The New WTO Law of Market Economy Status for China
Steve Charnovitz
12 April 2018
In this era of China bashing, WTO watchers should be reminded of one area of WTO law where the United States and the EU continue to engage in WTO-illegal behavior. That is, the unjustified application of so-called non-market economy adjustments to China's domestic prices as part of a protectionist strategy to raise antidumping duties to higher levels.
China lodged a WTO complaint against the EU practices in 2017 and that panel (Price Comparison Methodologies, DS 516) is ongoing. Unfortunately, China has not made its briefs available to the public, so I have no way of knowing whether China is making a cogent legal case against the mistreatment it is suffering.
The key issue in the non-market economy debate and in the China-EU dispute is the meaning of Section 15 of the Accession Agreement between China and the WTO. Like any WTO accession agreement, the terms of the agreement have the status of higher WTO law that prevails over regular WTO law. Often, accession agreements give applicants more stringent obligations than exist for WTO Members generally and such provisions are known as applicant WTO-plus law. See Steve Charnovitz, Mapping the Law of WTO Accession, January 2007, available on SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=957651.
China signed up for many WTO-plus obligations when it joined the WTO in 2001. But in one instance, the Chinese negotiators were able to secure arguably better treatment than exists for the rest of the WTO Members, in that the Accession agreement gives China specific guarantees on how it will be treated regarding market economy status after 15 years of membership. The key takeaway for Section 15 is that it installs an incumbent WTO-plus obligation on all WTO Members in how they treat imports from China.
This Section 15(a) law provides a new primary rule, just for China, in Section 15(a)(i) which states that the importing WTO Member "shall use Chinese prices or costs for the industry under investigation" when "the producers under investigation can clearly show that market economy conditions prevail in the industry producing the like product...." In other words, if the Chinese producers being investigated for dumping can clearly show that there are market economy conditions in their domestic industry, then those producers have a right for any antidumping determination (by the United States, the EU, or any WTO Member) to be based on Chinese prices rather than the commonly used surrogate pricing methodologies designed to inflate antidumping duties.
China's accession protocol does not define "market economy conditions" and there is no definition of that term in WTO antidumping law because WTO antidumping law does not even contain the term "market economy." The only use of that term in WTO law is in Article 29 of the SCM Agreement (Transformation into a Market Economy). Yet that article does not define "market economy" and has not been explicated by a WTO panel. Thus, in an appropriate WTO case, the panel would have the role of defining "market economy conditions" in Section 15(a).
The scholarship on the Chinese accession agreement (including my own) has largely missed the point that Section 15(a) creates a new primary rule that overrides any inconsistent rule in the Antidumping Agreement or GATT Article VI. This China-only rule has several significant features:
First, Section 15(a) transforms the determination of whether a Chinese industry has "market economy conditions" from being a matter of national law to being a matter of international law. In other words, the decision made by a domestic antidumping authority on whether to use Chinese prices has to be based on the new WTO standard rather than on any idiosyncratic national law standard. So hypothetically, if the conditions in the Chinese widget industry have become market economy, then the industry should be treated as "market economy" by all WTO Members. Moreover, if one of the national law criteria for a market economy seems inapposite for the WTO (for example, the extent to which wage rates in the foreign country are determined by free bargaining between labor and management), then a WTO panel ought to consider itself justified in rejecting that criterion.
Second, the WTO's normal standard of review in antidumping provided in Article 17.6(i) of the Antidumping Agreement should not apply to the Section 15(a) market economy law because under Article 17.6(i), a panel has to defer to a national antidumping judgment if it is "unbiased and objective" even if the panel might have reached a different conclusion. This deferential standard of review — which is unique to WTO trade remedy law — should not apply to Section 15(a) because that Section makes no mention of national law or of national investigating authorities. A counterfactual of leaving the final determination of "market economy conditions" to each WTO Member country could lead to one WTO member using Chinese prices to quantify widget dumping and another WTO member rejecting those same Chinese prices. Although my argument is not free from doubt, the most reasonable way to understand the new incumbent WTO-plus law is that it requires an objective standard whereby a panel could reverse a domestic authority for failing to make an objective assessment of the facts as to whether the industry being investigated has clearly shown that it enjoys market economy conditions.
Third, the new law of market economy conditions also means that the focus of investigations needs to be on the particular Chinese industry rather than the aggregate Chinese economy. In other words, governments like the United States and EU should no longer be able to make decisions about antidumping prices based on whether China as a whole has a market economy. That's because Section 15(a) is clear that the determination is based on the market economy conditions in the industry producing the like product to the import that is allegedly being dumped. So China could have market economy conditions in one industry yet not in another.
Fourth, Section 15(a) suggests that the respondent producers have the burden of proof to show, and show clearly, that market economy conditions prevail in order to receive the benefit of domestic prices in an antidumping investigation. This is not a light burden, and so one can reasonably assume that the EU or the United States will continue to be able to use conditions outside of China (rather than China's own domestic prices) in certain antidumping investigations. But if domestic investigating authorities apply the wrong legal standard or if they make unjustified dumping determinations, then a WTO panel should not hesitate to find a WTO law violation in the national authority's decision.
Fifth, Section 15(d) addresses the interaction of national antidumping law to the new primary rule in Section 15. Two sentences in Section 15(d) will be discussed: The first sentence applies only to WTO Members, such as the United States, that had market economy criteria in domestic law at the time of China's accession in 2001. The first sentence states that when one of those WTO Members accepts that China has established that "it is a market economy," then Section 15(a) will be terminated for that Member (and presumably kept for other qualifying WTO Members). The first sentence is silent on what would happen if one of those Members sought to withdraw China's market economy status. The third sentence addresses an establishment under an importing Member's national law that market economy conditions prevail in a particular Chinese industry or sector. Should such a legal finding occur, the third sentence provides that the provisions of Section 15(a) "shall no longer apply to that industry or sector" in that Member (but presumably still applies for other Members).
The confusion about the lex specialis status of Section 15 is illustrated in the Trump Administration's third party WTO Brief submitted for DS516. According to USTR (see §1.8), the primary rule for determining price comparability in China is contained in GATT Article VI and the Antidumping Agreement, rather than Section 15(a). In effect, USTR would turn Section 15(a) on its head and deny that it has important normative value added. But Section 15 is clear that the normal WTO law applies to China only when it is "consistent with" the new rule articulated in Section 15(a). Although I think USTR is correct to note (see §8.6.3) that the treaty words used are "consistent with" rather than "subject to", this commentator would not draw the conclusion that USTR seems to draw which is that Section 15 merely means that the accession agreement is consistent with regular WTO antidumping law. And without dwelling on the details of the now-expired Section 15(a)(ii) and Section 15(d) second sentence, suffice it to say that USTR held the opposite position about the original meaning of Section 15(a) which was said to give the United States license for 15 years to impose non-market economy pricing on China. Now that the 15 years is over, USTR is in effect claiming that Section 15(a) was always bereft of content.
I hope that the WTO panel in Price Comparison Methodologies will see through USTR's casuistry and construe Section 15 of the Accession agreement contra proferentem.
