China’s NME status at the WTO: analysis of the debate

View #1: Magical deadline

According to the “magical deadline” (Tietje and Nowrot, 2011, pp. 7–8) view, China should automatically receive the MES after the expiration of subparagraph 15(a)(ii). It is believed that although Article 15(d) mentions only the expiration of subparagraph 15(a)(ii), the rest of paragraph 15(a) does not provide sufficient space for applying the NME methodology. There are several arguments that the proponents of this view have put forward [4].

First, the chapeau was added later by the US and it was not involved in the previous drafts of CAP. Even in the last draft, the negotiators adopted the word “may” and not the word “shall” which can be found in the final document. Therefore, Rao claims that:

A review of the drafts still indicates that the addition of the chapeau could be largely intended to reiterate the conditional options of the importing Member, instead of obligating it to use alternate methodologies (Rao, 2013, p. 164).

Furthermore, the chapeau states that the methodology should be “based on the following rules” explained in subparagraphs 15(a)(i) and 15(a)(ii). As the chapeau is based on both subparagraphs, it cannot continue to work without subparagraph 15(a)(ii). The remaining parts of the chapeau become meaningless because “the condition it depends on to be invoked no longer exists” (Rao, 2013, p. 161; see also Zhou, 2017, pp. 350-351; Fang, 2018, p. 116).

Second, according to some, paragraph 15(d) states that “in any event” the WTO members may not use the surrogate country methodology against Chinese exports beyond the 15 years transition period following China’s accession to the WTO (Cheng, 2016, p. 30). The expression “in any event” is decisive here and if the NME methodology is used after this deadline, then it would mark paragraph 15(d) useless and why would the negotiators then decide to adopt it (Cheng, 2016, p. 30)? This argument is connected with the effective treaty interpretation principle, adopted by the WTO Appellate Body, which “requires us to give meaning to every term of the provision” (see Appellate Body Report on Canada – Renewable Energy, paragraph 5.57; see also reports on US–Gasoline and Japan–Alcoholic Beverages) [5].

Third, there is no legal basis for using the NME methodology against China which can be found in the language of the Accession Protocol after subparagraph 15(a)(ii) expired. This conclusion is supported by the Report of the Working Party on the Accession of China which, it is argued, constitutes the relevant context for the interpretation of Article 15 (Suse, 2017, p. 959). The chapeau of paragraph 151 of China’s Working Party Report mentions subparagraph 15(a)(ii) instead of the whole paragraph 15(a) when discussing the NME treatment of Chinese exports, and therefore “it can be argued that the Working Party’s understanding was that the second subparagraph is the true legal basis for the use of NME methodologies” (Suse, 2017, p. 960). Having said that, it should be concluded that those legal texts enabling the use of the NME methodology are no longer active, and thus the NME methodology should not be used against China.

Fourth, many statements made by officials and institutions representing the US and the EU may be found that should be taken into account when interpreting Article 15. Two reasons were put forward for such an approach. First, these statements provide the interpretative context as allowed by the Vienna Convention on the Law of Treaties. Second, the Appellate Body explained that the unilateral statements of individual negotiating parties may be useful in determining “the reality of the situation which the parties wished to regulate by means of the treaty and […] for discerning the common intentions of the parties” (see Appellate Body Report, EC – Chicken Cuts, paragraphs 283 and 289). When commenting on the 1999 USA-China bilateral agreement (which later provided the basis for Article 15 of CAP), the US chief negotiator and then US Trade Representative (USTR) Charlene Barshefsky said in February 2000 that “China’s WTO entry will guarantee our right to continue using our current ‘NME’ methodology in anti-dumping cases for 15 years after China’s Accession to the WTO” (Barshefsky, 2000). Similarly, then US Secretary of Commerce William Daley stated that:

China has agreed to guarantee our right to continue using our current methodology (treating China as an NME) in antidumping cases for 15 years after China’s accession to the WTO (Suse, 2017, p. 961).

A statement posted on the website of the White House after the conclusion of the 1999 agreement says that:

We will be able to maintain our current antidumping methodology (treating China as an NME) in future anti-dumping cases without the risk of the legal challenge. This provision will remain in force for 15 years after China’s accession to the WTO (Suse, 2017, p. 961).

As for the Accession Protocol itself, a note on the USTR’s website stated that:

[…] [f]or 15 years after China’s accession to the WTO, the US and certain other WTO members will continue to have the ability to use a special NME methodology for measuring dumping in antidumping cases against Chinese Companies (Suse, 2017, p. 962; see another statement in Xiangchen, 2017, pp. 9–11).

Fifth, it is not necessary that China graduates to the MES in the respective national legislations. The members of the WTO can continue to treat China as an NME country for whatever reasons (e.g. political). Nonetheless, the NME status cannot any longer justify the application of the NME methodology in antidumping calculations (Zhou, 2017, p. 354).

Sixth, the Appellate Body has already interpreted the meaning of paragraph 15(d) in one case and it observed that:

Paragraph 15(d) of CAP establishes that the provisions of paragraph 15(a) expire 15 years after the date of China’s accession (that is, December 11, 2016) […] paragraph 15(a) contains special rules for the determination of normal value in antidumping investigations involving China. Paragraph 15(d), in turn, establishes that these special rules will expire in 2016 (Appellate Body Report EC–Fasteners, paragraph 289).

Fang, for instance, argues that it is oblivious that the Appellate Body referred to the whole paragraph 15(a) and not to the subparagraph 15(a)(ii) (Fang, 2018, p. 109). This seems to imply that the understanding of the Appellate Body is that the whole Section 15(a) should expire.

Finally, the use of the NME methodology tends to ignore the development of the market economy in China, which is not significantly different from other countries around the world. According to some authors, China either became or is on the right way to become a market economy and/or does not influence the economy in a substantively different way than others (Cheng, 2016, p. 30; Rémond, 2007, p. 348; Watson, 2016, 2014, p. 8). Some authors also speculate if China is dumping at all and its low prices are not just a consequence of its comparative advantage and cheap labor (see a short overview of these views in Rinaldi-Larribe et al., 2009, p. 115; see also Yalcin et al., 2016, p. 34). Nicely claims that:

The current NME methodologies [are] being used throughout the world as outdated vestiges of the cold war. They do not take into account sufficiently the fact that the countries we call NMEs − at least the ones that are active members of the global economy and members of the WTO − have thriving market economies. The fact that the state is involved in the economy in these countries is not significantly different […] from the manner in which many governments across the globe influence the market (Nicely, 2014, pp. 160-161).

It is acknowledged by some authors that the only remaining basis for using the surrogate country methodology is the Second Interpretative Ad Note to Article VI:1 of the GATT, as noted above. On the contrary, some authors claim that the usage of the surrogate country methodology is prohibited in the WTO system, see e.g. William Watson from the CATO Institute (2016, p. 16, 18, 20, see also Urdinez and Masiero, 2015, p. 161; Tietje and Sacher, 2018, p. 8). However, even those authors, who correctly bring attention to the Second Ad Note, often claim that the conditions of the note cannot possibly be met, and therefore China should be protected against the surrogate country methodology after passing the magical deadline of December 12, 2016 (Rao, 2013, p. 167; Tietje and Nowrot, 2011, p. 11; de Kok, 2016, p. 528). China itself argues that the application of the surrogate country methodology is inconsistent with the most-favored-nation (MFN) principle and the general rules for the antidumping calculation under Article 2 of ADA (Zhou, 2017, p. 347; Nedumpara and Subramanian, 2018, pp. 22-23). Chinese Ministry of Commerce insisted in one recent antidumping investigation that the “US is obligated to no longer use a surrogate methodology with respect to all antidumping determinations targeting Chinese products after December 11, 2016” (USDOC, 2017, p. 9).

As exhaustive as this list of arguments may seem, there are, expectedly, many problems with the “magical deadline” view.

First, the fact that the chapeau was added later does not necessarily mean that it only reiterates what was already stated in the previous drafts. Quite the contrary, as observed by O’Connor, the logical option seems to be that the fact that the US insisted on adding the chapeau makes it likely that it was intended to have some effect (O’Connor, 2016a, p. 4). Furthermore, there is nothing in the text that would imply that the meaning of “based on the following rules” must entail all the stated rules and not just some of them, if other rules expire (O’Connor, 2016a, p. 3).

Second, the effective treaty interpretation principle is a double-edged weapon. In this case, it may be argued that the continuing use of the NME methodology contradicts this principle because it marks paragraph 15(d) useless. However, the opposite view – such that paragraph 15(d) prohibits the use of such methodology – marks the rest of paragraph 15(a) and subparagraph 15(a)(i) useless. Moreover, the interpretation of the respective section of Article 15 by Cheng and others, according to which the WTO members may not use the surrogate country methodology against Chinese exports after December 11, 2016, does not seem to be correct. Not only it is not specifically written in CAP and it does not automatically follow the expiration of subparagraph 15(a)(ii) but this view also ignores the multilateral legal basis for using the surrogate country methodology as discussed at the beginning of this article.

Third, it is true that CAP does not specifically mention the surrogate country methodology besides the expired subparagraph 15(a)(ii), however, this does not automatically mean that this methodology is, therefore, prohibited. Moreover, it has been stated by the WTO Dispute Panel that paragraph 151 of the Working Party Report is not considered an integral part of CAP, and therefore can only be taken into account as an existing condition at the time of releasing the Accession Protocol (see Panel Report in EU – Footwear, paragraph 7.181; see also Nedumpara and Subramanian, 2018, p. 33).

Fourth, as for the statements by officials presented above, if we accept that they should be given such weight in interpreting a treaty – it is one thing to provide a context for interpretation and another thing to base our interpretation on these statements – and if we accept that some of them deal with a different agreement (which seems quite marginal given the clear connection between the documents), we can conclude that when read carefully, these statements do not contradict a further use of the surrogate country methodology. What they do claim is that for 15 years, the US and other members of the WTO can use this methodology without the risk of a legal challenge (if they follow the agreed rules). This does not automatically imply that after this period, the methodology is prohibited.

Fifth, although the approach according to which China may still be considered an NME country without this status having any effect on the antidumping proceedings seems appealing, the problem is that the NME status basically does not have any other real usage besides antidumping proceedings. It was originally created to deal with non-market economies in antidumping investigations and it remains to be closely tied with antidumping to these days (GAO, 2006, p. 4; Tietje and Nowrot, 2011, p. 2; Washington, 2018, p. 274). Furthermore, the strategy of loosening the connection between the NME status and the surrogate country methodology is not a clever one. Australia recognizes China’s MES and – to China’s resentment – is still using the surrogate country methodology based on the PMS notion mentioned above (Zhou and Percival, 2016, pp. 887–91). Under this logic, Australia could claim that there is no connection between anti-dumping proceedings and the NME status, which is hardly something China would appreciate.

Sixth, the Appellate Body interpretation of paragraph (d) was made in a different case and it was clearly obiter dictum (not a legally binding part of the decision) [6], and therefore does not constitute a legally binding definition (Kaszubska, 2017, pp. 9-10; Fang, 2018, pp. 109-110).

Generally, the main problems of this view are that it ignores other documents within the WTO system enabling the use of the surrogate country methodology and that it cannot explain why the remaining sections of Article 15 should be marked meaningless after the 15 years period as there is nothing that would force us to follow this interpretative approach. Therefore, it seems to be an unreasonably strong interpretation. The surrogate country methodology can be used against China in antidumping investigations in accordance with the WTO rules even without CAP. Actually, it is even commonly used between two market economies (Kelly, 2014, p. 113).

View #2: Urban myth that seems to have gone global

The radically opposing to the “magical deadline” view is the “urban myth that seems to have gone global” (O’Connor, 2011) view. Simply put, authors holding this view argue that nothing substantial changes after the “magical deadline” of December 11, 2016, and business can continue as usual [7]. Bernard O’Connor is often mentioned as the leading proponent of this view (Washington, 2018, p. 283; Kaszubska, 2017, p. 8; Tietje and Nowrot, 2011, p. 2). He states:

Despite all these affirmations, there is no deadline. There is no provision setting any date in the WTO agreements themselves and there is no deadline in the protocol signed by China when it acceded to the WTO. The idea that there is a deadline is an urban myth that seems to have gone global. It has gone viral even in a world w[h]ere the underlying agreements are freely available to all on the internet (O’Connor, 2011).

According to the view of O’Connor, CAP does not automatically guarantee China the MES after December 11, 2016. He argues that “If [China] can establish that it is a market economy then some of the transitional provisions on comparison methodologies will terminate” (O’Connor, 2011). In other words, only “one specific comparison methodology set out in one subparagraph of the Article will expire, in any event, 15 years after Chinese accession” (O’Connor, 2011). This does not mean that China will automatically receive the MES.

Moreover, the proponents of this view also argue that the remaining parts of Article 15 – the chapeau, subparagraph 15(a)(i) and remaining parts of paragraph 15(d) – provide a sufficient basis for the NME methodology (O’Connor, 2016a, 2011; Washington, 2018, p. 283; Brown, 2016, p. 23). This was referred to as “a contrario” interpretation, which is a reasoning based on an argument from the contrary or on negative reasoning from another argument. In other words, if Chinese producers cannot prove market economy conditions the “a contrario” interpretation means that non-Chinese costs and prices can be used (Nedumpara and Subramanian, 2018, p. 25). Also, the remaining parts of paragraph 15(d) require Chinese producers to prove under the national law of the importing country that market conditions prevail in their industry. This is clearly an exception in the WTO system because under normal conditions only the prices of the producer are taken into account (Lee, 2016, p. 11). However, in this case, the prices of the industry may be taken into account (O’Connor, 2016a, p. 3). Therefore, the view that says that after the magical deadline China has to be treated like any other member of the WTO is mistaken. In addition, the Appellate Body arguably concluded that Article 15 of CAP constitutes a differential treatment for China in EC–Fasteners case (see the Appellate Body Report, WT/DS397/AB/R, 2011, paragraphs 287, 290).

In addition to the argument presented in the section about the magical deadline view, some argue that there is clear evidence that China is not a market economy, and therefore insisting that all the WTO members treat China as a market economy would be contrary to the purpose of Article 15 (Price et al., 2015, pp. 2–3). This purpose, as can be found, e.g. in the Working Party Report on China’s Accession, is to help China to continue its progress toward becoming a full market economy (Washington, 2018, p. 285; Nedumpara and Subramanian, 2018, p. 32). Adding to this view, it was proposed to read Article 15 together with Article 9 of CAP, in which China commits itself that its domestic prices will be determined by market forces. Both provisions are understood as having a reciprocal nature and as China has not removed price distortions, the importing countries do not have to be obliged to take these prices into account (Kaszubska, 2017, p. 8).

As in the previous case, there are several difficulties connected with this view. First of all, as already mentioned above, loosening the ties between the NME status and NME methodology is not a convincing strategy and misses the real issue – the usage of non-Chinese prices in antidumping investigations.

Second, although the remaining parts of Article 15 still continue to exist and they point at some hints about using an alternate methodology, it is hardly the case that the NME methodology can be used as nothing has ever changed (Kaszubska, 2017, p. 9). Not only is that nowhere to be found in CAP but more importantly, this would mark the expired sections of Article 15 useless. As shown above, this strongly contradicts the effective treaty interpretation principle. Simply put, if the situation remains the same after the expiration of subparagraph 15(a)(ii), why was that subparagraph ever considered relevant? And why was it included in CAP at all?

Third, arguments pointing to the economic conditions seem to be misleading. As discussed by many authors, the NME status is not truly connected with economic performance or concrete market situation (Pan, 2015, pp. 751–756; Rinaldi-Larribe et al., 2009, p. 117; Detlof and Fridh, 2006, p. 7). Moreover, it is not clear why certain economic conditions should matter for a legally binding interpretation of Article 15. As for the connection between Article 15 and Article 9, there is nothing that would force us to understand these two provisions as being of a reciprocal nature.

Generally, the implication of this view that marks the expired sections useless even before its expiration indicates that also this interpretation is too strong. However, two conclusions seem to be correct. First, the remaining parts of Article 15 continue to be active. As Messerlin pointed out “[i]t is almost impossible to eliminate a provision included in a country’s protocol of accession” (2004, p. 124). Second, China can be treated differently on the basis of these remaining parts than other WTO members in the future.

View #3: Shift of burden of proof

The “shift of burden of proof” view can be understood as a sort of middle ground between the two views analyzed above. It is also the view that the US and the EU adopted in their respective disputes considering China’s NME status (see First Written Submission by the EU, 2017; and Third-Party Submission of the US, 2017). The EU even changed its domestic anti-dumping regulations to put them in accordance with this interpretative approach.

According to this view, after December 11, 2016, a shift in the burden of proof took place. Before this deadline, other WTO members could suppose that China is an NME country and Chinese producers had to prove otherwise if they wanted to gain a different treatment (although this has not happened often and applications from Chinese companies have been often unsuccessful, see e.g. Xu and Tang, 2009, p. 70) [8]. After the deadline, this proof has to be made by other WTO members’ investigative authorities. If they can prove that NME conditions prevail in the Chinese industry under consideration, they can continue to treat products of such industry as coming from an NME country, and therefore use the NME methodology (Miranda, 2014). Besides, this shift in the burden of proof, nothing changes after December 11, 2016 (Joshi, 2018, p. 203). The EU explained this view in its First Written Submission to its case with China as follows:

[I]f there is no evidence of either market economy conditions or NME conditions, the investigating authority cannot, on the basis of the new Section 15, apply a methodology that is not based on a strict comparison with domestic prices or costs in China. Second, if there is some evidence of market economy conditions (and no evidence of NME conditions), the investigating authority also cannot, on the basis of the new Section 15, apply a methodology that is not based on a strict comparison with domestic prices or costs in China. Third, in weighing some evidence of market economy conditions against some evidence of NME conditions, there is now no China-specific rule in Section 15 placing the burden of proof on Chinese exporters (2017, paragraph 110).

The reasons for this shift of the burden of proof can be found either in the remaining sections of CAP or they can be based on the WTO legal documents which allow for using the surrogate country methodology (Tietje and Nowrot, 2011, p. 10; Telep and Lutz, 2018, pp. 700-701; Fang, 2018, p. 112). The non-exclusive understanding concerning the remaining section of Article 15 was already presented above and the shift of the burden of proof is based on such interpretation of the remaining parts of paragraph 15(d). The first sentence of this paragraph says that “[o]nce 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 […].” The third sentence says:

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 NME provisions of subparagraph (a) shall no longer apply to that industry or sector.

These provisions can be read as placing the burden of proof on the importing country and not on China, as was proposed by the US (see Third-Party Submission of the US, 2017, Attachment 1, paragraphs 8.5.5–8.5.6). This reading would mean that the expired subparagraph 15(a)(ii) required China to demonstrate the market economy conditions (Telep and Lutz, 2018, p. 701).

One can easily find many misunderstandings in the debate about this view connected with the views and arguments already presented above. For instance, Fang (2018, pp. 116-118) claims that after the expiration of subparagraph 15(a)(ii), the whole Article 15(a) is terminated and China must be treated in the same way as other WTO members. I have already discussed the shortcomings of similar views. Tietje and Nowrot (2011, p. 10) acknowledge that a shift of the burden of proof occurs with the expiration of subparagraph 15(a)(ii) and the surrogate country methodology based on the respective WTO documents can be used against China, however, the respective document for them is only the Second Ad Note to the article VI:1 of the GATT. According to them meeting the conditions of the Second Ad Note is almost impossible, the surrogate country methodology cannot be used any further. Nonetheless, this approach completely misses the PMS notion introduced above.

The shift of the burden of proof view is able to escape the counterintuitive consequences of the previous view according to which there is no change after December 11, 2016. Now there is a change, something significant happened, however, the NME methodology can still be used and China can still be treated differently from other WTO members. Nevertheless, the problem of this view is that there is nothing to be found in the Accession Protocol that would actually provide the basis for the shift of the burden of proof (Zhou and Peng, 2018, pp. 512–513). Even the reading of the remaining parts of paragraph 15(d) suggested by the US is speculative and not really convincing from the textual point of view. The inverted interpretation according to which China has to prove that market economy conditions prevail is at least as probable as the reading suggested by the proponents of this view (Fang, 2018, p. 112). O’Connor argues:

The first and third sentences of Article 15(d) make clear that it is China, which must establish that it has become a market economy (for the whole economy or for particular industries or sectors of the economy) and that the standard to be met in that evaluation is as set out in the law of the importing WTO Member (2016a, p. 2).

Arguably, by proposing this interpretation, the US and the EU are somehow trying to improve the position of China in the WTO system. Although the NME methodology can still be used and it can still be based on the Accession Protocol (which is crucial if the other legislation concerning for instance the PMS notion will be clarified in the future), now the US and the EU have to prove that the specific company/industry/sector does not operate on market economy conditions. If they fail to do so, they cannot use the NME methodology based on the Accession Protocol.

View #4: Something remains

According to the “something remains” view, which is being hinted at by Nedumpara and Subramanian (2018, pp. 21–34), the remaining parts of Article 15 provide a sufficient basis for using some alternate methodology. Therefore, similarly to the second and third views examined above, China is not entitled to automatically obtain the MES and it is not correct to claim that the surrogate country methodology is prohibited from the magical deadline onward. Tables 1 and 2 present the possible scenarios under this view according to subparagraphs 15(a)(i) and 15(a)(ii).

What distinguishes this view from the second view is that under this interpretation, there is a substantial change, which took place on December 11, 2016. Up until then, IAs could use the NME methodology according to the established rules and without the risk of legal challenges. After this date, it is not clear what the IAs can do, but the possibility for differential treatment is definitely open. If we take the chapeau into account, it states that a methodology “not based on a strict comparison with domestic prices and costs in China” may be used based on the rules expressed in subparagraphs 15(a)(i) and 15(a)(ii). As already mentioned above, this reading is based on a non-exclusive understanding of the phrase “based on the following rules” (Nedumpara and Subramanian, 2018, p. 27). In other words, if one rule expired, the other is still active nonetheless. The question is, then, what this methodology actually entails. It may entail the surrogate country methodology, which disregard Chinese prices and costs totally or it may refer to a different possible methodology that somehow uses Chinese prices and costs but do not strictly compare them to the export prices, e.g. uses Chinese prices and costs as a starting point and then adjusts them in a certain way. In any case, this would provide for the change, which would explain the magical deadline in the Accession Protocol.

Contrary to the shift of the burden of proof view, according to this view, no shift of the burden of proof takes place. China still has to prove that market economy conditions prevail in a certain industry and if it is able to prove so, it has to receive market economy treatment (Nedumpara and Subramanian, 2018, p. 32; O’Connor, 2016a, p. 3). It is not the responsibility of other WTO members to prove that market economy conditions prevail in respective Chinese industries.

This interpretation is arguably the least elaborated; however, it is successful in avoiding the biggest shortcomings of the other views as they were analyzed above. It is true that according to the “something remains” view, it is not clear what methodology the IA can use and it is exactly this vagueness, which is the most serious shortcoming of this view. However, the important aspect of this interpretation is that there will always be room for differential treatment of Chinese exports based on CAP and this can be significant in the future. As the PMS notion and the Second Ad Note apply to every member of the WTO, one can expect that there will be a higher pressure from the international community to clarify their meaning and regulate them according to common rules. If this happens, it can be much more difficult to disregard domestic prices in antidumping investigations. However, according to something that remains view, such an option will always be provided for the antidumping investigations against China. In this sense, the vagueness of this interpretation could be useful for China’s counterparts in the future.