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Moving forward after European lawmakers said ‘no’ to China’s market economy status
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THE discussion in the European Union about China’s Market Economy Status (MES) is taking place as certain provisions governing China’s World Trade Organization Accession Protocol are about to expire on December 11. At the same time, these talks are taking place during a difficult time for Europe’s economy, particularly for its steel industry.
On May 12, a majority of members of the European Parliament issued a resolution that refused to recognize China’s MES. A debate took place two days before the vote where European lawmakers across the political spectrum expressed strong reservations about such a status being recognized to China, crystallizing a policy of resistance against China’s imports.
The resolution is a non-binding document and the European Commission will have to finally answer to the same question later this year.
MES is attributed to an economy that operates by voluntary exchange in a free market, in contrast to Non-Market Economies (NME) that have a planned or controlled economy. Up to now the EU remains one of the entities, along with the US, that has not recognized MES to China. The European Union specifically has established five criteria that have to be met before it recognizes a country’s MES .
Based on Article 2 (7)(c) of the European Council Regulation No. 1225/2009 of 30 November 2009 on protection against dumped imports from countries not members of the European Community: “A claim under subparagraph (b) must be made in writing and contain sufficient evidence that the producer operates under market economy conditions, that is if: decisions of companies regarding prices, costs and inputs... are made in response to market signals…; companies have one clear set of basic accounting records which are independently audited in line with international accounting standards...; the production costs and financial situation of companies are not subject to significant distortions carried over from the former non-market economy system.... and exchange rate conversions are carried out at the market rate.
Now turning to the relevancy of achieving the status, one must consider that if a country is deemed an NME, the importing country, in this case the EU, has the right to apply different methodologies to calculate price comparability and this facilitates the application of anti-dumping and corrective measures.
The discussions under way arise from different interpretations that China and the EU are giving to the Section 15 paragraph d) of China’s WTO Accession Protocol: “Once China has established, under the national law of the importing WTO Member, that it is a market economy, the provisions of subparagraph (a) shall be terminated provided that the importing Member’s national law contains market economy criteria as of the date of accession. In any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession. In addition, should China establish, pursuant to the national law of the importing WTO Member, that market economy conditions prevail in a particular industry or sector, the non market economy provisions of subparagraph (a) shall no longer apply to that industry or sector.”
Seeking practical solutions
The European Parliament’s interpretation is an expression of a narrow interpretation whereby on the 15th anniversary only the application of non-standard methodology will cease to apply, however it will still be possible to apply the standard methodology for price comparability in determining subsidies and dumping. According to this interpretation, the MES is determined based on the EU regulations and will not be automatically extended in December 2016.
Only should China establish, pursuant to the national law of the importing WTO Member, that market economy conditions prevail in a particular industry or sector, the non market economy provisions of subparagraph (a) shall no longer apply to that industry or sector. The EU, based on its five criteria, as cited above, does not deem China to have fulfilled the requirements to qualify for MES.
China’s interpretation on the other hand is wider. Fifteen years after its accession to WTO, China should be automatically recognized as a Market Economy. The Chinese interpretation would therefore increase the EU’s burden of proof in cases where it wishes to demonstrate the Chinese firms are dumping or have access to subsidies.
The next months will tell which interpretation will prevail or whether another route is possible — one where the legal interpretations are set aside for more practical considerations such as China’s reforms over the past 15 years. While the EU might debate whether China meets all its criteria for MES, it should take into account China’s efforts to reform its economy, carried out consistently over the past 15 years, to strive to be in compliance with the EU’s requirements.
The author is Managing Partner and Lawyer at GWA Law, Tax & Accounting. Shanghai Daily condensed the article.
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