Granting pricing methodology after the expiry of 15 years

 

 

 

Granting Market Economy Status to China: Assessment from USA and EU National Law after 2016

 

 

 

International Business and Trade

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Regulating International Business And Trade

Autumn 2017

 

Prepared By:

Hasan, Md Tareq 851003

 

 

 

 

 

 

 

 

1. Introduction

Being one of the manufacturing based fastest growing economy in the world, China has joined WTO with on 11/12/2001 by signing the Accession Protocol. To comply with the Article VI of the GATT 1994 (Anti-dumping and Countervailing Duties), Anti-Dumping Agreement & SCM Agreement some special provisions has been set to determine price comparability for WTO members for importing from China. Here the main debate is with the interpretation of section 15(d) of the accession protocol. Fifteen years’ time has been granted to China´s to transform their economy from non-market economy (NME) to market economy status (MES). China´s economy is directly or indirectly government regulated through they are working for economic reform. And according to Section 15(d) of the WTO Accession Protocol, China has claimed automatic (MES) by the expiry of NME status of using surrogate pricing methodology after the expiry of 15 years (after 11 December 2016). In response to the MES claim of China other WTO member country especially USA and EU are not granting the MES referring to non-fulfillment of the requirements of USA and EU local laws and regulations.

Here in this document, we will assess the debate form the legal aspects from WTO, The US and EU criteria and the recent progress of this issue to come to the conclusion whether this only a legal issue due to enough interpretation of WTO accession protocol for China (Puccio.L, 2015).

 

2. Background

China became the 143rd WTO Member on 11th December 2001. Upon Signing the accession protocol china become the membership with the commitments to implement the WTO Agreement and of the related provisions of this Protocol.

From the date of accession, China is working for economic reforms and transforming its economy into one which is more market-based within 15 years from the date of accession (WTO NEWS, 2001).

 

2.1 Why China has been treated as NME (Non-Market Economy)?

•       The role of the government and state-owned enterprises (“SOEs”) is very extensive in China’s economy, and the government support lowers the cost of production in China in a way that is not available in other market-economy countries.

•       Not meeting the core principles of the market economy, because the supply and demand of goods and services would then be influenced by governmental decisions, rather than market forces (Lee. Y.S, 2017)

 

 

 

3. Legal Aspects

Here related legal provisions are given and discussed below from WTO:  

i) Addendum to article VI GATT

Paragraph 1(2) of the Addendum to Article VI of GATT:

It is recognised that, in the case of imports from a country which has a complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the State, special difficulties may exist in determining price comparability for the purposes of paragraph 1, and in such cases importing contracting parties may find it necessary to take into account the possibility that a strict comparison with domestic prices in such a country may not always be appropriate.

 

Explanation: Here in above addendum refers NME can influence on price determination, strict comparison of domestic process is relaxed and allows importing countries to consider alternative methodologies to use third country pricing if comparing of domestic prices of the exporting country is inappropriate. As a result, WTO member countries- USA and EU can get the option to use alternative pricing method which is comparing the price with third country pricing (Puccio.L, 2015).

 

 

 

 

Article 2  of Anti-dumping legislation or regulations

Determination of Dumping:

2.1    For the purpose of this Agreement, a product is to be considered as being dumped, i.e.  introduced into the commerce of another country at less than its normal value, if the export price of the product exported from one country to another is less than the comparable price, in the ordinary course of trade, for the like product when destined for consumption in the exporting country.

 

2.2    When there are no sales of the like product in the ordinary course of trade in the domestic market of the exporting country or when, because of the particular market situation or the low volume of the sales in the domestic market of the exporting country, such sales do not permit a proper comparison, the margin of dumping shall be determined by comparison with a comparable price of the like product when exported to an appropriate third country, provided that this price is representative, or with the cost of production in the country of origin plus a reasonable amount for administrative, selling and general costs and for profits.

 

Explanation: Allows methodologies to determine normal value by making a comparison to the price of the like product exported and sold in a third country or to the full production cost in the country of origin plus reasonable profit where an adequate comparison to the home price is not feasible.

  

b) Section 15(a) & 15(d) of the Chinese Accession Protocol to the WTO

 

Section-15: 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: 
(a) 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:             (i) 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;
            (ii) The importing WTO Member may use a methodology that 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.

 

Explanation: Here in above clauses, pricing method of both economic conditions has been given. Paragraph 15(a) permits the WTO Members to adopt “a methodology that is not based on a strict comparison with domestic prices or costs in China” for the producers who cannot demonstrate that the prevalence of market economy conditions in the industry.

This provision offers a regulatory basis for Section 773(c) of the US Trade Act and Article 2(7) of the EU Regulation, which authorizes the determination of normal value by comparison to the production costs in a third country (Puccio.L, 2015).

 

(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 provisions 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.           

Explanation: This is the main conflicting point where it is indicated that China needs to establish a market economy status to another member country. And the right to set the market economy criteria has been given to member countries. But no general framework has been suggested by WTO (Puccio.L, 2015).

Here China is claiming the expiry of (a)(ii) since 15 years has been expired in December 2016. And in the last paragraph, it has been restated that China should establish as Market economy status as per the requirements of member countries. Here instead of the total economy, particular industry or sector has been referred for non-applicability of (15)(a) (Puccio.L, 2015).

But the fact is member countries (USA and EU) are setting their own criteria in National Regulations – provisions under Section 773(c) of the US Trade Act and Article 2(7) of the EU Regulation to grant market economy status and China yet to get MES.

 

 

 

 

4. The Main Debate

USA & EU

 

China

 

USA & EU

 

 

4.1 U.S. Criteria for NME Status

As per Section 773(a) of the Tariff Act of 1930 (Tariff Act), the United States Department of Commerce (USDOC) is authorized to determine the market economy status (MES)  and applicability of MES on a country, individual sector or an enterprise.

NME-“nonmarket economy country” is any foreign country that does not operate on market principles of cost or pricing structures, leading to sales that do not reflect a product’s fair value. There are six factors to be considered in the U.S. determination of MES:

The extent to which the currency of the foreign country is convertible into the currency of other countries;   
The extent to which wage rates in the foreign country are determined by free bargaining between labor and management;
The extent to which joint ventures or other investments by firms of other foreign countries are permitted in the foreign country;
The extent of government ownership or control of the means of production;
The extent of government control over the allocation of resources and over the price and output decisions of enterprises; and
Such other factors the administering authority considers appropriate.

As per the USDOC (U.S. Department of Commerce) review report of on April 18th 2017, the commission has assessed the economic conditions of China and declared China as a nonmarket economy (NME) for nonfulfillment of above criteria (US Issue Brief, 2017).

 

4.2 Five MET(Market Economy Treatment) criteria set out in the EU anti-dumping regulation.

An NME applying for economy-wide MES in the framework of anti-dumping investigations must prove, in the EU, that it meets five criteria and also pointed nonfulfillment of Section 9 of the Protocol (Puccio.L,2015):

Professor O’Connor summarised the five criteria applied in assessing China:

 (1) a low degree of government influence in the allocation of resources and in decisions of enterprises. No

(2) an absence of distortion in the operation of the privatized economy. Yes

(3) the effective implementation of company law with adequate corporate governance rules. No

(4) effective legal framework for the conduct of business and proper functioning of a free-market economy (including intellectual property rights, bankruptcy laws, …). Not in any significant way

(5) the existence of a genuine financial sector. No

As per the EU assessment on 2008, China has not fulfilled all 5 criteria above and China has been treated as NME (Puccio.L,2015). 

5.  Recent Update on this Issue and related cases

According to the news article of Financial Times: On the 15th anniversary of its WTO membership, China’s commerce ministry said it had requested consultations with both the EU and the US Measures Related to Price Comparison Methodologies and seek a WTO panel rule (Donnan.S, Hornby.L, & Beesley.A, 2016). Where China has urged to comply with section 15 (d), the first line of China accession protocol to apply to the determination of normal value for imports from China without derogation and claimed that US and EU national law to determine of normal value in anti-dumping proceedings is inconsistent with those provisions of WTO.  

In response, EU and the US have officially denied to WTO for the claim of China for granting automatic market economy status and interestingly US has raised question against WTO Dispute Settlement system (Donnan.S, 2017). And the US has raised the antidumping and antisubsidy investigations into Chinese aluminum and China has criticized it.

6. Criticism

Ø  More clear guidelines are required by WTO to resolve the debate on the interpretation and application of Section 15(d) of the Chinese Accession Protocol to the WTO

Ø  WTO regulations only provide the definition of NME but it has been given the authority to importing countries to define the country wise domestic rules for MES. Here there may be a chance of excessive strict and discriminatory provisions. WTO common framework may be required here to define MES, where every country may be customised to certain reasonable extent

Ø  Uniform rules required to determine the cost of factors of production-Labor cost etc.

Ø  China should allow prices for traded goods and services in every sector to be determined by market forces, and multi-tier pricing practices for such goods and services shall be eliminated.

Ø  China should publish in the official journal the list of goods and services subject to state pricing and changes thereto

7. Conclusion:

Here the main debate is based on the interpretation and application of section 15(d) of Chinese accession protocol where WTO members have been divided into two groups. Few member countries have granted the MES to China automatically granting after 15 years, on the other hand, other countries like the US and EU has denied on granting the automatic MES rather highlighting the fulfillment of the set national criteria to meet MES. Here in EU evaluation report, the interpretation of section 15 has been mentioned as highly controversial (Puccio.L, 2015). Because there is no common framework for defining the MES by WTO rather it has been kept open for WTO member countries.

As a result, there is a scope to impose highly strict national criteria for granting MES and it can be utilized as a political and economic weapon to dominate China treating as the threat from competitive aspects. On the other hand, still, China did not meet all the condition set in accession protocol and MES criteria to truly transform their economy to get MES but they have good progress on it. WTO has more role to play in the periodic assessment of MES and define the common framework of MES to interpret section 15 (d). US and EU have protective measures while considering protecting their domestic economy, on the other hand, the good relationship with China is very important for both country because China is very big and important market which has a huge impact on the global value chain. On the other hand, both country has granted MES to Russia in 2002, where it has more market economy than china, the fact is Russia is not real threat for their economy because they do not have to compete with Russian product in their market.

Finally, it can be said, that granting a MES to China is not only a legal, technical and economic issue, but also a political decision with important consequences for the EU-China, US- China relationship, and for the EU-US relationship (Skrzypczy?ska, J, 2016).

 

Reference:

1)    WTO NEWS (2001). WTO successfully concludes negotiations on China’s entry. (PRESS RELEASES-Press/243). https://www.wto.org/english/news_e/pres01_e/pr243_e.htm. (2017-10-22)

2)    Puccio.L(2015).EU IN-DEPTH ANALYSIS. Granting of Market Economy Status to China(PE571.325). https://publications.europa.eu/en/publication-detail//publication/cbc9d72b-b9c0-11e5-8d3c-01aa75ed71a1/language-en . (2017-10-22)

3)    Donnan.S, Hornby.L, & Beesley.A(2016). China challenges EU and US over market economy status. https://www.ft.com/content/6af8da62-bf5d-11e6-9bca-2b93a6856354  (2017-10-22)

4)    Donnan.S (2017), US seeks to deny China market economy status in WTO, Financial Times, https://www.ft.com/content/f7941646-d571-11e7-8c9a-d9c0a5c8d5c9 (18-12-2017)

5)    Lee. Y.S (2017). Should China be Granted Market Economy Status? : In View of Recent Development. China & WTO Rev. 2017:2; P 319-342. https://ssrn.com/abstract=3037708. (2017-10-22)

6)    Skrzypczy?ska, J. (2016), Market Economy Status for China in anti-dumping procedures – what is really matters? Prace Naukowe Uniwersytetu Ekonomicznego We Wroc?awiu, (447), Prace Naukowe Uniwersytetu Ekonomicznego we Wroc?awiu, 2016, Issue 447. DOI: 10.15611/pn.2016.447.04

7)    US Issue Brief (2017). Evaluation of China’s Nonmarket Economy Status, US-China Economic and Security Review Commission. https://www.uscc.gov/sites/default/files/Research/Non%20Market%20Economy%20Issue%20Brief.pdf .(2017-10-22)

8)    Monthly Economics and Trade Bulletin (2017), United States Deems China a Nonmarket Economy, Prompting a WTO Challenge, U.S.-China Economic and Security Review Commission, December 2017, https://www.uscc.gov/sites/default/files/Research/December%202017%20Trade%20Bulletin.pdf (2017-12-20)

9)    WTO website for related articles of the law