NON-MARKET ECONOMY STATUS AND SURROGATE COUNTRY

By Hansa Sinha

This article aims to discuss the concept of non market economy as followed under WTO and various other jurisdictions with special emphasis on China’s Status post December 2016***

I.INTRODUCTION

The advent of globalization which is encouraged by World Trade Organization has seen an increase in anti dumping investigations globally. The various economic and financial crises have only fanned the flame. Countries such as China, Vietnam etc have arguably suffered at the hands of antidumping investigations on the principles of non-market economy. This article looks into the concept of non-market economy and surrogate country through legal provisions of International treaties and national legislations and provides some understanding by looking at the prevalent practices of various jurisdictions in this regard. It also discusses briefly the possible change in non-market economy status of China post December, 2016.

In layman terms a market economy is that where money is freely and fully exchanged for goods and services. In the same tone, a non-market economy thrives on the concept of self-sufficiency also understood as a barter trade. Herein, the necessities of livelihood are met by different activities undertaken by different households for e.g. fishing, hunting, farming, gathering etc. The excess amount of goods or skill sets is shared with others owing to governmental or social pressures. For instance, in Vietnam private ownership of property is strictly prohibited.[1] Unlike a market economy, no importance is placed on acquisition of money.[2] Thus non market economy is an economy that does not rely chiefly on market forces to allocate goods and resources to determine prices.[3]

II. NON-MARKET ECONOMY UNDER GATT/WTO

The non market economy categorization finds its origins in the 1954-55 Review Session of the GATT and in the consideration of issues relating to the Working Party on the Accession of Poland.[4] As per WTO, non market economy is that where the government has complete or substantially complete monopoly/control on trade. Further wherein all the domestic prices are fixed by the state. Thus, the law under GATT and the relevant agreement prescribe that a strict comparison with the domestic or home market prices may not be appropriate in such cases. Therefore, countries exercise discretion and devise methods to properly calculate the normal value of products exported from non-market economies.[5]

Today, this treatment has become a tool at the hands of many countries against the various non-market economy countries. USA, EU, India, the Latin American countries taken together are all utilizing the options against countries like China, Vietnam, Russia, Kazakhstan etc. However, Russia’s situation had been reviewed by United States and it was concluded that Russia had made a transition to market economy as far as the US anti dumping and countervailing duty laws are concerned.[6]  Similarly around the same time EU also afforded ‘market economy’ status to Russia.[7] Both Vietnam and China acceded to WTO on the condition of being contended with the non-market economy treatment for a said duration. For China this expires in 2016 December and for Vietnam in 2018. However, this in no manner prevents these countries from persuading jurisdictions to afford market economy treatment to them or specific companies in specific investigations. In fact, India now treats Vietnam as a market economy treatment in its investigations.[8]

III. ACCESSION OF CHINA PR TO WTO

On 10th December, 2001 a Hybrid economy i.e. China PR acceded to WTO. China’s Protocol of Accession allows other countries to treat China as an non market economy (NME) until the end of 2016. Till date neither USA nor EU has granted market economy status to China. Therefore Chinese producers possibly wait with bated breath and to see its status transform automatically by the end of this year. Under China’s Protocol of Accession with regard to dumping it is provided that WTO members may use those prices or costs that are not based on strict comparison with domestic prices or costs in China and further provides that in any case this provision shall expire 15 years after the date of accession. Pursuant to this, many countries like India, USA, EU, Brazil and Canada almost always use surrogate prices and costs to calculate the Chinese dumping margins.[9] The promoters of Chinese market economy status advocate that this almost always leads to higher margins and higher penalties.

a. Diplomatic campaigns by China PR

Considering that China became a leading target of dumping investigations, China launched vigorous measures in the form of diplomatic campaigns in order to ask its major trading partners to grant it market economy status. Many countries like New Zealand, Singapore, Malaysia and Australia gave it a market economy status in 2004 and 2005. Today 60 countries have given China a market economy status.[10] However, the campaign failed to garner support from countries such as United States, European Union, Canada etc.[11]

b. The December 2016 controversy

Although it is widely believed that by December 2016 China will automatically be given a market economy status, it is not devoid of confusion and contradiction. Many EU and US lawyers are advocating a different interpretation of Article 15 of the Accession Protocol and say that China will have to present sufficient evidence that it has established a market economy. In arguing this, they have reliance on the opening line of the Article 15 (d) which provides as follows:

‘Once China has established, under the national law of the importing WTO member that it is a market economy…..”

Therefore, it is being contended that these jurisdictions may not relieve the Chinese producers from satisfying their burden of proof.[12]

IV. SURROGATE COUNTRY- CONCEPT

Instead of taking the prices of a country that is a non-market economy, another market economy country’s prices are taken and that country is then called a surrogate country. WTO provisions do not have prescriptions on how to choose a surrogate country. Therefore, every country is free to devise their methods in this regard. Under US and EU regimes, importing country can identify a third country as the surrogate country and use the prices in that country as a comparable normal value. Such a third country can also be suggested by producers from importing and exporting countries. The final authority vests in the antidumping authorities of the importing country. However, regulations are unclear on whether there can be appeal if a party is not satisfied with the final choice.[13] Often China didn’t participate in investigations.

Certain Non-Frozen Concentrated Apple Juice from China was one of the few cases investigated by the USA wherein China participated on the choice of surrogated country. Till date, this appears to be the only case where Chinese exporters’ claim was successful in the USA. They actively argued that India as a surrogate country is not appropriate as India was not a significant producer of apple juice. The case was brought before US Court of International Trade. Finally Turkey (Chinese exporter’s suggestion) was taken as a surrogate country.[14]

V. USA AND NME

USA has since long considered non market economy status for China. When dealing with such non market economy imports, the Commerce Department constructs normal value by using Chinese company’s factors of production. However, it values those factors using prices paid for the inputs by some other company or companies located in a market economy at a similar level of economic development. Therefore, while the quantity of inputs such as raw materials, labour and energy comes from the respondent, commerce finds surrogate values to use as prices for those inputs. Taken all together the resultant value is an approximation of what the non market economy producer’s domestic price would be if it were operating in a market economy.[15]There are six diverse factors that are primarily analyzed for market economy treatment.

VI. INDIAN RULES FOR NON MARKET ECONOMY

Prior to 2002 India maintained a list[16] of about 17 countries which were given a non-market economy status. This included Russia, China, North Korea, Mongolia and some CIS countries. Post opposition from Russia a more generic format was adopted by way of amendment in the Custom Tariff (Identification, Assessment and Collection of Anti-dumping duty on Dumped Articles and for Determination of Injury) Rules, 1995 (Anti dumping Rules).  The word ‘any country’ was provided herein. Point number 7 and 8(1) to the Annexure I to the Rules i.e. Principles Governing the determination of normal value, export price and margin of dumping talks about non-market economy. Further 8(3) provide the criteria for the same. It clarifies that there exists a presumption of NME. If in the preceding three years of the ongoing investigation any WTO Member country or the Designated Authority has accorded NME treatment then the same can be given by India as well.[17] Although India is pursuing talks with China for making huge investments in areas such as industrial parks, railways etc, it appears that India is not inclined to give market economy status to China. India cites many factors such as lack of transparency in China with regard to minimum wages, property rights, huge government subsidies and loan rates, absence of proper business accounting standards etc.[18] A Chinese producer can make use of market economy questionnaire and can establish that it is operating under market economy conditions. If the Designated Authority is satisfied that market economy status can be afforded to the specific company or set of companies, the same is granted.[19] In fact, India has granted market economy status to a large number of Chinese companies.

VII. CONCLUSION

China has since its accession emerged as a super power. Many argue that a lot has changed. However, it is unclear, how China and other non market economies will be able to convince important members of WTO to grant it market economy treatment. India does not seem to be inclined, but it might also be waiting to cross the bridge when it comes. There are no public statements. China’s market economy treatment can also translate into shift in reliance on other trade remedies such as subsidies and countervailing measures. Whatever may be the outcome, the major regimes will have to rethink the strategies and principles that they apply to anti dumping investigations when dealing with market and non-market economies.

[1] Land Regulations, Embassy of the Socialist Republic of Vietnam in the United States of America (accessed on January 1, 2016 at 1:14 pm) http://vietnamembassy-usa.org/basic-page/land-regulations

[2]G.Wiesen, Edited by Shereen Skola, Wise Geek; What is a Non-Market Economy? (December 23, 2015) (last modified) http://www.wisegeek.com/what-is-a-non-market-economy.htm

[3] http://www.vocabulary.com/dictionary/non-market%20economy

[4] Andrew L Stoler, Treatment of China as a Non-Market Economy: Implications for Antidumping and Countervailing Measures and Impact on Chinese Company Operations in the WTO Framework. Institute for International Business, Economics and Law. Presentation to Forum on WTO System & Protectionism: Challenges China Faces After WTO Accession, Shanghai, 1  http://www.iit.adelaide.edu.au/docs/Shanghai.pdf

[5] Technical Information: https://www.wto.org/english/tratop_e/adp_e/adp_info_e.htm , Also see Article 2.7 of the Agreement on Anti dumping.

[6] Sabrina Tavernise,  U.S Decides to Recognize Russia as Market Economy, The New York Times (June 7, 2002) http://www.nytimes.com/2002/06/07/business/us-decides-to-recognize-russia-as-market-economy.html

[7] EU announces formal recognition of Russia as “Market Economy” in major milestone on road to WTO membership, Brussels, IP/02/775,  (May 29, 2002) https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwjDpuvepojKAhVBRI4KHc8uCj4QFggbMAA&url=http%3A%2F%2Feuropa.eu%2Frapid%2Fpress-release_IP-02 775_en.pdf&usg=AFQjCNFa_0H7xPbAOfTaRXxyQhZNQw6wpA&bvm=bv.110151844,d.c2E

[8] Digital Versatile Discs- Recordable (DVD-R and DVD-RW) from Malaysia, Thailand and Vietnam, Final Findings, (July 2, 2010)

[9] Yanni Chen, The Surrogate Country System for WTO Antidumping Investigations against Non-market economy countries: China as an Example, Faculty of Law, University of Toronto 19 (2013) https://tspace.library.utoronto.ca/bitstream/1807/42729/5/Chen_Yanni_201311_LLM_thesis.pdf

[10] Arun S, India unlikely to give China market economy status, Financial Express (September 16, 2014) http://indianexpress.com/article/business/economy/india-unlikely-to-give-china-market-economy-status/

[11] Gary Clyde Hufbauer & Cathleen Cimino, Looming US-China Trade Battles?: Market Economy Status (Part II), Trade and Investment Policy Watch (March 9, 2015), http://blogs.piie.com/trade/?p=145

[12] Jorge Miranda, Interpreting Paragraph 15 of China’s Protocol of Accession, Global Trade and Customs Journal, Wolters Kluwer Law and Business  (2014) http://www.kslaw.com/imageserver/KSPublic/library/publication/2014articles/3-1-14_GTCJ__Miranda.pdf

[13] Supra note 10 at 19

[14] Ibid 35.

[15] K. William Watson, Will Nonmarket Economy Methodology Go Quietly into the Night? US Antidumping Policy toward China after 2016, Policy Analysis, CATO Institute 763 (October 28, 2014)  http://object.cato.org/sites/cato.org/files/pubs/pdf/pa763.pdf

[16] Note to Annexure I to Anti Dumping Rules

[17] Rule 8(1) & 8(3), Antidumping Rules.

[18] Supra note 11

[19] Final Finding, Ball Bearings (upto 50 mm bore dia) from China PR, Poland, Russia and Romania, (March 19, 2004), http://commerce.nic.in/writereaddata/traderemedies/adfin_ballbearings_chinapr.htm [Market economy treatment was afforded to one Chinese exporter. All other responding and non-cooperative exporters were given an NME status.]

***This article first appeared in A Handbook on Trade Remedial Measures- An Indian Perspective: Anti Dumping, Countervailing/Subsidy & Safeguards Measures [LexisNexis], by TPM Consultants.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s