It’s just six months until the 15th anniversary of China’s accession to the World Trade Organization, and the second-largest economy believed this would be the time when it would automatically be granted market economy status. Unfortunately, the European Union and the Unites States do not agree.
This has become one of the most hotly debated issues in trade negotiations this year. But while it is important to China, it’s wrong for the country to waste so much energy focusing on this one issue.
Instead, China should concentrate on ensuring the EU and the US stop using the analogous country method in their anti-dumping investigations against imported goods from China.
The analogue country method is an approach used in anti-dumping investigations. Under it, investigative authorities don’t use the product price in the exporting country as a basis when determining whether to impose tariffs. What this means in practice is that more Chinese products end up being investigated, and in most cases they have to pay higher anti-dumping duties.
Unfortunately, part of the focus on the less important issue of market economic status comes from the fact that many commentators and government officials think of this and the question of analogue country method as one and the same. While the two concepts are linked, there are still important differences.
A country that is considered by the EU or the US to be a “market economy” may have a better chance of being treated fairly, but that is not always the case. In practice, the EU and the US also use an approach similar to the analogue country method to investigate exports from a market economy country. Several of these EU measures are actually being challenged in the WTO, including the EU’s anti-dumping duty on biodiesel imported from Argentina. Another example to illustrate this point is Australia, a WTO member that recognized China as a market economy in 2005 but still uses cost adjustments, instead of original costs in China, to establish the normal value of Chinese imports in anti-dumping cases.
From a legal perspective, Section 15 of the Accession Protocol of China to the WTO does not explicitly say that other WTO members should grant China market economy status and does not set a deadline by which this must happen. In addition, the WTO itself does not actually have a definition of what is considered to be a market economy. Market economy criteria are only set up by domestic trade laws.
But the protocol does say that “in any event” WTO members may not use the analogue country method against Chinese exports beyond the 15 year transition period. That means that after 16 December 2016, the EU and the US should treat Chinese exported goods like those from other WTO members, unless renegotiating an agreement with China to prolong the transition period, which China surely won’t.
What this means is simple: whatever decision the EU and the US take regarding China’s market economy status, from this date they will have to stop using the analogue country method in their anti-dumping investigations against Chinese products.
Experts like Bernard O'Connor argue that other provisions imply that after December, China still needs to meet the market economy criteria of importing countries before it can stop being treated using the analogue country method.
This logic has two major flaws. First, if China still needs to prove it qualifies for market economy status after December 2016, as he argues, then the expiry date in the protocol is totally meaningless. Why would negotiators have included this paragraph?
Second, the most likely intention of negotiators writing this specific negotiated text was to allow for a 15-year transition period during which China accepted discriminatory treatment in anti-dumping investigations; it should not be read as a permanent arrangement. The use of the term “in any event” in the protocol was clearly intended to imply an end to the transition of using the analogue country method regardless of China's (non) market economy status.
More importantly, we are witnessing a certain level of hypocrisy from EU and US officials here, who apply criteria to other countries that they themselves do not meet. No government intervention in productions and sales? There are numerous cases where WTO panels have ruled against the EU and US for their government interventions, including billions of dollars of subsidies to their domestic civil aircraft manufacturing and cotton subsidies.
And what about the requirement of genuine financial institutions receiving no interventions from government, as indicated in EU and US market economy criteria? CNN Money tracker shows the US government pledged $11 trillion and actually spent $3 trillion on rescuing its financial institutions from 2008 to 2009. Europe spent at least $1 trillion to bail out its banks.
Yes, China is still far from being a well functioned market economy, although it has steadily progressed towards market economy over the past 20 years. This was something Chinese President Xi Jinping himself acknowledged in a speech in May 2014.
It’s this that China should be focusing on over the next few months: continue improving its market economic institutions for the good of its own development, rather than fighting to get recognition of market economic status from the EU and the US. And for the US and the EU, it’s time to respect the agreement of 15 years transition, and start treating the world’s second largest economy as equally and fairly as it deserves.