China’s market economy status: implications for trade remedies procedures in Brazil

This article presents the discussion regarding China’s treatment as a market economy after December 2016, and the implications of such treatment on subsequent antidumping investigations. Given the imminence of this date, it is necessary to question which will be Brazil’s position on the matter, considering also the political and economic aspects that may influence the country’s decision.

 Importance of the matter

The legal treatment to be applied to China in antidumping investigations after December 2016 is mobilizing trade remedies’ authorities and high-level political authorities in several economies around the world. Many countries, among which are the United States, the European Union and Brazil, have a significant number of trade remedies measures applied in face of Chinese exports.

The discussion focuses on the assumption that after December 2016 certain provisions contained on article 15 of China’s Accession Protocol to the World Trade Organization (“WTO”) will expire. As a consequence of such expiry, WTO Members may have to recognize China’s status as a market economy. This recognition implies on altering the methodology for the calculation of dumping margins in antidumping investigations initiated against China. To recognize China as a market economy could potentially limit third countries in imposing antidumping duties against the country or, at least, could decrease the amount of duties to be charged against imports originating in the country.

The abovementioned article provides the methodology for the calculation of the normal value in antidumping investigations involving China, establishing a different form of calculation for the country’s internal sales. This alternative methodology usually considers sales on a comparable third-country, or a constructed price through the calculation of the cost of production of the product, commonly resulting in higher dumping margins calculated for the Chinese companies.

For that reason, the normal value of the like product sold in China would not be the price effectively practiced within the country, but the price of a like product in a third market economy country, analogous to China. However, the same article provides that, 15 years after China’s accession, item “a.ii” of such provision, which establishes the possibility for the alternative methodology, will expire. The expiration date takes place on December 11, 2016.

In order to explain the consequences of the expiration of this legal provision, three major legal interpretations have been raised: (i) the expiration would result in the automatic recognition of China as a market economy country, preventing third countries from utilizing the alternative methodology for the calculation of normal value; (ii) the expiration would end the presumption that China is not a market economy – countries would have to demonstrate that a particular segment from the Chinese economy is still not guided by market rules in order to apply the alternative methodology for the calculation of the normal value, or; (iii) the expiration would not have any practical effects, and countries would still be able to utilize the especial methodology for the normal value.

Most countries are still debating the subject and have not yet positioned themselves on how they will treat China on antidumping investigations after December 2016. What about Brazil? Thus far, the country has not taken any official decision nor signaled which path it will follow after the expiration of the provisions under China’s Accession Protocol.

Historically, Brazil has never recognized any Chinese company or industry as operating under market economy conditions, for the purposes of calculating the normal value in antidumping investigations. Antidumping measures have often been utilized by sectors of the Brazilian industry to defend themselves from significant volumes of Chinese products imported to the Brazilian market. Thus, the decision to be taken by the Brazilian Government about the issue is of very high relevance for Chinese exporters and Brazilian importers.

Current scenario in Brazil and future developments

Lately, antidumping investigations in Brazil directed at products originating from China have been under growing opposition through the consistent participation of Chinese companies and their associations. It is safe to say that the Chinese interest in the Brazilian market may only increase with this window of opportunity. The matter is of interest for various productive sectors in Brazil and for an unlimited number of Chinese manufacturers and exporters – this situation may cause the Chinese government to grant importance to this issue in its Brazilian agenda.

Due to the proximity of the referred expiration date, Brazilian authorities will have to reach a decision, towards the effective recognition – or not – of China as a market economy.  If Brazil does not express its point of view in a clear way, the Brazilian Trade Remedies Department (“DECOM”) is likely to receive requests for the initiation of reviews of the antidumping duties currently imposed against China, thus being forced to clarify its position on the calculation of the country’s normal value.

An eventual official position on the subject, or the silence on the matter, involves the consideration of technical, legal, political and diplomatic aspects; the country’s domestic industrial policy, as well as the bilateral relationship between Brazil and China. Several WTO Members and national associations are already beginning to position themselves on the issue. For the time being, there is no official signal from the Brazilian authorities regarding what the position of the country will be.

Under a legal point of view, it is understood that the post-December 2016 will be marked by the impossibility of utilizing alternative methodologies for calculating China’s normal value. Thus, only methodologies provided originally on the WTO’s Antidumping Agreement could be utilized for the purposes of conducting antidumping investigations. As it was negotiated at the time, article 15 of China’s Accession Protocol intended to establish a deadline for the use of the third-market economy country proxy in the calculation of the normal value – this time limit should be respected in the conduction of investigations.

Brazilian political recognition

On November 29, 2004, a Memorandum of Understanding (“MOU”) between Brazil and China on Cooperation in the Area of Trade and Investment was published on the Brazilian Official Gazette. The MOU was signed at the Ministerial level, and represented a political recognition of China as a market economy.

The first article of the MOU literally states that “Brazil recognizes the market economy status to China”. Nevertheless, this recognition did not affect the Brazilian practice in antidumping investigations. DECOM understood that the implementation of the MOU had to be performed through a decision of by the Brazilian Foreign Trade Chamber (“CAMEX”). This decision has not been enacted and the treatment previously utilized in antidumping investigations against China has still been maintained.

The Brazilian Government acknowledged the lack of implementation of China’s recognition as a market economy in two separate occasions: (i) through the publication of the “Joint Action Plan between Brazil and China”, of April 15, 2010, and; (ii) through the publication of the “Joint Communication between Brazil and China”, of March 12, 2011. On those occasions, Brazil committed itself to implementing the recognition of China as a market economy.

In view of the commitment established under the MOU, and for the reasons stated on the previous section, it is probable that Brazil should recognize China as a market economy. The direct consequence of such act comprises the impossibility to use an analogue country as a parameter for calculating the Chinese normal value. It is important to keep in mind that the normal value in this case would be calculated according to the traditional methods provided by the WTO’s Antidumping Agreement, i.e., considering the costs and prices of the like product practiced in the Chinese domestic market.

It is hereby emphasized that the treatment directed to China would then be the same as that applied to producers and exporters from other countries in antidumping investigations. Therefore, in order for Chinese companies to have their prices and costs considered, they would have to provide the requested information in a full and proper way and, if necessary, to have such information validated on an on-site verification.

Finally, according to internal regulations, if Brazil opts for the recognition of China as a market economy country, such situation will have to be formalized by a decision issued by CAMEX.

Conclusion

The discussion about the recognition of China as a market economy country is, actually, a very complex issue, involving several countries with diverse interests, an increasing amount of trade flow, and differing interpretations of China’s Accession Protocol to the WTO. In the Brazilian case, despite having recognized China as a market economy on the political level, the absence of a decision by CAMEX about the matter resulted, in practice, in no real implications for the Brazilian’s trade remedies policy.

Indeed, DECOM still adopts the alternative methodology to calculate the Chinese normal value in antidumping investigations that are currently being held in Brazil. Whether this situation will officially change after December, 2016, however, is still unknown.

From a legal standpoint, it cannot be stated that the expiration of Article 15 of the Chinese Protocol Access to WTO will imply in no practical effect, and that countries may continue to apply alternative methodologies through the use of prices and costs from a substitute market to evaluate the normal value of Chinese products.

Eventually, the Brazilian Government will be faced with the need to make a decision – this decision may consider political and strategic aspects, more than considering merely technical and legal issues. Especially at this sensitive economic moment, maybe it will be probable that Brazilian authorities take into account the trade relationship between the countries, as well as China’s importance on Brazil’s economy, in order to make their decision.