The country’s key tool for that has been to over-produce products such as steel and aluminum, and since Beijing’s plan to shift to a consumption-led domestic economy has cooled lately, those products make their way into China’s export market.
That’s why in 2014 alone, China was the subject of 55% of all global anti-dumping investigations.
The main driver behind the dumping claims is essentially the role China’s government plays in influencing the country’s economy, and — many say, unfairly — subsidizing industries to be more competitive with those of their trading partners. China also stands accused of outright theft of intellectual property from some U.S. companies.
In other words, many parties are concerned that China’s foreign trade actions, and how they reflect the interplay between its government and its domestic economy, may belie Beijing’s insistence that the country has outgrown its non-market economy status.
Let’s Define a ‘Market’ vs. ‘Non-Market’ Economy
Broadly speaking, the definition of a market economy implies that
- Prices are determined by supply and demand through free competition
- Investment decisions, production and distribution are also determined by supply and demand
- Economic decisions and price decisions involving goods and services are conducted by a country’s citizens — not the government
The NAFTA countries — Canada, Mexico and the U.S. — are classified as market economies.
This contrasts starkly with a centrally planned economy, in which the government shapes and controls everything from costs, prices, wages, output quotas, the value of its currency and more. The former Soviet Union and China are both prime examples; these are considered “non-market” economies (NME).
After the collapse of the Soviet Union in 1991, former satellites moved from centrally planned to market economies, formally becoming transition economies.
In the immediate years after the WTO came into being in 1995, 10 more transition economies became members, recognizing special treatment in their protocols of accession.
Here’s Why Everyone is Talking About China and Market Economy Status Now
China has the opportunity to be treated fully as a market economy since accepting its Protocol of Accession and becoming a WTO member on December 11, 2001.
By The White House from Washington, DC (P092310PS-0253) [Public domain], via Wikimedia Commons
Premier Wen Jiabao, seen here shaking hands with President Obama, guided China as a new WTO member from 2003-2013.
Because of the way China’s Communist government operated at the time, the protocol established the “governing process in granting China WTO status.” According to this E.U. policy analysis:
China committed to adhering to the rules and obligations of the WTO system, which is based on market economy principles, and to the WTO's policies of pro-competition and non-discrimination; to granting market access for imported goods and services; and to promoting a transition towards a 'socialist market economy.’
Since China’s 2001 accession, countries such as those comprising NAFTA have treated China as a non-market economy in anti-dumping cases due to the Chinese government’s influence in economic enterprise.
However, based on the Accession Protocol’s language, China maintained that after December 11, 2016, it would automatically achieve MES due to the expiration of one particular clause within the protocol. The interpretation of the language within that specific section is at the heart of the dispute.
Here's The Meat of the Debate
How the Non-Market Economy (NME) Methodology Works
Basically, non-market economies pose a problem when it comes to appropriately determining the margins used to compensate for products unfairly dumped into another market.
This is mainly because the two factors used for purposes of comparison — the exporting country’s “home” prices, and its costs of production — are both too skewed in a non-market economy due to heavy governmental involvement. Using either would lead to inaccurately calculated margins.
Therefore, under the General Agreement for Tariffs and Trade (GATT), it was agreed to construct the home market price on the basis of prices from a “third country” — in essence, a similar country with a market economy. The Tokyo Round of 1979 incorporated this component into the GATT, after which it got wrapped into U.S. law, according to this study.
Since the early 1980s, the U.S. Department of Commerce has applied this NME methodology for purposes of calculating anti-dumping margins in cases involving China. Will it be applying a different methodology to China cases come December?
The Legalese at Play: It All Hinges on ‘Price Comparability'
In order for China to join the WTO as a member in 2001, all negotiating parties (including China) agreed to a different standard in that country’s Protocol of Accession regarding anti-dumping investigations.
As part of China’s promise to move toward fully becoming a market economy, that standard required China to demonstrate “that market economy conditions prevailed in the industry producing the product under investigation,” and, if it couldn’t, the importing country could compare prices or costs based on an economy of similar economic development to China — rather than Chinese prices and costs.
The exact language resides in Section 15 of the Accession Protocol:
- ) 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:
- ) 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;
- ) 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.
Here’s the kicker: China’s argument for achieving automatic market economy status hinges on one specific sentence in Section 15, which states that “in any event,” the second provision above “shall expire 15 years after the date of accession” — that is, on December 11, 2016.
Certain legal experts argue that based on a plain reading of the protocol language, this will not happen. Attorneys at Wiley Rein LLP, a firm based in Washington, D.C., argue on the grounds that if this was to be the actual ‘intent of the law’ as written, then the rest of Section 15 would be nullified. Based on the length of these types of WTO negotiations and the ways in which treaties such as this one are meant to be interpreted, this expiration is not likely to happen.
Others note that based on the language, WTO “member countries, including the NAFTA countries, can continue to apply the NME methodology (or similar ones) until China (or Chinese producers) can demonstrate that it operates under market economy conditions.”
Therefore, the debate boils down to…
- The interpretation of the WTO Accession Protocol, specifically Section 15
- The ability of the Chinese government and/or producers to prove market economy conditions prevail for a particular producer, industry or the economy as a whole
- How each individual WTO member’s national law allows for China to become a market economy
So Is China a Market Economy Now?
Many indications point to an uphill battle for China in officially proving its market economy status. Long known as a currency manipulator, China has been accused of purposely devaluing their yuan in the past to gain economic advantage.
Government subsidies at local and state levels have also given Chinese companies a leg up on global competition. According to the World Bank and other bodies, China and its government continue to eschew market economy conditions. For example, land prices in particular are subject to comprehensive government control, causing fundamental distortions in land prices in China.