Why China isn’t a Market Economy

Before discussing China’s push for recognition as a market economy, it is helpful to look at an ongoing legal dispute against two Chinese companies in the United States [Animal Sci. Prods. v. Hebei Welcome Pharm Co][1].

Over 90 percent of global vitamin C production takes place in China[2]. Two Chinese companies, Hebei Welcome Pharmaceutical and its holding company colluded with other Chinese suppliers and China Chamber of Commerce of Medicines to fix prices of vitamin C sold to American firms. In, a jury found both the firms in violation of Section 1 of the Sherman Act – the main statute of United States antitrust law – and awarded the plaintiffs $147 million in damages.

Both the firms didn’t argue about the amount of damages, didn’t dispute the allegations, and didn’t question the District Court’s jurisdiction.

Instead, they asked for the United States Court of Appeals to dismiss the case because the companies acted as they did because Chinese law required them to do so. Specifically, Ministry of Commerce of the People’s Republic of China (MOFCOM) “required vitamin C exporters to coordinate prices and create a global supply shortage in order to maintain China’s longstanding dominance of the vitamin C market” . Surprisingly, MOFCOM itself filed an amicus curiae with the court detailing how Chinese law required price fixing in this situation.

To muddy the waters further, it turned out that the group of alleged competitors, the China Chamber of Commerce of Medicines, was not what it seemed. The Chamber was not like a chamber of commerce in the US or a trade association. Rather, the Ministry stated in its brief that the Chamber was in fact a state instrumentality that implemented the Ministry’s rules and regulations governing the vitamin C trade. The Ministry provided evidence that the Chamber was responsible for coordinating industry-wide prices for all vitamin C exporters in China[3].

The Ministry further provided submissions to the district court representing that “all of the vitamin C that was legally exported during the relevant time was required to be sold at industry-wide coordinated prices

In addition, MOFCOM explained China’s regime to regulate export prices: during the relevant period, all vitamin C manufacturers were required to submit documentation to the Chamber indicating both the amount and price of vitamin C it intended to export. The Chamber would then “verify” the contract price and affix a special seal to the contract that indicated the Chamber’s approval; a seal was provided only if the price was “at or above the minimum acceptable price set by coordination through the Chamber.[4]

The usually discreet MOFCOM intervened the way it did because it would get the case dismissed on grounds of international comity – US courts do not hold firms accountable for actions forced by their home governments. This is precisely what the US Court of Appeals did. Judge Peter Hall wrote in his judgment,

In short, by directing vitamin C manufacturers to coordinate export prices and quantities and adopting those standards into the regulatory regime, the Chinese Government required Defendants to violate the Sherman Act.

… Recognizing China’s strong interest in its protectionist economic policies and given the direct conflict between Chinese policy and our antitrust laws, we conclude that China’s interests outweigh whatever antitrust enforcement interests the United States may have in this case[5].

Key takeaways

First – China isn’t a market economy by its own admission. Prices in some sectors in the domestic economy may reflect true nominal value of inputs but prices in the external sector do not. Particular emphasis is on MOFCOM’s soft regulations designed to ensure firms apply self-discipline – euphemism for MOFCOM expectation that firms wouldn’t mindlessly compete but work towards the government’s policy goals.

Second – Chambers of Commerce in China are fundamentally different from their counterparts in the United States. They are responsible to ‘facilitate self-discipline within the industry’ so that an industry meets MOFCOM’s export targets at all costs[6].

Third – Beijing has been advancing two very different narratives. To the international community and the WTO, MOFCOM said it has stopped manipulating vitamin C export prices in 2002. To US courts, it said the manipulation continued will into the late 2000s. Any observer of Chinese trade policy would tell you that its only transparent aspect is it opacity.

Non-market economies and the WTO

WTO doesn’t recognize any country as a market or non-market economy (NME), its members nations.

WTO anti-dumping protocol permits member countries to impose duties on dumped imports. Anti-dumping duties are usually calculated as the difference between the dumped product’s export price and its price in the domestic market or ‘a constructed value based on the product’s cost of production’. In case of NME countries, home prices or cost of production – input prices such as cost of labor and electricity – are artificially suppressed. Correspondingly, WTO Anti-dumping protocol gives trade partners significant leeway calculating anti-dumping duties.

Upon joining the WTO in 2001, China acceded to be considered a NME for 15 years. Essentially, China accepted that ‘the government has a complete or substantially complete monopoly of its trade and where all domestic prices [input prices for the purpose of production and export] are fixed by the State[7].

China hasn’t reformed its economy – especially its anti-trust regulatory regime – enough to be considered a market economy, neither does it make this claim. Its argument hinges on its interpretation of a clause 15 in its WTO ascension document that automatically grants China market economy status after 15 years[8].

As and when the WTO decided on this case, the ruling will most probably favor China. It’s legal argument is strong[9].

US and EU’s likely course of action

For European Union and the United States, recognizing China as a market economy implies accepting that domestic prices – especially factor prices such as land, electricity and labor costs – are set by open competition rather than the government. Any well-regarded observer of the Chinese economy would tell you that its not true.

US and EU will eventually nominally recognize China as a market economy but will de facto subject Chinese exports to a similar anti-dumping measures as they do now.

European Parliament has approved legislation to nominally the distinction between market and non-market economies but retains the analogue country methodology to calculate dumping duties on exports from countries with significant state intervention[10].

Unlike the EU, US will likely wait it out longer but will approach a similar non-confrontational approach which nominally grants China MES but maintains the current anti-dumping duty regime[11]. The US Department of Commerce has already developed the ability to apply countervailing duties on implicitly subsidized exports from China in order to offset any disruptive damage to American companies after granting China MES[12]

Imports Subject to dumpingIncreasing share of CVD’s to offset a decline in dumping duties.

Conclusion – Market economy status for China would mostly just put an end to the stigma of being considered a non-market economy. Chinese policymakers know full well that China’s isn’t a market economy – MOFCOM’s statements in vitamin C litigation. They realize that trade partners wouldn’t allow a surge in imports from China because of a mere legal argument in its WTO ascension. China’s proclivity for further economic reforms is unfortunately diminished at present.

By Sunny Sunny Mewati, Republished from Quora with permission.

 Footnotes:

[1] https://cases.justia.com/federal…

[2] Vitamin C in China: Too Much of a Good Thing?

[3] Price Fixing in the US Violates Antitrust Law. Not Always So in China. – LawRoom Blog

[4] Client Briefing: US Second Circuit reverses Vitamin C ruling on international comity grounds | Lexology

[5] https://cases.justia.com/federal…

[6] Client Briefing: US Second Circuit reverses Vitamin C ruling on international comity grounds | Lexology

[7] Anti-dumping – Technical Information

[8] Subscribe to read

[9] 2016 News items – China files WTO complaint against US, EU over price comparison methodologies

[10] EU lawmakers clear law to limit cheap Chinese imports

[11] Commerce Continues China’s Status as a Non-Market Economy | Trade and Manufacturing Monitor

[12] https://piie.com/system/files/do…

Written by Godfree
Visiting China and studying it since 1967. Interested in its culture, politics, education and economy.