China Market-Economy Status in the United States Still Far Off

Many assumed that China would automatically graduate to market-economy ("ME") status in 2016.  The big deal with ME status is that antidumping (AD) calculations must be made based upon a comparison of prices and costs, and cannot use a methodology that requires an assessment of factors of production ("FOP") and substitution of prices with surrogate values ("SV").  This so-called non-market-economy ("NME") methodology for calculating AD duties with FOPs and SVs has resulted in high AD margins when no margin would exist under the normal ME methodology used for nearly all other countries in the world. But the first petition filed against Chinese goods treats China as a non-market economy ("NME").  When will China graduate to ME status?  I believe it is still years off.

The recent petition for antidumping (AD) and countervailing duty (CVD) investigation into "Certain Off-The-Road Tires" from China maintains the status quo.  In that petition, Titan Tire bases its entire AD margin calculation on China as an NME country.  It asserts, "By statute, Commerce’s determination of NME status remains in effect until a contrary determination is made, and Commerce has not since that time published any notice of a determination that China is a market economy." 

Unfortunately for Chinese producers, China's WTO Accession Agreement does not appear to require otherwise; even though China and others may have thought 2016 would be its year for market-economy status.  Specifically, the Agreement allows members to treat China as an NME until Chinese producers under investigation "can clearly show that market economy conditions prevail."  China WTO Accession Agreement, para. 15(a)(i).  Until that time, "importing WTO Member[s] may use a methodology that is not based on a strict comparison with domestic prices or costs in China."  China WTO Accession Agreement, para. 15(a)(ii) (emphasis added).  These provisions are the basis for allowing the U.S. to use the NME methodology for calculating AD duties (requiring factors of production and surrogate values).

Paragraph 15(d), first sentence, of the Accession Agreement states affirmatively what must be done if China establishes that it is not a market economy country -- the importing WTO Member must then treat China use direct price comparisons because "the provisions of subparagraph (a) shall be terminated."  Paragraph 15(d) thus means that once China proves it is an ME to a particular importing WTO Member, the WTO Member must, from thenceforth, use direct price comparisons.  Significantly, the language does not say that all other importing WTO Members must also treat China as an ME.  Thus, although other countries have graduated China to ME status, the United States has not.

Paragraph 15(d), second sentence, appeared to offer a slight glimmer of hope if China were not able to convince a WTO Member that it has a market economy.  But, properly read (that is, through the eyes of the U.S. Department of Commerce ("USDOC") and U.S. industries which hold significant influence over USDOC interpretations), paragraph 15(d), second sentence does not provide much hope.  That sentence states, "In any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession."

Unfortunately for Chinese companies, USDOC will not read the 15-year expiration (that is, after the end of 2015), as they hope.  The view of the USDOC will almost always be in favor of the U.S. domestic industry.  Here, the 15-year expiration only applies to paragraph 15(a)(ii), and does not apply to Paragraph 15(a) or 15(a)(i), which allows WTO Members to use a methodology "that is not based upon a strict comparison with domextic prices or costs in China," and that only requires that a strict price comparison be used if Chinese producers can demonstrate that market economy conditions prevail in the industry producing the like product."  China WTO Accession Agreement, Para. 15(a) and 15(a)(i) (emphasis added). 

Thus, I believe USDOC will claim that the 15-year expiration mentioned in paragraph 15(d), second sentence, does not affect its treatment of China as an NME or its use of the NME methodology to calculate AD duties on products from China.  USDOC will claim that it merely eliminates the express provision allowing NME treatment, but does not prohibit NME treatment of China. 

I expect China will bring an action against the United States at the WTO, and -- if China prevails -- the United States will only implement (graduate China to ME status) if it loses at the Appellate Body, and USDOC will ask for the maximum Reasonable Period of Time it can before implementing.  China's chance of winning is uncertain given the ambiguity of the language and the general WTO attitude favoring the United States.  China will only win if a significant number of other WTO Members side with China.

Even so, as my earlier post explained, I believe USDOC will continue to use a methodology like the NME methodology (requiring factors of production and surrogate values), but under the guise of the Particular Market Situation. 

The one difference will be, however, that companies that are not individually investigated should no longer be required to demonstrate that they are separate from the government of China via the submission of Separate Rate Applications and Separate Rate Certifications.  Instead, they should receive the all-others rate -- the weighted average of the rates calculated for individually investigated companies -- without any additional filing requirement beyond any required Quantity & Value questionnaire response.