China’s Status as a Nonmarket Economy (NME)

China’s Status as a Nonmarket Economy (NME)

Updated January 10, 2019
China’s Status as a Nonmarket Economy (NME)
When China joined the World Trade Organization (WTO)
Since 2007, the Commerce Department has also employed
in 2001, it agreed to allow other WTO members to continue
countervailing duty (CVD) measures against NMEs to
to use an alternative (surrogate country) methodology for
counter subsidies given to their exporters. Commerce often
assessing prices and costs on products subject to anti-
initiates both AD and CVD investigations against Chinese
dumping (AD) measures. This occurred because other
and other entities for the same products and issues separate
WTO members argued that distortions in the Chinese
AD and CVD duty rate orders.
economy caused by government intervention would make it
Under U.S. law, a NME means any foreign country that the
impractical in many cases to use Chinese prices and costs
U.S. Department of Commerce deems not to “operate on
for determining dumping margins. China contends that
market principles of cost or pricing structures, so that sales
language in its WTO accession protocol required all WTO
of merchandise in such country do not reflect the fair value
members to terminate their use of the alternative
of the merchandise.” The NME designation is significant
methodology by December 11, 2016, including the United
because the use of a surrogate country to construct a
States, which has classified China as a nonmarket economy
product’s “normal value” in an AD investigation is thought
(NME) for trade remedy cases since 1981. The United
by many analysts to often result in the imposition of higher
States and other WTO members argue that that the WTO
AD rates than would occur if the producer’s/exporter’s
language did not automatically obligate them to extend
prices and costs were used. In AD cases for NMEs,
market economy status (MES) to China. On December 12,
Commerce assumes that market mechanisms do not exist
2016, China initiated a WTO dispute settlement case
for the calculation of prices and costs for the products
against the United States and the European Union for not
subject to an AD investigation and imposes a NME
affording China MES status.
country-wide AD duty rate against all imports except for
The Mechanics of NME Treatment and Dumping
those firms that can demonstrate that they are operating in
U.S. AD measures provide U.S. firms and workers a
absence of government control in law and in fact (they may
mechanism to seek relief from the potential injurious effects
receive a separate AD rate). For the country-wide AD rate,
of foreign firms that attempt to sell products in the United
Commerce seeks to determine which market economies
States at less than fair value, which generally means at
(MEs) are closest to the NME in terms of development,
prices below those sold in their home market. If the
based on the World Bank’s measurements of gross national
Commerce Department determines that dumping has
income on a purchasing power parity basis. In the case of
occurred, and the U.S. International Trade Commission
China, Commerce, in recent AD cases, has identified
(USITC) finds that it has caused or threatens to cause
Bulgaria, Ecuador, Romania, South Africa, Thailand, and
“material injury” (such as declining profits or market share)
Mexico as meeting this criterion. From this list, Commerce
to a U.S. industry, Commerce issues an order imposing
seeks to identify a country that manufactures products
additional duties on the targeted imports that attempts to
similar to the targeted products made by the NME under
offset the market distorting effects of the dumping. China is
investigation. It then takes the prices and costs in the
the largest target of U.S. AD orders, which totaled 120
surrogate country and compares them to the prices of the
through December 14, 2018 (34% of total).
goods exported by the NME to the United States to
determine the AD margins, which are imposed if the
Figure 1. Major Targets of U.S. AD Orders
material injury test is also met.
(In place as of December 14, 2018)
How Can China Achieve MES Under U.S. Law?
Currently, there are 11 countries designated by
Commerce as a NME, including 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. Several countries have had their NME
status changed to MES by Commerce over the years, such
as Poland (1993), Russia (2002), and Ukraine (2006). In
order for a NME to have its designation changed to MES,
the government of that country must make a formal request
for review, or back a claim by a respondent in a U.S. AD
investigation that the country has a ME. The Commerce
Source: U.S. International Trade Commission.
Department must investigate the request and consider six
major factors: (1) the extent to which the currency of the
foreign country is convertible into the currency of other
countries; (2) the extent to which wage rates in the foreign
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China’s Status as a Nonmarket Economy (NME)
country are determined by free bargaining between labor
Conflicting Opinions on the NME Issue
and management; (3) the extent to which joint ventures or
The Chinese government and some analysts contend that
other investments by firms of other foreign countries are
China’s 2001 Protocol of Accession contains language
permitted in the foreign country; (4) the extent of
(Section 15(a)(ii)) that effectively requires WTO members
government ownership or control of the means of
to end their use of NME methodologies to calculate AD
production; (5) the extent of government control over the
margins on imports from China after 15 years (i.e.,
allocation of resources and over the price and output
December 11, 2016). During his State visit to the United
decisions of enterprises; and (6) such other factors as the
States in August 2015, Chinese president Xi Jinping called
administering authority considers appropriate. Commerce
on the United States to recognize China’s MES. In
could declare that certain industries are operating under
December 2015, a Chinese Foreign Ministry official stated
market conditions while continuing to apply the NME
that continued use of the NME methodology after
methodology to other sectors. Commerce last conducted a
December 2016 would mean treating Chinese firms “in an
review of China’s status in October 2017. Commerce
unfair, unjust, unreasonable and discriminative manner.”
concluded that China was still a NME because “the state’s
China is the largest target of global AD investigations
role in the economy and its relationship with markets and
among WTO members and thus, obtaining MES from its
the private sector results in fundamental distortions in the
trading partners appears to be a major Chinese priority.
Chinese economy.” Commerce determined that it still could
Other analysts contend the language in Section 15 of
not rely on Chinese prices and costs for the purposes of its
China’s WTO Protocol is vague at best. Some argue that
anti-dumping analysis. Some critics contend that the U.S.
even after the expiration of Section 15(a)(ii), WTO
criteria for conveying MES is too broad and fails to offer
Members can continue to treat China as a NME until China
guidance on how to weigh each factor.
can demonstrate under each country’s laws that it is eligible
for MES. Others point to Section 9 of the Protocol where
U.S. AD Orders of Chinese and ME Products
China pledged (with certain exceptions) to “allow prices for
The table below provides 10 AD cases from 2010 to June
traded goods and services in every sector to be determined
2016 where AD orders were issued against the products of
by market forces,” arguing that because China has failed to
China and one or more MEs. In six of these cases, some
live up to this provision, WTO members can continue to
Chinese exporters were able to show that they operated
treat China as a NME.
under market conditions and obtained separate AD rates,
U.S. policy on this issue has been somewhat unclear. At a
and in every case these were lower than the China-wide
February 2000 congressional hearing, then-USTR Charlene
rate. In one case, the AD rate levied on the products of a
Barshefsky stated that the bilateral agreement with China
firm from a ME country was higher than the China-wide
on its WTO accession would enable the United States to
AD rate. In all 10 cases listed, CVDs were also imposed
maintain its ability to utilize its existing NME methodology
against Chinese products, ranging from 2% to 256%.
in the application of U.S. antidumping laws “for 15 years
Table 1.Sample of U.S. AD Rates Imposed on Chinese
after the date of China’s accession to the WTO.” During his
and ME Products
confirmation hearings in June 2017 to be the U.S. Trade
Representative, Robert Lighthizer said that a WTO ruling
China-
China
against the United States on China’s NME status would be
Wide
Separate
ME
“cataclysmic for the WTO.”
Product and year
Rate
Rates
Rates
Stakeholder Concerns
Corrosion-resistant steel,
210
None
3-92
Some U.S. groups support giving MES to China, in part to
2016
avoid complicating trade relations with China and/or to use
the issue as leverage with China on various commercial
Certain cold-rol ed steel,
266
None
71
issues. Others support MES for China because they see the
2016
NME methodology in AD cases as harmful to U.S.-
importing firms and consumers. Others oppose granting
Certain polyethylene
126
105-118
8-19
China MES status, contending that it would weaken the
terephthalate resin, 2016
ability of the United States to effectively counter China’s
Certain uncoated paper, 2016
149
84
2-222
dumping practices, especially at a time when many Chinese
industries (such as steel) are facing significant overcapacity
Melamine, 2015
363
None
173
and could flood global markets with low-priced products,
Non-oriented electrical steel,
408
None
7-205
harming U.S. firms and workers. On September 30, 2018,
2014
Canada joined the United States and Mexico to reach the
U.S.-Mexico-Canada Agreement (USMCA). Article 32.10
Certain crystalline silicon
165
27-78
12-28
of USMCA would require a party to the agreement to notify
photovoltaic products, 2014
the other parties if it intends to enter into a free trade
Certain coated paper, 2010
136
8
20
agreement (FTA) with a nonmarket economy. If the first
party concludes an FTA with a nonmarket economy, the
Magnesia carbon bricks, 2010
236
128
58
other two parties could withdrawal from the USMCA and
Narrow woven ribbons, 2010
248
124
4
form a bilateral FTA.
Source: U.S. Department of Commerce press releases.
Wayne M. Morrison, Specialist in Asian Trade and
Finance
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China’s Status as a Nonmarket Economy (NME)

IF10385

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https://crsreports.congress.gov | IF10385 · VERSION 13 · UPDATED