China and Non-Market Economy Treatment: A Tale of Two Interpretations

One of the more important questions that the UK will have to face as it exits the EU is whether China must be treated as a “market economy” in dumping investigations. This is a complex issue to which developed countries have taken different approaches. Ultimately, though, it is a question that is to be determined by WTO law.

“Dumping” refers to the practice of exporting products at less than normal value, where “normal value” is generally the domestic price (or cost of manufacture) of the product at issue. The WTO’s anti-dumping agreement (“ADA”) allows importing Members to impose duties on dumped products - normally the difference between the export price and the normal value. The ADA is premised on domestic prices or costs being more-or-less set by the market, i.e. that the exporting country is a market economy. If government policies significantly reduce or fix prices, ordinary comparison stops being meaningful. Importantly, the WTO does not define what a non-market economy is; however, the ADA allows investigating authorities in importing countries to ignore domestic prices and costs  when the exporting country has “a complete or substantially complete monopoly of [its] trade and [where] all domestic prices are fixed by the State” (Ad note 2 to GATT Article VI:1) but this is a very high threshold and not designed with anything like the Chinese model of economic development in mind.

To account for this, during China’s negotiation of accession to the WTO, Members plugged the gap with  section 15 of China’s accession protocol. Section 15 is titled “Price Comparability in Determining Subsidies and Dumping”. The introductory part of paragraph (a) (its “chapeau”) lays down the options available to investigating authorities of other Members: they can use domestic (Chinese) prices or costs or ignore them. In itself, the chapeau does not law down any rule or obligation. These are present in the following sub-paragraphs: (a)(i) says that if Chinese producers are able to prove that market economy conditions exist in their industries, foreign investigating authorities must use Chinese prices or costs. This does not add anything special either. The novelty is (a)(ii), which, by way of exception (Appellate Body Report, EC–Fasteners, para 285), says that if Chinese producers cannot prove market economy conditions, foreign investigating authorities can ignore Chinese prices or costs. In trade parlance, paragraph (a) means that China has non-market economy (“NME”) status.

Here things get even more complicated. Paragraph (d) of section 15 (nicknamed the “sunset clause”) states that “in any eventsub-para a(ii) shall expire 15 years after the date of accession” (this happened in December 2016). This is the debate’s lynchpin – what experts mainly disagree on is whether para (d) results in a partial or a complete expiry of para (a). If the expiry is partial, and the chapeau and (a)(i) survive, Chinese producers will have to prove market economy conditions to get market economy treatment; if the expiry is complete, then there is no legal basis to ignore Chinese prices and costs in dumping investigations.

The difference is opinion is essentially a difference in interpretative choices.

The partial expiry camp points to the fact that paragraph (d) refers once to (a)(ii) and twice to (a) as a whole, and argues that this difference was intentional. It bolsters this argument with the principle of “effective treaty interpretation”: that all parts of a treaty (in this case, the surviving language) must be given meaning or effect. Finally, this camp argues that section 15 (as a whole) was an acknowledgement by China that it is an NME, and that this fits with the surviving language – nothing has changed (i.e. China is still an NME), and it must prove market economy conditions to get market economy treatment.

However, the opposing camp is more persuasive. As to the drafter’s intentions, there would be much clearer ways of expressing what the partial expiry camp believes that to have been, and trade agreements are notorious for bad drafting. Further, as astutely pointed out by Suse (2017), “effective treaty interpretation” “cuts both ways”: if we give effect to the surviving language (and on this basis China can still be treated as an NME), we would completely negate (if not contradict) the meaning of paragraph (d). Effective interpretation could not allow this. Further, China has maintained that section 15 was supposed to be only a temporary and limited derogation from ADA rules on normal-value calculation. Vietnam and Tajikistan have similar provisions in their accession protocols, and it would be a bit odd to say that all these countries agreed to be treated as NMEs in perpetuity. Finally, the context of section 15 also points to a 15-year life-expectancy of paragraph (a). This context includes: the Working Party Report on China’s accession, statements made by the then US Trade Representative and a 1999 agreement between the US and China which contained the precursor to section 15. Notably, countries like Australia and New Zealand have already recognized China as a market economy (not unrelated to the fact that both have FTAs with China).

On balance, there are more reasons to believe that since December 2016, there is no legal basis to continue to treat China as an NME. Two days after this deadline passed, China filed WTO complaints against the US and the EU. The complaint against the US is still in consultations (i.e. it has not proceeded to a panel), whilst the second submissions in the EU case will be shortly filed. In the meantime, the EU has amended its legislation (which previously explicitly discriminated against China).

The case promises to be a defining moment in the future of international trade, especially for the WTO (if the organization is able to get over its Appellate Body crisis, that is: the issue is discussed by Nivedita Sen on this blog here ).


Note: All italics and underlining are added by the author. The authority cited in the text is: Andrei Suse, ‘Old Wine in a New Bottle: The EU’s Response to the Expiry of Section 15 (a) (ii) of China’s WTO Protocol of Accession’, (2017) Journal of International Economic Law 951. The author thanks Andrei Suse (Leuven Centre for Global Governance Studies) for helpful comments on the post. 

Written by Akhil Raina, Marie-Curie Fellow and PhD candidate at the Leuven Centre for Global Governance Studies.

Edited by the Linklaters Trade Practice. The views and opinions expressed here are the personal opinions of the author(s) and do not necessarily represent the views and opinions of Linklaters.