The NME Methodology against Chinese Imports post 2016 and China’s
Unique Economic Structure
Name: Yulin Tao
Master Track: International Trade and Investment Law Name of Supervisor: dhr. Dr. G. (Geraldo) Vidigal
The NME Methodology against Chinese Imports post 2016 and China’s
Unique Economic Structure
Abstract
China agreed in Article 15(a)(ii) in China’s Protocol of Accession that WTO members can use Non-Market-Economy Methodology towards imports from China for the purpose of anti-dumping investigations. As expressed in Article 15(d) this NME provision shall expiry after 15 years since China’s accession to WTO. Nevertheless, some scholars insist WTO-members are entitled to apply NME methodology after the expiry of this provision. This article aims to clarify that after December 31, 2016, WTO members are no longer permitted to use NME methodology to replace the domestic price with surrogate country price in anti-dumping investigations with regard to Chinese products, instead, WTO members should rely on ADA or SCM Agreement. Noting that the high-profile NME/ME issue actually roots in China’s unique economy structure, this article further attempts to analyze whether trade disputes raised by China’s current economy structure can be properly handled by the WTO framework after 2016. As a result of
EU-Biodiesel case, reading together with the aim and purpose of Article 2.2, sanctioning government interventions to the overall Chinese industries through anti-dumping duties is not likely to be WTO-consistent in the future. A possible alternative to tackle government intervention is countervailing duties, while considering the onerous test to determine ‘public body’ in light of the DSB’s decision, this alternative is lack of certainty and efficiency. In conclusion, the WTO framework, which primary designed for market economy countries, does not prepare well for China’s accession and China’s sheer amount of trade exacerbates the tension between itself and the multilateral trading system. The endogenous conflicts rooted in the discrepancy between two economy structures are hard to be resolved unless with the transformation of WTO to a more comprehensive and flexible system.
1. Introduction
According to the statistics in the World Trade Organization(WTO), from 1995 to 2017, there have been 55529 anti-dumping initiations in total.1 Among that, China has by far been the most frequent target in anti-dumping case.2 The legal concept of dumping can be found under Article VI of GATT and Article 2.1 of Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (hereinafter ADA), dumping is defined as an introduction of products into the commerce of another country at a price less than the normal value of the products causing or threatening material injury to the industries of the importing countries.3 In light of the goal of WTO to facilitate international-wide trade, reciprocal and mutually
advantageous arrangements, measures of a discriminatory nature must be excluded.4
Nevertheless, Article VI of GATT and Article 2 of ADA allow WTO members to deviate from this principle to charge dumping duties on exporting members in order to remove injury to domestic industries. However, these two provisions are poorly drafted and entail inconsistent interpretation against the determination of normal value.5
Against this background, the determination of dumping margin, i.e the export price minus normal value is highly controversial due to the differentiation between Non-Market-Economy (hereinafter NME) and Market Economy (hereinafter ME). GATT (nowadays WTO) was an organization that primarily designed for countries with market economy.6 In respect of imports from those countries, the normal value is determined based on the domestic price of the export country. In contrast, regarding NME countries, there is an assumption that the domestic price in
1Anti-dumping Initiations: By Exporter 01/01/1995 - 31/12/2017 https://www.wto.org/english/tratop_e/adp_e/AD_InitiationsByExpCty.pdf 2Ibid.
3 General Agreement on Tariffs and Trade 1994(hereinafter GATT), Article VI; ADA, Article 2.2 4 GATT, preamble
5 den Bossche V, Henry P L, Zdouc W. The Law and Policy of the World Trade Organization: Text, Cases and Materials[M]. Cambridge University Press, 2017, Chapter 11.
6 Polouektov A. The non-market economy issue in international trade in the context of WTO accession[C]//United Nations Conference on Trade and Development, http://www. unctad. org/Templates/Download. asp. 2002.
those countries are not determined by the demand and supply relationship therefore not reliable, importing countries are thus permitted to use surrogate country benchmark in determining normal value.7
In the WTO context, the term NME can be traced back to the 1950s when central-planned countries started acceding to WTO. In order to accommodate those countries, the Second Ad Note to Article VI:1 GATT was codified into WTO, under which the WTO members are allowed to use a methodology not based strictly on the comparison with domestic price when calculating dumping margin.8 However, with the collapse of the former Soviet Union, market reforms across Eastern Europe, the opening up of China and Vietnam,9 the central-economy described in the Second Ad Note to Article VI GATT no longer exist among WTO members.10
During China’s acceding to WTO, China agreed in the China’s Protocol of Accession Article 15(a)(ii) that by December 2016, WTO members can use surrogate country price to replace the domestic price in determining normal value, unless the Chinese producer can prove that market condition prevail in the relevant industry.11 This is the so-called NME provision. With the expiry of this provision in December 2016, the question whether the WTO Member States can continue to use the NME methodology towards China in anti-dumping investigations causes debates. Some WTO members granted China MES, while China’s two main trading partners, namely US and EU, are reluctant to acknowledge China’s economy is a fully ME.12 In spite of the divergent
7 Huang C. Non-Market Economies' Accessions to the WTO: Evolution of the Approach and Implications for the Organization[J]. The Hague Journal of Diplomacy, 2009, 4(1): 62.
8 Para 1.2 of the Interpretative Ad Note Article VI, GATT
9 McCarty A, Kalapesi C. The economics of the ‘non-market economy’ issue: Vietnam catfish case study[J]. Mekong Economics Ltd, 2003, page 4
10 Detlof H, Fridh H. EU Treatment of Non-Market Economy Countries in Anti-Dumping Proceedings, The[J]. Global Trade & Cust. J., 2007, 2: 268.
11 WT/L/432, China’s Protocol of Accession, 23 November 2001,Article 15(a)(ii)
12 European Commission Staff Working Document, Impact Assessment on the ‘Possible change in the calculation methodology of dumping regarding the People’s Republic of China (and other non-market economies)’, SWD(2016) 370 final, 9 November 2016, at 12 and 13; USDOC Memorandum, China’s Status as a Non-Market Economy,
interpretations on the effect of this expired NME provision, a general accepted notion is that this provision can no longer provide legal basis for the adoption of NME methodology towards imports from China. Members need to rely on ADA exclusively with regard to anti-dumping investigations against imports from China.
Although the NME provision method for the purpose of anti-dumping investigation may not be applicable after 2016, the unique economic structure of China nevertheless raises questions to WTO. The economic reforms started from 1978 does not transform China to a full market economy country like US or EU, nor does China’s government controls trade entirely as central-economy. During the discussion of China’s Protocol of Accession, China’s economy structure was described by some WTO members as ‘transitional market economy’. Through the
establishment of State-owned Assets Supervision and Administration Commission, Central Huijin from 2003, together with multiple policy tools, the Chinese government not only remains close connection with State-Owned Enterprises(hereinafter SOEs) but also effectively interferes with the business management of private companies. As recognized by Mark Wu, ‘the modality of intervention - selective in scope and with great variance in depth - has resulted in an economic structure that is uniquely Chinese.’13
The China’s unique economy structure was not contemplated during the negotiation of China’s Protocol of Accession, therefore questions emerge on whether ADA is flexible enough to tackle challenges raised by China with respect to anti-dumping duties? If not, does WTO has alternative instruments to address the problem. The first question calls for the clarification on the meaning of Article 2.2 ADA which authorizes WTO members to construct normal value on the condition that there exists particular market situation or there are no sufficient sales in the ordinary course
Investigation A-570-053, 26 October 2017.https://enforcement.trade.gov/download/prc-nme-status/ prc-nme-review-final-103017.pdf (visited 16 July 2018)).
13 Regulating the Visible Hand?: The Institutional Implications of Chinese State Capitalism[M]. Oxford University Press, 2015, page 316
of trade.14 In practice, the ‘particular market situation’ has been resorted to by WTO members like EU and Australia as a substitution to the NME methodology towards China. However, due to the vagueness of Article 2.2 ADA, how to apply this ‘particular market situation’ is
questionable. The WTO Dispute Settlement Body(hereinafter DSB) in the recent EU-Biodiesel case adopts a restrictive interpretation on Article 2.2 to the effect that ‘particular market
situation’ can not serve as a justification for disregarding of records kept by producers or establishing normal value based on the out-of-country prices.15 As a consequence, the WTO member’s leeway for sanctioning price distortion resulting from state intervention under ADA is very narrow.16 In light of this restrictive decision, WTO member may resort to duties under Agreement on Subsidies and Countervailing Measures(hereinafter SCM Agreement) or other method in order to offset the injury cause by the government intervention.
This article is organized in eight parts: The second part talks about the historical development of the notion NME and the relevant legal basis of this term in the WTO system. The third part focus on the China’s accession to WTO and the commitments made by China to facilitating its market economy transformation. The fourth part analyzes the legal effect of the expiration of Article 15(a)(ii) of China’s Protocol of Accession and how to understand its relationship between the NME status of China. In the fifth section, this article describes China’s current economy structure. This sixth part addresses the question whether anti-dumping measures can tackle the disputes arising out of China’s economy structure. The answer will be gave in light of the
interpretation of Article 2.2 and the WTO DSB’s decision on EU-Biodiesel case. In addition, this part also analyzes the ‘significant distortion on price of raw material’ approach adopted in EU’s 2018 anti-dumping regulation to see whether this can be a WTO-consistent alternative to the NME methodology.17 The seventh part talks about the determination of ‘public body’ in
14 ADA, Article 2.2
15 Zhou W, Percival A. Panel Report on EU-Biodiesel: A Glass Half Full?-Implications for the Rising Issue of “Particular Market Situation”[J]. The Chinese Journal of Global Governance, 2016, 2(2): 159.
16 Stephanie Noel, Wihuan Zhou, Replacing the Non-Market Economy Methodology: Is the European Union’s Alternative Approach Justifies Under the World Trade Organization Anti-Dumping Agreement?, Global Trade and Customs Journal, Volume 11, Issue 11-12, page 56
countervailing duties. Other elements with regard to countervailing duties will not be discussed in this article.
2. NME in WTO
The basic rationale of the GATT is viewed as to ‘de-politicize international trade by removing politics from economics.18 The GATT was been described as facilitating ‘the existence of free and open markets where prices are determined by supply and demand under normal competitive conditions’.19 The GATT regulation is primarily designed for market economy countries.20 The differentiation of NME/ME for the purpose of anti-dumping investigation can be viewed as GATT’s initiation to accommodate countries whose economies are not primary market-oriented. Article VI GATT 1947 provided for the method of determining of normal value under the presumption of the exporting country are MES countries,21 it states:
‘...a product is to be considered as being introduced into the commerce of an importing country
at less than its normal value, if the price of the product exported from one country to another (a) is less than the comparable price, in the ordinary course of trade, for the like product when destined for consumption in the exporting country, or,
(b) in the absence of such domestic price, is less than either
(i) the highest comparable price for the like product for export to any third country in the ordinary course of trade, or
Regulation(EU) 2016/1036 on protection against dumped imports form countries not members of the European Union and Regulation(EU) 2016/1037 on protection against subsidsed imports from countries not members of the European Union.(hereinafter Regulation(EU)2018/825)
18 Francis Snyder, The Origins of the ‘Nonmarket Economy’: Ideas, Pluralism and Power in EC Anti-dumping Law about China, European Law Journal Volume 7, No. 4, December 2001, page 379
19 Beseler J F, Williams A N. Anti-dumping and anti-subsidy law: the European Communities[M]. Sweet & Maxwell, 1990, page 86
20 Polouektov, A.(n6), page 18-20 21 Zhou W, Percival A. ( n15)
(ii) the cost of production of the product in the country of origin plus a reasonable addition for selling cost and profit.’ 22
In the GATT Review Session during 1945-1955, it was argued that the price of products from a central planned economies were manipulated by the government, thus could not reasonably reflect the market’s demand and supply relationships.23 Under this concern, the Second Ad note to Article VI:1 GATT was introduced to regulate imports from such countries.24 It states: ‘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 exist in determining price comparability for the purpose of paragraph 1 and in such cases importing contracting parties may find it necessary to take into account the
possibility that a strict comparison with domestic prices in such a country may not always be appropriate.’25 This is the initial expression of NME, only applies to the central-economy where state played an overwhelming role in trade. Against imports from those state-trading countries, WTO members are permitted to deviate from the standard dumping margin calculation
methodology and use surrogate country prices in determining normal value of products. As clarified by the Appellate Body in EC-Fasteners after several decades, ‘the Second Ad Note only describes a certain type of NME, which can be only applied to a limited situation, i.e where the state has a complete or substantially monopoly over trade and all domestic prices are fixed by the state’.26 It should be noted that, currently, as a result of the economic reforms took place in NME countries, none of the WTO member would fit into the scenarios described in this provision.
22 Article VI(1), GATT
23 Vermulst E, Sud J D, Evenett S J. Normal Value in Anti-Dumping Proceedings against China Post-2016: Are Some Animals Less Equal Than Others?[J]. Global Trade and Customs Journal, 2016, 11(5): 213.
24 Para 1.2 of the Interpretative Ad Note Article VI 25 Ibid.
26 WT/DS397/AB/R, European Communities-Definitive Anti-Dumping Measures on Certain Iron or Steel Fasteners from China(hereinafter EU-Fasteners), Appellate Body Report, adopted 15 July 2011, para. 285.
The application of NME methodology was expanded during the acceding of several Eastern and Central European countries to the WTO. According to the Working Party Report on the
Accession of Poland, although Poland did not qualify as central-economy, the Working Party held that ‘a contracting party may use as the normal value for a product imported from Poland the prices which prevail generally in its markets for the same or like products or a value for that product constructed on the basis of the price for a like product originating in another country, as long as the method used for determining normal value in any particular case is appropriate and not unreasonable.’27 It was the first time the using of surrogate country price in anti-dumping investigations was jointly agreed by GATT parties.28 Leaving alone the fact that this statement expanded the meaning of the Second Ad Note, it was acknowledged by the other Working Parties, for instance, the Report of the Working Party on ‘Accession of Romania’ and the Report of the Working Party on ‘Accession of Hungary’ used a similar expression.29 Influenced by this interpretation, the surrogate country approach was adopted in the domestic legislation of EU and US.30
The inadequacy of Article VI GATT 1947 with regard to NME countries prompted further discussion in WTO. At the end of the Uruguay Round, a compromise was ultimately reached in the ADA, together with Article VI of GATT 1994,31 which set out the current legal framework for the NME methodology. In Article 15 ADA, a special concern with regard to the developing countries is provided, which permits the use of constrictive remedies against those countries.32 In respect of anti-dumping investigations, Article 2.2 ADA provides the ‘constructed normal value
27 Francis Snyder (n 18), page 392 28 Polouektov A. (n6), page 10. 29 Francis Snyder (n 18), page 393. 30 Ibid, page 402
31 Van den Bossche, Peter. The law and policy of the World Trade Organization: text, cases and materials. Cambridge University Press, 2008, Chapter 11, 2.1.
32 GATT, Article 15. It provides, ‘It is recognized that special regard must be given by developed country Members to the special situation of developing country Members when considering the application of anti-dumping measures under this Agreement. Possibilities of constructive remedies provided for by this Agreement shall be explored before applying anti-dumping duties where they would affect the essential interests of developing country Members.’
approach’, which states: ‘When there are no sales of the like product in the ordinary course of
trade in the domestic market of the exporting country or when, because of the particular market situation or the low volume of the sales in the domestic market of the exporting country, such sales do not permit a proper comparison, the margin of dumping shall be determined by comparison with a comparable price of the like product when exported to an appropriate third country, provided that this price is representative, or with the cost of production in the country of origin plus a reasonable amount for administrative, selling and general costs and for profits.’33
Comparing to the Second Ad Note and Article VI GATT, there are several main changes in the Article 2.2 ADA regulation. First, Article 2.2 ADA does not only focus on the determination of normal value, rather, it shifts the focus to the dumping margin, i.e. the result of normal value minus export price. Moreover, Article 2.2 ADA indicates that the determination of dumping directs to ‘price comparability’, although the definition of ‘price comparability’ was not specified. Furthermore,this provision does not restrict the application of NME methodology to imports from central-planned countries anymore, instead, it emphasis on whether sales ‘permit a proper comparison’ and specified two scenarios, i.e. ‘particular market situation’ and ‘no sales in the ordinary course of trade’. Under those two situations, the normal value of the products under investigation can be determined by two methods, first is using a comparable price of the like product from the import country to the third country, the second is using a constructed normal value, i.e. ‘the cost of production in the country of origin plus a reasonable amount for
administrative, selling and general costs and for profits’34. Those two terms in Article 2.2 ADA are able to capture a wide range of countries where the level of government intervention to the market may not up to the level of NME, but where market force is not the dominant role in price determination.35
33 ADA, Article 2.2 34 Article 2.2 ADA
35 Regulating the Visible Hand?: The Institutional Implications of Chinese State Capitalism[M]. Oxford University Press, 2016, page 320
3. China’s Accession to WTO
On December 2001 China became a member of WTO. China’s accession to WTO went through 15 years, what made the negotiation process so lengthy and complicated was the discrepancy between China’s unique economic structure and the framework of GATT which primary designed for market economy countries. Before 1978, China’s economy was central planned.36 During that time, the industries in China were virtually dominated by SOEs, which accounts for 78% of the industrial output.37 Following a series of reform introduced by Deng Xiaoping, China gradually opened its market towards foreign countries and the SOE sector has been largely reformed during the subsequent decades cause it was deemed by Chinese Communist Party (CPP) as necessary to increase the economic efficiency of Chinese industries.38
The economy reform in China went through several phases. In the second phase commenced from 1992, in which the SOEs are required to transform into modern enterprise with ‘‘clear property rights, well-defined power and responsibility, separation of enterprise from government, and scientific management’,39 the central government issued the policy of concentrating the government control on large SOEs and refrained its control over small SOEs.40 As a result of the continuous reform, by 2001, SOEs only contribute to 18% of the total industrial output value,41 market force played a more important role in Chinese economy and China was no longer a central planned economy.42 Nevertheless, the governmental influence over the market was still
36 Bajona C, Chu T. Reforming state owned enterprises in China: Effects of WTO accession[J]. Review of Economic Dynamics, 2010, 13(4), page 802
37 Ibid.
38 Xi Li,Xuewen Liu, Yong Wang, A Model of China’s State Capitalism (2012), page 9, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2061521 (accessed July 25, 2018)
39 Decision on Issues Regarding the Establishment of a Socialist Market Economic System, para. 1 (2), November 11, 1993
40 Mattlin M. Chinese strategic state-owned enterprises and ownership control[J]. BICCS Asia paper, 2009, 4(6), page 8
41 National Bureau of Statistics of the People’s Republic of China, China Statistical Yearbook 2002, 423 (2002). 42 Regulating the Visible Hand?: The Institutional Implications of Chinese State Capitalism[M]. Oxford University Press, 2016, page 324
an expressed concern of the WTO members at that time.43 The reform in this stage mainly privatized small and mid-sized SOEs, the large SOEs were still remained in the State’s hand. Several members of the Working Party on the accession of China noted that China was continuing the process of transition towards a full market economy, which bears both the characteristics of NME and ME.44
Against this background, in order to ensure China’s economy to evolve towards market economy,45 besides the commitment to comply with WTO obligations, China was required to comply with extensive obligations that fall outside the scope of WTO general obligations, for example, requirement on economic reform of China, transparency requirements, and rules concerning primarily trade remedies.46 With regard to the economic reform commitments, China made an overall commitment to let the market force determining all prices except for those specified and to reform its SOE sector on an on-going basis and ‘ensure that all state-owned and state-invested enterprises would make purchases and sales based solely on commercial
considerations’.47 Those obligations are the so-called WTO-plus obligation. Among all the WTO-plus obligations, rules concerning anti-dumping, anti-subsidy and safeguard measures are either deviate from general WTO regulations, or without a clear legal basis in the WTO
context.48
43 WT/ACC/CHN/49, Report of the working party on the accession of China, 1 October 2001, page 9, para 44 44 Ibid, page 29, para 150
45 Regulating the Visible Hand?: The Institutional Implications of Chinese State Capitalism[M]. Oxford University Press, 2016, page 324
46 Qin J Y. WTO-Plus Obligations and Their Implications for the World Trade Organization Legal System[J]. J. World Trade, 2003, 37, page 491.
47 WTO, Report of the working party on the accession of China, WT/ACC/CHN/49, 1 October 2001, para 46, 50-64.
The China’s Protocol was perceived by WTO members as an instrument to accelerate China’s reform to the market economy.49 It incorporated several temporary provisions specially designed for the ‘transitional economy’ of China to equip the negotiation parties to tackle the possible disputes related to China.50 Some scholars believe that once the liberalization tools set in China’s protocol of accession were in force, China would gradually become market economy.51 Even if China does not transform to the market economy anticipated by WTO members, they believed that they had put sufficient mechanisms in the protocol to tackle the possible disputes emerge in the future, for example, the NME provision provided in Article 15.52 However, due to the following economic reforms took place in China, China’s economy structure evolve to a unique form that was not anticipated by the negotiators at the time of China’s accession to WTO. Neither the general WTO regulation nor the China’s Protocol of Accession prepare well for the disputes arise from China’s unique economy structure.
China’s Protocol of Accession was the first WTO document that imposes a series of special rule of conduct on a single member state and it has been criticized that it creates more stringent obligations for China,53 which is considered as a derogation to the rule-based WTO system.54
49 Hai W. China’s WTO membership: Significance and implications[J]. China Center for Economic Research (CCER) working paper, 2000 (E2000007)
50 Thorstensen V H, Ramos D, Müller C, et al. WTO: market and non market economies: the hybrid case of Chine[J]. 2013, page 783
51 Barfield C. The Dragon Stirs: China's Trade Policy for Asia-and the World[J]. Ariz. J. Int'l & Comp. L., 2007, 24, page 107.
52 Regulating the Visible Hand?: The Institutional Implications of Chinese State Capitalism[M]. Oxford University Press, 2016, page 327.
53 Qin J Y. (n 46), page 518
54 As an outcome of the Uruguray Round Negotiation, WTO has been transformed from a power-based system to a rule-based system. See Hilf M. Power, rules and principles-which orientation for WTO/GATT law?[J]. Journal of International Economic Law, 2001, 4(1), page 114-115. See also Qin J Y. (n 46), page 514, ‘The most salient features of this rule-based system are probably the uniformity of WTO rules of conduct and the new dispute settlement mechanism.’
Moreover, the temporary rules in this protocol created much uncertainty and left many gaps to the WTO law, which may calls for further clarification by WTO tribunal.55
4. Legal Effects of Article 15(a)(ii) in China’s Protocol of Accession
Recently, China’s commitment with regard to anti-dumping investigations causes much controversy. Article 15 states:
‘(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:
...
(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. ’56
Under this provision, as provided in sub-paragraph(d),57 the WTO members are permitted to use the surrogate country’s price in determining the normal value of the products from China within 15 years from China’s accession to WTO. Regardless of the fact whether China would transform into a pure market economy country by the end of 2016, this provision served as a temporary safety guard to forestall any possible trade disputes related to China.58
55 Qin J Y. (n 46), page 519
56 Protocol of the Accession of the People’s Republic of China
57 As expressed in the second sentence Article 15(d) of China’s Protocol of Accession: ‘In any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession.’
58Regulating the Visible Hand?: The Institutional Implications of Chinese State Capitalism[M]. Oxford University
The legal effect of this provision after 11 December 2016 has been subject to hot debate. China expressed in US-Measure Related to Price Comparison Methodology:
‘The inconsistencies with the covered agreements specified above ceased to be justifiable when Section 15(a)(ii) of the Protocol expired on 11 December 2016 pursuant to Section 15(d) of the Protocol. After that date, Section 15(a)(ii) of the Protocol does not provide a legal basis for Members to determine normal value using methodologies that are "not based on a strict comparison with domestic prices or costs in China". In addition, the measures at issue are not justifiable under the second Supplementary Provision to Article VI:1 of the GATT 1994, as referenced in Article 2.7 of the AD Agreement.’59
Some scholars insist that even if the Article 15(a)(ii) expires, the Chapeau of sub-paragraph(ii) effectuates the application of a ‘methodology not based on a strict comparison with domestic prices or costs in China’, based on the fact that China is still not a ME country. For example, O’Connor says that the wording ‘based on’ in the chapeau of Article 15(a)(ii) does not necessarily indicates that the rule should be applied rigidly as set out in the sub-paragraph, instead, it allows for another application different form the rule in the sub-paragraph.60
Supported by Miranda, they suggest that the surrogate country methodology is still applicable by virtue of sub-paragraph(a).61
59 WT/DS515/1/Add.1, United States-Measures Related to Price Comparison Methodology, request for consultations by China, 8 November 2017. With regard to EU’s anti-dumping regulation, in European Union - Measures related to Price comparison methodologies(WT/DS516/9), China claimed that Article 2(1) to 2(7) EU regulation 2016/1036 is inconsistent with Article I:1 of the GATT 1994 and Article 2(7) is inconsistent with Articles 2.1 and 2,2 of the Anti-dumping agreement, Article VI: 1 of the GATT 1994 and the second paragraph of the Ad Note to Article VI:1 of the GATT 1994, and in violation of MFN treatment in GATT cause the expiry of the justification in paragraph 15(a)(ii) of China’s Accession Protocol
60 O'Connor B. The Myth of China and Market Economy Status in 2016[J]. 2016-07-07] hap://worldtmdelaw, typepad, com/files/oconnorresponse, pdf. Panel Report (WT/I) S, 2012, 405.
61Jorge Miranda, 'More on Why Granting China Market Economy Status after December 2016 is Contingent upon
This argument is unconvincing. First of all, Chapeau refers to the different options provided in the sub-paragraph (a) and (b), it does not have legal effect independently without the provisions set out in these two paragraphs, or otherwise, it is useless to introduce those two
sub-paragraph. Moreover, O’Connor’s interpretation would reduce Article 15(d), the so called sunset clause to be inutility.62 This view also finds support in the Working Party Report which confirms that the right to use NME is conferred by Article 15(a)(ii) rather than the chapeau.63 Its
paragraph 151 reads ‘‘in response to these concerns, Members of the Working Party confirmed that in implementing sub-paragraph (a)(ii) of Section 15 of the Draft Protocol, WTO Members would comply with with what?’.64
The relationship between NME status and NME methodology should also be pointed out. WTO does not provide with definition or criteria with regard to MES, rather, it is regulated in the domestic law. The MES criteria adopted by EU are namely i) a low degree of government influence; ii) an absence of state-induced distortions in private market or the use of non-market trading or compensation system iii) a transparent and non-discriminatory company law;iv) a coherent, effective and transparent set of laws with regard to property rights and bankruptcy regime; v) a genuine financial sector which operates independently from the state and subject to guarantee provisions and supervision.65 In 2008, EU Commission made an overall assessment over China’s progress towards graduation from ME. The EU commission confirmed the progress made by China. However, it concluded the Chinese government still remains influence in the determination of production prices and in the financial sector, the lending system is in favor of the SOEs.66
62 Mathew R. Nicely, ‘Time to Eliminate Outdated Non-Market Economy Methodologies’, 9(4) Global Trade and Customs Journal(2014) 160
63 WTO, Report of the Working Party on the Accession of China, 1 October 2001, WT/ACC/CHN/49, para 151. 64 Ibid.
65 European Commission Staff Working Document, On Progress by the People’s Republic of China, towards Graduation to the Market Economy Status in Trade Defence Investigations , SWD(2008) 2503 final, 19 September 2008, page 5,6.
In the case of US, in the Omnibus Trade and Competitiveness Act of 1998 adopted by US Congress, the NME test includes the following criteria: ‘the extent to which the currency of the foreign country is convertible into the currency of other countries; the extent to which wage rates in the foreign country are determined by free bargaining between labor and management; the extent to which joint ventures or other investments by firms of other foreign countries are permitted in the foreign country; the extent of government ownership or control of the means of production; the extent of government control over the allocation of resources and over the price and output decisions of enterprises; such other factors as the administering authority considers appropriate’.67
With regard to those five criteria, the USDOC in its recent assessment confirms that China’ economy has grown rapidly and the Chinese government has taken significant steps to modify legal framework and institution that governs China’s economy.68 Moreover, it notes that
economy reforms also be taken to enhance the market dynamics and liberalize the SOEs sector in China. However, the USDOC does not consider China graduates from the MES based on the finding:
‘Chinese government continues to maintain and exercise broad discretion to allocate resources
with the goal of achieving specific economic outcomes. China’s institutional structure, and the control the Chinese government and the CCP exercise through that structure, result in
fundamental economic distortions, such that non-market conditions prevail in the operation of China’s economy. These non-market conditions are built upon deeply entrenched institutional and governance features of China’s Party-state, and on a legal mandate to “maintain a leading role for the state sector.’69As expressed by US, ‘China seems to be embracing state capitalism
67 19 U.S.C 1677(18)(B)(2006)
68 USDOC Memorandum, China’s Status as a Non-Market Economy, Investigation A-570-053, 26 October 2017, page 196
https://enforcement.trade.gov/download/prc-nme-status/prc-nme-review-final-103017.pdf, 69 Ibid.
more strongly each year, rather than continuing to move towards the economic reform goals that originally drove its pursuit of WTO membership’.70
Those NME criteria endorses the US Department of Commerce(hereinafter USDOC) a wide discretion in deciding to what extent should the exporting country fulfill those elements in order to be granted the ME status.71 The unclear definitions of ‘the extent’ and ‘other factors as the administering authority considers appropriate’ create much unpredictability to the NME criteria and left much discretion for local administration. Depending on the different national legislation, a same country may be qualified as NME and ME as the same time.72 The development of those ME criteria in domestic realm is a result of the inadequacy of the WTO legislation to the
countries whose economy where not fully driven by market force. In turn, those domestic rulings, together with the accession obligations, are likely to cause discrimination and create a second class membership in the WTO. The uncertainty of the ME criteria increases its political nature, for example, Russia was granted MES by EU and US for political reasons.73
In conclusion, in order to preserve WTO as a rule-based system, the question whether China is granted MES by WTO members should be separate from whether WTO member can still apply NME methodology towards imports from China. WTO legal system does not confer a NME status to China, the status only exists in the domestic realm. As asserted by the Appellate Body in EC-Fasteners,74 ‘China’s Accession Protocol does not authorize WTO Members to treat China differently from other Member except for the determination of price comparability in respect of
70 ‘Remarks by the US Ambassador to the WTO Michael Punke on the China Transitional Review of the Protocol of Accession to the WTO Agreement’, Geneva, November 30, 2011.
https://geneva.usmission.gov/2011/12/01/remarks-by-ambassador-punke-onthe-china-transitional-review-of-the-protocol-of-accession-to-the-wto-agreement/
71 In US, the Department of Commerce is the agency responsible to decide the ME/NME status. 72 Polouektov A.(n 6) page 30.
73 Antonini R. A ‘MES’ to be adjusted: past and future treatment of Chinese imports in EU anti-dumping investigations[J]. Global Trade and Customs Journal, 2018, 13(3), page 81.
74 It is the first time that the Appellate Body provided its interpretation of Article 15 of China’s Protocol of Accession
domestic prices and costs in China, which relates to the determination of normal value ... it does not contain an open-ended exception that allow Member States to treat China differently’.75
More than that, according to the text of ADA, it is indicated that at the crux of the dumping margin calculation methodology is the price comparability rather than the market economy status. In line with the de-politicization goal of the WTO, NME status of China should be separate from the dumping margin calculation against China anymore after 2016. As provided by Article 1 of the ADA, ‘An anti-dumping measure shall be applied only under the circumstances provided for in Article VI of GATT 1994 and pursuant to investigations initiated and conducted in accordance with the provisions of this Agreement’,76 no matter the criteria of NME or ME in the domestic regulation, the WTO-consistency of anti-dumping measures would be assessed in accordance with Article 2.2 ADA. Whether those domestic criteria are WTO-consistent would be depend on the result whether they can fit in the situation explained in the ADA regulation and GATT 1994.
5. China’s Current Economic Structure
After 17 years since China’s accession to WTO, China did not transform to market economy as contemplated by the negotiators of China’s Protocol of Accession. Besides the aforementioned assessments by US and EU, as published by the World Bank, China affirms that the government continues to dominate key sectors and that ‘close links between the government, big bank, and state enterprise have created vested interests that inhibit reforms and contribute ad hoc state interventions in the economy.’77 In order to analyze how to tackle trade disputes related to China afterwards, the current economic structure of China should be assessed. It should be noted that, as expressed by Article 6 of Constitution of People's Republic of China, the basic economy system of China is the one under which ‘the public ownership plays a dominant role and diverse
75 EC-Fasteners, Appellate Body Report, para 290 76 Article 1, ADA
77 Development Research Center of the State Council, The World Bank. China 2030: Building a Modern, Harmonious, and Creative Society[M]. World Bank Publications, 2013, page 12
forms of ownership develop side by side’.78 Under this basic system, Chinese government is not likely to loose its grip over the state economy. As stipulated in Article 1 of the Law of the People’s Republic of China on State-Owned Assets in Enterprises:
‘This Law is enacted for the purpose of safeguarding the basic economic system of China, consolidating and expanding the State-owned economic sector, strengthening protection of State-owned assets, giving play to the leading role of the State-owned economic sector in the national economy, and promoting the development of the socialist market economy.’79
Starting from 2003, China began a new phase of SOE reform.80 This basic economy system was also the first and foremost principle regarding the general ownership of SOEs.81 As a result of the privatization reform of SOEs started from 1992, the government ownership was largely removed from small and middle-sized SOEs. The percentage of the contribution by SOEs to the total industrial output was declined to around 25% by the end of 2013.82
However, on the part of SOEs controlled by states, question was pointed out as who would be the ultimate principal of the activities of SOEs.83 In order to fulfill the state’s ownership function, the State Assets Supervision and Administration Commission (SASAC) was established.84 The SASAC operates on the principle ‘shall not interfere in production and
78 Article 6, Constitution of People's Republic of China
79 Law of the People’s Republic of China on State-Owned Assets in Enterprises (adopted by NPC on October 28, 2008).
80 Deng Y, Morck R, Wu J, et al. Monetary and fiscal stimuli, ownership structure, and China's housing market[R]. National Bureau of Economic Research, 2011, page 10
81 For example, the principle of insisting the basic economy system in the reformation and development of SOEs was expressed in Decision of the Central Committee of the Communist Party of China on Several Major Issues Concerning the Reform and Development of State-Owned Enterprises’, passed on September 12, 1999. (http://cpc.people.com.cn/GB/64162/71380/71382/71386/4837883.html)
82 Aglietta M, Bai G. China’s 13th five-year plan. In pursuit of a “moderately prosperous society”[R]. CEPII research center, 2016, page 12.
83 Sheng H, Hong S, Zhao N. China's state-owned enterprises: Nature, performance and reform[M]. World Scientific, 2013, page 267
84 Du M. China's state capitalism and world trade law[J]. International & Comparative Law Quarterly, 2014, 63(2), page 417.
operation’ and ‘separating government administration from enterprise management and
separating ownership from management’.85 Its main functions and responsibilities are presented in the SASAC website: performing of investor's responsibilities, supervises and manages the state-owned assets of SOEs; oversight of state-owned assets; guiding of the reform and restructuring of state-owned enterprises; selecting of the top executives of the supervised enterprises, and evaluating their performances; drafting of laws, administrative rules and
regulations that promote increased development of corporate law in China; Coordination of local state‐owned assets as prescribed by law.86 As can be seen from the above, on the one hand operating based on the principle not to meddle with the business operation, on the other hand bears the function to appoint the key management, to supervise and evaluate SOEs in accordance with the related regulations, the SASAC contains both centralizing and decentralizing natures.87 Moreover, SASAC is not the only public organ that plays role in SOEs, the three top positions - party secretary, chairman of the board and CEO - of the SASAC-owned SOEs are directly appointed by are appointed directly by the Communist Party’s Central Organization
Department (COD).88 In this regard, there is a strong assumption that the SASAC-owned SOEs are closely connected with CPC. In the provincial, municipal level and county-level, each level’s SASAC duplicates the function of the central one, under the leadership of the central one.89
Following the guidance of ‘Guiding Opinion on Promoting the Adjustment of State‐Owned Capital and the Reorganization of State‐Owned Enterprises’ issued by State Council in 2006, for industries such as defense, electric power and grid, petroleum and petrochemical,
telecommunications, the so-called ‘strategic industries’, the government should remain absolute
85 WT/TPRB/262, WTO Trade Policy Review, Report by the Secretariat: People's Republic of China 2006, page 133-134.
86 http://en.sasac.gov.cn/n1408028/n1408521/index.html(accessed on 25/7/2018) , see also Szamosszegi A, Kyle C. An analysis of state-owned enterprises and state capitalism in China[M]. Capital Trade, Incorporated for US-China Economic and Security Review Commission, 2011, page 74
87 Du M. (n 84), page 418.
88 Szamosszegi A, Kyle C. (n 86), page 75
control.90 For example, China Southern Power Grid Corporation, Zhu Hai Zhen Rong Company, China Mobile Communication Group Corporation are all those strategic SOEs. For those ‘pillar industries’ such metal, auto, information technology, construction, chemical industry industries, the government ownership should remain predominant control.91 The report issued in 2011 by U.S.-China Economic and Security Review Commission collected statistics from the financial report of the named SOEs and suggest that those pillar firms absolutely controlled by state are the dominant firms in the respective industry.92 It is pointed out that Chinese government has a strong grip over the ‘national champions’.93
In the financial sector, it is Central Huijin Investment Ltd.(‘Central Huijin’) and other Vehicles pass the state influence to the ‘Big four’ commercial banks - the Bank of China (‘BOC’), the Industrial and Commercial Bank of China(‘ICBC’), the China Construction Bank(‘CCB’) and the Agricultural Bank of China.94 Central Huijin is a subsidiary of the China Investment Corporation, which is called ‘Financial SASAC’.95 State Council performs the main
shareholder’s function and responsibility in Central Huijin. Through Central Huijin, the State Council can influence the Big Four’s decision. Moreover, the government influence over the Big Four Banks creates the endogenous relationships between SOEs and SOEBs. China’s SOEBs plays a crucial role in implementing the policy goals of Chinese government, in order to facilitating the ‘Going Out’ program which aims at develop 30-50 national champions and
90 Notice of the General Office of the State Council on Forwarding the Guiding Opinions of the SASAC about Promoting the Adjustment of State-owned Capital and the Reorganization of State-owned Enterprises, No.97 [2006] of the General Office of the State Council, see also,
http://www.china.com.cn/policy/txt/2006-12/19/content_7527663.htm 91 Ibid
92 Szamosszegi A, Kyle C. (n 86), page 38.
93 Lin L W, Milhaupt C J. We are the (national) champions: Understanding the mechanisms of state capitalism in China[J]. Revista Chilena de Derecho, 2013, 40: 801.
94 Wu M.(n 89), page 273
95 Walter C, Howie F. Red capitalism: The fragile financial foundation of China's extraordinary rise[M]. John Wiley & Sons, 2012, page 150
expand their business to abroad, the Chinese SOEBs should apply a lower interests rates on loans to the SOEs in this program.96
Another issue matters here is the five year plan of China - the long-term plan of the economy development of China, which mainly focus on the major national construction projects, distribution of productive forces and individual sectors’ contribution to national economy. According to Angang Hu from National Studies Institution in Qinghua University, the five years plan ‘is a plan for human capital investment for all people, and a plan to improve the
development, entrepreneurship, and innovation capabilities of all people’.97 The thirteenth five year plan, covers the year from 2015 to 2020, was drafted by the National Development and Reform Commission (NDRC). Interacting with the slowdown in the World Trade and facing with the over-capacity in heavy industries and the increasing social inequalities, China’s 13th five year plan focus on ‘a steady increase in average income, and reduced inequalities due to a
restructuring of the production system towards domestic demand, innovative industries, and development of formerly backward regions’.98 The implementation of the five year plan will be decomposed to different level’s governments by State Council. Based on the overall plan, the industry-wide plan will be formulated.99Although the task of implementing the five year plan was not directly assigned to SOEs, given the dominant ownership of states in the key industries of China, and SOEs’ massive contribution to the overall revenue in those industries, considering jointly with SOEs intertwined relationships with government and CPC, SOEs inevitably take the responsibility to facilitating the implementation of the distributed five-year-plans. It should be noted that the State Council classifies the industries into different categories and financial
96 European Commission Staff Working Document, On Progress by People’s Republic of China towards Graduation to Market Economy Status, SEC(2008) 2503 final, 19 December 2008, page 24, see also, ‘China Government Subsidies Survey’ by Anne Stevenson-Yang, Twin Poplars LL, EU-China Trade Project, 2007
97 The Essence of the ‘Five Year Plan’ in China, http://www.xinhuanet.com/comments/2015-10/19/c_1116860606.htm
98 Aglietta M, Bai G. China’s 13th five-year plan. In pursuit of a “moderately prosperous society”[R]. CEPII research center, 2016, page 3.
institutions are required to give loans to the ‘encouraged categories’.100 Moreover, apart from implementing such policy plans through SOEs, the NDRC monitors the price of goods and industrial inputs in the national level and adjustments are made in the provincial level by local pricing bureaus.101 Private enterprises are also subject to the indirect influence of those policy, one possible approach is through the CPC committee established inside of those enterprises.
To summarize, the expiry of the NME provision of the anti-dumping investigation in China’s Protocol of Accession boosts the rethinking of China’s economy structure in WTO. Although privatization reforms over SOEs sectors had been taken place in China, the Chinese government insists its control over key industries and the overall control of the state’s economy through the effective implementation of the five years plans. It should be noted that the public ownership does not necessarily mean that SOEs are not driven predominantly by market force, while the close relationship with CPC through personnel appointment, the constant monitoring of state and the financial support from SOEBs under the guidance of government policy, nevertheless influence the behavior of SOEs. As indicated by a scholar, China economy structure is not only unique due to its ownership structure, but also its continuous oversight and strong influence on the economic sector.102
China’s current economy structure is highly different from the one when China accede to WTO. The State oversight of the whole economy was gradually formulated with the establishment of SASAC and Central Huijing, together with the transformation of NDRC.103 All of those reforms took place after China’s accession to WTO. Through multiple mechanisms, the State remains close link with the SOEs and even private enterprise. The task of tackling possible disputes with regard
100 No I. China: Description of Selected Government Practices and Policies Affecting Decision-Making in the Economy[J]. 2007.
101 European Commission Staff Working Document, On Progress by People’s Republic of China towards Graduation to Market Economy Status, SEC(2008) 2503 final, 19 December 2008, page 8
102 Regulating the Visible Hand?: The Institutional Implications of Chinese State Capitalism[M]. Oxford University Press, 2015, page 331
to China’s unique economy structure is imposed on WTO DSB.
6. Alternative to the NME Methodology towards China after 2016
Currently, some major anti-dumping users have been shifting their focus from the NME
treatment to imports from China towards the ‘particular market situation’ stipulated in Article 2.2 ADA. This notion is of much significance cause after the expiry of Article 15(a)(ii) in the
China’s Protocol of Accession, it becomes an alternative for Member States to use out-of-country price/cost to determine normal value of the products from China. However, neither Article 2.2 nor the other provisions of the ADA provides guidance on what may constitute ‘Particular Market Situation’. For example, Australia has been the most frequent user of
‘particular market situation’ approach to disregard the domestic price of the imports from China. In applying this approach, the Australian investigation authority mainly assess whether the competitive conditions has been materially distorted by the government’s intervention, while in practice the government intervention itself can be the decisive factor of this determination.104
In recent years, the EU Commission starts to mimic the Australian approach in EU anti-dumping regulation.In November 2016, contemplating the possible legal effect of the expiry of the NME provision in China’s Protocol of Accession, the European Commission proposed the
modification to EU’s anti-dumping regulation(the ‘Basic Regulation’).105 On December 2017, the new EU anti-dumping regulation went into force.106 As stated in Article 2.7 of EU’s ‘Basic Regulation’, the normal value of the imports from the NME countries shall be decided on the
104 Zhou W, Percival A. Debunking the Myth of ‘Particular Market Situation’ In WTO Anti-dumping Law[J]. Journal of International Economic Law, 2016, 19(4)869, see also, Anti-Dumping Commission, Dumping and Subsidy Manual(November 2015), at 35
105 Proposal for a Regulation of the European Parliament and of the Council, amending Regulation (EU) 2016/1036 on protection against dumped imports from countries not members of the European Union and Regulation (EU) 2016/1037 on protection against subsidized imports from countries not members of the European Union, COM(2016)721final, 9 November 2016.
106 REGULATION (EU) 2017/2321 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 12 December 2017 amending Regulation (EU) 2016/1036 on protection against dumped imports from countries not members of the European Union and Regulation (EU) 2016/1037 on protection against subsidised imports from countries not members of the European Union.(hereinafter Regulation (EU) 2017/2321)
basis of the prices or cost data in the ME countries and countries like China, Vietnam and Kazakhstan are explicitly listed as NME countries in this provision.107 In EU’s 2017
anti-dumping regulation, the NME methodology is replaced by a country-neutral methodology to the effect that the domestic prices or cost would be disregarded when there exists a significant market distortion by the government intervention.108 The ‘significant distortion methodology’ abolished the differentiation of NME/ME country thus theoretically every foreign country will be assessed equally, however, it has been criticized as maintaining the essence of the NME
approach as it also entails the disregarding of domestic price or costs.109 According to the Impact Assessment report accompanying the Commission’s 2016 proposal, the new methodology would result in a similar outcome as the NME methodology.110 Moreover, the US also expanded it application of ‘particular market situation’ to the situation where the ‘the cost of materials and fabrication or other processing of any kind does not accurately reflect the cost of production in the ordinary course of trade’.111
5.1 The Interpretation of Particular Market Situation in Article 2.2 ADA
Subjecting to the treaty interpretation rules stipulated in Article 31 VCLT, preparatory work could be resorted to as a supplementary means of interpretation.112 ADA was codified during the Kennedy Round Negotiation and be replaced in the Tokyo round negotiation. However, the term of PMS did not happen to any changes.113 When discussing the price comparability, the
107REGULATION (EU) 2016/1036 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 8 June 2016 on protection against dumped imports from countries not members of the European Union.(hereinafter Regulation (EU) 2016/1036)
108 Article 2.6(a), Regulation (EU) 2017/2321.
109 Andrei Suse, Old Wine in a New Bottle: The EU’s Response to the Expiry of Section 15(a)(ii) of China’s WTO Protocol of Accession, Journal of International Economic Law, 2018, page 15
110 European Commission Staff Working Document, Impact Assessment on the ‘Possible change in the calculation methodology of dumping regarding the People’s Republic of China (and other non-market economies)’
111 Matthew R. Nicely and Brian Gatta, 'U.S. Trade Preferences Extension Act (TPEA) of 2015 Could Lead to Increased Use of “Particular Market Situation” in Calculating Normal Value in Anti-Dumping Cases” (2016)11(5) Global Trade and Customs Journal, page 243.
112 Vienna Convention on the Law of the Treaties
113 Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade(Tokyo Round Anti-Dumping Code)
European Community stated that normally reference should be the domestic price, only when there was no such price in the ordinary trade or when the domestic price was not reliable due to, for example, the market situation in the country of origin, the export price to third country or the CNV could be resort to.114 The representative of US stated that ‘in determining the question whether a reliable price exist, the authority may consider whether the economy of the exporting country is state-controlled to an extent that sales or offers of sales of such or similar product in that country or to third countries do nor permit a determination of normal value on those bases.’115 Although the parties hold different views with regard to ‘particular market situation’, they all demonstrated the concern on the ‘reliability of the domestic price’.116 The question that to what extent does the government intervention influences the ‘reliability of the domestic price’ remains unsolved.117 During the Uruguay Round Negotiations, parties did not made much efforts to address the ‘particular market situation’ issue, it remains unimproved after the negotiation.118
Recalling that the Second Ad Note describes an extreme form of NME and Article 2.7 ADA emphasized that Article 2 ADA is without prejudice to the Second Ad Note, therefore, it can be reasonably concluded that the ‘particular market situation’ does not encompass the situation where the market is completely monopolized by States and where the domestic prices are fixed by State. Furthermore, as already elaborated above, the ‘proper comparison’ and ‘dumping margin’ stated in Article 2.2 indicates that this provision focus on the comparison rather than the normal value. It suggests the interpretation of ‘particular market situation’ should direct to the appropriateness of the price comparison rather than the appropriateness of normal value. That means the price distortion by the government intervention does not necessary represent the existence of ‘particular market situation’, as long as the price comparison is not affected. This
114 Committee on Anti-Dumping Practices, Minutes of the Meeting held on 24-28 October 1977(COM.AD/46), 10 March 1978, para 12.
115 Ibid, page 9
116 Weihuan Zhou, Andrew Percival (n 104), page 874
117 Terence P.Stewart(ed), The GATT Uruguay Round: A Negotiating History(1986-1992)(Volume II), Kluwer Law and Taxation Publishers, 1993, at 1537-1572.
interpretation is supported by the WTO jurisprudence. In EEC - Cotton Yarn, the Panel indicated the wording in the ADA made it clear that the one of the situations that could justify the use of CNV is not the existence of ‘particular market situation’, as the particular market situation was ‘only relevant insofar as it had the effect of rendering the sales themselves improper for a fair comparison’.119 This DSB decision supports the idea that the interpretation of particular market situation should focus on whether the market situation provide with a proper price comparability. Government intervention to the market may serve as evidence to the price comparability but not the decisive issue.
5.2 The Definition of Ordinary Course of Trade and Price Comparability
The other question that remains to be solved is the definition of ‘comparable price’. In the recent case EU-Biodiesel the ‘fair comparison’ issue was raised by Argentina. From the view of
Argentina, the constructed normal value approach adopted by EU, on the ground that the price of raw material of biodiesel was distorted, failed to take into account that the price of the domestic biodiesel was also affected by the depressed price of the raw material.120 Argentina alleged that EU should make ‘due allowance’ to the domestic price,121 as provided by Article 2.4.122 In Panel’s view, the ‘price comparability’ refers to ‘differences in characteristics of the compared transactions that have an impact, or are likely to have an impact, on the prices involved in the transaction.’123 However, the Panel does not consider the price difference caused by the CNV
119 GATT Panel Report, EC-Imposition of Anti-Dumping Duties on Imports of Cotton Yarn from Brazil, 42S/17 (adopted 30 Oct. 1995), para. 478.
120 WT/DS473/R, European Union-Antidumping measures on Biodiesels from Argentina(hereinafther EU-Biodiesel), Argentina's second written submission, para. 202.
121 EU-Biodiesel, Argentina's response to Panel question Nos. 56, para. 138, and 113, paras. 98-100. Argentina submits that this difference accounts for approximately 75% of the dumping margin found by the European Union at the definitive stage. (Argentina's first written submission, para. 300; opening statement at the first meeting of the Panel, para. 105; response to Panel question No. 56, para. 137)
122 Article 2.4 ADA provides that ‘A fair comparison shall be made between the export price and the normal value... Due allowance shall be made in each case, on its merits, for differences which affect price comparability, including differences in conditions and terms of sale, taxation, levels of trade, quantities, physical characteristics, and any other differences which are also demonstrated to affect price comparability...’
123 EU-Biodiesel, Panel report, para 7.295, see also, WT/DS294/AB/R, United States - Laws, Regulations and Methodology for Calculating Dumping Margins (Zeroing), Appellate Body Report, para. 157; WT/DS179/R,United States - Anti-Dumping measures on Stainless Steel Plate in Coils and Stainless Steel Sheet and Strip from Korea,
approach adopted by EU as a difference affects ‘price comparability’.124 We do not see reasonableness in Panel’s perception on the ground that neither the text of Article 2.4 nor the previous EC-Fasteners exclude the adjustment on the difference caused by the adoption of CNV approach. The Appellate Body expresses reservation to this understanding by Panel, but it considers there is no need to go on examining the ‘fair comparison’ issue.125
To interpret this notion, we first look into Article 2.1, which states the normal value is a comparable price in the ordinary course of trade for the like products. The text suggests the prices not presented in the ordinary course of trade should be excluded from comparison. WTO regulation does not provide with the meaning of the ‘ordinary course of trade’. According to the French translation, ‘ordinary course of trade’ means the normal commercial transactions with the primary aim to make profits.126 Therefore, the prices that are not driven by the commercial aim should be excluded from comparison. The Appellate Body in the US-Hot Rolled Steel supported this definition and raised several examples of ‘transactions not in the ordinary of trade’ such as transactions that are aimed at shifting resources between sellers and buyers.127
5.3 The Aim and Purpose of Anti-Dumping Regulation
The interpretation of the price comparability requires further recourse to the aim and purpose of ADA, more specifically, whether anti-dumping measures are meant to address the country-wide market distortions, going beyond the determination and comparison of an individual exporting producer’s export and domestic prices.128 However, the DSB in EU-Biodiesel case did not
Panel Report, para. 6.77. 124 Ibid, para 7.301
125 EU-Biodiesel, Appellate Body Report,para 6.89
126 Stephanie Noel, Weihuan Zhou (n16), page 563
127 WT/DS184/AB/RW, United States - Anti-Dumping Measures on Certain Hot-rolled Steel from Japan, Appellate Body Report (adopted on 24 July 2001), para 140, 141, 143
128 Akritidis V, Sneij F. The Shake-Up of the EU Institutions’ Dumping Calculation Methodology and the Compatibility of a Market-Oriented Concept of Normal Value with WTO Law[J]. Global Trade and Customs Journal, 2018, 13(4): 135
consider it necessary to go further to the object and purpose of the ADA.129 Back to Article VI GATT, which states:
‘The contracting parties recognize that dumping, by which products of one country are
introduced into the commerce of another country at less than the normal value of the products, is to be condemned if it causes or threatens material injury to an established industry in the
territory of a contracting party or materially retards the establishment of a domestic industry.’130 From the text, it can be implied that WTO does not prohibit dumping, instead, the dumping is actionable unless it cause injury or threats to material injury to the domestic industry of the importing country. Nothing in the GATT or ADA indicates that anti-dumping measures are set to sanction government policy. As considered by Noel, anti-dumping regulation does not direct to the unfair trade but to the price differentiation and anti-dumping measures permitted under WTO should sanction commercial companies decisions, rather than government policy.131
6.3 The Implications of EU-Biodiesel Case
The interpretation of PMS is only pathway to determine whether the investigation should use a representative price for the like product when exported to a third country or whether a
constructed normal value, i.e the cost of production in the country of origin plus a reasonable amount for administrative, selling and general costs and for profits.132 The costs to be used in the constructed normal value approach is stipulated in Article 2.2.1.1 which states:
‘For the purpose of paragraph 2, cost shall normally be calculated on the basis of records kept by the exporter or producer under investigation, provided that such records are in
accordance with the generally accepted accounting principles of the exporting country and
129 Panel Report, EU-Biodiesel, para 7.238, Appellate Body Report, para 6.25 130 Article VI(1) GATT
131 Noel S. Why the European Union Must Dump So-called ‘Non-market Economy’Methodologies and
Adjustments in Its Anti-dumping Investigations[J]. Global Trade and Customs Journal, 2016, 11(7), page 297, 298. 132 Article 2.2 ADA
reasonably reflect the cost associated with the production and sale of the product under consideration...’133
With regard to CNV, the WTO Panel as well as the Appellate Body in a recent case EU-Biodiesel, formulated a restrictive interpretation towards the application of CNV. The disputes arose out of the fact that in the anti-dumping investigation against biodiesel from Argentina, the EU investigation authority decided to construct normal value of biodiesel on the ground that the Argentinean biodiesel market is heavily interfered by state, therefore the domestic sales of biodiesel are not made in the ordinary course of trade, in other words, there exists particular market situation in the domestic biodiesel market of Argentina.134 In the process of constructing normal value, noting the prices of the main raw materials( soybeans and soybean oil) for
biodiesel are depressed by Argentinean Differential Export Tax(DET) system, the EU authority therefore considers the ‘the actual costs of soya beans (the main raw material purchased and used in the production of biodiesel) as recorded by the companies concerned in their accounts’ do not reasonably reflect the costs of the main raw material.135 Consequently, the EU authority used the hypothesis price eliminating the distortion of DET which reflects the international price.136 By adopting this surrogate country price, the dumping margin inflated from 41.9% to 49.2%.
The WTO DSB’s decision answers two questions: the first is whether Article 2.2.1.1 ADA permits Member States to disregard the costs of production based on the finding of price
distortion by government intervention; the second issue is whether Article 2.2 allows for a CNV calculated based on the cost of production other than those prevailing in the country of origin.137 In discussing the first issue, EU’s referred to the ‘reasonably reflect’ in Article 2.2.1.1, arguing
133 Article 2.2.1.1 ADA
134 EU-Biodiesel, Panel Report, para. 7.180 (referring to Provisional Regulation (Panel Exhibit ARG-30), Recitals 44-45), see also, EU-Biodiesel, Appellate Body Report,para 5.4
135 EU-Biodiesel, Panel Report, para. 7.181 (quoting Definitive Disclosure (Panel Exhibit ARG-35), para. 34). See also Definitive Regulation (Panel Exhibit ARG-22), Recital 38, see also, EU-Biodiesel, Appellate Body Report, para 5.7
136 Ibid, para 7.257, see also, Definitive Regulation(Panel Exhibit ARG-22), Recital 36 137 Andrei Suse(n 109), page 20
