Non-market Economies in the Global Trading System

This chapter opens the discussions of the issues relating to non-market economies under the multilateral trading system by highlighting the importance of these issues and outlining the development of these issues in relation to China. It sets out the structure of the book and summarises how each subsequent chapter contributes to the understanding of and debate over non-market economies, the interpretation and application of the relevant WTO rules especially those on anti-dumping and subsidies, and the anti-dumping laws and practices in major jurisdictions, using China as a special case.

The debate on the market economy status of China is possibly one of the most critical issues in the field of international trade law. While the use of non-Chinese costs and prices in anti-dumping proceedings hinges on the interpretation of Section 15 of China’s Protocol of Accession, individual WTO Members have undertaken peculiar and ingenious methods to address State intervention in the Chinese market. This chapter discusses the legal nuances of the debate on Section 15 and argues that despite the expiry of Section 15 (a)(ii), the use of surrogate prices can be justified through reliance on the surviving parts of Section 15. The chapter also analyses country specific practices of key anti-dumping users to determine the different practices adopted by these Members to continue rejection of Chinese costs and prices, even after December 11, 2016.

China’s remarkable economic performance since the process of economic reforms began in 1978–79 is described by some as involving a transformation into a market economy. This characterization, while appealing, is inaccurate. What China did was to modernize its non-market economy by re-creating markets, abandoning central planning, and introducing some degree of privatization and opening to foreign trade and investment. Because China’s revitalized non-market economy is export-dependent, policies have been engineered to provide Chinese producers with artificial cost advantages consisting of heavily distorted factor, raw material and energy pricing. The Chinese Government also regulates industry conduct {regulation of industry conduct} to prevent “excessive competition” amongst Chinese producers. Finally, to assure that China’s industrial structure is sufficiently concentrated on high-value goods, the Chinese Government nurtures sectors, products and even production processes that it views as strategic or involving “cutting edge” technologies through development programs which result in further cost assistance, the regulation of market entry and scale of production, and even the provision of subsidies. So China has become an economic success story, but a market economy it is not.

A complicated legal issue tests the wisdom of a treaty interpreter. The Appellate Body in recent years has called for a holistic interpretation of the law of the World Trade Organisation (“WTO”). Both the issue of whether Section 15(a) and (d) constitute a “grandfather” clause and, therefore, should be terminated after fifteen years of accession, and the issue of whether Article 2.2.1.1 of the Anti-dumping Agreement (“AD Agreement”) allows the use of foreign information to calculate producers’ production costs, deserve a holistic approach of interpretation, taking into account all the relevant provisions and covered agreements, protocols, etc. Bearing this in mind, this chapter tries to analyze the grandfather clause nature of Section 15(a) and (d) of China’s Accession Protocol and the legal consequences. Moreover, the chapter also tries to point out the differences in the governing scope of the Agreement on Subsidies and Countervailing Measures (“SCM Agreement”) and the AD Agreement. Further, this chapter also aims to show how State-Owned Enterprises (“SOEs”) and subsidies can be dealt with under the SCM Agreement separately in a manner without causing double remedies. The SOE issue can also be examined under commercial operation obligations under the GATT. In such a contextual background, the WTO anti-dumping rule for calculating production costs under Article 2.2.1.1 of the AD Agreement should be interpreted in a way that only resolves normal value calculation, while not addressing price distortion or subsidy issues. With such a clear distinction of the governing scope, this chapter argues that production costs calculation under Article 2.2.1.1 cannot be interpreted as permitting the use of surrogate costs from other countries so that the surrogate country methodology in Section 15 of China’s Accession Protocol as a grandfather clause would not be reincarnated and inserted back into the AD Agreement.

The chapter traces the regulatory regime of the US and the EU for conducting parallel anti-dumping and anti-subsidy investigations against imports from non-market economies. It examines the problem of double remedy, its economic rationale and the impact of the WTO Appellate Body report in US—Anti-Dumping and Countervailing Duties on the practice of the investigating authorities. In particular, it assesses the relevance of double remedy issue following the expiry of the relevant provisions of China’s WTO Accession Protocol and the upcoming termination of Vietnam’s Accession Protocol. In the light of the US opposition to grant China market economy status and the EU’s new methodology for the calculation of the normal value which allows to disregard exporter’s domestic prices in the anti-dumping investigations, it concludes that double remedy problem is likely to remain relevant in future trade relations between China and its trading partners.

The use of external benchmark prices, in the determination of ‘dumping’ under the Anti-Dumping Agreement and ‘benefit’ under the SCM Agreement, is one of the most controversial topics in trade remedy jurisprudence today. The Appellate Body Report in EU—Biodiesel (Argentina) and the Panel Report in EU—Biodiesel (Indonesia) provide some useful indications for employing an external benchmark for constructing the normal value in an anti-dumping investigation. In relation to the SCM Agreement, reliance may be placed on the Appellate Body Reports in US—Softwood Lumber IV, US—Carbon Steel (India) and US—Countervailing Measures (China). These disputes provide circumstances in which departure from the prevailing in-country prices approach could be made during the subsidies and countervailing duty calculations. This chapter aims to analyse the use of external benchmarks in the calculation of ‘dumping’ under the Anti-Dumping Agreement and ‘benefit’ under the SCM Agreement—especially in the context of the expiry of Section 15(a)(ii) of the China’s Protocol of Accession to the World Trade Organization (2001).

The expiry of the so-called NME Methodology under China’s WTO Accession Protocol has led to the search for potential alternatives to continue to treat China as an NME in anti-dumping actions, and the growing importance of the concept of ‘particular market situation’ (“PMS”) under the WTO Anti-Dumping Agreement. This chapter discusses how the PMS method should be interpreted and applied and the implications of the Appellate Body’s recent decisions in the EU—Biodiesel dispute for the issue of PMS. The chapter then offers a brief overview of Australia’s application of the PMS method in anti-dumping actions, and the latest development of anti-dumping laws and practices in the US and the EU in this connection.

This article traces the history and development of the current non-market economy methodology (NME) under U.S. anti-dumping law and practice as it applies to China and Vietnam and examines the likely change the methodology might undergo in the event that either China or Vietnam were granted market economy treatment. The study reviews early days of U.S. anti-dumping practice, which evolved to address imports from centrally planned economies such as Czechoslovakia and Poland where domestic prices were considered unreliable due to the centrally planned nature of these economies. The Department of Commerce in those early cases weighed different methodologies to calculate normal value for goods originating from these countries and developed a practice where it tended to rely on data from non-state controlled third country “surrogates”. The surrogate country methodology had its limitations, and as Chinese imports made their way to the United States in the 1980s, the Department of Commerce again reworked its methodology to arrive at what is now known as the “factors of production methodology”. The factors of production methodology has led, to what many believe, inflated dumping margins on Chinese and Vietnamese exports. As part of its accession to the WTO, China agreed to be treated as an NME in domestic anti-dumping proceedings but it premised its agreement to such treatment on the understanding that NME treatment would end after 15 years of China’s accession to the WTO, i.e. by December 11, 2016. However, the United States and the European Union continue to apply the NME methodology to Chinese exports even after this date, resulting in a challenge by China at the WTO. Against the backdrop of the battle at the WTO, U.S. anti-dumping law continues to evolve to address unfair trade concerns with the application of new pricing methodologies, such as the “particular market situation” methodology which is being increasingly relied on by the Department of Commerce to reject both costs and domestic prices of exporters from market economy countries. That the methodology is being applied to market economy exports suggests that any success which China may have at the WTO in compelling the United States or the European Union (EU) to end its NME status may well be limited. The article concludes with a look to the future including the evolution of the “particular market situation” methodology and the potential WTO challenges that might arise in response to its continued application.

The case of China against the European Union at the World Trade Organisation on market economy treatment and the consequent use of the analogue country methodology against Chinese producers and exports in anti-dumping investigations has brought about unease in political and legal circles. The European Union, in the interim, has put forth a new methodology, which allows the European Commission to rely on third country and international benchmarks in case where “significant distortions” are found in the exporting country. While this new methodology does away with the classification of Members as market or non-market economies, it is argued that the new methodology of the European Union presents the earlier law in a new form. This chapter examines the nuances of the new anti-dumping legal framework introduced by the European Union and provides a critical analysis of the EU law vis-à-vis China.

Mexico has employed special methodologies for price-determination and calculation of dumping margins against Chinese imports in almost all anti-dumping investigations. This chapter attempts to explain and analyze the NME-specific procedures employed by Mexican authorities in anti-dumping proceedings against China. It also clarifies the Mexican standpoint on the controversial issue of how the expiry of Section 15(a)(ii) of China’s Accession Protocol to the WTO impacts the surviving parts of Section 15 of the Protocol, and whether Mexico has changed its treatment towards Chinese imports following the expiry of Section 15(a)(ii) post 12 December 2016.

This chapter analyses the approaches adopted by India’s Anti-dumping Authority since 1995 in dealing with producers from China and other Non-Market Economies in anti-dumping investigations. It discusses the relevant Indian legislative framework and emphasizes on factors that have been considered for determining the market economy status of co-operating producers/exporters. The chapter also highlights the methodology adopted by the Anti-Dumping authorities in calculating the normal value of products exported from China.

This chapter draws some overall conclusions and provides observations regarding the significance of the materials and arguments presented in this book to the understanding of and debate on non-market economies. It reiterates the challenges that non-market economies have posed to the world trading system and anticipates that these challenges are likely to remain so that how WTO rules may be utilized or otherwise developed to tackle these challenges will remain crucial for the future of global economic order.