What Do Global Trade
Rules Really Say?
According to Deputy U.S. Trade Representative Michael Punke,
“The issue of China’s status is not automatic… . The mere
change of date at the end of the year does not automatically result
in a change of status for China.” He then noted that the U.S.
government was “still considering what our decision will
be.”1 The existence of a legal
argument to support continued nonmarket economy treatment gives the
U.S. government a convenient excuse to maintain protectionist
policies it already agreed to end. The U.S. Trade Representative
will likely employ the argument in dispute settlement at the WTO
once China inevitably brings a challenge in 2017.
This statement about China’s status under WTO rules, however, is
wrong, and any continued use of nonmarket economy methodology will
almost certainly lead to WTO-authorized retaliation.
For nearly 15 years, there has been a clear understanding among
all parties that China’s protocol of accession to the WTO only
permits the use of nonmarket economy methodology until December 11,
2016, after which time other WTO members will no longer be able to
discriminate against Chinese goods in antidumping cases.
Paragraph 15 of China’s accession protocol allows other WTO
members to “use a methodology that is not based on a strict
comparison with domestic prices or costs in China.”2 That is, it exempts WTO members, including
the United States and the European Union, from having to follow the
rule that prohibits the use of nonmarket economy methodology.
That permission, however, is subject to certain limitations, and
WTO members must also employ what is known in U.S. law as the
market-oriented industry test. Under that test, if a Chinese
exporter can show that market conditions prevail in its industry,
the use of nonmarket economy methodology is no longer permitted.
Similarly, the Chinese government must be given the opportunity to
establish that its economy as a whole meets the criteria for market
economy treatment under a member’s domestic law.
These tests were created long before China joined the WTO.
Paragraph 15 simply requires countries to use the tests and abide
by the results. Also, any positive determinations under these tests
must be permanent, meaning that once nonmarket economy treatment is
rescinded, it cannot be reapplied.
The basic purpose of Paragraph 15 is to establish a transition
period — not for China but for other WTO members that apply
antidumping measures against Chinese imports. During that period,
existing WTO members can maintain WTO-inconsistent antidumping
practices when dealing with China. China’s WTO accession protocol
states that those practices must end either when China meets the
(otherwise WTO-inconsistent) criteria under domestic law for market
economy treatment or, “in any event,” by December 11, 2016.
Recently, however, some enterprising trade lawyers have
developed an argument to justify continued discrimination even
after the 15-year transition period has elapsed.3 They point out that only one part of
Paragraph 15 technically expires after 15 years, leaving other
provisions intact after December 11, 2016. One of the remaining
provisions says that members must use Chinese prices or costs if
producers pass the market-oriented industry test.
The theory is that the continued existence of this provision
demonstrates intent by the drafters of the protocol that some
discriminatory treatment for China should still be available after
2016 if particular industries have not yet completed their
transition away from state control.
A comprehensive defense of this argument was made by American
trade lawyer Jorge Miranda. He has interpreted the partial
expiration of Paragraph 15 to mean that the 2016 deadline merely
requires a shift in the burden of proof regarding market conditions
December 2016, Chinese respondents bear the burden of proof to
demonstrate that the individual industries or sectors have reached
the stage where they operate under [market economy] conditions.
Conversely, after 11 December 2016 the burden of proof shifts and
petitioners are tasked with demonstrating that the individual
industries or sectors remain under [nonmarket economy]
The biggest problem with this argument is that the provision
that does expire is the only one that allows WTO members to use
nonmarket economy methodology in the first place. The remaining
provision simply restates, in conditional language, what WTO
members are already required to do under the WTO Antidumping
The purpose of that remaining provision was to limit the special
rights granted under the expiring provision. The expiration of the
latter cannot somehow transform the former into a grant of
After the provision allowing members to “use a methodology that
is not based on a strict comparison with domestic prices or costs
in China” expires, nothing in China’s accession protocol exempts
WTO members from having to follow the regular rules of the WTO
Antidumping Agreement.5 The use of
nonmarket economy methodology is inconsistent with those rules, so
WTO members will be in violation of their international obligations
if they continue treating China as a nonmarket economy after the
The Myth of Market
The modern justification for nonmarket economy treatment relies
on a presumption that excessive state interference in the economy
renders domestic prices so out of sync with supply and demand that
they cannot serve as a legitimate benchmark for export prices.
Advocates for the use of nonmarket economy methodology against
imports from China argue that China’s economy is so controlled by
the central government as to make regular antidumping methodology
inappropriate. They want to continue to use nonmarket economy
methodology until China can prove that it has met the
qualifications necessary for market economy status.
The contention may sound reasonable on its face, but it assumes
that nonmarket economy treatment makes good sense in the first
place and that the test for granting market economy status is
reasonable. Neither is true.
The United States began using a special methodology to deal with
imports from state-controlled economies in the Soviet Bloc during
the Cold War. The regular methodology of comparing home market
prices and export prices didn’t make any sense in those situations,
because home market prices were set by central planners and export
prices were determined by state-trading companies. There was no
relationship at all between those prices.
Rather than acknowledge that antidumping was simply not an
appropriate mechanism to regulate trade with Communist countries,
U.S. officials chose instead to develop a convoluted formula that
fabricated home market prices based on the investigated producer’s
factors of production and another, unrelated producer’s costs for
inputs in a third country.
The methodology allows for an incredible amount of bureaucratic
discretion, as trade officials have to determine what manufacturers
in what countries will provide cost data for dozens — or even
hundreds — of surrogate values.6 While the stated goal of nonmarket economy
methodology is to estimate what prices would be in a market economy
country, the actual result is an antidumping duty based on
“differences between an exporter’s price in the U.S. market and a
fictitious hodgepodge of estimated components serving as a proxy
for his home market price.”7
Most nonmarket economies didn’t really trade with the West and
were not parties to the General Agreement on Tariffs and Trade
(GATT), a precursor agreement to the WTO that included basic rules
to discipline antidumping practices. Nevertheless, the GATT did
include an explicit exception to those general rules in cases where
a country “has a complete or substantially complete monopoly of its
trade and where all domestic prices are fixed by the
While China’s economy certainly suffers from a great amount of
government interference, it doesn’t come close to meeting that
Not only does China not meet the definition of nonmarket economy
under international rules, it doesn’t meet the definition under
domestic law, either. After the Soviet Union collapsed, the U.S.
government developed criteria to determine whether former Communist
countries should no longer be treated as nonmarket economies. The
European Union has a similar test.
When people argue that China doesn’t meet the criteria for
market economy status, this is the test they are talking about. The
test is actually a series of vague factors officials are supposed
to consider and base their decision on. In the United States, the
test has six factors:
the extent to which the country’s currency is convertible,
the extent to which wage rates are determined by free bargaining
between labor and management,
the extent to which foreign investment is permitted,
the extent of government control of the means of production,
the extent of government control over pricing and output
any other factors considered appropriate.9
As you can see, the test doesn’t tell us how much government
control in each area is indicative of a nonmarket economy or how to
weigh the different factors. Only one of the factors even considers
the price comparability problem originally posed by Soviet
economies. The sixth factor expressly permits authorities to
consider whatever they want to justify their decision.
What’s more, federal statute expressly prohibits judicial review
of any decision to impose or revoke nonmarket economy
status.10 The reality is that the
question of nonmarket economy status is purely political. The way
the test has been used in the past only highlights its
The last time U.S. officials considered changing China’s
nonmarket economy status was in 2006. In justifying the decision to
maintain China’s nonmarket economy status, the official report
stated, “China has a dynamic (but constrained) private sector, but
… the state retains for itself considerable levers of control
over the economy.”11
The most interesting thing about that decision is that only
seven months later, the same agency decided — based on the
same factors — that China’s economy was indeed sufficiently
market-driven to allow for the imposition of duties to countervail
government subsidies. The analysis was largely the same, but the
conclusion was worded very differently:
now dominates many sectors of the Chinese economy, and
entrepreneurship is flourishing… . Many business entities in
present-day China are generally free to direct most aspects of
their operations, and to respond to (albeit limited) market forces.
The role of central planners is vastly smaller.”12
The lesson here is that China is either a market economy or a
nonmarket economy depending on which designation will enable trade
officials to impose higher tariffs.13 The test is overly strict, has been
inconsistently applied to China in the past, and is immune from
There’s Always Regular
The antidumping lobby has urged governments to continue using
nonmarket economy treatment by claiming that otherwise there will
be no way to protect domestic industries from low-priced Chinese
imports. One European steel industry representative went so far as
to say “Granting China [market economy status] is giving it an
unlimited license to dump.” 14
Hillary Clinton claims that abiding by our obligation to abandon
nonmarket economy methodology would “defang our anti-dumping laws
and let cheap products flood into our markets.”15
Although nonmarket economy treatment is one of the most
egregious forms of antidumping abuse, the unfortunate truth is that
even if governments stop using nonmarket economy methodology, there
are still plenty of ways, consistent with the WTO Antidumping
Agreement, to impose excessively high antidumping duties. Cato
scholars have thoroughly documented the myriad ways antidumping
authorities have found to abuse their discretion under domestic and
international antidumping rules.
The most likely outcome after the end of nonmarket economy
treatment is for antidumping authorities to rely heavily on a
methodology known as constructed value.16 Under certain circumstances, domestic
prices can be approximated, or “constructed,” by adding together a
producer’s costs of production plus estimated profit.17
The WTO rules allow for the use of constructed value when a high
portion of domestic sales are not made “in the ordinary course of
trade” or when “a particular market situation in the exporting
country does not permit a proper comparison with the export
Antidumping authorities will enjoy the latitude to claim that
Chinese prices are unreliable because of government interference in
the market. This would enable them to resort to constructed value,
which (while not nearly as unpredictable and unrealistic as
nonmarket economy methodology) tends to produce unrealistically
high estimates of domestic prices and so inflates the values of the
antidumping duties ultimately imposed.
There is also the option of imposing countervailing duties that
directly target Chinese subsidies. Protectionists often conflate
antidumping, which deals with private pricing practices, and
countervailing duties, which directly address the price distortions
of foreign subsidies. They are, in fact, two totally separate
remedies. In 2015, every U.S. antidumping duty order against
Chinese goods was accompanied by a countervailing duty order. The
average countervailing duty in those cases was approximately 103
percent.19 Far from defenseless
in the face of Chinese market intervention, protection-seeking U.S.
companies have numerous weapons in their arsenals.
Advocates for maintaining the status quo discrimination in
antidumping treatment of Chinese imports are trying to frame the
question of China’s nonmarket economy designation in ways that
misdirect the debate. There is no real question about what WTO
rules require. China does not still need to show that it meets the
criteria for market economy status. And, ending nonmarket economy
treatment will not leave other countries defenseless against
“unfair” trade practices.
The United States and European Union have already agreed to end
nonmarket economy treatment of Chinese goods by no later than
December 11, 2016. Refusing to honor that agreement will serve to
frustrate important economic and political relationships with China
and harm U.S. and European businesses and consumers.
1. Bryce Baschuk, “USTR Official Says Chinese Market
Economy Status ‘Not Automatic’ after Dec. 11,” Bloomberg
BNA, February 8, 2016.
2. World Trade Organization, “Protocol on the
Accession of the People’s Republic of China,” ¶15, WT/L/432,
November 23, 2001.
3. Bernard O’Connor, “Market-economy Status for
China Is Not Automatic,” Vox, November 2011,
http://www.voxeu.org/article/china-market-economy; and Jorge
Miranda, “Interpreting Paragraph 15 of China’s Protocol of
Accession,” Global Trade and Customs Journal 9, no. 3
4. Miranda, “Interpreting Paragraph 15 of China’s
Protocol of Accession.”
5. World Trade Organization, “Protocol on the
Accession of the People’s Republic of China,” ¶15.
6. Daniel J. Ikenson, “Abuse of Discretion: Time to
Fix the Administration of the U.S. Antidumping Law,” Cato Trade
Policy Analysis no. 31, October 6, 2005, p. 6.
7. Daniel J. Ikenson, “Nonmarket Nonsense: U.S.
Antidumping Policy toward China,” Cato Trade Briefing Paper no. 22,
March 7, 2005, p. 3.
8. General Agreement on Tariffs and Trade, annex I,
Ad Article VI.
9. 19 U.S.C. §1677(18).
10. 19 U.S.C. §1677(18)(D).
11. International Trade Administration,
“Antidumping Duty Investigation of Certain Lined Paper Products
from the People’s Republic of China — China’s Status as a
Non-market Economy,” memorandum, August 30, 2006, p. 80.
12. International Trade Administration,
“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,” memorandum, March 29, 2007,
13. See Scott Lincicome, “Documenting DOC’s Ample
Discretion RE the ‘NME’ Designation,”
lincicome.blogspot.com (blog), September 11, 2012.
14. Nicole Goebel, “Steel Industry Urges Tough
Action on China Amid Overcapacity,” Deutsche Welle,
February 15, 2015,
15. Hillary Clinton, “If Elected President, I’ll
level the Playing Field on Global Trade,” Portland Herald
Press, February 23, 2016,
16. K. William Watson, “Will Nonmarket Economy
Methodology Go Quietly into the Night? U.S. Antidumping Policy
toward China after 2016,” Cato Policy Analysis no. 763, October 28,
17. Brink Lindsey and Daniel J. Ikenson, “Reforming
the Antidumping Agreement: A Road Map for WTO Negotiations,” Cato
Trade Policy Analysis no. 21, December 11, 2002, p. 17.
18. World Trade Organization, Agreement on
Implementation of Article VI of the General Agreement on Tariffs
and Trade 1994, Articles 2.1–2.2.
19. See U.S. International Trade Commission,
“Antidumping and Countervailing Duty Orders in Place,” January 14,