China-U.S. Trade Law : International Trade Lawyer & Attorney : Baker Hostetler Law Firm : Trade Remedies, Customs & Export Controls

China’s goals of international recognition during the last decade, in addition to accession to the World Trade Organization (“WTO”), include most prominently acceptance by the United States as a market economy. There have been at least two motivations: to have its creation of a market, “with Chinese characteristics,” recognized and approved around the world; and to be liberated from the trade remedy methodology tailored specifically for non-market economies. The former is more psychic; the latter is pragmatic.

Non-Market Economy Status

World trade rules are built around principles of free trade. Free trade as an ideal type refers to unimpeded private market transactions where governments, monopolies, and state enterprises do not have enough influence to distort the conduct or outcomes of private enterprise competition. The free private enterprise system assumes, as did Adam Smith, that the selfish private acts of individuals and their organizations will yield, out of their competition and interaction, a greater public good. The market, not government, defines and produces the public good. It also assumes that governments and monopolies, when regulating or controlling private transactions, distort markets and thus are harmful to the public good.

The role of government in the ideal free private enterprise system is limited, mostly to regulating anticompetitive behavior and breaking up excessively large conglomerates and monopolies that prevent free competition. Of course, such limited government is a fiction. Governments have many roles in civil society, and all impact the economy.

All governments raise revenue through taxes. They make judgments about who most can afford to pay. Despite the periodic calls in the United States for a “flat tax” imposed on everyone equally, taxes everywhere are “progressive,” graduated according to the perceptions of what can be afforded and by whom, including business enterprises as well as individuals. Taxes on transactions – sales taxes or value added taxes – are also common. The form of taxation, the extent to which taxes are graduated, and the taxpayers (corporate or individual) all express public policies favoring some over others. A core public policy in the United States favors private home ownership, which has produced special tax provisions affecting everything from bank loans to construction materials. All such government interventions and taxes distort markets in one way or another. Yet, like death, taxes are inevitable and are the most obvious form of government intervention in markets.

Governments play additional roles. Every free market system assigns governments a role in forbidding the formation and operation of anticompetitive monopolies and trusts. Governments may regulate to protect the health, safety, and welfare of citizens. Such regulations typically raise costs of production for private enterprise, and impose certain manufacturing methods and ways of doing business. Hence, despite the ideal type, governments everywhere intervene in the free market.

Corporations rhetorically champion free enterprise, but in practice they seek competitive advantages that inevitably translate into limitations on competition. Governments regulate to limit or eliminate such corporate behavior. The nature of competition is to seek an advantage and a superiority over others. Such advantages are defined by reducing the competitive abilities and positions of others. Individuals and corporations idealize competition only to the extent that competition can improve their situations, which by definition requires the degrading of the competitive positions of others. Consequently, free private enterprise systems foster competitors whose objective is always to reduce competition. Governments overseeing such systems endeavor to maximize competition, while protecting against the release into the stream of commerce of products and practices inimical to the health and safety of individuals and society.
This ideal type of free enterprise system is the theoretical antithesis of a state-controlled or command economy. In the ideal type, government intervenes only as required, reluctantly, and while trying to guarantee free competition. In a command economy, government seeks to direct all economic activity, deciding what needs to be manufactured, to whom it should be distributed, and at what price. Government extracts rents from this production and, therefore, in control of the entire economy, can raise revenues anyway it likes. Markets function only to the extent that governments permit, in any particular sector, the interaction of willing buyers and willing sellers. Mostly, demand is regulated by supply, the latter controlled entirely by the government.

The United States, since the ascension to power of Mao Tse-Tung, has treated China, dominated by state-owned enterprises and with a tax system dictated by government (rather than negotiated among competing interests), as a non-market economy. However, China, since the “opening” of Deng Xiaoping, no longer regards itself as a non-market economy. Instead, China thinks of itself as a capitalist, market economy, albeit with “Chinese characteristics.”

There are many indicia supporting China’s self-image because substantial competition has grown up in China. Capitalist goods are everywhere and are sold competitively throughout the country. There are advertisements promoting different prices for the same or comparable goods. People decide what to buy, from food to cars, such that supply does not control demand, and the government does not control supplies. Labor has become mobile, with people moving from one part of the country to another, from one kind of job to another, from one corporate entity to another making or selling the same product. Prices vary with supply and demand, not dictated by government.

There are many indicia that China remains a command economy. The government owns and controls the supply and prices of natural resources and public utilities. The government controls banks and insurance, lends money through the banks according to government policy and rates, controls the currency and its value. The most important economic sectors, such as steel production, are dominated, when not exclusively captured, by state-owned enterprises. Through the control of money and loans and prices, the government dictates the supply and demand for the most important products and services.

The global economic meltdown with the fall of Lehman Brothers in September 2008 made the United States look more like China than the other way around. The U.S. government took effective control of major banks and insurance companies, bought out one of the leading economic sectors – automobile manufacturing – and shaped subsidy programs throughout the economy designed to assure the success or survival of enterprises chosen by the government. Yet, while insisting that it is the world’s leading capitalist economy, the United States denied China’s claim to be recognized as a market economy.
 

Symbolism Of Market Recognition

China, as a matter of national pride and self-respect, has resented the American insistence that massive American subsidies and market intervention preserved a capitalist, market, free enterprise system, while identical conduct in China guaranteed that China would be considered outside the mainstream, along with Cuba and Vietnam and North Korea, as a non-market economy. The more China has insisted that the United States should recognize it as a market economy, the more the United States has resisted. Excuses have become cumulative, most prominently in the American complaint over China’s refusal to float fully the value of its currency, notwithstanding that U.S. currency did not float freely until 1971, and the United States certainly was not considered a non-market economy before then.

Recognition as a market economy has come to mean, for China, fulfillment of a promise it perceives was made in 2001 when China acceded to the WTO. Even though the WTO agreement projected recognition as a market economy by 2016, and then only upon the satisfaction of various criteria, China’s Commerce Minister now insists that the United States agreed to recognize China’s market economy status by 2010 and offers a sense of betrayal that recognition has not happened.

The Practicalities Of Market Economy Status

In only one significant respect does recognition as a market economy matter: when complaints are brought that Chinese goods are dumped in the United States, the methodology for determining whether there is dumping, and if so, how much, is different for non-market economies. This distinct methodology gives the United States Department of Commerce more discretion and flexibility to find dumping, and to inflate the dumping “margin,” the measure of how much dumping and consequently how much duty will be owed for the merchandise to be imported into the United States.

Dumping is determined in one of two ways: either a good is sold abroad for a price lower than the price at home, or the costs to produce the good exceed the price at which the good is sold abroad. When Chinese goods are subjected to this second measurement, the cost of production, the non-market economy methodology becomes critical.

Non-market economy status presumes that, in the absence of markets, there are no market prices. It is then theoretically impossible to determine the cost of production because it is impossible to determine the costs of any of the inputs. There are no market wages; no market rents; no market utilities. Raw materials have no market prices, nor do any component parts.
When the inputs are imported from a market economy, dumping analysts use the price the Chinese manufacturer has paid for those inputs. But when the inputs are domestic products, analysts assume there is no market price for them. The analysts then seek and apply “surrogate” prices – prices of the same input in a “market” economy that, supposedly, is at a similar level of development as China. Surrogate values may come from many different countries, but American official analysts have favored (for China) India, Bangladesh, Indonesia, and occasionally other countries.

The selection of surrogate values is highly contentious and is decided, in the end, by U.S. government officials. They have decided that freight costs, for example, could not be used if derived from a Chinese-flag ship. They have chosen, instead, some of the highest shipping rates in the world.

Subsidies And Market Economy Status

Until November 2006, treatment of China as a non-market economy did have advantages for China. A “subsidy” in international trade is a financial contribution from a government that is market-distorting. Where there is no market, there is nothing to distort. Therefore, until November 2006, the United States had never brought a subsidies (countervailing duty) case against China. Subsidies could not be alleged; they had to be treated as costs of production susceptible to the application of surrogate values.

It was always thought that China could not and would not be exposed to countervailing duty allegations unless and until it might be recognized as a market economy. The Chinese Government, consequently, stayed out of trade remedy disputes, as dumping is the business of business, not government. Dumping is determined by prices, and companies, not governments, set prices. Moreover, it was exceedingly difficult to address some of the “inputs” this way for a cost-of-production analysis.

The 2006 mid-term elections delivered a significant Democratic majority pressuring the Administration to get tough on China, especially as to alleged subsidies. A petition alleging subsidies to coated free sheet paper was pending. The Department of Commerce, soon after the elections, decided to initiate a countervailing duty investigation, while refusing, still, to recognize China as a market economy.

China protested the apparent anomaly – a non-market economy subjected to a countervailing duty investigation – but to no avail. Various legal issues emerged and several are still the subject of WTO proceedings initiated by China. None has been resolved by the WTO, and meanwhile the United States has found subsidies and imposed countervailing duties in 12 cases already. All of these cases were accompanied by antidumping petitions, and a cumulation of dumping and subsidies duties have been imposed in 26 cases since 2007. Petitioners complaining about unfair competition from China now routinely file simultaneously antidumping and countervailing duty petitions.

Why Non-Market Economy Status No Longer Has Practical Meaning

The decision to investigate subsidy allegations and impose countervailing duties while still treating China as a non-market economy rendered the non-market economy status practically meaningless. It is not as if, were China tomorrow to be recognized as a market economy, anything of practical value would change.

The United States has been applying surrogate values for subsidy allegations against China throughout the economy. For the allegation that China was not charging enough money for the commercial use of land in rural Shandong Province, the Department of Commerce used land values from suburban Bangkok. The Commerce Department ignored entirely expert testimony that the use of such values was nonsensical from the perspective of economics and land use.  And Commerce treated any input supplied by a state-owned enterprise as a subsidy, the value of which was to be determined by selection of a surrogate value in a market economy. 

The rationale for the application of surrogate values is based on Certain Softwood Lumber from Canada.  Even though a WTO panel found the use of such values improper in the case of Canada and a NAFTA panel found it illegal, the Commerce Department dismissed the NAFTA panel as having no precedential authority and the WTO panel as ambiguous. Beginning with coated free sheet paper, the Commerce Department has cited its own administrative determination in the softwood lumber case as the basis for its treatment of China.

The Commerce Department argues that, even though Canada is indisputably a market economy, Canadian provincial governments own so much of the forests that any price for standing timber cannot be a market price. It did not matter that nearly twenty-five percent of the standing timber sold in Quebec is private, as is more than fifteen percent in Ontario. It did not matter that the pricing scheme for public forests in Quebec was based entirely on the prices in the private forest. The Commerce Department reasoned that the public sector was so large compared to the private sector that the private sector prices were driven by the public sector and therefore could not be used. It reasoned that the residual value methodology applied by Ontario, whereby the market price of manufactured lumber required certain pricing of the raw material, could not be used because most of the natural resource was in public hands. It did not matter that the NAFTA and WTO panels disagreed, as did a number of notable experts.

China, over the course of three years, has failed to successfully challenge any of the Commerce Department surrogate value applications in U.S. courts. [confirm] Consequently, the Commerce Department has been laying a foundation of subsidy findings as “administrative practice,” upon which it can rely for virtually anything that may arise in the Chinese economy. Bank loans, even from commercial banks, can be treated as non-market rates because of the alleged dominance of state-owned banks setting the market rates; prices for inputs from private companies can be set aside as long as there are state-owned enterprises in the same business. It will be very difficult for China to prove that the state is not dominant in one sector or another, and the burden of proof will fall on China.

The United States can recognize China as a market economy and continue to apply surrogate values and non-market economy methodologies in trade remedy disputes because China has focused on the issue of market economy status instead of on the methodology the United States developed in the softwood lumber dispute with Canada. The core issue remains not the nomenclature, but the predominance of state-owned enterprises.

The Strategic And Economic Dialogue

The Strategic and Economic Dialogue in Beijing in May 2010 seemed to produce only one Chinese headline: that the United States was going to recognize China as a market economy. The expectation was variously seen as fulfillment of a promise and as an essential American concession, a Chinese victory of sorts. The United States, as it happens, did not provide such recognition, only promising to continue a discussion about it. Consequently, the United States now knows it is holding something that China values highly, and yet is not worth very much, an enviable negotiating position. China, for its part, needs to recognize how little such recognition means, and move on to more meaningful discussions.
 

       过去十年里，中国积极努力希望获得世界认可：除历经艰辛终于加入世贸组织外，还包括要求美国授予中国市场经济地位。这一努力背后有两大动力：希望“具有中国特色” 的市场经济制度得到世界认可，同时免受只针对非市场经济体的贸易补偿方法。前者出于心理因素，后者处于实际考量。

       请阅读英文全文。

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Political pressures have led the U.S. Department of Commerce to launch countervailing duty investigations against China while insisting that it cannot use market information from within China to measure the alleged subsidies because China is a non-market economy. That political reality contravenes the principles embodied in U.S. law. Subsidies are found and measured according to the market distortion they cause. Where there is no market, there can be no market distortion. It is not possible for China to have developed markets sufficiently to be subject to subsidies allegations and investigations, yet have no markets by which to ascertain and measure the subsidies.

The problem that pervades the United States’ countervailing duty investigations of China is an attitude, which has at least three manifestations.

1. There is the Department’s confusion of methodologies used in dumping and countervailing duty investigations. In dumping cases involving non-market economies, the law expressly allows the Department to seek out surrogate values from other countries. In theory, at least, this exercise is fairly precise: the cost of a nail in India might substitute for the cost of the same nail in China. The Department, however, has taken to utilizing this methodology in countervailing duty cases where the law does not authorize it and the measurements are not remotely so precise.The consequence is that the Department ignores prevailing market conditions within China in favor of data from hand-selected countries to determine the existence and amount of a countervailable subsidy in China. The Department is having the market issue both ways: China is enough of a market economy for government subsidies to cause distortions, but not enough of one – in any sector – to resort to prices in China that are less likely to show the existence of a subsidy.
2. There is a lack of recognition and appreciation of China’s radical transition to a market economy. The People’s Republic is privatizing, and creating competition, at a feverish pace. Its central planning is indicative and no longer directive; its collectives are giving way to individual entrepreneurs and its controls are yielding to markets. The Department verified that state-owned enterprises are operating autonomously, for profit, without government direction. They are seen as benefiting the people collectively instead of a small group of private owners, but contrary to the Department’s preconceived notions, that collective benefit makes them no less market-driven than privately-owned entities. Many of the changes in China’s economy are taking place in weeks and months, not years or decades. Countervailable subsidy allegations of a practice in June quickly become outdated as the practice disappears in September. The United States’ failure to recognize and appreciate these changes is a bad policy toward China because it carries all the wrong incentives: offsetting programs that have been abolished or expired creates liabilities that discourage abandoning the programs, or beg for replacements. It teaches all the wrong lessons about opening markets, because what it really communicates is that the United States is closing its own.
3. There is the allegation that officials of the People’s Republic of China do not always cooperate with the Department or do all they could to answer questions and assist with the Department in its investigation. The allegation is worse than undiplomatic. It violates the comity of nations by refusing to respect the acts of foreign sovereigns within their own jurisdictions. By presuming that China must collect and have information that, within its own jurisdiction it says it does not collect and does not have the Department violates a principle respected formally by the United States since the Supreme Court first pronounced on it in 1797. This third manifestation of attitude – the willingness to deny the veracity of official testimony without contrary information or evidence – tarnishes the Department’s investigations. As a matter of comity, the Department owes good faith respect to Chinese officials as it would expect them to respect officials of the Department.

Comity is not merely an element of diplomacy. It is an obligation of international practice and a legitimate expectation of our friendly trading partners. Chinese officials are entitled to be believed absent strong evidence to the contrary. The Department breaches its trust when it makes decisions based on nothing more than hostile beliefs. Insisting something must exist when told it doesn’t, and having no evidence to the contrary, is nothing more than a hostile belief. What is at stake is much more than the fate of any particular exported product. What is at stake is the good faith of American trade relations with China.

Hostile attitudes ought not to interfere with respect for the law and sound policy. In this instance, there is an additional concern. Much of the American objection to alleged Chinese subsidies could now be said, at least since September 15, 2008, about the United States. It probably has been necessary to combat global rececession with massive government economic interventions, but it has made much more of the American economy dependent on government support. We analyzed those troubling contradictions in formal comments filed with the United States Trade Representative in January 2008 on Applying the CVD Laws to China.
 

 

 

虽然美国尚未承认中国的市场经济地位，但是美国国内巨大的政治压力迫使美国商务部针对中国产品展开了一系列反补贴调查。美国商务部的做法违背了规范世界贸易体系的原则——世贸组织章程。只有当政府补助对市场健康发展造成负面影响时，才能证明不正当政府补助的存在；同时政府补助对市场发展的影响程度也是衡量反补贴的标准。 所以美国政府这种一方面说中国的市场程度已经发展到一定程度因而成为反补贴调查的对象，另一方面又说中国国内不存在可以用来判断、衡量不正当补助的市场指标的做法是完全站不住脚的。

在针对中国产品展开的反补贴调查中，美国政府的立场问题影响了所有反补贴调查的顺利进行。在一些案件中这一问题比较突出，在另一些案件中要稍许好一些。我们暂且把这一立场问题称为“态度问题”。美国商务部的“态度问题”可以简单概括为三个层面。

首先，美国商务部将反补贴和反倾销调查的调查方法混为一谈。在针对非市场经济体展开的反倾销调查中，美国法律允许美国商务部采用第三国经济数据来计算反倾销税税率。至少从理论上来讲这种计算方法是比较精确的：在印度生产一个铁钉的成本应当和在中国生产一个铁钉的成本相当。但是美国商务部居然在反补贴调查中也使用这种计算方式，这是美国法律所不允许的，同时也是非常不精确的。

美国商务部采取这一做法的结果是它对中国的市场行情视而不见，却用精心挑选的第三替代国的数据来裁定中国政府是否提供了不正当补助、及反补贴税率。由此可见美国商务部充分利用市场经济这一议题对中国采取双重歧视：一方面认为中国已存在市场经济体系，因而政府补助影响了市场健康发展；另一方面又认为无论在哪一领域，中国的市场经济体系都不够发达，所以要用第三替代国的数据来计算反补贴税率。

“态度问题”的第二个层面是不承认、不充分肯定中国从政府主导向市场经济转变过程中取得的巨大成绩。中国正以极快的步伐从计划经济向市场经济转变，这同时刺激了市场竞争。原有的中央计划不再具有指令性特征，而是转变成为远景方向和目标；中国私营企业取代了公有性企业，在经济生活中扮演更重要的角色；政府逐渐让位于市场，让市场在经济生活中扮演更重要的角色。美国商务部承认，在核查中他们看到中国的国有企业是独立运作的、把追求经济效益放在首位、不再接受政府指令。国有企业的存在和运作是为了能让大多数人、而不是少数私营企业所有者受益。与美国商务部固有的印象完全相反，代表公众利益的企业能和私营企业一样对市场信号迅速做出反应。

腾飞的中国经济往往在短短几个星期、几个月时间内就会发生显著变化，而不是用几年或几十年的时间。所以六月提出的反补贴指控可能在九月就会变得过时，因为这项政府补助可能已经不存在了。美国政府往往忽视、或是没有充分认可中国的这些变化，仍一意孤行、针对这些稍纵即逝的项目采取贸易限制和保护措施。 这种针对中国的错误政策只会带来负面效应：鼓励中国维持这些补助，或用其他政府项目来取代这些已取消、或是即将失效的项目。同时，美国政府的这一做法非但没有起到开放市场的示范作用，反而告诉她的贸易伙伴：美国正在关闭市场。

美国商务部的“态度问题”的第三个层面是指责中国政府官员不与调查官员合作、不尽全力回答调查问卷、不协助美国商务部调查。这种指控不仅仅是不懂外交艺术的表现，同时还带来更严重的后果。这种指控违背了国家间应相互尊重的原则，因为指控方没有做到尊重一个主权国家在自己领土内决策的权力。美国商务部假定中国政府应当收集、而且一定拥有国内的某些信息，全然不顾事实上中国政府并未收集也没有这些信息。这种做法违背了美国政府理应遵守的、美国最高法院早在1797年就宣布的国家间相互尊重的原则。 因此，“态度问题”的第三个层面——在没有相左信息或证据的情况下，拒绝中国政府官员参与核查并作证的行为——给美国商务的核查工作蒙上了阴影。根据国家间相互尊重的原则，既然美国商务部官员期待得到中国官员的尊重，那么他们也应给予中国政府官员相应的尊重。

相互尊重不仅仅是外交要素之一，同时也是国际交往中各个国家都应承担的义务，是友好贸易伙伴之间最基本的期待之一。中国官员理应被信任。当美国商务部官员从敌视的、没有根据的信念出发采取某一行动的时候，他们就破坏了这种信任。当被告知某一事物并不存在，且没有证据的情况下，仍然坚持己见、认为这一事物一定存在，这就是敌视。这时，面临危机的就不仅仅是某一出口产品，而是中美两大贸易伙伴间的诚信了。

 

（翻译：朱晶）

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