K. William Watson is a trade policy analyst at the Cato Institutes Herbert A. Stiefel Center for Trade Policy Studies.
The history of
lawlessness in
U.S. practice
toward China
strongly
suggests that
the United
States will not
accept the
2016
deadline
in good
faith.
INTRODUCTION
President Obama has an important decision
to make between now and December 11, 2016.
On that date the United States will no longer be
permitted by the rules of the World Trade Organization (WTO) to treat China as a nonmarket
economy (NME) in antidumping actions. Ending Chinas NME designation in U.S. law is the
only legal and logical option for the United States.
Yet it is also almost certainly not going to happen.
In standard antidumping practice, the U.S.
Department of Commerce determines the
margin of dumping by comparing a producers
U.S. price to normal valuethe price that the
producer charges in its home market or a constructed price based on costs of production. If
the imports have injured, or threaten to injure,
a domestic industry, a duty will be imposed on
future imports in order to offset the dumping.
In an NME investigation, however, Commerce approximates a home market price by
quantifying a producers factors of production
(such as labor and material costs) and valuing
those factors using prices paid by other producers in a third country. The practical consequences
of Chinas NME designation are that Commerce
ignores Chinese producers own costs and domestic prices when investigating whether to impose antidumping duties. The practice results in
higher margins and more uncertainty for both
Chinese producers and American importers.
The rationale behind treating NME imports differently is not unreasonable. It makes
no sense to compare prices as you would in a
normal antidumping investigation if those
prices are arbitrarily and independently set by
government dictate. But that is not how Chinas economy works anymore.
Chinese economic reforms that began in
1978 have lifted hundreds of millions of people
out of poverty and have enabled China to become one of the great economic powers of the
early 21st century. Chinas path toward liberalization has been a winding one that has not
producedand may never lead toa pristinely
Western-style economic system. Price controls
and state ownership remain embedded in cer-
Because the
Chinese firms
cannot know
what normal
value is until
Commerce
concocts it
through
surrogate
values, it is
very difficult
for them to
avoid
antidumping
duties.
Without the
legal discipline
of the World
Trade
Organizations
Antidumping
Agreement,
nonmarketeconomy
antidumping
practice has
been able to
develop in a
state of
lawlessness.
Make It Up As You Go
Much of the structure and purpose of modern U.S. trade law was devised through protectionist legislation in the 1920s, a time when
there was little concern about trade with centrally planned economies.
The end of World War II, however, saw
the beginning of the Cold War and the advent
of the global liberal trading system. Just as the
U.S. antidumping law came to be governed by
international disciplines under the General
Agreement on Tariffs and Trade (GATT), Western nations also had to figure out how to apply
domestic trade laws to imports from countries
where prices were not set by market forces.
At the international level, the result was a
broad exception to GATT rules on antidumping. To address imports from Czechoslovakia,
then the only GATT member with a centrally
planned economy, the parties to the GATT decided in 1955 to adopt an interpretive note to
Article VI governing antidumping measures:
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
market sales of a different producer in a different country.11 Although this practice completely
ignored the respondent producers actual prices
or production methods, it was a simple methodology to employ once the investigators determined which third country to use.
The fact that this method was used despite
not being provided for in U.S. statute or agency
regulations shows how NME treatment began
with lawlessness. Eventually, antidumping regulations were amended to catch up with agency
practice, so that in 1968 they provided for the use
of sales by third country producers, either in the
third country market or in the United States.12
The approach proved not to be feasible in
cases where the United States and the NME
country were the only places on earth that made
the product. In Electric Golf Cars from Poland,
U.S. investigators had originally used sales from
a Canadian producer to provide normal value,
but when that company stopped making golf
carts, investigators had no source for normal
value.13 So, not long after codifying its previous
practice in official regulations, U.S. authorities
began to develop a new, more convoluted and
complex practice of using surrogate values and
factors of production.14 By using third party
prices to value inputs, investigators were free
to use prices paid by companies using the same
inputs as the NME producer even if they were
not making the exact same product.
Rather than reserve this methodology
for cases in which more straightforward approaches were impractical, investigators simply
defaulted toward the more complex process in
all cases.15 Indeed, at each step in the evolution
of NME treatment, investigators took an approach developed to address a specific problem
in one case and turned it into standard practice
even when the conditions justifying the new
approach were not present.
Through a
combination
of statutes,
regulations,
or agency
practices,
formal
transition
mechanisms
developed
that would
ease the
passage of
countries out
of nonmarketeconomy
status as their
economies
liberalized.
So far,
Commerces
marketoriented
industry test
has been a
farce.
phony transition mechanisms became irrelevant as they were promoted out of NME status. But while former Soviet and other Easternbloc countries gained recognition in U.S. law as
market economies during the 1990s and early
2000s, China has retained its NME status.
In 2001, China joined the WTO while still being treated as an NME in U.S. and EU antidumping law. Rather than reform its discriminatory
practices to conform to WTO rules, the U.S.
government insisted that China accept NME
treatment despite WTO membership. The result
was an exception written into Chinas accession
agreement allowing the United States and other
WTO members to use the NME methodology
subject to some important limitations.
Paragraph 15 of Chinas WTO accession protocol reads:
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 in
the industry producing the like product
with regard to manufacture, production
and sale of that product.26
This provision makes a number of important
contributions to WTO law. First, it implies
that China does not meet the requirements of
the 1955 interpretive note that already allowed
antidumping investigators to ignore domestic
prices in countries with a state-controlled economy. Chinas accession protocol gave the United
States the right to use NME methodology regardless of whether China was in fact an NME.
Also, it incorporated the MOI test into WTO
law. The provision recognizes that Chinas economy is in transition and endorses the U.S. practice developed over the previous decade.
Chinas accession protocol also requires that
the United States abide by the outcome of its
NME test. Subparagraph 15(d) states that the
permission to use NME methodology ends
once China has established, under the national
law of the importing WTO Member, that it is a
market economy.27 So, Chinas accession protocol allows discrimination but does so in a limited
way by turning both transition mechanismsthe
NME and MOI testsinto WTO obligations.
The unwillingness of U.S. authorities to use
those mechanisms in a constructive way will
not matter forever because even those mechanisms are transitional. The most important
thing to know about the NME provision in
Chinas accession protocol is that it expires in
December 2016.28 After that date, the United
States will not be allowed to treat China as
an NME regardless of whether Commerce
thinks its economy, industries, or manufacturers meet the conditions of any test. Vietnam
has a similar provision in its WTO accession
agreement that expires in 2018.29 After that
time, the United States will have no right to
use NME methodology against imports from
any of its trading partners at the WTO.
Chinas
accession
protocol gave
the United
States the
right to use
nonmarketeconomy
methodology
regardless
of whether
China was
in fact a
nonmarket
economy.
Many of the
nonmarket
aspects of
Chinas
economic
policies that
Commerce
points to are,
in fact,
common
in other
countries
comfortably
recognized as
market
economies.
market-determined but are instead set by central planners, then they may bear no meaningful relationship to export prices.30 But this situation does not exist in China today, nor does
the U.S. government claim that it does. When
Commerce denied Chinas most recent formal
request to be removed from the NME list in
2006, it nevertheless noted, The era of Chinas
command economy has receded and the great
majority of prices are liberalized.31 Despite
this general observation, Commerce pointed to
a number of systemic and institutional policies
that keep China from passing the five-factor
test to be graduated from NME status.
Many of the nonmarket aspects of Chinas
economic policies that Commerce points to
are, in fact, common in other countries comfortably recognized as market economies. For
example, direct currency controls and limits on
capital account transactions are used in various
ways throughout Asia and Latin America. Likewise, many countries maintain state-owned
monopolies and restrict foreign investment in
priority industries. These are not good policies and they certainly distort the proper functioning of markets, but they do not alter the
viability of price comparisons in antidumping
throughout the entire economy.
Commerce also went beyond the five factors
in discussing intellectual property laws, industrial policy in the automotive and steel sector,
trade liberalization, and corruption.32 These issues are not especially relevant to the question of
whether the Chinese economy operates according to market principles, but they do reflect the
priorities of politically powerful U.S. businesses.
The most important criteria for maintaining Chinas NME status, according to the Commerce Department, is the prevalence of statedirected financing. Chinas government owns the
vast majority of the banking sector and is accused
of giving preferential credit to state-owned firms
or to state-approved activities.33
Strong government intervention in financial
markets does not justify continued use of NME
treatment. For one thing, while liberalization of
the banking sector may have some bearing on the
extent to which Chinas economy operates on
Double Remedies. In 2006, Commerce decided to impose anti-subsidy duties on Chinese imports subject to investigations under the countervailing duty (CVD) law. This
reversed a decades-old policy of exempting
NMEs from CVD actions.
The exemption was itself a rare display of
logic in the history of NME treatment. If an
economy is so controlled by government that
prices were set by central planners, how can
you possibly calculate the effect of a particular
government bounty on export prices?
The idea that countries subject to NME
methodology in antidumping were exempt
from the CVD law had a significant effect in
the formation of transition mechanisms in the
early 1990s. Graduating from the NME designation was not always a good outcome for
NME producers because it would then open
them up to CVD investigations. One reason
why the bubbles of capitalism approach to
transition was abandoned by Commerce was
that petitioners immediately filed CVD complaints against those producers found to be
operating under market conditions.36
Reversing the policy in 2006 caused a host
of logical and legal problems. As noted above,
Commerce had to decide that China was a market economy and an NME at the same time.
The decision showed how U.S. authorities were
willing to resort to total nonsense in order to
keep Chinas firms from competing in the U.S.
market.37 It also upset the balance worked out
in Chinas WTO accession protocol.
The problem with Commerces decision was
not that China should remain exempt from CVD
measures, but that exposing China to CVD liability
should have been accompanied by the end of NME
treatment in antidumping. Doing so would have
given protectionist U.S. industry what they sought:
a new tool against Chinese exporters accused of
benefiting from unfair subsidies. Maintaining
NME treatment gave the protectionists what
they wanted without granting Chinese producers
the legally and logically necessary recompense.
China successfully challenged the current practice in WTO dispute settlement on
the grounds that using CVD measures and
The U.S.
authorities
were willing
to resort to
total nonsense
in order to
keep Chinas
firms from
competing
in the U.S.
market.
10
The U.S.
government
continues to
claim that
Chinas
economic
structure
justifies a
wholesale
departure
from standard
antidumping
practices.
tus is a matter of law rather than fact, which directly undermines the U.S. position.
It has become quite clear that the United
States has no intention of complying with
WTO rules, despite numerous legal challenges
on both double remedies and separate rates.47
That defiant attitude reflects longstanding
U.S. practice of ignoring WTO condemnation
of its trade remedy practices. The most noted
example of U.S. defiance has been the decadeslong saga over zeroing, a practice the United
States uses to inflate dumping margins, even in
market economy cases, that has been deemed
illegal by the WTO over and over again.48
NME treatment is poised to become just one
more way the United States flagrantly flouts
WTO rules on antidumping.
Willful Ignorance
One possibility is for U.S. authorities to completely ignore the expiration of Chinas NME
exception. There is no automatic trigger in U.S.
law that would end the use of NME methodology. Rather, Commerce has to decide that China
is no longer an NME based on the factors in the
NME test. As discussed above, the outcome of
that test is purely political.
That means the Obama administration currently has the power to end Chinas NME designation if it so chooses. The deadline to do so is
just before the end of his second term. Stubbornly ignoring that deadline would completely disregard the agreement made when China joined
the WTO and would violate international trade
rules. But, that fact has not prevented lobbyists
and representatives of protection-seeking industries from advocating just such an approach.49
Some commentators have begun to present an argument that the permission to treat
China as an NME does not actually expire
in 2016.50 They argue that only one portion
of the NME section will expire, and that the
remaining portionswhich require that countries offer the NME and MOI tests to Chinese
producersare still in effect. The argument,
while appealing to antidumping petitioners
and their lawyers, is fundamentally lacking because the part that expires is the one provision
that expressly permits NME treatment. The
fact that everyone has understood for over 10
years, without controversy, that the NME permission would expire at the 2016 deadline also
makes it difficult to take seriously a previously
unconsidered argument to the contrary.51
Nevertheless, the U.S. government could
choose to press this argument in dispute settlement at the WTO. Based on the WTO Appellate Bodys history of narrowly interpreting the
NME exception, it seems unlikely this hypothetical U.S. position would succeed.
Constructed Value
Another more nuanced possibility is that
the United States will formally recognize China
as a market economy while continuing to use
some kind of modified methodology in antidumping investigations. Even without the special procedures of the NME methodology, U.S.
law gives Commerce an option for bypassing
Chinese companies domestic prices.52
One option is for Commerce to decide that
the particular market situation in the exporting country does not permit a proper comparison with the export price or constructed export
price.53 Under U.S. law, such a determination
would permit investigators to use an alternative
methodology. When Congress implemented
the WTO Antidumping Agreement into U.S.
law, the accompanying Statement of Administrative Action seemed to contemplate that
a particular market situation might prevent
proper price comparison where there is government control over pricing to such an extent
that home market prices cannot be considered
to be competitively set.54
11
Nonmarketeconomy
treatment
is poised to
become just
one more
way the
United States
flagrantly
flouts
World Trade
Organization
rules on
antidumping.
12
Even if
Commerce
determines
that Chinese
domestic
prices are
unusable,
U.S. and
WTO rules
specifically
provide
only two
alternative
methods for
calculating
normal
value.
global trade disciplines will strengthen the system. A course correction on the issue of Chinas
NME treatment would send a clear signal that
the United States values the rules-based trading
system, especially the foundational principle of
nondiscrimination. Making that change before
the 2016 deadline would show even stronger respect for the law and would do much to bolster
Americas ability to provide leadership in global
trade relations.
Bringing the United States into compliance with trade rules and proving its capacity for leadership would also improve the U.S.
governments influence in global trade negotiations. Much of the impasse currently preventing progress in WTO efforts to further
liberalize global trade stems from confrontational attitudes between developed countries
and emerging economies such as Brazil, India, and China. Neither side trusts the others
willingness to take on new obligations and
reforms, and for good reason. Perhaps U.S.
officials are not genuinely interested in bridging that divide, but if they are, addressing the
NME issue will be essential.
CONCLUSION
The United States has a choice to make. The
end of Chinas NME status in December 2016
will necessitate a change in U.S. antidumping
policy. Whether that change is for the better is up to U.S. policymakers. Essentially, the
choice is between good faith compliance with
global trade rules or stubborn adherence to illegal protectionism.
Unfortunately, history prompts us to expect the latter. The U.S. antidumping practice against NMEs has always stretched the
bounds of law and logic. Even as Chinas economy liberalizes, U.S. authorities at the Department of Commerce have increased their use
of discriminatory methods to disrupt legitimate trade and to construct higher margins
for Chinese exporters. The United States is already operating outside the bounds of current
WTO rules, and tit-for-tat trade litigation and
retaliation has already begun. What will hap-
13
The United
States has a
strong interest
in maintaining
the rule of law
in global trade
relations.
14
Law and
logic are both
on the side
of ending
nonmarketeconomy
treatment
altogether.
NOTES
1. 19 U.S.C. 1677b (2012).
2. Jacob Viner, Dumping: A Problem in International
Trade (Chicago: University of Chicago Press, 1923),
pp. 23957.
3. See Brink Lindsey and Daniel J. Ikenson, Antidumping 101: The Devilish Details of Unfair
Trade Law, Cato Trade Policy Analysis no. 20,
November 21, 2002.
4. Ibid.
5. Peter Buck Feller, The Antidumping Act and
the Future of East-West Trade, Michigan Law Review 66 (November 1967): 11719.
6. 19 C.F.R. 351.408.
7. See Daniel Ikenson, Nonmarket Nonsense:
U.S. Antidumping Policy toward China, Cato
Trade Briefing Paper no. 22, March 7, 2005.
8. Ibid.
9. General Agreement on Tariffs and Trade, annex I, Ad Article VI.
10. 19 U.S.C. 1677b.
11. Fur Felt Hoods, Bodies, and Caps from Czechoslovakia, 27 Fed. Reg. 6099 (June 22, 1962); JalousieLouvre-Sized Sheet Glass from Czechoslovakia, 27 Fed.
Reg. 8457 (August 15, 1962).
12. Donald L. Cuneo and Charles B. Manuel
Jr., Roadblock to Trade: The State-Controlled
Economy Issue in Antidumping Law Administration, Fordham International Law Journal 5, no. 2
(1982): 29092.
13. 40 Fed. Reg. 25497 (June 11, 1975).
14. See Cuneo and Manuel, pp. 29295.
15. See Joseph P. Hornyak, Treatment of Dumped
Imports from Nonmarket Economy Countries,
Maryland Journal of International Law 15, no. 1
(1991): 2729.
16. In a formal sense, the United States does not
actually have a list of NME countries (although
Europe does). According to U.S. law, Commerce
can determine that a country is an NME at any
time, and that determination remains in force and
unchallengeable until Commerce revokes it. 19
U.S.C. 1677(18)(C).
17. Former NMEs include Poland (graduated in
1993), the Czech Republic (1998), Slovakia (1999),
Hungary (2000), Latvia (2001), Kazakhstan (2002),
Russia (2002), Romania (2002), Estonia (2003),
15
Lithuania (2003), and Ukraine (2006).
18. Countries currently designated as NMEs are
China and Vietnam, as well as nine former Soviet
states: Armenia, Azerbaijan, Belarus, Georgia,
Kyrgyzstan, Moldova, Tajikistan, Turkmenistan,
and Uzbekistan.
19. 19 U.S.C. 1677(18).
20. 19 U.S.C. 1677(18)(D).
21. Judith H. Bello, Alan F. Holmer, and Jeremy
O. Preiss, Searching for Bubbles of Capitalism:
Application of the U.S. Antidumping and Countervailing Duty Laws to Reforming Nonmarket
Economies, George Washington Journal of International Law and Economics 25 (1992): 69195.
22. Ibid.
23. See Sulfanilic Acid from the Peoples Republic of
China, 57 Fed. Reg. 9409 (March 18, 1992); Robert
H. Lantz, The Search for Consistency: Treatment
of Nonmarket Economies in Transition under
United States Antidumping and Countervailing
Duty Laws, American University International Law
Review 10, no. 3 (1995): 9931059.
24. Chrome-Plated Lug Nuts from the Peoples Republic of China, 57 Fed. Reg. 15052 (April, 24, 1992); see
also Import Administration Antidumping Manual,
Chapter 10, p. 32, http://enforcement.trade.gov/
admanual/index.html.
25. Import Administration, Issues and Decision
Memorandum for the Antidumping Duty Investigations of Certain Coated Paper Suitable for High Quality
Print Graphics Using Sheet-Fed Presses from the Peoples
Republic of China (September 20, 2010), p. 8, http://
enforcement.trade.gov/frn/summary/prc/201024184-1.pdf.
26. Protocol on the Accession of the Peoples Republic of China, 15, WT/L/432, (November 23,
2001).
27. Ibid.
16
Ample Discretion RE the NME Designation,
lincicome.blogspot.com (blog), September 11, 2012,
http://lincicome.blogspot.com/2012/09/document
ing-docs-ample-discretion-re.html.
17
to Chinas Market Economy Antidumping Treatment in 2016.pdf.
54. Statement of Administrative Action accompanying H.R. 5110 (H.R. Doc. No. 316, 103d Cong.,
2d sess.) at 822 (1994) [emphasis added].
55. Import Administration, Inquiry into the Status of
the Russian Federation as a Non-Market Economy Country under the U.S. Antidumping Law, June 6, 2002,
http://enforcement.trade.gov/download/russianme-status/russia-nme-decision-final.htm.
Zeroing In: Antidumpings Flawed Methodology under Fire by Daniel J. Ikenson, Cato
Institute Free Trade Bulletin no. 11 (April 27, 2004)
China: Just Say No to Monetary Protectionism by Dr. Nadine Abdallah and Lee Hoskins,
Cato Institute Free Trade Bulletin no. 6 (January 15, 2004)
Byrdening Relations: U.S. Trade Policies Continue to Flout the Rules by Daniel J.
Ikenson, Cato Institute Free Trade Bulletin no. 5 (January 13, 2004)
Bull in a China Shop: Assessing the First Section 421 Trade Case by Daniel J. Ikenson, Cato
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Reforming the Antidumping Agreement: A Road Map for WTO Negotiations by Brink
Lindsey and Daniel J. Ikenson, Cato Institute Trade Policy Analysis no. 21 (December 11, 2002)
Antidumping 101: The Devilish Details of Unfair Trade Law by Brink Lindsey and Daniel
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Coming Home to Roost: Proliferating Antidumping Laws and the Growing Threat to U.S.
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Chinas Long March to a Market Economy: The Case for Permanent Normal Trade
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Policy Analysis no. 7 (August 16, 1999)
Trade and the Transformation of China: The Case for Normal Trade Relations by Daniel
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