The issue of market economy status (MES) has once again become a heated topic, especially in terms of the trade relations between the EU and China, when we entered the Year 2016. Fifteen years ago China became a member of the World Trade Organization (WTO) on 11 December 2001 with the status of non-market economy. From the Chinese government’s perspective, China has made substantial efforts in reforming its economy since 2001 and the Accession Treaty of China into the WTO, as interpreted by China, has enabled China to automatically acquire the MES in the end of 2016. The Chinese view is apparently not shared by their European counterparts as Cecelia Malmström, EU Commissioner for Trade, said in an interview that “there’s no automaticity in that (granting China MES). We need to make a formal decision and table a law.” Given the diverging views of China and the EU on the issue and its potential significant impact on trade between the 2 sides, this issue is worth our attention in the year 2016 in order to understand what is at stakes.
Why MES matters?
The MES matters because it affects the method of calculation of anti-dumping cases in the WTO framework. When a country is not considered a market economy, anti-dumping investigations will not be based on strict comparison with domestic prices and costs in the exporting country, but will instead apply an “analogue country” methodology to calculate the antidumping duties. In most of the antidumping cases on Chinese exports investigated by the EU, the prices are higher under the “analogue country” methodology, resulting in a higher anti-dumping margin on goods imported from China. As long as China is not treated as a market economy, the EU can still apply the “analogue country” methodology in the investigations on Chinese goods.
One of the main controversies over the issue is how to interpret the legal document of Chinese accession to the WTO. According to the Article d (ii) of the Section 15 of China’s Accession Protocol to WTO, it is stated that the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession. The subparagraph (a)(ii) states that importing WTO member can use the “analogue country” if the producers concerned cannot clearly demonstrate the prevalence of market economy conditions. The Chinese side claims that the expiry of subparagraph (a)(ii) implies that importing countries can no longer apply “analogue country” calculation on Chinese exporters 15 years after the date of accession, which is 2016.
Nevertheless, the legal implication is far from clear after the expiry of the subparagraph (a)(ii) as the subparagraph (a)(i) continues to require the Chinese producers to clearly show the prevalence of the market economy conditions in order to allow the use of Chinese prices or costs in determining price comparability. From this perspective, the criteria of “market economy conditions” is still essential in determining whether importing WTO member countries will use Chinese prices or costs. It can be argued that there is no explicit mention whether Market Economy Status (MES) will be granted to China or not after 15 years of Chinese accession to the WTO.
The EU’s approach toward the issue of MES of China
According to the WTO rules, each importing WTO member can decide whether they treat China as a market economy or not based on their national law. The European Union has not yet granted China MES based on its latest assessment performed in 2008. It focused on a number of specific technical areas related to the influence of state intervention on prices and costs in China. The MES requests are evaluated on the basis of the below five criteria:
- Government intervention in the allocation of resources or business decisions in the economy
- Absence of state intervention in enterprises linked to privatization and the absence of non-market forms of exchange or compensation such as barter trade
- Use of appropriate modern accounting standards
- Bankruptcy, intellectual property and property laws
- Existence of a financial system independent from the state
China has to fulfill all the 5 criteria so that the EU would grant the MES to China. Since 2004, the EU concluded that China had met criterion 2. The 2008 assessment acknowledged the progress that China has made in reforming the economy and law but the remaining 4 criteria were still unmet. Therefore, the EU has still not yet granted the MES to China.
Policy options for the EU
Beijing has long reiterated its disappointment with the WTO members, including the EU, for not granting China the MES in the anti-dumping investigations. The expiry of the subparagraph (a)(ii) in Dec 2016 will definitely create diplomatic tension over whether the EU should automatically grant China the MES. There are a number of potential scenarios:
- The EU does not automatically grant China the MES and the EU continues to apply its current practice. Under this scenario, nothing will change from the EU side and the EU will continue to apply the anti-dumping calculation based on the “analogue country” approach. In this case, although the EU can safeguard itself against the Chinese imports with the maintenance of higher anti-dumping margin as a result of the “analogue country” calculation, it can be foreseen that there will be strong disappointment from Beijing and China may impose retaliatory measures against their so-called “unfair treatments”.
- The second scenario is that the EU grants China the MES in Dec 2016. Under this case, the EU can no longer apply non-market economy treatment to all the imports from China and the anti-dumping tariffs which are currently imposed may have to be revised downward if Chinese prices and costs, instead of analogue country prices, are used in the calculation. Although this will bring positive results to the EU-China bilateral relations, the potential costs to some of the EU industries which are hugely affected by Chinese exports may be colossal.
- The third possible scenario is that the EU will not grant China the MES but its general application of “analogue country” methodology will cease due to the expiry of the article (a)(ii) of the Section 15. In this case, it is similar to the scenario 1 but the EU could only use an alternative methodology in investigations against Chinese imports as long as China does not meet the 5 criteria of the EU.
EU’s stance on the issue
The EU has so far not yet confirmed its position towards granting China MES or not. For the supporters of granting China MES, it is a way to win favor in Beijing so as to help European investment in China as well as accelerate Chinese investment in Europe. For skeptics, granting China MES would kill industries which face intensive competition of Chinese exports, including steel, ceramics and textiles. A report of the Washington-based Economic Policy Institute (EPI) even claimed that granting MES to China would translate into 3.5 million potential job lost in the EU plus up to 2 percent loss of the EU GDP.
EU member states also do not appear to have a common viewpoint regarding the issue. According to the media report, countries like the UK are highly favorable to granting MES to China while countries like Italy strongly oppose. Countries like Germany are a bit ambiguous on the subject. During the official visit in China, German Chancellor Angela Merkel revealed that she was in principle positive towards granting MES to China. However, she also warned that China still had work to do and cautioned that Europe’s steel and solar industries needed protections. It was reported that the European Commission is likely to propose MES for China as early as February this year and the decision will be subject to the approval of the 28 member states as well as the European Parliament.
The issue of whether EU will grant China the MES will not only have impact on the EU-China relations, it will also affect the EU’s relations with other trading partners. Currently, WTO members that have not yet granted MES to China include the USA, Canada, Japan and others. The US is clearly opposed to recognizing China as a market economy. Any unilateral action from the EU without coordination with other trading partners would negatively affect the EU’s relations with these partners, especially given the prospect of the ongoing negotiation of the Transatlantic Trade and Investment Partnership (TTIP) as well as other bilateral Free Trade Agreements with Japan, Canada and others.
PROTOCOL ON THE ACCESSION OF THE PEOPLE’S REPUBLIC OF CHINA
- Price Comparability in Determining Subsidies and Dumping
Article VI of the GATT 1994, the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (“Anti-Dumping Agreement”) and the SCM Agreement shall apply in proceedings involving imports of Chinese origin into a WTO Member consistent with the following:
(a) In determining price comparability under Article VI of the GATT 1994 and the Anti‑Dumping Agreement, the importing WTO Member shall use either Chinese prices or costs for the industry under investigation or a methodology that is not based on a strict comparison with domestic prices or costs in China based on the following rules:
(i) If the producers under investigation can clearly show that market economy conditions prevail in the industry producing the like product with regard to the manufacture, production and sale of that product, the importing WTO Member shall use Chinese prices or costs for the industry under investigation in determining price comparability;
(ii) 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.
(b) In proceedings under Parts II, III and V of the SCM Agreement, when addressing subsidies described in Articles 14(a), 14(b), 14(c) and 14(d), relevant provisions of the SCM Agreement shall apply; however, if there are special difficulties in that application, the importing WTO Member may then use methodologies for identifying and measuring the subsidy benefit which take into account the possibility that prevailing terms and conditions in China may not always be available as appropriate benchmarks. In applying such methodologies, where practicable, the importing WTO Member should adjust such prevailing terms and conditions before considering the use of terms and conditions prevailing outside China.
(c) The importing WTO Member shall notify methodologies used in accordance with subparagraph (a) to the Committee on Anti-Dumping Practices and shall notify methodologies used in accordance with subparagraph (b) to the Committee on Subsidies and Countervailing Measures.
(d) Once China has established, under the national law of the importing WTO Member, that it is a market economy, the provisions of subparagraph (a) shall be terminated provided that the importing Member’s national law contains market economy criteria as of the date of accession. In any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession. In addition, should China establish, pursuant to the national law of the importing WTO Member, that market economy conditions prevail in a particular industry or sector, the non‑market economy provisions of subparagraph (a) shall no longer apply to that industry or sector.
 Dalton Matthew, Malmstrom: No Automatic Market Economy Status for China in 2016, Wall Street Journal, 11 Dec 2014
2 Commission of the European Communities, Commission Staff Working Document on Progress by The People’s Republic of China Towards Graduation to Market Economy Status in Trade Defence Investigations, Brussels, 19 September 2008, SEC(2008) 2503 final
3 Scott E. Robert & Jiang Xiao, Unilateral Grant of Market Economy Status to China Would Put Millions of EU Jobs at Risk, EPI Briefing Paper #407, Economic Policy Institute, 18 September 2015
4 Oliver Christian & Pooler Michael, “China’s market economy push divides Europe”, Financial Times, 29 December 2015
5 World Trade Organization, Accession of The People’s Republic of China, WT/L/432, 23 November 2001
 Dalton Matthew, Malmstrom: No Automatic Market Economy Status for China in 2016, Wall Street Journal, 11 Dec 2014
 Commission of the European Communities, Commission Staff Working Document on Progress by The People’s Republic of China Towards Graduation to Market Economy Status in Trade Defence Investigations, Brussels, 19 September 2008, SEC(2008) 2503 final
 Scott E. Robert & Jiang Xiao, Unilateral Grant of Market Economy Status to China Would Put Millions of EU Jobs at Risk, EPI Briefing Paper #407, Economic Policy Institute, 18 September 2015
 Oliver Christian & Pooler Michael, “China’s market economy push divides Europe”, Financial Times, 29 December 2015
 World Trade Organization, Accession of The People’s Republic of China, WT/L/432, 23 November 2001