October 2016 - Dec. 11, 2016 will mark the anniversary of China’s accession to the World Trade Organization (WTO). On this date 15 years ago, China obtained all of the benefits of membership in the club that governs most of the world’s trade in goods, including “most favored nation” tariff rates. In the case of the United States, these tariff rates are so low as to be negligible for most products. 

Lower import duties have boosted growth in China’s exports to the United States. Our annual trade deficit for goods with China exceeds $350 billion. Some U.S. companies have prospered from increased access to the Chinese market, but there is undoubtedly a lot less manufacturing in the United States than there used to be, and much of that manufacturing has moved to China.

The upcoming anniversary is of substantial importance because tucked away in one of the articles of China’s Protocol of Accession is a provision governing how other countries may deal with Chinese products that are “dumped” in their own markets. 

What is dumping, anyway?

Dumping is defined as selling a product in an export market for less than normal value. In most cases, whether an exported product is sold at less than normal value is determined by comparing the price in the export market to the price in the home market. If—after adjusting for things like freight to ensure both prices are “at the factory gate”—a foreign producer charges its home market customers $100 for a particular good and export customers $100, there is no dumping and no problem. Conversely, if an investigating authority discovers that home market customers paid $100 but export market customers paid only $90 for the same product, then the exporter is dumping. 

Dumping is not illegal, but the WTO agreements authorize an administrative remedy if dumping causes injury to a competing industry in the country where the product is being dumped. For China and certain other “non-market economies,”  government interference in the domestic industry may make those prices unreliable as a measure of normal value. 

 Modern Metals readers may be acutely aware, for example, that the Chinese central and provincial governments own almost all the nation’s major steel producers and, in recent years, sustained their loss-making operations through subsidies and loans that will never need to be repaid. The same is true for the aluminum market, where Chinese producers do not respond to market signals. Politicians are more apt to maintain employment and social stability than worry about profitability.

Is China a market economy?

In the early 2000s, the Chinese government engaged in a campaign to be recognized as a “market economy” by as many national governments as possible. I was then serving at the U.S. Embassy in Beijing and would occasionally be informed by my Chinese government counterparts that a particular Caribbean or Southeast Asian country had recognized China as a market economy and, by implication, the United States should do so, too. Often, the relatively small size and limited trading footprint of the country recognizing China made the conversations surreal.

The debate about whether China is or is not a “market economy” is heating up because on Dec. 12, 2016, five lines of China’s WTO Accession Protocol will lapse. These five lines including language stating that a WTO member conducting an antidumping (AD) investigation may “use a methodology that is not based on a strict comparison with domestic prices or costs.” 

Many consider that when this provision lapses, other countries will not be able to treat China as a non-market economy in AD investigations. So instead of using alternative methodologies to determine whether a Chinese exported good is sold at less than normal value, the investigating authority would be required to compare the export price to the selling price in China. 

The problem with this argument is that the five lines that will lapse are not the sole legal provisions authorizing special methodologies for exports from non-market economies. These lines are, in fact, just a subparagraph in a larger provision stating that a “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.” Notably, the language in this main paragraph does not lapse at the end of this year. 

In addition, numerous governments had conducted AD investigations of exports from non-market economies using special methodologies as authorized by other WTO provisions well before China joined the club, and those other provisions will remain after Dec. 11.

What will change after Dec. 11, 2016?

Probably not much. In some countries, treaties are self-executing, and China’s WTO Accession Protocol may have some direct effect in those jurisdictions. Treaties are not self-executing in the United States, however, and any change to the statute governing how exports from non-market economies are treated, or the criteria for a country like China to “graduate” to market economy status, would have needed to be part of implementing legislation. 

The 2001 implementing legislation that led to the United States recognizing China as a WTO member did not include any such changes. Consequently, U.S. trade agencies remain bound by the domestic laws that existed prior to China’s WTO Accession on issues of non-market economies. 

In many industries like steel and aluminum, Chinese government ownership and interference make it hard to conceive how an investigating authority like the U.S. Department of Commerce could on Dec. 12 change course and determine that, all of a sudden, market forces prevail in China. The Communist Party still appoints company executives, state-owned banks are still directed to loan to favored industries regardless of the likelihood of repayment, and government policies still guide industrial development.

Certainly, China could decide to challenge the continued use of non-market economy methodologies through dispute settlement at the WTO. 

This process normally takes years, and even then the result is not binding in the sense that the WTO cannot compel the United States to do anything. Rather, if China were victorious, the United States would be presented with the choice of either modifying its behavior prospectively or allowing the WTO to authorize China to retaliate by, for example, increasing import duties on particular products exported from the United States.  MM