China’s Non-Market Economy Status

In recent years there has been an increase in high-profile trade defense cases between the EU and China, relating to key export products like solar panels, wines, polysilicon (a raw material used by the solar panel industry) and mobile telecommunication networks. These trade disputes between the EU and China have sparked an interest, by lawyers and non-lawyers alike, in the laws governing the recent trade investigations that have made headline news.

The EU-China dumping and subsidization conflicts are predominantly governed by WTO law, which allows all of its members, including the EU, to impose, under well-defined conditions, additional duties on imported products to prevent damage to its domestic industry. In simplified terms, the EU may impose an anti-subsidy duty to remove the benefit of a foreign subsidy, or an anti-dumping duty when the imported product is sold at a lower price in the EU than the price in the exporting country – in other words, where there is international price discrimination.

However, in the calculation of the dumping margin for imports from China and other so-called Non-Market Economies, the EU is allowed to compare the import price with prices in a third country, as Chinese prices are considered to be too distorted due to significant government subsidies and intervention. The effects of using the prices in a third country are incredibly far reaching. Instead of comparing the import price with the actual prices of the Chinese exporter, the EU may compare the import price with prices of, for instance, American or Turkish producers.

Considering that the prices of producers in a third country like the United States or Turkey may often be higher than those of Chinese exporters, it is unsurprising that the so-called Non-Market Economy (NME) Treatment has been consistently criticized for resulting in unpredictable, inaccurate and unreasonably high anti-dumping duties resulting in significant financial losses for exporters. (See, for instance, Qin (2004), Cornelis (2007) and Rao (2013)) For these reasons, China’s Status as an NME has become one of the most contentious issues in EU-China relations, and is among the most important obstacles in the development of their trade relations. (Bendini (2014))

Future Framework for EU-China Trade Disputes

The current framework for resolving trade disputes with China is, however, about to change significantly. On 11 December 2016 certain elements of China’s Accession Protocol will expire, thereby rendering the use of the NME methodology obsolete. Even though there has been an increasing debate on the exact extent to which the EU can continue to classify China as an NME, the EU appears to have already made up its mind when it comes to granting China ‘Market Economy Status’ in 2016. (See for instance Tietje and Nowrot (2011) and Gatta (2014))

Alternative methods available to counteract unfair trading practices in situations where domestic prices or costs are distorted by state intervention are however widely available. While not as far-reaching as a blanket rejection of using Chinese prices, both the anti-dumping and the anti-subsidy agreements allow for the adjustment of data or even the use of third-country data.

In fact, China’s Accession Protocol gives significant leeway in the use of a third country benchmark if there are ‘special difficulties’ in determining the benefit of a certain subsidy by using the standard rules on subsidies. These provisions, unlike those relating to anti-dumping investigations, are not subject to a time limitation. Therefore, as anti-dumping NME methodology will soon expire , anti-subsidy measures will start to play a larger role, thereby replacing the current NME Treatment as a major source of contention in EU-China trade relations.

The shift towards subsidy measures has already commenced with the recent Telecom Network trade dispute, in which the EU reached the decision that the trade dispute in fact concerned subsidies rather than dumping. It therefore decided to drop its anti-dumping investigation, and to focus instead on its anti-subsidy investigation, before eventually settling the case with the relevant producers and the Chinese government.

Lessons for the Future

In the light of the considerable criticisms to the unfairness, inappropriateness and protectionist effect of the NME methodology in anti-dumping investigations, the Commission should attempt to adjust the Chinese data before considering the use of terms and conditions in a third country where ‘special difficulties’ arise. The leeway provided by China’s Accession Protocol must thus not be used as a method for protectionism.

Nevertheless, considering the continuing influence of the central, provincial and regional governments on the economy, situations may arise where the initiation of a trade defense investigation makes sense from an economic or policy point of view.

For instance, China’s leading wind, solar and telecommunication companies industries have benefited from more than $92.4 billion in below-market rate lines of credit provided by the China Development Bank (CDB), the world’s largest development bank and wholly owned by the Chinese government, as part of China’s ‘going out’ strategy. (Sanderson and Forsythe (2013)) Not coincidentally, the solar panel and telecommunication industries have been at the forefront of recent trade disputes between the EU and China.

Both the solar panel and telecom disputes were eventually settled; in the Solar Panel dispute, the EU and China reached an agreement that solar panel exporters would not sell their solar panels below a certain minimum price, while in the Telecommunications Network dispute, the EU dropped its anti-subsidy investigation in return for, amongst others, equal access to the relevant Chinese standard setting body and equal treatment for publically funded research and development projects.

From a policy level, the recent high-profile trade defense investigations reveal the diverging interests between Member States, the limitations of the EU to act with one voice in its relations with China, and the seriousness to which Beijing takes the initiation of anti-dumping or anti-subsidy investigations, retaliating with counter-investigations on European wines and polysilicon.

While governmental subsidization is widespread in China, subsidies are a prevalent phenomenon in the EU as well. The increasing resort to dumping and subsidy investigations would therefore heighten the risk of an escalation of EU-China bilateral trade disputes. Considering the important and diverging interests at stake, the EU should attempt to resolve complaints about subsidization or dumping through negotiation before initiating adversarial dumping and subsidy investigations.

Lastly, the recognition of China as a Market Economy for the purposes of WTO Anti-Dumping Laws constitutes a valuable but quickly depreciating bargaining chip in future negotiations with China. In the light of the approaching expiry of China’s NME status, the significant reforms in the Chinese economy, the protectionist effect of NME treatment, and the shift towards anti-subsidy investigations, the EU has plenty of reasons to grant China Market Economy Status ahead of 11 December 2016. Such early recognition would furthermore create significant goodwill in Beijing, representing, as former PRC Premier Wen Jiabao put it, ‘the way a friend treats another friend.’

Jochem de Kok is an LLM student at the University of Cambridge. He graduated from the LLM in Legal Research at the University of Groningen before commencing his studies in Cambridge. This blog post is based on his Cambridge LLM Thesis on ‘The Future of EU Trade Defense Investigations against Imports from China’.

References

Bendini, R., ‘In-Depth Analysis: Trade and Economic Relations with China 2014’ (2014) European Parliament, Directorate-General for External Policies, DG EXPO/B/PolDep/Note/2014_101

Cornelis, J., ‘China’s Quest for Market Economy Status and its Impact on the Use of Trade Remedies by the European Communities and the United States’ (2007) 2(2) Global Trade and Customs Journal 105

Gatta, B., ‘Between ‘Automatic Market Economy Status’ and ‘Status Quo’: A Commentary on ‘Interpreting Paragraph 15 of China’s Protocol of Accession’’ (2014) 9(4) Global Trade and Customs Journal 165

Qin, J.Y., ‘WTO Regulation of Subsidies to State Owned Enterprises (SOEs) – A Critical Appraisal of the China Accession Protocol’ (2004) 7(4) Journal of International Economic Law 863

Rao, W. ‘China’s Market Economy Status Under WTO Antidumping Law After 2016’ (2013) 5(151) Tsinghua China Law Review 151

Sanderson, H., and M. Forsythe, ‘China’s Superbank: Debt, Oil and Influence – How China Development Bank is Rewriting the Rules of Finance’ (Bloomberg Press, 2013)

Tietje, C., and K. Nowrot, ‘Myth or Reality? China’s Market Economy Status under WTO Anti-Dumping Law after 2016’ (2011) 34 Policy Papers on Transnational Economic Law 1