‘Market-oriented’ criteria squarely target China

By Ni Jianlin, Dentons
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The Decision of the General Council on the Importance of Market-Oriented Conditions to the World Trading System, drafted by the US, was adopted by the World Trade Organization (WTO) and circulated to all its members on 20 February 2020. In this document, the US puts forward eight elements for market-oriented conditions, which essentially reiterate what is said on market-oriented conditions in the seventh US, EU and Japan joint statement.

market-oriented
Ni Jianlin
Dentons
Senior Partner

The market economy-oriented elements. In this document submitted to the WTO, the US sets out the following eight elements for market-oriented conditions: (1) decisions of enterprises on prices, costs, inputs, purchases and sales are freely determined and made in response to market signals; (2) decisions of enterprises on investments are freely determined and made in response to market signals; (3) prices of capital, labour, technology and other factors are market-determined; (4) capital allocation decisions of, or affecting, enterprises are freely determined and made in response to market signals; (5) enterprises are subject to internationally recognized accounting standards, including independent accounting; (6) enterprises are subject to market-oriented and effective corporation law, bankruptcy law, competition law and private property law, and may enforce their rights through impartial legal processes such as an independent judicial system; (7) enterprises are able to freely access relevant information on which to base their business decisions; and (8) there is no significant government interference in enterprise business decisions described above.

As compared to the US, EU and Japan joint statement on market-oriented conditions, the author notes that the elements submitted to the WTO by the US include one not found in the joint statement, i.e., enterprises are able to freely access relevant information on which to base their business decisions.

The core issues of the eight elements proposed by the US are the following three key consideration factors: enterprises freely determining and making their decisions based on market signals; production factors and prices are market-determined; and no interference by the government.

Impact on WTO reform and the next phase of Sino-US trade negotiations. The US, EU and China have all put forward reform plans for the difficulties that the WTO is currently facing. The author notes that the US has proposed a reform plan of principle, part of which has already been implemented (concerning the issue of developing members), placing priority on the WTO revising its rules to meet the challenges posed by non-market economies, whereas those of the EU and China are more comprehensive, focusing on resolving urgent issues, e.g., the crisis in the WTO’s appellate body, without specifically discussing the issue of non-market economies.

Whether the elements for the market-oriented conditions proposed to the WTO by the US can genuinely spur the WTO to revise its rules accordingly will depend on negotiations, and the mutual give-and-take among WTO members. However, the author would argue that China needs to be clearly aware that the US, EU and Japan have essentially achieved a consensus on this issue.

What the next phase of the agreement negotiations between China and the US will cover is of concern to all parties. From the information disclosed in the 2019 Report on China’s WTO Compliance, recently published by the Office of the US Trade Representative, it can be seen that such issues as state-owned enterprises (SOEs), subsidies and industrial policy are likely to be the focus of the next phase of negotiations. But in truth all of these issues converge on one fundamental issue, namely the market economy issue. It can be anticipated that, with the unstinting US efforts to press for the formulation of market-oriented condition and criteria rules at the WTO, it is almost certain that the US will emphasize the so-called market-oriented conditions issue when structural reform and industrial policy are touched upon in the next phase of Sino-US trade talks.

Response. Both the market-oriented criteria submitted to the WTO by the US and the market-oriented criteria jointly established by way of the tripartite joint statement are targeted at China. They take aim at China’s structural reforms and industrial policy, while revamping the multilateral trading rules for fair competition under the market economic criteria, so as to exclude competition from non-market-oriented enterprises, and, while seeking to protect vested interests, they rely on this to expand the interests of their own favoured industries.

In consequence, the author would argue that China should respond in the following ways:

(1) Cleave to the baseline that WTO reform has to protect the principle of fair competition, promote the inclusiveness of the multilateral trading system, and respect the various development models of the members. With respect to the efforts to revise the WTO rules, and to demand the establishment of market-oriented conditions and elements led by the US, China should stand on reason, leverage the WTO’s decision-making by consensus , cleave to the baseline, and avoid falling into discriminatory restrictions.

(2) Comprehensively promote market-oriented reform, promote opening with broader reforms, intensify the reform of SOEs, forge a fair competition environment and further stimulate the vitality of private enterprises. Improvement of an economic system where resource allocation is determined by the market, which is the objective of our reforms, does not fundamentally conflict with the US demand for a market orientation.

The issues of SOEs and subsidies, which will be subjects covered in the next phase of the talks between China and the US, are also elements that China will vigorously promote in its intensification of system reform.

(3) The author encourages enterprises to actively respond to anti-dumping and countervailing investigations, and argue against the discriminatory US and EU method of comparative surrogate prices used in investigations. In US and EU anti-dumping practice, the two use the “surrogate country” rule when rendering a finding on enterprises from non-market economy countries, that is to say, they use the constructive cost of a surrogate country to determine the “normal value” of a Chinese respondent enterprise, and compare that with the Chinese respondent enterprise’s export price.

Where the surrogate country is artificially selected, and the constructive cost arbitrarily determined, the Chinese respondent enterprise’s dumping margin is arbitrarily enlarged. The enterprise in question should actively participate in the response and arguments, and vigorously present its views on the selection of the surrogate country on the basis of reason, so as to secure a determination of normal value that is favourable to the respondent enterprise.

Ni Jianlin is a senior partner at Dentons

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