Abstract

Paragraph 15(d) of China’s Accession Protocol provides that the provisions of subparagraph 15(a)(ii) shall expire in 2016. Subparagraph 15(a)(ii) permits the importing Member to derogate from a strict comparison with Chinese prices or costs when determining the normal value of the products if the producers under investigation cannot clearly show that Market Economy conditions prevail in the industry in question. While a respected commentator argues that, despite the stipulated expiration, the importing Member can still treat China as a Non-Market Economy and use alternative methodologies based on the remaining provisions in the chapeau, this paper takes a different view by analyzing the role and textual structure of paragraph 15(a) in light of the negotiation documents and relevant rulings of the Appellate Body in EC-Fasteners. It demonstrates that the expiry of subparagraph 15(a)(ii) in 2016 will have the same effect as the expiry of paragraph 15(a) as a whole. Thus, there will no longer be any legal basis in China’s Accession Protocol for the importing Member to derogate from a strict comparison with Chinese prices or costs after 2016. In this sense, the expiration of subparagraph 15(a)(ii) in effect bestows Market Economy Status on China.


I. Introduction

China has long been categorized by many WTO Members as a Non-Market Economy (NME). China has thereby been subjected to methodologies that deviate from the strict comparison with domestic prices or costs required by the GATT 1994 and the Antidumping Agreement. This different treatment is based on paragraph 15(a) of China’s Accession Protocol, which permits the importing Member to use an alternative methodology when Chinese producers cannot clearly show that market economy conditions prevail in the industry in question. Meanwhile, paragraph (d) of Article 15 contains an expiration clause stating that the provisions of subparagraph 15(a)(ii) shall expire 15 years after the date of China’s accession. For many scholars and governments, this clause is the basis for the automatic shift of China’s status from Non-Market Economy to Market Economy in 2016.

On 15 July 2011, the Appellate Body, in its report in EC-Fasteners, interpreted Article 15 of China’s Accession Protocol for the first time. The Appellate Body largely endorsed China’s claim that Article 15 contains only a temporary and limited derogation from the general rules for determining normal value in antidumping investigations. The Appellate Body also affirmed that these special rules would expire in 2016 as established by paragraph 15(d).

Bernard O’Connor has challenged this consensus by arguing that paragraph 15(d) only provides for the expiry of subparagraph 15(a)(ii) in 2016. Thus, the chapeau of Section 15 and subparagraph 15(a)(i) remain, and the importing Member can still resort to the chapeau to justify its use of a methodology that is not based on a strict comparison with domestic prices or costs. O’Connor concludes that the expiry of subparagraph 15(a)(ii) will not automatically grant China Market Economy Status. Instead, China’s status will still be left to the discretion of the importing Member according to its domestic laws.

The Market Economy Status here refers to the eligibility of a country for the obligatory use of domestic prices or costs when determining the normal value of the products in antidumping investigations, which is generally provided for by Article VI of the GATT 1994 and the Antidumping Agreement. However, for WTO Members who are subject to either a determination of Non-Market Economy in the sense of the exception in the GATT 1994 itself or a specific provision in this regard in a respective WTO Accession Protocol, the importing Member may adopt an alternative methodology instead, such as the use of surrogate prices in a third Market Economy country.

The Market Economy Status issue is extremely important to domestic enterprises, related industries and the overall environment for trade and investment in China. First, Chinese exporters have suffered significant financial losses due to the alternative methodologies used to calculate antidumping duties justified by the Non-Market Economy provision in paragraph 15(a). A classic example is the parallel U.S. antidumping cases against color television receivers from China and from Malaysia from 2003 to 2004. The televisions manufactured in China and Malaysia was essentially identical and used the same internationally available parts and components. However, although the U.S. Commerce Department found no dumping in the action against Malaysia, weighed-average dumping margins of up to 78% were found in the proceeding against Chinese producers. This discrepancy occurred because the U.S. Commerce Department treated China as a Non-Market Economy in the investigation and used India as a surrogate country when determining the normal value of color television receivers from China. Consequently, Chinese enterprises had to pay extremely high antidumping duties and lost significant market share to foreign competitors. Second, the use of Non-Market Economy procedures also has devastating impacts on the related industries. The consequent burden of high antidumping duties drags domestic enterprises into business difficulties and cuts down their spending in research and development, thereby impedes the technological advancements of the entire industry. Moreover, the distress in the dumping industry could also negatively impact the upstream and downstream industries. For instance, the kinescope industry in China also shrank dramatically after the levy of antidumping duties on color television receivers of Chinese origin in the U.S. and the European Union. Finally, the considerable discretion enjoyed during the course of adopting alternative methodologies makes it easier for importing Members to make an affirmative finding in an antidumping investigation for a Non-Market Economy than it is for them to make such a finding for a Market Economy. Unsurprisingly, the rate of affirmative findings in antidumping investigations for Non-Market Economy countries like China is relatively high, which deteriorates their overall environment for trade and investment. Therefore, whether other importing Members will still be justified to treat China as a Non-Market Economy in antidumping investigations after 2016 matters a lot to domestic enterprises, related industries and the overall environment for trade and investment in China.

This paper will refute O’Connor’s position and evaluate China’s status in future antidumping investigations after the expiration of subparagraph 15(a)(ii) in 2016. It first examines the text and context of Section 15 of the Accession Protocol, including the negotiation history of the Section and relevant provisions in the GATT 1994 and the Antidumping Agreement. It also briefly discusses the EC-Fasteners case and the Appellate Body’s interpretation of Section 15 in its report. The paper devotes the next section to introducing and arguing against O’Connor’s interpretation of the termination of subparagraph 15(a)(ii), based on an analysis of the role and textual structure of paragraph 15(a). This paper then demonstrates that the expiry of subparagraph 15(a)(ii) will have the same effects as the expiry of paragraph 15(a) as a whole. The paper also envisages possible reasons for the partial termination under the second sentence of paragraph 15(d), which refers to subparagraph 15(a)(ii) alone. Finally, it concludes that the expiry of subparagraph 15(a)(ii) in effect bestows Market Economy Status on China, since after 2016 there will be no legal basis in China’s Accession Protocol for an importing Member to categorize China as a Non-Market Economy and thereby treat it differently from other Members with regards to the determination of the normal value of the products.