China joined the World Trade Organization (WTO) in 2001. As an economy undergoing transformation, special trade rules were negotiated and agreed with China to safeguard the interests of the existing WTO membership. Article 15 of China’s WTO Accession Protocol sets out that modified rules for imposing anti-dumping tariffs (less favorable to China) will apply for a period of fifteen years from the accession date. This period expired on 11 December 2016 and since then the interpretation of the provisions in Article 15 of the Accession Protocol has become a bone of contention. The dispute over granting China market economy status (MES), which is associated with the expiry of the special conditions in Article 15 of the Accession Protocol, affects directly the legal basis of EU’s trade (defense) policy towards China.

On 1 February 2017, shortly after the fifteenth anniversary of China’s WTO membership, during a meeting of the Camera dei Deputati (Chamber of Deputies, 734th Meeting, XVII Legislature), Mr. Raffaello Vignali, a member of the Italian Parliament, posed an interpellation to the Ministro dello Sviluppo Economico (Minister of Economic Development), Mr. Carlo Calenda, regarding the issue of granting China MES – which would potentially weaken the competitiveness of Italian companies – and the initiatives undertaken at the European Union (EU) level to achieve a balanced solution.

The legal context for such interpellation and the Government’s response thereto needs to be clarified in more detail. Under standard WTO rules (Article VI of the General Agreementon Tariffs and Trade (GATT) and the related Anti-Dumping Agreement (ADA), where products of one country are introduced into the market of another country at less than their “normal value” (i.e. dumping), and this threatens or causes injury to an industry in the importing country, the latter is authorized to levy duties to offset or prevent such practice. Anti-dumping duties should not be higher than the margin of dumping in respect of the product at issue and, as a general principle, duties at a level lower than the margin of dumping are desirable – but not mandatory – if this level is adequate to remove injury (lesser duty rule, Article 9 ADA). The so-called normal price sets the basis for calculating the scale of dumping.

The relevant WTO provisions indicate different ways to determine the normal price of a product, first, as the “domestic price” of the product in the exporting country (Article VI(1)(a) of the GATT) and second, in the absence of a domestic price, as either the “highest comparable price for a like product for export”, or the cost of production in the country of origin plus a reasonable addition for selling cost and profit (Article VI (1)(b) of the GATT). The Interpretative Note Ad Article VI, however, also recognizes that, where imports originate from “a country which has a complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the State” a strict comparison with domestic prices may not be appropriate, and a comparison with prices in a third country can be used to determine the“normal value”. In all these cases, the country imposing the anti-dumping duty bears the burden of proof that dumping which caused material injury to a domestic industry has taken place.

Article 15 of the WTO Accession Protocol acknowledges State control of the prices of land, capital and energy in China and sets out different rules for establishing the normal value of products: first, by introducing a legal presumption that China is not a market economy and, second, by shifting the burden of proof on Chinese firms or the government. Article 15 of the Accession Protocol establishes that if the producers under investigation can clearly show that market economy conditions prevail in the relevant industry, the importing WTO Member must use Chinese domestic prices as a basis for anti-dumping duties (Article 15(a)(i)). The comparison criterion is the same as under general WTO rules (i.e. domestic price) but a different standard of proof applies. Where Chinese producers cannot offer such evidence, the importing WTO country can apply a standard other than domestic prices or costs in China, for instance, third-country price comparison (Article 15(a)(ii)). Anti-dumping duties determined this way are notably higher than those that would apply under standard WTO rules and this makes Chinese products less competitive. This latter provision was set to expire fifteen years after China’s date of accession to the WTO (Article 15(d)).

The ambiguity regarding the interpretation of the Accession Protocol arises from the fact that the provision in Article 15(d) contains two limbs, one on granting MES to China once it has fulfilled the conditions set out in the domestic legislation of the importing WTO Member, and the other on the elimination of the legal basis for applying third-country price comparison methodology under Article 15(a)(ii), starting from 11 December 2016. The relationship between the two provisions remains unclear, i.e. whether the expiry of Article 15(a)(ii) amounts to an automatic fulfillment of MES conditions. If this interpretation is valid, Article 15(a) will cease to apply in its entirety, the special treatment of China will terminate vis-à-vis the importing State, and China’s position in this respect will become equal to that of most other WTO members. Significantly, on 12 December 2016 China notified the WTO Secretariat of a request for consultations with the United States and the EU regarding special calculation methodologies used by the United States and the EU in anti-dumping proceedings.

The position of the Italian government on this issue was made clear by Mr. Calenda before the Commissione X – Attività produttive (Commission X – Economic Activities) of the Chamber of Deputies, on 31 January 2017:

Given that the text of Article 15 is actually drawn up in an unclear way, in our interpretation, the deadline of 12 December 2016 does not imply the obligation to use the Chinese prices and costs for the calculation of the normal value in investigations using standard methodology, which would be equivalent to a “recognition of the status of a market economy”.

Some countries (notably Australia) have granted recognition of MES to China, mainly granting the status as a condition for negotiating free trade agreements (FTA) with China. The EU (similarly to the United States) has established domestic criteria for granting MES and has been in dialogue with China regarding their fulfillment^[1]. At the same time, however, to avoid open conflict, most recently, the EU has modernized its instruments on the methodology for determining cost and price distortions related to dumping.

In this regard, at the above-mentioned meeting of the Chamber of Deputies (734th Meeting, XVII Legislature), Mr. Calenda reported that:

Italy, in fact, has blocked an attempt by the European Commission, which dates back to the middle of last year, to recognize, in practice, market economy status to China, through a mechanism that, while recognizing it as a market economy, would have included so-called mitigation clauses, i.e. safeguarding the anti-dumping duties imposed. We have considered this case as potentially disastrous for the Italian and European industry. The Italian government was the first and for a long time the only one to talk openly about it, to mobilize the press and to take concrete steps, which ultimately achieved a result, because the Commission stopped and proposed today a Regulation, that will need to be approved by the European Parliament, which is totally different and somewhat similar to that of the United States, and uses an analysis of average prices compared to the country’s prices, in the calculation of dumping mechanisms. However, we are not comfortable with how this Regulation is developing, because we still think that it is too weak. In particular, we believe that the regulatory text must maintain a clear anchoring to the five criteria on the basis of which a market economy is evaluated^[2]. We must strongly limit the discretion of the Commission, in the sense that, when there is dumping, dumping must be sanctioned; in this sense we are concerned about the idea of a macro economic study to be produced by the Commission before being able to operate with a non-market economy methodology ^[3].

The Minister added that:

In our opinion, the new situation of international trade policy urges a strengthening of all instruments of commercial defense, also because the United States goes towards this path […]. On this, the Italian government has the strongest position in Europe and continues to support it with the hope of achieving what we have experienced in the last year, namely that slowly other countries start to follow and agree on strengthening these instruments.

Among such trade defense instruments, the Italian Government had proposed to limit the use of the lesser duty rule in anti-dumping cases where there are structural raw material distortions. The rule is not mandatory under WTO law as such, but is a criterion included in EU trade defense regulations, praised by the EU as a positive instrument that reduces trade distortions. At the abovementioned meeting of the Commission X – Economic Activities, Mr. Calenda summarized the Italian position on this issue:

Unfortunately, this attempt got stuck as a result of the ideological and pre conceived opposition of some Member States, who simply rejected the idea of partially reducing the application of the so-called “lesser duty rule” […]. Unfortunately, despite the political pressure and the economic interests at stake, which also involve the employment of many European citizens, the position of some Member States has remained ideologically anchored to the principle of not changing the provisions relating to the lesser duty rule. However, this rule cannot be considered an intangible principle, because it is a WTO-plus guarantee, therefore not mandatory, that numerous and important international partners, starting from the United States, do not apply.

It should be recalled that the EU speaks with one voice at the WTO level and the solution eventually pursued by the EU institutions is partially different from what Italy had foreseen, even though it is equally aimed at maintaining protection standards against Chinese products similar to the ones previously in force. On the one hand, the EU has substantially revised its anti-dumping legislation by removing all references to MES, and on the other, it has incorporated in a current draft legislation the Italian proposal to derogate from the lesser duty principle, where there are raw material distortions in the exporting country, and where this (the non-application of the lesser duty rule) is in the EU’s interest^[4].

To continue defending the interests of EU firms in compliance with WTO obligations, a new regulation (EU Regulation 2017/2321) was adopted on 12 December 2017, amending the methodology that the European Commission uses to calculate price distortions for all WTO countries alike. The previous Anti-Dumping Regulation applied, for all countries qualified by the EU as “Non-Market Economy”, the “analogue country” methodology to calculate normal prices or costs. The new legislation removes the source of the conflict with China, namely all reference to MES (a distinction repeatedly labeled as discriminatory by China) and introduces a “neutral” mechanism that will purportedly apply equally to all WTO Members. A standard methodology based on domestic market prices for dumping calculation purposes will apply to all WTO Members, with a non-standard methodology being used where “significant distortions” caused by government intervention are established. Where the Commission has “well founded indications of the possible existence of significant distortions”, it shall make public and regularly update a report describing the distorted market circumstances and use as a basis for anti-dumping duties certain international benchmarks, including costs/prices in an appropriate third country with a similar level of economic development. On 20 December 2017 the Commission published its first report, concerning China, and announced the preparation of the next one, on Russia.

Despite these efforts, which are intended to solve some of the issues covered by China’s legal action before the WTO, the real matter at the core of the dispute, i.e. the level of duties to be imposed on Chinese products in the future, remains open. The EU solution is as close as it gets to the third-country price comparison standard in Interpretative Note Ad Article VI, but the Non-Market Economy definition therein contained sets a higher threshold than the requirement of “significant distortions” caused by government intervention in Regulation 2017/2321. The EU’s approach, which has been only partly successfully contested by Italy throughout the negotiations of the new legislative framework^[5], was finally hailed by Mr. Calenda as “the best possible result considering the various interests involved”. He also added that “the level of alert must remain high and the task of the Government and the other actors is now to ensure that the new legislation is rigorously applied”^[6].

[1] Council Regulation (EC) No. 905/98 of 27 April 1998 amending Regulation (EC) No. 384/96 on protection against dumped imports from countries not members of the European Community. See in particular the revised Art. 2.7(c). The regulation has not been in force since 10 January 2010 but the same conditions were replicated in subsequent regulations. Recently, Regulation (EU) 2017/2321 of the European Parliament and of the Council of 12 December 2017 introduced a new methodology and removed all references to market economy conditions in Regulation (EU) 2016/1036 on protection against dumped imports from countries not members of the EU (see infra).

[2] Such criteria are listed in Art. 2.7(c) of Regulation (EC) No. 384/96 as amended by Council Regulation (EC) No 905/98.

[3] The new mechanism is explained below.

[4] See the Provisional agreement resulting from inter-institutional negotiations: Proposal for a regulation of the European Parliament and of the Council amending Council Regulation (EC) No. 1225/2009 on protection against dumped imports from countries not members of the European Community and Council Regulation (EC) No. 597/2009 on protection against subsidised imports from countries not members of the European Community (COM(2013)0192 – 2013/0103(COD)), AG\1142795EN.docx, 10 January 2018.

[5] In mid-September 2017, Mr. Calenda was still hoping for a “significant improvement of the text”. The press release (in Italian) is available here.

[6] See the texts (in Italian) of the declarations here and here.

Carlo Calenda, Chamber of Deputies, 1 February 2017.

Carlo Calenda, Commission X – Economic Activities of the Chamber of Deputies, 31 January 2017.