Apr 2, 2019

Is China a Non-Market Economy?

Daniel Griswold Senior Research Fellow , Danielle Parks Research Assistant

One of the biggest issues confronting the global trading system is currently working its way through the dispute settlement process at the World Trade Organization (WTO): should China be classified as a “non-market economy” (NME) for purposes of assessing antidumping duties?

Three of the WTO’s heavyweights—the United States, the European Union, and Japan—say yes. They argue that widespread distortions in China’s economy make it impossible to investigate whether its firms are exporting goods at below “fair value.” The NME designation would allow them to use prices from a third country, which typically leads to the imposition of even higher antidumping (AD) duties.

China responds that its economy meets the generally accepted definition of a market economy in most antidumping cases. It also argues that the United States and other major trading nations agreed when China entered the WTO in 2001 that the NME label would no longer be applied to China after 2016.

The practice of labeling countries as NMEs for antidumping purposes goes back to the Cold War era. In the 1960s, the WTO’s predecessor, the General Agreement on Tariffs and Trade (GATT), accepted certain member nations from the Soviet Bloc, such as Poland, Romania, and Hungary, which were still communist but had carved out trade policies that were more independent from the Soviet Union.

Calculating the “fair” market price of a good is virtually impossible in a centrally controlled economic system devoid of market prices and private allocation of resources.  An interpretive note to the GATT Article VI covering antidumping duties recognized that comparing prices to determine if goods were being “dumped” would be difficult “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.” This accurately describes the economies of the Cold War Soviet bloc countries, but not China in 2019. 

After four decades of reform, China today falls far short of a free-market economy—but it has also come a long way from central planning where the government controls prices and production. The reforms have gone furthest in the manufacturing sector, where AD cases are the most relevant. In 2014, China expert Nicholas Lardy concluded, “It’s more accurate to think of [China] as a market economy. The role of the state has diminished dramatically from where it was 20 to 30 years ago. When you look at the number of people employed by the state, it’s less than France as a percentage of the labor force. China’s not a pure market economy, but it’s very hard to find pure market economies these days …” Although China has backslid on some reforms since then, its economic model has not fundamentally changed.

The core weakness of the NME approach is that the nations of the world do not categorize neatly into “market” or “non-market” economies; most fall along a spectrum between those two poles.

The US Department of Commerce currently labels 11 countries as NMEs: Belarus, Georgia, the Kyrgyz Republic, the People’s Republic of China, the Republic of Armenia, the Republic of Azerbaijan, the Republic of Moldova, the Republic of Tajikistan, the Republic of Uzbekistan, the Socialist Republic of Vietnam, and Turkmenistan. In the past, some countries designated as NMEs were then converted to market economies (MEs), such as Poland (1993), Russia (2002), and Ukraine (2006).

The duties the United States imposes on China because of its NME status have increased over time. In many cases, these antidumping duties are higher than the duties on other trading partners. An analysis in 2016 by the Peterson Institute found that the average antidumping duty imposed on cases involving China was 81.4 percent, whereas the average antidumping duty imposed on cases involving other trading partners was 54.3 percent.

When China joined the WTO in 2001, other WTO members argued that the Chinese government’s intervention in the market created inaccurate prices and costs when determining anti-dumping (AD) measures. As a compromise, China agreed to temporarily allow the members to use an alternative methodology by assessing the country as a non-market economy. Under Article 15 of China’s Protocol of Accession, NME status would no longer apply if China could establish under the national law of the importing WTO member that it is a market economy; otherwise, the NME provision would expire on December 11, 2016. This date has passed, but the United States continues to label China an NME.

In response to the continued NME treatment, China issued a complaint with the WTO against the European Union (EU) on December 12, 2016. Due to the “complexity of the legal issues covered in the dispute,” this case has been ongoing and the final report is expected during the second quarter of this year. A similar case has been made against the United States; however, the US case is not progressing.

Starting in December 2017, the European Union amended its antidumping laws to utilize an alternative method when a country’s market interference significantly distorts the exporting country’s economy. Countries are no longer placed on a list of NMEs, but rather any WTO member could be subject to this methodology. The method uses undistorted benchmark prices and costs of production to determine whether dumping is occurring. The undistorted prices may come from an “appropriate representative country with a similar level of economic development as the exporting country.”

The WTO ruling on China’s NME status is due soon. Whatever the decision, the United States and other WTO members should end the blanket designation of China as a non-market economy and instead consider antidumping actions on a sector-by-sector and product-by-product basis. Goods that are produced with inputs that are priced relatively freely should not be exposed to an AD methodology that produces even higher “dumping” margins. The domestic economy should be assumed to be a market economy unless the AD petitioner can demonstrate that it is not.

Better yet, the United States should restrict the use of its antidumping law in general. The law is often abused to unfairly target foreign imports that are produced and priced under conditions that would be perfectly normal and legal in the domestic US market. But that can be a reform for another day.

China’s current challenge of the NME classification in the WTO offers the United States the opportunity to end the worst form of abuse of a questionable law.  

Photo credit: White House/Flickr

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