The EU and US should treat China fairly in international trade

5 August 2016

It is just six months until the 15th anniversary of China’s accession to the World Trade Organization (WTO), and the world’s 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 talks this year. But while it is important to China, it may be better for the country to shift its focus to what really matters. China would gain more if it concentrates on ensuring the EU and US stop using the analogue 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 the method, investigative authorities do not use the product price in the exporting country as a basis when determining whether to impose tariffs, but rather third-country reference prices. 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. It should be acknowledged, however, that there are problematic issues related to price estimation in China.

Unfortunately, part of the distracting focus on the matter of market economy status stems 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 important differences.

A country that is considered by the EU or 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 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 recognised 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 strictly 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 it 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. Domestic trade laws have created this concept of market economy status and the criteria to grant it.

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 following accession. This means that after 16 December 2016, the EU and US should treat Chinese exported goods like those from other WTO members, unless an agreement to prolong the transition period is renegotiated with China, which Beijing may or not agree.

What this means is simple: whatever decision the EU and US decide to take regarding China’s market economy status, from December this year 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 2016, China will still need to meet the market economy criteria of importing countries before it can stop being treated using the analogue country method.

This logic, however, has two major flaws. First, if China still needs to prove that it qualifies for market economy status after December 2016, as O’Connor argues, then the expiry date in the protocol is meaningless. Why would negotiators have included this paragraph?

Second, the most likely intention of the 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 period during which the analogue country method was applied, regardless of China's (non-) market economy status.

More importantly, we are witnessing a degree of hypocrisy here from EU and US officials, 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 domestic civil aircraft manufacturing as well as cotton subsidies.

And what about the requirement that genuine financial institutions do not benefit from government interventions, as indicated in the market economy criteria set out by the EU and US? 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 smooth-functioning market economy, although it has steadily made progress in that direction over the past 20 years. Chinese President Xi Jinping himself acknowledged this in a speech in May 2014.

This is what China should be focusing on over the coming months: to continue improving its market institutions for the good of its own development rather than fighting for recognition of market economy status from its EU and US partners. And for these Western trading powers, it is time to respect the negotiated agreement of a 15 year-transition on the application of analogue country methods and start treating the world’s second-largest economy equally and fairly.

This is an updated version of a post that first appeared on the World Economic Forum website.

Shuaihua Cheng is Managing Director of ICTSD China.