Fifteen years ago, China joined the World Trade Organization (“WTO”). To alleviate concerns of cheap Chinese goods flooding international markets at that time, China agreed to allow other WTO members to continue conducting their anti-dumping calculations in a special way, thereby recognizing the concerns of certain members that prices of Chinese goods could be distorted due to state interference. This methodology considered China as a “non-market economy” (“NME”). In a nutshell, this means other countries can disregard Chinese prices or costs, and can use “alternative methods” (external benchmarks, such as hypothetical costs of a third country) to determine the margin of dumping in an investigation. In doing so, authorities will typically end up levying higher anti-dumping duties on Chinese goods.

Is China a “Market Economy” or Not?

To understand all sides of this debate, the intricacies of Article 15 of China’s Accession Protocol to the WTO would need to be fully dissected. For this post, suffice to say that China, and many others, thought that this NME presumption, contained in Section 15(a)(ii) would expire after fifteen years, that is, on December 11, 2016.

This has not turned out to be a straightforward affair. On the one hand, China’s “market economy status” (“MES”) has been recognized by several countries, including Australia, New Zealand, Uruguay, and Singapore. On the other hand, others like the U.S., Canada, India, and Japan, still consider China an NME (or have not explicitly recognized any change in status in their anti-dumping legislation).

Proponents of the position against China argue that other portions of Article 15 (that did not expire) are enough to ensure the continued survival of NME status. Essentially, they believe that, in order to use Chinese price data for calculations, Chinese producers would still be required to first demonstrate that market economy conditions exist.

The Situation in the EU

Currently, the EU does not officially consider China to have market economy status. Nevertheless, it recognized last year that something had to change in order for the EU to ensure it is “living up to its WTO commitments”. (For further context, see our previous memorandum here.)

Under current rules in the EU, China is expressly identified as an NME. This means that the European Commission is allowed to automatically use “alternative methods” to calculate dumping value, unless Chinese firms can prove they operate under market economy conditions. The Commission presented a proposal for a new anti-dumping and anti-subsidy Regulation in November 2016. In its proposal, the Commission sets out a different approach – instead of listing countries that would automatically fall under the “alternative method” regime, it stipulates that if a country is found to have an economy with “significant distortions”, the Commission may then use alternative methods. The proposal contains a list of examples that can be used to identify significant market distortions.

This proposal is currently winding its way through the EU legislative process. It is following the ordinary legislative procedure route, which means that the European Council and the European Parliament will need to reach a consensus. It is still at the first stage (Parliament level) and has already encountered some opposition in Parliament. On the other hand, in May 2017, the Council agreed to the main principles of the Commission’s proposal and stated its readiness to negotiate the new anti-dumping methodology as soon as the Parliament has determined its position.

As to the next steps, the Parliament will have to vote on the proposal, and, thereafter, the Council will either approve or amend the proposal. If the Council amends the Parliament’s proposal, a “second reading” will ensue. If the Council and Parliament do not reach consensus, then they enter a “conciliation stage” and the “third reading”.

Can the WTO Resolve This?

Unsurprisingly, the EU’s approach has failed to assuage China’s concerns. On December 12, 2016, China started a WTO dispute resolution process with the EU and the U.S. In these disputes, China claims that European and American regulations on calculating value for “NME countries” do not comply with WTO obligations. China would like the WTO to order the U.S. and EU to stop using example prices when investigating Chinese goods for dumping.

On April 3, 2017, the WTO established a panel to decide China’s dispute against the EU. Based on general timelines, a first decision could be expected in March 2018. Parties can appeal the panel’s decision before the WTO’s Appellate Body, and such appeal is likely to occur no matter which party wins.

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