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China tries to dump WTO anti-dumping rules
By Jayanthi Iyengar

The Chinese have been remarkable in many ways, but they may set yet another record by showing the non-market economies (NMEs) a way to work around the anti-dumping norms under the World Trade Organization. Many experts consider these norms to be discriminatory and some WTO members such as China have already sought a review of these provisions. China faces more than 500 dumping cases worldwide and is considered by many a trade predator, while China sees itself as victimized by unfair anti-dumping charges.

Broadly, non-market status means that the country in question is not a free-market economy and its pricing policy is based on factors other than demand and supply. The United Nations Conference on Trade and Development (UNCTAD) defines a non-market economy as "a national economy in which the government seeks to determine economic activity largely through a mechanism of central planning, as in the former Soviet Union, in contrast to a market economy which depends heavily upon market forces to allocate productive resources. In a non-market economy, production targets, prices, costs, investment allocations, raw materials, labor, international trade and most other economic aggregates are manipulated within a national economic plan drawn up by a central planning authority; hence the public sector makes the major decisions affecting demand and supply within the national economy." A market economy, in contrast, is one where the price policy is free and a function of demand and supply, without any interference from the state.

China wants to be recognized as a market economy because of its numerous market reforms and liberalization.

The WTO Anti-dumping Agreement allows member nations to treat NMEs differently from countries that enjoy the market-economy status (MES), while working out anti-dumping and safeguard duties. This works to the disadvantage of the NMEs, since it translates into higher prices for their exports, which means lower sales and margin for the exporter.

Chinese ingenuity
China is seeking a review of its NME status at multiple forums using various strategies, but its ingenuity lies in buttoning up a series of free trade agreements with trading partners at the bilateral level that grant it MES. The bilateral agreements are outside the WTO purview. The agreements that China has signed up to now are with small countries and Asian neighbors - Singapore, Malaysia, Thailand, New Zealand, Kyrgyzstan, Benin and Togo - but this could well be the beginning of trend in which the Dragon could force the United States and the European Union into granting it MES through the weight of sheer numbers.

Of course, it goes without saying that every NME cannot be China, and only the Middle Kingdom can leverage as well its growing economic and geopolitical clout to drum up support; one thing that cannot be scoffed at is the emerging superiority of Chinese diplomacy. The Middle Kingdom has repeatedly demonstrated this in recent months both within Asia and globally. A good example is its able management of its neighbors, as a result of which the US administration of President George W Bush has been unable to force revaluation on the Chinese yuan, despite trying to generate support at the Association of Southeast Asian Nations (ASEAN) early this year. Another is the finesse with which China stalled the recent US move at the United Nations Human Rights Commission to pass a resolution against it for human-rights violations.

"The best way to argue against anti-dumping is to call for the dumping of anti-dumping provisions," Barun Mitra, activist and director of the New Delhi-based free-markets think-tank Liberty Institute, told Asia Times Online. "This is one of the most retrograde systems within the WTO. If developing countries like India and China are not aggressively calling for this [dropping the anti-dumping provisions], it is because they have also become major anti-dumping seekers. But this will [only] affect their own competitiveness." Mitra has been participating in the WTO deliberations since 1999.

Non-market status implications for China
As a major exporting nation, the economic implications of NME status is a matter of major concern for China, but equally important to it are issues of "face" or national pride. China has showcased itself as a a model economy that has successfully made a transition from a controlled to a market economy in the shortest possible time. It irks the Chinese that they are not being considered a market economy for anti-dumping and safeguard duty purposes, though Russia was accorded this status in 2000, even when it was still negotiating entry to the WTO. China, on the contrary, acceded to the WTO in December 2001.

The importance of MES status for the Chinese is demonstrated by the aggressiveness with which the Middle Kingdom has been pursuing the issue at multiple forums. These include:
  • Moving the WTO to review the NME clause in the anti-dumping agreement.
  • Diplomatically pressuring the US and others to grant it MES status.
  • Pressing for its rights under its protocol of accession to the WTO.

    Thus in March 2003, the Middle Kingdom made a beginning by tabling a number of negotiating proposals aimed at modifying provisions of the current anti-dumping agreement, including the non-market-economy clause. China sought the review under the WTO "rules" negotiations. The Chinese also initiated the process of requesting MES status with the US and the EU. In April this year, Chinese Premier Wen Jiabao followed this up by lobbying with US Vice President Dick Cheney during his official visit to China. The next was Wen's official visit to Brussels in May when he raised the same issue with the EU.

    Though these measures didn't bear fruit - the EU turned down China's request for MES early this month - the Chinese themselves have not been sitting idle. Since April, they have signed bilateral agreements in which trading partners have agreed not to use the discriminatory clause in the anti-dumping agreement while deciding anti-dumping cases against China.

    These are small countries and also those that do not have much to lose by granting MES to China, though China's growing dominance of Asia is also not to be underestimated. As Ananbel Egan, press officer for the European Commission delegation to China explained to Asia Times Online, it is possible for such countries to grant China MES as "the number of AD [anti-dumping] cases opened by these countries against China in 2003 was very limited - two cases for New Zealand and none for Malaysia".

    The EU, on the contrary, has 32 definitive anti-dumping measures currently in force and 22 ongoing anti-dumping investigations (six new cases and 16 reviews) against China. The most important products by import volume subject to measures are bicycles and their parts, fluorescent lamps, dead-burned magnesium, and fluorspar. The US, another major trading partner, has 52 anti-dumping measures in force against China at present on products such as chemicals, non-iron-and-steel products (eg potassium permanganate, pure magnesium, steel concrete-reinforcing bars).

    There are many ways to interpret these data. At one level, they could mean that China's major trading partners are protectionist and are trying to block Chinese imports by indiscriminately slapping anti-dumping cases against China-made products using WTO-compatible mechanisms. At another, this could also mean that China's intent is to capture the developed Western markets using its low-cost advantage. Hence the Chinese threat is more real for the West than for developing Asia and Africa.

    Bottom line: WTO demands free trade flow
    To understand the issues, one must understand the underlying principle of the WTO and the anti-dumping jargon that make it possible for some countries to be treated as non-market economies under the new trade order.

    The WTO is based on the basic principle of free flow of trade among nations except under certain circumstances. Protectionist barriers of any form that render the products of a competing nation non-competitive in another market are not allowed under the WTO, except when national interest is at stake. Thus, as a norm, tariff barriers to protect domestic industry from foreign competition are not permitted. However, to safeguard national interest and protect the interests of domestic industry from unfair competition, some provisions have been made. The anti-dumping and subsidy norms fall under the latter category. They are aimed at providing a level field to all players when some resort to unfair market practices such as price undercutting to capture foreign markets. At present, China faces more than 500 anti-dumping cases worldwide. Given the number of anti-dumping cases against Chinese products, it would not be inappropriate to say that the Chinese are currently considered by many nations to be unfair market predators.

    When countries suspect dumping by another nation, their producers are within rights to approach the anti-dumping authority in their country for redress. The anti-dumping authority investigates whether injury has occurred to its producers by the discriminatory pricing policy of the foreign competitors. To decide the issue, the anti-dumping authority resorts to what is known as comparing the "normal" value - the price of the product in the home market - with the export price. It also sees if the normal value at home has been arrived at because of free market forces.

    Dumping is considered to have taken place when the normal value is higher than the export price. Unfortunately, the calculation of normal value is complicated even in a market-driven economy, but it becomes more so in a NME.

    The non-market economic clause has its roots in the second paragraph to anti-dumping Article VI:1 of the GATT (General Agreement on Tariffs and Trade) of 1994. This provision dates from the 1954-55 Review Session of the GATT. It is part of the considerations of the Working Party on the Accession of Poland. The provision has been subsumed into the current WTO anti-dumping agreement under Article 2.7. Through this provision, WTO members explicitly recognize that NME countries may need to be treated differently from market economies in anti-dumping cases. It also allows WTO participants to adopt a discriminatory approach while dealing with countries that have a complete or substantially complete government monopoly over international trade and where all domestic prices are fixed by the state.

    Consequently, there are 10 NMEs at present. These are China, Ukraine, Kazakhstan, Vietnam, Albania, Armenia, Georgia, Kyrgyzstan, Moldova and Mongolia. Russia was granted market status in 2000, while Vietnam's request for MES has been considered and rejected.

    Procedurally, the WTO anti-dumping agreement allows members to use prices in surrogate markets to arrive at the normal value in a NME. A surrogate market is one where the cost and price structure are similar to the country under investigation and the prices in these markets are driven by demand and supply forces. In China's case, the surrogate markets for purposes of arriving at the normal value often are India, Turkey and Mexico.

    The origins of the Chinese NME
    It is significant that China's NME status is drawn from its accession protocol to the WTO. Under this agreement, signed in 2001, China agreed that it is willing to be considered a NME for a 15-year period ending 2016, which is considered the transition period from a controlled to a free economy. In that sense, there is no violation of the existing norms when China is treated as a NME. As Egan of the EU said, "The possibility to treat China as an economy in transition in trade defense investigations for up to 15 years was agreed and enshrined in the Chinese WTO accession protocol signed in 2001. Therefore, there is a clear and mutually agreed legal framework to deal with this matter."

    However, China would like a review of the term of the protocol now, which would allow it to be recognized as a market economy sooner. This is crucial for the Middle Kingdom since it would be able to fight the anti-dumping cases filed against it based on its own price data. China's major trading partners, particularly the US and the EU, would like to defer this eventuality, considering that their manufacturers already face stiff competition from Chinese products in many sectors, despite anti-dumping duties, which render Chinese exports expensive in their markets.

    Significantly, some leeway is already being extended to China for purposes of arriving at the normal value. This reflects to an extent the grudging recognition of the Middle Kingdom's market-economy status by its trading partners. The US uses a more rigid factor value table to arrive at the wage structure in China, based on the wage structure existing in comparable markets, to calculate normal value. For instance, in 2000, before Russia was removed from the list of NME countries, the US Department of Commerce factor value tables showed expected hourly wage rates in US dollars of $1.52 for Russia, $0.80 for China and $0.62 for Tajikistan. "It seems clear that the use of such artificially derived rates can only work to the disadvantage of China," Andrew L Stoler, executive director of the Institute for International Business, Economics and Law and senior adviser to the Shanghai WTO Affairs Consultation Center, recently told Chinese delegates at the Forum on WTO System and Protectionism.

    The EU, however, adopts a more flexible system. It recognizes that market conditions may prevail in some sectors of the Chinese economy and hence it is willing to accept the price data of Chinese producers in these segments as normal value. India has a similar flexible approach, whereby it allows the Chinese prices to be accepted as normal value if it is satisfied after its own investigations that market prices prevail in case of the products in question.

    China, of course, is making a case for itself on the basis of the MES recognition granted to Russia. It is arguing that if Russia could be granted MES, why can't it also be accorded the same status? Further, it is stating that it is a market economy for all practical purposes. Interestingly, the EU, which rejected China's request for MES early this month, did not swallow this argument. It turned down China's request on four counts: continued state influence, weak corporate governance, discriminatory property and bankruptcy law, and inadequate financial-sector reforms.

    The Chinese expectedly retaliated by alleging that political rather than economic considerations drove the decision - the Chinese, among others, believe that the US granted Russia MES as a reward for supporting it in its "war against terrorism" after September 11, 2001. However, the EU has categorically stated that MES assessment is not a political statement but a technical analysis exclusively linked to trade defense investigations. "We need to be sure that costs and prices of Chinese companies can be relied on for the purpose of these investigations," Egan said.

    Impact of EU's rejection
    Dr Veena Jha, UNCTAD's New Delhi-based coordinator, told Asia Times Online that the EU's denial of market economy status for China would imply that dumping margins would be inflated for products originating in China. "De facto this would mean that India's costing structure from previous anti-dumping cases would be used to determine dumping margins," she said. At the ground level, it would translate into higher prices of Chinese exports to the EU region.

    However, though the Indian price structure is likely to be used for arriving at the incidence of the anti-dumping duties to be levied on China, the direct impact of the decision on the former would be marginal, "except that some trade diversion towards India could take place in the case of textiles and garments if high dumping margins are determined for China", Jha said. She added that it is not all surprising that China is seeking a review of the NME provisions in order to reduce the incidence of anti-dumping duties on its products. "This is pure and simple defense of China's commercial interests."

    Some experts today believe that China should wait for it to be granted MES in natural course - after all, it is at best getting MES by 2016, but the Middle Kingdom may be devising its own strategy for beating its competitors at the anti-dumping game.

    Jayanthi Iyengar is a senior business journalist from India who writes on a range of subjects for several publications in Asia, Britain and the United States. She may be contacted at

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  • Jul 22, 2004

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