US law provides option, without WTO, for China to press case it is a market economy

First published by MLex 12 December 2016. By Adam Sigal.

Despite the fact that the US has said it will continue to treat China as a non-market economy country in antidumping reviews, there is a path forward in US law should China or an individual Chinese company want to make changes without waiting on the World Trade Organization.

On Monday, China made the formal move to resolve its dispute with the US and EU at the World Trade Organization by requesting consultations over whether it should be treated as a market economy in antidumping investigations.

But WTO disputes without amicable resolutions take at least 18 months to resolve. Complicated cases can take much longer.

China says that it is entitled to receive market economy status beginning on Dec.11, 2016 — the 15th anniversary of its accession to the WTO — as part of an agreement made in 2001. The US and EU deny this interpretation of the accession agreement, and China’s status as a non-market economy results in higher duties.

The Office of the US Trade Representative, the agency responsible for resolving the dispute with China, said on Monday that “China has not made the reforms necessary to operate on market principles. China’s WTO Protocol of Accession does not require that WTO members automatically grant market economy status to China.”

However, just because China is not entitled to automatic market economy status in the US does not mean that China could not request it under US law. Additionally, the USTR is not equipped, as a matter of law, to determine whether China operates on market-economy principles.

The US Department of Commerce, the agency actually responsible for administering the antidumping determinations and market economy determinations, said “consistent with its WTO obligations, the United States will continue to apply alternative antidumping methodologies, as appropriate, to ensure accurate calculations in proceedings involving China.”

But what does it mean for the methodology to be applied “as appropriate”?

Under US law, China or particular Chinese companies have always had the right to request a review of China’s market economy status. However, this must be done in the context of an individual case. It is “appropriate” to apply non-market economy methodology until a case proves it is not.

Any company, or the government of China, can ask the US to use a six-part test to determine whether or not a country has a market economy.

On Nov. 23, 2016, at the conclusion of the US-China Joint Commission on Commerce and Trade, US Secretary of Commerce Penny Pritzker said that China would be unable to pass the market economy test under US law.

But despite Pritzker’s comments, Commerce couldn’t — even if it wanted to — proactively engage in this analysis in a way that binds a company legally. The department can only make a market economy determination when asked to, and such a determination would be subject to judicial review.

The six criteria for a market economy ruling for China are:

  • whether the renminbi is convertible into the currency of other countries
  • whether wage rates are determined by free bargaining
  • the extent to which joint ventures and foreign investment are allowed
  • the extent to which government controls the means of production
  • the extent to which China controls resources
  • the extent to which China controls the price and output decisions of companies.
    China passes the test on some of these criteria, but distinctly fails on others.

Additionally, the outcome of this analysis could be very different if applied to various industries in China. The country’s steel sector, for example is highly regulated with government control over inputs and product destinations, but many consumer goods or electronics companies are not so heavily regulated. Workers in some industries, or in some geographical locations, have more bargaining power than in others.

US law is unclear as to whether Commerce could continue to use market economy status to calculate duties for some industries while extending market economy status to others, meaning that one case could provide the groundwork for many companies to alter how their duties are calculated.

US law is an open invitation to challenge a country’s market economy status. This is a conundrum for China because the US is offering an opportunity to litigate whether it operates according to market economy principles.

This is the same opportunity that China has had for years and declined to take advantage of, most likely because when you know what the answer will be, sometimes you don’t want to ask the question.

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