Home >> News & Publications >> Lee and Li Updates >> Newsletter >> Will China Have the "Market Economy Status"?

Search by Year: Search by Year:
Time Period: ~

Will China Have the "Market Economy Status"?

1.      Effect of the Non-Market Economy
The term "Non-Market Economy" was first introduced by "The Tariff Act of 1930" of the United States to distinguish its treatment of socialist countries. The term was later incorporated into the "General Agreement on Tariffs and Trade" (GATT) as capitalist countries believed that the domestic selling prices and costs of the socialist countries are not reliable due to their highly controlled domestic economies through providing subsidies to domestic producers, monopolization of foreign trade, and severe exchange control. Therefore, when conducting anti-dumping investigations, importing countries may treat socialist countries as "Non-Market Economy" (NME) countries, and choose the comparable prices and costs of the like products from a third country ("Surrogate Country") which is a market economy that is similar to the NME country under investigation, instead of the domestic selling prices or the costs of the NME country. China, the largest exporting country in the world, has been treated as an NME country. As a result, the investigating authority may be able to ascertain a high margin of dumping by China by way of choosing comparable selling prices and costs from a Surrogate Country that appears to be more favorable in the opinion of the investigating authority. 
Given the above, China's exporters are frequently subjected to anti-dumping investigations and are repeatedly found to be dumping. Therefore, China is eager to be granted a "Market Economy Status" so as to get rid of the adverse impact on its exports resulting from the NME status. 
2.      The Debate on the Interpretation of Article 15 of the Chinese WTO Accession Protocol
Backtracking to the history of China's entry into the WTO, because China was deemed to have control over the financial system and exchange rates of its economy, the WTO members insisted in including the provision of the "Price Comparability in Determining Subsidies and Dumping" in the Chinese WTO Accession Protocol ("Protocol"). 
To obtain membership of the WTO, China agreed to the request. Therefore, Article 15 (a)(ii) of the Protocol states that "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." Pursuant to this Article, other WTO members, when investigating whether exports from China were dumping and when calculating the margin of dumping for Chinese producers, may use the selling prices or costs of a Surrogate Country and disregard China's prices and costs.   
However, the above provision is not permanent. Article 15 (d) of the Protocol stipulates that the provisions of Article 15 (a)(ii) should expire 15 years after the date of China's accession to the WTO. In other words, as of the expiration of China's accession to the WTO (from 12 December 2016), Article 15 (a)(ii) of the Protocol will become invalid. Nevertheless, there is a serious debate on whether China will automatically be allowed to retain the Market Economy status as of 12 December 2016.
The government of China and some scholars hold a positive view, believing that Article 15(d) of the Protocol has already clearly stipulated that the term allowing the WTO members to use the Surrogate Country approach is limited to 15 years only, beginning from the date of the accession of China. Therefore, the WTO members should not take the Surrogate Country approach after the expiration of the 15-year period.
On the other hand, some lawyers and scholars take a different view claiming that the limitation of the 15-year period should only apply to Article 15 (a)(ii) and should not to other provisions under Article 15. In particular, Article 15 (a)(i) should still be effective, pursuant to which the importing WTO member should use Chinese prices or costs in determining price comparability if the producers under investigation can clearly show that the market economy conditions prevail in the industry producing the like product with regard to the manufacture, production and sale of that product. Obviously, the expiration of Article 15 (a)(ii) only causes the investigating authority to bear the burden of proof. Therefore, if the producers under investigation fail to satisfy the market economy conditions, the investigating authority can still choose the Surrogate Country approach.
The different views above show that there is a loophole in the context of Article 15 (a)(ii) of the Protocol on one hand, but on the other hand, the members have doubts about recognizing China as a Market Economy.
3.      The Market Economy status of China and the Difficulty of Taiwan.
Undoubtedly, the government of China is eager to get rid of its NME status by aggressive diplomatic lobbying and by signing free trade agreements with other countries in recent years. The outcome of those methods had significant effect. As of the end of February 2016, there are 81 countries, including Russia, Brazil, New Zealand and Australia, etc., that recognize the Market Economy status of China. However, the US, EU and Japan are still unwilling to recognize China's Market Economy status. This shows that the economic interests and the development strategies are the major concerns regarding the recognition of China's Market Economy status.
It is more difficult for Taiwan to choose what stance to take on this issue.  On the one hand, a large number of Taiwanese manufacturers are established in China, and their exports have been restricted by EU, US and Japan owing to the anti-dumping measures. On the other hand, if Taiwan chooses to recognize the Market Economy status of China, Taiwan will find it more difficult to impose anti-dumping measures on China because it may be unable to prove that the Chinese exporters' selling prices to Taiwan are lower than those of the like products they sold in the China market. This may seriously damage the industry of Taiwan since Chinese producers deal in large quantities that amount to a few times more than that of Taiwanese producers, and their costs of production are much lower than those of the Taiwanese producers. Therefore, the Taiwan government should determine its policy that is in the best interest of the economy and the development of the domestic industries.