US Maintains China's Non-Market Economy Designation

Trade & Policy

US Maintains China's Non-Market Economy Designation

The U.S. Department of Commerce has concluded that mainland China remains a non-market economy country for purposes of assessing anti-dumping duties. The determination was immediately criticised by Beijing, which has cases on this issue pending at the World Trade Organisation against both the United States & European Union.

China's protocol of accession to the WTO allowed WTO members to use calculations in AD proceedings involving mainland Chinese products that are not based on the actual costs of mainland Chinese producers if the producers cannot demonstrate that market economy conditions prevail in their industry. The United States has used this provision to automatically assign NME status to goods imported from mainland China, which typically results in higher AD duties than would otherwise be the case. When this provision expired on 11 December 2016, mainland China asserted that WTO members would have to stop using NME-type methodologies altogether with respect to mainland Chinese goods as of that date.

The United States and others, however, believe they may continue to use such methodologies as long as the petitioners clearly show that market economy conditions do not prevail in the industry at issue.

As a result, as part of its on-going AD duty investigation of aluminum foil from the mainland, the International Trade Administration (ITA) conducted an inquiry into whether it should continue to treat mainland China as an NME. In a 26 October memo, the ITA's Office of Policy, Enforcement and Compliance determined that mainland China continues to be an NME for AD purposes because it does not operate sufficiently on market principles to permit the use of mainland Chinese prices and costs for purposes of AD analysis. The ITA explained that at its core the framework of mainland China's economy is set by the mainland Chinese government and the Chinese Communist Party, which exercise control directly and indirectly over the allocation of resources through instruments such as government ownership and control of key economic actors and government directives and do not seek economic outcomes that reflect predominantly market forces outside of that control.

In mainland China's economic framework, state planning through industrial policies conveys instructions regarding sector-specific economic objectives, particularly for those sectors deemed strategic and fundamental. Moreover, the government's and the CCP's legal and actual ownership and control over key economic actors and institutions pervades mainland China's economy, the memo stated. Additionally, authorities use this control selectively to affect the interaction of supply and demand. The ITA states that its conclusion is based on the following analysis of six factors established in US law.

Currency Convertibility

The renminbi is convertible into foreign currencies for trade purposes, the mainland Chinese government has made market-oriented modifications to its capital account and exchange rate system, and steps have been taken to develop the foreign exchange market, but the government still maintains significant restrictions on capital account transactions & intervenes considerably in onshore & offshore FOREX markets. The mainland Chinese government also maintains approval requirements for all major capital account transactions, does not disclose the weights attached to price quotas that are used to calculate the central parity rate for the RMB, and intervenes to limit the extent of price divergence between the onshore & offshore FOREX markets.

Determination of Wage Rates

There is variability in wages across regions, sectors and enterprises in mainland China but also significant institutional constraints on the extent to which wage rates are determined through free bargaining between labour & management. The mainland Chinese government prohibits the formation of independent trade unions to represent labour and workers do not have the legal right to strike, which is an important lever in collective action and negotiation with management over wages.

Foreign Investment/Joint Ventures

Despite some government efforts to streamline procedures, mainland China continues to impose significant barriers to foreign investment, including equity limits and local partner requirements, opaque approval and regulatory procedures, and technology transfer and localisation requirements.

It is the mainland Chinese government's foreign investment regime, not the market primarily, that channels foreign investment to sectors and technologies the mainland Chinese government determines to support, while limiting foreign investment in those sectors that the mainland Chinese government finds strategically important to maintain under its control alone.

Means of Production

The mainland Chinese government continues to exert significant ownership and control over the means of production, as demonstrated by the role and prevalence of state-invested enterprises & the system of land ownership & land - use rights. The ITA belives the prevalence of SIEs in mainland China's economy is significant & their relative "economic weight" is substantial in comparison with other major economies.

Allocation of Resources

The mainland Chinese government plays a significant role in resource allocation and employs numerous mechanisms to implement industrial policy objectives, including investment approvals, access standards, guidance catalogues, financial supports & quantitative restrictions. Science and technology development, industrial restructuring and upgrading, and the geographic distribution of industry are three areas that demonstrate the extent to which the government uses industrial policies to influence economic outcomes.

Others

Mainland China's legal system continues to function as an instrument by which the government and the CCP can secure discrete economic outcomes, channel broader economic policy and pursue industrial policy goals. Key legal institutions, such as the courts, are structured to respond to their direction, whether broad or case-specific.

Individuals and firms are constrained in their ability to have meaningful independent input into administrative rulemaking or to challenge administrative decisions. As a general matter, to the extent that individuals and firms seek to act independently of government or CCP direction, the legal system does not provide the venue for them to achieve these objectives on a systemic or consistent basis. In addition, firms continue to face challenges in obtaining impartial outcomes, either because of corruption or local protectionism.