New Paper Shows How WTO Jurisprudence Has Created Flexibilities for Anti-Dumping Actions against Distorted Markets, Which China Has Made Use Of

A new paper by legal scholars Weihuan Zhou and Xiaomeng Qu looks at the evolution of the World Trade Organization (WTO)’s jurisprudence on anti-dumping (AD), focusing on the flexibility the WTO AD Agreement provides for tackling market distortions caused by government intervention. In effect, under this jurisprudence, the whole idea of special treatment for "non-market economies" has been broadened so that any government can use these types of AD practices against any other government. One result, they argue, is that "[t]he flexibilities and loopholes in the case law … have been increasingly utilized by China in its own AD practices," in part by drawing on the practices of the United States, Australia and others.

The paper begins by noting the original creation of special GATT AD rules -- in the form of a Note to Article VI:I -- to deal with non-market economies in 1954-55, after the accession of several Eastern European communist countries. When China joined the WTO, there were concerns that this Note was insufficient, and therefore a more detailed set of rules was included in China's accession protocol, in Section 15. In China's view, this provision offered a set 15 year period in which governments could consider China to be a non-market economy (NME), and on this basis could treat China differently in AD proceedings. Under the NME methodology, governments are able to use "non-Chinese or surrogate/benchmark prices or costs in a market economy third country to calculate normal values," a methodology that "typically inflates dumping margins and thus the AD duties that are levied."

However, the U.S. and EU interpreted Section 15 as not expiring after 15 years, and continued their practices at least to some extent after the period ended. China's WTO complaint against the EU in relation to these practices failed, leaving intact the ability to target China with a special (and less favorable) AD methodology.

In the meantime, the authors argue, before the WTO had ruled on this issue, the US and EU had "started to examine potential flexibilities within the AD Agreement – i.e. for them to continue the application of surrogate prices or costs in AD actions against China – in case they lose the disputes." Both countries made use of the concept of “particular market situation” (PMS) in Article 2.2 of the AD Agreement. This provision allows AD authorities "to disregard domestic sales in the exporting country, thereby constituting a convenient substitute for the NME Methodology." (In addition, the EU "revamped its AD regime by creating a new approach that is ostensibly non-discriminatory but has the same effect as the NME Methodology.")

The PMS methodology was also used by Australia, which had agreed to recognize China as a market economy in 2005 as a precondition for the negotiations of the China-Australia Free Trade Agreement, and therefore could not make use of Section 15. Instead, "Australia resorted to the PMS method by finding that a PMS existed in a variety of Chinese sectors in most of its AD actions against China." This finding "was essentially based on findings of the Chinese government’s intervention in the relevant upstream and downstream markets, which artificially lowered the cost of production and the prices of the goods under consideration." In this way, a positive finding of PMS "allowed Australian authorities to use surrogate prices or costs in determining normal values, leading to inflated dumping margins and AD duties," which was similar to what would have happened if China was considered an NME.

While these practices have been challenged at the WTO, the authors argue that "[t]he current case law has created flexibilities for AD authorities to consider such distortions and to resort to surrogate production costs in determining [constructed normal values]." It has also left "uncertainties around the exact scope of such flexibilities," which "leave considerable discretion for AD authorities to continue the use of surrogate prices or costs." And unlike the special AD rules that were designed to deal with NMEs such as China, "these uncertainties and flexibilities can be utilized by all WTO Members."

One WTO Member that has made use of these "uncertainties and flexibilities" is China. As it became a target of the creative use of PMS, it incorporated these kinds of practices in its own AD methodology.

China was late to the use of AD, with its trade remedy regime having been introduced only in 1997. Since its WTO accession, the authors note, China has undertaken a "massive effort to build trade law capacity and expertise, with AD being one of the major focuses." China is now the sixth largest user of AD among WTO Members, following India, the US, the EU, Argentina and Brazil.

China's use of PMS came only recently. In four investigations between 2017 and 2020, MOFCOM found that "a PMS existed in a range of the US’s energy and resources industries – i.e. petroleum, natural gas, coal, electricity and renewable energy more broadly – based on evidence showing US government intervention in these industries through industrial policies, laws and regulations, subsidies at both federal and state levels, import and export restrictions, and price controls." MOFCOM then found that the PMS "distorted or artificially lowered the input prices and the prices of the final goods produced by the downstream chemical industries under investigation." According to the authors, "MOFCOM’s approach to PMS, including its evidentiary standards, largely reproduced the practices in Australia and the US." MOFCOM also learned from the US in using the so-called “best information available” approach, and, the authors say, "applied 'PMS' and 'best information available' cumulatively to support its use of surrogate prices or costs."

Most recently, MOFCOM took a broad approach in two AD actions against Australia involving barley and wine exports. Interestingly, MOFCOM did not use the PMS method to facilitate the use of surrogate prices or costs, although in both cases the Chinese industry applicants claimed that a PMS existed. In barley, MOFCOM decided not to examine the issue of PMS; in wine, MOFCOM undertook a detailed assessment of the applicant’s evidence but decided not to make a finding on whether a PMS existed, instead resorting to “best information available.”

Other governments could challenge these Chinese practices at the WTO, but they face a dilemma, because they themselves sometimes engage in these practices, and thus if WTO jurisprudence were to create constraints on the practices, their own practices could be affected as well. Australia has challenged the barley and wine AD determinations at the WTO, though, and China has challenged a number of Australian AD determinations in response.

The authors conclude as follows: "the case law has arguably ‘multilateralized’ the NME treatment under the general framework of the WTO and may incentivize tit-for-tat use of AD. These recent developments in the AD practices of China and its major trading partners will intensify the debate over, and drive the further development of, the WTO jurisprudence on AD."