China-US WTO Dispute on the Horizon?

Erin Ennis

December 12, 2016

 

December 11, 2016 was an important day in China’s membership in the global economic community. Sunday marked the 15th anniversary of the nation’s membership in the World Trade Organization (WTO)—and it began the watch party for when China will choose to challenge some of its major trading partners over treatment of its exports under antidumping rules. A solution exists that would check three boxes for the United States, provided the Trump administration and other constituencies have any interest in avoiding an unnecessary brawl.

 

When China joined the WTO in 2001, its government’s pervasive intervention in the economy meant that China’s trading partners could not trust data on the true cost of production and determine a fair market value in antidumping cases. A provision in China’s accession agreement resolved this issue by allowing other WTO member countries to use special tariff calculations, known in the United States as nonmarket economy (NME) calculations, in China cases—for a period of 15 years. As a result, the United States could use pricing in a surrogate, third-country market (often Thailand) to determine the value of antidumping tariffs to apply to Chinese goods sold at unfairly low prices. That provision of China’s accession protocol expired Sunday.

For context, at least 88 countries—including the members of the Association of Southeast Asian Nations, Brazil, and Australia—have recognized China as a market economy in recent years. While many parts of China’s economy are market-oriented, USCBC does not believe that China is a fully market economy, and China certainly doesn’t meet the criteria under US law for that designation. However, China’s WTO accession protocol does not require the United States to declare China a market economy; it only requires that the United States stop using NME methodology as of yesterday.

The United States and the European Union appear to have no intention of making any immediate change in the use of the NME methodology. Japan has stated publicly that it will not change its approach. As a consequence, China is widely expected to challenge one or more countries at the WTO for failure to comply with the provision.

In recent months, Europe has taken some steps that may signal their planned path. In October, the European Commission announced it would rewrite its existing trade remedies laws to eliminate references to nonmarket economy calculations and replace it with a new approach to take into account “market distortions” or where a foreign government has a “pervasive influence” in the market. It is not clear when the new methodology will be approved and implemented.

The United States, by contrast, appears to have no immediate plans to change its approach to calculating duties on dumped imports from China. USCBC sources in the US government have indicated the issue is one that will need to be addressed by the incoming administration. While President-elect Donald Trump did not take a position on the NME issue during his campaign, his support for the use of tariffs and his regular criticism of Chinese trade policies make it unlikely that he will change the existing NME approach to dumping calculations.

The timeline of WTO dispute settlement cases makes it inevitable at this point that the Trump administration will have to deal with the issue. If China were to file a case today, the first stage of dispute settlement—a 60-day “consultation period” before litigation formally starts—would not conclude until mid-February 2017, about a month after the Trump administration takes office.

USCBC has advocated throughout 2016 that the United States should honor the WTO commitment to end the use of NME calculations, but replace it with a new methodology that would enable the United States to address the distortions that remain in some sectors of China’s economy—just as it can do in cases involving other trading partner economies. Sectors with overcapacity are good examples of where government-supported market distortions exist. There would need to be a rigorous, grounded process for demonstrating a sector or producer qualifies for using an alternative methodology, to avoid simply using this approach for protectionist purposes, and it would need to be WTO compliant.

This approach would result in a triple win for the United States—ensure China can’t export its overcapacity problem to the United States, satisfy domestic political constituencies who are concerned about losing the NME methodology, and send a signal to China about the importance of honoring agreements.