THE TTALK QUOTES 

On Global Trade & Investment

 

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No. 20 of  2016

TUESDAY, MARCH 29, 2016

Filed from Portland, Oregon

Click here for last Thursday's quote from the Confederation of British Industry.

CHINA'S ECONOMY - A CHARACTER QUESTION FOR ALLIES

"Granting China market economy status this year would not reflect current economic reality and is the wrong choice for the millions of American and European workers and their families who are facing unfair trade from China. It is critical that the United States and Europe continue to stand together for strong trade enforcement."

Sen. Ron Wyden
March 10, 2016
CONTEXT
When EU Commissioner Cecilia Malmstr�m was in Washington earlier this month, one of those she met with was Senator Ron Wyden of Oregon, who is the Ranking Member - the senior Democrat - on the Senate Finance Committee.  Today's quote is from a statement Senator Wyden issued following his meeting with Commissioner Malmstr�m.  To be sure, Senator Wyden expressed concern about more than the treatment of imports from China in the U.S. and the EU.  He also talked about issues in TTIP, the Transatlantic Trade and Investment Partnership, such as digital trade.  His first issue, however, was China and specifically whether the EU and others will grant market economy status or MES to imports from China. 

All of these things are linked, but for today we'll keep the focus on the MES issue.  The U.S., the EU, Japan, Canada and others have long considered China a non-market economy.  Whatever its more general meaning, the place where that designation has practical significance is in the evaluation of imports - more specifically the assessment of subsidies and/or dumping margins associated with imports that are injuring domestic industries. 

All such imports can be challenged under long-established, WTO-sanctioned national laws.  The difference is that when a non-market economy - China for example - is the source of those goods, the process of deciding on the appropriate level of antidumping or countervailing (anti-subsidy) duties is more complicated and generally less favorable to the exporter.  The key to that process is data from third country surrogates, and, to repeat, the usual result is higher penalties against the "unfair" imports.

To say the least, China resents the non-market-economy designation.  She would like it to go away, and her officials are of the view that all of China's WTO trading partners have an obligation to begin treating China as a market economy - to grant her imports market economy status - by the end of this year if not before.

December 11, 2016, is the magic date.  The day will mark the 15th anniversary of China's membership in the WTO.  It is also the trigger date for the expiration of the provision in China's Protocol of Accession, under which China's trading partners have treated it as a non-market economy for the past 15 years.  That, at any rate, is our understanding of China's position. 

Others take a different view. If you are looking for a place to begin to get a grip on this issue, you could do worse - much worse - than the hearing that the U.S.-China Economic and Security Review Commission held on February 24.  The full hearing was on the topic of China's Shifting Economic Realities and Implications for the United States, and one of the panels dealt specifically with whether China is, or rather needs to be treated as, a market economy as a result of its WTO Protocol of Accession of November 10, 2001, particularly Article 15 of that document.

Gary Hufbauer of the Peterson Institute for International Economics was one of the witnesses.   His preference would be for the United States to join the club that already includes Australia, New Zealand and several other countries and grant market economy status to imports from China.  He was clear, however, that this is not the only reading of the protocol, and on this point his testimony is worth quoting at length:

from the Testimony of Gary Clyde Hufbauer
February 24, 2012

Article 15(a)(ii) of the Protocol states:

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 ...
 
However, buried in Article 15(d) is the critical sentence:

In any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession.

Chinese officials insist that this sentence requires all countries to accord China market economy status on December 11, 2016, 15 years after China's accession, and that WTO members can no longer use surrogate costs and prices in AD cases. 

Some lawyers read the text differently.  While they agree that Article 15(a)(ii) effectively disappears on December 11, 2016, they do not agree that the Protocol confines WTO members to a binary choice between MES (strict comparison of export prices with Chinese [domestic] prices or costs) and NME (comparison with surrogate prices or costs).  They point to the opening language in Article 15(a), which states:

....the importing 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 ...

COMMENT I
So, what will happen?   What will the United States and the European Union do in response to the December 11 deadline of the Protocol?  We don't know.  Our understanding is that, in the United States, this is largely an administrative issue to be decided primarily by the Commerce Department, as the agency responsible for antidumping and countervailing duty calculations.

In his February 24 testimony, Mr. Hufbauer speculated that, "...come December 11, [the United States might well decide] that China has not established that it has become, in all important respects, a market economy."
 
"The Commerce Department," he said, could modify its current surrogate practices and instead "use a 'mix-and-match' approach - claiming on a case-by-case basis that some Chinese prices or costs reflect market conditions and others do not."
Our guess is that that is just what the U.S. will do if it makes any change at all, but we are not expert in these matters.

The situation in the European Union is both clearer and less certain.  Under EU law, China is treated as a non-market economy, and the law would need to be changed before the EU could treat imports from China as coming from a market economy.  Changing the law is a major undertaking and, given China's overcapacity in steel and aluminum, the stakes are huge.

We have no idea where the EU will come out on this.  One possibility being floated in the press is that of an EU-China deal, in which China eases up on steel exports to the EU in exchange for MES for Chinese goods generally.  Our impression is that Europe would lose more than it would gain from such an arrangement, but that, of course, depends in turn on how one reads the EU's (and America's) obligations to China under the WTO.

Finally, the issue of how the U.S. and the EU respond to this challenge will inevitably affect the relationship between the two of them in different ways.  Gary Hufbauer took note of one of them.  If, as expected, the U.S. continues to use some form of NME methodology for Chinese goods after the December deadline, they can expect a WTO challenge from China.  Ultimately, then, the issue would be decided by a WTO panel or, more accurately, a panel first and then the WTO Appellate Body.  Legalistic though those tribunals may be, the political context will matter, and the U.S. will be in a more difficult situation if it turns out to be the only WTO not granting full market economy status to China.

Alan Price of Wiley Rein raised another issue at the February 24 hearing: trade agreements like TPP and TTIP.  Those agreements too could feel the winds of the various MES decisions.  As Mr. Price explained:

"Any decision by other countries to provide China with market economy treatment ... would have significant negative effects for the United States."

Among other things, he argued, that is because U.S. exports into those markets would have to compete with more unfairly traded imports from China than might otherwise be the case.

COMMENT II
We confess it wasn't Lewis Carroll's marvelous book that served as our introduction to the Caterpillar who grills Alice so exquisitely.  It was the Disney movie.  In both mediums the recurring question is the same: "Who are you?"  It is a question one now has to ask of China. 

For the purposes of the WTO, China contends that the Chinese economy is in fact a market economy.  To that end, China agreed not only to Article 15 of the Protocol of Accession, discussed above, but also to Article 9 of the same document.  As Mr. Price pointed out in his testimony, "China committed under Article 9 of the Protocol to allow 'prices for traded goods and services in every sector to be determined by market forces.'"

Obviously a fulfillment of that requirement would in fact be the strongest argument in favor of MES for China, and yet, as far as we know, China is relying more on Article 15 (a)(ii) and 15(d) than on Article 9.

And then there is the Chinese Constitution which proudly announces that "The State-owned economy, namely the socialist economy under ownership by the whole people, is the leading force in the national economy." (Article 7)

Certainly, one can read too much into statements like this, but they do beg the question, what kind of country is China?  How does it think of itself?  And can that be so very different from the way it presents itself to the world?

Finally, a word about ambiguity.  It is possible that the Chinese are right and that from December 11, 2016, on all of its WTO partners are unequivocally obligated to treat the products of China as coming from a market economy. 

Alternatively, lawyers like Alan Price may be right and China's trading partners have no such obligation. Rather it is up to China to demonstrate to the satisfaction of those same trading partners that it meets their respective criteria for market economy status.

For our part, we are inclined to a third, less satisfying option.  That is to recognize the curse of ambiguity that hangs over China's 2001 Protocol of Accession to the WTO.  No doubt about it, ambiguity is the grease that makes agreements possible, and they needed it for this one.  It is also a curse that makes a mockery of the notion of agreed rules - and sows the seed for future discord.  The players in this drama - the U.S., the EU, China, and others - now have to deal with some of that discord.  Because the stakes are so very high, because each country stands to lose a lot if it overplays its hand, the MES issue should be manageable.  It should be... .
SOURCES & LINKS
A Statement from Senator Wyden takes to you to the China related statement issued by the Senator on March 10.  This was the source for today's featured quote.
 
The Protocol is a link to China's WTO Protocol of Access of November 10, 2001.

Commission hearing is a page on the website of the U.S.-China Economic and Security Review Commission with information on the Commission's hearing on February 24, the subject of which was China's Shifting Economic Realities and Implications for the United States. 

Hufbauer Testimony takes you directly to the written testimony of Gary Hufbauer for the above hearing.

Price Testimony takes you directly to the written testimony of Alan Price for the above hearing.

The Chinese Constitution is an English version of this document as it appears on an official Chinese website.

EU Steel Imports and MES is a link to a March 4 Reuters story on the possible linkage between these two issues.

 

 

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