Trade lawyer Bernard O'Connor has more to say about China and market economy status:
Introduction
In a first note (published on VOXEU and re-posted on WorldTradeLaw net) I looked at whether China was automatically entitled to Market Economy Status (MES) in 2016 on the basis of the Accession Protocol of China to the WTO. This note concluded that there was nothing in the Protocol which entitled China to automatic recognition as a market economy. In a second note (published on WorldTradeLaw net) I examined the thesis that the expiry of Article 15(a)(ii) of the Protocol would de facto oblige WTO members to consider China as a market economy. The note concluded that the de facto argument had many flaws given the extent to which other substantive elements of Article 15 remained and were required to be implemented.
This third note speculates on the approaches that the EU Commission would be entitled to take in relation to China given the text of Article 15 of the China Accession Protocol.
How to determine normal value if market economy conditions prevail
Article 15(a)(i) of the China WTO Accession Protocol provides:
If the producers under investigation can clearly show that market economy conditions prevail in the industry producing the like product with regard to the manufacture, production and sale of that product, the importing WTO Member shall use Chinese prices or costs for the industry under investigation in determining price comparability;
This provision seems rather straight forward. An entitlement to have Chinese prices used is dependent on the producers showing that market economy conditions prevail in the industry producing the like product with regard to three activities: manufacture, production and sale. The text clearly indicates that the market economy conditions must prevail in all three activities. Thus, market economy conditions in relation to sales alone would not be sufficient. The difference between manufacture and production is not clear but both concepts seem to cover the costs of inputs. Therefore, it would seem that the market economy conditions must prevail in all aspects of the industry's activities.
How a single producer or group of producers is required to establish that market economy conditions apply in a particular industry is not clarified. As is often the case the WTO rules allow a degree of discretion to the Competent Authority to implement the provision and thus set the standards.
A key consideration is the meaning of the word 'prevail'. Prevail means something less than universal. But would 90% of producers operating in market economy conditions (across the full range of the industry's activities) be sufficient or would some other threshold be appropriate. And how would State Owned Enterprises (SOEs) operating within national economic development plans be considered for the purposes of this exercise. Could it be argued that the very presence of SOEs (or that the SOEs had a particular market share of the like product) in a sector means that market economy conditions could never be found for that industry? In this regard, the US considers that the presence of SOEs does not necessarily exclude the findings of market economy conditions to the extent that state ownership in the industry under investigation is not “substantial”. This is probably the correct approach as the WTO does not consider ownership in and of itself an issue for trade defence purposes. However, given the specific circumstances of state capitalism in China, it would seem difficult to find MES in a sector in which SOEs operate.
A second element to be considered is that the producer will have to show that the prices or costs are those 'for the industry under investigation'. This triggers the question whether the producers' own costs and prices must be used for price comparison or whether some sort of blended industry wide prices must be used. If a producer or producers can show that market economy conditions do prevail in the particular industry, an individual producer might argue that its own costs and prices reflect the industry-wide costs and prices. However some proof of this would be necessary. Thus the producer might be required, on the basis of the text, to provide in any event the industry wide costs and prices. This might or might not be a difficult task. If the market provides benchmark prices for inputs as in most market economies it won't be a problem. If these don't exist then it is probably indicative that market economy conditions don't prevail for that industry. In fact this could be a threshold test for the finding of a market economy for an industry or sector.
A possible difficulty with the requirement to use industry wide prices is that an individual producer might lose or gain in the calculation of its normal value. Depending on whether the producers’ costs and prices are higher or lower than the industry average there might be a benefit or a loss. A similar issue currently arises when sampling is used: non-sampled cooperating exporters get, at most, the weighted average dumping margin of the sampled exporters. If their individual prices and costs are to be considered, they would obtain a higher or lower margin. This difficulty is equally inherent in the use of industry-wide data but it does not cause problems in the law. In any event, the requirement to use the industry average costs and prices is enshrined in the Accession Protocol.
That being said, it cannot be totally ruled out that the Competent Authority could allow for the individual producer to show that its costs and prices are legitimately below the industry average thus introducing a sort of lesser costs and prices rule (mirroring the EU's lesser duty rule) and a rule ignoring the producer’s costs and prices if they are higher in favour of the industry average. This could be a sort of WTO double plus, the use of which could be conditional as the EU Commission is currently considering for the lesser duty rule.
Another difficulty concerns the determination of the average industry costs and prices for the purposes of comparing prices: how is any one producer going to show what those prices are. And how is a Competent Authority going to verify those averages? Would, on both sides, desk research into Chinese industry publications (if available) be sufficient?
Currently, the EU does not require that individual producers show that market economy conditions prevail in the industry as a whole. They are only required to show that MET applies to them individually. This seems to be out of line with WTO law and causes all sorts of administrative difficulties when sampling is used (as is often the case in TD actions against China) as has been seen in the recent Brosmann case before the EC Court of Justice. In addition, in determining normal value the EU does not take the industry costs and prices but the individual producer costs and prices. It is probable that the EU will have to change its practice of treating all producers individually so as to be in line with the Protocol and WTO law in general. Thus some change to the current practice in relation to Chine appears to be necessary.
What if market economy conditions do not prevail?
The real problem arises for a Competent Authority if the producer cannot show that market economy conditions prevail in the industry in question. In these circumstances the producer is not entitled to have the industry-wide costs and prices used and the Competent Authority is not obliged to use them. So what costs and prices can be used?
Currently, competent authorities use a methodology based on Article 15(a)(ii). For the most part, competent authorities interpret this to allow the analogue country method. However, as has been seen in the previous notes, this subparagraph will expire in December 2016.
In the absence of Article 15(a)(ii) but the continuation of Article 15(a)(i), the Competent Authority could consider using the costs and prices of the producer in question. But these prices are by definition not market prices because the producer has not been able to show that market economy conditions prevail in the industry within which it operates. To use those prices would distort the very purpose of the general AD rules which is to make a fair comparison between a 'market based' normal value and the export price.
Allowing the use of individual costs and prices does not seem to be in line with the object and purpose of the Accession Protocol. It is clear from Article 15(d) that this subparagraph (and, in extension, the Article as a whole) is concerned with economy wide (first sentence) or industry wide (third sentence) conditions and not the conditions of an individual producer. And in fact this economy or industry wide approach is more logical. If market economy conditions do not prevail in the economy or in the industry how can it be reasonably sustained that one individual producer within that context stands out alone as a true market economy player. This seems implausible. And, if found, is likely to be very rare.
Where market economy conditions do not prevail for the whole economy or the relevant sector and where an individual producer cannot obtain MET, the current practice is to use the costs and prices of one or more producers in an analogue country to determine what the 'market based' normal value would be and to impute it to the individual exporters from the non market economy. The objective of using the analogue country is to be able to make a fair comparison in a market economy context.
Does the expiry of Article 15(a)(ii) preclude that approach in the future (as has been claimed by a number of commentators)? This issue was addressed to some degree in the second note. However that article did not speculate on approaches that a competent authority might take.
In the search for a solution reference should be made to the Chapeau of Article 15(a) which provides that a methodology other than a strict comparison can be available. Does this have any meaning once 15(a)(ii) has expired? Given the impossibility of the situation that a competent authority faces if a producer has not been able to show that market economy conditions prevail, should some meaning be given to this? The Chapeau says that that the Competent Authority 'shall use' one method or another. Further reference must be made to Article 15(d) which, as has been seen above, deals with economy-wide and industry-wide market economy conditions. It does not provide for individual MET. The solution must be found by looking at Article 15 as a whole.
Currently the EU examines dumping for Chinese producers on an individual basis. Sampling does allow the Commission to group producers together but this is an administrative convenience rather than a change to the fundamental approach taken (and confirmed by Brosmann). When an individual producer cannot show MET then the costs and prices of one or more individual producers in an analogue country is used. So the costs of these producers replace an individual Chinese producers costs and prices. Again the fact that the same costs and prices might be attributed to a whole series or even all of the individual Chinese producers does not change the EU's individualistic approach.
One solution for the competent authority in 2017 is to move away from an individualistic approach and to fall in line with the economy-wide and industry-wide approach found in Article 15. The text of Article 15 clearly obliges this approach. The test in Article 15(a)(i) is not individualistic. It is not an individual producer that must show market economy conditions. The word used is 'producers' in the plural. And the test is industry-wide. This is also reflected in Article 15(d).
A non individualistic approach would mean that when the EU finds that market economy conditions do not prevail in the industry in question (on the basis of Article 15(a)(i)) and yet must determine market based costs and prices so as to find a true market based comparator for the determination of dumping, it should look to the costs and prices of the like product industry in the global or another market. Thus the EU should not use one or more individual producers in an analogue country but industry-wide costs and prices in a regional or global market in which market economy conditions prevail. This means in practice that the EU will still be able to use an external benchmark for costs and prices. The difference between the current practice and the post 2106 practice is that the examination will be industry wide and not based on the prices of one or more individual producers.
Article 15(a)(ii) provides that when the producers cannot show that market economy conditions prevail competent authorities can use a methodology not based on a strict comparison of domestic costs and prices in China. The lacuna created by the expiry of that provision needs to be filled within the context of the general WTO anti-dumping rules and the whole of Article 15 of the Protocol of Accession. Abandoning an individual producer approach, both when determining if market economy conditions prevail in China and in choosing an appropriate alternative normal value when MET does not prevail, allows the gap to be filled in line with the theory of anti-dumping law and the text of the Protocol.
