Patrick Low, Fellow of Asia Global Institute, writes on a debate that has an impact on China's WTO membership and its market economy status.
China and its major trading partners are embroiled in an impending stand-off that could undermine trust and sour international commerce in ways we have not seen since the country joined the World Trade Organisation (WTO) 15 years ago.
The problem arises from the terms of China's membership of the organization agreed in 2001. China's protocol of accession contained a number of sui generis (unique) provisions, one of which concerned procedures for anti-dumping actions.
Anti-dumping rules allow governments to impose duties on imports if their price is in excess of the comparable price of the like product in the domestic market of the exporting country. Various provisions exist to allow alternative means of assessing the margin of dumping if that particular comparison is deemed inappropriate or simply impossible.
The Chinese accession protocol allows its trading partners to assume that China is not a market economy and domestic price comparisons with export prices never need to be used as a reference point. Instead, the comparison can automatically rely on third country data, providing an easy way to ratchet up dumping margins and impose more punitive duties.
That arrangement is due to expire on December 15, 2016. Until quite recently, the general assumption was that this would happen. But a flurry of legal arguments have been offered up, questioning the solidity of the language in the protocol and suggesting that the determination of China's market economy status is a matter for individual countries to decide.
The main economies prospectively holding out on market economy status (MES) for China are the big players - the U.S, the European Union and Japan - although others lurk in the wings. Around 90 of the WTO's member economies have already declared that they accept China's MES for the purpose of anti-dumping actions.
The EU may be more inclined to give MES to China than the United States, but it would be an uphill battle, considering that the European Parliament decided overwhelmingly against the idea recently in a non-binding vote. All the EU member states would have to concur. Rumour has it, however, that the EU may try to split the difference by granting MES in some sectors but not others.
The situation has been further complicated by conditions of over-production in the international steel market. The United States has just imposed anti-dumping and anti-subsidy duties of more than 500 per cent on Chinese exports of cold-rolled steel, which must surely close off the market. China accounts for over half of global steel production and protests from steel interests in the E.U. and U.S. have been vigorous.
Apart from the case of pure monopoly, a threshold has never been established to distinguish between a market-based and a state-controlled economy. Asset ownership alone is not an adequate criterion. Moreover, enough anti-dumping and other actions to inhibit foreign access to a market can kill competition even in putative market economies.
The bottom line is that while not everyone admits it, the original 15-year MES deal for China was just that - a deal. No amount of legal gymnastics can alter that political reality or the sense of injustice that inaction on MES will engender.
It will be seen as a promise broken and the consequences for trade relations will go beyond the confines of the issue at hand.
Substantively the only thing at stake here is the burden of proof. Instead of simply assuming that markets play an insufficient role in pricing outcomes in China, those wishing to sustain that position in anti-dumping investigations would have to substitute an assumption with evidence. That means more work. It is hardly a surrender in the face of unfair competition.
If the major trading nations cannot rise to the responsibility of addressing this issue, the trading system is in for an even rougher ride, with further erosion of a shared sense of its legitimacy. This is not an outcome for which governments should be willing to take responsibility, especially in an already fragile global economy.
This article first appeared in the South China Morning Post on May 25, 2016.
The views expressed in this article are the author's own and do not necessarily reflect Asia Global Institute's editorial policy.