Monday, July 18, 2011

The NME Issue in Asia: Beginning of the End or the End of the Beginning?

Last Friday the WTO Appellate Body ruled against the EU’s approach in an antidumping investigation on carbon steel fasteners from China. The ruling on its face is limited to addressing the practice of assigning non-participating exporters a single antidumping duty rate based on the presumption that all exporters in China are controlled by the government unless demonstrated otherwise.  In cases involving China, exporters must submit information to demonstrate that they operate independently of the government to qualify for their own antidumping duty rate or face imposition of the “China-wide” rate, which is usually rather high. But the decision could have a more wide-ranging effect on exporters in ASEAN and China in dealing with trade remedy disputes.

The practice of assigning a “China-wide” rate, which is also followed by the United States and other jurisdictions, is based on the assumption that China is a “non-market economy” (NME) in which government control of the economy is overwhelmingly distortive.   In such cases, the exporter’s actual prices and costs cannot be used, allowing the investigating antidumping authority to use hypothetical values, which usually result in higher antidumping duty rates.  Just as controversially, the U.S. and EU also impose anti-subsidy (countervailing) duties against NMEs on the basis that the exporter’s government can subsidize individual exporters as well as control the economy as a whole (although another WTO panel ruled that this approach provides excessive, duplicative import relief; how can one measure a government subsidy to an exporter in an economy under overwhelming government control?).   

In the ASEAN context, the NME issue cuts both ways.  Under the terms of the ASEAN-China FTA, ASEAN members recognize China as a market economy.   ASEAN members thus use Chinese exporters’ actual costs and prices in calculating their antidumping duties.  Theoretically, this would also allow ASEAN members more leeway to impose antisubsidy duties against China, but traditionally ASEAN members are reluctant to initiate antisubsidy investigations (and the few that have taken place have been against India). 

ASEAN member Vietnam is also regarded as an NME and agreed to be treated as such until 2018 as part of its WTO accession terms.  Fortunately for Vietnam, it has used its ASEAN membership to negotiate treatment as a market economy both by its fellow ASEAN members and by countries with which ASEAN has FTAs (e.g., China, Australia, New Zealand, Korea, Japan and India).    This is an example of an ASEAN member using its status to achieve results comparable to what a larger country such as China has achieved (although many more countries recognize China as a market economy, in advance of the 2016 date stipulated in China’s WTO accession terms).   Vietnam will surely ask for market-economy status if and when bilateral FTA negotiations with the EU take place, and the NME issue has already affected the Trans Pacific Partnership negotiations. 

In the carbon steel fasteners case, the EU had argued that its approach was necessitated by the NME situation in China.  Its calculation of the “China-wide” rate for the entirety of China not demonstrated to be operating independently of the government was required in order to calculate a dumping rate for the exporters operating as a single entity under Chinese government control. The WTO Appellate Body explicitly rejected this argument, finding that the WTO Antidumping Agreement has no such provision for dealing with such a situation. 

The WTO ruling thus appears to undermine the entire premise of the NME methodology, i.e., that the government in an NME should be considered to be an exporter due to its control of the economy. It could be the impetus for resolving this ongoing trade irritant for China and Vietnam, even though the issue should dissipate by 2016 (for China) and 2018 (for Vietnam).  However, it is just as likely that the domestic industries in the U.S. and EU will push for alternative NME approaches that avoid the problems raised in the EU carbon fasteners case or even outright rejection of the WTO ruling itself.  Either way, the WTO has handed Asian trade policymakers another set of trade frictions to resolve.