)(ii).
Does EU law require changes because of the expiry of (a)(ii) in December 2016? Again there is much ado about nothing.
In relation to paragraph (d), there is no need, today, to change the law to state that China has the status of a market economy. Unless of course, China can establish that it meets the five criteria set out in EU practice for market economy status. When China can establish that it meets the criteria then a change in the law will be necessary. But China has not been in a position to demonstrate this.
Nor is there a need to change the basic EU anti-dumping Regulation in relation to the expiry of paragraph (a)(ii). Article 2(7)(a) sets out a series of choices that the EU investigating authority can make when dealing with non-market economies. Currently the methodology used in relation to non-market economies is the analogue country approach. However, Article 2(7)(a) gives a much wider choice to the investigating authority. These include the use of baskets of prices from other countries or even the price actually paid or payable in the EU for the like product duly adjusted. The EU investigating authority is even entitled to use any other basis it considers to be reasonable so long as it is unbiased and objective in its approach.
In one respect some change in EU law might be needed. It can be argued that EU law does not meet the terms of Article 15(a)(i) in that it does not allow producers to show that market economy conditions prevail in their industry. Currently EU law only allows an individual producer to show that it individually operates in market economy conditions. A change to allow a claim that market economy conditions prevail in the industry should be considered. But this is something very different from the problem addressed in this note. This note is about what to do when market economy conditions don’t prevail. Current EU gives sufficient discretion to the EU institutions to deal with that issue.
So, as Shakespeare might have said, to conclude this little tale:
- China agreed in 2001 when it joined the WTO that it was not a market economy.
- There is nothing in Article 15 giving China the status of a market economy in 2016.
- Rather, paragraph (d) of Article 15 shows that China must establish, according to EU rules, that it is a market economy if it is to benefit from market economy price comparison methodologies.
- A gap in WTO law opens up after December 2016 as to what to do when producers from China under investigation in
individual anti-dumping investigations cannot show that market economy conditions prevail in their industry.
- This gap will need to be filled in those investigations. The AB allows investigating authorities to choose methodologies where no particular methodology is imposed by the GATT or the WTO Anti-Dumping Agreement so long as it is unbiased and objectively applied.
- Thus the emergence of a gap in Article 15 does not remove the legal basis for the use of methodologies other than
market economy methodologies.
- The basic EU anti-dumping Regulation gives the EU Commission sufficient legal basis to chose appropriate methodologies when producers cannot show market economy conditions prevail in their industry.
- No legislative change is therefore necessary (unless there is a need to introduce a system to evaluate the prevailing conditions in a particular industry) as a consequence of the expiry of sub section (a)(ii) of Article 15 of China’s WTO Accession Protocol.
- 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:
- 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:
- 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;
Th e importing WTO Member may use a methodology that is not based on a strict comparison with domes tic prices or costs in China if the producers under investigation cannot clearly show that ma rket economy conditions prevail in the industry producing the like product with regard to m anu facture, production and sale of that product.
- In proceedings under Parts II, III and V of the SCM Agreement, when addressing subsidies described in Articles 14(a), 14(b), 14(c) and 14(d), relevant provisions of the SCM Agreement shall apply; however, if there are special difficulties in that application, the importing WTO Member may then use methodologies for identifying and measuring the subsidy benefit which take into account the possibility that prevailing terms and conditions in China may not always be available as appropriate benchmarks. In applying such methodologies, where practicable, the importing WTO Member should adjust such prevailing terms and conditions before considering the use of terms and conditions prevailing outside China.
- The importing WTO Member shall notify methodologies used in accordance with subparagraph
(a) to the Committee on Anti-‐Dumping Practices and shall notify methodologies used in accordance with subparagraph (b) to the Committee on Subsidies and Countervailing Measures.
(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 p rovisions 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.