WTO reportedly rejects China’s claim to be market economy

Trade correspondent L.C. reports:

China has reportedly lost the WTO case it brought against the EU for not granting it market-economy status.

The report of this ruling comes from Bloomberg, citing two well-placed sources. WTO rulings are circulated to the parties to a case well before they are publicly released, so the report amounts to a leak and can’t be confirmed. However, there has been no push-back against the Bloomberg report and most analysts assume it is accurate.

China filed a parallel case against the US at the same time as the filing against the EU but the EU case moved first. A panel has not yet heard the case against the US.

The US participated actively in the EU’s defense as a “third party,” submitting supporting briefs that outlined the defense the US would make in its own case. It is expected that the case against the US would have a similar outcome to the EU case if it is pursued.

Analysts are awaiting release of the panel report because its reasoning – how it arrived at its decision – will be important.

If the EU has indeed won, it will show that the US and EU can cooperate to work through the WTO on the China problem.

This is a matter of existential importance for the WTO because a decision in favor of China would have outraged Washington – not just the White House but legislators of both parties who believe the US should be taking a harder line on Chinese trade abuses and would like to see the WTO on their side.

This was the WTO dispute about which US Trade Representative Lighthizer, testifying to Congress almost two years ago, said “I have made it very clear that a bad decision with respect to the non-market economy status of China… would be cataclysmic for the WTO.” In fact, a win for Beijing would have likely revived the President’s threats to withdraw from the institution.

Although most other countries don’t treat China as a non-market economy (NME) for purposes of antidumping investigations, many were sympathetic to the US/EU position. China mainly had sympathy from other non-market economies like Russia. China has market-economy status (MES) from some major countries, including Australia, granted when talks for their bilateral free trade agreement began. But Japan, Mexico, Canada, and India are among large countries that retained China’s NME classification.

The ruling also has implications for the US-China trade talks, to which the US had linked the WTO actions. Washington was demanding in the talks that China drop its WTO complaints on US and EU denial of market-economic status. Now that China reportedly lost its case against the EU, it appears the US won’t have to make this demand and therefore won’t have to offer something in return.

Despite the huge symbolic significance of this case, it doesn’t have a corresponding monetary significance. Market-economy status (MES) relates to how a country’s exports are treated in antidumping investigations by other WTO members. When calculating dumping by a NME, the determination of a fair market price can be made on the basis of the price in a third country rather than in the target country. This generally raises the comparison “fair” price, thus making the price of the dumped product appear even less fair and increasing the dumping penalty the target country is allowed to charge.

The justification for characterizing China’s economy as NME is that it is too distorted by government intervention to enable a fair price to be based on the domestic price in China.

US law defines an NME as a country that “does not operate on market principles of costs or pricing structures, so that the sales of merchandise in such a country do not reflect the fair value of the merchandise.” According to the Commerce Department, for a country to get MES, the US government must examine the extent to which the country’s “government has receded from state planning, which is to say, state control over pricing, production, investment and resource allocation, but also whether market forces are firmly rooted in the economy.” Beijing argues that it meets these criteria; the US argues it that it certainly does not. Beijing also argues that its WTO Accession Protocol forces countries to give it MES after 15 years anyway. The US — and reportedly now the WTO panel — disagree.

This panel decision pertains only to anti-dumping (AD) methodology. Most US businesses and political constituencies believe China is a non-market economy highly distorted by state intervention that has, in fact, been backsliding from reform for the past ten years. A WTO decision that ignored this reality and instead directed Washington to grant China new benefits reserved for market economies would have been a cause for outrage.

China now has to decide if it will withdraw its complaint against the US; appeal the panel ruling to the Appellate Body (AB); or negotiate a settlement with Brussels and Washington.

US wins vs. China in a second WTO dispute

The US has also just won a second WTO case that the Obama Administration, just before leaving office, filed against Chinese agricultural practices. This one targeted China’s system for administering tariff-rate quotas (TRQs) for wheat, rice, and corn. TRQs are border barriers that designate a set quota for a product to be imported duty-free or with a low duty, with any imports above the quota level being subjected to a usually large duty.

TRQs are WTO-legal and were often implemented to replace strict quotas that are considered more trade-distorting. But the US was able to argue successfully that China administered its TRQ system in a way that unfairly limited US farm exports. According to Agriculture Department estimates, US farmers could have exported up to $3.5 billion more wheat, rice, and corn in 2015 had China’s TRQs been administered fairly. Instead, the TRQs often went unfilled – that is, China didn’t import as large a quantity of agricultural commodities as it had pledged to do.

Lighthizer and Agriculture Secretary Sonny Perdue released statements welcoming the ruling. It was particularly welcome given the pressure the White House is under from farmers who have found that, despite promises of greater foreign access, Administration trade policy has instead led to a contraction of their markets.

Despite the favorable WTO panel decision that will require China to be fair and transparent in its implementation of TRQs, US farmers still face barriers erected when China retaliated against the US imposition of $200 bn. in Section 301 tariffs against China. An eventual US-China trade deal could remove that further barrier. The two WTO wins should help the US negotiating position in the final run-up to a trade agreement.