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U.S. Says China Does Not Meet Requirements for Market Economy Status

Wednesday, November 01, 2017
Sandler, Travis & Rosenberg Trade Report

The Department of Commerce has concluded that China remains a non-market economy country for purposes of assessing antidumping duties. The determination was immediately criticized by China, which has cases on this issue pending at the World Trade Organization against both the U.S. and the European Union.

China’s protocol of accession to the WTO allowed WTO members to use calculations in AD proceedings involving Chinese products that are not based on the actual costs of Chinese producers if the producers cannot demonstrate that market economy conditions prevail in their industry. The U.S. has used this provision to automatically assign NME status to goods imported from China, which typically results in higher AD duties than would otherwise be the case.

When this provision expired Dec. 11, 2016, China asserted that WTO members would have to stop using NME-type methodologies altogether with respect to Chinese goods as of that date. The U.S. and others, however, believe they may continue to use such methodologies as long as the petitioners clearly show that market economy conditions do not prevail in the industry at issue. As a result, as part of its ongoing AD duty investigation of aluminum foil from China, the International Trade Administration conducted an inquiry into whether it should continue to treat China as an NME.

In an Oct. 26 memo, the ITA’s Office of Policy, Enforcement, and Compliance determined that China continues to be an NME for AD purposes because it does not operate sufficiently on market principles to permit the use of Chinese prices and costs for purposes of AD analysis. The ITA explained that at its core the framework of China’s economy is set by the Chinese government and the Chinese Communist Party, which exercise control directly and indirectly over the allocation of resources and do not seek economic outcomes that reflect predominantly market forces outside of that control. The government’s and the CCP’s legal and actual ownership and control over key economic actors and institutions pervades China’s economy, the memo stated, and authorities use this control selectively to affect the interaction of supply and demand and accordingly distort the incentives of market actors.

The ITA states that its conclusion is based on the following analysis of six factors established in U.S. law.

- Currency convertibility. The renminbi is convertible into foreign currencies for trade purposes, the Chinese government has made market-oriented modifications to its capital account and exchange rate system, and steps have been taken to develop the foreign exchange market, but the government still maintains significant restrictions on capital account transactions and intervenes considerably in onshore and offshore FOREX markets.

- Determination of wage rates. There is variability in wages across regions, sectors, and enterprises in China but also significant institutional constraints on the extent to which wage rates are determined through free bargaining between labor and management.

- Foreign investment/joint ventures. Despite some government efforts to streamline procedures, China continues to impose significant barriers to foreign investment, including equity limits and local partner requirements, opaque approval and regulatory procedures, and technology transfer and localization requirements.

- Means of production. The Chinese government continues to exert significant ownership and control over the means of production, as demonstrated by the role and prevalence of state-invested enterprises and the system of land ownership and land-use rights.

- Allocation of resources. The Chinese government plays a significant role in resource allocation and employs numerous mechanisms to implement industrial policy objectives.

- Other. China’s legal system continues to function as an instrument by which the government and the CCP can secure discrete economic outcomes, channel broader economic policy, and pursue industrial policy goals.

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