Transitioning to China's Market Economy Antidumping Treatment in 2016 by osx12863

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									                 TRANSITIONING TO CHINA’S MARKET ECONOMY
                      ANTIDUMPING TREATMENT IN 2016
                                                    By
                                                      1
                                 Kenneth J. Pierce and Matthew R. Nicely2


         The world has an array of antidumping calculation tools to control dumped imports from

non-market economies (NMEs), particularly China. This is because NME antidumping

mechanisms are largely unbounded by explicit WTO rules when it comes to determining normal

value3; indeed, the 1995 WTO Antidumping Agreement never mentions non-market economies.

In China’s case, the few rules for determining normal value are provided in its Protocol of

Accession to the WTO, which substantively provides only that:

                  In determining price comparability under Article VI of the GATT
                  1994 and the Anti-Dumping Agreement, the importing WTO
                  Member shall use either Chinese prices or costs for the industry
                  under investigation or a methodology that is not based on a strict
                  comparison with domestic prices or costs in China . . . .4

         Soon, in 2016, all WTO Members must further integrate China into their trade regimes by

extending it market economy (ME) treatment for antidumping (AD) purposes. All this means is

that Chinese exporters will be judged to be dumping (or not) based on their own costs and prices,

just like everyone else. This prospect has set some domestic industries on edge, probably

prematurely, as there is plenty of room under the WTO Antidumping Agreement and the U.S.

1
         A partner at Hughes Hubbard & Reed LLP.
2
         A partner at Thompson Hine LLP.
3
           Second Supplementary Provision to paragraph 1 of Article VI in Annex I to GATT 1994: “It is recognized
that, in the case of imports from a country which has a complete or substantially complete monopoly of its trade and
where all domestic prices are fixed by the State, special difficulties may exist in determining price comparability for
the purposes of Paragraph 1, and in such cases importing contracting countries may find it necessary to take into
account the possibility that a strict comparison with domestic prices in such a country may not always be
appropriate.”
4
        World Trade Organization, Accession of the People’s Republic of China, Nov. 10, 2001, WT/L/432, at 8.
Viet Nam’s Protocol of Accession to the WTO uses virtually identical language. Under that Accession Protocol
Viet Nam is to be accorded market economy antidumping status in 2019.



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statute to address any lingering concerns with normal value once ME status is implemented for

China.


             ·   Current NME Methodologies

         China had been subject to antidumping disciplines as a non-market economy long before

it joined the WTO in 2001. Prosecuting antidumping cases against China presented conceptual

difficulties since home market prices and costs are at the heart of the dumping construct and

China’s were considered unreliable given state ownership and controls. As a result there is no

unifying consistency in how nations adjust their normal value methodologies to account for non-

market economies like China. One commonality is that whatever methodology is employed

often tends to result in high antidumping margins, giving rise to the consequent concern that ME

status will reduce them in 2016. Two main models have emerged to determine NME normal

value:

         ·       The U.S. system, using the Chinese producer’s actual experience but only to
                 derive quantitative factors of production, valued by application of “surrogates”
                 from a similarly developed ME country with like product production, most often
                 India mainly because data are readily available; and

         ·       The EC approach, which entirely disregards the NME producer’s actual
                 experience – both values and quantities, and instead looks for a reasonable
                 “analogue” ME country where the like product is made and sold, and borrows
                 wholly from it – both home market producer’s prices and costs – to find normal
                 value, with analogue country selection dependent on the vagaries of where a
                 cooperating producer might be found, which is often the United States.

         Either approach is allowed under the Antidumping Agreement, in that China’s Protocol

merely provides that until 2016 China be extended either ME treatment or a methodology “that is

not based on a strict comparison with domestic prices or costs in China . . . ,” which is hardly a

methodological proscription. As a result, the world is polyglot when it comes to determining

normal value in dumping cases against China. On the one hand, countries in over 70 cases



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reportedly have already extended ME treatment to China in a variety of instances. On the other,

most major trading nations do not do so across the board and follow the EC’s NME approach

with variations on the analogue theme (e.g., Japan, Mexico, and Brazil). The United States’

more complex use of factors of production and surrogate values has few followers. Notably,

Section 773(c) of the Act actually allows either surrogate values or the EC’s analogue values to

be applied, although the former is preferred and the latter a dead letter in U.S. practice.

       What is likely to happen between now and 2016? Will the United States, overnight,

simply shift seamlessly to determining normal value in China antidumping cases in the usual

market economy manner, with the expectant result of falling antidumping rates? Probably not.

Other events have interceded to make the transition more complicated. Regardless, whether the

transition takes place over time or all at once in 2016, the manner in which China’s dumping

margins will be calculated is likely to be much more complicated and contentious than the usual

market economy calculation as a variety of other statutory options come into play in new ways.

We highlight the major ones below, preceded by a discussion of their context set by the three

other major China trade restraints that have emerged as 2016 approaches.

       ·       The Ascendance of Non-Antidumping Measures

       Antidumping law cannot be viewed in isolation as its evolution with respect to China is

affected by three other primary trade measures that have gained prominence in their use against

U.S. imports from China: 1) countervailing duties; 2) Section 421 China safeguards; and 3)

Section 337 intellectual property (IP) actions.

       Countervailing Duty (CVD) Measures: For imports from China, CVD measures are a

new phenomenon over the last two years. Previously, Commerce held that foreign governments

with non-market economies exercise so much economic control as to render meaningless the

entire concept of a measurable subsidy. This policy was controversial because it prevented U.S.


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companies from filing countervailing duty cases against China and other non-market economies.

Commerce's preliminary ruling on March 30, 2007, in the Coated Free Sheet Paper

investigation, 5 which marked the first imposition of countervailing duty measures against

Chinese imports, triggered the filing of seven countervailing duty cases in 2007 against China

and five more in 2008. Many of these cases were accompanied by antidumping allegations and

filings against other countries.6 It appears that the change to Commerce’s countervailing duty

policy resulted in more antidumping duty cases than might otherwise have been filed.

         Ironically, in the Coated Free Sheet Paper investigation with all its hoopla the

International Trade Commission (ITC) ultimately determined that the Chinese imports were not a

cause of material injury to the U.S. industry. 7 But with Commerce’s policy of permitting

Chinese countervailing duty cases now established, most observers believe that imports from

China will continue to drive trade remedy activity for the immediate future. The possibility of

additive countervailing duties only enhances NME high-margin incentives to bring antidumping

cases against China. This, along with trends indicating slower U.S. economic growth, a

fluctuating dollar, and rising Chinese imports and market shares, have fueled trade community

speculation that a large number of cases will be filed over the coming year.

         Importantly, the debate continues as to whether application of the CVD law to China is

legal or otherwise good policy. So far, only Canada and Australia have followed the U.S. lead.

The ostensible reason for applying the NME methodology to imports from China is that the


5
         Coated Free Sheet Paper from the People’s Republic of China, 72 Fed. Reg. 17484 (Dep’t of Commerce
April 9, 2007).
6
         It is common for antidumping and countervailing duty cases to be filed simultaneously against multiple
countries because the incremental cost of adding targets is relatively low, while subject import volume is gained and
non-subject import sources are narrowed for the injury test.
7
       Coated Free Sheet Paper from China, Indonesia, and Korea, 72 Fed. Reg. 70892 (Int’l Trade Commission
December 13, 2007).



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market is so distorted by government intervention – a.k.a. subsidies – that normal value must be

calculated using surrogate production input values from market economies. By doing this, the

distortions, including subsidies, are erased, thus making duplicative the application of both AD

and CVD measures. Chinese respondents are challenging this in the courts and the WTO.8

Meanwhile, Commerce still entertains the notion of allowing individual companies to gain ME

antidumping treatment by demonstrating they are a "market oriented enterprise," a policy change

that Commerce acknowledged in the Coated Free Sheet Paper case might be necessary to justify

its application of the CVD laws to China.9 The point is that the application of CVD laws to

China is a primary motivating force for a true transition to treating China as a market economy

and might precipitate various other changes to antidumping practices (discussed further below)

before 2016 arrives to require full market economy treatment.

        Section 421 China Safeguard: Although not yet used against Chinese imports as of this

writing (because President George W. Bush declined to apply a remedy whenever the ITC found

injury), many observers expect these restraints to actually be imposed during the Obama

Administration. Given the relatively modest threshold required to obtain relief (“market

disruption”), the lower legal fees required, and the great discretion afforded the President to

derive a remedy, Section 421 could become a major weapon employed against imports from

China. The relief, once granted under Section 421, though, remains in place for a shorter time

than AD or CVD measures. Furthermore, this provision is on the books only until 2013, whereas

AD/CVD actions presumably will be around forever.


8
         GPX International Tire Corporation et al v. United States, Case No. 08-00285 (Ct. Int’l Trade 2008), and
United States - Definitive Anti-Dumping and Countervailing Duties on Certain Products from China - Constitution
of the Panel Established at the Request of China, WT/DS379/3 (11 March 2009).
9
        Memorandum to David Spooner from Shauna Lee-Alaia et al, Countervailing Duty Investigation of Coated
Free Sheet Paper from the People’s Republic of China – Whether the Analytical Elements of the Georgetown Steel
Opinion are Applicable to China’s Present-Day Economy, (March 29, 2007) at 10.



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        Section 337: There has been a sharp increase in Section 337 actions against Chinese

imports, reflecting widespread concern with Chinese companies’ failure to respect intellectual

property rights. Even though these actions are dominant at the ITC, they are not generally

viewed as a substitute for other kinds of trade remedy actions; rather, they are seen as a

compliment to other forms of intellectual property protection, not a replacement of AD/CVD

actions. As such, Section 337 actions likely will have less impact on how the China’s

antidumping methodology develops over the coming years.

        ·       Statutory Means to Adjust China’s ME Antidumping Calculations

        Although the recent CVD cases against China may suggest a shift in views about the

Chinese market, the fact is that the United States continues to apply the NME methodology

against China with the same fervor as in years past. While antidumping margins have been

lower in some cases (e.g., Wooden Bedroom Furniture10), Commerce still has never applied the

“market oriented industry” provision and has only given lip service to possible adoption of a

"market oriented enterprise" policy, despite this being an established alternative outcome in EC

cases against China. Consequently the United States does not have much experience in applying

ME methodologies to particular industries or companies operating in a country deemed to have a

non-market economy overall.

        Rather, the opposite has been seen with U.S. NME approaches still available in dumping

cases involving countries that have graduated from NME status, a situation analogous to what

China will face in 2016. When Russia was graduated to ME status by the Commerce

Department in June 2002, the Department asserted authority to selectively reject the foreign

producer’s home market prices and costs due to lingering state influence. The legal rationale

10
      Wooden Bedroom Furniture from the People’s Republic of China, 69 Fed. Reg. 67313 (Dep’t of
Commerce November 17, 2004).



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rested on the statutory provisions regarding home market sales not being made “in the ordinary

course of trade”11 or “not reasonably reflect{ing} the costs associated with the production and

sale of the subject merchandise.”12 The Department staked out a broad proposition of its

authority:

                   Accordingly, the Department will examine prices and costs within
                   Russia, utilizing them for the determination of normal value when
                   appropriate or disregarding them when they are not.13

          The Department nearly did disregard them in Magnesium Metal from the Russian

Federation14, where it considered adjusting the foreign producer’s actual electricity costs because

it found that “the Russian electricity sector is still, as a whole, in the early stages of reform, and

is a sector where prices are based neither on market principles nor on long-term cost recovery.”15

In the end, the Department declined to adjust the respondent’s electricity costs because “the

macroeconomic distortions in the Russian energy sector do not allow the Department to discern

and measure the effects of such distortions on Respondents’ reported electricity costs.”16 But

Commerce’s legal assertion for “disregarding them when they are not {appropriate} . . .” still

stands.

          The Russian experience portends what probably lies ahead in China dumping cases after

it gains ME status. A Chinese producer’s normal value prices and costs could still be

disregarded under the “reasonable costs” and “ordinary course of trade” rationales if significant


11
          Section 773(a) of the Act.
12
          Section 773(f) of the Act.
13
       Memorandum to Faryar Shirzad from Albert Hsu et al, Inquiry Into the Status of the Russian Federation as
a Non-Market Economy Country Under the U.S. Antidumping Law (June 6, 2002).
14
          Magnesium Metal from the Russian Federation, 70 Fed. Reg. 9041 (Dep’t of Commerce February 24,
2005).
15
          Id. at 9044.
16
          Id.



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market distortions are found. Given the Department’s inclination to broadly interpret these

statutory terms to stop short of full ME treatment of graduated countries in particular cases, other

provisions also will likely come into greater play in post-2015 normal value decisions involving

significant market distortions in China. These include:

         ·      Common state ownership or control sufficient to establish affiliation, and thereby
                invoke the ME “transactions disregarded” and “major input” provisions in
                Sections 773(f)(2) and (3) of the Act.

         ·      Finding a “particular market situation” under Section 773(a)(1) of the Act to
                disregard a foreign producer’s normal value prices and costs, a determination that
                can turn directly on the level of state intervention in the market, as explained in
                the Statement of Administrative Action (SAA) (an example of a particular market
                situation is “government control over pricing to such an extent that home market
                prices cannot be considered competitively set.”17)

         While affiliation often has been broadly defined by the Department, thus far there has not

been widespread use of the provision to deal with NME graduates where state control hangs on.

Given continuing extensive state ownership in the Chinese economy even as market principles

take hold, affiliation by virtue of ownership by the common state may come to the fore, opening

the door for ME normal value still not being based on a Chinese producer’s actual prices and

costs.

         With respect to the particular market situation provision, a term provided but undefined

in Article 2.2 of the Antidumping Agreement, thus far the Department has been reticent in its

application, in essence requiring a near complete absence of any significant competitive behavior

affecting pricing or costs, such as discounting, a high hurdle. While grounded in the SAA, this

strict interpretation is primarily a policy decision by the Department that could be viewed

differently concerning China in 2016.



17
        Statement of Administrative Action accompanying H.R. 5110 (H.R. Doc. No. 316, 103d Cong., 2d Sess.) at
822 (1994).



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       Furthermore, the sunset statue (Section 751(c) of the Act) will be unaffected by China’s

2016 transition. There is every reason to expect that the Commerce Department will continue to

deny revocation for virtually every antidumping order in a contested review, whether or not

involving China. The International Trade Commission can also be expected to not bend its near

unerring sunset trend of continuing Chinese orders.


       ·       Conclusion

       China’s market economy treatment under the U.S. antidumping law in 2016 does not

necessarily spell a lessening of U.S. trade measures. For one thing, the change will be

intermittent, with existing rates not being altered other than through 18 month long Section

751(a) Department reviews initiated after 2015. In any event, the United States will still have

plenty of tools available to apply protective trade restraints against imports from China. Some,

such as countervailing duties, Section 421 safeguards, and Section 337 IP protections, are

established and exercised. The legal justification for others directly in the antidumping context

already has been asserted (“normal course of trade” and “reasonable” prices and costs), and still

more are only a question of rethinking policy and may not require legislative mandate

(“affiliation” and “particular market situation”).




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