“Market economy status” in China’s WTO Protocol of Accession: No, the rule in Article 15(a) didn’t disappear after 2016

There’s currently a debate over whether China’s WTO trading partners should grant it “market economy status” (MES). The significance of the debate lies in the fact that if China has MES, then in dumping proceedings, the domestic Chinese price will be used instead of a price constructed from some other method. The “some other method” is much more subjective than a market price, and invariably works against the respondent in dumping proceedings. so that’s why China is eager to get rid of it. Normally, it’s up to the petitioner in dumping proceedings to prove that there are good reasons for not using the domestic market price, but under Article 15 of China’s Protocol of Accession (POA), the presumption and burden of proof were reversed: a method other than one based on domestic prices could be used unless the respondent (i.e., the Chinese exporter) could prove that market economy conditions prevailed in the industry in question. And antidumping authorities have made that very hard to do.

China is unhappy because it contends that 15 years after its accession in 2001, the rule of Article 15 was supposed to disappear, but here it is 2017 and the US and the EU are still treating it as a non-market economy in antidumping proceedings. China’s contention boils down to saying, “You promised to treat us as a market economy after 2016.” The response of the EU and the US is essentially to say, “No, we promised to get rid of a special rule in Art. 15, but we still have the right to apply the same standards to you that we could apply to any country when there are grounds for thinking market economy conditions don’t exist in the industry in question.” And it’s true, you don’t need a special rule like that in Art. 15 in order to decide that you’re not going to use domestic prices of the respondent, and will instead construct a price using a third-country proxy or some other method.

Much of what I read on this, both in academic articles and the serious press, assumes that this is indeed the issue, and that the rule of Article 15 on the use of domestic or constructed prices disappeared after 2016. But that is not actually true. To understand why, let’s look first at the text of Article 15:

Price Comparability in Determining Subsidies and Dumping

Article VI of the GATT 1994, the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (“Anti-Dumping Agreement”) and the SCM Agreement shall apply in proceedings involving imports of Chinese origin into a WTO Member consistent with the following:

(a)        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 based on the following rules:

(i)         If the producers under investigation can clearly show that market economy conditions prevail in the industry producing the like product with regard to the manufacture, production and sale of that product, the importing WTO Member shall use Chinese prices or costs for the industry under investigation in determining price comparability;

(ii)        The importing WTO Member may use a methodology that is not based on a strict comparison with domestic prices or costs in China if the producers under investigation cannot clearly show that market economy conditions prevail in the industry producing the like product with regard to manufacture, production and sale of that product.

[Paragraphs (b) and (c) omitted as not relevant to this discussion.]

(d)        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.

Take a look at Paragraph (d), where the language about expiration occurs. The first and the third sentences deal only with things that Members may decide to do if they please pursuant to their own law. They don’t impose any obligation. The key sentence is the second one–the one that begins, “In any event, …” But look carefully at what expires 15 years after accession: not Art. 15 in its entirety; not Art. 15(a) in its entirety. Instead, only subparagraph (a)(ii) expires. Apparently the rest of Art. 15, including subparagraph (a)(i), continues to be valid.

All right, then, what does subparagraph (a)(i), which continues to be valid even after the expiration of subparagraph (a)(ii), say? Amazingly, it says essentially the same thing as the expired subparagraph (a)(ii). Look closely: subparagraph (a)(i) says that if the producers (i.e., the respondents in an antidumping investigation) can show that market economy conditions prevail, then the importing Member shall use Chinese prices and costs. The burden of proof is on the producers; they have to show that market economy conditions prevail. And if they can’t? The logical corollary is obvious: the importing Member is not required to use Chinese prices and costs, and can use some alternative method (subject to other WTO rules on methodology).

Now look at subparagraph (a)(ii): it sets forth the same rule, but phrased negatively. In other words, it simply sets forth the logical corollary of the rule of subparagraph (a)(i): If the producers cannot show that market economy conditions prevail, then the importing Member may use a methodology not based on Chinese prices and costs. But we already knew that from reading subparagraph (a)(i). Thus, the expiration of subparagraph(a)(ii) does nothing to change the rule: producers have the burden of showing that a market economy exists, and if they can’t meet that burden, then the importing Member may use a methodology not based on Chinese prices and costs.

What the heck is going on here? Frankly, I don’t know–I keep hoping to run across someone who was at the table when this language was being drafted and asking what people thought they were doing. I can’t think of any explanation that makes sense. Let’s canvass the possibilities:

(1) We apply the rule of statutory interpretation that says we should assume that people drafting rules don’t intend to do meaningless things. We then conclude that the language about subpara. (a)(ii) expiring was intended to mean that the substantive rule it embodies expires, and therefore we ignore subpara. (a)(i).

(2) We apply the exact same rule of statutory interpretation that says we should assume that people drafting rules don’t intend to do meaningless things. We then conclude that they had a reason for specifically limiting the expiration language to subpara. (a)(ii), since it would have been a simple matter to say “subparagraphs (a)(i) and (a)(ii)” or just “subparagraph (a)”, but they chose not to.

Hmm. Applying the exact same rule of statutory interpretation leads to contradictory and equally plausible conclusions, so how about a third possibility:

(3) It’s a drafting error.

But that doesn’t seem plausible, either, because the same language appears in Vietnam’s Protocol of Accession (see Art. 255 of the Working Party Report, which is incorporated by reference into the Protocol). Somebody really likes that language!

I get even more confused when I read the USTR’s recent submission to the WTO addressing the EU’s dispute with China over (among other things) the meaning of Article 15. The relevant section begins at Para. 145 (p. 159). The submission recognizes that subpara. (a)(i) survives the expiration of subpara. (a)(ii), but does not seem to recognize that they state the same rule. Para. 149 of the submission states the rule of POA 15(a)(i), and then states the logical corollary I’ve noted above: “where market economy conditions do not prevail, the industry’s prices or costs will not be ‘comparable’ and therefore need not be used.” (“Do not prevail” should really read “cannot be shown by producers to prevail”.)

Para. 150 then says the same thing: “an importing Member may use a methodology not based on a strict comparison with domestic prices or costs if the producers cannot clearly show that market economy conditions prevail in that industry.” Mysteriously (to me, anyway), though, the paragraph is prefaced with the words “in contrast,” even though there is no contrast at all. Doesn’t the USTR understand that (a)(i) and (a)(ii) are simply two ways of stating the same thing? If I am missing something, please help me out in the comments.

So where do we end up after all this? It doesn’t seem to me that either interpretation (1) or interpretation (2) above is obviously right or wrong. Their strength–they are based on the assumption that the drafters didn’t intend to do something meaningless–is exactly their weakness. But we can certainly say that it is wrong to report, as if it were simply an unproblematic fact, that the POA’s special rule on antidumping proceedings expired after 2016. Any such statement ignores the continued existence of Art. 15(a)(i). One can argue that Art. 15(a)(i) should be interpreted out of existence, but one has to actually make that argument.

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