The granting of Market Economy Status (MES) to China: an historical perspective

From the Second Supplementary Provision to Section 15 of WTO China’s Accession Protocol

The granting of the Market Economy Status (MES) to China is one of the most relevant topic in the current debate on international trade and has raised economic, political and legal issues. According to Section 15 of China’s Protocol of Accession to the WTO, signed in 2001, indeed, WTO Members have to grant China “Market Economy Status”, i.e. to treat China as a market economy and to use Chinese prices for the determination of the normal value in anti-dumping proceedings, after 11 December 2016. In the following paragraphs, I will briefly examine the issue under an historical perspective.

The “Non-Market Economies (NMEs)” in the GATT (1947–1995): the Second Supplementary Provision to Article VI

GATT aim was to create the basis for a Multilateral Trading System after the failure of the creation of the ITO (International Trade Organisation) and to provide incentives for trade liberalisation. However, it was weakened by its provisional nature and the absence of Non Market Economies (NMEs) during the GATT negotiations. Thus, there was no real definition of NMEs. However, from the mid-1950s onwards, because of the growing tensions of the Cold War and the existence of many countries with a centralized economy, GATT signatories had to deal with the issue of NMEs. In 1955, GATT Members introduced the Second Supplementary Provision to paragraph 1 of GATT Article VI (anti-dumping) which states:

“It is recognized that, in the case of imports from a country which has a complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the State, special difficulties may exist in determining price comparability for the purposes of paragraph 1, and in such cases importing contracting parties may find it necessary to take into account the possibility that a strict comparison with domestic prices in such a country may not always be appropriate” (Source: WTO Anti-dumping Agreement, WTO website)

This provision includes the first reference to a NME as a situation in which a country has a complete or substantially complete monopoly of its trade and where all domestic prices are fixed. By stating that countries may find difficulties in determining price comparability, this provision gave GATT Members the possibility of using alternative methods. Many GATT signatories referred to such provision when applying the “third country methodology”.

The use of the “third country methodology” was proposed by Czechoslovakia, at the time a NME country and one of the original GATT signatories (another NME — Cuba — was among them). After Czechoslovakia and Cuba, other NMEs joined the GATT: Yugoslavia (1966), Poland (1968), Romania (1971) and Hungary (1973). The GATT Working Party on the Accession of Poland explicitly referred to “third country methodology”.

Yugoslavia was given a different treatment by the GATT Members, compared to the other NMEs. Indeed, in 1962, Yugoslavia was asked to implement reforms (e.g. elimination of State intervention, adoption of customs tariff, etc.) which it undertook even if it did not become a market economy. The decision to let Yugoslavia join the GATT was motivated also by political reasons (i.e. Yugoslavia stance as a “non-aligned” country).

NMEs in the WTO: art. 2.2 & 2.7 of the Anti-Dumping Agreement (ADA)

The WTO agreements do not explicitly mention NMEs. However, article 2.2 ADA states that a WTO member may use the “third country methodology” when there is a “particular market situation” (which may exist even in a market economy country), while art. 2.7 ADA states that Article 2 ADA (“Determination of dumping”) is “ without prejudice to the second Supplementary Provision to paragraph 1 of Article VI in Annex I to GATT 1994”.

After the establishment of the WTO in 1995, many NMEs countries (Croatia, Moldova, Bulgaria, Estonia, Georgia) applied for membership. As for Yugoslavia, they were asked to fully implement the economic reforms needed to become a full-fledged WTO Member and thus to accept the market economy model. Their commitments towards a market oriented economy were included in their Accession Protocols.

EU Regulation 2016/1036 (basic AD regulation) and its MES criteria: are the EU criteria WTO-law based?

Article 2, par. 7 c) of the EU Regulation 2016/1036 lists 5 criteria for the granting of MES to NMEs countries: a) absence of State interference in firms decisions; b) firms have clear accounting records which are in line with international standards; c) absence of non-market distortion (e.g. absence of barter trade); d) firms are subjected to bankruptcy and property laws; e) exchange rates are at market rate. China has requested EU country-wide recognition of the above mentioned criteria, as foreseen in Section 15 par. (d) of the Protocol of Accession — whose implications I will examine in detail in another article — , and has challengend them before the WTO Dispute Settlement Body (cfr. EU-Fasteners from China) even if only the third of the criteria mentioned above is actually fullfilled. A question thus arise: are those EU criteria WTO-law based? In my opinion, the 5 EU MES criteria are WTO-law based and I will briefly explain why.

The 5 criteria, introduced in the EU legislation by the Council Regulation 905/98 of 27 April 1998, allow the EU to apply market economy rules (as provided for in art. 2 parr. 1–6) in determining the normal value to NMEs countries (and thus to China) in cases where it is shown that “market conditions prevail for one or more producers subject to investigations in relation to the manufacture and sale of the product concerned”. In this regard, par. 151 of the Report of the Working Party on the Accession to China to the WTO states that “when determining price comparability in a particular case in a manner not based on a strict comparison with domestic prices or costs in China, the importing WTO Member — e.g. the EU — should ensure that it had established and published in advance (1) the criteria that it used for determining whether market economy conditions prevailed in the industry or company producing the like product and (2) the methodology that it used in determining price comparability” (Source: WTO website).

This is the case of the EU and its MES criteria intoduced in the EU law in 1998 and thus before China’s WTO acession in 2001. In my opinion, the 5 MES criteria are WTO-law based. When joining the WTO, NMEs — including China — decided to fully abide to market rules and to become fully-fledged market oriented economies (cfr. Section 9 of China’s WTO Accession Protocol). As seen for the case of China, while drafting the Accession Protocol, the Working Parties agreed to determine normal value for situations where strict price comparability is not possible.

Which countries have granted or not granted MES to China?

As of today, WTO Members are deeply divided on the issue. Some WTO Members (e.g. US, India) refuse to grant such a status to China while a few others (e.g. Argentina, Brazil) have only granted a “political” MES. The Commonwealth of Australia is one of the few WTO Members which decided to grant MES to China even before Section 15 expiry.

China has brought the issue before the WTO Dispute Settlement Body against the European Union on 12 December 2016 requesting consultations. On 3 April 2017, the DSB decided to establish a Panel (DS 516, European Union — Measures Related to Price Comparison Methodologies). However, the dispute and Section 15 of China’s WTO Acession Protocol, will be further examined in another article.

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