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Landmark Debate Held at European Parliament, Showing Unanimous Support Against Granting MES to Mainland China

On 10 May 2016, a debate on whether to grant market economy status (MES) to mainland China was held at the European Parliament. The presidency of the Council and the European Commission made statements in front of the plenary, followed by reactions of members of the European Parliament (MEPs) from diverse political groups.

The MEPs were unanimous in their agreement that mainland China is not a market economy. They joined the EU Council in calling on the Commission to swiftly come forward with a new proposal to deal with the upcoming expiry of Section 15(a)(ii) of mainland China’s accession protocol on 11 December 2016.

More precisely, this aforementioned provision provides for the use of alternative methodologies for the calculation of anti-dumping duties, permitting WTO members to use comparable market-based prices or costs to account for the government’s dominant role in allocating resources within the Chinese economy. Up until today, the “domestic price” (or so-called “normal value”) of the non-market economy exports to the EU is calculated through third countries, e.g., India or the U.S., in the case of mainland China.
While over 90 economies, including Russia, New Zealand, Singapore and Australia, have already recognised mainland China’s MES for the purpose of WTO anti-dumping investigations, the EU and other major WTO economies such as Canada, Japan and the United States have not yet given their go-ahead on mainland China’s MES. With the upcoming expiry of Section 15(a)(ii) of mainland China’s accession protocol, they urgently need to arrive at a decision.

On 12 May 2016, the European Parliament adopted a non-binding Resolution on mainland China’s market economy status, advising the European Commission not to unilaterally grant mainland China market economy treatment in trade defence investigations as of 11 December 2016. The European Parliament stressed that mainland China is not a market economy, as it has not yet fulfilled the five criteria established by the EU to define market economies.

The European Parliament is convinced that until mainland China proves to be a market economy, the EU should use a non-standard methodology in anti-dumping investigations into Chinese imports in determining price comparability, in accordance with and giving full effect to Section 15 of mainland China’s Accession Protocol. The European Parliament also stressed the “imminent need” for a general reform of the EU’s trade defence instruments. Many MEPs are of the opinion that the Commission’s 2013 proposal for trade defence modernisation should be advanced in order to strengthen the EU’s ability to impose higher duties on cheap Chinese imports.

While the European Parliament’s resolution is not legally binding, it does put political pressure on the European Commission when drafting its proposal on whether to treat mainland China as a market economy in trade investigations after 11 December 2016.

On 16 May 2016, Chinese Foreign Minister Wang Yi responded that the European Parliament’s vote against mainland China’s MES was “not at all constructive”. Mainland China insists that its accession protocol is to be interpreted as automatically granting MES as of 11 December 2016 and has repeatedly urged WTO members to “keep their promise” and end the practice of using third-country data to calculate Chinese anti-dumping duties.

Despite consensus that mainland China is not (yet) a market economy, the EU must still determine whether to shift mainland China to its list of market economies by 11 December.

Granting MES to mainland China would oblige the EU to resort to Chinese prices or costs in the calculation of dumping duties, reducing its ability to protect domestic companies with higher dumping margins based on comparable market prices. A flood of cheap Chinese products could, it is felt, cause severe damage to the EU industry, as European-produced goods such as steel, textiles and ceramics would become less competitive. According to a recent report of the EU Trade Commission, granting mainland China MES without implementing any mitigating measures could result in up to 188,000 job losses in Europe alone. Those job losses would be centred in France, Germany, Italy, Poland, Portugal and Spain and would focus specifically on the ceramics, iron, steel, bicycle and solar panel manufacturing industries.

One the other hand, the importance of mainland China as a strategic trading partner of the EU should not be underestimated. Blocking mainland China’s MES at the WTO could entail a high legal risk for the EU and could provoke mainland China into launching a major WTO dispute against it, with the risk of deteriorating trade relations.

On 13 May 2016, the EU’s Foreign Affairs Council on trade matters met in Brussels to further discuss the issue of mainland China’s MES. During the meetings, Germany and France expressed their support for the removal of the “lesser duty rule”, arguing that this rule should not apply in trade defence cases “where structural distortions to competition in the field of raw materials, including energy, would be caused.” Thirteen countries, however, remain against the removal of the lesser duty rule in any circumstance, with Belgium, the previously fourteenth country, reversing its position.

The final decision on how the EU will address the expiry of Section 15 of mainland China’s accession protocol to the WTO will be made by the European Parliament and EU Member States, but the legislative initiative belongs to the Commission.

The European Commission is still in the process of analysing whether it is legally obliged, under its WTO obligations, to treat mainland China as a market economy as of 11 December 2016, together with the potential impact of Chinese MES on the EU industry. While the Commission has not yet published a formal proposal on how to deal with Chinese MES, it has suggested three options for the EU:

  1. Make no changes to the EU legislation. This option could, however, put the EU in breach of WTO rules, entailing the risk of a Chinese complaint at the WTO.
  2. Simply grant mainland China MES by removing it from the list of non-MES countries in the EU’s anti-dumping legislation. This option seems unrealistic due to the perceived potential damage to the EU industry.
  3. Combine Chinese MES with the imposition of “mitigating measures”, ensuring that the EU's anti-dumping legislation is strong enough to protect the EU industry from an influx of cheap Chinese imports. Such mitigating measures could include (a) imposing duties that are higher than needed to counter the harm caused to the domestic industry by removal of the “lesser duty rule”, (b) prohibiting Chinese companies from requesting reviews of current duties, (c) adjusting Chinese costs in cases of market distortion and (d) boosting the Commission’s ability to apply tariffs to counter unfair governmental aid.

While the third option seems to be the most popular, several MEPs and EU Member States have already stated that they dislike all three alternatives, raising their concern that the proposed mitigation measures will lead to future legal challenges. Indeed, the recent report in the EU – Biodiesel case, issued by a WTO panel and circulated on 29 March 2016, indicates that an adjustment of Chinese costs in case of a market distortion would be in violation of the EU’s WTO commitments.

An official proposal by the European Commission on whether to modify EU trade law to make the change in market treatment is only expected in July this year. For the time being, the Commission is awaiting the finalisation of its full impact assessment and reviewing the approximately 5,000 public responses it received during its 10-week online consultation period.

Content provided by Picture: HKTDC Research
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