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Market economy status for China – Some points to ponder

By Manoj Gupta
Come December 2016, China would no more be a non-market economy country. While Beijing is leaving no stone unturned to get the status of a market economy from major trading partners  even before the date the WTO accession protocol has fixed, it is to be seen as to what lies ahead for India in particular after 1st December, 2016. This write-up discusses some aspects of China being declared a market economy.

Market economy status and its importance

First, we will see as to what is a market economy. A country is said to be a market economy when the price of goods therein depend largely on principles of demand and supply. The principle is in contrast to a national economy where the government seeks to determine economic activity largely through mechanism of central planning as in the case of former Soviet Union. In a market economy production targets, prices, costs, investment allocations, raw materials, labour, international trade and most of the other economic aggregates are determined by market forces.
The status of market economy is important because if China  is classified as a market economy, costs of production and selling prices prevailing in China shall be used for determining normal value and then, in turn, the anti-dumping duties. If the country is treated as a non-market economy, then costs and prices prevailing in an ‘analogue’ market economy, which are typically higher, will be used.  This means that the dumping margin, and in turn, the anti-dumping duties, are generally higher in the case of non- market economy countries.
Imports from China after December 2016

Article 15 of Chinese WTO Accession Protocol provides the rules for use of 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.  Article 15(a)(i) of the Protocol provides that 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 in determining price comparability.  Article 15(a)(ii) of the Protocol states that the importing WTO Member may use a methodology which 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 sale of that product.
While conducting an anti-dumping investigation, the investigating (importing) country gives an opportunity to the Chinese producers to show that they operate under market economy conditions. However, except in a few rare instances, such market economy claims are rejected on the ground that the Chinese producer cannot clearly show that market economy conditions prevail in the concerned industry. This has indeed helped many importing countries in determining artificially high normal values and as a consequence, to build a high wall of protection against imports of many products from China on the ground that imports from China have caused or threaten to cause material injury to the domestic producers in the importing country. USA, EU, India and a number of other importing countries have imposed steep anti-dumping duties against imports from China using Article 15(a)(ii).
However, Article 15(a)(ii) shall cease to exist after 15 years i.e. it will expire by 1st December, 2016. What will happen from December, 2016 when China is granted a market economy status? Should the method of determining normal value be changed overnight? Should Beijing be asking all the countries to review their anti-dumping duties as the normal values for most of them were calculated while taking China as a non-marketing economy country? Only Article 15(a)(ii) expires in 15 years but Article 15(a)(i) will continue to exist and therefore, will the Chinese producers be continued to be asked to clearly show that market economy conditions prevail in the concerned industry is a question for which there is no clear-cut answer. Such an interpretation is akin to a negation of expiry of Article 15(a)(ii).  Is there a particular meaning as to why expiry deadline has been given only for Article 15(a)(ii) and not for Article 15(a)(i)?  How do major trading partners of China look at this issue?  What methodology will be used in determining normal value in anti-dumping investigations from December, 2016?  There are no clear answers to these questions.
Is market economy status enough?

Let us look at one peculiar example. Russia was granted market economy status by USA in June, 2002 but the U.S. carried on to selectively reject Russia’s home market prices and costs due to the lingering state influence in determination of such prices/costs. The argument was that Russia’s domestic market sales were not made “in the ordinary course of trade” or “not reasonably reflected” the costs associated with the production and sale of the goods imported into USA therefrom. The U.S. disregarded the prices and costs prevalent in Russia in the case pertaining to import of Magnesium Metal from the Russian Federation [70 Fed. Reg. 9041 (Dept. of Commerce February 24, 2005)], where it considered adjusting the Russian producer’s actual electricity costs because it found that “the Russian electricity sector is still, as a whole, in the early stages of reform, and is a sector where prices are based neither on market principles nor on long-term cost recovery.” The U.S. declined to adjust the Russian producer’s electricity costs because “the macro-economic distortions in the Russian energy sector do not allow the Department to discern and measure the effects of such distortions on Respondents’ reported electricity costs.” So, we see that there is always scope of invoking other provisions or interpreting the present ones to continue with the present levy.
Russia is still not a WTO member and hence, cannot go before the Dispute Settlement body if any country imposes anti-dumping duty sidelining the market economy status granted to it by that country. However, China is already a WTO member which allows it to challenge any such levy if it finds the same to be not in line with WTO obligations of the importing Members. This also may have an impact on how the importing countries would like to look at the issue.
The anti-dumping duty is generally levied for a period of 5 years and so if a duty is imposed after December, 2011 it will have its impact even after December, 2016 which may call for review at that time. It is high time that either the WTO or the major countries imposing anti-dumping duties against China spell out their stand well in advance so that the domestic producers in those countries as well as the Chinese producers and exporters are clear of what would happen with effect from December, 2016.

[The author is Assistant Manager, Lakshmikumaran & Sridharan, New Delhi]
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