Author: Henry Gao, Singapore Management University
When China acceded to the World Trade Organization (WTO) in 2001, it agreed to be treated as a non-market economy in anti-dumping investigations involving Chinese products. In practice, this meant that an importing country could substitute Chinese producer-set prices with the prices of a producer in another country. This clause came with an expiry date of 15 years after the date of China’s accession.
As this 15-year deadline approached, neither the United States nor the European Union — the two largest WTO members — showed any willingness to abandon the clause. On 26 October 2017, the US Department of Commerce announced that it will continue to treat China as a non-market economy. In other words, Washington effectively decided to ignore the clause’s expiry. While the European Union changed its law in June 2016, the methodology proposed in the new law (Regulation (EU) 2016/1036) is essentially the same as before in treating China as a non-market economy.
To add insult to China’s injury, the United States argued in its November 2017 submission to a WTO panel titled ‘Measures Related to Price Comparison Methodologies’ that ‘WTO members have always recognised that non-market prices … are not suitable for anti-dumping comparisons because they are not appropriate to use “in determining price comparability”’. According to Washington, this means that WTO members can still ‘reject prices or costs that are not determined under market economy conditions in determining price comparability for purposes of anti-dumping comparisons’.
In response, China took the unprecedented move of simultaneously filing cases against the United States and the European Union on 12 December 2016, the day after the deadline’s expiry. China’s ambassador to the WTO Zhang Xiangchen made a rare appearance before the panel at the first hearing of the EU case in December 2017. Quoting the Latin maxim ‘pacta sunt servanda’ (‘agreements must be kept’), Zhang made clear at the outset that ‘China brought this matter to dispute settlement with the objective to establish that promises made must be respected, and treaty terms struck must be honoured’.
In China’s 14-page statement, Zhang referred to the word ‘promise’ six times and lambasted Washington and Brussels for breaking their promises of ending China’s non-market economy status after 15 years. Zhang also highlighted the high stakes at play, including ‘the credibility of the dispute settlement mechanism, the integrity of the World Trade Organization, and the membership’s faith in the multilateral trading system’.
Broken promises aside, Washington and Brussels highlighted how to — or more appropriately how not to — set a bad example in the WTO. A WTO panel and the Appellate Body will inevitably rule US and EU actions as illegal. In the meantime, by continuing to treat China as a non-market economy, the United States and the European Union are giving China a lesson on how to bend the rules for short-term benefit while sacrificing long-term interests. China will remember this lesson, and will follow their example when it is convenient to ignore or bend WTO rules to suit its own interests.
This is not a remote possibility; it will probably happen sooner than most expect. It has already happened on a smaller scale through the WTO’s dispute settlement mechanism. When China first joined the WTO it settled almost all of the cases brought against it. But in 2006, Ji Wenhua, a Ministry of Commerce official in charge of China’s WTO cases, observed a lesson China had taken from a dispute case with Mexico: ‘under certain circumstances, we [China] should try to employ some strategies, including resorting to sophistry and delay tactics’.
Ji also noted that ‘even if such arguments are mere sophistry, or made for purposes such as creating artificial difficulties for the panel, gaining sympathies, diverting the attention of other parties, or delaying the progress of the case, they are justified so long as they serve to protect our [China’s] own interest’.
Since then, China has changed tack, now making aggressive legal arguments that bolster its case and using sophisticated procedural objections. The lesson that Washington and Brussels can take from this is that unless they are willing to look beyond their short-term interests and start treating China fairly, China will continue to follow their lead.
So far, China has implemented most of its WTO commitments on schedule and complied with most of the cases it has lost in the WTO. While there have been some debates on whether these are compliances on paper or in substance, the more important fact is that China acknowledges the legitimacy of the WTO rules and is willing to subject itself to the authority of the WTO. But as the WTO increasingly comes under attack in the West, China will start to doubt the WTO as well. When China escalates its emulation of the West from words to actions, the United States and the European Union might finally remember the warnings from Ambassador Zhang, but it will be too late.
Henry Gao is Associate Professor of Law, Singapore Management University, and Dongfang Scholar Chair Professor at the Shanghai Institute of Foreign Trade.