cJ L/ c J

% FGV
Centro do Comrcio Global
e Investimento

IS CHINA A MARKET OR A NONMARKET ECONOMY?

Implications for the rules of the WTO and the textile sector of Brazil

Center for Global Trade and Investrnents - EESP/FGV

Coord ination: Prof. Vera Thorstensen
Research Assistaitis:
Daniel Ramos
Carolina Ml!er
Jos Stucchi
Thiago Nogueira
Fernanda Bertolaccini
juIy, 2012

INDEX
1. INTRODUCTION

.7

II. TEXTILES AND CLOTHING SECTORS TARIFF OVERVIEW . ................................................ II

l.Brazil .........................................................................................................................................12
2. Argentina ......... . ......................................................................................................................... 14
3. China .........................................................................................................................................15
4. Mexico .... . .................................................................................................................................. 17
5. United States .............................................................................................................................20
6. Conclusioris .................................................................................. . ............................. ...............22
III. COMPETITION WITH CHINESE PRODUCTS ...................... . .................................................... 23
111.1. THE ISSUE OF EXCHANGE RATES ...................................................................................23
1. Irnpacts of Exchange Rates on Tariffs ......................................................................................25
1.1. Effects ofexchange rate rnisalignments on market access obligations ...... . ....................... 27
1.2. Effects of exchange rate misalignments on exporters' compctitiveness.............................14
1 .3. Coriclusions ......... . ....................................................................................... . ...................... .38
2. Legal Aspects of Exchange Rate on Trade ................................................................................19
2.1. Exchange rate and the WTO ..............................................................................................40
i. Exchange rales and IMF - Are exchange rales an exclusive matter ofthe IMF? ... . ........ ..40
ii. Exchange rale inipacts on the Multilateral Trade Systeni. ................................................ 41
2.2. WTO Agreements and the exchange rate issue .............. . .... . ......................................... . .... 49
1. Article XV ................... . ...................................................................................................... 49
ii. Article XXIII .......................... ... ... . ................................................................... . ................ .52
iii. Trade defense reniedies .................................................. . ................................................. .54
iv. Article II: 1 .........................................................................................................................59
v. Article 11:6.. .................................................................................................. . .................... 61
2.3. Conclusions .......................... . ................................ . ............................................................ 62
111.2 THE ISSUE OF SUBSIDIES .... . .......................................................................... . .................... 64
1. WTO rules: GArI'. SCM and the Protocol of Accession of China ..........................................65
1. 1 WTO rules ........... . ........... . .................................................. . ................................................ 65
1.2 Protocol of Accession of China lo the WTO: conirnitments on subsidies ..........................68
2. Main characteristics of the Chinese Textile Industry ............................................. . ................ ..71
2.1 Adjustment and revitalization plan for the Textile Industry ...............................................78
2.2 Chinese Textile Industry: private and puhlic enterprises ....................................................80
3. A suhsidizedeconoiriy ..............................................................................................................82
3.1 Two rnodelsofdeveloprnent .............. . ......................................................... . ...................... 82
3.2 Chinese subsidies programs potentially applicahle to the Textile and Apparel Industry.... 87
i. Specific textile and clothing industry subsidies programs .................................................87
ii. United States and European Union countervailing investigations .................................. ..90
iii. US Counter notification and the 200-11st Chinese subsidy programs ..............................93

4. Conclusions.

97

.
Definition of SOEs.......................................................................................................

100

2. Overview of SOEs in Chinese Economy .....................................................................

102

Chinese commitments at the WTO ..............................................................................

104

3.1. Subsidies ...............................................................................................................

3.2. Governrneiit Procurement .....................................................................................

los

3.3. State influence over SOEs governance .................................................................

107

4. SOEs and China WTO niles compliance .....................................................................

107

4.1. State influence over the Economy.........................................................................

108

4.2. Governmental support and competitiveness ................................... .......................

110

4.3. Chinese outward foreign direct investment...........................................................

III

4.4. Government procurement......................................................................................

113

5. Conclusions ................ ... .... . ........................................................... ...............................

114

IV. WTO AND CHINA: TI-IE ISSUE OF NON-MARKET ECONOMIES ...........................

lis

IV. 1 DEFINITION OF MARKET AND NON-MARKET ECONOMIES .........................

116

1. International definitions ...............................................................................................

116

2. National definitioris .................. . ............................... ....................................................

3. Conclusions..................................................................................................................

121

IV.2 NME AT THE MULTILATERAL TRADING SYSTEM ..........................................

130

1. Tile GATT era..............................................................................................................

130

2. The WTO era................................................................................................................

135

3. The accession of China to the WTO ............................................................................

136

4. Conclusions... ........................................................................... ....................................

137

IV.3 IMPACTS OF NON-MARKET ECONOMIES ON THE WTO SYSTEM ............. ...

1. Irnpacts on Multilateral Trading Systein instruments ..................................................

139

2. China's obligations.......................................................................................................

144

3. Conclusions ............................................................. . ..................... . ..... .........................

IV.4. NME AND ANTIDUMPING: LEGAL CONSEQUENCES OF 2016 ......................

150
151

1. Tile regular system of normal value determination......................................................

151

2. The special system of normal value determination ......................................................

153

3. 2016 Is it the end 7 ....................................................................................................

155

4. Is the NME concept in the Ad Note itupossible to reach? ...........................................

158

5. Conclusions... .................................... . ..... .....................................................................

160

IV.5 CONCLUSIONS ON TH NME ISSUE.......................................................................

162

V. ARGUMENTS TO BUILD A CASE AGAINST CHINA .............................................

164

1. Exchange rate misalignments ................................................................ . ........... ...........

164

2. Commitments on subsidies, state owned enterprises and other NME features............

167

3. Conclusions ..................................................................................................................

169

111.3. TI-IE ISSUE OF STATE OWNED ENTERPRISE

1.

3.

100

106

128

139

VI. SUMARY AND CONCLUSIONS

. 171

I3IBLIOGRAPHY...............................................................................................................................178
ANNEX 1 - Table - Main Indicators of Industrial Enterprises above Designatcd Size - Textile
Industry(2009)....................................................................................................................................190
ANNEX 2 - Table - Chinese Textile Provinces Economic Indicators (2007-2010)..........................191
ANNEX 3 - AD/CVD Investigations against the PRC ......................................................................192
ANNEX 4

- European Union AD Investigations Against China by Sector .......................................193

ANNEX 5 - Remaining List of Subsidies Programs notified by China to the Comniittee on Subsidies
and Countervailing Measures in 2011 .................................................................................................195
ANNEX 6 NCTO Iist of 28 subsidies prograrns for Chinese textile sector.....................................198

e
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ACRONYMS

e
e
e
e

e
e
e
e
e

e
e
e
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O
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1
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e
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e
O
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e
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AB - Appellate Boc/y (WTQ)

148C - Agricultura] Bank of china
Ad Note - Second Ad Note to Paragraph 1 of GA TTAriicle VI
ilDA - Agreeinent on Implenientation of Article VI of die General Agreement on Tarifs and
Trade 1994 ('Agreement on Anliduniping)
4SEAN - Association ofSoutheast Asian Nations
Benelux - Belgiuzn, lhe Netherlancls, and Luxembouig
BOC - Bank of china
CAMEX - cmara de Comrcio Exterior ('C'hamber ofForeign Trade - B'azii,)
CB - China Constriiction Bank
CEMAP - center foi' Applied Macroeconomics froni FG V So Paulo
CGTI - Center for Global Trade and Investznent - EESP/FGVSo Paulo
CNTA c - china Nationai Textile and Apparel C'ouncil
CNTEX - chiiia Textile Network coinpaiiy
Coniecoii - council foi' Mutual Economic Assistance
CTEI - China National Textile and Apparei couricil
C VD - Countervailing Duties
DECOM - Depariaiziento de Defesa Comercial (Department of Trade Defense - Brazil)
DoC - US Departmenl of cominerce
DSB - Dispute Seuiement Boc/y
EC - European Cominunities
EEC - European Economic Community
EU - European Uzion
FDI - Foreign Direci Ir, vestnen!
FIE - Foreign Invesied enterprises
GDP - Cross Domestic Produci
GPA - Agreenient 0,, Governineni Proctirement
GA TI' - General Agreement on Tariffs and Trade
LIS - Harnionized Coi;iniodity Description and Codirzg System
1CBC - Industrial and Coininerciale Bank a china
ICTSD - Internadonal Centre for Trade and Siistainable Developinent
Ii'vfF - Inernational Monetary Fund
ITO - International Trade Oigaiiization
LDC - Least Developed Couniries
MDIC - Ministrio do Desenvolvimento, Indstria e Comrcio Exterior ('Ministry o!
Development. Industy and Foi'eign Trade - Brazil,)
Mercosur - Mercado C'oiizn dcl Sur (Conunon Soutlzern IVarkei)
MFN - Most Fa vored Natioii Principie (GA 71 Article 1)
MOFCOM - Chinese Ministiy of Comnerce
ATCTO - National council of Textile Ozganizations (United Siaes)
NEM - New Economic Mechanism
NME - Non-markct economy
NPL - Non-Performing Loans
OECD - Organization for Economic Co-operation and Development
PTA - Preferential Trade Agreemeni
RAM - Recentiy Acccded Members
5

L INTRODUCTION
China acceded to the World Trade Organization (WTO) ia 2001. aftcr 15 years of
negotiatiOnS. lts membcrship aI the Multilateral Trading System allowcd the country to
benefit from non-discriniinatory trealment by ali WTO rnembers, including acccss to their
inarkcts.
The hcnefits accruing from China's accession [o the Organization, cornbined with the highly
competitive prices ol' Chinese products have hclped to boost the country's exports and its
devclopment. la 2009, China becarne the World's leader cxporter (excluding intra-EU trade).
In 2011. China's exports amounted to US$ 1,9 trillion'. In 2010, exports from the textile
sector alone amounted to US$77 billion, placing China also as thc major textile exporter, with
a share in World exports of 30.7%, followed by the European Union (EU), with a 8.3% share
(considering only extra EU trade) and India, with a 5. 1% share.
This rapid growth of China represents a major chalienge for Brazil and its textile sector. Ia
2010, Brazilian textile imports arnounted to US$ 3,78 billion, against VSS 2,58 biliion in
2009, while the imports from China ia the sector amounted to USS 1,49 hillion, against
US$0,90 billion ia 20092, showing a significant incrcase ia inlports that couid affect the
Brazilian textile industry.
Thc accession of China to the WTO lias brought opportunities and chalienges hoth to China
and to other WTO members. ia one hand. China would he obligcd to comply with the rulcs of
the Multilateral Trading System, thus protecting other memhcrs froni unfair trade pract ices
that couid be promoteci by thc Chinese governnient or producers, whiic it wouid he assured
that China did aol receive any discriminatory treatmcnt against its products or un!'air barriers
to its trade. On the othcr hand, the significant weight of Chinese cconomy and thc fact that the
country was still ia transition from a state-capitalism economic model towards a markctoricnted one hrought inipacts to other menibers' econoniic activities and uncertainlies about
the application of WTO ruies.
Thc Multilateral Trading System was created ia the 1940's with the GATT, which contained
cicar objectives to liberalize trade and to promote trade as an instrument oU economic
dcvclopment. The system was estahlished hy market ccononiies, based ia niarket CcOnoiriy
principies and rules. Airning to be multilateral, it gavc support and incentives to other market
and non-market econoniics (NMEs) to participate ia its activities, as a way to develop a
universal trading systcln. During its history, GATT gave little consideration to the impacts of
NMEs to Lhe systeni, once such cconornics were cilher small or in transition to market
oriental jon.
With thc cstahlishnient oU lhe WTO in 1995, this little conccrn was transformcd into a clear
presuniption that ali acccding countries - in transition or NMEs - would transform
thcniselvcs mio niarket economies, accepting lhe principies and the ruies guided hy a inodei
under niarkct orientalion.
Thc analysis prcsented in this research ciearly shows that thcse presumplions were negotiated
and acccpled ia ali accession processes. Ali eCOnomiCS invitcd to participatc in the WTO
\V'I'O Statistic Database - Tiuw S''ries on inwiijaionnl Trach'

V'FO. Inwn,ationa/ liade S'aiistics 2011.

negotiate and agree to the conimitment of undertaking Lhe necessary reforms to migrate to
market Ccofl01flCS, with the objective oU participating fuliy in lhe Multilateral Tracling
S ystern.
China was Lhe first major hybrid econorny containing NME features to accede to lhe WTO
and was followed by Viet Nam. The recent accession oU Russia4 and olhei- fonner ccntrallyplanned economies is attracting attention Urom other WTO members and renewing lhe
discussion ou the issue of NME features at the WTO.
When acccding, China cornmitted to undertake several reforms, regarding, e.g., governineni
subsidies and the management of state-owned enterprises (SOEs), and liberalization oU its
banking system which would assure a levei playing fieid between China and other economies
under Lhe WTO system. This purpose is cleariy stated in tis Protocol of Accession5.
Nevertheless, there is strong evidence that. ten years after accession. China sull lias not
completed its transition process. A recent study about China puhiished by the World Bank
china 2030 - affirms that the governrnent continues to dominatc key sectors and that dose
/inks between lhe governineni, big banks, and state enlerprises have crealcd vested interests
ibat inhibil refoi'ms and contribute (o contiiuied ad lioc state interventions iii lhe econom.
Furtherinore, the report states that
China's transition to a rnarket economy is incomplete in niany arcas. A mix of market and non-market
measures shapes incentives lbr producers and consumers. and there remains a lack of clarity iii
distinguishing lhe individual roles of government state enterprises, and lhe private sector. It is imperative.
therekre that China resolve these issues, acceleiate structural ret'orms and develop a market-bascd system
with sound foundations in which lhe state focuses 011 provi(ling key puhlic goods and services - while a
vigorou,, private sector plays lhe more important role ol driving growth7.

The report of flue World Bank cxpressly states that China is stili not a market economy,
despite thc reforms it lias aiready undertaken, and that there are distortions on its economy
that impacts on the Uairne.ss of competition 8 . China still relies heavily Upon SOEs to
implement public policies conceived by the Communist Party. Considering the internal
opposition to furthcr Jiberalization and privatization reforms, some commcntators are starting
to douht tliat China could ever complete iLs transfornlation into a fu!l market economy, given
'lhe Working Party Report on lhe Accession of China constantly refers (o lhe Chinese econornic model as iii
transition lowards a Socialist Markei Economy. 'l'he detinition ol' a Socialist Market licoiiomy is 1101 given. biit
Memhers siiinal to lhe fact that lhe Chinese economy hears characteristics of both market and non-market
economies. In this sense. Chinese economy could be considered as a hybrid economy. Sce \VTO. Reporto! t/w
ft'oi'king P;uiy on lhe Accession o! China. l47721C( '/CHiV/49. October 2001. para. 4
Russia had ratitied lhe WTO Agreemeni under its national Law in July 2012 and became a fuIl niember of Lhe
WTO.
See. inter alia. provisions concerning Lhe liberalization of the Right tu 'I'rade (Article 5). Non-Tarit'f N'leasures.
especially paragraph 3 (Article 7). Price Controls (Article 9) and Price Comparability in Determining Subsidies
and Dumping (Article IS) in WTO. Protoco/ o! Accession of the People is Republic of China. WT/1J432, 10
Novembei' 2001. Julian Qin refers tu these obligations as being "obl igations to practice market economy" and
"oblieations concernino domestic L'overnance". See QIN. Julia Ya. "China. India and WTO Law". ia
SORNARAJAH. Muthucumaraswamy: WANG, Jiangyu. China. ndia and lhe nternational Econondc Order,
Carnhride University Press. 2010,1)1) 172-173
WORI .1) BANK. china 2030 -- Buildin,g a Modera, IIar,nonious, and Creative iligh-Jncoine Society.
Conf'erence Edition. Washington. l)C. 2012. p. 25.
'Ibid.. p. 25
5 lbid.. p. 120
8

the intrinsic political Iinks bctween thc Cornrnunist Party, SOEs and the means by which
pubi ic policies are implemented.
Thcsc NME features o[ China bring several irnpacts to the Multilateral Trading System. Since
lhe Multilateral Trading System was nol designed to regulatc trade practices of NMEs, neither
to force thcm to transforrn their economies towards rnarket ones, lhe WTO is unabie to
properly supervise China's internationai trade, failing to prevenI unfair trade such as the
practice of subsidies, the promotion of SOEs and exchange rale misalignrnents to subsidize its
exports.
Some relevam questions can he proposed:
Is the WTO au organization created under markct economy principies and mies or does it
provide rules for both market and NMEs! If lhe laner is acccpted. are the rules of Ad Note to
GATT Article VI (ou antiduiriping for NMEs) and GATT Arlicle XVII (state-owncd
enterprises) sufficient?

U O

Can ii he assumed that, by acccding lhe WTO. China, Viet Nam, Russia and olher countries
to the WTO committcd to transform themselves mio inarket economies, or can two economic
systems he allowed!
'y
Is the WTO properly cquippcd with mcchanisms to supervise for fair trade bctween statc-Ied
and market-ied economies? Are the principies and rules established by lhe market econoniies
in the WTO efficient to regulate state-led economies?
Is it possible to foresee a negotiation of a set of rules to deal with NMEs or hyhrid
economies when the transition processes are paraiyzed?
\Vith growing impacts of iarge NMEs participating in thc WTO and no ciear progrcss in
their transition processes, what can he done to answer this new chailenge: a panei, a new
round, a China Round. a NMEs Round?
\J c'/J 1,
j

TJ

Should some preIiminry steps be taken such as a Working Party on NMEs to disct ti
s
issuc
2
fj
uu&
uUJi
With thc impasse oU lhe Doha Round and thc lack of political will to unbIok ii. either WTO
meinbers take the chailenge to their hands and negotiate new niles to accommodate this
chailenge, om, once again, this expiosive issue wili go to the Dispute Settienient Body (DSB).
l'he diplomatic-juridical tribunal- of the WTO will have the task of soiving a dispute
through ruiings of lhe Appcllate Body (AB). hased on amhiguously old articies. Once again,
negotiation and diplomacy will be surpassed by conflicts that wili force lhe adaptation of rules
created to iinforesccn situations.

JOc()

The research

This research work airns to discuss the participation of NMEs in the WTO. The case to be
(Iiscussed is China, nol only due to its preeminence as an exportcr but also because of its
impacts ou lhe principIes and rules of the Multilateral Tmading System and on the fair trade
proinotedi by the Omganization.
9

The report will, firstly, presem an outlook of markct access rules for the textile sector in
several countries. In the foliowing. it shall analyze the main features of China's econorny that
can have an impact on international trade and its legal consequences to the WTO systeni. The
l'irst feature is the misaligiiincnt of the Chinese currency that gives an incentive to Chinese
exports and crcates new tariff barriers to its imports. Tile second feature is thc massive
granting of subsidies to thc Chinese indusiry. resulting in unfair trade practices. The third
feature is the large presence of SOEs iii the Chinese cconomy. Since SOEs are closely linked
to the government, it is difficult to assure that they act under rnarket conditions and are not
intiuenced by siate intervention. Ali these features can constitute violations of the WTO rules
and of China' s cornrnitments and could be addressed through negotiations or hy lhe WTO
Dispute Seulement Systeni.
Finaily, the issue of NMEs participation aI the WTO will be discussed. The section will
analyze whether lhe presence oU NMEs such as China can be conipatible with the WTO rules
or if the spccificities of such econornic niodel allow the country to bypass thesc rules, turning
ineffective multilateral tradc rules. Tile section will also discuss which instruments of the
WTO agrcements are affected hy NMEs and what are the possihle solutions to Lhe NME
issue.

10

II. TEXTILES AND CLOTHING SECTORS TARIFF OVERVIEW:

Braziis main partners
Textile production is a traditional industrial sector iii rnost countries. lts profits and capital
accwnulation were the main componenis of the Uirst Industrial Revolution. Ever since, its
industry occupies a key role in many countries' strategic growth pianning. In 2010, the
textiles and clothing global exports ainounted to US$ 602,1 hillion, and global imports totaled
US$ 632,6 billion9.
In thc GATT era (1948 - 1994), international trade niles harely affcctcd the sector, since
rnany exceptions were negotiated among export and import countries, through quotas and
controlled growth rates. Laler on, during the negotiation of the Uruguay Round (1986 - 1994)
and the estahlishinent oU thc WTO (1995), international trade on textiles was liberalized,
prcssed by lhe development of international trade and lhe globalization of production. The
cconomic interdependence oU commerce was significantly increased and stimulated, pressing
for lhe negotiation of a ncw agrecmcnt, the Agreernent on Textiles and Clothing, with a
progressive disniantlement of quotas and barriers to trade. The rules negotiated incorporate
lhe textile and clothing sectors in the GATT/WTO framework imposing general rules to the
sectors in a period of 10 years. Among these rules: bound tariffs, prohihition of quantitative
rcstrictions, antidumping, countervailing measures and general safcguards, ali of them
suhmitted to Lhe mechanism of dispute settlemcnt, the juridical-diplomatic-tribunal- of the
WTO.
By GATT/VVTO rules, ali developcd inernbers and the majority of developing oncs hound
their tariffs, including textiie and clothing sectors, classified in the Harinonized Commodity
Description and Coding System under chapters 50 to 60 for textiles and 61 tu 63 for inade ups.
Through lhe rounds of negotiations, each member liberalizes these sectors following (lifferent
sirategies and hargaining paths, rcspccting different reduction goals. The result is ihat,
l)resefltly, developed and developing countries have different tariff profiles, with developing
countries prescnting significantly highcr tarifs than thosc of devcloped ones. In contrast,
rccently acccdcd members (RAM), such as China and Russia, 1)resent lower tariffs than othcr
developing nicmbers, since they had to negotiate their acccssion after lhe end oU thc Uruguay
Round.
Ii is relevam to ernphasize that thcrc are sectors ainong lhe 1-IS chapters 50 to 60 that are
considered agriculturai goods and SO subject to lhe Agrccmcnt on Agriculture and subject to
Lhe rules oU this Agreeinent, including higher bound tariffs. Those are: raw silk and silk waste,
(lIS heading 5001 to 5003). wool and animal hair (HS heading 5101 to 5103), raw cotton,
waste and cotton carded or combed (1-IS heading 5201 to 5203), raw Ilax (HS heading 5301)
and raw Ilemi) (HS heading 5302), also known as fiber crops.
The following pages will analyzc the tariff protiles of the textile and clothing sectors for
Brazil and four of its main trade partners: Argentina, China, Mexico and lhe Unitcd States.
Tile objective is to highiight the main charactcristics of ihese profiles, since they are nol oniy
devclopcd countries and developing ones, but also acccded GATT/WTO in different periods,
which explain importam differences of tariff policies.
WTO. Tim( Sedes Database. Available at:
<hup://stat.wt.orStatistieaIProerarn/WSDBViewData.aspx?Laiwtiuic=E>. Viewcd at: 1

Januaiy 2012.

IU

This aiialysis kvill he Uurther revieved vhen Lhe study ot Lhe impacts of exchange rate
misalignments is introduced, to explain why Brazilian competitiveness is heing uridermined.

1. Brazil
Brazii's tariffs on textiles and clothing sectors are compietely bound and present ad valorem
rates. According to the WTO Tariff Profile 2011, applied tariff averages are lower than the
bound tariffs for textiles, but appliecl rates were increased to Lhe bound leveis for Lhe clothing
sector.

Brazil's Tariff Profile

40,0%
35,0%
30,0%
25,0%
20,0%

Bound AVG

15,0%

Applied AGV

10,0%
5,0%
0,0%
Textile sector

CIottung sector

Source: WT() Tarif Protile 20110

AVG = average

There is au historical debate ou Lhe issue of high differences between bound rates and appiied
ones. Developing countries have deended these differences for Industrial Policy reasons,
since tariffs are the only ailowed protectioil under GAYI'f'vVTO Law, and offer an important
fiexibility to deal with ternporary terms of trade iosses. This called "policy space" lias
rcceived many criticisms from developed countries, that ciaim non transparency from their
deveioping partners.

According to WTO data, in 2010, from 108 textile subsectors in HS 4 digits, 63 (58%) have
applied MFN tarif.s varying from 4% to 18%. Some products, such as carpets and 43 of the
44 clothing subsectors have appiied tariffs exactly at Lhe stipulated bound limit of 35%, as
shown beiow:

WTO. i'iuu' Seii's Di ibase - Brazi/. Available ai:

<hu p ://stat.wto.orgrrarifmfileAWSDRTarifFview.aspx?Language=E&country=BR>. Viewed ai: 29
Febniary 2012.
12

Brazil Applied and Bound Tariffs

...,. II1
,..,WTO1D

Coltan

40%
(ornrI. H.)

Bund Tvff
tripk avere)

20%

-4 li
0'

li

'0 o - io G -4 '0 O m r'. n ,'. .i A m -

-4 iA 0' N o o

-4

0' 0'

'i N.

0'

4 '0

fl

P.

0'0'0'0'0'0'0'0'0'0'0' AiA 0 0'0'0'0'0' ' '0000' '000'

Source: WTO Tariff Data. Eiaborated by CGTI.

Considering average tariffs under lhe HS 4 digits classification, bound tariffs are consoiidated
ai 35% with some products presenting bound rates at higher leveis, such as cotion ai 55%, or
ai lower rates, such as nonwovens ai 28.3%.
Proclucts whose appiiecl tariffs are above 25% are included in lhe clothing sector such as
woven fabrics: silk, wool, animal hair, cottoii, fiax,jute, yarn, siaple fiber, felt, chenilie, terry,
gauze, tulle, plastic fibers, hand-woven tapestry, knitted or crocheted and metal thread,
summing 35 items under textile sector and 49 items under clothing sector.
The higher rates are given to raw cotton, cotton waste and cotton, carded or combed,
presenting a 55% bounded tariff. Nonetheless, the respective applied tariffs are relatively low
ai 6% and 8%. This is the largest difference in Brazilian 50 - 63 4 digil 1-IS profile. The
above-the-average bound tariff of 55% reflects the treatment given to cotton as a sensitive
agricultural product in Brazil, in respect to the Agreemeni on Agriculture.
Apart from carpets, the appiied tariffs of textile products are subject to tariff escaiation: tariffs
on raw materiais and their scraps are around 6%, yarns and sewing tlireads are near 15% and
woven fabrics are near 25% while tariffs in the clothing sectors are applied at the bound rate
of 35%. Tu general, tariffs do not vary from these four tariffs leveis.
Brazilian's tariff profile is very similar to Argentina's: bound tariffs have some slight
differences, but Lhe applied tariffs, apart from the products on Mercosur's Exception List,
follows lhe Mercosur common external tariffs. Furthermore, they hotli protect carpets and lhe
13

clothing sector by applying tariffs at bound rates leve!, and both app!y higher tariffs to goods
with higher value added. In general, both rnarkets present relatively high tariffs (23,2% MFN
applied rates average on textiles and 35% on clothing) and are subject to tariff escalation,
from !ower to higher added va!ue products.
It is relevant noting that Brazil and Argentina are both part to the Mercosur - Mercado
Corninde/ Suz' (Cornrnon Southern Market) and have, in general, the sarne applied tariffs. The
Mercosur's Cornrnon Externa! Tariff (TEC) accepts sorne exceptions that each country can
present to their Lists, aliowing thern to apply different tariffs. Regarding textile and appare!
sectors, Argentina lias included products in three 4 digit HS headings: synthetic filament yarn
(5402); narrow woven fabrics (5806); and tyre cord fabric of nylon (5902). Brazil lias
inc!uded one 4 digit HS heading: Cotton, not cai ded or cornbed (52.01).
2. Argentina
Argentina's tariffs on textiles and clothing sectors are cornpletely bound and ad valorein.
According to Lhe WTO Tariff Profile 2011, the bound average of the textile sector presents
the sarne level for clothing. But applied average for textiles is lower than the ones for
clothing.

Argentina's Tariff Profile

40,0%
35,0%
30,0%
25,0%
20,0%

BoundAVG

15,0%

Applied AGV

10,0%
5,0%
0,0%
Textite sector

Clothing sector

Source: Wi'() TarjO PinOte 2011

AVC = average

'lhrough textile and clothing sectors tarif analysis, it cai) l.)e ol)served that Lhe hound aiiffs
are consolidated aL ai'ound :35%. Also according to WT() Data ou Argentina, iii 2010, its
applied MFN tarifs were, ou average, 23.1% for textiles and 35% ffir clothiiig. Some
products tarifs, such as CarpetS and the clotliing sector, are closer or cxactly aI tlie stipulaled
bound lim it , as showii below:

\'VT(), /i,,u' 5ei ,i's I)i I,,e,i -

Available at:
<hnp://siai.wto.urgl'ariflPiofik'/WSI )UTariffPFView,aspx?I .angua '=F&Couniry=AR>. Vicwed aI: 29
Fehriiary 2012.
14

Argentina Applied and Bound Tariffs

15C43 .oc.WTO.2l
40%

35%

*--AppIldTffs

25%

(rnpte

.ere)

,uiidTff
mpte crge)

20%

15%

10%

0%

0%

O O O O - O O O O O .4 O O O O 4 .4 O O O O O O O O
004

.1 44Nr4,n LA

LA
lIS La La (A La La La La La La La

O O O O .4 -40 O -4 -40 O
'O 'O 'O 'O 'O 'O 'O 'O 'O

.4
OS 0444-1-4 NtI S14 LALA
'1 LaLaLALaO w N o LALAL
La LA La LA La lIS IA La LA La 5/5 IA La O O 'O

Source: WTO Tariff Data. Elaborated by CGTI

At 1-IS 4 digits ciassification, products whose tariffs are above 25% are woven abrics: silk,
voo1, animal hair, cotton, flax, jute, yarn, staple fiber, felt, chenilie, terry, tuile, hand-woven
tapestry, knitted or crocheted and metal thread, as well as ali clothing sectors, reaching an
amount of 35 items under textile sector and 49 items under clothing sector.
Apart from carpets, the applied tariffs of textile products are subject to tariffescalation: tariffs
on raw materiais and its scraps are around 6%, yarns are near 15% and woven fabrics are near
25% while tarifl's in the clothing sectors are applied at the bound rate of 35%. In general, the
products do not vary much from these four tariffs leveis. Nonetheless, in Argentina's tariff
proflie, the higher the value added in a textile or clothing product is, the higher are the applied
tariffs.

e
e

Although they have the sarne overail external applied tariffs, each Mercosur member lias
negotiaed their bound tariffs separately. In this sense, it is worth to also anaiyze Brazi1s tariff
prol IR'.
3. China
China's tariffs on textiles and clothing sectors are 100% bound and a! valorein. According to
the WTO Tariff Profile 2011, there is a minimum space between the consolidated tariff
average for thc textile and clothing sectors and those applicd (lhe so-caiied "poii(-y space"):

e
e

15
e
e
e

Chinas Tariff Profile

18,0%
16,0%
14,0%
12,0%
10,0%

Bound AVG

8,0%

Applied AGV

6,0%
4,0%
2,0%
0,0%
Textile sector

Clothing sector

Source: WTO l'ariff Profile 201112

AVG = average

Also, according to WTO data on China, in 2010, of the 108 textile subsectors in HS 4 digits.
104 (96%) had applied MFN tariffs varying frorn 4% to 15%. The only textile sectors which
presented appiied tariffs above 15% were: wool, fine or corse animal hair (HS 5101, 5103 and
5105) and cotton (HS 5201 and 5203). Regarding the clothing sector, China's appiiecl tariff
rates range from 14% to 20%. Almost ali products have appiied tariffs dose to or exactly at
lhe stipulated bound limit, as shown beiow:

\'VTO, Time Se,ie Dalnise -

AviilabIe at:
<hup://stat.wto.oi'gfrarifProfi1e/WSDBTariffPFView.aspx?Languav= 1&(;oufltr y=cN>. Vicwd dt: 29
February 2012.

16

China Applied and Bound Tariffs

pi. po
,t HS 4 ditt, SO-$3 ,
WTO IZ 0101
45%

Cotion
40%

::LI
25%

II

CdwooIj
aramllh
31.1

Apphtd Tu iff o
(mpk n,crogc)

BounJT.ffo
(ornpI

ov,roa. Cuts
20% - -

15%

fi

Wo&

Cotton Flax and

fabric
lutofabrc

Sntth&tknbpi*
fibnflb,k

Car!ct

- --

_iinum
DIoue, shirts, suts,
underpan.

Sp,dl fob,,

0%
"4 41% ('400 'lIA 01.-4 '00#fl?.. 'O (.-44fl'O(.. (4.1 IA 0% "4 00 4'
. .1 LA 0(01'. CO "4(01'. N
O O O O .4 O O O O O -1 O O O O .1 .4 O O O O O O O O -4 O O O O .1-40 O .4-4 O O
0 0 .4 -4 .4 (4 (1 (4 CO CO CO 't 't IA IA IA IA oO 1'. CO CO CO CO CO O O .-4 .4 .4 .1 .4 (4 (4 (4 ((4 CO CO

Source: WTO Tariff Data. Elaborated by CGT!

In the textile sector, the bound and appiied tariffs for raw materiais and its scraps are around
9%; for yarns and sewing threads, arouiid 6%: and for woven fabrics. near 11%, tariffs in the
clothing sectors are appIied at around 15%. As seen, China's appiied tariffs, except for raw
materiais and its scraps, are subject to moderate tariff escaiation.

'Fhe products witl'i tariffs above 25% are: vooI and cotton, carded or combed, with 38% and
40% applied duties respectively, revealing clear interest in protecting those specific
agricultura! sectors (HS sectors 5101, 5201 and 5203). Also in the textile sector, a !ess
accentuated tariff peak is uoted on synthetic stap!e fibers, carpets and linoleuni. The clothing
sector's tariff peaks, concentrateci Ou overcoats and suits, vary from 18.8% to 20%, not very
distant from the sector's 16.0% MFN applied duties average.

la general, China's market access presents mecliunl tariff rates (9,6% MFN appiied rates
average on texti!e and 16% ou clothing) and are suhject to moderate tariff escalation, froni
lower to higher added value products.

4. Mexico

Mexico's tariffs ou textiles and clothing sectors are also 100% bound and ad valoreiii.
According o the WTO Tariff Profile 2010, there is a significant difference between the
consoiidated tariff average and those appiied for textile and less for the clothing sectors, just
as other developing WTO members that are not recently acceded rnenibers:

17

rC.)

Mexico's Tariff Profile

40,0%
35,0%
30,0%
25,0%
Bound AVG

20,0%

Applied AGV

15,0%
10,0%
5,0%
0,0%
Textile sector

Clothing sector

Source: WTO Tariff Profile 2011

AVG = average

Also accordiiig to WTO data, in 2010, ofthe 108 textile subsectors in HS 4 digits. 19 (17,6%)
were duty-free, while other 88 subsectors (81,5%) had app!ied MFN tariffs varying from 2%
to 15%. Regarding the clothing sector, Mexico's applied tariff rates range from 15% to 30%,
with 39 ot' the 44 clothing subsectors (88,6%) presenting applied tariffs of 30%.
Tile textile items present a difference of approximately 20% between bounded and applied
tariffs wliile the clothing sector has an average oU 5% difference, as illustrated below:

' \' TO. Ti,ijt Seiie.s Datalxist - ifr.vico. Available ai:

1
0

<http://stat.wto.orTT'ariffPrnflIeAVSflBTarjffPFVjevaspx?Language=E&Cotiinry=MX>. Viewed ai: 29

Fc'bniary 2012.
18

Mexico Applied and Bound Tariffs

npIeanrctnt 1G1d11u(3043)-nurtemolzaoa)
50%
Wool
45%.

35Lit

30% 1--lU-i

(otto.,

LI

Wotneh shM,, juta,

undetpanh, onrcoal,.

II-

--

I t

25%

*AppliedT&lffs
(sampre
'Boundi,riffs
(mpIe avtre)

Tntil. Fabrica

20%
st_
15%

Knitt,d Fabrica

,nd

10%

'O O -
G - 0 Offi,%M..iI,a,P-t1e4 Ia o, ri 'O 0'O,.I'Oo'MI'. fl 'O tI 'O
0t400 000 t100 00t1 t1000 0000 CrI 0000 ti rIOOttti 00

Data Plahnratd hv

In spite of the 35% MFN bound tariff rate average for the textile sector, raw materiais and its
scraps have applied Lariffs of 0%, demonstrating an incentive to import such inputs. The
average applied tariffs for yarns, sewing threads and woven fabrics are around 15%. Even Lhe
tariff peak of terry toweling and similar woven terry fabrics, at 18,8%, is not lar from the
13,9% MFN applied duties average on textiles.
In lis turn, apparel and clothing have 30,0% MFN applied duties average, with Lhe exception
of bags and sacks and seis consisting of woven fabric and yarn for making rugs and tapestries,
both at the tariff of 15%.
The protection on cotton, wool and fiber cultures can be justified by their ireatment as
sensitive agricultural products, condition which is under the rides of the Agreernent on
Agriculture.
In general, Mexico's market access presents medium tariff rates for the textile sector (13,9%
IMFN applied rates average) and high tariff rates for Lhe ciothing sector (30% MFN applied
rales average). The applied tariffs are subject to tariff escalation, from lower to higher added
value products.

[k

S. United States
United States' tariffs on textiles and clothing sectors are 100% bound and ad valorem.
According to the WTO Tariff Profile 2010, there is almost no difference between bound
tariffs and applied ones for the textile and clothing sectors.

United States Tariff Profile

14,0%
12,0%
10,0%
8,0%
Bound AVG
6,0%

Applied AGV

4,0%
2,0%
0,0%
Textile sector

Clothing sector

Source: WTO Tariff Profile 201114

AVG = average

Also according to WTO Data, in 2010, of the 108 textile subsectors in HS 4 digits, 20
(18,5%) were duty-free, while other 68 subsectors (63%) had applied MFN tariffs varying
from 0.5% to 10%. Regarding Lhe clothing sector, United States' apptied tariff rates range
from 0% to 20%, with 20 of lhe 44 clothing subsectors (45,5%) presenting app!ied tariffs
from 4% to 10%.
For both the textile and clothing sector, the applied tariffs are very dose to the bound limits,
as shown below:

14 WTO, Time Series Database - UidtedStates. Available at:

<http ://stat.wto.orgfFariffProfile/WSDBTarjfPFVjew.aspx?Lanuage=E&CuflryU5 > Viewed at: 29
February 2012.

20

USAAppIied and Bound Tariffs

mpI. .nnp,flRI4dIL$5O4-aouintWT0{200)
25%
BIouse dilit;. sult%
und*rant,, avercoat.

20%

stipIo
fibro yrn
wid fabrlc

wool fabrFc
15%

fflain,,t
(abrk
cottonya'n
andtabrk

woowasto
and cai
10% --- -

ti

00

Kiiitted
Jac*eto
and
hirts

M.talk ya,n
and fabrk

0
1 " Knittod

tratk,ujt,

BahWi

Doundtwiff,
(simple averoge)

ICnittod
fabrk.

1
4-Applied TNiHS
(sinple avtraje)

Ino,,ioomNmN,-iIAmNn,1Lnonwo,,1u.,nN o o

00000

'40

0004'4

0000000

0'4OOOO

ri
,4-00-00

.0 'A (A A 'A A (A A A 'A A A

nIrr WTfl T,rifffl.ta Vl,,nr,rpd hv

What can be noted from USA tariff profile is that the pattern of increasing tariff rates for
higher value added products presented in the other analyzed couritries profiles are not so
significant. Also, duty-free is not restricted to the fiber crops agricultural producis and not ali
agricultural products are duty free. In general, woven fabrics' tariffs are higher than the sarne
material's yarn. According to WTO Tariff Profile, in 2010 the MFN applied duties average
for the textile sector was 7,9%. There are, nonetheless, tariff peaks, such as the 15,1% applied
to woven fabric of combed wool or of combed tine animal hair, or the 14,9% apptied to
woven fabrics of metal thread and woven fabrics of metalized yarn.
Also according to WTO Tariff Profile, in 2010 the MFN applied duties average for the
clothing sector was 11,7%. It reflects the higher protection rate for clothes and apparel in
comparison to the textiles 7,9% average. Also, the clothing sector can have its tariffs clearly
divided between knitted or crocheted and not knitted or crocheted articles of apparel and
clothing accessories, he first having higher tariffs than the latter. Specifically, the tariff peaks
made of knitted or crocheted are shirts, at 16,5%, babies' garments and clothing accessories, aL
16,7%, and track suits, ski suits and swimwear, at 19,5%. The tariffs for not knitted or
crocheted items, such babies' garments aiid clothing accessories at 15,2%, and brassires,
girdies, corsets, braces, suspenders, garters and similar articles and parts thereof, at 15,1%, are
significantly !ower. There are no tariffs, bounded or applied, above 25%.

21

6. Conclusions
At first, it can be observed that ali studied countries have tariffs on textiles and clothing
sectors 100% bound and ad valorem. In addition, it can be noted that the United States has the
iower bound and applied tariffs for both textile and clothing sectors:

.)UUI C. VV 1 J t aLui LJOLd. L.laIJuLaLcu UJ

AVG = average
When analyzing the frequency distribution of the countries' tariff tines and import values, it is
ciear that the United Siates have the lowest MFN applied tariff average on non-agricultural
products: 74,4% of ali its tariffs are below 5%. Brazil, in contrast, have the higher MFN
apphed tariff average on non-agriculturai products: 40,4% of ali lis tariffs are above 15%.
In comparison to Argentina, Brazii, China and United States, Mexico's tariff profile on
textiles and clothing presents the higher difference average between bound and applied tariffs.
China and the USA have applied tariffs dose to their bound timits.
Except for the USA textiie profile, ali other countries present ciear pattern of tariff escalation.

li also app!ies to the clothing sector, for which ali countries appiy higher tariffs.

22

III. COMPETITION WITH CHINESE PRODUCTS

There are some important features of Chinese economy directly affecting international trade
and distorting the competition of Chinese products. This Chapter will present an outlook of
these main features and the legal consequences under the WTO system.
The first issue to be analyzed is the misalignxnent of Chinese exchange rate. Calculations
show that the rerzminbi is substantially devaluated, which can represent an incentive to
Chinese exports and an additional barrier to its imports.
The second issue is the granting of subsidies by the Chinese government. The WTO has strict
rules on the granting of subsidies, which can Iead to unfair trade. There are several subsidy
programs that may be affecting international trade and may be inconsistent with WTO rules.
Finaily, the third issue is the management of SOEs. These companies, present in the Chinese
economy in a very large number, can be influenced by state policies instead of acting under
commercial considerations, causing distortions to trade.

111,1. THE ISSUE OF EXCHNGE RATES

Since the GATT, the International Monetary Fund (IMF) and lhe World Bank were created in
the 1940s, a strict division of functions was established: the GATT would be responsible for
international trade liberalization, the IMF would maintain the stability of exchange rates and
balance of payments, and the World Bank would provide funds to Europe's reconstruction,
after lhe Second World War. At that time, lhe multilateral trade system was created based on
lhe dollar/gold standard, and even after it was changed to the flexible exchange system in lhe
1970s, the exchange rate issue remained controlled by the IMF, not being incorporated neither
by lhe GATT nor the WTO.
Whi!e the World was under lhe US and EU (Lhen, EEC) economic leadership, whenever
exchange rate misalignments affected trade relations, the issue was discussed and negotiated
by only a few parties, as demonstrated by lhe Plaza Agreement, in 1985. This agreement was
reached by the US, lhe UK, Germany, France and Japan, and lhe main purpose was to
devaluate the doilar. This kind of "agreement amongst a few" began to be challenged after
some developing countries reached a more active position in lhe international trade arena,
especial!y after China's accession to the WTO and its prominence as Lhe World's biggest
exporter.
It is importam to
to clarify how lhe WTO has been dealing with the exchange rate issue
throughout the years. Since 1947, Article XV of lhe GATT has estabtished rules on exchange
arrangements: Article XV.4 states that contracting parties shall not, by exchange action,
frustrate the intent of the provisions o! this Agreernent, nor, by trade action, the intent of the
provisions o! the Articles o! Agreerneril af the Internationai Monetary Fund.
Furthermore, lhe exchange rale concept is both menlioned in Lhe Agreements on Antidumping
and in the Agreement on Custonis Valuation, bul only with the purpose of indicating lhat lhe
official exchange rates informed by governments are the ones to be considered in lhe
investigations. Due to lhe escalation of exchange rate misalignments, which is responsibte for
opposing lhe US and China, as well as other Asian countries, several experts are examining
23

the issue concerning the exchange rate irnpacts over international trade regulatory system, in
order to define whether these misalignments could represent a violation of Lhe WTO mies.
Although many attempts of using trade remedies, such as antidumping and countervailing
measures, to offset the exchange effects have been made, the results appear to be legaily
questionable, since trade remedies were not negotiated or agreed as mechanisms to inhibit the
use of exchange rates as unfair trade.
In other words, the issue conceming how exchange rate variations affect trade has never been
incorporated to the WTO mies. The oniy consensual rule was that exchange rate is an IMF
matter. Any attempt to raise this issue inside WTO rooms would fail.
The problem is that the IMF is an international organization which does not have an
enforcement mechanism such as the WTO's DSB. It decides the relevant issues through an
agreement amongst the most influential parties (those who own more voting power), in a
political way. Unlike the WTO, which decides by consensus, the IMF does not have a
negotiation nature.
Due to the intensificatiori of the debate on the effects of exchange rates on trade since the
2008 financial crisis, the subject has been addressed to the 0-20. Howevcr, in the present
phase of multilateral crises, as expected, developed and emerging countries have failed to find
a solution to the matter.
While experienced diplomats debate on how to raise the issue and trade iawyers attempt to
find a legal solution, economists have been proposing methodologies to calculate
misalignments of exchange mates in relation to some equilibrium rates. There are several
models for calculating equiiibrium exchange mates: the purchasing power parity, the
equilibrium of Lhe current account, the equilibrium of assets and tiabilities fiows of a country,
or the exchange mate based on the unit ef labor costs. Banks also estimate the levei of
exchange misalignment with the purpose of anticipating future fluctuations. When reviewing
ali these studies, it becomes quite evident that the magnitude and the extension in time of
these exchange mate misalignments for Lhe main currencies are so significant that ignoring
their effects on trade might undermine the objectives of the whole Multilateral Trading
System.
The argument that different exchange methodoiogies produce different resuits cannot be
accepted any ionger. The main target is not to search for an estimate with absolute degree of
precision, since this is the task of IMF, but to discover limits wh
salignments can cause
V trade distortions. What reaily matters is to find out a threshold from where trade poticy
trumenecome ineffective and the WTO ruies might be nullified.
In sum, arguing that exchange rate is a matter exclusively of the IME's responsibility and that
ir does not affect the WTO is to ignore Lhe obvious, that, indeed, exchange rates deeply affect
trade. The WTO cannot continue to ignore the effects that exchange rates have on the trade
system and its rules, at risk of iosing touch with reality and transforming the organization imo
just a sophisticated juridical. fiction!
Nevertheiess, after the financial crisis of 2008, persistent misalignments of exchange rate
raised Lhe concemu of some WTO members that the issue should not be left unattended. Brazii
presented a submission to the Working Group on Trade, Debt and Finance (WGTDF) in Aprit
2011, suggesting a work program consisting in an academic research on the reiationship
24

between exchange rates and international trade (WT/WGT13FIW/53). In September 20th,

2011, Brazil prcsented to the sarne Working Group a second proposai on the therne,
suggesting the exam of available tools and trade rernedies in the Multilateral Trading System
that might allow countries to redress the effects of exchange rate misalignrnents
(WTIWGTDF/W/56).
The WTO Secretariat presented its Note on a Review of Economic Literature in September
2701, 2011. (WT/WGT13F/W/57), as mandated by the Working Group. Although an extensive
rescarch, this work, encompassing the effects of exchange rates on economic fiows, did not
touch the issue of the irnpacts of exchange rate misalignment on WTO principies, mies and its
instrurnents: tariffs, antidurnping, subsidies, safeguards, rules of origin, GATT Articles 1, 11,
III, XXIV, just to name some of the mies that are certainiy being affected by exchange rates.
In sumrnary, the WTO Secretariat Notes speaks "IMF language", not "WTO ianguage".
This first part of this section wiiI study the irnpact of exchange rates misalignments on the
most traditional WTO instrurnent - tariffs.
The second part wiii undertake a legal anaiysis of the issue to identify potential deviations
frorn the Multilateral Trading Systern rufes. li includes the effects of exchange rate
misalignments on tariffs, mainly on GATT Article II and GATT Article 1 (MFN).
1. Impacts of Exchange Rates on Tariffs
To better understand lhe effects of exchange variation on tariffs, one can inake sirnuiations
based on values of rnisaiignrnents present in lhe literature.
There are different methodologies to estimate misahgnment. Some of thern are presented in
THORSTENSEN, V., MARAL, E. and FERRAZ, L.'5.
To caicuiate lhe effects of lhe misalignments on tariffs, these authors estimate adjusted tariffs
through an exercise of misalignrnent "tariffication". The sarne methodoiogy is applied here.
The misalignment values for Brazii, US and China were estirnated by CEMAP - Center for
Apphed Macroeconomics from FGV So Paulo. This Center is currentiy caicuiating
rnisalignments for ali G-20 members. Credit Suisse in 201116 also made estirnates for some
emerging markets. The results for Argentina and Mexico exchange rate rnisalignments are
used here. Both CEMAP and Credit Suisse estimates use similar methodologicai approaches.
For the present exercise the following values, for 2010, were assiimed:
Brazil: + 30%, China: - 20%, US: - 10%, Argentina: + 4%, Mexico: - 3%
Note:
After lhe com p letion of this stud y , CEMAP p ublished misaii gnrnents for 2011:
Brazil: + 40%. China: - 15%, US: - 12%, Ar gentina: + 20%, Mexico: - 8%
With these numbers the conclusions p resented in the present stud y are the same.
' 5THORSTENSEN. Vera; MA.RAL, Ernerson; FERRAZ. Lucas. lmpacts of Exchange Rates on International
Trade Policy Instruments: the case of tariffs, Journal o! World Trade, 46-3, July 2012.
Available at: <hnp://www.uncrad.ori/meetings/en/SessionalDocuments/ditc dir 201 2d Ia Vera.pdf>. Viewed
at: 2 April 2012.
"6CREDIT SUISSE. "2011 - Valuation of Ernerging Markets Currencies." Debc TradingMonthly, January 2011.

25

In July, 2012, after the Central Bank of Brazil intervention in the Exchan ge Market, the
evaluation for the "real" misalignment is still 15%. Again, the "real" is overvalued and the
conclusions are preserved.
It is important to emphasize that for our exercise the precise value of the misaiignment is not
relevant. The aim is to search for Lhe Lhreshoid above which the efficiency of trade mies is
undermined.
The next question to be raised is how such misaiignments affect the internationai trade policy
instruments negotiated by the GATT/WTO over the Iast 60 years.
It is possible to develop a methodology to analyze the effect of exchange rate misalignments
on either bound tariffs, negotiated by a country as a compromised ceiling for the tariff of each
product, or on applied tariffs, used by such member as a protection levei determined by its
Trade Policy.
Tariffs are a GATT's historical instrument for trade protection and one of lhe main
negotiating subjects inciuded in multilateral rounds. lis purpose is to ailow an objective and
transparent protection for agricultural and non-agricuitural goods, and to be reduced over
time, as a restdt of trade iibera!ization. The difference between bound and applied tariffs
represents an important space avaiiabie for industrial poiicy purposes, the so calied poliy
space, strongiy defended by developing countries and highiy critized by developed countries.
The concepts of tariff and tariffication are the core of the GATT/WTO iogic. Endless hours
have been spent in ali negotiation rounds to estimate the ad vaiarem equivaient rates of
several duties expressed on a monetary basis, such as specific rate duties and variable levies.
Even in the cases of antidumping, countervailing measures and safeguards, the duties are
equiva!ent to tariffs. According to this iogic, exchange rate misaiignments can aiso be tariffied
through Lhe calcuiation of a tariff equivalent. Just like tariffs, the effect of the exchange rate
can be transferred to imported and exported goods' prices'7.
To bettcr demonstrate the effects of exchange rate misaiignments on tariffs, two exercises
were conducted.
The first exercise focuses on the effects of exchange rate misaiignments over a country's
tariffs. Depending on the overvaluation or devaluation of its currency, each country ana!yzed
(Brazil, OS and China) will present a stimuius to imports or extra-tariffs above the levei
bound at Lhe WTO, respectively. This exercise demonstrates the effect of each country
exchange rate misaiignment on the levei of market access negotiated at Lhe WTO.
The second exercise conducted in the present study aims at demonstrating the perspective of
Brazilian exporters facing the effects of different exchange rate misaiignments in selected
markets. Argentina, Mexico, liS and China markets were depicted and the competition wth
Chinese exporters was anaiyzed. It will be possible to identify lhe chailenges faced by each
exporter to be competitive in the seiected markets.
' Tlie exchange rate misalignment tariffication methodology is developed ia Section III of THORSTENSEN,
V.. MARAL, E and FERRAZ. L. in Impacts of Exchange Rates on International Trade Policy Jnstruments: the
case of tariffs. Journat of World Trade , 46-3. July 2012, and So Paulo School o[Econoxnics (EESP), PC V So
Paulo (Brazil), September 2011.

26

The tariffs used for Argentina, Brazil, China, Mexico and US were obtained in the WTO
database (Tariff Arialysis Online) and dated from 2008 to 2010. A comparison is presented
using:
- bound tariffs - simple average at HS 2 digits
- applied tariffs - simple average at HS 2 digits
In this sirnulation, the effects of exchange rates were calculated at HS 4 digits simple averages
to iliustrate the direct impact on tariff rules and are restricted to Textile and Clothing sectors
(HS sectors 50 to 63). Sirnulations using 2 and 6 digits and weighted averages were also
analyzed, but they are not presented in this study since their results show the sarne
conclus ions.
1.1. Effects of exchange rate misalignments on market access obligations
A quite realistic picture of each WTO member tariff protection's frarnework can be given by a
graphic showing tariff averages for each chapter of the HS.
In this exercise Brazil, US and China's bound and applied tariffs were examined after
applying the rnisalignments of their exchange rates. The effects of tariffied exchange rates can
be visualized on the variation of both bound and applied average tariffs for these three
countries.
The results of the simulations show that the effects of exchange rate rnisalignments on tariff
averages are considerable.
Brazil - for a valuation of its exchange rate at + 30%, its bound and applied average tariffs
become negative, representing an incentive to irnports.
US - for a devaluation of - 1.0%, their bound and applied average tariffs increase above
the current levei, representing an extra-tariff to imports.
China - for devaluation of - 20%. its bound and applied average tariffs significantly
increase, representing an extra-tariff to irnports.

Impacts of Exchange Rates on Tariffs for Brazil, US and China

Misalignmcnts: Brazil 30% overvaluation: China 20% devaluarion; LIS 0% devaluation

Tariffs

Brazil China US

Simple average bound rales (2009)

31,4%

10%

Adjusted simple average bound rales

-8,0%

32% 13,9%

Simple average MFN applied rales (2009)

13,6%

9,6%

Adjusted simple average MFN applied rales

Trade weighted average applied rales (2008)
Acljusted trade weighted average applied rates

3,5%
3,5%

-20.5% 31.5% 13,9%

8,8%

4,3%

2,0%

- 23,8% 25,2% 12,2%

So=e: Tariff Profile - WTO. Elaborated by CGTI

27

Brazil's textile and clothing adjusted tarittproflle

When we analyze the effects o!' exchange rate rnisalignments on Brazii's textile and clothing
iariff profile, the resuits are lhe foliowing:
i) For a 30% overvaluation of Brazil's exchange rate
- Brazil's average bound tariffs, which currently vary from + 25% to + 55%, with an
overvaluation of+ 30% will vary from - 12,5% to + 8,5%, most of them presenting negative
vaiues.
- Brazil's average applied tariffs, which currently vary from + 4% to + 35 %, due to its
exchange rate overvaluation, wiil vary from - 27% to - 5,5%.

In surnmary, exchange rale overvaluation at a + 30% levei, represents not only a nuilification
of Brazii's bound tariffs, but also au incentive to irnports, since lhe applied tariffs are reduced
to negalive leveis.
In this scenario, to ask for any significant cut ou bound tariffs, as in the Doha Round, would
mean imposing larger distortions to the already negotiated tariff levei. The sarne observation
can be made in the context of negotiations in preferentiai trade agreements.
ii) Considering a devaluation of 10% for liS' exchange rate, lhe effects ou Brazil wouid be
lhe foiiowing:
- Brazil's average bound tariffs, currently varying from + 25% to + 55%, when adjusted to the
liS devaluation will vary from + 13% to + 40%.
- Brazil's average appiied tariffs, currentiy varying from + 4% to + 35%, will vary from
- 6,5% to + 21,5%.
28

iii) Considering a devaluation of 20% for China's exchange rate, the effects on Brazil would
be the foliowing:
- Brazil's average bound tariffs, currently varying from + 25% to +
China devaluation will vary between 0% and + 24%.

when adjusted to

- Brazil's average applied tariffs, currently varying from + 4% to + 35%, will vary from
17%to+8%.
iv) Combining Lhe 30% overvaluation of Brazil's exchange rate with Lhe 20% devaluation of
China's exchange rate, Lhe effects in Brazil wou!d be Lhe foliowing:
- Brazil's average bound tariffs, currently varying from + 25% to + 55%, when adjusted to
both devaluations will vary frorn - 37,5% to - 22,5%.
- Brazil's average applied tariffs, currently varying from + 4% to + 35%, wili vary froni
- 48% to - 32,5%.
BrSI Applledtadffsx Adjusted taflffs . Effettof BRA + 01 Exchange Bate Oevtatlons
.-WO0t

40%

ia

10%
ApSt1flt(*r

20%
-

(tia

SA4lSfffi.tff*d
ofeM 04 dn4aqlon, s0%

0o,jffihlhfl*m*
20%

40%

In summary, liS and China's exchange rate devaluations, which represent a subsidy to their
exporLs, not only nullify Brazil's negotiated bound tariffs, but also transform Brazil's apphed
tariffs into a stimulus to US and China's imports.
The overvaluation of Brazii's currency virtually nuilifies Lhe tariff instrument, representing a
stimulus to imports in general. When faced with devaluated currencies, Lhe WTO's negotiated
tariff leveis can be further affected, which shows that Brazii is offering a much larger market
access that Lhe one negotiated at WTO.

29

US textile and clothing adjusted tariff profile

Unlike Brazil's tariff proifie, US bound and applied tariffs present dose values. This means
that any valuation of actually appl.ied tariffs have a high probability of piercirig the bound
Lariffs at the WTO. When we analyze the effects of exchange rate misalignments on OS
textile and clothing tariff profile, the results are Lhe following:
i) Considering a devaluation of 10% in the liS' exchange rate:
- The effect of a 10% exchange rate devaluation on tariffs currently varying from 0% to +
20%, will result in tariffs varying from + 10% to + 31,5%. Therefore, tariffs will become well
above the bound values negotiated by the US at the WTO.

ii) Considering a devaluation of 20% in the China's exchange rate:

- The effect of China's 20% exchange rate devaluation, will result ia OS tariffs currently
varying from 0% to + 20%, ia tariffs varying from - 20% to -4,5%.
iii) When the effects of both deviations are calcu!ated simultaneously, the effects ia Lhe OS
will be the foliowing:
- Considering Lhe effect of Chinas 20% exchange rate devaluation and US's 10% exchange
rate devaluatiori, those tariffs currently varying from 0% to + 20%, will vary from - 10% to +
7,6%.

30

USAAppIIed rariffs x Adjusted Tariffs - Effects of China + USA Exchange Rate Deviations
25%

10%

15%
-*Appliedtarifs IsIrrle
10%

-ffectoi 1

9OVI6TaTI CsMwle
ele rege)

In surnmary, lhe devaluation of Lhe exchange rale not only represenls a stirnulus to devaluated
currency countries' exports, but also creates an extra-lariff to other countries' imporls. Due to
lhe fact that bound and applied rales are almosl the sarne for some countries, the adjusted
tariffs became values well above lhe WTO's bound tariffs.
One could queslion whether lhose countries are violating the WTO's rules, especially GATT
Article II, which establishes thal lhe conlracting parties shall not apply tariffs in excess to lhe
bound tariffs.
On Lhe other hand, the offset effect of Lwo different exchange rale devaluations - the
irnporling country's devaluation having lhe effect o!' increasing 115 tariffs while lhe exporting
country's devaluation lowering lhern - demonslrates lhe potential "race to lhe boltorn"
consequence of competitive exchange rate devaluations.
China's textile and clothing adjusted tariff profile
China's average bound and applied lariffs also present dose values. This rneans that any
valuation o!' actually applied lariffs have a high probability o!' piercing lhe bound lariffs aI (he
WTO. When we analyze lhe effecls of exchange rale misalignrnenls on China's lextile and
clothing tariff profile, lhe resuils are lhe foliowing:
i) Considering a devalualion o!' 20% in China's exchange rale:
- Wilh an exchange rale adjustrnent of 20% devaluation, those Lariffs currenlly varying from
4% to + 40%, will vary from +24,8% to +68%. Therefore, these tariffs are also well above
Lhe bound values negotialed by China at the WTO.

31

China Applledrarlffs ii AdjustedTariffs- Etfects of china Exchange Rato Devaluation

o4.ro.I .gsun.WTiltta

70%

60%
..- Ap*i,d 11.61k
-)
s0%
Oo,ad Ttb
40%

20%

.Adj,nted Ap14kd
rd, t,cPge.
R_
091.10%

I0%

ii) Considering a devaluation of 10% in the US exchange rate:

- China's average bound and applied tariff, currently varying from 4% to 40%, will vary from
- 6,5% to + 26%.
iv) When Lhe effects of both deviaLions are catculated simultaneously, the effects in China will
be the foliowing:
- Considering the effect of China's 20% exchange rate devaluation and liS 10% exchange rate
devaluation, those tariffs currently varying from 4% to 40%, will vary from + 14,5% to +
54%.

32

alnaApptkdTarlfh *Adjusted Tariffs - ffects ofcttlna + USA Exchange Rato Devaluatlon

.wsMIfl4#t,00-% ..,nflfltfl

50%

ADOSS r.av,
fiI,DIs awrtl

40%

50%

20%

Iosnd TatU's
(--ri-)

MIisted fali?, tifeciofool tWA

*10%

10%

In summary, as shown in the liS case, the devaluation of the exchange rate not only
represents a stimulus to devaluated currency countries' exports, but also creates an extra tar!ff
to other countries' imports. As the values are also above the WTO's bound tariffs, one could
once more raise the question of whether those countries are violating the WTO's rules,
bearing in mmd that GATI' Article II establishes that the contracting parties shall not apply
excess tariffs to the bound tariffs.
Some authors argue that China's devaluation, which represents a subsidy to its exports, is
compensated by Chinese imports, which are penalized with higher tariffs. Nevertheless, as a
significam share of Chinese imports comes from countries which China has preferential trade
agreements (ASEAN) or are imported to processing zones where they are re-exported, those
extra tariffs are partially nullified, transforming the misalignment into yet another stimulus to
Chinese exports.
Some conclusions
In conclusion, the coexistence of exchange rate misalignments, with significant overvalued
currencies and with significant devaluated ones, when applied for extended periods of time,
represerits a serious distortion for many international trade policies, especially for tariff policy
instruments, which are essential for efflcient and transparent rules and practices.
The possible simulations on exchange rate misalignments on countries' tariffs are limitless
since each country will have a different set of adjusted tariffs for each bilateral trade
relationship, considering both countries deviations. The problem is, thus, systemic, affecting
potentially every contracting party, with different degrees of distortion. These distortions will
be greater where the differences between each country's exchange rate deviations are wider.

33

1.2. Effects of exchange rate misalignments on exporters' competitiveness

With the enactrnent of the most favored principie, the GATT and, later, the WTO, sought to
levei the piaying field between exporters froni different countries when disputing the sarne
national rnarket. The idea was that each country should face the sarne tariff rales in a given
rnarket, independently of where the products carne frorn. In this sense, comparative
advantages wouid be the main reason for rnarket accession to be acquired by an exporter in
detrirnent of other, fostering better productivity and rewarding cornpetitiveness - two of the
rnain benefits of open trade.
Nonetheiess, exchange rate misalignrnents add a new element to the equation. Exchange rate
rnisalignrnents frorn different countries have an irnpact on the competitiveness oU exports
from these countries to the sarne rnarket. Since each country presents different leveis of
exchange rate rnisalignrnents, their exporters wilil face different tariff rates when adjusted to
each particular misalignrnent. In practice, the export price will be affected, along with their
cornparative advantage against other countries' exporters.
When we analyze the effect of severai exchange rate rnisahgnments on a particular country's
tariff profile, a complex picture of cornparative advantages is drawn. The more exchange rate
rnisaiignments are added, more compiex is the cornpetitiveness frarnework in lhe market. One
couid, arguably, consider ali different exchange rate misaiignments from ali WTO rnembers
that produce a particular product and iliustrate it in a singie graphic, dernonstrating the chaotic
tariff profile and rnarket access in a single rnarket.
For the purpose of this study, 3 markets of interest for the exports of Braziiian textle and
clothing products were analyzed: Argentina, Mexico and US. In these rnarkets, the adjusted
tariffs faced by exporters from the US and frorn China are depicted in comparison to the
adjusted tariffs faced by exporters frorn Brazil.
Aiso, thc Brazilian market is portrayed in order to dernonstrate its market access situation,
with adjusted tariffs frorn the perspective of foreign exporters. Once again, only the tariff
rates from textiie and clothing sectors were depicted, at 4 digits HS.
In surnmary, for each country considered, the cornbined effects of exchange rate
rnisalignment on applied tariffs, wifli present different tariff profiles for the sarne country. In
other words, considering the new "adjusted tariffs", each exporter wili face a different market
access situation depending which country he exports his products from.
The first rnarket anaiyzed is Argentina and exports from China and Brazii are depicted. The
second one is Mexico and the third the US. China's rnarket is also analyzed and exports frorn
the US and Brazii are depicted. By the MFN principie, each of these exports shouid be facing
the sarne tariff treatment to reach each rnarket, which is not the case.

34

Argentina Market
The graphic shows the applied tariff rates of Argentina (depicted iii green). Since Brazil and
Argentina are both part of the Mercosur free trade agreement, there are no tariffs applicab!e
for textile and clothing exports from Brazil to Argentina - this is depicted by a bright yellow
une at the base of the graphic.
For Chinese exporters, if Argentina has its currency overvalued by 4 %, it has the effect of
lowering Argentina tariff rates. If China's exchange rale is devaluated by 20%, it has the
effeci of towering further the tariffs applied by Argentina. When both misalignments are
considered, as they bear the sarne effect, the result is around 24% lowering effect of Argentina
tariffs when faced by Chinese exporters (depicted in red).
For Brazilian exporters, if Argentina has its currency overvalued by 4 %, it has the effect of
lowering Argentina tariff cates. If Brazil's exchange rate is overvalued by 30%, it has lhe
effect of raising lhe tariffs applied by Argentina. When both misalignments are considered,
Argentina's overvaluation offsets, partially, Brazil's rnisalignrnent effect. Since exports from
Brazil do not pay irnport tariffs when entering Argentina Market (because of the Mercosur
agreernenQ, the practical resuil is barrier of around 26% across the border faced by Brazilian
exporters due to the combined exchange rate deviations effect (depicted in yetlow).

As can be seen in the graphic, even though exports from Brazil to Argentina should have a
comparative advantage when cornpeting with exports frorn China, due to the Mercosur
agreernent, the actual situation is the opposite. Considering exchange rate misalignments,
exporters from Brazil face a 26% barrier to enter Argentina Market while exporters from
China face, in average, negative tariffs, i.e. incentives.

35

Mexico Market
The graphic shows the applied tariff rates of Mexico (depicted iii green).
For Chinese exporters, if Mexico has its currency devaluated by 3%, li has the effect of
raising Mexico tariff rates. If China's exchange rate is devaluated in 20%, it has the effect of
lowering the tariffs applied by Mexico. When both misalignments are considered, Mexico's
devaluation offsets, partially, the Chinese misalignment effect. The upcoming resuli is around
a 17% lowering effect of Mexico tariffs when faced by Chinese exporters (depicted in red).
For Brazilian exporters, if Mexico has its currency devaluated by 3%, it lias the effect of
raising Mexico tariff rates. If Brazil's exchange rate is overvalued by 30%, it has the effect of
raising the Lariffs applied by Mexico. When both rnisalignments are considered, as they bear
the sarne effect, Lhe result is an effect of around 33% raise of Mexico tariffs when faced by
Brazilian exporters (depicted in yellow).
MexlcoApplled ibrtffs x Adjusted hriffs - Effects of $elected Countries Exdiange Rate Deviations
Wa*t* 4, e4*n.wt0001%
80%
70%
60%
50%
10%

- Ulva
OIMU OM deVOtIM
33%

30%
20%

Apptd lrM'. t*n8e

t.eraceI

10%
AdMlvdIwIlh . olIva
SMU 04 detiMil80
- 37%
40%

c,e

Once again, Brazilian exporters face signiflcantly higher tariffs Lhan their Chinese
competitors.
US market
The graphic shows the applied (depic(ed in green) and bound (depicted ia blue and red
circies) tariff rates of the liS.
For Chinese exporters, if the US has its currency devaluated by 10 %, it has the effect of
raising liS tariff rates, If China's exchange rate is deva!uated in 20%, it has the effect of
lowering the tarifs applied by Lhe US. When both misalignments are considered, Lhe liS
devaluation offsets, partially, the Chinese misalignment effect. The upcoming resuli is around
a 10% lowering effect on liS tariffs when faced by Chinese exporters (depicted in red).
KY

For Brazilian exporters, if the US has its currency devaluated by 10%, ir has the effect of
raising US tariffs rates. If Brazil's exchange rate is overvalued. by 30%, it has the effect of
raising the tariffs appiied by the US. When both misalignments are considered, as they bear
the sarne effect, the result is an effect of around 40% raise on US tariffs when faced by
Brazilian exporters (depicted in yeliow).

It is clear from the flrst three graphics that Chinese exporters, due to the combination of
bilateral exchange rate misalignments, including its own undervaluation, face significantly
lower tariff rates than Brazilian exporters.
Brazil Market
The graphic shows the appiied (depicted iri green) tariff rates of Brazil. This is the levei of
market access decided by Brazilian Trade Policy as sufficient to protect its home induslry
while aliowing a regular trade flow in the textiie and clothing sector. The effect of different
exchange rate misalignrnents, however, demonstrate that the market access levei conceded is
not only dependent upon trade policy measures, but by Brazil's own exchange rate
misaiignrnenl as well as other countries' misaiignnients. In this sense, the protection granted
to the sector will vary according to which country the exports come from.
For Chinese exporters, if Brazil has its currency overvalued by 30%, it has the effect of
reducing the tariffs applied by Brazil. If China's exchange rate is devaluated by 20%, it has
the effect of lowering the tariffs applied by Brazil. When both rnisalignments are considered,
as they bear lhe sarne effect, the result is around a 50% lowering effect of Brazil tariffs when
faced by Chinese exporters (depicted in red).
For American exporters, if Brazil has its currency overvalued by 30%, it has lhe effect of
reducing the tariffs applied by Brazil. If the US exchange rate is devaivated by 10%, II has the
37

effect of also lowering Brazil tariffs. When both misalignments are considered, as Lhey bear
Lhe sarne effect, the result is around a 40% lowering effect of Brazil Lariffs when faced by
Ameilcan exporters (depicted in blue).
Brazil AppfledTariftsxAdjostedhriffs - fectsofselected Countries Eschange Rateoeviations
seIe.04% .*Wl0
40%
va ----ri TdlfltIc
30%
253%
20%
rats flMa
T1ffs

20%

.
A4ndTaiffs-qffeaS
I0%

40%
Adjugod rnVk .ff,cs
aftA 04 de,bdns -50

40%

40%

Since each export country is facing a different tariff proflie, one can wonder about Lhe
effectiveness of Lhe MFN principie established by GATI' Articie 1. "that any advantage, favor,
privilege or imrnunity granted by any contracting party to any product originating in or
destined for any other country shall be accorded imrnediately and unconditionafly to Lhe like
product originating in or destined for Lhe territories of ali other contracting parties".
The sarne sirnuiation can be done for any other chosen rnarket. Each market will present a
different Lariff profile for each commercial partner. The adjusted Lariff rates will vary widely
depending on the exchange rate rnisalignrnenLs considered.
1.3. Conciusions
Tariffs are stilil an iinportant international trade policy instrurnent for many WTO rnernbers.
They are the single instrurnent allowed for market protection in accordance with WTO rules.
For decades, negotiations on Lariffs were Lhe main objective of Lhe GATT rounds.
The exchange rate issue and iLs impacts on international trade policy instruments have been
ignored, by consensus of Lhe parties, not only by Lhe GATT but by Lhe WTO as weil.
Although being present in some Articles af Lhe GAFI' and in sorne agreements of Lhe WTO,
Lhe effects of exchange rate rnisalignrnents on trade reguiation were never Laken mio
consideration, insLitutionally, by lis merubers. The main GATT Article to foresee Lhe effect of
exchange rates, Article XV.4 has never been Lested neither by the CATT nor by Lhe WTO
dispute settiernent bodies.
However, Lhe rnisalignments of exchange rates have significant irnpacts on Lhe application of
trade principies and instruments: iL can affect rnarket access concessions. They can affect the
38

balance of tariff negotiation achieved through several multilateral trade rounds. Their effects
on tariffs can represent commercial advantage gains for countries with devaivated currencies.
A more accurate analysis about the effects of exchange rates on tariffs demonstrates that this
issue can no longer be ignored by the WTO. Tariffs, that were, for decades, the basic
instrument iii trade negotiations, end up being nuliified by the effects of exchange rate
misalignments. More than that, exchange rate misahgnments affect directly the levei of
concessions offered in negotiations and the extent of market access bound aL the WTO.
GATT Article II, the legal rule guaranteeing the levei of negotiated market access, has never
been raised at the DSB under exchange rato terms, despite the potentialiy violating effects of
those misaiignments.
Furthermore, misaiignments can bring unpredictability to the multilateral trade system and
undermine one of the main piilars of the WTO: the MFN principie (GATT Articie 1). The
simulations above demonstrated that due to exchange rate misaiignment, exporters from
different countries will each face different access conditions in any particular importing
market, contrary to what the MFN (GATT Articie 1) principie seeks.
With the progressivo tariff rate reduction throughout the negotiation rounds, and due to the
high levei of exchange rate misaiignments maintained by several important countries, the
exchange rato rnisa!ignments end up having a greater reievance than tariffs themseives.
Moreover, for devaluated exchange rate countries, (bis misaiignment not only converts itseif
into an export subsidy, but also imo an import surcharge, and, thus, imo a much more
effective trade barrier than applied tariffs.
Several questions can be raiscd when observing that Doha Round negotiations are blocked
because members such as the US and the EU are demanding more concessions from emerging
countries. One can ask about lhe real levei of market access offered by these members, given
that their exchange rato policies are cieariy nuilifying ali their offers in Lhe negotiations. The
levei of market access granted by members who practice long term exchange rate devaluation
can be put in doubt. How largo were in reaiity the tariff cuts offered in the last few years of
negotiations?
Flistorically, until the 1.970s, Lhe GATT's contracting parties accepted the renegotiation of
specific tariffs of some countries which faced exchange rate misahgnments. During these
renegotiations, the threshoid provided by Article II was used so that exchange rate
misahgnments would aHow the renegotiation of specific bound Lariffs. The question is: why
not reconsider the exchange rate issue and negotiate a new threshold?
Regarding market access, only by the introduction of the concept of adjusted tariffs for the
exchange rate effect, would the WTO members be abie to analyze the real leveis of market
access negotiated and guarantee the levei of Lhe market access protection committed in the
negotiation.
2. Legal Aspects of Exchange Rate on Trade

After Lhe analysis of the impacts caused by rnisaligned exchange rates in countries' tariffs, it
is importam to consider these impacts on trade ruies, more specifically, the provisions of the
WTO Agreements.
39

The first part of this section will present the legal impacts of exchange rate on WTO
instruments and principies, whiie the second section wifl analyze the provisions of the WTO
agreements in order to search for possible mechanisms that could address Lhe exchange rate
problem.
2.1. Exchange rate and the WTO
i. Exchange rates and IMF - Are exchange rates an exclusive matter of the IMF?
Exchange rate and currency issues were historically considered as rnatters of the IMF
competence. Accordingly, at Lhe time of the creation of the Bretton Woods system in 1945,
maintaining an international fixed exchange rate system based at par values to the doliar was
the main objective of the IMF.
As the economist and IMF historian James Boughton stales, Lhe economic impacts of
exchange rate manipuiations on international trade fiows were very much in the minds of the
politicai parties in the negotiations of Lhe Bretton Woods agreements' 8 . The chaotic
consequences to trade of the practice of competitive currency devaluation in the years before
the World War II were sUtil very present and an international effort was sought to restrain
these mutually damaging "beggar thy neighbor" practices.
The fixed exchange rale system was anchored at the Articie IV of the IMF Agreement, which
determined that every country should maintain their exchange rates within a 1% band of a par
value to the doliar established by the IME. This meant that the Multilateral Trading System,
created a couple of years later, would not have to focus on the issue of exchange rate
manipulations, nor elaborate mechanisms to counter it.
That is Lhe reason behind the fact that exchange rate manipulation and other currency issues
are not present but in a few Articles of Lhe GATT. The problem seerned surpassed, with Lhe
creation of the IMF, and the GATT could be roughly silent about it.
Concems about the impacts of exchange rate misalignments on internationai trade, however,
would resurface after the end of the par value system in Lhe 70s. The fali of the gold standard
required major modifications of the IME practice in the corning decades, a process that carne
to be known as the organization's "silent revoiution"9.
The extent and depth of such rnodifications had direct impact on the IMF mies, particularly
on its Article IV, which was transformed from a rigid control to a flexible surveiliance
mechanisrn. Andreas Lowenfeld argues that, after the fali of Lhe par value system and the
creation of the new surveillance mechanism, "[1]! lhe Fund Agreement no longer described,
leI alone controlled, lhe interna (tonal inonetary system, then 11 seerned reasonable that lhe
Articles should be rewritten ". No such resurfacing, however, was done and "[tJhe institution

BOUGHTON. Limes M., "The IMF and Lhe Force of History: Ten Events and Ten ideas That Have Shaped
tbe Institution," LMF Working Paper WP104175. PolicyDevelopineritandReviewDepannient, IMF, 2004, p. 6.
'9 BOIJGHTON. James M., Si/ent ievolution; tbe [aternational Monetary Fund, 1979-1989, IMF, 2001, pp. 1-

50.

RC

was preserved - that is, the skeletori; but 11w fundamental rule was replaced by a non-rule,
and the mission gradually changed"o
The new mission of the IMF was then focused on guaranteeing the balance of payment of
endangered countries in a World of floating exchange rates. The objective of restricting
exchange rate manipulations was al.located to lhe new surveil!arice mechanism. However, due
to a change in the Economic Theory that relaxed concern over exchange rate manipulations
and the expansion of Lhe IMF's surveiliance mechanism in order to include several other
economic factors, lhe objective was never completely attained.
On that, Lowenfeld further states that:
Article IV did not accomplish the objectives that the drafters had in mmd. Governments were reluctant to
answer inquiries put by the Fund, and had no real incentive to do so. ( ... ) The idea that the IMF. or the
iriternational comrnunity through the IMF, could prescribe conduct under amended Article IV comparable
with what the Fund prescribed under Articte V did not prove viable. if indeed it was ever seriousty
considered21.
The consequence was that Lhe IMF no longer had the mechanisms, or even the objective, of
exerting a rigid control over exchange rate manipulations. A!though this reality fitted well the
new Fund role in international economic governance, it striped the Multilateral Trading
System of its safe-net against competitive currency devaluations.
In this sense, current argurnents defending that exchange rale issues should be dealt with
sole!y at lhe IME are outdated. As IMF History has demonstrated, the JMF cari no longer be
the main forum where the impacts of currency issues on trade should be discussed, especially
not when the control of exchange rate manipulations is Lhe main focus of discussion. Tt Iacks
Lhe mandate and the mechanisms to do so.
ii. Exchange rate impaets on the Multilateral Trade System
Although Ieft unguarded since Lhe mid-70s, lhe Multilateral Trading System would not fee!
Lhe consequences of exchange rate deviations until Lhe 2008 crisis. The tensions that have
arisen concerning the relationship between trade and exchange rale have been dealt with,
during this period, outside of lhe scope of either Lhe IMF or Lhe GATTJWTO, norma!ly
through political agreements between the concerned countries. The Plaza and lhe Louvre
agreements are examples of negotiations that sought to rebalance depreciated or overvalued
currencies causing diversion o trade fiows.
In Lhe present political landscape, however, such accords are harder to be reached. After the
2008 financial crisis and the political choice of some of the biggest economies to devaluate
their currencies in order to stimu!ate economic recovery and growth (notab!y Lhe USA, China
and some other Asian countries), the problem has again arisen and the Multilateral System has
found itself unprepared to offer solutions.
Even after the creation of the WTO and the considerab!e enlargement of Lhe Multilateral
Trading System scope, the exchange rale issue was not incorporated imo Lhe Marrakesh
20 LOWENFELD, Andreas E.. "The Internalional Monetary System: A Look Back Over Seven Decades",
bania! o! Jaternational Econornic Law. v. 1 3. n.3, 2010. p. 582.
21 fb1d. p. 585.
41

0
0
agreernents. The Uruguay negotiation round focused on tackling non-tariff trade barriers that

were becoming a much greater concern to international Lrade than the traditionai
barriers.
Even though the importance of a closer cooperation between the IMF and the

was highuighted in the resulting agreernents (Deciaration ou the relationship between Lhe
WTO with the IMF - Umguay Round Declarations), no specific rnechanism was created to
deal with exchange rate manipulations.

The case of tariffs and frade remedies

O
.

As shown above, however, in the first exercise ou tariffication, persistent exchange rate
rnisalignrnents do have significant distortion effects on ad valoreni applied and bound tariffs
negotiated in the WTO, being at the sarne time au incentive to exports from a country
maintaining an undervalued currency as well as raising additional barriers to the entry of
imports into its rnarket. However, irnport tariffs are um the only trade instrurnents affected.

Since Lhe creation of the Multilateral Trading System, with the GATT, the contracting parties
have sought to restrain protectionist measures to border tariffs. This wouid provide Lhe system
with better transparency and predictability. The notion of tariffs or "tariffication" of other
trade instruments is of great importance for the Multilateral Trading System and has been on
its base since its beginning. Many trade diversion studies make an effort to "tarifficate" trade
restrictive measures in order to assess their impact on trade flows. The distortion effects of
persistent and deep exchange rate rnisalignrnents are not, in this sense, to be taken lightiy.
Trade remedies such as antidumping and countervailing ineasures are thernselves tariffs that
are applied in amount to import tariffs at Lhe border. Exchange rate misalignmenLs can either
strengLhen or weaken the effect of trade rernedy measures applied - in Lhe case of a
considerabie variation between the currency used to levy the duty and the currency of the
intemationai price of Lhe product after the investigation. That would mean a potential
violation of Lhe objectives of trade rernedies.

. If Lhe airn of trade remedies is to curb a deterrnined unfair trade pracLice, iLs effectiveness
depends on accuraLeiy accessing and countering such practice. Antidurnping and
countervailing nieasures, which both are ievied, in general, as specific Lariffs, will be distorted
by exchange rate variations and will not accurately address the pracLice identified as unfair
during the investigations, to Lhe detrirnent of either the exporters or the affecLed sector
involved. The measure would, possibly be recalibrated afLer its review. In Lhe meantirne,
however, Lhe exchange rate issue brings instability and unpredictability to yet Lhis instrument.

O
0

In Lhe sarne manner, the invesLigations prior to the application of Lrade rernedies are
themseives also affected by deep exchange rate rnisalignrnents. A counLry facing particularly
deep devaluations can suffer additional antidurnping duLies if no proper consideration is dono
during investigations. The normal price construction and the price comparability both can be
affected. The problem lies in that Lhe rules governing such investigations are silent about the
issue, demanding oniy general respect to particular rnarket situations and fair price
eomparison, while prescribing no specific obligation concerning exchange rate variations.
The issue was raised in a GATT panei brought by Brazil against EC's appiication of
anLidurnping measures ou cotton-yarn frorn Brazihan producers (EC-Emposition of AD Duties
on Imports oU Cotton-Yarn from Brazil - ADP/137, 4 July. 1995). Brazil argued that the
had violated its obligation under Lhe Tokyo Round Antidurnping Code (the predecessor of the
42

0


.

Uruguay Round Antidumping Agreement - ADA) by not taking imo consideration lhe
particular volatile situation of Brazilian exchange rate concurrent with high inflation.
In early 1989, facing very high inflation, lhe Brazilian Govemment froze lhe exchange rate
one Cr$ ("Cruzeiro") to one US$ in an attempt to decrease rnoney supply and control
inflation. The exchange rate freeze continued for a period oU three months. During this period
domestic infiation continued to grow. Receipts from export saies (which were paid in US$),
when converted imo Cr$, remained stabie. Foliowing lhe unfreezing of lhe exchange rate,
Cr$ depreciated. Brazii argued that this combination of a fixed exchange rate and dornestic
inflation led to a gross distortion in lhe comparison between domestic prices (when used as
lhe basis of normal vaiue) and export prices, and this resultcd in an inflated dumping margin.
Brazil argued that lhe phrase "particular market situation" in Article 2:4 (presently Articie 2:2
of lhe ADA) inciuded lhe relevant situations external to lhe domestic rnarket, such as
exchange rates, which affect price comparabiiity. Furthermore Brazil argued that Article 2:6
(presently Article 2:4 of ADA) required lhe EC to consider lhe particular exchange rate freeze
situation in Brazil at lhe moment o!' export in order to respect lhe "fair comparison"
requirement in lhe Article. The panei so summarizes Brazil's position:

Brazil emphasized that the overriding principie of Articies 2:4 and 2:6 of lhe Agreement, reiterated
throughout lhe text ai' the Agreement, was that the methodology adopted should permit a proper
comparison. Brazii beiieved that this fundamental principie had been violated in this case. Brazil argued
that to ensure a proper comparison between normal vaiue and export price, lhe EC shouid have taken
further steps by acknowledging lhe particular market situation prevailing in Brazil and basing normal
value on saies to third countries, or adjusting lhe normal value based mi domestic data, or adjusting the
exchange rate used. ( ... ) li was not possible to make such a comparison without using an exchange rate,
and lhe selection ai' the exchange rate, particuiariy in lhe iight o!' domestic inflation, was criticai for lhe
comparison. Article 2:4 therefore recognized lhe tink between lhe establishment of normal vaTue and
.
evolution a' exchange rates. (EC-Jmposition of AD Duties mi Imports o! Cotton-Yarn from Brazil -

ADP1137, 1" July 1995, p. 77-81)

e
Although reiating to a fairiy specific situation involving exchange rate issues, lhe case was an

opportunity in which both parts had to discuss particularly differcnt views of lhe impact of
exchange rate variations on antidumping investigations. Even more broadly, lhe concept oU
neutraiity of exchange rates was discussed by lhe parts.

Brazii was of lhe view that lhe EC's refusa] to adjust the exchange rates used in

investigation violated a fundamenta] principie o! the Agreement, considering as "price

dumping" what was, in fact, the weII-known phenomenori o! 'exchange durnping'.

Furthermore, Brazil argued that in so doing, lhe EC had rehed on certain principies such as
'monetary neutraiity' that were not vaid in the context of antidumping proceedings. (ECImposition o! A Duties on .[rnports o! Cotton-Yarn from Brazil- ADP/137, 41h Juiy, 1995,
118)
The EC, on lhe other hand, argued

O
e

The calculation ai' duniping margins had to be marte mi lhe basis of objective and verifiable information,
and not on lhe basis of arbitrary and subjective aspects. Accepting Braziis arguments in this regard would
amount to introducing considerabie amount of subjectivity and uncertainty imo lhe system. It wouid go
far heyond lhe scope of lhe Agreement, lhe possibitities and lhe competence of the investigating
authorities, and lhe interests a' lhe signatories to have security and predictability in internationai trade.

(PC-huposition o!' AD Duties on Imports o! Cotton- Yarn froin Brazil - ADP1137. 4" July, 1995. p. 119)
43

The EC was, in this sense, concerned with lhe potential consequences to the system of
integrating exchange rate considerations imo antidumping investigations. Brazil disagreed
that the clear intent of the negotiators was to leave "monetary aspects of dumping" outside lhe
scope of lhe Agreement. Rather, the intent of lhe negotiators would have been to exciude lhe
depreciation of exchange rate (the so called exchange rate dumping) from the scope of lhe
Agreement. In other words, since exchange cate dumping was not part of lhe Agreement, due
consideration to exchange rate situations should be done in order to respect normal price and
price comparability, as well as to avoid considering such a phenomenon as "regular
dumping".
Ir absoiutely wrong to infer from this specific fact lhe general statement that "monetary aspects of
dumping" were outside the scope of the Agreement. In any event, even if such a principie couid be
relevam to lhe interpretation o! the Agreement, Brazil did not consider that it couid be appiied in a way to
frustrate the fundamental objective of tbe Agreement, i.e. the requirernent that there be a proper and fair
comparison between normal value and export price. (EC-Imposiuon o!AD Duties on Irnports oCbtton-

Vara from Brazil - ADP1137. 41h July, 1995, p. 280).

Both countries agreed that lhe present ruies governing antidumping investigation exc!uded lhe
possibility of considering exchange rate dumping ia the "price dumping margin". Brazil
however argued that compieteiy exciuding monetary aspects of dumping wouid do exactiy lhe
opposite, since it would open up lhe possibility of counting exchange rate dumping as regular
dumping, whiie lhe EC feared the possible consequence of bringing unpredictability to lhe
system if it considered such arguments.
The panel in lhe case did not render specific answers to lhe overarching question of whether
monetary aspects of dumping were intended to be exciuded or not from the ADA. It iimited
its anaiysis to lhe practicai question posed by Brazil of whether lhe EC had violated the
agreement by using lhe official exchange rate in its investigation. The panei thus conciuded
that Brazil had not proved that lhe particular exchange cate situation at the time of lhe seus
affected directiy lhe prices practiced in its local market insomuch to render it inadequate as a
basis for normal price consideration. On that, lhe Panei further stated that:
Even assuming arguendo that an exchange rale was relevant under Article 2:4, ir would be necessary, ir,
Lhe Panei's view. to estabiish that it affects the domestic saies themseives in such a way that they wouid
not permit a proper comparison. Brazil had asserted that exchange raies were capabie of affecting
domestic saies and prices, because for example, the cost of raw materiais couid be affected by
fluctuations in lhe exchange rate. In particular, domestic saies and prices couid be afected if imported
raw materiais were used in domestic production. However. Brazii had not argued that the costs of raw
materiais used in manufacture of cotton yarn were in fact so affected. For the Panei to engage in such an
exercise, it would have to exceed irs scope of review. (EC-Iinposition of AD Duties on Jmports o[C'otton-

Vara from Brazil - ADP1137, 4rn July. 2995, p. 479)

In this sense, Lhe panei did not exclude completely Lhe infiuence exchange cate misaiignments
couid have on antidumping investigations. Actually, were imported inputs considerabie costs
in cotton-yarn production, and provided that Brazil presented this argument, exchange rate
could be a reievant aspect in lhe investigation. In lhe Panel's view, there is no a priori
exciusion of exchange cate considerations ia the application of lhe antidumping rules.
Considering price comparability and Article 2.6 of lhe Antidumping Cede, lhe Panei reached
a narrower interpretation, li considered that exchange cate misalignments wouid not affect
price comparability since, if lhe prices compared (export price and normal price) had been
44

rightfufly se!ected, the only purpose of exchange rate would be to transiate these princes into
a cornmon currency:
e
.

The exchange rate in itself is not a differene affecting price comparabitity. It is a mere instrunient for

transiaring mio a common currency prices that have previously been rendered comparabie ia accordance
with the second sentence of Article 2:6. In the view of Lhe Panei, an exchange rates function is to rnake it
possibie to subsequently effect an actual comparison on a common basis as provided under the other
relevant provisions of the Agreement (EC-Iniposition o! AD Duties on Tmports of Cotton-Yarn from
Brazil - ,4DP1137, 4" Julji 1995, p. 494)

It is interesting to note that the practice of zeroing by the EC and whether it affected price
cornparability was also discussed in Lhis panei. The panelists reached the conclusion that the

practice of zeroing did not affect price cornparability in the case. More recent cases, however,
have further analyzed the issue and considered such practice as incongruent with Article 2:4

of Lhe ADA (the equivalent of Art. 2:6 of the Antidumping Code analyzed ia this case). It is,
in a sense, a more developed interpretation that could well be transposed to exchange rate
considerations.
.

e


.





.


.

In any sense, the EC-AD duties ou Cotton-Yarn case offered the possibility to discuss Lhe
irnpacts exchange rate misalignments can have on important multilateral rnechanisms. It also
exposed the lack of specific provisions to deal with the issue ia the Antidumping Code.
absence remained in the foliowing Uruguay round ADA. The sarne overail staternent can be
made in relation to the Subsidies and Countervailing Measures Agreement (SCM).
Other aspects of the Multilateral Trading System are potentially affected as well since they
are based on tariffs in their functioning, The Dispute Settlement Mechanism itself can be
deep!.y affected ia its efficiency since its most praised characteristic - the possibility of
enforcing decisions through Lhe allowance of retaliatory measures - would be softened were a
country to maintain its currency persistently undervalued, weakening measures airned at
curbing its violating conduct. Naturaily, different rneasures such the suspension of
rules wouid be immune to such effects, but a considerable part of the System could be
jeopardized.
Furthermore, rules of origins can be distorted as weli, since rnany ruies depend on accurateiy
assessing the value added to a product ia differcnt moments of the production chain.
dealing with severely distorted exchange rates, it becomes hard to determine the exact value
added by a particular production stage. The assertion can be compromised, making it hard to
guarantee the fulfillrnent of the objectives sought with rules of origin. This is particularly
important in the context of Preferential Trade Agreements (PTAs), potentially being a cause
of trade diversion and circumvention of the
The Director-General to the WTO, Pascal Lamy, has already brought to the attention the
difficulties modern production chains present to Lhe traditional view of rules of origin and
international trade negotiations ia general. The "made ia the world" initiative 22 launched by
the WTO to support measuring and analyzing international trade in terms of value added, can
be severely impacted by exchange rate misalignments.

22

Viewed at: 31 January 2012.

WTO. Macle tu the world. Avaiiable aL: <http://www.wto.org/enghsh/res_e/statis_e/miwi_e/miwi_e.htm>,

45

The overarching principies

A more disturbing picture can be drawn if one considers Lhe impact of persistent exchange
rate rnisaiignrnents on some of the piliars of the Multilateral Trading System. One of the
system's principies most hit by the different exchange rate fluctuations is the Most-Favored
Nation (MFN) present in Articie 1 of lhe GATT. It reads as foliows:
I. With respect to customs duties and charges of any kind imposed on or in connection with
importation or exportation or imposed on the internationai transfer of payments for imports or exports,
and with respect to lhe method of levying such duties and charges, and with respect to ali roles and
formalities in connection with importation and exportation, and with respect to ali matters referred to
in paragraphs 2 and 4 of Articie 1IJ, any advantage, favour, privilege or immunity granted by any
contracting party to any product oriinating in or destined for any other country shall be accorded
immediateiy and unconditionaily to the like product originating in or destined for the territories of ali
other contracting parties. (Emphasis added)

tinder Lhe MFN principie, each contracting party is broadiy obiiged to concede the sarne tariff
treatrnent to every other contracting party. Furthermore, any kind of advantage or privilege
one contracting party shouid have in reiation to imports and exports with another contracting
party should be "immediateiy and unconditionally" extended to ali other contracting parties.
This principie aims at bringing two mam benefits to lhe system.
Firstiy, it guarantees that no particular country wili have a cornmerciai advantage in its trade
with another contracting party, which otherwise coutd raise tensions and divert trade. This is a
broad guarantee, encompassing any kind of benefit a particular country could have in its trade
with another country pari to lhe system. The aim here is to avoid arbitrary and iess-thanoptirnai aliocation of trade fiows between contracting parties, which could harm lhe benefits
brought by internationai trade competitiveness.
The other benetit is the stabiiity of the system. Since a producer knows he wiii face the sarne
tariff barrier to export to a particular country no rnatter where he exports from, he wili be able
to decide where to produce without taking appiied tariffs into consideration. Ir also brings
predictabiiity and provides a better environrnent for production to seek whichever country
presents better comparative advantages. In this sense, the MFN principie stands as one of lhe
main piflars of the Multilateral Trading System established after the Second World War and
the econornic turmoii of the 30s enhanced by protectionist and arbitrary measures in the
period.
The misalignrnent (and possibie manipuiation) of exchange rates, however, brings another
variabie to the equation, with no direct connection to fair competitive features. The particular
exchange rate of a country, and its variation from a levei considered of medium term
cquihbriurn, could represent an "advantage or privilege" in bilateral commercial reiations
between a set of countries when compared with other exchange rates portraying different
leveis of variation from their equihbrium. This is due to the effects exchange rate
misaiignrnents have on tariffs appiied by each country.
After the fali of the fixed exchange rate system under the auspices of lhe IMF during lhe 70s
and its substitution with a floating exchange rate system, lhe CONTRACTING PARTIES to
lhe (IATT have manifested ther concern with its consequence to the multilateral trade
system. In particular, the impact on market access actualiy faced by exporters was highlighted
in a floating exchange rale system:
46

1. The CONTRACTLNG PARTIES. while not questioning Lhe floating exchange rate system and the
contributions it has made, acknowledge that in certain circumstances exchange market instability
contributes to market uncertainty for traders and investors and may iead to pressures to increased
protection; these problems cannot be remedied by protective trade action (Exchange Rate Flucwations
and their Effect on Trade - Fortieth Session o! the CONTRA CTING PARTIES, Action taken on 30
Afovenber 1984 - ff5761)

When exchange rate misalignrnents are "tariffied" and apphed to a country's tariff, a better
picture of the uncertainties brought to Lhe system by the exchange market instability and the
levei of tariff barriers actualiy faced by exporters from a particular country can be perceived.
As shown before, in the second exercise on tariffication, each particular exporter, depending
on where he exports from, will have different tariff treatments and privileges, meaning
different market access leveis, contrary to what the MFN principie states. The greater the
iength and persistence of such exchange rate misalignment, Lhe greater the consequences for
the most-favored nation treatment.
The absence of specific consideration to the broad and persistent exchange rate misaiignments
of WTO members means potentiaHy infinite different tariff treatrnents between any set of
analyzed countries. This situation is directiy the opposite of what the Multilateral Trading
System sought with the estabiishment of the MFN principie.
Not only the MFN principie is affected but, with ir, the principies of transparency and
predictabiiity. After the end of the fixed exchange rate systetn, Lhe GATT contracting parties,
concerned with the negative effects of exchange rate fluctuations on intemational trade fiows,
made a statement urging the IMF to improve its system in order to take into account "the
reiationship between exchange market instability and internationai trade"23.
In response, the IME pubiished in 1984 a study describing Lhe ways by which such exchange
rate instabiiity could affect internationai trade fiows 24 . The acadernic and empiricai evidences
were inconciusive and no systemic adjustments were made by the contracting parties to Lhe
GATT in order to address the uncertainty and potentiai negative effects of exchange rate
fluctuations. No particular study was commissioned by the GATT, however, to analyse the
impacts of exchange rate manipulations on the instrumerits of the Multilateral Trade System.
Aid for Trade and Quota-Free-Duty-Free Initiatives
Finaily, a crucial aspect of the WTO is also potentiaiiy affected by persistent exchange rate
misaiignments. Considered by many as the "social" aspect of the multilateral trade system, the
Aid for Trade Initiative seeks to help least-developed countries to fight poverty and attain
economic development through the insertion of their economies in Lhe internationai market.
Through material, and know-how aid, it seeks to develop the trade-related skilIs and
infrastructure that is needed to irnplenient and beneflt from WTO agreernents and to expand
their tra de25.

23 Exc/;ange Rate Fluctuations and (heir Effect on Trade - Fortieth Session of Lhe CONTRACTINO PARTIES,
action taken on 30 November 1984 1J5761.
241MF. "Exchange Rue Votatility and World Trade," WT/GC1444. IMF Occasional Paper 30, 1984.
25
WTO. Ajd for Trade (WTO dedicated website pane for Lhe program). Availabte at:
<http://www.wto ,org/english/rratop e/devei e/a4t e/aid4trade e.htm>. Viewed at 25 March 2012.
47

The outlaying idea is that through lis insertion in lhe international market, small economies
could get better prices for their products and better prospects for local producers. The
volatility of exchange rates and, especially, the possibility of competitive devaluation of big
economies currencies, bring deep instability and insecurity to such "export-Ied" and open
econorny strategies.
At the 1984 Declaration, lhe contracting parties had already identified the particularly fragile
position that small trading countries would face in a floating exchange rate situation. At
Paragraph 2 of the Declaration, it is stated that:
The CONTRACTING PARTIES also recognize that adjustrnent to uncertainty over exchange market
instability could be more difticult for smatt traders when hedging opportunities are limited, and for small
trading countries and developing countries, inter alia when the geographical distribution a their trade
cannot be easily diversified. Exchange Rale Fluctuations and their Effect on Trade - Fortieth Session of
the CONTRACTINO PARTIES, action taken on 30 November 1984 - L/576 1)

The foliowing study by lhe IMF also acknowledge that small trading economies would be
more vuinerable to intense exchange rnarket instability since traders would have fewer
hedging options26.
In this sense, Marc Auboin states that:
Of particular concern to LDCs is the dilemma created by regular periods of tosses in the terrns of trade
ar
and lhe sarne time the need to keep the nominal exchange rate relatively siable for domestic monetary
policy reasons. In periods of terrns of trade tosses, this dilemrna results in a constam real
real appreciation of
domestic currencies, and hence an inducement to irnport, with adverse effects on the current account
balance and debt to l3retton-Woods institutions.27

A recent OECD study has put renewing Iight into the subject, further strengthening such
fears25 . The paper examined lhe impact of sharp exchange rate misalignments in two smaH
open economies - that of Chile and New Zealand. It proved that small economies tend to be
more impacted by exchange rate misalignments than larger econornies such as the EU, lhe
US, China or even Brazil. The authors sirnulated misalignments, eitlier upwards or
downwards, of 10 per cent of these countries' exchange rates and analyzed the impact on their
bilateral trade with bigger econornies. Small trading countries have to bear lhe "fuil
adjustrnent of exchange rate changes", as they have less diversified production and export
base, being less in a position to move into economic sectors Iess affected by intemational
trade. Bigger economies, when facing lhe appreciation of their currencies, are abie to limit lhe
damage done to their export position by moving up their production imo sectors where price
e!asticity is wider. The sarne does not occur with smaller, more concentrated econornies. On
the other hand, when facing depreciations, lhe number of dornestic producers is sma!ler and
hence insufficient to substitute for imports when prices increase. The study demonstrates,
then, that smalier economies will be hit harder by exchange rate rnisalignments, either of their
own currencies or of their bigger trading partners. Price elasticity and lhe structure of their
production chains are also iinportant, helping (or hindering) to rnitigate negative effects.

26 1fv1F "Exebange Rate Votatility and World Trade," WT/GC1444, IMF Occasional Paper 30, 1984.

" AIJBOIN. Marc, Fufflhling lhe Marra kesh Mandate on Coberence: Ten Years o! Cooperation between lhe
WTO. IMF and World Bank. WTO. 2007. p. 26.
28 OECD, To What Extent Do Exchange Rates and Their Volatility Affect Trade? The Case o! Two Sinal] Open
Econornies, Chile and J'Jew Zealand, TAD/TCWP(20 1 1)17.

48

The WTO has already acknowledged such problem. In a recent publication entitled "Aid for
Trade ar a Giance 2011, showing results", published in conjunction with lhe OECD,
authors recognize
If a currency is overva!ued, trade liberalization can triger rising imports and declining exports - because
of the damage to cost competitiveness - with the excess demand for foreign exchange resulting ia
balance-of-payments problems. In addition. domestic economic activity usuatty declines and
unemp!oyment rises because the contraction in iniport competing sectors is not offset by an expansion of
the export sector. Governments then face Lhe choice of either adjusting the exchange rate or reversing
trade reform. ( ... ) the impact of supportive macroeconomic policies is ofien larger than Lhe impact of
reducing binding export constraints through aid for trade29.

This brings enormous chailenges to lhe objective by the WTO to promote economic
development of LDC through their insertion in lhe international market. These
would depend on a very narrow band of export products, without any real space to divert their
production or climb up lhe production chain. With whole economies dependent on such a
small economic structure, exchange rate variations of any particular trade partner could have
serious impacts to such
In lhe sarne manner, the Quota-Free-Duty-Free Initiative, which the WTO Secretariat and
some WTO members struggle to rescue out of lhe stalled Doha Round, could be offset by
sharp variations of lhe exchange rates of either the conceding countries or of lhe

The Quota-Free-Duty-Free initiative consists in an agreement between WTO members, in

2005, to make it mandatory for developed countries, and optional for developing countries, to
give duty- and quota-free market access to ali exports from Ieast-developed countries.

Members were allowed, nonetheless. to exciude up to 3% of tariff lines from this initiative,
order to protect sensitive sectors30.

2.2. WTO Agreements and the exchange rate issue

Considering the huge impacts that misaligned exchange rates have 011 trade, one might ask
lhe existing provisions under lhe WTO agreements cannot address, at least partially, to lhe

matter. This section will anaiyze lhe main provisions of lhe WTO that couid give rise tu
complaints under lhe WTO Dispute Settlement Mechanism or could provide mechanisms to
rebalance lhe impacts caused by misaiigned currencies.

1. Article XV

The mam Article of the GATT to deal with exchange rates and its impacts on trade is Article

XV. li establishes the cooperation between lhe GATT/WTO and lhe IMF for matters such as
monetary reserves, balances of payments and exchange arrangements, denying the idea of a
complete separation between WTO and IMF subjects.

The Article exphcitly encourages WTO members to seek policy coordination on questions
within lhe jurisdiction of lhe IMF that affect trade measures, recognizing lhe intrinsic relation

______________

29WT0, OECD. Md For Trade ar a Glance 2011: showing results, 2011. Available at:
chttp:f/dx.doi.org/10 . 17871978926411747 1-en>. Viewed at: 20 December 2011. p. 99.
30
LABORDE. David. "Looking for a meaningful Duty Free Quota Free market access initiative in the Doha
Development Agenda". ICTSD, Issue Paper n. 4. December 2008. p. 14.

49

between trade and finance and assuring the coherence of the international economic system as
a whole, as designed aL Bretton Woods.
Concerning the specific issue of exchange rates, Article XV.4 states that:
Contracting parties shall not, by exchange action, frustrate the intent of the provisions of this Agreement,
nor, by trade action, the intent ai' the provisions of the Articles of Agreement ai' the International
Monetary Fund.
It puts on evidence the negative impacts that trade and exchange rate measures can have on
one another, recognizing that exchange rate issues can affect international trade. The Article
stresses the need to WTO members to take imo consideration the relationship between the
international trade and monetary systems and to avoid trade or exchange rate measures that
could harm any of the purposes of both agreements.
Nevertheless, despite the clear aim of this Article to enhance coherence between such
systems, its enforcement is uncertain, due to the lack of precise definition of expressions such
as "exchange action" and "trade action" and due to the need to engage mio consultations with
IMF. There are no examples, in the WTO, of the application of the Article XV.4, no member
having ever questioned another's exchange rate arrangements at the WTO Dispute Settlement
System.
To declare a violation of Article XV.4, it is necessary to determine that a member is taking an
exchange action which is having consequences on trade and, furthermore, is frustrating the
intents of WTO.
The notion of exchange action is unclear and was never tested by the WTO Dispute
Settlemerit Mechanism on a policy of currency devaluation. Although the expression has a
wide meaning, one would still have to argue that policies of currency devaluation can be
classified as exchange actions. It would be necessary to prove the existence of specific
measures taken by a government that directly impacts on the devaluation of its exchange rate.
The simple devaluation of a currency, independent to government's actions, cannot be
challenged under Article XV.4. A distinguishable govemmental measure that results in
currency devaluation must be identified.
A second step to apply Article XV lies on the proof that the exchange action is frustrating the
intent of the provisions of GATT. The nieaning of the word "frustrate" is given in the Notes
and Supplementary Provisions (Annex 1) of Article XV, which explam that its intention is:
( ... ) to indicate, for example, that infringements of the Ietter of any Article a this Agreement by
exchange action shall not be regarded as a viotation a that Article ii'. ia practice, there is no appreciable
departure from the intent a the Article. ( ... )
Exchange actions operated in accordance with the Articles of Agreement of IMF will not be
deemed to contravene GATT Articles because there is no departure from the intent of those
Articles. In order to find a violation of Article XV.4 ii is, thus, necessary to find a violation of
Article IV of IMF's Articles of Agreement, which specificaily deais with exchange rate. Such
interpretation is in accordance with the exception imposed by Article XV.9, which establishes
that nothing in the GATT can preclude members to exchange controis or exchange restrictions
in accordance with IMF's Articles of Agreement.
50

As mentioned hefore, Article IV has !ost its primary goal in stabilizing a fixed exchange rate
system. Under a context of free floating exchange rates, the Fund on!y has a feeble
surveillance role and members have a wide choice of exchange rate policies. Due to these
factors, it becomes more difficult that an exchange rate policy is considered by the Fund as a
violation of its Articies of Agreement.
Nevertheless, the IMF, in its Article IV Consultations has already noted the substantial
devaluation of the Chinese currency, advocating for stronger exchange rates, whch could
indicate that those currencies were not fully consistent with the Articles intent3t.
It is a!so irnportant to recali that Article XV.2 states that WTO mernbers shal! consuit IMF
when dealing with problems conceming foreign exchange arrangements. Consultations with
IMF would, therefore, be required in any dispute concerning Artic!e XV.4.
However, the status of this consultation shou!d be as of ainicus curiae. The WTO Dispute
Sett!ement Understanding states iii its Artic!e 13 that: Each panei shall have lhe right to seek
information and technicai advice from any individual or body which il deems appropriate.
t4onetheless, the conc!usions provided by this third party - the azuicus curiae - shall not be
mandatorily accepted by the panei, which has thc competence to make its own findings and
reject those made by a third party. In this sense, the AB has stated that the panel shali not
simply accept IMF findings when consulted under Articie XV.2, but to criticai!y access those
findings32.
Finaily, in order to determine a violation of Articie XV.4, members must identify which
provision of GATT has had its intent frustrated. Concerning currency devaluations, Article II
of GATT that deais with market access could be cha!ienged. This interpretation wiii be
deveioped beiow.
Despite its relevance to the issue of misa!igned exchange rates, the changes suffered by IMF
during the years, which have resulted on the weakening of the Fund's control and surveiliance
over exchange rates have had a significant impact on the provisions of the GATT over the
is sue.
The whole Article XV reiied on the control by the Fund over its members' exchange rates.
When the IMF stopped exerting such control and allowed members to have either f!oating or
pegged exchange rates, the determination of an exchange rate policy inconsistent with its IMF
Articles of Agreement became harder, despite the mpacts that those policies might have on
trade. The application of GATT Articie XV.4 became more difficult while the risks of
distortions to trade caused by misaligned exchange rates became grater, since the main
institution responsible for the issue no longer exerts any form of control.
Nevertheless, the application of Article XV on exchange rate issues is stil! possible: IMF
Artic!e IV was weakened but it sUfi provides a guideiine for exchange rate policies. At the
sarne time, GATT Articie XV remains in force, and li cannot be made ineffective.
Furtherrnore, Artic!e XV is relevant for the fact that it puts in evidence thc risks brought by

31

2011 - Councry Report People s Republic of China: 4rtic1e IV Consulsation, Staff Report, July 2011, p.
18.
WTO, AB, Judia - Quantitative Restrictions, DS90. AB Report, 23 August 1999, paras. 149-150.
51

exchange rate policies to the WTO system and the need to regulate it ia order to avoid
distortions on the multilateral trade system.
ii. Article XXIII
One of the most unique rules of the WTO system is Article XXIII, which deals with nonviolation issues: measures that affect a member's benefits, gained through negotiations,
although they do not violate any of Lhe WTO rules.
GATT Article XXIII:I (b) states that, if a member considers that a benelit accruing to it is
being nullifled or impaired as a result of the application by another member of any measures,
whether or not it conflict with the provisions of GATT, the member may take the issue to the
DSB. The disputes arising from Article XXIII can therefore be either violation or nonviolation complaints.
The logic of this provision is that competitive opportunities, legitimately expected from tariff
concessions, can be frustrated by both measures inconsistent and consistent with GATT33.
Therefore, it is necessary to protect the balance of concessions under the WTO, by providing
means to redress any actions that impairs member' s legitimate expectations from tariff
negotiations. In this sense, the Panel for Japan - Rim considered that:
( ... ) the safeguarding of the process and Lhe results of negotiating reciprocal tariff concessions under
Article II is fundamental to Lhe balance of rights and obtigations to which ali WTO memberssubscribe
(Pane! Report on Japan Fi]rns, DS44, para. 10.35).

The possibiiity to pursue a complaint under Article XXIII based on misaligned currencies was
affirmed in a Working Party of the GATT. During the discussions, in 1979, about the
app!ication of Article 11:6 (a), which allows the adjustment of specific duties by members with
devalued currencies, under the new context of floating exchange rates, a question was raised
about the possibility of application of that Article in the opposite situation: whether
contracting parties with appreciated currencies should be required to rcduce their specific
duties, ia order to maintain the negotiated levei of market access. The working party agreed
not to pursue the matter, noting that contracting parties could resort to Articles XXII and
XXIII of GATT if they considered that the currency depreciation impaired in a particular case
the value of specific duty concessions34.
A devalued currency that reduces or nullifies other members tariffs cou!d, thus, affect the
negotiated levei of market access, and give rise to a compiaint, regard!css of the violation of
any WTO rule, if three elements are met: application of a measure by a WTO member; a
benefit accruing under the GATT; and nuliification or irnpairment of this benefit as result of
the application of the measure35.

GATT, EEC paynients and subsidies paid to processors and producers of oi/seeds and related anirnai-eed
proteins, Panei Report adopted 011 25 January 1990. BISD 37S186 (Thirty-seventh Supplement, Forty-sixth
Session, 1989-1990), 116627, July 1991, para. 144: and WTO. AB. European G'omrnunities - Measures
Affecting Asbestos and Products Containing Asbestos, DS 135, 12 March 2001. para. 185.
GArI'. Report ofthe Working Party ou Specific Duties, 114858. 2 November 1979. p. 6.
35 WT0, DSB, Japan - Measures Affecting Consumer Photographic Rim and Papei-. DS44, 31 March 1998,
para 10.41.

52

The word "measure" has a broad definition which encompasses bindin government action as
well as measures that have an effect similar to a binding one 3 . Regarding currency
misalignments, one can argue that governmental policies that aim to keep exchange rates in a
certain levei below or above its fundamental equilibrium could be considered as a measure
under the meaning of Article XXIII. It is importam to
to notice that the Article requires an action
by a government, which resutts on the misalignment. The misalignment itself cannot be object
of a complaint under Article XXIII. Therefore, misalignments deriving from instability in the
global economy, which express only the floating character of some exchange rates could not
be charged under a non-violation complaint.
Regarding the benefit, it is usually considered as legitimate expectation of irnproved market
access. In a market with devalued currency, other members will face a more restricted market
access, with higher tariffs, once considered the effects of exchange rates, which can easily be
classified as an impairment of the legitimate expectation of improved market access. The
opposite reasoning can also be done: when members with devalued exchange rates export
their products, they are, by giving an incentive to their exports through devalued exchange
rates, making other members concede a larger market access than the one that was negotiated,
irnpairing expectations of a balanced levei of concessions between these mernbers.
An important aspect of those expectations of a benefit is that, in order to it to be legitimate,
the measures must not have been reasonably anticipated at the time of the tariff concessions.
This can be a problem when dealing with longstanding policies of currency devaluation. It
could be argued that this specific situation couid have been foreseen during the negotiations
of tariff concessions and, therefore, there is no misbalance to be addressed to.
In the other hand, in the case of China, for example, the government had affirmed that China
had adopted a inanaged floating exchange rate system, based on supply and demand 37 . If one
can prove that the devaluation of Chinese currency is due to government management based
in other criteria than supply and demand, it is possible to claim that renminbi devaluation38
could not be reasonably anticipated, since China affirmed that it was adopting a more flexible
exchange rate system.
At last, one is required to prove the existence of a nuilification or impairment of that benefit.
Such nullification or impairment should be understood as upsetting the competitive
reiationship between domestic and imported products, clearly caused by the measure at issue.
When dealing with policies of cunency devaluations, such nuilification is evident, since it can
give a significant competitive advantage to products, nullifying the protection performed by
tariffs and further causing trade diversion.
Article XXIII can, thus, be a usefui remedy to some cases of distortions caused by exchange
rate misahgnments. li does not directly address the issue but it couid provide countries
instruments to redress the negative impacts caused by exchange rate rnisalignments.

36 Jb1d.paras. 10.47-50.
37WT0, Report o!the Working Party on the Accession o! China, WT/ACC/CHN/49, 1 October 2001. para. 31.
381n this sense. see IMF, 2010 . Country Report Peopie s Republic o! China: Articie IV Consultation, Staff
Report, July 2010, p. 4.

53

iii. Trade defense remedies

Another instrument that would be able to provide mechanisrns to address distortions caused
by misi1igned exchange rates would be the trade defense remedies. Antidumping rights and
countervailing measures are the two WTO instruments that cmi be used unilaterally against
unfair trade. Those instruments allow countries that are importing products with unfair
competitive advantage, due to the practice of dumping or the concession of subsidies, to
implement duties up to the margin of this advantage, rebalancing the competition in its
rnarket. Considering the competitive advantages accorded by devalued currencies, iii a
manner that distorts many of the WTO instruments and principies, one can ask if there is an
applicable trade defense remedy.
The Antidumping Agreement has very few dispositions on exchange rates. The Uruguay
Round Agreement was based in the concept of dumping and the practices made during the
GATT period, which, by its tum, was created under a context of par value system of
currencies, where exchange rate misalignrnents where not a worry.
The concept of dumping is the practice of an export price below the comparable price of such
product, in the ordinary course of trade, in the internal market of the exporting country
(normal value). The concept of durnping, as presented above, is based on the difference of
the mo prices of a product (ADA, Article 2.1) and not on the comparison of the export price
practiced and Lhe export price that the product should have if the currency was not misaligned.
This competitive advantage that products from countries with devalued currencies may have
is not addressed under the Antidumping Agreement.
Under this "price dumping" concept, the issue of exchange rates appears only during the price
comparison, when the normal value, in a local currency, must be converted imo the sarne
currency used for the export price. Article 2.4.1 states that the conversion shall be made on
the date of saie. During negotiations, such provision was proposed due the fact that (..) lhe
amount othe durnpin margin may differ significantly, depending on lhe exchange rate to be
used on speciic case3 . An exception is made to fluctuations in exchange rates, which shall be
ignored. Finaily, exporters shali have at Ieast 60 days to adjust their export prices to reflect
sustained movements in exchange rates during Lhe investigation.
The Article reflects some of the impacts of exchange rate tiuctuations on trade, aliowing
rnechanisrns to adjust the calculation of dumping margins to sudden variations of exchange
rates during the period of investigations, which could lead to an inadequate comparison
between the export price and normal value. Nevertheless, it does not consider Lhese variations
after the implementation of antidumping rights nor it considers the effects of exchange rate
rnisalignments on Lhe determination of the injury.
Usualiy, exchange rate misalignments can affect antidumping rights in two different
moments: during Lhe investigation, when determining the injury caused by Lhe dumped
products and during the application of antidumping rights when there is variation of exchange
rates.

JAPAN/GATF, Subrnission o[ Japan ou lhe Amendments to lhe Antidumping Code, Multilateral Trade
Negotiations - The UruguayRound, MTNNG/NGS/W148. 3 August 1989, p. 5.
54

When the conversion of the normal price is made in accordance with Articie 2.4, there shouid
be no impact of exchange rates on the determination of the margin of the durnping, since the
sarne rate would be used for the estabiishment of the export price by the producer
(consjdering the costs of production in its local cunency) and for the normal value, as
converted to the export currency on the date of the saie. Since fluctuations shali be ignored,
both rates should be the sarne, regardless of its misalignment.
The problem arises when determining the injury caused by the dumped products on the
importing country's market. When a dumped product comes from a country with devalued
cw-rency, besides the unfair competitive advantage arising from the price dumping itself, ir
also has an advantage frorn its lower price due to the currency conversion at favorabie rates.
This second factor can increase significantly the injury caused by the imports of such product
at the domestic industry of the importing country, which cannot compete with these
artificialiy low prices. The amount of injury, used for the determination of the antidumping
rights (Article 9.1), will be much greater than the injury that wouid be caused oniy by the
dumping. This is relevant because the injury is essential to the application of antidurnping
rights. If no injury is caused by the dumping, but an injury is found due to currency
devaluation, antidumping rights may be implemented in contradiction with its original airn of
avoiding harmful price dumping.
In the case of antidumping, a devalued currency rnay facilitate the application of antidurnping
rights. This demonstrates the importance of addressing the issue of exchange rates under the
WTO, since it distorts rnany trade instruments, in different manners. The correction of such
distortions interests ali countries, since countries with both overvaiued and devalued
currencies are being affected by exchange rate misaiignments.
The second unaddressed impact on antidumping rights occurs after the investigation.
Misahgnments will affect the antidumping duties, frequently charged as specific duties in
foreign currencies. This distortion will oniy be adjusted at the sunset review, untii then, the
producers may be charged of a much higher or lower antidumping duty.
To address the cornpetitive advantages of a product arising from currency devaluation,
another instrument would have to be created, since the Antidurnping Agreement has no
provisions over the issue, except for the few ones mentioned above. This new instrument
would be based on the cornparison between the export price and the export price that wouid
be practiced if the currency was in its mediurn term equilibrium. It is a concept of "currency
dumping".
Negotiations of the Havana Charter have considered this possibility, within a proposai of
creation of four kinds of dumping, which couid be object of antidumping measures: price,
service (freight), currency and social durnping40.
The proposal was rejected possibly because in a par vaiue system the idea of a currency
dumping seemed a remote risk since the IMF would aiready provide enough guarantees to
avoid countries manipuiating their currencies to get competitive advantages. Nevertheiess, in
a floating exchange rate systern, the concept of a currency dumping rernedy seems very

UN. ECOSOC. Report o! me Drafting Gornmittee o! ffie Preparatory Cornrnittee o! ffie United Nations
conference on Trade and Einpioyrnent, UN ECOSOC, E/PCJT/34, 5 March 1947. p. 13.
55

plausible, creating a trade defense mechanism Lhat would allow countries to offset lhe
advantages acquired by imported products due to exchange rate misalignments.
Despite Lhe lack of prevision of a currency durnping, GATT states, in its Second Ad Note to
paragraphs 2 and 3 of GATI' Article VI, that:
Multipte currency practices can iii certain circunistances constitute a subsidy to exports which may be met
by countervailing dutics under paragraph 3 or can constitute a forro dumping by means of a partial
depreciation of a country's currency which may be meL by action under paragraph 2. By "multiple
currency practices" is meant practices by governments or sanctioned by governments.

This provision was included at lhe behest of South Africa request that stated that:
Mr. Chairman, ibe South African delegation raised this matter of multiple currency rates in relation te
what we temi "exchange dumping duties", We had these expressions of opinion and we withdrew our
741
endeavours to get the proposed new paragraph
written into this particular Articte, by virtue of the fact
that this commentary was te be included in Lhe notes of this meeting.42

The provision shows that although no specific instrument to counter currency dumping was
created and although lhe IMF would exert control over exchange rates, some currency
practices were considered by members as a form of countervailable subsidy or dumping.
Indeed, another trade defense instrument that should be analyzed when dealing with exchange
rates is lhe countervailing measure. The SCM regulates lhe granting of subsidies and aliows
members to charge countervailing duties iii order to offset lhe effects of subsidies on imports
that are found to be hurting domestic producers.
Economically, a devaluation of a country's exchange rale can be considered as a subsidy,
since it is a governmental policy, that includes the buying of foreign currency in order to keep
its own currency at artificially Iow rates, and it has an effect of lowering lhe prices of
exported products, granting them a competitive advantage in other markets. One can ask if
this economic concept can be framed under lhe concept of subsidy under lhe WTO, aliowing
lhe use of countervailing measures.
The SCM has a much more restricted concept of subsidies:
1. For Lhe purpose of this Agreement, a subsidy shatl be deemed to exist if:
(a)(l) Lhere is a financial contribution by a government or any public body within Lhe Lerritory of a
Meniber( ...);or
(a)(2) there is any form of income or price support in the sense af Article XVI of GKfl' 1994;
and
(b) a benefit is thereby conferred.

In lhe case of devalued exchange rate, lhe conferred benefit is evident, as a devalued currericy
aliows a product to have a lower price at the externai market than it would have with an
exchange rate at its equilibrium. The benefit could be recognized by lhe fact that Lhe

41 Paragraph 7 of Articte 17 of the Havana Charter would have created the concept of currency dumping.
42 IJN, ECOSOC. Verbatim Report o! the Twentieh Meeting o! Commission A to the Second Sessiori o! the
Preparatory Coinrnittee o! the Unitcd Nations Conference on Trade And Employrnent, UN ECOSOC.
E/PC/T/A/P V/ 20, 28 June 1947, p. 34.

56

beneficiary would be piaced in a "better position than it would be in the absence of the
subsidy"43.
A greater difficulty arises from the identification of a financial contribution. This requirement
was intended to ensure that not ali governrnental measures that conferred benefits could be
deemed to be subsidies. That indicates that the expression "financial contribution" cannot be
understood in a wide sense, including ali governmentai measures that confer a benefit. A
financial contribution is au act or an omission invoiving the transfer of money or the
provisiori of certain goods or services45.
In order to classify a devalued currency as a subsidy, first of ali it is necessary to prove that
the government is taking action to maintain its currency artificiaily iow. The devaluation
cannot be a result of an extemal economic context, there must be a governmentai act or
omission. Nevertheless, even if a government is deliberately manipuiating its currency, one
has yet to identify the money trans Ler between the government and the beneficiary. It coud be
argued that this transfer lies in the act of converting a currency, by buying a foreign exchange
cate at a lower price than the regular market price, or what should be the market price, since
the official exchange cate would be the misaiigned one.
Once again, the Second Ad Note to Paragraphs 2 and 3 of GATT Article VI states that
muitiple currency practices can in certain cases constitute a form of subsidies. As the Articles
of GATT shail be read together with lhe SCM, this implies that, in some circumstances, one
can identify a financial contribution - that would constitute a subsidy - in certain currency
practices. The provision foresees, thus, that some currency practices might be deemed as
subsidies by the contracting parties and should be object of countervailing measures.
To be actionable under the WTO, a subsidy must also be specific. A specific subsidy is either
a prohibited subsidy (contingent upon export performance or upon the use of domestic over
imported goods), or a subsidy specific to an enterprise or industry or group of enterprises or
industries (Article 2). In the case oL multiple currency practices, the specificity was evident,
since a lower exchange rate would be accorded only to some sectors, and thus an Ad Note
was included under GATT Articie XVI, in order to ailow muitiple cates in accordance with
IMF.
lii the case of a sinale devaluated exchange rate, it seems difficult to consider as specific a
devalued exchange cate that should be available to ali exporters, investors, etc. Nevertheless,
if one can prove that the exchange rate is directly linked with the volume of a country's
export, varying when this volume raises or diminish, it is possible to argue that the subsidy
arisen orm a devaivated exchange cate is contingent upon exports, and thus, a prohibited
subsidy under SCM Article 3 - which couid be object of a fast track panei.

WTO, AB. Canada - Measures Affecting ffie Export o! Civilian Aircraft, DS70, AB Report adopted on 2
August 1999, para. 161.
WTO, DSB, US - Measures Treating Export Restraints as Subsidies, DS 194, Panei Report adoptcd on 29 June
2001, para.8.65.

WTO, DSB, lIS - Prelirnirxary Determinations with Respect to Certain Softwood Lamber from Canada TI,),

D5236. Panei Report adopted on 27 September 2002, para. 7.24.

57

Furthermore, by lhe provision 011 SCM Article 2.3, this prohibited subsidy shall also
constitute a specific subsidy, actionable by countervailing duties if it is proved that it causes
injury to the domestic industry of another member46.
A proposal dealing with trade defense remedies as a mechanism to address the effects caused
by misaligned exchange rate is lhe "Currency Exchange Rate Oversight Reform Act of 2011".
The American Act, still pending on approval, seeks to address to lhe effects caused by
fundamentaliy misal.igned exchange rates through negotiations or by implementing trade
defense remedies.
The Secretary of Treasure shall submit to lhe Congress an annual report on monetary policy
and currency exchange rales, which will include a lisi of currencies designated as
fundamentally misaligned. Some of those currencies will be designated for priority action,
according to factors such as: market interventions protracted in Lhe currency exchange market;
accumulation of foreign reserves; and restrictions on lhe inflow or outflow of capital, for
balance of payment purposes.
The Secretary of Treasure shall seek bilateral consultations with countries with rnisaligned
currencies, so these countries can adopt measures to address Lhe issue, and also seek the
advice of Lhe IMF, in case of currencies designated for priority action. In this Iast case, if no
policy is adopted by Lhe respective country, antidumping initiations taken by Lhe USA shall
take into consideration Lhe exchange rate effect, by adjusting lhe price used to establish export
price to reflect the misalignment of Lhe currency of Lhe exporting country. The US
government shall also: prohibit procurement by Federal Government of products and services
from lhe cowty, if iL is not party to Lhe Agreement on Government Procurement; request LhaL
lhe IMF consuit the country with misaligned currency under Article IV of IMF Articles of
Agreement; and not approve any financing of projects located in Lhe country.
One year after Lhe designation of a currency for priority action, if no measure is adopted, the
government of lhe US shall: request consultations at Lhe WTO with such country; and
consider undertakiig remedial intervention in the international currency markets.
The draft hill also proposes an amendment to lhe Tariff AcL of 1930, in order to allow Lhe
initiation of investigations to determine whether currency undervaluation by the government
of a country is providing a countervailable subsidy. The initiation of the investigation shafl be
mandatory for currencies designated as for priority action. The proposal also presents a
provision that states that "Lhe fact that a subsidy may also be provided in circumstances that
do not involve export shall not, for that reason alone, mean that the subsidy cannot be
considered contingent upon export performance".
The Act proposes, thus, both the creation of a currency dumping, that should be implemented
together wiLh regular price dumping, and the use of countervailing duties to address to
exchange rate issues, altering the definition of a subsidy contingent upon export, in order to
allow lhe classification of a currency misalignment under this concept.
Even though, trade remedies appear to be an interesting solution to Lhe exchange rate issue,
they require a negotiation under lhe WTO, in order to adapt Lhe existing mies to lhe matter.
46

For a deeper analysis, sec LIMA-CAMPOS, Aluisio de; GIL, Juan Antonio Ouvir ia, A case for n;isaligned

currencies as councervailable subsidies. unpubl ished

58

Even though, trade remedies appear to be an interesting solution to the exchange rate issue,
they must be used carefully. In order to impiement countervaiiing duties, one would also have
to prove in the concrete case that the exchange rate policy cmi be considered as an export
subsidy. The concept of currency dumping does not exist under the Agreement ou
Antidumping. t4ew negotiations would be required to adapt the Multilateral System to the
concept of currency dumping and to create specific trade remedies such as currency
antidurnping. Another possibility would be the negotiation of speciai bilateral safeguards to
offset the impacts of exchange rate misaligaments.
iv. Article II:!
The basic ruies for market access in the context of the GATTIWTO are in GATT Articie II.
Article 11:1(a) estabhshes that:
Each contracting party shall accord to the commerce of the other contracting parties treatmenl no Iess
favorabte than that provided for in the appropriate Part of the appropriate Schedule annexed to this
Agreement.

The paragraph states that the levei of market access, determined by tariffs and other barriers,
shall not be less than the negotiated levei under each country"s schedule of concessions.
The provision aims, thus, to assure that thc negotiations made through GATT and WTO
rounds are not impaired by any treatment imposed by a member that might increase or impose
new barriers to international trade, reducing the market access. There is a worry of
guaranteeing the respect of concessions in order to aHow an increasing access to countries'
markets. Under this trade liberahzation logic, the expression "iess favorabie treatment" shouid
have a wide meaning, inciuding aii measures piaced by a member that reduces the negotiated
market access. Such is the understanding of the EC - IT Products case (DS377) that has
stated that a iess favorable treatment should be understood as a measure that adverseiy affects
the conditions of competition for a specific product (Panei Report, para. 7.757).
Article 11:1 (b), on its tum, states that products described on Scheduies shaH:
"( ... ) be exempt from ordinary eustoms duties in excess of those set forth and provided therein. Such
products shalt also be exempt from ali other duties or charges of any kind imposed on tor in connection
with the iniportation in excess of those imposed on the date of this Agreenient or those dircctly and
maridatorily rcquired (o be imposed thereafter by legislation in force in the importing territory on that
date"

In other words, countries have to keep their applied tariffs in an equai or lower levei than their
bound tariffs and shaH not impose any other kind of duty connected with importation that
exceeds the negotiated duties under the WTO. It should be noted that paragraph 1(b) is more
specific than paragraph 1(a) and its vioiation automaticaliy means a violation of paragraph
1(a).
When considering exchange rate rnisalignments, one can tariffy its effects, by caiculating the
percentage by which prices of products are increased or decreased due to the misalignment, as
shown in the first exercise of the previous chapter.
When dealing with converting currencies, the tariffication process can indicate distortions
caused by misaligned exchange rates ou prices. When this effect of misahgnments is applied
59

onto tariffs charged at the frontier, one can analyze the real barriers irnposed by a country to
imported products and compare it to its WTO commitments.
In the case of devalued currencies, Lhe final barrier imposed to irnported products (tariffs
adjusted to exchange rate rnisalignment) may be greater than the bound tariffs under the
country's Schedule, reducing the market access and resulting on a less favorable treatrnent.
This effect clearly impairs the aim of Articte II, which is the maintenance of Lhe negotiated
market access, ia a perspective of trade liberalization.
The provision requires, nevertheless, that such less favorable treatment is accorded by the
country which is irnporting the products. In other words, the treatment must be attributable to
governments. It cannot be a result of external circumstances. If one considers Lhat the
misalignment is a result of a countrys policy, regardless if the devaluation was the aim of
such policy or just a side effect, it is possible to argue that it is according a less favorabie
treatrnent than the one negotiated under the WTO, in violation of Article 11:1(a).
One could argue that since the provision makes reference to a treatment provided on a
member's Schedule, this could only comprise tariffary treatrnent. This interpretation is
incorrect for two reasons: first, Article II: 1 (b) has specific provisions on customs and duties.
If paragraph (a) was restricted to tariffs, both Articles would have Lhe sarne exact purpose.
The difference in the wording of both provisions should be taken into consideration. The
second reason is found in Article 5(b) of the SCM, which states that a subsidy is actionable if
it nuilifies or impairs the benefits of concessions bound under GATT Article II. This means
that a subsidy, which is not tariffary, can be considered a treatment less favorable than the one
provided in the Schedule. Therefore, Article II: 1 (a) can also apply to other non tariffary
treatments.
Furthermore, tariffs adjusted to the exchange rate rnisalignment may be considered as charged
in excess of the ordinary customs duties settled on the country's Schedule. The exchange rate
rnisalignment distorts the applied tariff and rnay increase it over the bound tariffs, especially
ia deveioped countries and countries that have recently acceded to the WTO, that have a very
narrow margin between applied and bound tariffs. This Lariff in excess of the bound tariff
wouid constitute a de facto violation of Article 11:1(b) - and consequently of Articie 11:1(a),
reducing the market access and disrespecting the negotiations of tariff reduction through Lhe
GATT and WTO rounds47.
The impacts of exchange rate rnisalignrnents on GATT Article II: 1 are of great worry, since
they directly affect the guarantees of the WTO systern on Lhe respect of market access
cornrnitnients made by its members. The distortions caused by those misalignments on market
access are undeniable and musi be considered under Lhe WTO, under the principies laid out
on Article II.
Even if one considers that there is no violation of the letter of Article 11:1, is still possible to
argue Lhat its intent has been frustrated, since rnisaligned exchange rates can reduce Lhe
negotiated market access. In this case, the frustration of such airn may give rise to a chailenge
under GATT Article XV:4, cornbined with Article II, as explained above.
See also HUDSON, O.; BENTO de FARIA, P. and PEYERL. T.. "The Legality Of Exchange Rate
Undervaluarjon Under WTO Law, The Graduate Institute of Geneva. Trade and Investrnent Law Clinic
coordinated by Professor JoostPauwelyn, June 2011, elaborated upon request by the CGTI.

60

It is interesting to note that despite the lack of specific provisions of the reduction o!' market
access caused by devalued currencies of exporting countries, GATT Article 11:6 provides an
interesting mechanism of adjustment of specific duties, caused by importing countries'
currency devaluations. This providos an evidence of the impacts of exchange rates on tariffs
and market access, strengthening the argument of the impairment caused by devalued
currencies in Article 11:1.
v. Article 11:6
The idea that exchartge rato misalignrnents can affect the negotiated levei of market access is
evident under Article 11:6. The Article aliows the adjustment of tariffs in order to reestablish
the negotiated market access affected by misaligned exchange rates in one specific situation:
The specific duties and charges included in Lhe Scheduies relating to contracting parties members of Lhe
International Monetary Fund, and margins of preference in speciflc duties and charges are maintained by
such contracting parties, are expressed in Lhe appropriate currency at Lhe par value accepted or
provisionaily recognized hy the Fund at Lhe date o! this Agreernent. Accordingly, in case this par value
is reduced consistentty with the Articles of Agreement of lhe International Monetary FunU by mote
than twenty per centum, such specific duties and charges and margins of preference may be
adjusted to take account of such reduction; provided that Lhe CONTRACTINO PARTIES (i.e., Lhe
contracting parties acting jointly as provided for in Article XXV) concur Lha( such adjustments wili not
impair Lhe value of Lhe concessions provided for in Lhe appropriate Schedule or elsewhere in this
Agreement. doe account being taken of ali factor which may influence the need for, or urgency o!, suei
adjustment. (Eniphasis added)
A devalued currency has an effect of lowering the relative value of specific duties, enlarging
the negotiated rnarket access. It has Lhe exact opposite effect of ad valorem tariffs, which have
their relative value raised by a devalued currency, diminishing the market access. The Article
allows. thus, countries to reestablish their negotiated market access that was unduly enlarged
by the efects of the devalued currency, by negotiating a raise on their specific duties. This
negotiation has occurred nine times during GATT era, between 1950 and 1975, ailowing the
raise o!' bound specific tariffs of Benelux, Finland (3 times), Israel, Uruguay (twice), Greece
and Turkey.
Nevertheiess, the provision encompasses oniy one of four possibilities of the effects of
exchange rates on tariffs, the other three being: (i) overvalued currencies raise the relativo
value o!' specific duties, restringing the market access; (ii) devalued currencies raise Lhe
relative value of ad valorem duties, restringing the market access; and (iii) overvalued
currencies diminish the relativo value ol' ad valorem diities, enlarging the negotated market
access. If the Article recognizes the need that countries may have to adjust their tariffs in
order to address to Lhe impacts of currency misalignments, why not to aliow this adjustment in
ali four cases, nstead ofjust one o!' them?
A second interesting issue raised by Article 11:6 is the change in the intemational monetary
system, from a par value to a floating exchange rate system. Initially, any devaluation that
couid give rise to the application o!' Articie 11:6 would be defined by the IME, according with
Lhe par value system managed by the Fund. With the end o!' Lhe gold standard, it would be
necessary to adapt the Article, so misa!ignments couid still be caicuiated, despite the lack of a
par vaiue.

61

The GATT contracting parties created a Working Group whose objective was to adapt the
existing mechanism in Article 11:6 to the new reality of floating exchange rates. From 1978 to
1980, the Working Group met and adopted, in January 29 1980, the Guidelines for Decisions
under Article 11:6(a) of the General Agreement (L14938, 27S/28-29). This document
reaffirmed the importance of maintaining the mechanism in order to neutralize the effect of
exchange rate devai.uation ou specific tariffs of contracting parties and created a methodology
for the calculation of the currency depreciation, which shail be performed by the IME. The
calcuiation takes into consideration the import-weighted average exchange rate during the
previous six months, and the depreciation shall be based ou currencies of trading partners
supplying at least 80% of the imports of the concemed eountry. This Guidelines have been
incorporated under GATT 94, as established by its Article 1(b)(iv), and can be rightfuiiy
invoked by any WTO member.
It is also worth noting that, unlike Articie 11.1 and other GATT provisions that rnay deal with
the exchange rate issue, the provision of Article 11:6 is focused on the misalignment itself and
not on a governmentai action that results in a currency misaiignment.
Another relevant element of Article 11:6 is the threshold of a 20% devaluation, to enabie
countries to adjust their tariffs. This is importam as it shows that only large misalignments can
have a significam impact on the levei. of market access, justifying an adjustment ou tariffs.
Under a iloating exchange rate system, this threshold is even more necessary, since smail
variations and peaks in exchange rates occur often, but are not suffciently grave to affect
markets access. Oniy long standing misalignrnents, for the past six months, for instance, as
established by the Guidelines, should be taken into consideration when evaivating the leveis
of market access. The Guidelines kept the threshoid of 20% of exchange rate misalignment as
a base for Lhe renegotiation, but it should be noted that this threshold was considered
reasonable based ou the levei of the tariff rates ar that time. Due to Lhe decrease of tariff rates
leveis, a new exchange rate misaiignment threshold could be negotiated in order to aHow a
tariff renegotiation of Lhe current systems of fioating or administrated exchange rates.
Finally, iL must be stressed that the negotiation mentioned in Article 11:6 had the objective to
assure that Lhere has been au enlargement in the country's market access Lhat surpass the
negotiated levei and thaL Lhe tariffs are not adjusted in such way as to restrain bis access
further than the original negotiated levei. It is different, thus, of Articie XXVIII, which altows
members to withdraw its concessions, at the condition Lhat iL provides other compensations to
maintain Lhe general levei of concessions. In the case of Article 11:6, no compensation is
required since the adjustment aiready aims to reestablish Lhe levei of concessions.
Of ali the impacts of exchange rate on trade instruments, the impact on market aecess is the
most reievant one, since iL may impair the main aim of Lhe WTO: to liberalize international
trade, based on a balance negotiation of concession on market access. Article II already
provides some mechanisms to address the issue, but in au incomplete manner. Negotiations
are essentiai to adapt the Articie in a way iL can fully prevent the distortions created by
misaligned exchange rates on market aecess.
2.3. Conclusions

The issue of exchange rates was never properly addressed under the Multilateral Trading
System, mostly due to the initial responsibility of IMF over the subject. Iinder Lhe logic of the
Bretton Woods system, of a coherent financial and trade regulation, Article IV of Lhe [MF
62

Articles of Agreement should be sufficient to address to most of the impacts of exchange rates
on trade. Nevertheless, with the deep change caused by the end of the pair value system, the
rules ou exchange rates became inefficient at avoiding such negative impacts.
On the other hand, atthough the GATT and, in the foliowing, the WTO, have a few provisions
ou exchange rates, proving the direct relation between this and international trade, a more
consistent regulation over the issue was never a primary concern, since the matter was already
addressed by the IMF, with which the WTO should cooperate in order to achieve greater
coberence (Marrakesh Agreement Establishing the World Trade Organization, Article 111:5).
However, the changes uridergone by the IMF were riot talcen into consideration by the
GATT/WTO and the lack of regulation arisen after the end of the pair value system was never
properly analyzed.
Nonetheless, there are a few provisions under the WTO agreements that could be applicable
to the exchange are issue, although insufficient to address the rnatter under a systemic
manner, avoiding the negative impacts of misaligned currencies on mernbers' trade. A case
study is required in order to conclude on the possibility to chalienge a specific WTO member
under the Dispute Settlement System, based on violation (and non-violation) of WTO
provisions due to its currency misalignments.

63

111.2 THE ISSUE OF SUBSIDIES

China is estimated to become the most important economy ia the World in the next few years.
1-lowever, its model of economic development is raising concems from several intemational
partners. Since China acceded to the WTO, in 2001, it has been called to compiy with ali
international trade mies and had to accept a more trans parent manner to implement its reforms
and other changes required by its Protocol of Accession.
As the iargest exporter in the World and a fast growing economy, with rates varying from 7%
to 1.0% per year, China is identified by many countries as a threat to their international market
positions and also to their nationai industries.
The core of this chapter is to anaiyze one of the piilars of the Chinese Economic Development
Modei - subsidies. The maia objective is not to present a whole picture of the issue, but only
to show some evidence of the importance of subsidies in the Chinese economy.
International mies on subsidies are established by WTO, in Article VI of the GATT and the
SCM. The issue of Chinese subsidies is so sensitive, that a speciai clause was introduced in
lhe Protocol of Accession of China on the subject.
WTO does not prohibit ali kinds of subsidies programs, butjust those that are contingent upon
export or upon the use of national content (Article 3, SCM).
The 5CM defines subsidy as a financial contribution made by (or on behalf oO a government
or public body, or any kind of income or price support, which confers a benefit to the
recipient, as of Article 1.1., Article 1.2 and Article 2 of SCM rule that subsidies limited to a
specific firm, industry or group of firms or industries shall be actionable under the WTO, by
the imposition of countervailing duties or by a compiaint under the DSB, in accordance with
the requirements of the 5CM.
The Protocol of Accession of China to the WTO determined special mies regarding subsidies.
Article 10.2 states that: For purposes o! applying Articies 1.2 and 2 o! the SCM, subsidies
provided to SOEs will be viewed as specific if inter alia, SOES are the predoniinant
recipients of such subsidies or SOEs receive disproportionate/y largo amounts of such
subsidies.
Furthermore, Article 10.3 of the Protocol cails upon China to eliminate ali subsidy programs
failing within the scope of Article 3 (prohibited subsidies) of the 5CM.
In order to understand Chinese policy regarding subsidies it is necessary to address some
pecuharities of its economic development system, which can be summed up by two modeis: a
state-oriented model (e.g. Shanghai province) and an entrepreneurship model (e.g. Zhejiang
and Jiangsu provinces).
As an example, this study wiil show the differences amongst these three Chinese regions,
where proportionaily there are more SOEs in Shanghai than in Zhejiang or Jiangsu. Also, it is
worth to take note that the economic model applied to each region has interfered on its
development and GDP por capita performance through the years.

Chinese SOEs began to pay in since 1985. After that, SOEs started to make tosses and had to
be covered by the government. For this reason, those enterprises were granted subsidies ia
order to reverse the situation. lii 1999, China and the United States signed an agreemeat prior
to the Chinese accession to the WTO, where China agreed to cut its subsidies to Ioss-making
SOEs progressivety. Nevertheiess, up to 2008, this kind of subsidy remained as part of the
Chinese strategy to develop its textile industry.
Concerning the textile industry, if it was possibie to estabtish a pattern, it coutd be said that
the IOth Five-Year Pian (2001-2005) was a start towards a global market competitiveness of
Chinese textile industries. It is possibte to note a risc on subsidies leveis in order to permit
companies to enhance their competitiveness in the global market. Also, it is possible to verify
the privatization of small SOEs because of the deficit amount, affecting Chinese
government' s budget.
The 1 lth Five-Year Plan covered Lhe years from 2006 to 2010 and the incentives were still
based on the uprising of Chinese exports and companies' competitiveness. In this period, the
Eastern Region of China, where the textile provinces are tocated, experienced a strong rise on
minimum wages, social security bitts and reiated costs. For that matter, the Chinese
government, especialty the provinces, created some programs focused on financing and loans
to those companies, at low rates.
The 12th Five-Year Plan (2011-2015) is focused on innovation and R&D. In Lhis sense, the
Chinese government is still working te enhance the quaiity of the textiie products and
machinery produced in China and exported ali over the Wortd.
In the meantime, the Chinese government opted not to notify its known subsidies programs to
the WTO, as required by Lhe SCM The United States, in 2011, introduced a Request frorn the
United States to China pursuani to A rticle 25.10 of the Agreernent (C/SCM1Q2/CHN142 - 11
October 2011); listing 200 subsidies programs that China was in default to report to the
Committee on Subsidies and Countervaiting Measures.
This chapter is structured te introduce some aspects related to subsidies on Chinese economy,
especiaiiy in the textile industry sector. Firstty, the regulatory framework on subsidies of
GATT, SCM and Lhe Protocoi of Accession of People's Repubiic of China to the WTO is
presented. Secondly, the mam characteristics of Chinese textile industry based upon Lhe
availabie data are examined. Thirdly, a brief anaiysis of the economic devetopment modeis ia
China: state-oriented and entrepreneurial is summarized. Fourthiy, Lhe subsidies programs
investigated by the United States and submitted to the Committee on Subsidies and
Countervailing Measures in the WTO are iisted. Last but not leasi, our conciusions, presents a
brief legal analysis comparng the mie in force and Lhe practices of Lhe second iargest
econorny in the World.
1. WTO rules: GATT, SCM and the Protocol of Accession of China
1.1 WTO rules
The Agreement on Interpretation and Application of Articles VI, XVI and XXIII of GATT
1947, negotiated ia Tokyo Round, was built on in the Uruguay Round by the SCM, as a part
of the Marrakesh Agreements.
65

The bases of the concept of subsidies are: GATT Article VI that established lhe rules for
antidumping axid countervailing measures; GATT Article XVI that presents more rules for
subsidies; and GATT Article XXIII regarding nuilification of impairment. The Code on
Subsidies of lhe Tokyo Round introduced new rules but was not able to produce a definition
of subsidy. A definitive deinition was only introduced in lhe SCM of lhe Uruguay Round as
per Article 1 (Definition of a Subsidy):
1.1 For lhe purpose of this Agreenient, a subsidy shall be deenied to exist if:
(a)(I) there is a financial contribution by a government or any public body within the territory of a
Member (referred to in this Agreement as "government'). i.e. where:
(i) a government practice involves a direct transfer of funds (e.g. grants, loans, and equity infusion),
potential direct transfers of funds or liabilities (e.g. loan guarantees);
(ii) government revenue that is otherwise doe is foregone or not collected (e.g. fiscal incentives such as
tax credits)48;
(iii) a government provides goods or services other thari general infrastructure, or purchases goods;
(iv) a government makes payments to a funding mechanism, or entrusts or directs a private body to carry
out one or more of ifie type of functions illustrated in (1) to (iii) above which would normally be vested iii
the government and the practice, in no real sense, differs from practices normally followed by
governments; or
(a)(2) there is any forro income or price support ia lhe sense of Article XVI of GATT 1994; and
(b) a benefit is thereby conferred.
1.2 A subsidy as defined in paragraph 1 shall be subject to lhe provisions o! Part II or shall be subject to
the provisions o! Part III or V onty 1f such a subsidy is specific in accordance with the provisions o!
Article 2."

The 5CM determined three categories of subsidies: prohibited, actionable and non-actionable
subsidies. However, the category of non-actionable subsidies was riot renewed ia 2000 and
expired. As determined by Article 1 above a subsidy is defined by a financial contribution or
any forra of incotue of price support that confers a benefit. Unlike dumping definitions,
subsidies are performed by lhe government, even though lhe beneficiary may be a private
entity.
In accordance with Article 3 of SCM, lhe following subsidies shall be prohibited:
(a) Subsidies contingent, in law or in fact, whether solely or as one of severa] other conditions, upon
export perforniance ( ... )
(b) Subsidies contingent, whether solely or as one of severa] othcr conditions, upon the use of domestic
over imported goods.

Prohibited subsidies may be object of a complaint under the DSB, foliowing lhe procedures
established in Article 4 of the 5CM.
PART III of the SCM regulates Actionable Subsidies. Article 5 determines that
No Member should cause, through the use of any subsidy referred to in paragraphs I and 2 o! Article 1,
adverse effects to lhe intercsts o! other Members. i.e.:
(a) injury to the domestic industry of another Member;

(b) nuilification 0v impaivment of benefits accruing directly or indirectly to other Members under GATF
1994 in particular ifie benefits of concessions bound under Article 11 o! GATT 1994:
(c) serious prejudice to lhe interests o! another Member.

48 "In accordance with the provisions o! Article XVI o! CAI]' 1994 (Note to Article XVI) and the provisions o!
Annexes 1 through III o! this Agreement, the exemption of an exported product from duties or taxes borne by the
like product when destined for domestic consumption, or the remission of such duties or taxes in amounts not ia
excess of those which have accrued, shall not be deemed to be a subsidy."

66

This Articte does not apply to subsidies maintained on agricultural products as provided in Articte 13 of
lhe Agreenient on Agriculture.

Actionable subsidies can be challenged through the DSB, or through countervailing action if
iL causes injury to the dornestic industry of another member.
The SCM also presents some specific rules for countervailing investigations such as period of
Lime, reviews, sunsets, de minims clause. It is also importam to
Lo mention that Lhe SCM
recognizes Lhe positive use of subsidies in economic development programs, especially for
developing countries, and in Lhe transformaLion of centrally-planned economies to rnarket
economies (SCM Articles 27.1 and 29.1).
Under this concept, China should be considered an economy in Lransition. However, despite
of few moves in transition to a market economy, several observers have recognized Lhat China
has not continued its reforms towards ths kind of system.
As a consequence, iL is being held a new debate on how to apply Lhe SCM on NMEs as China.
It is been. argued Lhat iL would not make much of a sense to appty anti-subsidy measures
against China because it is treated as a NME. As a non-rnarker economy, subsidies cannot be
quantified; price and cost are artificia!ly set by a centrally-planning authority49.
The US faces a challenging dilemma: in 1983, Lhe US Department of Commerce had reached
this sarne conclusion about Lhe impossibitity to apply CVD againsL NME. This decision is
now being challenged by the US Presidency50who claims the very opposite, arguing that a
CVD rnusL be imposed when identified, even againsL NME counLries51.
TROMMER. Sitke Metanie. "Special Market I3conomy: Undermining lhe Principies of WTO?" In:

Chinese

Journai o! International Law. v. 6, n 3, 2007, pp. 597-598. The author also suggests a possible solution on the
matter: "If one considers that no WTO inember upholds a classical non-market econorny with complete State
monopoly over alt Lrade-related aspects of lhe econorny today, and that Lhe administrative practice addressing
this issue in antidumping proccedings is ledious and produces frustrating outcomes for ali parties invotved, one
may ask wheiher anti-subsidy investigations could not be conducted in cases of State intercrence, just tike
againsl any other wo member. Arguably. lhe prolection value of the domestic industry against unfair trading
practices is the sarne, since antidurnping duties theoreticalty can only be upheld before lhe Dispute Settlement
Body if they are irnposed in tine with Articte VI of GATT and lhe Antidumping Agreernent, that is to say if the
underlying catcutations are adequate and the industry of the importing counlry suffers material injury caused by
dumping. A survey of interested parties of EC Trade Defence Instruments in 2005 has shown that this view is
shared by severat EC industries which suggesled that the anti-subsidy inslrument should be used in the case of
economies in transition."
In its 2011 Report to Congress on China's WTO Conipliance. the LJSTR slates that "The Commerce
Departmenl began applying U.S. CVD taw to China after finding lhat reforms to China's economy in recent
years had removed the obstacles to appiying Lhe CVD taw that were present in Lhe 'Soviet-era economies' at
issue when the Commerce Department first declined to appty Lhe CVD Iaw to non-rnarket economies in lhe
1980s." tn: USTR. 2011 USTR Report to Congress on China 's WTO Coruplance, December 2011, page 46.
Reccntly, on lhe case GPX Internationat Tire Corp. v. U.S., case n 08-CV-0285. of 19 December 2011, the
U.S. Court of Appeals for lhe Federal Circuit stated lhat "Commerce appealed to our court, arguing that a
subsidy is 'a device used by governrnents to dislort the signals that the markel gives to firms,' and that by
detinition. subsidies do not exist in NMEs" (page 6). On pago II, Lhe Court reveals that "Cornmerce's primary
argument is that lhe piam statulory tanguage mandating that a countervailing duty 'shatl be imposed' requires it
to inipose countervailing dulies when il is able to identify a subsidy, even in an t'IME counlry". Finally. on page
17. lhe Court explores the Depariment of Commerce decisions uphetd in 1983, arguing that "Commerce flrst
considered imposing counlervailing duties on NME imports in 1983. when a countervailing duty subsidy was
called a 'bounly or grant,' 19 U.S.C. 1303 (1988) (repeated 1994). In 1984. Commerce deiermined that 'a
'bounty or granl, within the rneaning of the countervailing duty law, cannot be found ia an NME' because 'Lhe
notion of a subsidy is, by definition, a rnarket phenornenon.' Wire Rod, 49 Fed. Reg. at 19.372, 19.374. This

67

The United States Court of Appeals, recently, has upheld the understanding of the OS
Department of Cornrnerce, dated as of 1983, in the case CPX International Tire Corp v.
United States (GPX), which means that the OS Departrnent of Commerce cannot apply
countervailing duties to ariy merchandise from any country that the sarne department
considers a NME aiming at antidumping law. For that matter many countervailing orders
against China shall b revoked and the US Department of Cornmerce will not be able to
initiate any countervailing duty investigations against NMEs. This is why the USTR urges the
Congress to pass the bili "clarifying that Lhe CVD law can be applied to subsidized goods
from NME countries"52.
It is also important to notice that Article 27.13 of the 5CM itself, applicable to developing
countries in a process of privatization is not applicable to China, as of its accession's
commitments (RWP, paragraph 171).
1.2 Protocol of Accession of China to the WTO: commitments on subsidies
On the matter of subsidies there are some specific rules in the Protocol of Accession of China
to the WTO, which China has agreed to uphold by its accession time in 2001.
In a general basis, China has comprornised to notify the WTO of any subsidy within the
meaning of Article 1 (definition of a subsidy) of the SCM, including subsidies under Article 3
(prohibited subsidies) of the sarne Agreement, in accordance with SCM Article 25.10. In
2001,. upon its accession, China submitted, tinder Annex 5A, Notification Pursuant Article 25
of lhe SCM, describing subsidies applied by the central and local governments until the
accession.
Nevertheless, after its accession, China has notified its subsidies only twice (2006 and 2011.
Dite to the lack of subsidy notifications, the United States has adopted as one of its actions in
the Committee on Subsidies and Countervailing Measures of the WTO to press China to
submit new and fuli notification listing its subsidies programs 53 . However, China did not
submit its notification until the United States adopted a more intense measure, by filing a
counter notification on the matter in October 2011.
In addition to the commitments of notification, China has agreed to be subrnitted to a
Transitional Review Mechanism in which it was determined, as of Article 18.1 of its Protocol
of Accession, to have its subsidy prograrns annually analyzed. This rnechanism expired in
2011, afler 10 years of the Chinese accession to the WTO (Article 18.4).
On lhe matter of specific subsidies (Articles 1.2 and 2 of the 5CM), it is settled that they will
be viewed as specific if SOEs are the predominant recipients of such subsidies or if SOEs
receive disproportionately large arnounts of such subsidies 54.

rneans that the US Couri of Appeals for the Federal Circuit upheld Cornmerce's opiniori on the incompatibility
ofanti-subsidy measures against NMEs.
2
KIRK, Ronald. 2011 Annuai Report ofthe President ofthe United States ou 11w Trade Agreements Program,
Oftice of lhe United States Trade Representative, March 2012, page 181-182.
KLRK, Ronald. 2010 Aunual Report o! the Fresident o! tbe United States ou the Trade Agreerneuts
Progran.Office oF lhe United States TraJe Representative, March 2011, pagcs 34-5.
54wTO. Protocol ofAccession o17!se People sRepublic of Clima. WT1U432. lO November 2001. p. 7.

68

Article 15(b) of lhe Protocol of Accession of China to Lhe WTO establishes that for a matter
of comparability issues ia determining subsidies, when addressing subsidies described ia
Articles 14(a), 14(b), 14(c) and 14(d). (calculation of lhe amount of a subsidy ia terms of the
benefit to Lhe recipient) lhe SCM shall apply unless lhe importing WTO member finds some
special difficulties ia that application, iii which case, members may use other methodologies
which take imo account lhe possibility that prevailing terras and conditions ia China may not
always be available as appropriate benchmarks. When applying these methodologies, the
importing member shall, ia lhe first place, adjust such prevailing terras and conditions before
using terras and conditions prevailing outside China 55.
Furthermore, China provided a list of prohibited subsidies, with a timetable for Lheir elimination,
in Annex 58 of Lhe Protocol, As provided in Article 10.3 of Lhe Protocol of Accession, it shoutd
eliminate ali export subsidies, within the meaning of Article 31(a) of the SCM Agreement, by the
time of accession56.
Amongst the subsidies listed ia Annex 5B were Lhe subsidies provided to certain SOES which
were mnning at a loss. The graphic below shows lhe evolution of subsidies from central
budget provided these SOES 57:
SUBSIDIES FROM CENTRAL BUDGETPROVIDEDTO CERTAIN STATEOWNEDENTERPRISES WHICH ARE
RLJJNINGA1A LOSS (ICOmI RM)

L.

999

J9Z

-990

-094

1990

999

997

1990
o1

-----------

Source: Prowcol of Accession of People's Republic ol' China - Annex 5A 2001.

The graphic shows that Lhe subsidies from central budget provided to certain SOES which
were running at a loss experienced a substantial growth from 1996 to 1998.
The China Statistical Yearbook (2007) provides another picture of this kind of subsidies. The
graphic below shows Lhe percentage from the total amount of government reveriues that is
destined to SOES running at a loss. The graphic also presents lhe variation of this percentage
ia each year58:
55 1bd p 9
56 Sce also WTO, Report of me Working Pan)-' cm the 4ccession o China, WT/ACC/CHN/49, 1 October 2001.
aras. 166 and 167.
See also WTO, Protoco/ of/lccession o! People 's Republie o! China, WTILJ432, lO November 2001, p. 68.
li shall be mentioned that China Statistical Vearbook series (years 2008, 2009. and 2010) do not show the
figures of subsidies to loss makingcnterprises. If the reduction margin were between 6.8% to 13,5%. it is unclear
69

SUBSIDIES TO LOSS MAKING ENTERPRISES (1985-2006)

--------.

30.rt
'

15-o'

1o.r

o_o ---19:5

40.0%

J50%

+ VwlstJon 1%)

eI!I G ovt,n,nnt Rev*nut

5nc..chinastsIcjS
0,1%

Source: China Statistical Yearbook (2007).

The graphic above shows that the amount of subsidies to loss making 59 enterprises
experienced a consistent low since 1985 in percentage of central governrnent revenue. In Lhe
sarne year, SOEs started paying taxes and, a few years later, those enterprises transferred the
coss with social security to the local govemrnents, in order to decrease their negative
revenues 60 . Paying taxes reverted in massive loss to SOEs, which might be an explanation for
lhe 25% participation of subsidies to loss making enterprises on the government revenues in
1985 and its consistent decrease, after changes ia social security system.
The graphic also demonstrates that the share of these subsidies in the central government
revenue diminished, even though in absolute amounts, there was an increase in some years.
Since China Statistical Yearbook 2008 lhe data on lhe arnount of subsidies to loss making
enterprises has disappeared. Although there was a consistent reduction in the arnount of
subsidies since 2001, in relative and absolute nurnbers, it is not possible to know if Lhe
Chinese government has eliminated the remaining 0,5% of subsidies to loss making SOEs in
values of its revenue or if there was only a change n the statistics published in its Yearbook.
whether those subsidies no longer exist. In China's Trade Policy Review (WTO) of 2010, there is no information
on lhe matter.
59 Sourafel GIRMA eta/estimate that 11w subsidies to Ioss making State Owned Enterprises has reached a total of
USSI09.8 billion troto 1995, and Lhe variation remained between 4.4 to 2.4 billion from 1996 to 2005,
annualiy. GIRMA, Sourafelet ai. "Can production subsidies expiam China's expor( performance?", 8 July 2008.
Available ai: <htt p:f/www.voxeuorgfindexnh p?g=node/1373> Viewed at: 18 February 2012. p. 2.
a LIN, Shuanglin. "The Risc and Fali of Chinas Governrnent Revenue". 41 Wo.rking Paper a. 150, 2009, p.
14. The author also says: "Over lhe years. Lhe government has privatized many smali loss-making SOES. Also,
Lhe government has transferred SOES' social securlty burden to Lhe society. In Lhe past, SOES took care of Lhe
retirement and healthcare of their workers, and now, local governments Lake cate of the social security of
ernployees of the SOES. Ali flrms must join the social security program. New firms without retirees actuaily
subsidized (he SOEs."(p. 14, foornote 17).

70

2. Main characteristics of the Chinese Textile Industry

China's share in lhe Global Market of textiles rose from 38,8% (2001) to 47,1% (2005) but it
has seen no progress since then. 1-lowever, if considered only markets of the United States and
lhe EU, China's share was of 71,3% (2006), experiencing a declining to 66,8% (2008). In
terms of US apparel import market, China's share rose from 19,9% (2003) up to 35,9%
(2009) and its share of the EU apparel import market rose from 21,8% (2001) to 42,8%
(2008)61.
After Lhe creation of the WTO, members reached an agreement to the liberalization of lhe
textile and clothing sectors by lhe approval of the Agreement on Textile and Clothing that
determined the mIes for the integration of these sectors to general WTO rules, by a
progressive enlargement of the preexisting quotas on textiles until their removal in 2005. This
transition agreement expired in 200562. After this date, lhe United States and the EU,
individually, agreed upon with China to extencl lhe quotas until 2008 and 2007, respectively.
The WTO World Trade Report of 2006 concluded that the elimination of quota restrictions on
textile and clothing did not have considerable impact on demand or domestic market
conditions in lhe United States and EU market, what has perceptibly changed, however, is Lhe
composition of inarket shares among exporting countries" indicating that "Lhe competitive

situa tion of the textiles industry in Europe and Lhe United States is more favourabie than that
o! Lhe clothing industrjP 3 . Despite that, lhe Report concludes that the impact of restrictions on
Chinese exports was limited and tied to lhe market seasons64.
Textile and apparel industry has been an importam sector
sector for lhe development of Chinese exports
since lhe 1978 economy opening. By that time, lhe textile and clothing industry was chosen by lhe
Chinese Government as one of its national industries to be promoted. This choice can be explained hy

61 McCANN. Jack. "China's Textile and Apparel Inctustry and the Global Market: Five Competitive Forces.' itt
SAMAdvancedManagernenrfournal, Winter 2011, p. 33.
62
More information cm WTO's website on Textiles: chttp:f/www.wto.or/english/tratop eltexti eitexti e.htm>.
63
WTO. Exploring the /inks between subsidies, frade and the WTO. World Trade Report 2006. 223 pages.
Available at: <http://www.wto.org/english/res e/booksp e/anrep e/world trade reporto e.pdf>. Viewed ar: 12
January 2012, page iii and 17.
(i4Jbid pages 13-16.
71

1
1
e
e
e

e
e
e
e
e
e
e
e
e

two main factors: basic infrastructure and experience in the field 65 and lhe fact [hat Lhis field did not
require any advanced technology as from lhe start point66.
The Chinese Government established the pillars of its strategy to the sector in the 1980's by
lhe Congressional approval of the "Six Priorities" to the Textile and Apparel Tndustry, which
included favorable treatments in the foilowing areas: supply of raw materiais, fuel and power;
innovation and its transformation and infrastructure construction; bank ioans; foreign
exchange, imported foreign advanced technology and transportation67.
Accordingly to Larry QIU, China is the largest producer of total textile and apparel products
such as cotton yarn, cotton fabric, silk fabric, wool fiber, chemical fibers, garments, and
knitted goods68
MA and YANG state that Chinese textile industry is even more dependent on global markets.
Despite of its rapid growth, some textile sectors are deficitary such as wool, fabrics,
bombazine, worsted, high grade textiles and apparel 69. There are some factors to benefit the
Chinese textile products such as lower labor costs or the famous Chinese silk, which is around
75% oU lhe silk manufacturing in lhe World70.
Concerning trade defense instruments, several countries, including the United States and EU,
are using more frequently antidumping duties then anti-subsidies, because China is not
considered a market economy by the majority of WTO members, which allows the use of the
surrogate country methodology, in accordance with the provisions of China's Protocol of
Accession. However, there is enough evidence to support that several subsidies could be
countervailed.

65

e
e
e
e
e
0
e
e
e
e
e
s
e
e
1
e
e

QIU aIso determines that 'China's modera textile and clothing industry began in lhe 1870s. Chan Qi Yuan
bLIilt up Lhe first textile factory caIled Ji Chang Long Reeling Miii in China. During lhe foliowing years until
1949, lhe textile industry developed slowly as lhe society was very unstable and China had witnessed many wars
over many years."(QIU, Larry. "China's textile and clothing industry. (2005)". Available at:
<http:11s3.amazonaws.com/zanran stor,,ipe/www.bm.tist.hk/ContentPaQes/18112599.pd . Viewed at: 12
February 2012). In addition. lhe Departnient of Commerce of Lhe United States determined lha( "Nantong's
textile industry has a long history - dating from 1895 - and China's famous modern industrialist Zhang Jian
established lhe nation's first self-run textile mil! (presentiy lhe No 1 National Cotton MIII). For example,
Nantong has aiready deveioped into one of China's textile bases. The City uses 450.000 spindles and 26,000
cotlon machines. It has Lhe complete equipment to produce lhe 'tive fabrics' (cotton, silk. linen, wool and
chemical tibers) and lhe 'six synthetic fibers' (polyester, acrylic, polyvinyl chloride, poiyamide, poiypropylene
and polyvinyl alcohol). In Lhe past few years, Nantonf has used more than US$ 60miliion in tbreign investrnents,
and most of this investment has been used in lhe light and textile industries. It has greatiy increased lhe strength
of the Iight and textile industries and has laid down an excelient base for iture deveiopment."(US DoC, NTIS.
China Report: Econornic ,4ffars, Springfield, VA: FBIS. 1985, p. 6).
66
Available
ar:
textile
and
clothing
industry.
(2005)".
Larry.
"China's
QIU,
<http:/1s3.amazonaws.comlzanran storage/www.bm.ust.hklContentPages/i 811 2599. ydf>. Viewed aL:
12
February 2012, p. 3.
67
SFIAO-IUA, Ma, Govermnent-Industry Relatons after Decentralization: Froni ffie Five- Year P/an to the
World Trade Organization.PhD thesis, 2010. Available at:
<http://scholarbank.nus.edu/bitstreamJhandle/I 0635/27502(MaSH.pdt7sepuence= 1>. Viewed ar: 23 Fcbruary
2012, p. 86.
and
clothing
indLlstry.
(2005)".
Available
at:
QIU,
Larry,
"China's
textile
Viewed at:
12
<http://s3.amazonaws.com/zanran storage/www.bm.tLst.hk/ContentPaees/18112599.pd
February 2012.p. 4,
69
MA, Jing. VANG, Weiquan, "On Trade Barriers to China's Textiles Industry," in: International Journal of
Business and Managernent. v. 5, n9, September 2010, p. 127.
701b1d.. P. 129,

72

Recently, China has created several programs on green technoiogy subsidies 71 , which might
be seen as a change on China subsidies policy provided by central and local governments.
Moreover, regarding Lhe textile and clothing industry, lhe 2008 international financial crisis
started the trigger to a new stimulus package for lhe Chinese manufacturers.
The idea of subsidizing green technology initiatives is related to lhe core of Lhe Chinese
development: exports and foreiga direct investment. According!y to Rohit Aggarwal, lhe
main objective is to increase lhe market influence in lhe global textile markets, and, for that
matter, it is crucial to gather more advanced techno!ogies, innovation, and to operate in
harmony with lhe environment. Also, consumer concerns and some health issues are at stake,
if considered that lhe textile and apparei industry invo!ves in ther processes several chemical
formula and chemical proceedings that may affect consumers and workers if an appropriate
technology is not available72.
The main instrument to promote development in China was provided by lhe Five-Year Plan.
Provinces have specific plans and Lhe central government as well. The 1001 Five-Year Plan
established that the textile industry was to be stimulated and lhe focus was on the exports
leveis.
The ii" Five-Year P!an (2006-2010) was also concerned with lhe exports !evels but it started
changing paradigm by introducing lhe need to develop advanced technologies. Thus, lhe 11 h
Five-Year P!an determined that:
To strengthen lhe technological capability of lhe textile industry and increase ibe number of Chinese-

owned brand names; to devetop high-tech, high-performance, differential, and environrnentaL-friendly and
renewable fibers, and to enhance the development and utilization of textiles for industry use, silk and noncotton tibers; to advance the gradient shit of the textile industry.
Each Five-Year Pian focuses on some sectors to explore. In this sense, lhe economic
intervention is noticed by privaLe actors and lhe proper taxes incentives to be given in this
policy. The results are remarkable.
lu 2010, textile investments responded for 38,55% and 9,27% of total invested in central and
western regions in China, compared to 19,13% and 2,66% of 2006. This means that lhe
traditional textile provinces have been experiencing a decrease of its participation on
investments made on lhe textiie sector 73. 5h11, lhe Textile Tndustry Chamber of Commerce
informs thal, in 20 1.0, lhe exports in lhe sector have returned to lhe figures verified before
2008 financial crisis, amounting US$206,5 billion (up 75,72% from 2005).
The figures are remarkable and they demonstrate that Lhe Five-Year P!ans of lhe Chinese
government have had a great impact. By Lhe time of 2008 financial crisis, lhe Chinese
government also approved a plan to revitalize lhe textile industry: Top Ten Industry
USWTO, Request froni the Unired Stares to China pursuant to ,4rticle 25.10 o! the Agreement,

G/SCMJQ2/CHN/42. II October 2011, p. 2.

72
CTE!. 12 July 2011. The declaration was made by RohitAggarwal, vice-president, strategic marketing and
planning, TI-LE, in an interview to htty://english.ctei.gov ,cn, an official public body of central Chinese
overnment.
'China Textile Industry Report 2010-2011. Textle Industry Chamber o! Comnerce - The Sub-Coundll o!
Textile Industry, CCPITAvailabIe aI: <http:/fwww.ccpittex.coni/engfnews/44937.html>. Viewed at: 28 February
2012.
'4ldib.

73

Promotion Pianninj'5. The 11th and 12't` Five-Year Plans are very important as well on
dictating Lhe priorities of Lhe Chinese government invesLment and policies towards textile and
apparel industry.

Geographical arca
The China National Textile and Apparel Council (CNTAC), in 2008, included Lhe bases,
chies and towns where Lhere were textile industry activities. Also, determined which area of
textile and apparel sectors those entities were entitled for. The map below shows lhe
provinces where it can be found any textile and apparel economic activity:

China's Provinces on Textile and Apparel Industry

ma
Source: CTEI.

The figure shows that lhe textile and apparel industries are located mostly in East China
(Shandong, Jiangsu, Shanghai, Zhejiang, and Fujian), Central-South China (Hubei and
Guangdong), and also in the Northeast (Liaoning).The majority has a high levei o!' private
enterprises, with lhe exception of Shanghai.
SINOMACU, Top Ten Revitalization Industries Announced by Chinese Government to Cope with Financial
Crisis,' On 26.3.2010. Available at:
<http://www.sjnoniachcomcpJtemp ]atesfr nem eWcontent.asx?nodejd=320&parze=Con(entPage&contentid=
fi> . Viewed at: 29 February 2012.

74

Zhejiang, Guangdong, Jiangsu and Shanghai are, together, the traditional provinces where the
textile and apparel industries can be found. Thus, these provinces are of main concern when it
comes to the analysis of eventual local subsidy program and also the functioning of their
banking system for investments and loans. However, the main objective here is to provide the
information needed to identify the most relevant subsidy programs and the relation with those
provinces.
The Communist Party itself endorsed a study which details the division of work and
specialization in each rural provinces also leading to a rapid urbanization process. According
to it the production is coordinated in single product lines under the yicunyi pin system (which
is one item per viliage) or yixlangyl pin (one item per township)76.
The sarne study adds that this system not only increased the levei of industrlallzation in
Zhejiang 's countryside and rural sector, but also contrlbuted to speedlng up the process of
urbanlzation, prompting me reorganization of the population 77. B y adopting this system the
viliage and towns are well-known by specific products and sectors as the table below
details78:

76

LI, Xingshanet aL. lhe Successfut Practice and Implementation of the Socialist Market Economy: An
Investigative Research Report on Zhejiang's Econorny - Part 1," translated by M.E. Sharpe. In: The Chinese
Economy. v. 35. n. 4, July-August 2002. p. 16.
"Ibid., p. 16.
78
OnIy main chies and towns are related on the table, the list, for that matter. is not exhaustive.

75

The CTEI, an official organ of the Chinese governrnent commissioned by China National
Textile and Apparel Council (CNTAC) and operated by China Textile Network Company
(CNTEX), is the most influential network for those who need information on the Chinese
textile and apparel industry. Besides data and simple reports, CTEI maintains a dose
relationship with local governments, local textile clusters and local enterprises. li was
managed to catalogue thcir data in order to provide a complete list (dated from 2008) of the
textile sector and the producing province, Furthermore, it was possible to link Lhe province
production to the specific industries established in their cities and townships as well.

1
s

Provinces: Textile and Apparel Sectors

Source: Ci'EI.

Guangdong and Zhcjiang are lhe leading provinces in diversity of textile and apparel sectors
followed by Jiangsu, as it can be inferrcd from lhe table above. This diversity might be a
consequence of an entrepreneurial economic model. Zhejiang, arnongst ali industry sectors,
has 11% of textile and apparel industry participation and, actually, lhe most irnportant
province for that industry sector.
Both Zhejiang and Guangdong are very large and have huge economic indicators. As
demonstrated before, entrepreneurial provinces have better statistics if it is considered other
elements but foreign direct investment and GDP growth.
Shanghai had a historical importance to textile and apparel sectors before Mao Zedong
Revolution in I949. After that, Shanghai has been experiencing a planned economic

Accordingly to Jack SHEPI-IERD, 'Increasingly strict and burdensome regulation of the cotton industry at
home iii the period immediate!y preceding the outbreak of the present hostilities also hclped to inspire many
large Japanese texti!e concerns to transfer part of their activities to China. The Japanese seemed determined to
(um the three poris of cities of Tientsin, Tsingtao and Shanghai into strongholds from which to conquer the
Chinese texti!e markct, using Chinese labor and Chinese raw cotton for that purpose. ( ... ) The principal losses
suffered by Chinese textile interests through destruction and damage to mill properties during the course of
hostilities were in the Shanghai arca. Of the 2.500,000 spindles in operation before the war. no less than 44%
were concentrated in and around Shanghai, while 23% were scattered in the Province of [Jjiangsu, along the
Yangtze and the Shanghai-Nanking Railway.' ("Sa!vaging the Textite Industry in China." Par Eastern Survey.
v. 8, n 15, 19 July 1939, p. 172-3).

77

tnode1 80, notably new paths since the Revolution, probably forcing Chinese entrepreneurs to
move their business to Zhejiang or Jiangsu Province.

2.1 Adjustment and revitalization plan for the Textile Industry

After lhe financial crisis of 2008, which affected mainly the United States and the EU,
Chinese textile exports experienced a decrease compared to 2007. For that matter, ia 2009, the
government launched the Top Teri Jndustry Promotion Plari in order to prevent the crisis to
spread on the Chinese productive sector. It included automobile, iron and steel. electronic
information, petrochemicals, nonferrous metal industry, shipbulding industry, logistics
industry, light industry, equipment manufacturing, and textile industry.
Accordingly to LONGBAO, ali industries included in the aforementioned plan (logistics
industry excluded) are responsible for 80% of industrial added values or for 25% of China's
GDP81.
The core of the plan could be summarized in this way: ensure the demand and adjust the
supply. This plan had three-year duration and was focused on balancing lhe dornestic demand
(which ap rose) and the extemal demand (slightly diminished ia 2009). Thus, new
opportunities of investments were launched and that so-called adjustment, the incentives to
technological innovation, measures to achieve global competitiveness and other minor issues
were taken imo account82.
This revitalization plan counted on a US$586 billion stimulus package to promote the
adjustment of industrial structure, the restoration of market confidence and prevent the
economy to experience a trend of a fast slide down. Regarding the textile industry, the plan
was sumrnarized by SINOMACH (China National Machinery lndustry Corporation), a SOE
approved by the Chinese State Council83 , in verbis:
Markct funetions should be brought imo ptay to stimulate demands. White efforts are to be made to
stabilize lhe international markets, hard efforts have to be made to stimulate lhe domestie demand to
promote lhe economie growth. The government will deploy dedicated investments to support the
technical progress of the textile industry in Lhe hope of supports have to be augmented for Lhe textile
industry, inctuding Lhe increase of lhe export tax rebate and lhe credit and loan support.s extended to Lhe
enterprises which are in fundamental good conditions, but are experiencing temporary operating and
80

HUANO. Yasheng. Capitalsin with C'hinese Characteristics - Entrepreneurship ano dia StataCambridge:
Cambridge University Press. 2008. p. 176-9.
SI
LONGBAO. Wei. "Regional Economic Development and Entrepreneurship in China," Paper prepared for the
conference. In: US-China Business Cooperation in die 21 Century: Opportuniies and Chalienges for
Entrepreneurs. Indianapolis (IndianalUs), Indiana University, April 15-17, 2009, p. 14.
82 Tbid.. p. 14.
83

According to SINOMACH's website, "established ia January 1997, China National Machinery Industry
Corporation (SINOMACH) is a targe state-owned enterprise approved by lhe State Council and directty
administered by Lhe State-owned Assets Supervision and Administration Commission. ( ... ) SINOMACH is a
targe state-owned group with the targest scale, widest diversification. most comprehensive lines of business and
the strongest R&D capabilities ia lhe Chinese machinery industry. The Group has under irs portfolio 50 whollyowned and holding subsidiaries, including 7 tisted companies and more than 70 overseas services branches,
employing 100.000 stafs globatly. For years, SINOMACH has sustained annual growth rates over than 30%,
with operating revenue reaching RMB 155 billion in 2010. The group was ranked among lhe Global 500 for Lhe
first time in 2010 and has remained No. 1 among lhe top 100 Chinese machinery enterprises for years and has
been rated class A in the performance evaluation for state-owned enterprises conducted by the State-owned
Assets Supervision and Administration Commission." Available at:
chttD://www.sinomach.com ,c&temDtateslT common en/index.aspx?nodeid=147>. Viewed at: 12 March 2012.

78

financial difflcultics. The central and local governments and enterprises should expand their efforts in the
procurenient of cotton and silk materiais. Efforts shouid be made to guide textile and garment enterprises
to move to central and western part of Lhe country.

The government established a plan to expand textile and apparel industry to the Western part
of China and in lhe recovery of the export levei prior to lhe 2008 financial crisis. The portal
SINA inforrned that in 2008 lhe export rowth were lO percent iess than lhe previons year,
causing a profit decrease to 1.77 percent8
Public authorities estimated that lhe plan could imply in an average production 10% growth
each year untii 2011 (last year of lhe pian) and an 8% export growth, to reach US$240 billion.
The maia measure adopted by lhe government was lhe tax rebate increases. Beijing increased
them by five times since 2008. The measures wouid be implemented in order to achieve a
more advanced technoiogy to increase technology, aiso improving domestic consumption and
lhe extension of ioans tepayment deadlines to help lhe textiles enterprises experiencing a siice
down on their businesses86.
The transparency on lhe measures adopted in lhe use of the amount established in lhe package
stimuius remained unclear: China has shown a limited compromise to disciosure essentiai
information to allow an accurate analysis of lhe effects of this sort of action.
The Il Five-Year Pian provided stimulus for the growth of production, saies and exports of
China textile industry. The domestic demand was a pivotal issue in lhe achievements of
Chinese textile industry under lhe 1 11h Plan. Also, foreign direct investments and
exports leveis were part of lhe pian, increasing opportunities for independent innovation.
However, lhe quai.ity leveis need to be improved. Whiie lhe quantity of investments was
reached, there is an uncertainty if lhe quality goais foilowed the sarne path.
The 12' h
read:

Plan is concerned about those quaiity goais, and iii Chapter 9, one can

09 Textile - Promote the industriatization and application of hi-tech ftbers. and new-generation functional
and differential fibers. Accelerate the devetopment o industrial textite prodticts. Promote Lhe localization
of high-end looms and accessories. Support tbe recycling of otd and waste textile products.87

At the present time, Chinese authorities are to shift lhe course of lhe current deveiopment
pohcy. Despite lhe export and foreign direct investrnent goais, they are aiming at lhe
diversification of lhe industry and to enhance lhe quahty of those investments, providing
funding for high-tech research and assuring that lhe textiie industry of China wiill remam
84SLNOMACH. "Top Ten Revitalization Industries Announced by Chinese Government to Cope with Financial
Crisis," On 26.3.2010. Avaitable ar:
<http://www.sinomach.com.cn/templatesTr news enlcontent.aspx?nodejd=320&yape=Contentpage&contentid=
3028>. Viewed aL: 29 February 2012, p. 2.
"China hikes tas incentive for textile ex porters: state media. SINA. Beijing, 4 February 2009. Availabte at:
chtty :/Ienglish.sina.corn/business/2009/020412 1 5949.html>. Viewed at: 02 March 2012.
86China- Three- year textite otan targcts export groMh.Just-Style. 29 April 2009. Available at: chttp://www.iuststy1e.comJnews/three-year-textile-plan-tarets-export-growth id 1 04000.as px>. Viewed at: 02 March 2012,
CHINA, NPC & CPPCC, "12 Five-Year Plan (China);' 17 March 2011, p. 14. Available at:
<htt y ://ec.europa.eu/redonal policy/international/pdffchina draft 1 2th 5yearplan 17032011 .txlf>. Viewed aL: 02
March 2012. On page 11 one can also see that regarding the tight textile industry: "The light textile industry
should strengthen environmentat protection and quatity safety, strengthen corporate brand building and improve
technologicat equipment levei."

79

competitive and will start exporting not only becatise of its lower costs but also because of its
quality of practices and quahty of products.
The course of action Laken in the past five years included the optimization of the industrial
structure, the control of industrial inefficiency specially related to the consumption of
excessive amounts of energy, and to enhance the independent innovation and to improve wellknown global brand names, amongst others.
However, Chinese textile industry has its own problems such as the high labor costs, lhe
improvement of environmental protection laws and measures, rise iii the cost of raw materiais,
reverting to an increase on consumer prices, slightly growth of inflation and unernployment in
emerging niarkets88.
China textile industry will remain as largest and as competitive as now, and it will experience
significant growth ia the next years, amongst all incentive programs formally introduced by
the central government, and, as it will be demonstrated beiow, by a strong subsidization of its
market.
2.2 Chinese Textile Industry: private and publie enterprises

li is not one of Lhe goals of this stud.y to anaiyze Chinese economic framework. Nevertheless
it is useful to understand some policies upheld by the central govemment ia international fora.
The mainland Chinese government cornpromised to an econom.y opening, in 1978. Despite
this comprornise, China has not agreed to overtake its socialist market economy system. In the
1980's, coliective-owned enterprses were a successful example of the triumph of the Mao's
model.
[-lowever, since 1985, SOEs have been paying taxes to the government, and, for that rnatter,
what was profitable before became deficitarian. Thus, the government revenue started to
stiffer some downs, as seca . in the previous item.
lii Lhe 1.990's, as I.ong as it can be checked in China SLatistical Yearbooks, SOEs were highly
stibsidized and export subsidies were part of the Five-Year Plans elaborated by the Chinese
Government.
Between 1999 and 2000, China and the United States initiated negotiations to speed up
Chinese accession to the WTO, and one of iLs specific compromises can be seen ia item 10.3
ou subsidies, in which China agreed to eliminate ali prohibiLed subsidies.
Since 1999, as a first step of China's Lransition towards a market economy, the Chinese
goveniment privatized ali small SOEs or rnerged SOEs amongst themselves or SOEs with
other Icind of enterprises ia Chinese Law such as those of the private sector.
For Lextile and apparel industries, it is relevam to
Lo mention again the 10tE\ 1
and 12 Five1
01
Year P1an89. In 2001, the
Five-Year Plan was still concerned about exporL volume. In
88

YENER, Entre, "China textile industry Booming." Nome texte, 16 Septeniber 2011. Available at:
chtLp://www.hotnetextjle.com (r/haberde(ay.as?ID=203>. Viewed ar: 27 February 2012.
89
Provinces, themselves. have their own Five-Year Plan with specitic goa]s for the region and also by sector.

80

2006, the poiicy was to invest and to maintain ali incentives given to the textile industry.

However, China estabhshed the Adjustment and Revitalization Plan of Textile Industry in
2009, aiming to protect the domestic production, and increase exportation figures. In 2011,
the 12th Five-Year Pian determined (hat Lhe main concern should be investments in R&D and
innovation, in order to enhance the quality of the Chinese textiles and of their national brands.
The legal implications of (hese pians can only be understood when Chinese economic rnodels
of deveiopment are examined. In China, there are two main econornic models co-existing: the
state-oriented and the entrepreneurial ones. The graphic beiow shows China's Pubiic and
Private Industrial Sector before accession tili 2009, year of the international crisis and year of
the new Chinese package for textiies, by number of enterprises (public and private) and by
amount of their revenues (in renminb4:

Source: China Statistical Yearbook (201.0).

It is evident from the graphic Lhe augmentation of the private sector as whole in China after lIs
accession to lhe WTO. However, despite the increase of private enterprises, there is a
stalistical problem, because enterprises whose ownership belongs to Lhe government are
classifled as "non-public" as collective-owned enterprises. The question now is - who owns a
collective enterprise.
Secondly, the gross industrial output value of SOEs is slightiy better performed than the
private enterprises; despite that private enterprises outnumber the public ones. The graphic
also shows that the gross industrial output of private enterprises just outnumbered the SOEs'
by 2009, even though since 2003, private enterprises are Lhe large majority of the Chinese
registered enterprises. This comparison demonstrates Lhe nurnber of registered SOEs is not the
only data to be verified. There is evidence to believe that Lhe SOEs have a very importam
politic role and a support from the government that wouid be very hard to be foliowed by
private enterprises or, as Chinese classification, "non-public enterprises".

81

3. A subsidized economy
3.1 Two modeis of development
A brief historical approach and explanation of some of Lhe Chinese formal plans to enhance
lis industry development are relevam to
to understand what is absent from official reports of the
Chinese government. The incentives and priorities established by Lhe government can only be
understood if associated to the aggregation of several subsidies programs.
Before the Chinese accession to Lhe WTO Lhe socialisL market economy was based on public
ownership and export subsidies. In order to be part of the multilateral trading system, China
underwenL several economic reforms. Since its accession to Lhe WTO, though, there is !ess
evidence of plans to bring China imo a market economy model. This is Lhe main conc!usion
of Lhe China - 2030 report issued by the World Bank recently90.
Fotiowing Lhe examinaLion of the textile sector, two economic development mode!s coexisting
in China become clear: one entrepreneurial and the other state-oriented. Zhejiang, Shandong
and Jiangsu are considered entrepreneurial provinces since they present a much higher
nurnber of private enLerprises relatively to SOEs. Also, privaLe enterprises yie!d bigger
participation in Lhe provinces' econonlies. On the oLher hand, Shanghai and Hubei are
considered as state-oriented provinces because Lhe participation of SOEs in Lheir econornies is
bigger than that of private enterprises. These features can be seen in Lhe graphic be!ow (in
number of enterprises and renminbfl:
China's Public and Private Industrial Sector - Textile Industry Provinces
45000

03.000.00

40000
2.500,00
35000

30000

02.000.00

15000

1.300.00
2
o

20000

c
15000

O 1.000,00

10000
500.00
3000

00,00
Sbar,giial

c.,..........a.na..

SOE

ZIoefParg

Olangsu

Pdv,ite Crsterprhe.

Fujian

Shandor,g

~SOE Grou Ir,el,'strial OijIput VaI,re

Hubel

Guar,gdong

Llaonlng

lb.
-..- Prlvate Entprise Gros, ndue?rIaI Oiirp.itVahie 51,fic
2010

Source: China Statistical Yearbook (2010).

00

WORLD BANK. China 2030: Buliding a Modem, Harmonlous, and Creative High-Jnconze Society.

Conference Edition, 2012, p. 25.

82

The differences between lhe two main economic development modeis are clear: in Shanghai
lhe gross industrial output value of SOEs is higher than lhe private one, despite lhe fact that
there are more private enterprises than public ones. It is interesting to note lhe discrepancy
between private and public sectors, which can be noticed in Shanghai where lhe rnajority of
enterprises are considered private but lhe gross industrial output value of SOEs outnumbers
lhe private ones. The graphic above shows that SOEs have a very strong position under lhe
Chinese government, even though their nurnbers have been dirninishing every year, and that
their gross industrial output value is kept higher than private enterprises in state-oriented
provinces. This is another evidence how information on lhe subsidization of Chinese
industries are contradictory.
When it comes to the entrepreneurial provinces, such as Jiangsu and Zhejiang, lhe private
gross industrial output value outnumbered lhe SOU by a large margin. For that matter, it
could be fair to conclude that private enterprises performance is better prornoted ia
entrepreneurial provinces than in state-led ones.
Indeed, these two econornic development models have been considered by governrnent and
analysts alike as translating two opposite plans applied by regional governs in China. They
are viewed as two different alternatives to developing China's economy, both presenting
successes. However, in practice, it is often hard to distinguish between these two models by
lhe perspective of state interference in lhe economy.
Entrepreneurial provinces have experienced some reforms leading to a change ia their
enterprises profiles. Private enterprises were encouraged while public enterprises dirninished.
SOEs were substituted by TVEs (townships and villages enterprises) 91 , enterprises with
private coilective investments and public ownership 92 , which seem very similar to a public
body. In any case, several SOEs continue to exist in entrepreneurial provinces. This is one of
lhe reasons explaining lhe persistence of subsidies in these provinces since public enterprises
do not follow lhe sarne policies of private ones, and since lhe issue of public ownership is
disputable. In this sense, and along with lhe unclear statute of TVEs, private collective
invested enterprises and public ownerships, it is difficult to assess how rnuch the
entrepreneurial model differentiates itself froni lhe state-oriented one regarding prvate
ownership.

The WTO Trade Policy Review of China (2009) considered, in its footnote 82 that "collectively owned
enterprises usually take lhe forra township-village enterprises (TVEs) as most were founded by town or
viliage governments or village-coliective economic organizations. Some TVEs have been transformed imo
private enterprises and belong to the 'non-public' sector: those that continue to be owned by town or vilIlage
governments or village-coliective organizations belong to the 'public' sector" (WTO, Trade Policy Review
Body, Guria - Report by ffie Secrecariat, WTTPRJS1230, 26 April 2010, p. 54).
92
Despite lhe positive panorama drawn by the Comniunist Party, lhe adaptation process imo entrepreneurial led
developnient has proved to be challenging: "Most entrepreneurs displayed a passive type ol' entrepreneurship, in
particular in the levei of innovation capability. For exarnple. oniy 0,03% of domestic enterprises own
independent intellectual property righls. More than 99% of entrepreneurial businesses didn't apply for patents
and more than 60% doesnt own a trademark. It can be said that the current entreprencurial activity that
supported China's economic growth are still at a relative low levei." LONGBAO. Wei. "Regional Economic
Development and Entrepreneurship in China," Paper prepared for lhe conference. in: US-China Business
Gooperation in the 21' antury: Opportunities and Chal/enges for Entrepreneurs. Indianapolis (Indiana/US),
Indiana University. April 15-17, 2009, p. 16.

83

Furthermore, lhe entrepreneurial model has Iimits to which extent ir can rely on private
ownership and entrepreneurship to direct its deveiopment. Chinese economy is considered by
lhe Communst Party to be a socialist market economy and to follow several economic
principies as to guarantee it is a peop!e-based economy 93 , including lhe foflowing:
Characteristics of a 4 peopie-based economy':
1. Subject to the parameters and conditions of a market economy - stiniulate, encourage, and even goad
the coinmon peopie in society to be entrepreneurial and autonomousiy create new businesses and
enterprises. to develop their own strength, to exercise appropriate self-restraint, and to have a levei
piaying field for equal and fair competition;
2. Property rights are cleariy dehneated, and so is lhe distinction between responsibitity and power or
authority. "people-based economy" = "ownership by the whole people".
3. This is an economy in which the government of a socialist state exercises macroeconomic regulatory
influence or 'control' ( ... ), Lhe socialist nationat government serves as a powerful shield and provides
fundamental guarantees.
4. Finaily, this would also be an economy that emphasizes efficiency hut also pays attention to fairness
and justice ( ... ) whose most fundamental guidelines are to operate in accordance with Lhe law.

e
e
e
e

e
e
e
e
e
e
e
e
e
e
e
e

As can be noted from Lhe abstract above, the Chinese economy presents characteristics both of
a private-Ied economy and also of a government-!ed economy. The difference between
entrepreneurial and state-oriented development is, thus, dim. As Xingshan statcs, "If one were
compelled to say whether Zhejiang's economy was 'public' or 'private' in the traditional
sense, it would be very difficult"94.
In suminary if lhe entrepreneurial model is not exact!y entrepreneuriai in lhe western
economic sense, what is lhe state-oriented economic model, hereof rcpresented by Shanghai?
Shanghai has oniy 0,1 percent of Chinese territory and 5,4 percent of national GDP and yet
6,9 percent of lhe total national industrial output va!ue 95 . In lhe begimiing of lhe 20 Century,
lhe Iargest textile firms and banks headquarters were in Shanghai. After 1949, Shanghainese
industrialists moved on to Hong Kong and, in lhe 1970's, Shanghai entrepreneurs controlled
lhe massive majority of textile industries and factories in Hong Kong. For that matter, YI and
YASHENG conclude that "lhe Hong Kong miracle was a Shanghai miracle in disguise"96.
Despite of its magniticent bui!dings and alleged prosperity, what has been ca!led as "Shanghai
miracle" is not we!1 proven. YASHENG suggested, then, another approach to understand
Shanghai's economic development model: rural and urban household surveys; private-sector
surveys on larger and more establ.ished private enterprises; and a professionally managed
patent database7.

e
e
e
e
e
e
e
e
e
e
e
e

'

LI. Xingshanet aL. "rhe Successful Practice and Implementation of the Sociaiist Market Economy: An
Investigative Research Report on Zhejiang's Economy - Part II," translated by: M.E. Sharpe, in: The Chinese
Economy, v. 35, n. 4. JuIy-August 2002, pp 40-42.
94 Ibid. p. 49.
These
figures
found
ia
government's
website,
can
be
Shanghai
available
at:
<ht(p://www.shanghai.gt)v.cnlshanp,hai/node271 1 8/index.htmi>.
96
YI, Qian; YASI-TENG. Huang, "Is entrepreneurship Missing in ShanghaiT In: International Diferences i,
Entrepreneurship, edited by Josh Lerner and Antoinette Schoar. Chicago: Chicago University Press. May 2010,
p. 326.
p. 176, 'They [study's chosen micro datal have another distinct advantage over GDP and FDI data: GDP
and FDI data are exphcit benchmarks used by Lhe Chinese politicai system to promote and demote officiats. The
Iikelihood that the Micro data 1 report are politically tainted is mttch less and they thus reflect more accurately
Lhe economic dynamics on Lhe ground."

84

YASHENG estabiishes three key elements in Shanghai's economic deveiopment modei:

1) a heavy-handed intervention by lhe siate in most micro affairs of Lhe economy;
2) lhe rnost biatant anti-rural bias in its policy orientation in lhe country;
3) a biased liberalization that privileges foreign capitalists and restricts and
discrirninates against indigenous capitaiism98.
These multiple economic developrnent models in lhe sarne country lcd China to a very
complex administrative structure, essential to anaiyze subsidies prograrns and industrial
policies. China's government budget is rnanaged separately by governments at different
leveis 99 . There are five leveis of governments in China: central government, provincial
governments (including autonomous regions), prefecture governments, county governrnents,
and township governments. Each levei of government has its own budget. The nationai
budget is composed of central and local government budgets.
Discussing econornic development modeis, SOEs and interactions between pubiic and private
sectors are essential to introduce lhe subsidies applicd by Chinese authorities, considering that
lhe most distorting ones are those related to lhe SOEs.
As argued above, China offers several kinds of subsidies and fiscal exemptions in order to
guarantee its industries' performances. From 1985 to 2005, Chinese subsidies arnounted to
US$310 biiiion, which US$151 billion were to SOEs. Innovation funds and science &
technology prornotion funds accounted for Lhe other 50% of lhe given subsidies, which
translates Lhe Chinese governrnent objective to invest in high-tech products in order to
enhance Lhe industry structure and, then, improve their export performance - these subsidies
are availabie both to state and non-SOEs. The SOEs share is composed by 95% of subsidies
to cover ioss making'.
Some authors believe Lhat lhe subsidies to ioss making SOEs were decisive for lhe whole
Chinese economic system, as stated by ECKAUS:
The mariy stories about lhe inefficiencies and excess labor of lhe SOEs impty that their production costs
are retatively high. Were lhe SOEs dumping their production abroad and taking tosses doing so? The
subsidies would have heiped make it possible for them to do se and survive. It would be imrossible to be
more definitive without having much more information about costs of productions in SOEs'

98 Ibid..p. 178.
People's Republic ol' China states as following: "Article 30. The administrative division of Lhe Peoples
Republie of China is as follows: (1) The country is divided imo provinces, autonomous regions and
rnunicipatities directly under lhe Central Government: (2) Provinces and autonomous regions are divided imo
autonomous prefectures, counties. autonomous counties and cities: (3) Counties and autonomous counties are
dividcd imo townships. nationality townships and towns. Municipalities directly under lhe Central Government
and other large cities are divided into districts and counties. Autononious prefectures are divided into counties,
autonomous counties, and cities. Ali autonomotis regions, autonomous prefectures and autonomous counties are
national autonomous arcas." CHINA, Constitution (1982). Constirution o! the People s Republic o! China;
Chapter 1. General Principies. Avaitabte at: <http://engtish.people ,com.cn/constitution/constitution.htmi>.
Viewed at: 29 January 2012.
' GIRMA. Sourafelet a, "Can production subsidies expIam China's export performance? 8 July 2008.
Available at: chttp://www.voxeu.org/index.php?g=node/l 373> Viewed aI: 23 February 2012, p. 2-3. In addition.
lhe study argues that the resu/ts show that a doubling of production subsidies Ieads, on average, to a 2.1%
increase ia the levei o! exports (p 3).
'' ECKAIJS. Richard 5., "China's exports, subsidies to state owncd enterprises and lhe WTO," in: China
EconornicReview, 17(2006) - 1-13. p. 12.
85

The author suggests that the subsidies to loss making SOEs could have contributed to
dumping practices by the sarne Chinese enterprises and the effect around the globe could have
been massive. However, the lack of information and transparency turns the issue yet
unresolved. It is worth noting that China has agreed on elirninating subsidies to loss making
SOEs, ia accordance with its Protocol of Accession to the WTO. Those subsidies have been
marked as expenses and negative revenue in the Chinese national budget. Allegedly, in 2008,
those subsidies no lonqer existed in Chinese Statistical Yearbooks, despite the diminishing
curve of its elimination 02 Also it is difficult to identify this kind of data - since they are not
indicated as subsidies but as expenses - in provinces' budgets.
Another sign of the relevance of subsidies to Chinese economy can be drawn from the
country's answer to the 2008 financial crisis. According to the US Trade Representative and
the US Department of Commerce, it is estimated that ali fiscal stimulus packages to counter
the 2008 crisis in OECD countries was equivalem to
to 3.5% of their coilective GDP. On the
other hand, China's stimulus package (both fiscal and financial stimulus) was the largest ia
relative terms, amounting to around 13% of its GDP'3.
Since China has become a WTO member, China has agreed to change some of its econornic
policies moving towards a market-based econorny. However, the reforms reached its peak in
2005, when the fiscal reforrn and the privatization of enterprises were managed by the
govemment and the subsidies to Ioss rnaking SOEs slight!y decreased. After that, the Chinese
govemment did not keep the pace of reforms. A recent World Bank Report on China's future
alerted its authorities about the risks of stopping reforms'4.
Furtherrnore, some reforms undertaken by China seern to not change the underlying
subsidized aspect of its econorny, nor the place of SOEs in its developrnent. After the issue of
subsidies to loss making enterprises was settled, and new brands of incentives were being
discussed ia the DSB, another kind of subsidy was being implemented: non-performing loans
(NPL).
It is undisputed that China financial systern is mainly forrned by state-owned commercial
bai*s, so-called the big four: Industrial and Commercial Bank of China (ICBC), Agricultural
Bank of China (ABC), Bank of China (BOC), and China Construction Bank (CCB).
The Big Four are responsible for the largest financial projects and also responds for the SOEs
financial loans' 5 . Over 50% of market share (by assets) corne from. the Bi.- Four' 6 . Some of
102

See graphics on pages 78 and 80.

USTR; US Department of Commerce, Subsidies Enforcement - .4nnual Report to the Congress. February,
2010,p. 14.
' 0'See WORLD BANK, China 2030: Building a Modem, ffarmonious. and Creative Nigh-Inco.rne Society,
Conference Edition, 2012.
' 0'BIHONG. Huang, "Non-Performing Loan of China's Banking System." ia: The Bulietin o! Institute for
Research iii Busirzess and Econonncs. Meiji Gakuin University, no. 23, p. 130.
106
BURZYNSKA, Katarzyna, "Financial Developnient and Economic Growth: The Case of Chinese Banking
Sector," Master Thesis, Department ei' Economics. School of Economics and Management, Lund University,
September 2009. Available at: chtty://www.nek.Iu.se/NEjKfngfFjnancialdevclopmentandeconomicgrowth.pdf>.
Viewed at 29 November 2011, p. 16 Recently. according to B11IONO Huang, "Chinese Banks traditionally
adopt the 4-category system to classify loans as pass, past due, idle and Ioss. As of 2004, China's wholly stateowned commercial banks (SOCBs) and joint shareholding commercial banks (JSCBs) started to adopt the
international 5-category loan classification system. The 5-caregory system categorizes bank loans according to
their inherent risks as pass, special-mention, substandard. doubtful and Ioss" (ibid., p. 134).
103

86

these programs are in the form of NPL, which are highly criticized for their lack of
commercial viability, especially loans granted to SOEs without interests or that require no
repayment. In this sense HIJANG states that:
"Chinese NPLs is mainly Lhe result of extensive policy lending. low efftciency of SOEs, weak corporate
governance and poor operation skills of Lhe banks, and lhe business cycles. ( ... ) Although NPL ratio of
SOCBs has been reduced significantly, Chinese banks continue to make astounding numbers of
questionable loans atop lhe existing pile with Lhe economic overheating initiateci in 20)2. The Chinese
regulators must, therefore, go beyond merely fixing 'stock' problem of NPLs in Lhe financial system (o
confront an addi(ional source of instability: a flow of new bad debt"107.
China financial system is also under questioning due to Lhe decisive role of its state-owned
commercial banks. In this sense, China accepted, in its Protocol of Accession, that other WTO
members use foreign or other market-based criteria to verify Lhe benefit of the loan and its
terms, interfering in preferential policies to SOEs'8.

3.2 Chinese subsidies programs potentially applicable to the Textile and Apparel
Industry
This section. will Iist ali the programs potentially applicable to the textile and clothing sectors
as pointed out by several reports, investigations and official documents subrnitted to the WTO
as well as individual members' reports.

1. Specfflc textile and clothing industry subsidies programs

In 2007, Lhe National Council of Textile Organizations, an American association, elaborated
Lhe NCTO China Subsidies Review, regarding the textile industry. The 72 subsidy programs
listed were divided by the name of Lhe program, its relevance (specific or applicable), a brief
description, and financial implications. Some of lhe subsidies programs are listcd below, by
relevance'9:
1) Specific:
a. Export Incentive Program (Government Assistance to increase fabric exports);
b. Export Incentive Program (l-Iangzhou City of Zhejiang Province);
c. Export Incentive Program (Ningbo City of Zhejiang Province);
d. Go Global (One of special funds for brand development);
e. Technology Incentive Program (Assumption of Interests on Loans for
Technology Upgrade);
f. Value Added Tax (Special Refund).
2) Applicable to Lhe Textile and Apparel Industry:
a. Value Added Tax (Refund);
b. The "Two Free, Three Haif" Programt10;
c. Technology Grants (High-tech project support grants);

' 7 bid.,p. 151.

08

See article 15.b of Lhe Protocol of Accession of China. See also USTR, 2011 USTR Report to Congress on

China 's kVTO Compliance. December 2011. p. 44.

109

Further information can be found at NCTO. "Government of China lndustry Subsidies (Applicable to Textile
pages. Available at:
chttp://www.ncto.orgfNewsroom/chinesesubsidies.ydf >. Viewed at: lo March 2012.
Listed in the 2009-2010 US CVD investigation C-579-953, as it can be inferrcd from Lhe next item.
87
lndustry)," in: NCTO China Subsidies Review. 6

d. Technology Development Fund (Ningbo City Key Industry Technological

Development);
e. Subsidies (SOES) 1;
1'. Subsidy (energy)' 12;
g. Land Grant Program;
h. Income Tax Program (Refund, Reduction, Rate or Exemption) (10);
i. Foreign Trade Development Fund (Central Foreign Trade Development);
j. Foreign. lnvestment (Free Land);
k. Export Incentive Program (Subsidy Fund);
1. Export Incentive Program (Interest Subsidy);
By that time the main concerns about Chinese subsidies programs were related to SOEs,"Go
Global" (in order to make the textile enterprises global), rural Funds promotion, land
programs, tax incentives, and local incentives and subsidies programs" . The famous brands
programs and incentives were subject to a WTO dispute requested by the United States
(DS387 - Grants, Loans and Other Incentives), questioning severai programs, specially the
China World Top Brand Programme and the Chinese Famous Export Brand Prograrnme"4.
The dispute never reached the panei phase because China agreed to end the questioned
subsidies' IS
Recently, in October 2011, the Chinese Delegation to the WTO submitted a notification with
subsidies applied between 2005 and 2008 116. The docuinent can be seen as a response to the
counter notification submitted by the linited States Delegation one week before, as it is going
to be seen later in this section.
However, the United States still considers that the Chinese notification to lhe Committee on
Subsidies and Countervailing tvleasures in the WTO "was far from complete" '7.Reading
through Lhe referred Chinese notification, one can highlight the following programs as
relevant' 1.8:
1) Preferential tax policies for foreign-invested enterprises (2005-2008): "Two Free,
Three Hall" - any foreign invested enterprises may participate in this program,
which main objective is to guarantee profits in the five initial funetioning years:
mo years of fuily exemption of the enterprise income tax and pius three years of
reduction by haif. The enterprise rnust stay in the country for, at least, ten years.
This kind of subsidies does not appear in China Statistical Yearbook since 2008; however. it is not clear that
this program is inoperative doe to the lack of transparency and accurate information.
112

The US Qovernnient included this program in the counter notitication submitted in 2011 with Chinese

subsidies programs not presented to the Commiftee on Subsidies and Countervailing Measures.
II)

STEWART. Terence P.. "China's Support Programs For Se!cctcd Industries: Textiles and Apparel," Trade

Lawyers Advisoury Group, Report of June 2007, pp. 5 to 17.

114

See WTO. DSB. China - Grant, Loans ano Other Incentives, DS387. 2008.
"' See USTR, United States Wins End to Chinas 'Farnous Brand' Subsidies alter Chailenge ai WTO:
Agreernent Leve/s Piaying Fieid for American Workers in Eveiy Manufacturing Sector, Press Re!ease, December

2009. Avai!ab!e ar: chttp://www.ustr.gov/about-us/press-officefpress-releases2009fdecember/united-stateswins-end-china%E2%80%99s-%E2%80%9Cfamot,s-brand%E2%80%9D-sub >. Viewed at: 23 February 2012.

116

Programs extracted from CHINA/WTO.New and Fuji NotiYcation Pursuant te Article XVI?! ofthe G.477'
1994 and Articie 256 of the Agreenient cm Subsidies and 2ountervai.ling Ivfeasures. Committee on Subsidies and
Countervai!ing Measures (G/SCMINI!55ICHN and G/SCMIN/186/CHN), 21 October 2011.
" 7 IJSTR, 2011 USTR Report to Congress ai Chinas WTO Coznp/iance, December 2011, p. 43.

For lhe fui] Iist, see Annex 6.

88

2) Preferential tax policies for foreign-invested export enterprises: If an enterprise has

70% or more of its output value of export products it will pay only haif of the
enterprise income tax, after the five initial years of the program 1.
3) Preferential tax policies for advanced technology enterprises with foreign
investment: Advanced technology enterprises with foreigri investment, after the
expiration of Program 1 (five initial years) may continue to pay haif of the
enterprise income tax.
4) Preferential tax policies for enterprises with foreign investment recognized as high
or new technology enterprises established in the state high or new technology
industrial development zones: 15% reduction.
5) Preferential tax policies for enterprises with foreign investment established in Lhe
costal economic open arcas and in the economic and technological development
zones: 15% reduction.
6) Preferential tax policies for enterprises with foreign investment established in the
Three Gor-es of Yangtze River Economic Zone: 24% reduction of enterprise
income tax.
7) Preferential tax treatment for projccts for environmental protection, water and
energy conservation: exemption for the first three years and half reduction for the
uext three.
8) Preferential tax policies for enterprises making little profits: VAT refund from
integrated utilization of resources as electric power produced from urban waste.
9) Preferential tax policies for enterprises making little profits: qualified small
enterprise income tax reduction of 20%.
10)Preferential tax policies for township enterprises: "10% of the enterprise income
tax payable by township enterprises may be exempted to subsidize their social
security expenses."
11) Preferential tax policies for Lhe research and development of enterprises (2): "The
actual expenses of domestic industrial enterprises, regardless of the ownership, on
research and development of new products, new technologies and new crafts
which have increased 10 per cent (included) or more from the previous year shall
be deducted by 150 per cent from the taxable income of the year of the
enterprises."
12)Fund for supporting technological innovation of the technological small and
medium-sized enterprises (SMEs): it includes government grants, interest discount
and capital investment.
13) Fund for international market exploration by SMEs: it is provided to SMEs or
enterprises and organizations which provide services to SMEs for international
market exploratiori (RMB 1,08 billion in 2008).
1.4) Fund for promoting the trade of agricultural, light industry and textile products
(2007 to 2008): "The fund is provided for projects promoting the development of
quality system certification, registration of marks of origin and the training and
exchange of new technology, new design and new market concepts" (RMB 500
million ia 2007 and RMB 100million in 2008).
15) Preferential tax policies for foreign invested enterprises and foreign enterprises
which have establishments or place in China and are engaged in production or
business operations pitrchasing domestically produced equipment: 40% reduction
income tax of the expenses on purchasing domestically produced equipments
within the total investrnent of the project (1999 to 2007).

89

16) Preferential tax policies for doinestic enterprises purchasing domestically produced
equipments for technology upgrading purpose: 40% reduction on the sarne basis of
Program 15 above.
This list shows that the subsidies programs enacted by China have been changing along these
years as a WTO member. Before its accession the main problem was export subsidies and the
favorable treatment given to SOEs. Nowadays, WTO members are deeply concemed about
this subsidies nature change, focusing on new technologies and energy instead of loss making
SOEs.
Despite the fact that some rernainirig subsidies programs from the 2006 Iist provided by China
are still in the list, such as those ones related to foreign invested enterprises' 19 the previous
list submitted by China did not include any provincial and local government subsidies or any
state-owned banks subsidies 120 , failing to make any commitment to withdraw ifiem.
ii. United States and European Union countervailing investigations
Anothcr way to examine the Chinese subsidies programs is to study the United States and the
EU countervailing investigations. They are chosen in this analysis because of their relevance
in the intemational trade, especially, in the textile md apparel sector.
The WTO World Trade Report of 2006 reported that, in 2005, China market share in the
American textile industry was US$27,2 billions of US$102,6 billions, meaning an increase of
43% compared to the previous year. In the EU (25 members to that date), the Chinese
participation rose 44%, reaching US$24,2 billions of a total of US$77,8 biltion, while the rise
in imports in the American textile market as whole was only 6% and in the EU market it was
only 7%121 This means that China has been increasing its position as a trade partuer in the
textile industry and, as per an international trade perspective, the most affected ones are
necessarily third countries which are traditional trade partners in this sector, which are
constantly los ing their competitiveness.
The United States are more pro-active in the use of countervailing duties (CVD) against
China than any other country. By a brief analysis of their official data:

AD!CVD

estigations by the US and EU

D-CVI) Trw. (PRC)

EU

Source: European

China

CVDIAJ)

144

56,69%

128

110

43,31%

21

89

254
100,00%
22
id the US International Trade Commi

217
1
3
1
n (IJoC) (JuIy/September 2011).

"' See CHINA/WTO, New and Fui) Notificatian Pursuant to Articie XVI:) a the C Ti' 1994 and ,4rticle 25 o!
the SCM Agreement. Committee on Subsidies and Countervai!ing Measures, GISCM/N1123/CHN, 13 April
2006.
20
China also could have included preferential loans, debt forgiveness andothers. USTR, 2011 USTR Report to
Congress on Chinas WTQ Cornp!iance, IDecember 2011, p. 44.
121
WTO, Expioring the Jinks between subsidies, frade and the WTQ, World Trade Report 2006. Available at:
<hftw11~.wto.org/endishIres e/books p elanrep elwor!d trade report06 e.pdf>. Viewed at: 12 January
2012,pp. 14-15.
;tit

The table above shows that if considered only the (Jnited States and the EU investigations, lhe
EU is accountable for 56,69% of ali investigations, but only initiated one CVD investigation,
while the United States are accountable for 22. In lhe Annex 3 it is detailed the sectors
affected by those investigations.
The EU investigation concerned the wireless wide arca networking (WWAN)' 22 submitted to
lhe European Commission in 2010. The sole enterprise to operate in this market is the Optio
NV, the complainant' 23 . The investigation request was withdrawn by the complainant ia
March 2011 because it signed a cooperation agreement with a producer in China. The
European Commission closed lhe investigation, since there was no intercst of lhe EU on the
matter124.
The United States investigations show a variety of subjects. In a general basis, lhe USTR

states that the subsidy allegations investigated lia ve involved preferential loans, incorne tax
and VA T exemptions and reductions, the provision of goods and services on non-cornrnercial
terrns 125 , amongst other subsidies programs, central, provincial or local ones. For the purpose
of this study, only the investigation concerning lhe textile sectors where the International
Trade Commission and lhe US Department of Commerce were able to find some
countervailable subsidy programs are presented below.
These subsidies programs were identified by lhe US Department of Comrnerce ou lhe
Investigation C-579-953 - Narrow Woven Ribbons with Woven Selvedge from PRC, as of
December 14, 2009 (FR V. 74, a 238, p. 66090 et seq). The Department of Commerce
investigated two Chinese companies: Yama Ribbons and Bows Co., Ltd. and Changtai
Rongshu Textile Co., Ltd. The merchandise under investigation is classified under lhe
Harmonized System Classification 2007 sectors 58 (Special Woven Fabrics; Tufed Textile
Fabrics; Lace; Tapestries; Trirnrnings Embroidery), 59 (Impregnated, Coated, Covered or
Laminated Textile Fabrics; Textile Articles of a Kind and Suitable for Industrial Use), and 63
(Other Made up Textile Articles; Sets; Worn Clothing and Worn Textile Articles; Rags),
respectively 13, 05, 01 IO-digit subheading in HTSUS statistical categories.
In this investigation, lhe US Department of Commerce list several subsidies and categorize
them as follows'26:
1) Loan Programs'27:
122

Corresponding to the Harmonized System 2007 sectors 84 (Nuclear reactors, bollers. machinery and
mechanical appliances; parts thereoQ and 85 (Electrical machinery and equipment and parts thereof; sound
recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of
sLlch articles). In the European t.Jnion system, lhe 1 0-digit sectors are: 85176200 and 84718000.
123
See Oflcial Journai ofEuropean Lnion, C24917-11, 16,9.2010.p. 7
124

See 011k/ai Joumal o! Huropean Union. L58136-38. 3.3.2011. pp. 36-7.

' 25 USTR, 2011 USTR Report to C'ongress on China 's WTO Cornpliance, December 2011. p. 46.
- Department of Cornmerce.International Trade Administration.Narrow Woven Ribbons with Woven
Selvedge froni the People 's Republic o! China: Prelirninary A!flrniative Countervaiiing Duty Determination and
Aiignrnent o! Final Countervailing Duty Determination with Final Antidumping Duty Determination (C-570953). Federal Register, v. 74, n238, December 14. 2009 (Notices), pp. 66090 to 66096.
127
Itenis 1, 2. 3. and 4 were considered programs preliminarily determined to be not used by Yama or to not

provide benefits during lhe period ol' investigation. Ir worth noting that the progranis were analyzed in
accordance with lhe investigated sector and the investigated enterprises, which rneans that the programs existed
but werc not used by the specitc enterprise under investigation.

91

a. Policy Loans to Narrow Woven Ribbon Producers from State-Owned Commercial

B anks.
2) Grant Programs:
a. The State Key Technology Renovation Project Fund;
b. Famous Brand Program;
c. Export Assistance Grants;
d. Export Interest Subsidy Funds for Enterprises Located iii Zhejiang Province
e. Technology Grants for Enterprises Located in Zhejiang Provirice.
3) Indirect Tax Credits and VATfTariff Reductions and Exemptions:
a. Import Tariff and VAT Exemptions for FIEs Using Imported Technology and
Equipment;
b. lmport Tariff and VAT Exemptions for Certain Domestic Enterprises Using
lmported Technology and Equipment;
c. VAT Rebate for FIE Purchases of Domestically Produced Equipment;
d. Corporate Income Tax Refund Program for Reinvestment of FIE Profits in ExportOriented Enterprises;
e. Preferentia! Tax Policies for Township Enterprises.
4) Foreign-Invested Enterprises (FIE) Income Tax Rate Reduction and Exemption Programs:
a. Preferential Tax Policies for Enterprises with Foreign lnvestrnent ("Two Free,
Three HaIf") Program;
b. Preferential Tax Policies for Export-Oriented FIEs;
c. Tax Program for High or New Technology FIEs;
d. Preferential Tax Policies for Research and Development for FIEs;
e. Tax beriefits for FIEs in Encouraged Industries that Purchase Domestic
Equipment.
5) Preliminarily Determined To Be Countervailable
a) Tax subsidies to FIEs (Foreign Invested Enterprises) iii Specially Designated Arcas'28;
b) Local Income Tax Exemption and Reduction Programs for "Productive" FIE'29;
Those programs were Iisted iii the preliminarily affirmative countervailing duty
determination. In 2010, lhe IJS Department of Commerce issued its final affirmative
determination maintaining countervailing subsidies to the investigated enterprises' 30 . After
that, in September 2010, the Department of Cornrnerce issued the Countervailing Duty Order
maintaining the countervailing subsidies as of the previons determination and, also, lhe
termination of Lhe suspension of liquidation'31.
The United States Trade Representative holds hearings on China 's Compliance with WTO
Commitments, in which several American organizations are invited to speak. Recently, on
. the National Council of Textile Organizations (NCTO) delivered a speech
October 15 th 2011,
and submitted a written statement to this hearing.
28

Yama received a counrervailable subsidy of 0,24 percent ad valorem under this program (FR 66095, v. 74,
no. 238).
129
Yama received a countervailable subsidy of 0,05 percent ad valorem under this program (FR 66095, v. 74,
no. 238). The other investigated enterprise, Changtai, received a countervailable subsidy of 118,68 percent ad
valorem (FR 66094. v. 74. no. 238). The other enterprises investigated received a countervailable subsidy of
59,49 percent ad valorein under this program (FR 66096. v. 74. no. 238).
130
Yama recejved cot,ntervailable subsidy of 1,56 percent ad valorem. no longer ar de ,ninniis rate; Changtai
received countervailable subsidy of 117,95 percent ad valorem; and ali others 1.56 percent ad valorem (Federal
Register v 75, no. 137, July 19, 2010 2 p. 41804).
' See Federal Register, v. 75, no. 169, 1 Septernber 2010. pp. 53642

and 53643.
92

The written statement listed over 30 different policy initiatives from the Chinese central or
provincial governments aimed at supporting lhe Chinese textile sector. The document shows
the subsidies programs that are injuring the American textile sector, and also the connection
between Chinese textile imports to the United States and the decrease ofjobs in the American
textile sector.
NCTO believes that subsidies and grants are responsible for a 5 to 30 percent benefit for
Chinese textile producers. Alongside there is a 5 percent benefit from the increased VAT
export tax rebate and another 25 to 40 percent from currency manipuiation. Thus, the benefits
granted by the Chinese government would range from 35 to 75 percent132.
In accordance to the NCTO, the rnost significant subsidies are being offered in terms of
preferential lending, preferential land use rights and reduced costs for cotton and man-made
fibers' 33. In addition, NCTO informs that income tax reductions, indirect tax programs,
discounted electricity and grant prograrns are in effect but have a minor influence on the
Chinese textile sector performance.
The NCTO lists 28 subsidies programs, the tax rebate and the currency manipulation. For the
purpose of this chapter on!y those subsidies programs that are considered WTO prohibited by
the NCTO (ali 28 programs are listed in Annex 6) are reproduced below:
Prohibited Subsidies:
1) Tax reductions for Export-Oriented FIEs: Program available after the "Two Free,
Three Haif Program" and if the enterprise exports account for 70 percent of the
enterprises' saies: Export Subsidy (Article 3, SCM - Prohibited);
2) Tax reductions for FIEs and other Foreign Enterprises Purchasing Chinese-made
Equipment: National content over imported (Article 3, SCM - Prohibited;;
3) VAT rebates on FIE purchases of domestically-produced equipment: National
content over imported (Article 3, SCM - Prohibited);
4) Export Interest Subsidy Program (Shenzhen and Zhej iang Provinces): Export
Subsidy (Article 3, SCM - Prohibited);
5) Funds for "Outward Expansion" of industries in Certain Provinces (Jiangsu, Zhejiang,
Shandong, Guangdong): Export Subsidy (Article 3, SCM - Prohibited).
iii. US Counter notification and the 200-Iist Chinese subsidy programs
In the Protocol of Accession of People's Republic of China there was an obligation to notify
the Comrnittee on Subsidies and Countervailing Measures, every year, the subsidies prograrns
issued by the government. Those obligations are determined by Article 25.1 of the SCM
(Notifications) and by Paragraph 173 of the Report of the Working Party on the Accession of
China.
However, China has only notified lhe Cornmittee on Subsidies and Countervailing Measures
in 2006 and, after that, in 2011, as a response to the counter notification submitted by the
United States Delegation at the WTO.

32

NCTO. Statenient to me hearing Record U 5. Trade Representative - China 's 'on?pliance with kVTO
Cornrnitinents, submitted by Mr. Cass Johnson (President of NCTO) in 5 October 2011, p. 3.
' 33 Ibid.p. 1.

93

The Chinese notification with subsidies programs from 2005 to 2008 has already been
to take a look in lhe United States Counter notification to
studied. Now, it is importam to
complete lhe list of Chinese subsidies programs.
The United States alieges that more than 100 sub-central government measures were nol
notified, and 83 of them are related to the central govemment initiative "famous export
brands".
The document suggests that the subsidies are divided as foliows:
China Subsidies Progranis by Sector (US Counter Notification 2011)
Central

Sub-Central

Total

Green Technology

37

43

Famous Brand Ex

83

92
8

8
16
23

7
9
Source: US Counter

2011. WTO, G/SCM/Q/CHN/42,

Some relevant subsidies programs to lhe textile industry are

34

tilable at: www.wto.org .

134:

1) Central Government Measures:

a. Renewable Energy Law of People's Republic of China, adopted by the
National People's Congress on 28 February 2005, Order No. 33 1120051 of lhe
President of Lhe People's Republic of China, and amended by lhe National
Peoplc's Congress on 26 December 2009.
b. Notice of the National Development and Reform Commission on Provisional
Measures on Administration of lhe Price and Expense Apportionmenl of
Renewable Energy Power Generation, NDRC Price [2006] No. 7 (4 January
2006).
c. Equipment Manufacturing Industry Restmcturing and Revitalization Plan,
approved by the State Council on 4 February 2009.
d. Several Opinions of the State Council on Expediting lhe Rejuvenation of the
Equipment Manufacturing Industry, GuoFa [2006] No. 8 (13 February 2006).
e. Loans and lnlerest Subsidies Provided Pursuant to lhe Northeast
Revitalization: Liaoning Provincial Bureau of Foreign Trade and Economic
Cooperation and Department of Finance of Liaoning Province Notice on
Printing and Distributing lhe Provisional Administrative Measures on
Northeast Old Industrial Base Foreign Trade Development Fund, Liao Wai
Jing Mao JiZi No. 559 [2004] (18 November 2004).
f. Income Tax Exemption for Investmenl in Domestic "Technological
Renovalion': Technological Transformation of Domestie Equipmenl
Investment Credit Management of Enterprise Income Tax Audil, adopled by
State Tax Administration, No. 013 (17 January 2000).
2) Sub-Central Governmenl Measures:
134

The complete !ist can be found in WTO, Request from ffie Uriked States to China Pursuant to Article 25.10 of
the Agreement. GISCMIQ2/CFINI42. Committee on Subsidies and Countervailing Measures, 11 October 2011.

94

a. Opinions Regarding Accelerating lhe Development in the Environmental

Protection lndustry, issued by the Hunan People's Provincial Government,
Xiang ZhengFa [2009] No. 36 (11 November 2009).
b. Plans for a New Round Technological Renovation of Ningxia Industry (200820 12), issued by the Peopl&s Government of Ningxia Hui Autonomous Region
(25 December 2008).
c. Opinions on Promoting Fast and Healthy Development of Characteristic
Manufacturing Industry through lmplementing Industrial Upgrading Projects,
QWF [2007] No. 20.
d. Circular of the Provincial Department of Commerce, Deveiopment and Reform
Commission, Economic Commission, Department of Finance, Department of
Science and Technology, Bureau of State Tax, Administration for Industry and
Commerce, Bureau of Quality and Technical Supervision, and Entry-Exit
Inspection and Quarantine Bureau of Heilongjiang Province and Harbin
Custorns ori Printing and Distrihuting lhe "Guiding Opin.ions of Heilongjiang
Province on Supporting the Development of Farnous Export Brands, Hei
Shang LianFa [20061 No. 1.
e. Incorne Tax Exemption for FIEs Located in Jiangsu Province: Income Tax
Law of the People's Republic of China for Enterprises with Foreign Investment
and Foreign Enterprises, adopted by the Fourth National People's Congress n.
45 [19911 (9 April 1991); Industrial Structure Adjustment Guideline Catalog,
Jiangsu Commerce & Trade Commission (26 January 2007); Nanjing
Chemical Industry Park, Preferential Policies, sponsored by Narijing Municipal
Government (2004); Xuzhou Economic Development Zone, Policies for
Encouraging Investments in Xuzhou Economic Development Zone (14 July
2004); "China Through A Lens: Taxation Regulations and Tax Incentives,"
available at http://www.china.org.cn/eng1ish1features/62665.htm.
f. Notices on Publcation of Interim Procedures on Management of Zhejiang
Province Export Brands Fund, ZCQZ [20061 No. 207.
g. Income Tax Programs for FiEs in Guangdong Province "Preferential Policies
for Foreign Investment": Investment Guide to Guangdong, available at
http ://www.invest gd.com/main/tzdg/tzzn enI04.html.
h. Funds for Outward Expansion of Industries in Guangdong Province:
Implementing Measures of Guangdong Province on Supporting the
Dcvelopment of Outward-Oriented Private Enterprises, Yue Ban Fa No. 1.7
(2003).
L Intemational Market Development Fund Grants for SMEs: Xiamen Trade
Developruent Bureau pursuant to SMEs International Market Exploiting Fund
(Trial) Method, Cai Qi n. 467 [20001; Circular of the Ministry of Foreign
Trade and Economic Cooperation and the Ministry of Finance ori Printing and
Distributing the Detailed Rules for the Implementation of the Measures for the
Administration of International Market Developing Funds of SmalI- and
Medium-sized Enterprises, Wai Jing Mao JiCaiFa No. 270 [2001] (13 June
2001.).
j. Direct grants in Guangdong Province: lmplementing Measures of Guangdong
Province on Supporting the Development of Export-Oriented Enterprises (29
September 2003).
k. Preferential loans and interest rate subsidies in Guarigdong Province:
Implementing Measures of Guangdong Province on Supporting the
Development of Export-Oriented Private Enterprises (29 September 2003).
95

1. Income Tax Programs ia Huimin Industrial Park in Zhejiang Province: Jiashan

Economic Development Zone (12 May 2004); "Welcome to Jiashan:
Preferential Policies" (2004), available at htt://www.jszsj .com/en/epp.htm;
"Huimin Industrial Park: About 1-luimin," available at
http://www.hrnjszj.cn/huimin.asp.
m. Income Tax Offsets andlor Refunds for FIEs Purchasing Domestic Equipment
in Qingdao Municipality: "Local Preferential Policies," Chinese Govemment's
Official Web Portal (29 August 2005); "Zhejiang China: l-Iangzihou Economic
& Technological Development Zone" (10 May 2004); "China Investment:
Hangzhou Economic & Development Arca" (undated), sponsored by the
Management Commission of HEDA.
n. Income Tax Programs ia the Hangzhou Export Processing Zone in Zhejiang
Province: "Zhejiang China: Hangzhou Economic & Technological
Development Zone" (10 May 2004); "China Investment: Hangzhou Economic
& Development Arca" (undated), sponsored by the Management Cornmission
of HEDA.
o. Income Tax Prograrns for Export-Oriented FIEs in Dongguan City ia
Guangdong Province: "DongGuan: Preferential Policies," available at
http://english.dg.gov.cn/Prferential%20Policies.htm.
p. Export-Based "Reward" Subsidies for Enterprises in Huimin Industrial Park in
Zhejiang Province: "Jiashan Economic Development Zone" (12 May 2004),
available
at
http://www.zhejiang. gov.cnlgb/node2/node 161 9/node 1624/1 644/userobiect 1 3a
i6580.htm; "Welcome to Jiashan: Preferential Policies" (2004), available at
http://www.jszsj.cornlenlepp.htm ; "Huimin Industrial Park: About Huimin;
Preferential Policy" (For Foreign Invested Enterprises), available at
http://www.hmiszi.cri/huimin.asn.
q. Export Interest Subsidies from the Liaoning Provincial Govemment: Liaoning
Provincial Bureau of Foreign Trade and Economic Cooperation Circular on
Printing and Distributing the Provisional Administrative Measures on HighTech Products and Equipment Manufacturing Products Export Financial
Interest Assistance of Liaoning Province Liao Cai Qi No. 671 [2004. ] (16
December 2004).
r. Reduced Income Taxes Based on Geographic Location (Zhejiang and
Shandong Provinces): Income Tax Law of the People's Republic of China for
Enterprises with Foreign Investment and Foreign Enterprises, Article 7,
adopted by the Fourth National People's Congress n. 45 [1991] (9 April 1991).
s. Import tariff and VAT refunds and exemptions for FIEs in. Zhejiang:
Preferential Policies, the Peoples Government of Zhejiang Province (29 March
2006), available at
http://www.Zheiiang. gov.cnlzj foreignlenglish/node577/node578/node58 1/user
obiectlai557 1 .html; Yuhang Economic Development Zone, People's
Govemment of Zhejiang Province (4 August 2006), available aL
http://www.zp .gov.cn/zb/zinew/node428/nodel 848/node 1 854/node 1 857/userob
jectlai6491 .html.
t. Import Tariff Refunds and Exemptions for FIEs in Guangdong: Regulations on
Special Economic Zones in Guangdong Provirice, Approved by the IsthSession
of the Standing Cornmittee of the Fifth National People's Coagress (26 August
1980); DongGuan Tax Administration, DongGuan Website.

u. Exemption from Real Estate Tax and Dyke Maintaining Fee for FIES in
Guangdong Province: Invest in Shunde, Shunde Investment Promotion Bureau,
available at www.investshunde.org/English/zn 3.html.
v. Land-related subsidies to companies iocated in specific regions of Guangdong
Province: lmpiementing Provisions for Encouraging Foreign lnvestment in
Guangdong Province, People's Government of Guangdong Province (26 April
1987); Shunde Investment Policy availabie at
httl)://www.shunde.cnlgb/040801/68.htm.
w. Exemption from Land Development Fees for Enterprises Located in Industrial
Cluster Zones: "Preferential Policies" availabie at
http:www.lunjiao.gov.cii/zsyz3.htm; "Preferential Policies on Investment in
Zhongshan" available at
http://www.zs.gov.cnlenglish/governmentiview/index.action?did=849&id=39 1
08; "Policies and Regulations, Rules, Industrial Parks" - Zhongshan Industrial
Parks.
x. Income Tax Programs for FIES in Dongguan City iii Guangdong Province:
"DongGuan: Preferential Policies," available at
http://english.dg.gov.cnlPreferential %2Policies.htm.
y. Technology Grants for Enterprises Located in Zhejiang Province: Preferential
Policies of Zhejiang Province (7 December 2006).
z. Technologicai Innovation Funds Provided by Zhejiang Province: Preferential
Policies of Zhejiang Province (7 December 2006); Certain Opinions Regarding
Strengthening Independent Innovation, Speeding lJp Establishment of
Municipality of Technology and Innovation, Wenweifa [2006] No. 86.
The list of ali these subsidies programs are here included as evidence how China is
implementing its Industrial Pohcy and using subsidies as one of its main instruments.

4. Conclusions
After analyzing several subsidies programs provided by China, it is possible to surnmarize
some coriciuding remarks.
A recent USTR Report coinplained about Chinese compliance to lis WTO commitments on
subsidies. It notes that China has agreed to use a single official journal to publish its traderelated laws, to transiate its trade-related legisiation, courts to review administrative actions,
the uniformization of the application of lis laws and regulations. The report affirms that
China's publications in the MOFCOM Gazette concerning ali trade related measures was "far
[mm complete ". The report also states that China has a poor record of compliance with its
transiation commitment. Furthermore, a significant number of departmental rules are sul
issued without [irst having been published for public comment on me State Council 's
website!135.
According to the USTR, China has implemented only mo commitments from its Protocol of
Accession: the adoption of Lhe enquiry points, where any individual might obtain information,
operated by the MOFCOM, named as "WTO Enquiry and Notification Center"; the second
commitment refers to the notice-and-comment procedures regarding the proposition of new
t33EJSTR

2011 USTR Report to Congress on China 's WTO Cornp/iance. December 2011. pp. 109-112.

97

laws or by lhe time of their revision, which aliows lhe public to make comments on these new
or revised laws136.
The research performed showed that lhe Chinese govemment (central or local) provides
income tax refund grant, for many years. Local govemment usually refunds lhe investment of
lhe enterprise in buying Iamd to instail its units. Some subsidies are granted to building in
order to facilitate lhe construction of lhe piam. Several programs deal with technology and
others with the construction sector. Finaily, financial supporting fund associated with interestfree loans (or NPLs or non-repayable loans).
Ali these programs running at lhe sarne time can introduce significant disruption to the
market, creating an unfair competition environment, due to lhe amount of subsidies and lhe
diversity of funds. The participation of SOEs in ths process makes lhe practice even more
unfair because of its political role' 37.
As stated above, China has five administrative leveis and several shared competences. Some
of them reports to budget issues, tax and government revenue issues, and development and
incentive programs. Accordingly to ECKAUS, by 2003, lhe central governrnent was
responsible for 17,6% of ali subsidies and lhe local government respondcd for 82,4%. In
addition, lhe IJSTR affirms that around 20% of China's investment in industries comes from
provincial and local governments' 38 . This is relevant to understand why studying Chinese
provinces, countes, cities, and towns is crucial to learn lhe whoie process of subsidization
and find out measures that can be considered inconsistent with WTO Law that might be risen
upon lhe respective government and piead for anti-subsidy measures or, in specific cases, a
panei to settle the matter139.
One important conclusion to be taken is that lhe Chinese economy is strongly subsided. The
programs I.isted in this chapter show a significant list of subsidies programs. Furthermore, the
subsidies notificati.on submitted by China last October did not include any provincial or local
government subsidies, disregarding lhe fact that, in July 2011, lhe Chiriese govemment should
have submitted its subsidies notification for lhe period 20092010I40. The current notification
presented by China has only covercd subsidies programs for the period 2005-2008 and, once
again, it has failed to make commitments on lhe ending of those subsidies.
China had to impiement several reforms to accede to lhe WTO. Therefore, since SOEs and lhe
privatization movement in lhe early 2000's, there is no evidcnce of a consistent process of
pp. 11.0-111.
Thc 2012 Report of the World Bank on China: "In Lerms of political costs, it is irnportant to remember that
lhe political economy of policy reform is complex and difficult in alt countries. including China. Every subsidy
creates its own lobby, whether the subsidy takes lhe form of preferential access to land and credit, or access to
cheap energy and resources. State-owned enterprises have political power and lobbying capacity, and energyintensive export industries will also lobby for subsidies to maintain their competitiveness. Governrnent will need
to balance lhe wider social benetits of reforms with lhe losses of those adverse!y affected. Saety net policies for
those likely to be negatively affected may include income support. and access to alternative eniploynient,
retraining opportunities, and relocation assistance. Such policies will go a long way in mobilizing the political
and workplace-based support for lhe changes that are needed (ILO 2011) . WORLD BANK, China 2030:
Buliding a Modern. Harrnonious, and ('reative High-Jncoine Society. Conference Edition, 2012, p. 266.
38 USTR, 2011 USTR Report to C'ongress on China 's WTO Coinpliance, December 2011, p. 44.
' 39 ECKAUS, Richard S., "China's exports, subsidies to state owned enterprises and lhe WTO," in China
Eco!) ornic Revjew. 17 (2006) - 1-13, p. 4. Table 1,
40
USTR. 2011 USTR Report to Congres.s on China 's WTO Compliance, December 20!!, page 45
136 1b1d.,
M

98

reforrns. After 2008, there is no information that lhe Chinese government did continue its
procedures towards a market-based econom.y. Despite of revoking some subsidies programs,
China just gaveto them a new profile and use.
There is also evidence that either the socialist or the entrepreneurial development modeis are
not exactly private and ruled by market law. The China Statistjcal Yearbook 2010 estimate
that there are over 20 Lhousands SOEs registered, which means Lhat the disappearance of
subsidies to loss making SOEs from its official notifications and data rea!ly intriguirig.
The texti.Ie industries have been part of the Five-Year Plans for many periods. The three last
ones have been given speciat attention to textiles and to industry iii general.
There are several tax competences that be!ong to the provinces and local governments making
lhe research on subsidies even more complicated' 41 . Moreover, WTO members, businessmen,
and acadernics complain about lhe lack of transparency of Lhe Chinese government.
The current course of action includes tax incentives, rebates, and non-repayable loans, by the
means of bank credit and budgetarian rubrics' 42 . The 12 Five-Year Plan focuses on raising
Lhe quality and design standards of textile and apparel producis in order to help Chinese
brands to compete in lhe international market. For that matter, ir will be necessary strengthen
national brands and to build a positive image.
The main fact to be considered is if Lhe Article 27.13 of lhe SCM is applicable to a NME, in a
sense that it was written for market economies and perhaps it will need amendments or an
evolutionary interpretation to fit in China's characteristics. Neverthe!ess, China has agreed not
to invoke this Article143.
Lastly, the lack of transparency from lhe Chinese govemment is a great concern.
China will have to submit more information on the role of private sector, the role of the Big
Four, lhe subsidies to SOEs, lhe credit !ines, the budget division, and the available data.

141 MENDES, Marcos J., "Os Sistemas Tributrios de Brasil, Rssia, China, ndia e Mxico: Comparao das
Caractersticas Gerais," Texto Para discusso 49, Consultoria Legislativa do Senado Federal/Centro de
Estudos,Brazil. October 2008, p. 49.
112
V QIN, Jul ia, "WTO Regulation of Subsidies to State-Owned Enterprises (SOEs) - A Critical Appraisal of
the China Accession Protocol," in Journal o! Internationa! Economic Law, v. 7, n 4, 2004, p. 875.
143
WTO, Report o! the Working Party on the Accession o! China, WT1ACC/CHV149, 1 October 200!. p. 34,
para. 171.
99

111.3. THE ISSUE OF STATE OWNED ENTERPRISE

Since the late 1970's, the Chinese Government has been undertaking important refonns
towards economic liberalization and openness. Some of the main pillars of this strategy have
been the attraction of foreign irivestments, promotion of exports and an increasingly active
industrial policy. With its accession to the WTO, in 2001, China took an unequivocal step in
the direction of submitting its trade policy to a complex framework of multilateral
agreements. Although Lhe constraints to its policy space appeared to be excessively
burdensome, the potental gains China were about to obtain appeared to be far more
significant.
Amongst ali the critical points of the Chinese accession to the WTO, one of the most relevant
was state's influence over the economy, more specifically the key role played by SOEs in its
economy and how this scenario could be brought into conformity with the multilateral rules.
Changing structural fundamentais of the Chinese economy obviously represents a hue
chalienge and Beijing committed itself to doing so, by means of its Protocol of Accession '
and several declarations contained in the Report of the Working Party on the Accession of
China ("RWP")'45.
Several implications of the Chinese state prominence in the country's economy through SOEs
justifies WTO members' concerns regarding non-market oriented trade practices.
Subsidization, a promising government procurement market and the influence over outward
and inward fiows of investments can decisively affect intemational trade beyond Chinese
borders. For those reasons, the analysis of the Chinese levei of compliance with its WTO
commitrnents regarding SOEs and its activities reveals the economic impacts of Chinese trade
policies and how the WTO members are impacted by state presence iii the economy.
1. Definition of SOEs
The first chailenge when discussing the issue of SOEs is the precise meaning of such
expression. As discussed above, the activities of SOEs can have multipie implications over
Chinese economy and global trade, regarding for instance subsidies, investments and
competition, what suggests that a singie definition of SOEs can hardly fit in every possible
context.
The Chinese Statistical Yearbook 146, published by the Chinese governmental press, defines
SOEs as non-corporate econornic entities where ali asses are owned by the siate, including
SOEs, state-funded enterprises and state-owned joint-operation enterprises. Furthermore, it
creates a second category of state-holding enterprises which have mixed ownership and where
the percentage of state assets is iarger than any other single shareholder of the sarne
enterprise, giving state control over it.
The WTO has also expressed its understanding about the meaning of the expression SOEs in
different occasions. The report prepared by the Secretariat for the third Trade Policy Review
44

WTO, Protocois of accession for new rnembers since 1995, including cornrnitments in goods and services, II
February 2012 (last update). Available aL: <http://www.wto.org/engIish/thewto e/acc elcornQlcteacc e.htm>.
Viewed at: 5 January 2012.
'4'Jbid.
146 CHINA,

National Bureau of Statisties of China. C'hinese Statistica/ Yearbook 2010, Chinese Statistic Press,
2011. Available at: chtt://www.stats.gov ,crVtjsj/ndsj/20I0/indexeh.htm>. Viewed at: 22 IDecember 2011.

100

of China (2010) (TPR of China) contains a definition of SOEs for general purposes, stating
that SOEs consist of wholly state-owned enterprises, and enterprises in which the State has
controlling shares (state-controlled enterprises) 147 . State-controlled enterprises are those in
which Lhe state, or another SOE, holds more than 50% of equity or, if the share of the equity
is less than 50%, the state or another SOE has controlling influence on its management and
operation.
When it comes to the DSB, the AB has established itself a definition of "public body", which
is closely related to SOEs, wheri it comes to the SCM. On the case United States - Definitive
Antidwiiping and Countervaiing Duties on Certain Products from China (DS379), filed by
China against the United States of America (US), the AB reversed the Panel's understanding
that a public body is any entity controlled by a government' 48 . Differently, it concluded that a
public body is ao entity that possesses, exercises, or is vested with, governmental authority.
The definition of public body is thus narrower than the concept of SOEs, which Ieads to the
interpretation that only the SOEs that are under govemment control may be considered as a
public body.
The consequences of such a definition were crucial for the outcome of such case, as the AB
conciuded that Lhe (iS had acted inconsistently with the SCM when its authorities found that
certain Chinese SOEs that supp!ied steel, rubber, and petrochemical inputs te investigated
companies constituted "public bodies", a key element for lhe verification of a stibsidy, as per
Article 1.1 (a) (1) of the SCM.
This definition was particularly relevant because its main criterion for the determination of a
pubhc body is the role played by the entity and not the percentage of shares owned by the
government. The 2011 - Report to Congress of the U.S.-China Economic and Security
Review Commission' 49 (Report of the VCESRC) alerts to the difficulty to trace the real
ownership of any enterprise in China due te lhe lack of transparency of Chinese regulatory
systems. Considering this point, the AB definition appears to have adopted an adequate
criteria in its report for DS379, obliging the US to revisit its double remedies approach and its
public body determinations relating to SOEs.
Nevertheless, Lhe role played by the entity is also of difficult determination and should be
underiaken on a case by case basis, following a pmper evaluation of the core features of me
o.
entity concerned, and its re/ationship with governrnent ia the narrow sens
This initial approach te Lhe controversial nature of such concept is fundamental for the
comprehension of the Chinese commitments regarding SOEs and its implications in different
economic leveis.

WTO, Trade Policy Review Body, China - Report by the Secretariat. 26 Api! 2010, p. 54.
' WTO, AS, US - Antidurnping and Countervai/ing Duties (China), WT/DS379/AB/R, AS Report adoptcd ou
II March 201!. pp. 124-125, para. 322.
149UCESRC, 2011 Report lo Congress. Washington, D.C.: 112" Congress, I' Session, November 2011. p. 40.
'5 WTO. AS,
US - Antidumping and Countervailing Duties (China), WTIDS379/AB/R, AB Report adopted on
II March 2011. p. 124. para. 319.

101

2. Overview of SOEs in Chinese Econoiny

The incorporation of SOEs rnay have multipie objectives. Such enterprises may respond to
political, social, or cultural, or income redistribution purposes. Many of them were created
originally to pursue publ.ic policy objectives and this appears to fit perfectly to the Chiriese
case. These aspects complicate the understandng, in comparison with private companies, of
how SOEs operate, the way they are governed and how their relationship with the state plays
outt51.
The participation of SOEs in Chinese economy is particulariy remarkable but it is worthnoting that the number of such enterprises has been decreasing since 2000, accordng to the
Report of the 1.JCESRC' 52 . Although the number of SOEs in China tends to be quite unclear
and hard to precise, there are some estimates which provide a picture of the whole scenario, in
the central and local leveis.
A study by the Brooking Institution 153 , a public policy think tank based in Washington, DC,
estimates that in 2003, there were approxirnately 159,000 SOEs, including both centratly and
locally administered enterprises. This number would have been reduced to 1.14,500, in 2010,
according to the sarne research. On the other hand, the statistics of the China Statistics
Yearboolc 2010154 show a inuch lower number of such enterprises, as demonstrated in the
table below:
Number of SOEs in China
Year
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Source: China StatisticsYearbook 2010

Number of SOEs
64,737
61,301
53.489
46,767
41,125
34,280
35,597
27,477
24,961
20,680
21,313
20,510

Apart from making efforts to promote reforrns to downsize the state sector through the
quantitative reduction of SOEs, China pursues the strategy called "grasp the big, let go of the
smali", since 1997, which implies privatizing, filing bankruptcy of small SOEs in rnost

151 Unctad World Investinent Report 2011. Non-Equity inodes o! international production and developinent, New
York and Geneva, 2011, p. 34.
' IJCESRC, 2011 Report to Congress. Washington. D.C.: 112" Congress. ISI Session, November 2011. p. 42.
' LI, Cheng. "China's Midterm Jockeying: Gearing Up for 2012 (Part 4: Top Leaders of Major State-Owned
Enterprises)," China Leadership Monitor, n. 34. February 2011, p. 3.
'' CHINA. National Burcau of Statistics of China, Chinese Statistical Yearbook 2010, Chinese Statistic Press,
2011. Available at: chttp://www.stats.ov.cn/tjsj/ndsj/20I0/indexeh,htm >. Viewed at: 22 December 2011.
102

competitive sectors. According to an articie published by the World Bank' 55 , another common
solution found by the Chinese Govemment is merging those small enterprises to create
stronger firms. Those strategies are claimed to be a huge success, in terms of creating large
SOEs.
The administration of the largest 121 nonfinancial companies owned by the central
government is supervised by Lhe state-owned Assets Supervision and Administration
Commission (SASAC)' 56 , a kind of a holding company which reports to the State Council.
The SASAC also extends its supervision to SOEs in the provinces or central SOEs'
subsidiaries, by means of its local state-owned assets management authorities. The scope of
economic activities developed by SOEs in China is, however, much bigger than SASAC
companies and its supervision is in charge of other governmentai entities. According to the
Report of the UCESRC, the Chinese central SOEs can be categorized in 3 major groupings'57.
The first one, the SASAC companies, consists of the companies which provide public goods,
such as defense, communications, transportation and utilities, as well as firms related to
natural resources (oil, minerals and metais, for example). In 2003, the enterprises of this first
grouping accounted for 196 enterprises and, in 2010, it has been reduced to the above
mentioned 121 enterprises, which are the largest Chinese SOEs.
The second grouping includes companies of sectors such as banking, finance, and insurance,
under the administration of the China Bariking Regulatory Commission and the China
Ensurance Regulatory Commission. The companies of the third group are those specialized in
broadcast media, publications, culture and entertainment, which are administrated by various
agencies, controlled by the Chinese Communist Party.
Another important implication of the activities of SOEs in China is related to Chinese foreign
investments abroad. According to the Report of the UCESRC, SOEs in the energy, raw
materiais and metais have been major participants in the "going out" pohcy' 58 . The World
Investment Report 20l.1', elaborated by the Unctad, demonstrates Lhe prominent role piayed
by transnational Chinese SOEs in outward investment fiows, which account for 50
enterprises, a number considerably higher than other countries, such as Brazil, India or
Russia, as stated at the table below:

'55

XU, Gao, "State-Owned Enterprises in China: How big are theyT' East Asia & Pacfflc on 11w rise (World
. Available at: chttx//bIogs.worIdbank.orgieastasiapacific/state-ownedBank Blogs), 19 January 2010.
enterprises-in-china-how-big-are-they>. Viewed at: 19 December 2011.
56
See the State-Owned Asseis Supervision and Administration Commission (SASAC) official website aL
chttp://www.sasac.gov.cn/n2963340/index.html >
b
UCESRC. 2011 Report to Congress. Washington, D.C.: 112 Congress, 1 ` Session, Novernber 2011, p. 44.
' 5t Ibid..p. 58.
' 59Unctad. World Investrnent Report 2011: Non-Equity niodes of international production and de velopinent. New
York and Geneva, 2011.p. 31.
103

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A study by the Rhodium Group', an American company which analyzes investment

management, concluded that between 2003 and 2010. 74 percent of the number of investment
deals originated from private firms, which the authors ciassify as companies having 80
percent or greater nongovernment ownership. On the other hand, in terras of total deal value,
the picture is reversed, as SOEs account for 65 percent of the total.
It is hard to precise, however, the total participation of SOEs in Chinese economy, given ali
the considerations above regarding the problematic definition of SOEs, public bodies and the
controversial criteria to classify such entities as private or public ones. The difficulty to trace
ownership in China is also a significant obstacle for more accurate estimates. However, the
data analyzed herein is instrumental to a more comprehensive understanding of the role
played by SOEs in Chinese economy.
3. Chinese commitments at the WTO
li is a wide consensus that the WTO relies on the functioning of market-oriented economies.
For this reason the Chinese accession to the Multilateral Trading System demanded special
conditions to conform the dyiamics of a NME to WTO rules. WiLh the purpose of benefiting
160

ROSEN, Daniel li.; HANEMANN, ThiIo, An Anierican Open Door? Maxinnizing the Beneits of Chinese
Foreign Direct luvestinent, Special Repor(, New York, NY: Asia Society, May 2011. p. 33.

104

from the opportunities offered by the multilateral agreements, China assumed firm
commitments to implement, for example, importara legal and regulatory reforrns and special
safeguard mechanisms to protect other members' domestic industries against surges of
imports from China.
In regard to SOES, China committed itself to several obligations which are related, in general,
to a liberalization process, and contained either in its Protocol of Accession or in the RWP.
Most of those commitments are related to subsidies, government procurement and the
independence of the decision making process within SOES.
3.1. Subsidies
Discussing SOES in the context of subsidies is crucial, mainly considering Articles 1.. 1. and
1.1 (a)( 1) of the SCM, which prov ide that (..) a subsicly shali be deerned to exist tE there is a
financial contribution by a go vernment or any public body within the territory o! a Member
(emphasis added). Keeping in mmd the numerous possible definitions of a SOE, as stated
above, it is fundamental to assess, in each case, whether such enterprises constitute or not
public bodies, for the purposes determining whether a financial contribution made by a SOE
can be considered a subsidy.
As a matter of fact, SOES shall also be analysed as potential recipients of subsidies and not
only as providers, due to its commonly dose relationship with governments and public
bodies. This logic applies to the debate involving the Chinese government and Chinese SOES,
which are claimed to be disproportionately supported by the state.
The Protocol of Accession does not contain comprehensive provisions regarding China's
commitmerits related to SOES and subsidies. However, it brings a key mie regarding the
SCM, when dealing with subsidies provided to SOES and the determination of specificity,
according to Articles 1.2 and 2 of the 5CM. This Protocol of Accessiori provision states that
when applying such Articles, subsidies provided to SOES shalt be deemed to be specific if,
inter alia, SOES are the predominant recipients of such subsidies or SOES receive
disproportionately large amounts of such subsidies (Protocol of Accession Paragraph 15).
The determination of specificity is particularly important for the purposes of determining if a
subsidy is either prohibited or actionable under the DSB. The specificity of any such financial
contri.butions is also a requirement for the imposition of countervailing measures provided for
in Article 10 of the SCM, according to Article 1.2., as follows:
A subsidy as defined in Paragraph 1 shall be subjeer to the provisions of Part II [Prohibited Subsidies] or
sha]l be subject to the provisions of Part III [Actionable Subsidies] or V [Countervaiting Measures] only
if such a subsidy is specific in accordance with the provisions of article 2 [Specificity].

Another relevant provision contained in the Protocol of Accession concerns the prohibition of
introduction or maintenance of any export subsidies on agricultural products. Agricultural
export subsidies are regulated under WTO Agreement on Agriculture, and their limits are
usually established under each members Schedule of Concessions. In the case of China, there
is no atlowed margin for export subsidies on agricultural products.
On this matter, the Protocol of Accession dedicates special attention to fiscal and other
transfers between or among SOES in the agricultural sector and other enterprises that operate
1.05

as state trading enterprises in lhe agricultural sector, which sha!i be notified to lhe WTO. The
possibiiity that a SOE figures as a subsidies provider or recipient justifies lhe ratio of this rule
and lhe need of transparency on those transfers.
Likewise, the RWP expresses general concerns about subsidization provided by Chinese
SOEs, mainly the financial contributions made by state-owned banks, which wou!d be doing
SO as govemment actors. The Chinese representative stated, however, that China is committed
to lhe objective that SOEs, ineluding banks, should be rim on a conimercial basis and be
responsible for their own profits and Josses 161 . Moreover, lhe Chinese representative
reinforced that China would progressively work towards a fuil notification of subsidies, as
provided for by Articie 25 of the SCM.
3.2. Government Procurement
The Chinese SOE sector represents a considerab!e percentage of China's economy, giving rise
to strong economic interests amongst WTO members, more specifically in regard to China's
adhesion to lhe WTO Government Procurement Agreement (GPA). Upon Chinese accession.
to lhe WTO, lhe members of lhe Working Party stated that China shouid immediateiy become
an observer to lhe GPA and shouid initiate negotiations for membership in lhe Agreement
within mo years of accession.
China is an observer to such agreement since its accession to the WTO in 2002 but lhe
deadline for its entry in lhe GPA remains open, as lhe country committed itself to initiate
negotiations for membership "as soon as possibie". This open term has motivated several
concerns by other members, which have been urging China to adopt lhe UPA framework,
given lhe remarkabie business opportunities offered by such market.
On Lhe other hand, lhe Chinese committed to lhe adoption of fundamental principies of being
open, fair, equitable, efficient and acting in pubiic interest when carrying out government
procurernent. The RWP aiso brings lhe Chinese commitment that until lhe country becomes a
party to lhe UPA,
ali government entities at Lhe central and sub-national levei, as weli as any of its public entities other than
those engaged in exciusiveiy commerciai activities, would conduct their procurement in a transparent
manner, and provide ali foreign suppliers with equal opportunity to participate ia that procurement
pursuant to the principie of MFN treatment'62.

The commitment to Lhe adoption of lhe most favoured nation principie means that aii lhe
procurements which are opened to foreign suppliers sha!i offer lhe bidders equal opportunities
to participate in the procedures. With regards to transparency, China committed itseif to
subject its pubhc entities' procurements only to iaws, regu!ations, judicial decisions and
administrative ruhngs of general app!ication and procedures which had been pub!ished and
made avaiiab!e to Lhe public. For this purpose, lhe Protoco! of Accession imp!ies Lhe
obiigation of notifying to Lhe Council of lhe Trade in Goods !aws, reguiations and procedures
reiated to the Chinese government procurement system.

61 WTO, Report ofthe Working Party on the Accession of China. I'VT1ACC/CHN/49. October 2001, p. 34. para.
172.
' 621b1d., p. 70, para. 339.

106

In this context, China confirmed that, without prejudice to its rights in future negotiations in
Lhe GPA, ali laws, regulations and measures relating to the procurement by SOES ofgoods
and services for commercai saie, production of goods or suppiy of services for commerciai
saie, ar for non-governmentai purposes wouid not be considered to be laws, reguiations and
measures re/ating (o governinent procurenient' 63 . Therefore, it wouid be subject to Lhe
provisions of Articles II (MFN Treatment), XVI (Market Access) and XVII (Nationai
Treatment) of the General Agreement on Trade in Services and Article Ill (Nationai
Treatment) of the General Agreement on Tariffs and Trade 1994.
3.3. State influence over SOEs governance
Most of the Chinese SOES are major players in its respective markets and have strong
economic power due to such condition. Entering an organization which privileges marketoriented trade practices required a significant modification of the relation between the
Chinese government and the its SOES in the context of establishing a modern enterprise
system. The Working Party on Lhe accession of China to the WTO reported severa! Chinese
obligations in this regard. The RWP contains the statements o!' the Chinese representative
related to the commitments and objectives to be achieved by China upon its accession to the
WTO.
The representative o!' China stated that the country's SOES basically operated in accordance
with mies o!' market economy and thus the government would no longer directly control Lhe
human, finance and material resources, and operational activities such as production, supply
and marketing.
The content of this commitment is that prices of, for example, commodities produced by
Chinese SOES, or the allocation of resources in operationai arcas would no ionger be decided
by the govemment and shall be determined by Lhe market, which means that it shali be based
on commercai considerations. Chinese SOES which operate as financial institutions, such as
banks, wouid have to offer its ioans to other SOES exclusively under market conditions.
A more modern and independent system o!' enterprises is an important element o!' market
economies and the Chinese transition to such stage wiii hardly be achieved without
concluding this reform. The growing reievance of foreign invested enterprises in China
demands a clear and market-oriented competition between ali the players and gives risc to
severai concems by WTO members. Furthermore, Chinese private companies also Lend to be
in disadvantage due to governmental support to SOES.
4. SOEs and China WTO rules compliance
As expiained above, Chinese WTO commitments demand deep economic reforms which
might impiy structural changes in the role o!' SOES in the country's economy. A good
criterion to assess Lhe progress made by China regarding this aim is the analysis of economic
data, such as the evolution of Lhe effective participation of SOES in Chinese markets. When
evaluating Lhe whole scenario, WTO members and observers in general can only partially reiy
on officiai data pubhshed by the Chinese government.

63

WTO, Report o! me Working Party on the Accession o! China, W'T1ACC/CHN/49, October 2001, p. 9, para.

47.
107

A study by the (3.5.-China Economic and Security Review Commission' 64 reveals the
particular difficulties to evaluate the levei of China's compliance with its liberalization
commitments, when making use of lhe Chinese government's indicators.
TEie Chinese government publishes severa[ statistical rneasures which can be used to assess lhe size 01'
state-owned enterprises relative to orher fornis of ownership aecording to various dimensions. In many
cases. Lhe measures of SOE activity consider only whotty-owned SOEs. That is, these SOE measures do
not treat entities in which the state ownership share is less than 100 perceni. but greater than 50 percent,
as being state-owned. Further, the official estimates oten do not track ultimate ownership, thereby
ignoring enterprises that are not registered as SOEs or state-controtled enterprises even when indirect
state ownership is present. (Emphasis added)
As presented before, lhe Chinese Government divides SOEs in two categories: fully SOEs
and state-holding enterprise. Nevertheless, many statistics disregard the latter, providing only
a partial picture of Lhe issue, since several business structures, such as joint-ventures or shareholding corporations whose majority shares are owned by the Chinese government, public
bodies or other SOEs, are excluded from lhe official statistics.
In order to address a more accurate measurement and study of the Chinese SOE sector,
observers have to resort to other sources than official ones. The Report of the IJCESRC'65
makes reference to some estimates made by observers or intemational organizations, such as
the OECD, which take into consideration more comprehensive criteria. Those estimates
indicate a participation of between 27,9 and 50 percent of the SOE sector in Chinese gross
domestic product, with due consideration to Lhe fact that lhe remaining percentage does not
necessarily corresponds only to the private sector, but also to other forms of government
ownership much more difficult to trace.
4.1. State influence over the Economy

li appears to be a wide consensus that China took remarkable steps towards economic
liberalization ten years after joining lhe WTO. The need to meet its several obligations
resulting from its accession scems to have motivated such an important shift. However, this
process is claimed to have been reversed in the last years, as the Chinese Oovernment
indicated that iii does not intend to give up direct command of large portions of the economy.
This important guidcline has led to lhe retention of control over a large number of SOEs and
to lis strengthening by means of Lhe use of subsidies and other policies to create dominant
dornestic and global competitors, as reported by Lhe (3.5.-China Economic and Security
Review Commission 166 . As reported by Lhe WTO Secretariat through the TPR of China '6
SOEs have been retreating from some of the more competitive industries, concentrating its
activities in other industries with a state monopoly, which are related to national security and
overali economic development, according to lhe Chinese authorities.
With those purposes, in December 2006, lhe State Council issued the Cuiding Opinions on

Promoting Lhe Adjustment o! State-owned Assets and Lhe Restructuring of State-owned

Enterprises (Guiding Opinions). Aiming particularly the Iargest Chinese SOEs, according to
"SZAMOSSZEGI, Andrew: KYLE. Cole, "An Analysis of State-Owned Enterprises and State Capitalism in
China." Washington. D.C.: Capital Trade. Inc. and UCESRC. 26 October 2011. p. II.
165
UCESRC, 2011 Report to Congress. Washington, D.C.: 112 Congress, I' Session, November 2011, p. 40.
1661b1d., p41.
67
WTO, Trade Policy Review Body, China - Report by the Secretariat, 26 April 2010. p. 54.
108

0
0
O
O
O
a
a
a
a
a
O
a
e
0
a
a
a
a
a
a

the 2011 Report to Congress On China 's WTO Compliance (Report to the US Congress) such
measure calis on SASAC to
enhance the state-owned econoniy's controtling power", "prevent the Ioss of state-owned assets,"
encourage "state-owned capital to concentrate in major industries and key fieids relating to national
security and national economie lifelines" and "accelerate the forniation of a batch ol' predominam
enterprises with independent intel!ectuat property rights, famous brands, and sirong international
competitiveness.'68
The economic global crisis of 2008 seems to have intensified such policy and the Law on
State-owned Asseis o! Enterprises, which becanie effective in May 2009, provided lhe legal
means of putting lhe governmental guidelines in practic. Some strategic industries, in which
the state must hold control by means of SOEs, and five heavyweight industries, in which the
state must remain heavily involved, are identified by the Chinese government. The chart
below shows the elected sectors:
Industries that the Chinese Cosrernment Has iclent.ifled. as "Sirategie"
and "Heavyweight"
Strategic Industries:
1)Arrnaments
2) Power Generation and Distribution
31 011 and Petrochernicais
4) Telccornrnunications
5) Coai
6) Civil Avation
7) Shipping

Ileavvweight Industries:
1.) M ahi nery
2) Autornobites
3) Inknnation Technologv
4) Construction
5) Iran. Steel. and Nonferrous Metais

Source: Report of the UCESRC

As stated by SASAC's chairman Li Rongrong. State capital mustplay a leading role in these

sectors, whch are the vital arteries of the national economy and essential to national
securliy' 70. Important consequences derive from such governmental decision, as foreign

a
a
a
e
e
e
e
e
e
e
e
a

companies are not permitted to engage in lhe sectors reserved for strategic industries. Besides,
foreigners are submitted to very strict regulations iii those sectors designated as heavyweight
industries, confining compettion and creatng state-controlled markets.

a
e
a
e
a
a
a

Inward foreign direct investment fiows are often contingent on de facto transfer of
technology, given that in some sectors foreign investors are not allowed to have a controlling
share in enterprises. This issue is demonstrated by the Report to the US Congress, that
mentions lhe case of the iron and steel sector, which is classified as a heavyweight industry'71.
It is important to note that this kind of requirement is in conflict with lhe commitrnent in
China's accession agreement not to condition investment on the transfer of technology.
Finaily, lhe control by the state has relevant consequences regarding corporate governance of
such SOEs and appears to be inconsistent with the liberalization commitments reported by Lhe
RWP. The power to decide the composition of lhe corporate boards and SOEs' management
' 68 USTR. 2011 Report to Congress 011 China 's WTO Cornpliance. Washington D.C.. December 2011, p. 61.
Available at: chtt://www.ustr.govIwebfm send/3189>. Viewed at: 23 January 2012.
69
UCESRC. 2011 Report to Congress. Washington. D.C.: 112 Congres, 1 Session, November 2011, p.48.
170
HUANXIN. Zhao, "China names key industries for absolute state control." China Daily. 19 December
2006.Available at: <htt y ://www.chinadail y .comcn/chinaJ2006-12/19/content 762056.htm'. Viewed at: 18
December 2011,
' 71 IJSTR. 2011 Report to Congress on China 's WTO Corapliance, Washington DC., December 2011, p. 72.
Avaitable at: chttp://www.ustr.gov/webfm send/3 89>. Viewed at: 23 Jantiary 2012.

109

teams are not part of the modernization China is expected to accomplish as a result of its
WTO comrnitments.
4.2. Governmental support and competitiveness
One of the most controversial aspects for observers of the activities of Chinese SOEs is the
great levei of governmental support which is provided by the state, either by subsidization,
more favorable regulatory treatment or other forms of disruptive practices. This situation
leads to a distorted competition environment and is potentially harmful for foreign enterprises
and domestic private companies.
A!though the Chinese Government alieges that it has always supported Lhe development of
enterprises of ali ownership structures equally, the WTO Secretariat has already reported this
situation, which has been intensified after the 2008 global crisis which motivated a stimulus
package by the Chinese government:
However. SOEs have been benefiting disproportionately from the Government's recent measures to boost
the economy, particularly the economie stimulus. At the sarne time, dornestic private enterprises are
finding it more difficult to access credits from banks. ( ... ) (Ernphasis added)
When discussing Chinese subsidization, a preliminary rnatter arises from the lack of
transparency of such governmental practices iii China. Article 25 of the SCM provides for the
obligation of notifying subsidies granted or maintained within the territory of each member,
so as the WTO can evaluate the trade effects of such measure. Nevertheless, since its
accession to the WTO in 2001, China has done se only once and the list presented by Beijing
was judged by Chinese trade partners to be incomplete.
Inadequate transparency in several areas places an excessive burden on other WTO members
seeking to better understand China's trade policy measures A great evidence of how
problematic has been the Chinese notification of subsidies was the notification submitted by
the Office of the United States Trade Representative identifying approximately two hundred
subsidy programs, which China failed to notify'72.
The list provided by the US indicates that China favors the state-owned sector with a variety
of direct and indirect subsidies. In addition to that, although China notified several subsidies
that appear to be prohibited, it did so without making any commitrnent to withdraw them, and
ir failed to notify other subsidies that appear to be prohibited, according to the Report to the
US Congress'73.

si
1)
0)
e)

0)
SI
0

0)
'
E
0)

An example of the more favorable treatment granted to SOEs is expressed by the fact that, in
2009, 85 percent of Lhe total amount of bank loans in China (9,59 trillion yuan or 1,4 trillion
Arnerican doliars) has been assi.gned to SOEs. Most of those loans were granted by stateowned banks, which are China's largest banks, confirming that SOEs benefits from the dose
relation with the governrnent. On the other hand, private companies, which absorb nearly 85

172United States details China and India subsid y prorarns in submission to WTO, Press Release. Washington
Available
aI:
<http://www.ustr.gov/about-us/press-offlce/pressD.C.:
USTR,
October
2011.
releases/201 l/october/united-states-details-china-and-india-subsidy-prol>. Viewed aI: 19 December 2011.
173USTR, 2011 Report to Congress on China 's VYTO Coinpliance, Washington D.C., December 2011, p. 44.
Available at: chttp://www.ustr.gov/webfm sendf3 189>. Viewecl aI: 23 January 2012110

China outward foreign direct investments

a2

Untei
'GmarQ ()
France (?)
Hong K6ng,Chin(5)

283

iS

58.

Swltzerbnd (10)
japan (4)
Russian FSSon(8)

75

:sefl (4)

e
SIBJXW ($)
-.M
Korea Republic of (19)
Spain (23)

.'2010?
2009

a1

Luxembourg(17)
lreland(I3
ln
'!
o

/"
'10

:-1501-200

Source: Unctad178

The Unctad has recently reported that state-owned transnational companies are aii important
emerging source of FDI and, although they represent less than 1 percent of transnational
companies worldwide, they represented about 11 percent of global foreign direct nvestment
in 2010179. In the context o!' energy, raw materiais and metais sectors, Chinese SOEs played a
major role in the "going out" strategy. As stated above, a study by the Rhodium Group
concluded that betweeri 2003 and 2010, in terms of total deal value, SOEs account for 65
percent of lhe total, demonstrating the great influence of state initiative in relation to outward
foreign investments.
Besides having signiflcant government direct or indirect support, SOEs are also claimed to be
advantaged when getting governmental approval to invest abroad, in relation to Chinese
private companies O The table below shows the remarkable participation o!' only four
Chinese SOEs in total outward foreign direct investments, approximately 52 percent:

' 78Unctad. World !nvestnzent Report 2011: Non-Equlty niodes of internationaiproduction and development, Ne
York and Ceneva, 2011, p. 9.
' 79 fbid..p. 1.

'80USTR, 2011 Report to Congress o,; China 's WTO C'ompliance. Washington D.C., December 2011, p. 59.
Available at: <httn://www.ustr.gov/webfni send/3189>. Vicwed at: 2 3January 2012.

112

Participation of only four Chinese SOEs

Entity
CNPC

Global Iuvestment (U.S.$ biIlion

*34.48
32.21

Sinopet
25.67
China lnvestrnent Corporation tCIC)
Chinako (Alaminum. Corporation oChina) 20-62
Subtotal
[12.98
Chinese total Ff1 since 2005
5215.9
Sou rce: Revort of the UCESRC'8'
The ownership and governance of state-owned transnational companies generate multipie
concems in host countries regardin, among others, the levei playing fieid and nationai
security, as reported by the Uncta& 8 . As discussed above, the Chinese Government elected
strategic sectors where SOEs shall prevail and be administered according to governmental
purposes. It is widely known that Chinese Government guides outward foreign direct
investment imo those sectors it intends to see grow and develop. Due to the dose ties between
the Chinese Government and Chinese SOEs, acquisitions of firms with sensitive technology,
inteliectual property or in sectors reiated to natural resources a major source of concern, in the
outward foreign investments context.
When operating abroad, Chinese SOEs also pose a great competitive chalienge for the host
country's dornestic enteTrises. The United States-China 2010 Business Council Member
Priorities Survey Resuits' named competition with SOEs as one of the top three concerns for
its members.
However, these issues suggest a chalienge for host countries, which shall seek regulatory
ways and diplomatic understandings with the Chinese Government so as to direct investments
flows with a more constructive approach for both sides. It is important to remark that in areas
where there are no national security considerations, Chinese FDI has the potential to create
jobs and enhance economic growth of the host country, reason why this matter shall inspire
global leaders towards negotiation and conciliation.
4.4. Government procurement
As discussed above, upon its accession to the WTO, China committed itself to becoming a
member of the GPA as soon as possibie, but it is so far an observer of the agreement. This
situation also tends to favor Chinese SOEs because China's Government Procurenient Law
directs central and sub-central government entities to give priority to "local" goods and
services, with iimited exceptions, as China is permitted to do, because it is not yet a party to
the GPA'84.
' 81 USTR, 2011 Report to Congress on Chinas WTO Compliance, Washington D.C., December 2011, p. 58.
Available at: <http://www.ustr.ovJwebfm send/3 189>. Viewed at: 23 January 2012.
' t2 Unctad, World Investmenr Report 2011: Non-Equity modes of international production and development, New
York and Geneva. 2011. p. 1.
83
USCBC, USCI3C 2010 Meniber Priorities Survey Resu/ts, Washington D.C.: USCBC, 2010, p. 2.
184 USTR. 2011 Report to Congress on China 's w'ro Conipliance, Washington DC., December 2011, p. 65.
Available at: chttp://www.ustr.gov/webfm send/3 189>. Viewed aL: 23 January 2012113

Thus, to a certain extent, SOEs' procurements market can be lawfully reserved to Chinese
domestic producers. Likewise, those measures provide Chinese Oovernment with a huge
policy space. 50 that SOEs and other public entities in China can act as important tools for
industrial policy purposes.
With this purpose, the Chinese Government issued catalogues aiming aL qualifying
"indigenous innovation products". A second measure adopted by China was the issuance of
the Administrative Measures for Governnient Procurement of Imported Products, which
imposes several restrictions for government procurement of imported foreign products and
technologies. In addition, China inc!uded "Buy China" polices in its stimulus projects in
2009. 185
This kind of measures runs counter to the liberalization path expected of a WTO member
seeking to accede to the OPA.
5. Conclusions
The Chinese liberalization reforms have progressed, mainly after its WTO accession. The
WTO membership implied several coinmitments which motivated, for example, important
legal and regulatory reforms, remarkable tariff reductions and special safeguard mechanisms
to protect other members' domestic industries against surges of imports from China.
In other arcas, China appears to have made little progress and the frequently debated low levei
of compliance in those arcas has been raising WTO members' concerns. Governmental
intervention in the economy, by means of direct or indirect subsidization of SOEs, distortive
guidance of inward and outward foreign direct investment are some of the top listed critical
aspects of China's WTO compliance.
The Jack of transparency about Chinese firms', mainly SOEs', relation with the central
govemment, regarding financial support or decision making and corporate governance, is a
major problem. Considering Lhe huge Chinese SOEs' economic power in both national and
global levei, ir is reasonable to assume that any Chinese nade distortive practices or public
policies may have enormous impacts worldwide.
The discussion about the problematic role played by Chinese SOEs is closely related to the
transition from a NME to a market-oriented one, which is a necessary step when getting
engaged in an organization deeply compromised with international trade liberalization.
Moreover, its members have negotiated rules precisely designed for market economies and
China needs to demonstrate it is willing to play by the rules it accepted when it acceded to the
WTO.

' 85 1b1d., p. 66.

114

IV. WTO AND CHINA: THE ISSUE OF NON-MARKET ECONOMIES

China has acceded to the WTO in 2001,. after 15 years of intense negotiations. Although
China has greatly benefited from iL, Lhe presence of such a big NME has brought up Lensions
and uncertainty to the Multilateral Trading Systeni.
During the second haif of the 20th century, it was a common perception that the GATT
system, along with the OECD, was Lhe club of market economies in contrast to Lhe Council
for Mutual Economic Assistance - Comecom - that would be the club of sociaiist-planned
economies t86 . In this sense, its rules, tailored for market-economies, have riot envisaged
dealing with the different aspects of planned-economies, or NMEs.
The issue of NME in the Multilateral Trading System is noL a new one. Ir has been present
since Lhe negotiations of Lhe United NaLions Conference on Trade and Employment, in
Havana, which were organized to create the InternaLional Trade OrganizaLion (ITO). The
Havana Charter had provisions aimed aL making Lhe necessary legal adjustments to enable fair
trade between market and non-markeL economies alike. As Lhe ITO was never created, Lhe
only article present in Lhe remaining GATT to deal wiLh NME was its Articie XVII, on sLaLetrading enterprises.
Nevertheless, throughouL the hisLory of GATT development, and especially after Lhe creaLion
of the WTO, Lhe accession and presence of NME countries in Lhe Multilateral Trading System
has heen constam. The systemic response to the chailenges brought by the conLrast beLween
Lhe lack of specific rules to deal with NMEs and their economic singularities has varied
greatly from Lhe GATT to Lhe WTO eras. The accession of China, a hybrid economy wiLh
NME features, to the WTO has broughL new iighL to Lhe issue, increasing Lhe stakes of a
coherent integration of NME feaLures imo Lhe Multilateral System.
This section will discuss Lhe systemic chalienges of integrating NMEs in Lhe WTO. IL will
analyze how Lhe Multilateral Trading SysLem has dealt differently with the issue during the
GATT and during Lhe WTO era. IL will then discuss Lhe impacts of a NME on the principies
and rules of Lhe Multilateral Trading System and how Lhey mighL be affected. This analysis is
importauL to understand the meaning of the systemic changes imposed on China's economy
upon accession to Lhe WTO. The economic measures present in China's Accession ProLocol
have, Lhus, a broader meaning and iLs fulfillment is indispensable for Lhe welI-funcLioning of
the multilateral system.
Finaily, it will discuss the NME methodology for calculating normal price in antidumping
invesLigations and whaL the legal consequences are for the 2016 deadline for this
meLhodology.
FirsL of ali, however, Lhis secLion will iook imo the available definitions of NME ia Lhe
context of intemaLional Lrade and whether iL offers adequaLe criLeria for inLegraLing NMEs into
the multilateral Lrading system.

See, e.g., KASER. Michael. "Comecon and the new muttilateralisrn'. The

World Today, Royal Institute of

International AtTairs, Vol. 28. No. 4, April, 1972

115

IV.! DEFINITION OF MARKET AND NON-MARKET ECONOMIES

China joined the WTO in 2001 through the Protocol of Accession WTIL/432, in which China
committed to a series of obligations that should theoretically Iead it imo a market economy.
China's status of NME is also referred to in a few provisions of the Protocol, as, for example,
in Article 15, where concerns are raised about the difficulties arisen from the absence of
market economy conditions for the determinatiort of dumping and subsidies. Nevertheless,
there is no definition, under the Protocol, of the expression "non market ecoriomy". The
provisions of Article 15 only presume that China is a NME, but give no further ciarification
on the expression, leaving the matter to members' domestic legislations.
China's Accession Working Party Report, when referring to Articte 15 of the Chinese
Accession Protocol, states that:
Several members of the Working Party noted that China was continuing the process of transition
towards a fui] market econorny. Those members noted that under those circumstances, in the case of
imports of Chinese origin imo a WTO Member, special difflculties could exist in determining cosi and
price comparabiiity in che context of anti-dumping investigations and countervailing duty
investigations'87.
The Working Party thus evidenced some NMEs' effects mi the WTO system, especiaily on
the proper functioning of its mechanisms, but did not give a definition of what precisely is
deemed to be a NME or a "fuli market economy". In this context, one can raise the questiori:
what is a market economy and how to define it?
Although the main concem with the concept of NME focuses on dumping investigations, as
shown by China's Protocoi of Accession, such definition is crucial to shed some iight on other
NME chalienges to the mies of the Multilateral Trading System, and to fully understand the
participation of China, as well as that of other NMEs in the WTO.
1. International defmitions
There are a diversity of economic parameters and subtie gradations between a centrally
planned and a market economy. Hence, the difficulty of legaily defining a market economy
(or a NME). Apart from the United Nations Conference on Trade and Development (Unctad),
a legaily detailed description has still not been produced among influent internationai
organizations, though there are punctual official statements that, together, form an official
structure of what is needed for a country to be considered as a market economy.
Unctad
Unctad defines 188 market economy as "a nationai economy of a country that refles heavily

upon market forces to determine leveis ofproduction, consumption, investment and savings
wthoutgovernment intervention
Likewise, Unctad's definition of a NME is as follows:
A national economy in which the government seeks to determine econoinic activity largely
'v WTO. Report othe Working Party on me Accessior; o! china, WT1ACc/GHN149. October 2001. para. 150
88

tinctad's Glossary of Customs Terms, available at

http:J/www.asycuclaorg/cuglossa,asp?tcrm=inarket+ccononiv. Last viewed on 3 1 st January 2012.
116

through a mechanism of central planning, as in lhe former Soviet lJnion, in contrast to a

market economy which depends heavily upon market forces to aliocate productive resources.
In a "non-niarket' economy, production targets, prices, costs, investrnent allocations, raw
materiais, labour, internationai trade and most other econoniic aggregates are manipulated
within a national economic pian drawn up by a central planning authority; hence, the public
sector makes the major decisions affecting demand and supply within lhe national economy.

WTO
The Multilateral Trading System's first discussion on the subject happened during lhe Review
Session of General Agreernent on Tariffs and Trade (GATT 1947), on 1954-1955. Article VI,
which contains dispositions on subsidies and dumping rnatters, was arnended through lhe
second Supplementary Provision to paragraph 1 (Ad Note):
Ad Article VI
Paragraph 1
2. Ir is recognized that. in lhe case of irnports from a country which has a complete or
substantiaily complete monopoly of its trade and where ali domestie prices are flxed by
the State, special difficulties may exist ia determining price comparability for the purposes of
paragraph i ( ... ).(Emphasis added)
Point 2 of the Ad Note refers to lhe determination of price comparability between market and
centrally planned economies. But is it a WTO definition of a NME? Evidence in that sense
can be found in the reference to lhe Ad Note present in Article 15 of Lhe Tokyo Round
Subsidies Code, paragraph 1, which states:
Article 15
Speciai situations
1. In cases of alleged injury caused by imports from a country described in Notes and
Supplementary Frovisions to Lhe General Agreement (Annex 1, Articie VI, paragraph 1,
point 2) Lhe importing signatory may base its procedures and measures either: (...) (Emphasis
added)
Through that indirect reference to lhe Ad Note, the Panei on IJS Antidurnping and
Countervailing Duties (WT/DS1379). paragraph 14.119 declared that:
(T)he predecessor to lhe SCM Agreement - lhe Tokyo Round Subsidies Code - contained a provision
that expiicitly addressed the concurrent use of NME [non-market economies] methodologies in
anti-dumping investigations, and of countervailing duties, in respect of imports from NMEs. Where
imports from non-market economies were at issue, Article is of that Code imposed upon lhe
importing Member a choice between the use of anti-dumping measures or of countervailing duties.
(Emphasis added)

The presurnption that Lhe inferred Article deals with imports from NMEs can also be found in
Paragraph 578 of the Appellate Body's decision on the sarne case, which states that:
Article IS of lhe Tokyo Round Subsidies Code imposed upon an importing signatory a choice
between the use of anti-dumping duties and the use of countervailing duties against imports
from NMEs' 89 . ( Emphasis added)
e
e
e

189

WTO, US - Antiduniping and Countervailing Duties, Apelate Body Report, WTIDS/379, II March 2011,
para. 14.1 19.
117

The reference to the Ad Note in lhe heading of Paragraph 1 is explicit, and therefore it seems
reasonable to infer that lhe definition of lhe Ad Note is, for lhe Dispute Settlement Body
(DSB), a definition of a NME. This interpretation is confirmed by lhe Appellate Body in lhe
case EC Fasteners, in a footnote to its decision:
We observe that the second Ad Note to Article VI:! refers to a "country which has a complete or
substantially complete monopoly of its trade" and "where ali domestic prices are fixed by lhe Stat&'.
This appears to describe a certain type of NME, where thc State monopolizes trade and sets ali
domestic prices' 90 . (Emphasis added).
However, lhe Appellate Body continues:
The second Ad Note to Article VI:1 would thus not on its face be applicable to lesser fornis
of NMEs that do not fuiflil both conditions, that is, lhe complete or substantially complete
monopoly of trade and the fixing of ali prices by Lhe State' 91 . (Emphasis added)
This leads to Lhe interpretation that, although lhe Ad Note provides a definition of a NME, it
does not cover lhe whole meaning of Lhe expression. As lhe Appellate Body stated, there are

a country which has a complete or substantally complete

monopoly of lis trade and where ali domestic prices are !lxed by lhe State. Even though Lhe

olher forms of NMEs bes ides

Ad Note may not be applicable to such other forms of NMEs, they could be recognized as so.
The matter of NME was also addressed in the Agreement on Subsidies and Countervailing
Measures (SCM). Article 29, Paragraphs 1, 2 and 3, approaches lhe rnarket economy issue
while dealing with time-frame extensions for countries in transition to market economies:
Article 29: Transformation imo a Market Economy
29.1 Members in Lhe process of transformation from a centrally-planned into a market,
free-enterprise economy, may apply programmes and measures necessary for such a
transformation.
291 For such Members, subsidy programmes falling within the scope of Article 3, and notified
according to Paragraph 3, shall be phased out or brought imo conformity with Article 3 within a
period of seven years from lhe date of entry imo force of the WTO Agreement. In such a case,
Article 4 shail not apply. ( ... )
29.3 Subsidy progranimes falling within lhe scope of Article 3 shall be notified to Lhe Conimittee
by lhe earliest practicable date after the date of entry imo force o! the WTO Agreement. Further
notifications of such subsidies may be made up to two years afler the date ofentry imo force o!
the WTO Agreement. (Eniphasis added)
Article 29.3 determines that countries considered to be in lhe proeess of transformation from a
centrally-planned imo a market-oriented economy (Article 29.1) shall notify lhe Committee
on Subsidies and Countervailing measures of subsidies to which Article 3 of lhe SCM
Agreement would apply. The lack of a legal definition enables Lhe WTO and its members to
decide politically on Lhe matter to some extent. Notifications under Article 29.3 of lhe SCM
Agrcement were submitted by countries that were transitioning to a market economy, such as
1-lungary (1995), Poland (1996) and Romania (1996)192193.

WTO EC - Definitive Anu-Dumping Measures on Certain Iron or Steel Fasteners froin China (13S397).
WT/DS397/AB/R, Appellate Body Report adopted on 15 July 2011, para. 285, footnote 460.
Ibid.
14UNGARY/WTO, Notifications under Article 29.3 of the Agreenient on Subsidies and Countervaing
Measures, G/SCM1N19/HUN, 22 November 1995; POLAND/WTO, Notifications under Article 29.3 o! the
Agreernent on Subsidies and Countervai/ing Measures, GSCMIN19/POL. 23 February 1996; ROMANIA/WTO,
192

118

The Agreement ori Trade Related Inteilectual Property Measures (TRIPS) also handies lhe
market economy or NME condition in order to mie over measures that may arise from lhe
transitional situation:
Article 65
Transitional Arrarigements
1. Subject to lhe provisions a Paragraphs 2,3 and 4, no Member shall be obliged to apply the
provisions of this Agreement before lhe expiry of a general period of one year foliowing the date
of entry imo force of Lhe WTO Agreement.
2. A developing country Member is entitled to delay for a further period of four years Lhe date of
appiication, as defined in paragraph 1, of the provisions of this Agreement other than Articles 3,
4 and 5.
3. Any other Mernber which is ia lhe proccss of transformation from a centrally-planned into
a market, free-enterprise cconomy and which is undertaking structural reform of lts
intellectual property system and facing special problems in the preparation and implementation
of inteliectual property laws and regulations, may also benefit from a period oU delay as
foreseen in paragraph 2. (Emphasis added)

However, one can affirm that those Articies are no ionger valid in view of lhe fact that these
transitory provisions have aiready expired. it is comrnon practice in lhe accession of new
members to lhe WTO that their Accession Protocois wiflI inciude a provision stating that any
obligation in lhe Multilateral Trade Agreements annexed to lhe WTO Agreement that would
be impiemented over a period of time starting with the 'entry of force of that Agreement'
should be impiemented as if lhe new member had accepted such Agreement on lhe date of its
entry into force. This has been lhe case of China 194 and other recently acceded members. In
any case, it is expected that by lhe time new members acquires fuil membership, they have
already adjusted ia accordance with most WTO provisions. lu other words, the new members
rnust observe lhe mies frorn lhe date of their WTO accession.
The Anti-Dumping Agreement (ADA) is more cautious. In its Article 2.2, there is a vague
concept that is not further explored:
2. Deterniinalion of IDumping
2.1 For the purpose of this Agreement, a product is w be considered as being dumped, i.e.
introduced mio lhe commerce of anolher country at Iess than its normal value, if Lhe export
price of the product exporled from one country to another is less lhan lhe comparable price, in
the ordinary course a brade, for the like produel when deslined for consumption in the
exporting country.
2.2 When there are no saies af lhe like product in the ordinary course of trade in lhe domestic

Notifications under Article 29.3 o! me Agreement on Subsidies and Countervailing Measures,

G/SCMIN19/ROM. 31 October 1996, respectively.
193
Olher countries also submitted notifications under Article 29.3 of Lhe 5CM Agreement. However. lhose
notifications referred to lhe fact lhat either they had no subsidies programs under lhe scope of this article or thal
Lhe Articie 29.3 was not applicable la ihem. Those counlries are: Czech Repubiic (GISCMINI9ICZE. 24 July
1995), Jordan (O/SCMNI9IJOR. 12 July 2000), Oman (G/SCMJN/9/OMN, IS January 2001), and Saudi Arabia
(G/SCM!N/9/SAU, 12 Ocbober 2006).
' WTO. Protocol o! Accession of People s Republic o! China to the World Trade Organization, WTL/432, 23
November 2001, Article 3, p. 2. See also, inter alia. WTO. Protocol otAccession o! Socialist Repvblic o! Vier
Nam to 11w World Trade Organization, WT/L/662. IS November 2006, Article 3. p. 2; WTO, Protocol o!
Accession o! Ecuador to the World Trade Organization. WT/ACCIECIJ/6, 22 Augusl 1995. Article 3, p. 2

119

rnarket of Lhe exporting country or when, because of the particular market situation or lhe
low volume of lhe saies ia Lhe domestic market of lhe exporting country, such saies do not
permit a proper comparison, Lhe margin of dumping shall be determined by comparison with a
comparable price of lhe like product when exported to an appropriate third country, provided
that this price is representative, or with the cost of production ia lhe country of origin plus a
reasonable amount for administrative, selling and general costs and for protits. (Emphasis
added)

without prejudice to the

second Supplementary Provision to paragraph 1 o! Article VI iri Annex 1 to GATI' 1994.
Paragraph 2.7 of the sarne Article asserts that its provisions are

These specific clauses were never discussed in the DSB with a view to determine their
relationship, and there is, up until now, no clear definition as to what a particular rnarket
situation is, although it seems to have a rnuch wider meaning than a NME, since such a
market situation can also prevail in a specific sector of a market economy, e.g. a natural
monopoly.
The Agreement on Agriculture in its preambie only points out to a rnarket-oriented
agricultural trading system:
Recalling thaL their Iong-term objective as agreed at lhe Mid-Term Review of lhe Uruguay
Round "is to establish a fair and market-oriented agricultural trading system and that a reform
process shotild be iniLiated through lhe negotiation of commitments on support and protection
and Lhrough Lhe establishment of strengthened and more operationally efective GATI' roles and
disciplines". (Emphasis added)
Ali other agreements of lhe IJruguay Round are silent on lhe rnatter.

World Hank
Like other international organizations, lhe World Bank has not explicitly defined what a
market econom.y is. However, in lis reports and studies, especially on countries in transition to
market economies during the 1990s, sorne standards were defined. Those reports provide an
overview of lhe economy and discuss policy reforms and institutional changes deerned
necessary for achieving a quick transition from a centrally planned to a rnarket economy, after
sorne members have appiied for membership.
Czechoslovakia had reapplied mernbership in 1991 and requested lhe World Bank and IMF's
assistance into changing to a market economy. On the country report cal!ed Transition to a
Market Economy, from 1991, lhe World Bank rnakes lhe following staternents:
A market economy requires a modero banking system with a clear division of labour between lhe
Central Bank in charge of monetary ?olicY and bank supervision on Lhe one hand, and lhe
commercial banking sector on lhe other .
The state must play an active role to promote competition and avoid monopolies. The
implenientation of anti-trusL legistation and regulaLions are the most obvious requirements, but
not lhe only ones. Thus. Lhe sLaLe also needs to avoid controis and regulations that may be used to
strengthen inonopoly powers (for example, controis on lhe establishment or expansion of
economic activities notclearlyjustitied by necessary zoning, health and safety considerations; or
the aliocation of import licenses for essential-inpuLs to a favoured group of producers). There

195

World Bank. "Czechoslovakia: TransiLion to a Market Economy", The World Bank Courztry Studies,
Washington, 1991, p. xx.
120

may also be a need for a positive program to encotirage new entrants in to particular activitiest96.
The World Bank also points at price controls as a relevant issue when assessing lhe proper
funetioning of a market economy. Such controls are admitted only in extraordinary
circumstances:
( ... ) (A) market econorny cannot function properly without competition and lhe freedom to set
prices and that, eventually, price controis will remain for onty few activities, such as natural
monopolies like water, electricity, and gas, and social services like health care. as in otlicr market
economes'97.
2. National definitions

Complementing Lhe internatiortal provisions on market economy or NME, some countries

have more speciflc legal definitions and procedures whieh often become reference to other
countries' domestic legal system.
United States

The United States (liS) legal system is based on common law, and some acts are eompiled
under lhe US Code (USC). lis Tome 19 treats Customs Duties issues and regulations and
defines what a NME is under lhe Section 771(18) of lhe Tariff Aet of 1930 and, as amended,
under 19 USC 1677(18)198:
(18) Nonmarket econoniy country (A) In general
The term "nonmarket economy country" means any foreign country that the administering
authority determines does not operate ou market principies of cost or pricing structures, so
that saies of merchandise in suei country do not reflect the fair value of the merchandise.
(Empbasis added)
(8) Factors to be considered
In making determinations under subparagraph (A) Lhe administering authority shali take imo
account(i) lhe extent to which lhe currency of lhe foreign country is convertible imo lhe currency of
other countries;
(ii) lhe exteni to which wage rates in lhe foreign country are deterrnined by free bargaining
between labour and rnanagement.
(iii) lhe extent to which joint ventures or other investments by firms of other foreign countries
are permitted in lhe foreign country,
(iv) Lhe extent of government ownership or control of lhe means of production,
(v) Lhe extent of governmcnt control over lhe aliocation of resources and over lhe price and
output decisions of enterprises. and
(vi) such other factors as lhe administering authority considers appropriate.
(C) Determination in effect
(i) Any determination that a foreign country is a nonmarket economy country shall remain in
effect until revoked by lhe administering authority.
(ii) The administering authority may make a determination under subparagraph (A) with
respect to any foreign country at any time.

'96 Ibid. p. 43.

Ibid. p. 56

The Titie 19 of Lhe US Code was consulted at September 9 as currently published by lhe US Government
and refiects lhe laws passed by Congress as of Feb. lst, 2010. Until this date no officiai changes were made by
lhe Office of lhe Law Revision CounseL.

121

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If the Department of Commerce (DoC) has designated a country as a NME, this determination
remains in effect until revoked by lhe administering authority, pursuant to USC Section
771(18)(c)(i). For lhe DoC to conduct a review of a country's NME status, the country's
government must make a formal requcst for a review, or support a respondent's claim in an
antidumping case, that the country has a market economy. After receiving a formal request,
the DoC begins an analysis of lhe six factors outlined above to determine whether to treat lhe
country in question as a NME.
If a country has not been formally designated as a NME, it is presurned to be a market
economy. If an interested party alleges that the country is a NME and documents its allegation
with respect to each of lhe factors listed above, the DoC will initiate a formal inquiry to
determine whether the country should be treated as a NME or not.
Apart from that, lhe USC still carnes legislation from the Cold War period that refers to lhe
subject. Also under the customs titie, there is the provision that, if a NME limits the freedom
of eniigration in east-west trade, ir will be eligible to sanctions, such as not receiving the nondiscrimination treatment for the duration of the limitation (12 U.S.0 2432)'.
Even more sunpnisingly, lhe Titie 12 that regulates banks and banking brngs. under 12 USC
635, the definition of what is a Marxist-Leninist country:
(B) Marxist-Leninist country defined.(1) In generalFor purposes of this paragraph, the term "Marxist-Leninist country" means
any country that rnaintains a centraiiy pianned economy based on the principies of
Marxism-Leninism, or is economicaiiy and militarily dependeni on any other such country.
(ii) Specific countries deemed to be Marxist-LeninisLUniess otherwise determined by the
President in accordance with subparagraph (C). the foliowing countries are deemed to be
Marxist-Leninist countries for purposes of this paragraph:
(1) Cambodian People's Republie.
(II) Democratic People's Republie of Korea.
(III) Democratic Republic of Afghanistan.
(IV)Lao Peopies Democratie Republie.
(V) People's Republic of China,
(VI) Republic of Cuba.
(VII)Socialist Federal Repubhc of Yugoslavia.
(VIII)Socialist Republic of Vietnam.
(IX)Tibet. (Emphasis added)
As for a market economy, there is an open-ended definition under 19 USC 2703a (d), which
contains conditions for Haiti to receive economic aid:
(d) Eligibility requirements
(1) In general
Haiti shafl be eiigible for preferential treatment undcr this section if the Presidem determines
determines and
certifies to Congress that Haiti:
(A) has estahlished, or is making continuai progress toward establishing:
(i) a market-based economy that protects private property rights, incorporates an
' This disposition has been the source of much debate concerning lhe accession oU Russia to the WTO. For as
long as this Article remains applicable, the US wilil not be entitled to market access and non-discriminatory
treatment from Russia, neither Russia from the OS. The political process to modify this article is, however,
delicate and has provoked ample politicai debate in the country. See CLINTON. Hillary, Trade With Russia Is a
Win-Win, Wall Street Journal. 20June 2012. accessibie ar
http:/Ionline.wsj.orn/article/SB i000l42405270230383640457747506i 208876588.htnil?rnod=goo g lenews wsj.
last access in 25.06.2012.
122

open rules-based trading system, and minimizes government interference in the economy
through measures such as price controis, subsidies, and government ownership ofeconomic
assets;
(ii) the role of Iaw, potiticai pluraiism, and the right to doe process, a fair iria[, and
equal protection under lhe Iaw;
(iii) lhe elimination of barriers to United States trade and investment, including by:
(1) lhe provision of national treatment and measures Lo create an environment
conducive to doniestic and foreign investment;
(II) lhe protection of inteliectual property; and
(III) te resolution of bilateral trade and investment disputes; (Emphasis added)
Regarding lhe Russian Federation, lhe United States recognized Russia as a market economy
on June 7. 2002200.

European Union
The European Community (EC) had defined market economy on lhe Council Regulation No
384196 of 22 Decernber 1995 on protection against dumped imports from countries not
members o! lhe European Community, in its Art. 7(c). Due to lhe paradigm change on NME
discussion caused by size of China's economy, the Council Regulation EC 1225/2009
repealed that document and added new and more specific clauses 201 . About NMEs, its legal
text determines, on Article 7, that:
(b) In anti-dumping investigations concerning imports from lhe People's Republie of China.
Vietnam and Kazakhstan and any non-market econorny country 202 which is a member of lhe
ai
WTO lhe date of Lhe initiation of Lhe investigation, normal value shait be deterrnined in
accordance with paragraphs 1 to 6, if it is shown, on the basis of properly substantiated ciainis by
one or more producers subject LO Lhe investigation and in accordance with Lhe criteria and
procedures ser OUL ia subparagraph (c). that market economy conditions prevait for this producer
or producers in respecL of Lhe manufacture and saie of lhe like product concerned. When this is
noL the case. lhe roles set ouL under subparagraph (a) shait appty.
(e) A claim under subparagraph (b) must be made in writing and contam sufficient evidence that
the producer operates under market economy conditions, that is if:
- decisions of ftrms regarding prices, costs and inpuLs, inciuding for insLance raw materiais. cost
of Lechnology and tabour, output, saies and investment, are made in response to market signais
retlecting supply and demand, and wiLhout significant State interference in this regard, and costs
of major inputs substantiatiy retlecL market values,
- firms have one clear sei ol' basic accounLing records which are independently audited in tine
with international accounting standards and are applied for ali purposes.
- the production costs and financial situation of firms are not subject to significant distortions
carried over from lhe former non-market econotny sysLem, in particular in relation to
depreciaLion of assets, other write-offs, barter Lrade and payment via compensation of debts,
- lhe firms concerned are subject to bankruptcy and properLy iaws which guarantee legal
certainty and stability for Lhe operaLion ol' firms, and
- excharige rate conversions are carried out aL lhe market rate. (Emphasis added)

200

As provided by Pub. L. 107-246, 2, Oct. 23, 2002, 116 Stat. 1511

This legisiation was subject to the WTO Dispute Settiement because of its Individual Treatment clause
(WT/DS397), which provided for the possibility of applying a country-wide durnping margin and anLi-dumping
duties for companies from NME. This possibihty was considered contrary to lhe rules of the Anti-dumping
AgreemenL. See WTO, European Communities - Defiziitive Anti-Dumping Measures on C'ertain Jron or Steel
Fasteners froin China, Appeilate Body Report, WTIDS397/AB/R, 15 July 2011,275 p
202
Including Albania, Armenia, Azerbaijari, Belarus, Georgia, North Korea, Kyrgyzstan, Motdova, Mongotia,
Tajikistan, Turkmenistan and tizbekistan.
201

123

The EC

1225/2009

also provides lhe procedure for the market economy status verification

with respect to a specific sector:

A determination whether Lhe producer meeis lhe abovenientioned criteria shall be made within
three months of the initiation of the investigation, after specific consultation of lhe Advisory
Committee and after lhe Community industry has been given an opportunity to comment. This
determination shail remam in force throughout Lhe investigation.
e

The conditions to be fulfilled by countries acceding to lhe European Union (EU) shed some

further iight on lhe matter. According to lhe Treaty on European Union, Article
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49,

any

European State that desires to join lhe European Union shall be welcorne to do so as long as it

respects the European Union principies stated at Article

of lhe sarne treaty 203. Also, a broad

analysis of the institutionai and systemic reforms required for an acceding member to be abie
to respect such principies wili be done by lhe EU.

In June 1993, during lhe European Council rneeting at Copenhagen, lhe conditions for
countries aiming to accede to lhe EU were further developed imo a series of criteria: the
Copenhagen Criteria204. These criteria list necessary attributes for a country to be able to join

lhe European Union and were so resumed by lhe European Cornmission:

- stable institutions that guarantee democracy, the rute of law, human rights and respect for and
protection of minorities;
- a functioning market economy, as welt as lhe abitity to cope with Lhe pressure of competition
and lhe niarket forces a( work inside the Union;
- lhe abitity to assume the obligations of membership, in particular adherence to lhe objectives of
politicat, economic and monetary union 05 . (Emphasis added)

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Concerning lhe accession of forrner USSR members, a more specific descrtion relating
te

acceding countries of Central and Eastern Europe to lhe EU was outlined

206.

ii) The European Council welcomed lhe courageous efforts undertaken by lhe associated
countries to modernize Lheir economies, which have been weakened by 40 years of central
ptanning, and to ensure a rapid transition to a market economy. The Conimunity and its
Member States ptedge their support to this reform process. Peace and security in Europe depend
on the success of those efforts.

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iii) The European Council today agreed that lhe associated countries in Central and Eastern
Europe that so desire shall become members of lhe European Union. Accession will take place
as soon as an associated cotintry is able to assume lhe obligations of membership by satisfying
the economic and political conditions required.

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Membership recjuires that the candidate country bus achieved stability of institutions
guaranteeing democracy, lhe rute of law, human rights and respect for and protection of
minorities, the existence of a functioning market economy as weti as the capacity to cope with
competitive pressure and market forces within the Union. Membcrship presupposes Lhe
candidates ability to take on the obligations of membership including adherence to Lhe aims of
political, economic and monetary union. (Emphasis added)

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203

These are lhe principies of tiberty, democracy, respect for human rights and fundamental freedoms, and lhe

rule of taw. See EU. Treaty on Evropean lJnion, Maastricht, 7 February 1992, Articie 6.
204
See EU, European Counci! Meeting, Copenhagen, 21-22 June 1993. D0C19313.
205

As stated on httn://eceuropa.eu/cnlanzenlentithe-I)olicv/conditions-fbr-enlan!ementiindex en.htn1. iast access

on 25.06.2012.
206
See EU, Eurnpean Council Meeting, Gopenhagen, 21-22 June 1993, D0C19313. point 7A,
124

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Hence, the EU regards as market economies ali its 27 members, including the former sociaiist
states, as expressly declared in their Protocois of Accession 207 . Similarly, lhe EU established a
framework for EU negotiations with lhe Western Baikan countries (also comprising financing
programs): the Stabilization and Association Process 208, to be followed and updated until the
countries' eventual accession. The Process has tliree aims: (i) stabilizing the countries and
encouraging their swift transition to a market economy, (ii) promoting regional
cooperation, and (iii) promoting eventual membership of lhe EU.
This kind of EU initiative demonstrates the weight it gives to the existence of a market
economy in order for a country to be part of the Union and for it to function properly. There is
no single recipe, however, for which reforms are needed in order to achieve a functioning
market economy as the EU will work with acceding members in a case-by-case manner,
addressing each country's specific needs.
Australia
Austraiia's Customs Act also handies lhe NME issue. First created in 1901, its dispositions
have protected and regulated Australia's market ever since. In recent years, when some
sectors faced difficulties to counter the flood of Chinese products, the Australian Parliament
found the need to reform its 1901 Custom Act, Article 269TAC(4). This Article, which deals
with normal value of goods, had to be altered because it established methods for deterinining
normal value of goods in anti-dumping investigations involving command econornies only
within a very specific definition: lhe Government of the country of export had to have at Ieast
a substantial monopoly of all o!the frade of the country - not just conceming the goods under
investigation, and also had to substantially influence lhe domestic pn'ce of ali goods in that
country. The govemments of states in trans ition from a command economy to a market
economy may still control or greatly influence the domestic sefling prices of a significant
number of sensitive products, but ir is unclear whether the extent of this control would fali
within the scope of subsection 269TAC(4).
Because of that, lhe Australian Congress amended lhe law in order to include the transition
economy concept, through Customs Legislation Amendment Act (No. 1) 2003. These norms
amended subsection 269TAC(1) to include a definition of economy in transition, presently at
the new subsection 269T(5C):
A country has an economy in transition ata time if:
(a) before the time, Lhe Governrnent of the country had a monopoly, or a substantial nionopoly.
of Lhe trade of that country and deterniined, or substantially influenced, the domestic price of
goods in that country; and
(b) ar the time, that Government does nor:

207

See EU. "Commission Opinion on Lhe applications for accession to the European Union by the Repubtic of

Bulgaria and Romania (22 February 2005)," Qificia/Journal ofthe European Urjion, L1I57, 21 June 2005. pp.
3-4; and European Union, European Commission, "Commission Opinion on the applications for accession to the
European Union by the Czech Republic, lhe Republic of Estonia. Lhe Republic of Cyprus, lhe Republic of Latvia,
the Republie of Lithuania, the Republic of Hungary, Lhe Republie of Malta, the Republic of Poland. Lhe Republic
of Siovenia and the Slovak Republic (19 February 2003)," Official Journai of ffie European Union, 23
September 2003. pp. 3-4.
208

Europeari Community Commission, Cominunication troa, tlie Cornrnission to [he Evropean Council and
Parliarnent, Brusseis, 26 May 1999, COM(1999)235. See also. European Council, C'onciusions ou 11w
Deve Jopment of a Cornpre/iensive Policy Based on the Coininission Communication on "The Stabiiisadon and
Association Process for Countries o! South-Eastern Europe, 2192" Council meeting, General Affairs,

Luxemburg, 21-22 June 1999.

125

(1) have a monopoly, ora substantial monopoly, of the trade of that country; or
(ii) determine, or substantially influence, lhe domestic price of goods in that country.

In this sense, lhe countries which have economies in transition are those countries which
previously had centrally-planned economies and which are moving towards market- based
economies in which lhe price of goods is basically determined by supply and demand 209. The
1901 Customs Act now contains, when normal value of goods cannot be determined, standing
formulas for both NMEs and transition economies:
269 TAC Normal Vatue o Goods
(4) Subject to subsections (6) and (8), where lhe Minister is satisfied that it is inappropriate to
ascertain the normal value of goods in accordance with the preceding subsections because the
Government of the country of export:
(a) has a monopoly, or substantial monopoly, of the trade of the country; and
(b) determines or substantially influences the domestic price of goods in that country;
(...)
(5D) The normal value of goods (the exported goods) is the amount deterniined by lhe Minister,
having regard to ali relevant information, if lhe exported goods are expurted to Australia and lhe
Minister is satisfied that the country of export has an economy in transition and that at Ieast
one of the following paragraphs applies:
(a) both of the foliowing conditions exist:
(i) lhe exporter of the exported goods seus like goods in the country ofexport;
(ii) market conditions do not prevail in that country in respect of lhe domestic selling
price of those like goods;
(b) both of the foliowing conditions exist:
ia
(i) lhe exporter of the exported goods does not sell like goods
lhe country of export
hut others do;
(ii) market conditions do not prevail in that country in respect of lhe domestic selling
price of those like goods; (Emphasis added)

In spite of the legislation on transition economies, Australia's Foreign Affairs Department

recognized China as a market economy in 2005, by the time lhe Free Trade Agreement
between lhe two countries was concluded. The Memorandum of (Jnderstanding between lhe
Department of Foreign Affairs and Trade of Australia and the Ministry of Commerce of lhe
People's Republic of China on the recognition of China's fuil market economy status
establisbes that:
Paragraph 2Recognising that Australia and China should negotiute on na equal basis, Australia
acknowledges China as un equal WTO trading partner by recognising China's fuli market
economy status by permanently not seeking recourse to Sections 15 and 16 of the Protocol
ofAccession of the People's Republic of China to the WTO and Paragraph 242 ofthe WTO
Report of the Working Party on the Accession of China. (Emphasis added)

Brazil
Brazil also has specific norms on lhe matter of determining NMEs in lhe context of
antidumping !egislation. The Decree 1.602. dated 23 August 1995, enacts administrative
procedures of anti-dumping investigation and states:
Art.7 In finding difficu!ties in determining lhe normal value in case of imports from not
predominantly market oriented economies, where doniestic prices are mainly fixed by lhe state,
lhe normal value can be determined using lhe actual amounts incurred and realized by lhe
exporter or producer in question or can be a constructed value of a like product in a third market
economy country, or lhe export price to other countries, exclusive Brazil, or, whenever that is not
209

See, Australia, Custorn.s Legislation Arnendment BiI/ (No. 2). 2002, Item 2, p. 6

126

possible, lhe normal value can be based on any other reasonable method. inciuding Lhe price paid
or price to pay by the similar product on Brazilian market, dully adjusted, if necessary, in order
to inciude a reasonable profit margin.
Circular N. 59, dated 28 November 2001, clarifies some provisions of lhe aforementioned
Decree. Article

3.2 defines economies in transition:

3.2Considering the transformations undergone by severa[ countries with economies Lhat are
traditionally non-market orientated economies, which reached (he stage of economies in transition
having impiemented important measures with a view to removing state monopolies and the control
and state intervention on domestic prices, lhe foliowing understanding wiii be adopted:
3.2.1
The foliowing countries are considered as economies in transition: Bulgaria, lhe Siovak
Republic, Siovenia, Hungary, Poland, Romania and fite Czech Republic.
3.2.2 As regards the initiation of the investigation involving Lhe countries mentioned in
paragraph 3.2.1, the provisions o' Article 7 of Decree 1.602, of 1995, shall not appiy. However, if
during the investigation it is verified that the market rules do not prevail in the sector where the
producerfexporter under investigation operates, the provisions of Article 7 may be applied for the
calcuiation of the normal value. (Emphasis added)
Although there are no longer any countries under transition economy status 210, 22 countries2'
were Iisied as NMEs in lhe former Dumping Analysis Petition Form of lhe Ministry of
Developwent, Industry and Foreign Trade (MDIC). This form, however, has been replaccd by
a newer form, as provided by Portaria N. 46/2011 of lhe Secretariat of Foreign Trade
(SECEX) of MDIC. The new form does not list any country as a NME.
The Circular

59/2001's Article 3 also states:

3.3 For the assessment of the existence of market economy conditions, lhe foilowing elements,
"inter alia". wili be observed:
(a)
(b)
(c)
(d)
(e)

(f)

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lhe degree of government controi over the companies or over the means of
production:
lhe levei ol' state control over lhe ailocation of resources, over prices and over Lhe
producLion decisions by companies;
lhe tegisiation to be appiied in terms of ownership, investment, taxation and
bankruptcy:
the degree of freedom ia Lhe determination of wages in negoLiations between
employers and employees:
Lhe levei ai which distortions inherited from the centraiized economy system persist
in relation to. inter alia. assets amortizaLion, other asseLs deductions. direct swap of
assets and payments in the forro debt compensation; and
the levei of state interference on currency exchange operations. (Emphasis added)

This Article is open-ended and means that, among other things, a country is onl.y would be
rated as a market economy if it fulfils, to some extent, those six conditions. How lhe Chamber
of Foreign Trade (CAMEX) and lhe Departmerit of 'Frade Defence (DECOM) of SECEX
interpret the above market economy criteria is also relevant to lhe present study.
During an antidumping investigation involving mports of High Carbon Iron Chromium
(Charge Chrome) from South Africa, Kazakhstan and Russia, in 1998, DECOM had to
consider the characteristics of lhe sector in each of this countries in order to determine normal
210

The countries present ai Circular N. 59 were later recognized as market economies by Circular N. 32, of lo
June 2009, and by Circular N. 89, of IS December 2008.
211
They were: Albania, Armenia, Azerbaijan, Beiorussia, Bosnia-Herzegovina, KazakhsLan, China, North Korea.
Croatia, Cuba, Georgia, Serbia, Montenegro, Lithuania, Macedonia. Moidavia, Mongoiia. Kirgizstan, Tajikistan,
Turkmenistan, Uzbekistan and Vier Nam

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value for price comparability purposes 212 . It is interesting to note that DECOM considered
South Africa to be, a priori, a rnarket economy, while asking for the investigated producers
from Kazakhstan and Russia to provide evidence of the degree of State interference ia their
respective sectors. Only the degree of State interference was considered and no previous
analysis on the overail characteristics of these economies was made in order to determine if,
broadly, they were NMEs. In this sense, the investigations did not offer any further clue on
DECOM's arguments to consider those mo particular economies as non-rnarket ones, since
the burden of proof was allocated into the producers' side of the dispute. The producers did
not respond and the argument could not be developed.
More recently, CAMEX has limited its analysis during antidumping investigations to
provisions stating the temporary presumption of NME status of the concerned countries. This
has been the case in CAMEX Resolution 08/2011 on definitive anti-durnping for glass
products from Argentina, Tndonesia and China, where CAMEX stated that for cornrnerciai
defense purposes, China is not considered to be predominantly a narket CCOflOfflY
alluding to the presumption present in article 1.5 of China's Accession Protoco12 1 . The
documents available do not deepen the concept neither the pararneters used for such an
assessrnent. In a superficial analysis of CAMEX's database from 2008 to 2011, other
Resolutions follows the sarne pattern, such as Res. 1412010, Res. 20/2011, Res. 23/2010, Res.
2412010, Res. 3712010, Res. 48/2010, Res. 74/2010, Res. 212009, Res. 3/2009, Res. 14/2009,
Res. 1912009, Res. 33/2009, Res. 48/2009, Res. 49/2009, Res. 5312009, Res. 80/2009, Res.
5112008, Res. 79/2008.

(4'

Ia any case, companies from NMEs countries may request market economy treatment for
their specific rnarkets, for the purpose of dumping investigations. For exarnple, the
Xinanchem Company requested the rnarket econorny treatrnent for the sector under
investigation of dumping, but could not substantiate its request and was convicted of durnping
practices (CAMEX Res. 312009).
The NME treatment of China is under discussion in Brazil. In 2004, Brazil signed the
"Mernorandum of linderstanding on Trade and Investment Cooperation Between the People's
Republic of China and the Federative Republic of Brazil", recognizing China as a rnarket
economy.
However, such declaration of market econorny recognition, to have effect on the dornestic
legal system, must bc intemalized, through an act of thc Executive Power, specifically
through a Circular passed by SECEX of MDIC, as it happened in other instances (Russia,
Uksaine, Siovakia, Slovenia, Estonia, Hungary, Latonia, Lithuania, Poland, Czech Republic,
Bulgaria and Rornania). No Circular on China has been enacted yet, meaning that, for internai
purposes, China is still considered a NME.
3. Conclusions
The definition of a NME is irnprecise, especially when it attempts to cover multiple economic
situations in which a country requires international assistance or relies upon different degrees
of government interfcrence ia its econorny. The case of transitional econornies is particularly
difficult to comprehend. During a transitional period in which the economy will neither be
centrally planned nor a rnarket econorny, the Governrnent is required to intervene on behalf of
212
213

Sce, MD!C, Portaria lntcrniinisterial No. 19. dated 7 October 1998. point 4.1.3.
WTO. ProtocolofAccession o! the Peopie 's Repuhiic o! China. WTIL/432, lO November 2001.

128

the consumer, and anti-competitive behavior may arise from the possible distortions to the
market. To assist countries in that endeavor, assistance is granted in the form of special
conditions and periods extensions to fully abide by the WTO norms whi!e reforms take place.
From the WTO normative system and Accession Protocois, it can be inferred that the main
legal provisions to deal with the presence of NMEs in Lhe WTO are related to the
determination of normal value for dumping investigations, and Lhat the supporting treaties are
deliberately vague due to the difficulty of regulating such complex economic feature.
This explains why Um definitions of NMEs, both under the WTO and several national
legislations can only be found in the limited context of durnping investigations. A more
comprehensive discussion over Um issue was seldom undertaken under the Multilateral
System. Nevertheless, as it will be discussed below, NMEs' impact on the WTO system goes
well beyond antidumping rules.

129

IV.2 NME AT THE MULTILATERAL TRADING SYSTEM

1. The GATT era
At the end of World War 2, nations aimed aL ereating an international economic framework
which would regulate economic relations of ali countries, capitalists and socialists alike, in
order to avoid a repetition of the economic turmoil of the 1930s214. The so-called Bretton
Woods system would have included, in addition to the hilernational Monetary Fund (IMF)
and the World Bank, an Intemational Trade Organization (ITO).
The founding document for lhe ITO, the Havana Charter, drafted by the United Nations
Conference on Trade and Employment, contained provisions enabiing the participation of
NMEs in the projected trading system. Nevertheless, both because Lhe USSR, the main
socialist economy at the time, decided not to participate in the negotiations and because of Lhe
strengthening of the Coid War rivalry between the US and the USSR, these provisions on
NMEs were graduaily weakened. In the GATT, initialiy seen as a provisional agreement to
the creation of the ITO, only one of those provisions deahng with NME subsisted: GATT
Article XVII, on staLe-trading enterprises (STEs).
The ITO never carne imo force and Lhe GATT was the main source of mul.tilateral trade
regulation for aimost 50 years. The GATT did not concentraLe in finding ways to adapt
socialist economies to its framework, partly because of its provisional status and also because
of the lack of interest of the USSR in the emerging Multilateral Trading System. ThLLS, the
issue of NMEs was overiooked for some time.
Even the applicability of Article XVII to NMEs was questioned: Grzybowski affirms Lhat
when Lhe Article binds state-trading enterprises to make transactions solely in accordance
with commercial considerations, it theoretical!y exciudes ornei' molivations, which seerns to
contradici lhe basic tenets of economic planning in a socialist country of lhe soviet typ e215.
The first difficulties of applying GATT rules to NMEs arose during the 1950s with the
transition of Czcchoslovakia, a GATT founding member, towards a centrally-planned
economy. One of the first issues brought up was the calculation of dumping margins and the
determination of normal value216.
Czechosiovakia argued that the alternatives foreseen in GATI were not proper to calculate
Lhe normal value in centraily planned economies. The country affirmed thatno comparisor; of
export prices with prices in lhe dornestic market o! 11w exporting country is possible when
such doinestic prices are not esta blished as a result ol'fair competition in that market, but are

214

Sce LOWENFELD, Andreas F., "'Lhe InternaLional Monetary System: A Look Back Over Seven Decades",
Joui'nai ofhuernational Economic Law, vol. 13(3), pp. 575-595
21$
ORZYBOWSKI, K., "Socialist Countries in OATT," lhe Amercan Journal o! C'oinparative Law. v. 28, n. 4,
Autumn, 1980, p548.
216
In accordance with GArI' Article VI, durnping occurs when a product is exported to a country at a lower
price than the sarne product is solcl ia the domestic market of the exporting country. In the absence of an
acceptable domestic price to calculate the dumping margin, Lhe normal value of Lhe good could be derived from
(1) the highest comparable price for the product for exporL to any Lhird counLry or (ii) the cost of production of
Lhe product, plus a reasonabte addition for selling costs and profit.

130

fixed by the State27. The main problem was that, since the prices inside the country were
fixed, they could otEten be higher than export prices, which led to the determination of
dumping by other countries and consequent applicatiort of antidumping rights.
Czechoslovakia proposed, thus, an amendment to Article VI, by which lhe margins of
dumping should be calculated using the comparable price on the domestic market of Lhe
exporting country or, in lhe absence of such domestic price or when prices iri the domestic
market were fixed by the State, (1) the "average comparable prce for the Jike procluct for
export by third countries tu the irnporting country iii question iii the ordinary course of trade"
should be used, ou (ii) in the absence of such price, lhe average comparable price for the like
product for export by the exporting country to third countries, or (iii) the cost of production
plus a reasonable addition for sciling cost and profit2.
The GATI Contracting Parties did not accept the proposal, but agreed on adding an
Interpretative Note on Article VI, affirming that in lhe case of imports from a country with
complete or substantially complete nionopoly of trade and where domestic prices are fixed by
the State, special difficulties may exist in determining price comparability based on prices
practiced on the domestic market, and members may find that such strict comparison may not
al1ways be appropriate219.
This Note, though acknowledging lhe lack of price comparability for products trem NMEs,
did not provide any alternative methodology for determining normal value in antidumping
investigations involving such countries. Legally, GATT members had a large margin of
maneuver when dealing with dumping from centrally planned econornies. Czechoslovakia
requested further stud, to achieve a more specific antidumping rule for NMEs, but lhe issue
remained untouched22
In practice, however, the use of a third country, as proposed by Czechoslovakia, became the
common alternative methodology and was later explicitly rneritioned at the Working Party on
the Accession of Potand.
The transition of Czechoslovakia (to a NME) also brought difficulties in the application of
other GATT rules, in particular with respect to balance of payment provisions iri Article
XV:6. The provision deals with the membership of the contracting parties at the Intemational
Monetary Fund, stating that parties that fail to join the Fund shall enter into special exchange
arrangements with the CONTRATING PARTIES. The Article aimed to avoid parties to adopt
exchange rate policies incompatible with the rules of the multilateral financial system that
could impact on international trade.
It is worth noting that the international monetary system established at Bretton Woods, based
on a dollar-gold standard and par values, relied upon the IMF maintaining a strict control over

217

GATT, Article VI - Proposais b,y ffie C'zechoslovakia Delegation - Revision, W.9186/Rev. 1, Review Working
Party 11 on Tariffs, Schedules and Customs Administration, Contracting Parties Ninth Session, 21 December
1954. W.9186IRev. 1
218

219

Ibid.
GATL Report o! Review Working Party III on Barrjers to Trade other than Restrictions or Tariffs,

Contracting Party Ninth Session, U334, 1 Mareb 1955.

220
GATT, Anti-Dumping and Countervailing Duties - Memoranda received from the Governrnents o!
Czechoslovakia and Sweden. U943,26 Novernber, 1958.
131

its members' exchange rale policies 221. In this sense, the members of the IMF were considered
to practice trade-neutrai exchange cate policies and Lhe GATT thus required its own members
to also participate ia lhe IMF.
Czechoslovakia claimed that a country with complete monopoly of foreign trade could change
the par value of its currency without affecting international commerciai transactions and
without impairing any concessions made under Lhe GATT. Therefore, there was no need to
apply lhe provisions under Articie XV:6 to centraliy planned economies. It proposed an
amendment in the Article, with lhe inciusion of an exception of its application for those
countries 222 . The amendment was not accepted, but a waiver from lhe obhgations under
GATT Articie XV:6 was accorded to Czechoslovakia 223 . This exemption was extended to
some other NMEs when they acceded to lhe GATT, as well as to Cuba, when it withdrew
from lhe IMR.
The case of Czechoslovakia is relevant because it shows that its transition to a centrally
planned economy was never regarded, neither by other contracting parties, nor by itself, as
incompatible with its obligations in lhe Multilateral Trading System. Aithough lhe GATT was
generally seen as being based ou capitalist principies, aiming at market iiberalization, Lhe
participation of NMEs in such system was not thought to threaten its principies. The parties
considered lhe need to adjust some of lhe rules, in order to adapt to the particularities of
centrally planned economies (as some ITO provisions had been drafted to accommodate lhe
participation of lhe USSR), but the core of the system would remam intact.
Uniike Czechoslovakia, lhe second NME acceding to Lhe GATT, Yugoslavia, was already a
centrally planned economy 225 . In that case, GATT contracting parties formally requested from
Yugoslavia some changes in its commercial policies, in order to make it able to participate in
lhe GA1T.
In lhe accession of Yugoslavia, lhe compatibility of GATT rufes with the country's economy
was analyzed. The Working Party examined:
( ... ) Lhe economic and oreign trade system of Yugoslavia in Lhe light a Lhe requirements
a the provisions of Lhe General Agreement, particular attention was paid te Lhe institutional
set-Lip. Lhe nature o lhe business enterprises. Lhe relationship between Lhe public authorities
and these entities, the process af business decision-making, Lhe method of price forniation,
the problem of lhe elimination of export subsidies, and. in general, Lhe extent to which
foreign products could enter and compete on the Yugoslav market.226

221 IMF members were ohligated to mainrain their currencies aL an established par-value to the doliar, not varying
more than L% ftom it. This system collapsed in 1971 after the "Nixon Shock". when the U.S. declared that they
would no longer guarantee lhe convertibility a US dollars to gold. See BOUOHTON. James M., The IMF and
the Force a 1-listory: Ten Events and Ten Ideas That Have Shaped (he Institution, IMF Working Paper
W1,104175. Policy Deve!opment and Review Department, IME, 2004222 GATL Arnendinent to Article XV. 6 - Mernorandum othe Czecboslovak De/egation, W.9/142, Contracting
Parties Ninth Session. 14 January 1955.
223 GATF, Waiver granted to Czechoslovakia of the provisions o! Article XV:6 Decision o! 5 Marc!; 1955,
SR9145. Contracting Parties Ninth Session, IS March 1955.
224 GA'rr, Article XV.-6 - Waivergrantedto Cuba. Decision o7August 1964. L/2254, 14 August 1964.
225 Although Yugoslavia had already been promoting some economic reforms that distanced itself from the
Soviet model, it continued to be a NME aL lhe time of its accession.
226 GATL Report o!the Working Party on lhe Accession o! Yugosla via, , LJ2562. 24 February 1966.
132

The 1959 Decision on relations with Yugoslavia affirms that lhe go vernment o! Vugosla via is
not aI present in a postion to assume ali lhe obligations involved in accession to lhe General
Agreemenr'27 . Parties agreed, thus, that Yugoslavia would endeavor, ID the development of
arrangements affecting lIs commerciai policies, to move progressively lo ward a position in
which it can give fuil effect to lhe provisions o! lhe General Agreemen? 28 . Also, the Working
Party on the Accession of Yugoslavia affirmed that in 1959, the Yugoslav Parliarnent had
created conditions for lransforming lhe economy from one based on slrict central planning to
one reiying essenlially on market forces for lIs regulation229.
Yugoslavia did not becorne a market econorny, but it undertook some important changes
which allowed its provisional admittance to the GATT in 1962230. Such reforrns included: the
elimination of state intervention in Lhe activities of individual enterprises and business
decision-making; the adoption oU customs tariffs; the promotion of a reform in the pricing
system, allowing free pricing for a range of commodities and removing certain price limits for
basic industries; and lhe decentralization of investment resources, reducing the role of
government in investment financing.
Finally, in 1966, despite the fact that Yugoslavia clearly was yet a NME, the Working Party
determined that the changes undertook by the country were enough to allow a hill
participation in the Multilateral Trading System23 L It can however be argued that the entry of
Yugos!avia in the GATT under "market conditions" owed more to political than economic
reasons, to reinforce Yugoslavia's non-alignment with the USSR and thus further restrain
soviet influence over the region232.
The foliowing NME to accede to the GATT was Poland, in 1967. Its accession contrasts with
Yugos!avias, because some special provisions were devised for application to Poland that
differed from the obligations of ali other GATT contracting parties. No change was requested
from Poland's econornie system; this time the adaptation lied on the rules applicable to the
country.
The adjustments proposed by Czechoslovakia - a reserve from the obligations in Article
XV:6 and the application of the Interpretative Note on Article VI - were also applied to
Poland233 . Regarding the application of the Second AD Note to Article VI:!, the Working
Party Report acknowledged the possibi!ity of using the surrogate country methodology (the
construction of the normal value based on the prices of the sarne product produced in another
country), which was not expressly foreseen in the Note.
Since Poland did not have any customs tariff, its concessions were based on import
commitments: Poland committed to increase the total value of its imports from the territories
of the contracting parties by no less than 7% per annum. Also, to counter any sharp increase
227

GArE, Decisiou ou Relations with the Federal People s Republic o! Yugosla via, U986, Contracting Parties
Fourteentb Session, 16 May 1959.
228

Ibid

229

GArI'. Report odio Working Party on the Accession o! Yugosla via, 112562, 24 February 1966.
GATT, Provisional Accession o! Yugos/a via, 111939, Contracting Parties Twentieh Session, 13 November
1962.
231
GArE. Report o! lhe Working Parly ou lhe Accession o! Yugoslavia, 112562. 24 February 1966.
232
See POLOUEKTOV, Alexander. The Non-Market Econony Issue ia Internationa! Trade in lhe Context o!
WTAccessions, Unctad/DITCITNCD/MISC.20, Unctad Report, 9 October 2002, p. 39.
233
GATT, Accession oPoland, 112851, 19 September 1967, para. 8; and GATT, Accession o! Poland Reporto!
the Working Party, 112806, 23 JLIne 1967, para. 13
230

133

on imports of Polish products under non market conditions, a specific safeguard mechariism
was created aliowing GATT contracting parties to impose restrictions to the import of
products from Poland that were being imported in such increased quantities as to cause or
threaten serious injury to domestic producers.
Furtherrnore, members were permitted to maintain quantitative restrictions against Poland,
even if these were inconsistent with GATT Article XIII, provided that the discriminatory
elemeni of the restriction was not increased and was progressively relaxed.
The accession of Poland became a modei for future NME accessions to the GAYT 234. In the
case of Romania, which acceded in 1971, the only significant difference was in its Schedule
of Commitments, where it committed to "increase its irnports from the contra cting parties as
a whole at a rate not srnaller than the growth o! total Rornanian imports provided in its FiveYear Plans" 235 . This provided some flexibiiity to its obiigations on imports, if compared to
Poland.
The accession of Hungary, in 1973, presented a few more differences: the country already had
a customs tariff and had recently undertaken a reorganization of the central management of its
economy, which, according to Grzybowski, would have introduced market relations 236. The
economic changes did not alter the pianned character of the country's economy, but it ailowed
Hungary to negotiate concessions under a tariff base and not through quotas. Nevertheless, it
remained subject to quantitative restrictions and special safeguards by other contracting
parties. The country also reserved its position wth res?ect to Article XV:6 and was subject to
the application of the Interpretative Note on Article V1237.
The GA'fl' made, therefore, oniy few adaptations in order to accommodate NMEs into its
framework. The draft charter of ITO had intended to be open to ali economies, even though a
number of its mies were considered "market oriented". The GATT, although not having the
dispositions of the ITO that dealt with NMEs, never fuily closed itself to the participation of
such countries, despite its clear aim of trade liberalization, consistent with market oriented
governments. According to Jackson, as the sole "offspring" of the failed ITO, the GATT
attempted to accommodate different market siructures, not only NMEs, but also countries
with different leveis of industrial development and with policies of economic deveiopment
not fuily consistent with market oriented principies 238. Ali those adaptations of GATT ruies
were made in order to allow a better functioning of the Multilateral Trading System under
those specific circumstances.
The accessions of Poland, Romania and Hungary show the range of adjustments aliowed in
GATT rules. According to FIUANG, such approach, in contrast with general rules:
234

While Yugoslavia had a more "pro-market" orientarion, Poland followed a much stricter model of socialist
econoniy. See POLOUKTOV, Atexander, "The Non-Market Econorny" Issue in International Trade in me
ContextofWTOAccessions, UnctadIDITCITNCD/MISC.20, Unctad Report, 9 October 2002, p. 39.
235
GATF. Protocol for ffie Accession of Rornania to ffie GA 77', BISD 1 8S/5 (Eighteenth Supplement, TweritySeventh Session. 1969-1970), April 1972
236
GRZYBOWSICL, K., "Socialist Countries in GATF," The Arnerican Journal o! ('oraparative Law. v. 28, n. 4,
Autumn, 1980, p549
237
GATIT, Protocol for the 4ccession o! I-Iungary to me GATT. BISD 20S13-8 (Twentieth Supplenient,
Twenty-Ninth Session, 1971-1972), January 1974.
238
JACKSON, John H.. Restructuring the GATTSystem. Royal Institute of International Affairs, London. 1990.
pp. 81-82
134

(..) was to be based on silent recognition of the special status of the planned economy
system in the GArI' and of the provisory character of these arrangements. The accession

protocois, though also constituting binding obligations, impiy an exceptional tolerance of

planned economies within the organization. The GArI' rules, based on market principies,
were the norm of the organization. Planned economy features were exceptions which were
specially granted te state-trading countries in the accession protocols239.

These adjustments were referred by Jackson as the "interface principie". The idea was to
create mechanisms that would mediate between lhe different economie structures, providing
rules to reduce the incompatibilities among them240. The negotiations of quotas instead of
tariffs and the creation of specific safeguard mechanisms in NMEs accessions to the GATT
are vivid examples of that approach.
But Jackson also strcsses that the NMEs participating iri the GATT system were relatively
small and the accession of China or the USSR could create much more significant impacts,
demanding either a more complex interface system or a decision to revert GATT to being a
fortim designated primarily for market oriented economies241.
2. The WTO era

With the coilapse o communist regimes in Eastern Europe, a number of countries were
willing to promote significant economie reforms in order to transform their systems towards a
market oriented economy. The accession of such economies in transition to the WTO
triggered a change of direction in how the Multilateral Trading System approached NMEs:
instead of adapting WTO rules to integrate NMEs, the main eoncern was to promote a more
efficient transition of such economies.
Interestingly, the accession of Yugoslavia to the GATT became the main reference in that
new approach, to a certain degree. In the sarne way as Yugoslavia had been required to
undertake reforms such as the adoption of custorns tariff, the transition economies had to
promote economic reforms in a much deeper way than the ones required during GATT era to
be granted membership in the WTO.
Acceding members, such as Mongolia, Bulgaria, the Kyrgyz Republie, Latvia, Estonia,
Albania, Croatia, Georgia, Lithuania and Moldova, were required to commit to obligations in
the fields of: foreign exchange; state ownership and privatization; pricing policies; trading
rights; subsidies; industrial policy; state-trading enterprises and transparency 242 . Clearly, the
aim was to approximate these economies to a more inarket oriented model, aliowing the fuil
funetioning of the Multilateral Trading System.
The WTO agreements provided a few rules specifically devoted to transition economies (e.g.,
Article 29 of the 5CM and Article 65 of TRIPS), mostly granting them more time to enforce
their obligations, but there were no material changes in the WTO mies in order to aliow a
239 HUANG, Chien. "Non-market Economies Accessions to the WTO: Ao Empire is Rising?" ISA Annual
Convention, San Francisco, CA, March 23-26, 2008, p. 5
240 JACKSON, John II., Restructw'ing ffie GA 17 System, Roya] Institute o International Affairs, London, 1990,
pp. 84-85. See also HUANG. Chien, "Non-market Economies Accessions te the WTO: An Ernpire is Rising?"
ISA Annual C'onvencion, San Francisco, CA. March 23-26, 2008. p. 6.
241 Ibid. p. 82.
242 POLOIJEKTOV. Alexander. "The Non-Market Economy' Is.sue in International Trade in the C'ontext o!
WTOAccessions, UnctadIDITC/TNCD/MISC.20, Unctad Report, 9 October 2002, p. 26.

135

better participation of these economies. The commitments undertaken in the protocois of

accession related to changes in these countries' economic systems rather than to specific
changes in the WTO rules.
A different approach to the integration of NMEs into the Multilateral Trading System was
also a consequence of the evolution of lhe System itseif over time. With the successful GATT
rounds of negotiation, tariff leveis had been significantly reduced and non-tariff measures had
become the major perceived obstacle to trade liberalization. The WTO extended its scope to
ineasures once considered of domestic competence, bringing the organizatiorYs influence into
domestic policy makirig243.
Consequently, lhe nature of governance under lhe WTO is dramatical]y different from the
GATr in lhe sense that lhe power to regulate certain domestic policies has transferred from
member countries to lhe WTO Agreements. ( ... ) With regard to new member's accessions,
this signals that lhe accession negotiations under lhe WTO request countries to niake
remarkable commitments in relation to their capability to undergo ali reforms necessary to
meet WTO obligations. The candidate rnust not only familiarize themseives with the new
rules with respect to services and inlellectual property but are also under an obtigation to
bring their regulatory, judicial and administrative framework ia compliance with lhe
WTO2

The position of WTO members vis--vis lhe transition process from non-market to market
economy evoived from "adaptations and incentives" to "obligations", since NMEs practices
became incompatibie with a more integrated Multilateral Trading System. The interface
principie was no longer sufficient to allow the functioning of the roles: new members were
required to undertake deep economic reforms towards a market oriented modei in order to
fully compiy with WTO ruies.
3. The accession of China to the WTO

The Chinese accession in 2001, and Viet Nam's accession in 2007, followed this new pattern,
and represent interesting exampies of the new approach.
China was the first iarge NME to integrate the WTO system. While other NMEs had littie
weight in international trade and, thus, any distortions to competition could be easily
overiooked by other members, China had a much iarger economy, which couid cause greater
impact on other members' economies. The accomniodation of China in the system wouid
necessarily be more compiex than other NMEs, as every NME feature could give risc to
disruptions in other markets.
In its accession process, China committed:
to estabiish judicial review of administrative actions;
to accord non-discriminatory treatment at lhe procurement of inputs and goods and in respect
of the prices and avaiiability of goods and services supplied by governmentai authorities;
243

An interesting exampte of lhis extension of the WTO scope is Articte 27.13 o. lhe 5CM. The provision states
that forgiveness of debts and subsidies to cover social costs related to a privatization program in a developing
country shalt not be actionable. This is a clear incentive to privatization of companies in developing countries
where SOEs were an importam part of their economies.
244
HUANO. Chien. "Non-market Econornies Accessions to the WTO: An Empire is Rising?" ISA Annoal
C'onvention. San Francisco. CA. March 23-26, 2008. p. ti
136

 to liberalize lhe availability and scope of lhe right to trade;

to refrain from taking measures to influence or direct state-trading enterprises, except in
accordance with WTO Agreements;
to allow prices for traded goods and services in every sector to be determined by market
forces;
to eliminate export subsidies ori agricultural products, amongst others.
China's Protocol of Accession 245 also has provisions ou:
a progressive elimination of quantitative measures imposed by other members that are
incompatible with WTO Agreements;
the application of transitional specific safeguards;
the use of alternative methodology for lhe determination of normal value in the calculation
of dumping margins;
a special safeguard for textiles;
special methodologies for identifying subsidy benefits.
In one hand, China's Protocol has a series of obligations that should lead China Lowards a
market oriented economic system, an essential feature for lhe smooth functioning of the M/TO
system. On the other hand, lhe Protocol contains interface mechanisms, some of provisional
character, similar to those used for NMEs during the GATT era. Members considered at the
moment of its accession that China was not yet a market oriented economy and that members
would retain some buffer mechanisms while China implemented the comrnitments that would
ar
transform its economy, aliowing for lhe participation of China lhe WTO.
China's accession to lhe WTO was not only a chailenge for China that explicitly opted for
transforming its economy into a market economy; it was also a huge chailenge for the whole
Multilateral Trading System to adapt itself to China. In particular, there is today evidence that
China has not performed a fuil transition towards a market economy, which raises uncertainty
about the compatibility of such economic model with the WTO.
4. Conclusions
The failure to establish Lhe Intemational Trade Organization (ITO) Ied to a lack of specific
trade afies applying to international trade between planned and market economies. Article
XVII of the GATT dealt with only a minimal spectrum of the chalienges posed by the subject.
The process of accession of NMEs to the GATT, during lhe subsequent years, put on view
some of these chalienges and how they were dealt with in lhe protocois of accession - mainly
through buffer mechanisms and import obligations.
Even if lhe economic adaptations then required were minimal, there was already the
perception that they might not be sufficient 24 . In this sense, when referring to the adaptations

245
246

WTO, Protocol ofAccession ofthe Peop/e s Repubiic o! China. WT/U432, lo November 200!.
Some authors reler to this low levei of liberal requirements during GATT as the "embedded !ibera!ism" See

RUGGIE, John, "International Regimes. Transactions, and Change: Embedded Liberalism in the Postwar
Economic Order", International Organzation. volume 36(2), Internationat Regimes, Spring, 1982. Also, John.
Jackson argues that GATT operated as an interface between market and planned economies, not exerting
pressure unto the laLter boi enabling their interaction. See a!so JACKSON. John 1-!.. Restructuring the GAT7'
Systein, Roya! Institute of Internationa! Affairs, London, 1990137

made in lhe accession of sociahst economies to lhe GATT, in 1980, Grzybowski affirmed
that:
With this general formula GAFI' was satisfied. ( ... ) Whether Poland with her price policies and
investment prograns can really adhere, not only ia Ietter but also ia spirit. to provisions of Art.
XVI! of GATT. is another matter247.

As lhe Multilateral Trading System gradualiy changed its focas, from import tariffs to nontariff barriers, and started to supervise internal policy measures from its members in order to
guarantee a levei playing field, so did lhe adaptations required for lhe accession of NMEs.
With lhe creation of lhe WTO, there was a substantiai change in lhe nature of obligatioris
imposed on acceding NME countries in order to preserve lhe weli functioning of lhe system.
They now focus on a systemic approach, requ ring deep economic changes and an adaptation
of lhe development model of lhe acceding NME.
The accession of China to lhe WTO brought new chaHenges, because of its size and aiso due
to lhe partiai reforms perforrned ort its system.

247 GRZYBOWSKI. K., "Socialist Countries in GATT", The Arrierican Jowwal o! Co;nparative Law, vol. 28, no.
4. Autumn, 1980, p 548

138

IV.3 IMPACTS OF NON-MARKET ECONOMIES ON THE WTO SYSTEM

The shift in the treatment of NMEs when acceding to the WTO, as outlined above, derived
not oniy from the faet that members perceived that they had aiready conceded considerable
leveis of market access through the negotiation rounds and should now ask equivalent
concessions from acceding countries; lhe economie ehanges now required rather attempt to
respond to the practieal difficulties brought by eompetition on the international market with
products from NMEs, whose weight in some eeonomic seetors can have an important trade
impact. In a series of recent Articles ou the subject, The Economist highiighted some of the
fears of market economies:
Another concern is Lhe impact of the model ou the global trading system ( ... ). Ensuring that trade is
fair is harder when some companies enjoy the support, overt or covert, of a nationai government.
Western politicians are beginning to lose patience with state-capitalist powers that rig the system
in favor of Lheir OWTI companies. For emerging countries wanting to make their mark on the
World, state capitalism has au obvious appeal.
gives them the clout that private-sector
companies would take years to build24t.

li

In light of these concerns and considering the impact that the Chinese accession has had to the
Multilateral Trading System, it is worth analyzing what exactiy are the trade rules and
instruments that are not adapted or wouid not be fit to deal with trade from NMEs. There are
two ways of addressing this analysis and both will be undertaken in this section. Firstly, a
brief theoretical analysis of lhe economie and legal instruments of Lhe WTO will offer insights
about which of these would not offer sufficient solutions to dealing with NME economies.
The second approach, emprica!, is to analyze recent accessions of NME countries to the
WTO and understand which adaptations were deemed necessary by WTO members. In this
case and due to Lhe scope of this study. China's Accession Protocol will be analyzed.
1. Impacts on Multilateral Trading System instruments
First of ali, it is importam to
to stress that, after the end of the socialist biock and the gradual
transition of planned economies to market-oriented ones, it is hard to determine, today, a
whole economy as planned or as NME, i.e., where government is Lhe sole or predominant
vector of resources aliocation. Nevertheless, one can identify NME characteristics or "forms
of NMEs" (as stated by the Appellate Body of the WT0249) with different leveis of
govemment interference in the economy. This central planned interference can attain different
leveis and might indicate NME features that may cause difficulties in the application of WTO
rules.
These NME features were identified in the first part of this article and are Lhe basis for the
present anaiysis. Particulariy some NME features in some economies are indications that
structurai reforms might be required for their integration in Lhe Multilateral Trading System. It
is also interesting to indicate that these features are not exclusive to socialist or transition

248

The
rise of state capitaIism.
lixe
Available
Econornise.
21
January 2012.
at:
chttp:/Jwww.economistcornfnodc/2 1543160>. Viewed at: 27 January 2012249 In Lhe case EC - Fasteners. Lhe Appellate Body argued the existence of severa] fornis of NME, varying in
their levei of government interference, and that the one Lhat oniy a narrow one fitted the requirements of the
second Ad Note to Artcle VI of Lhe GAfl. WTO, AB. EC - DeYnitive Anti-Duinping Measures on Certain Iron
or Stee/ Fasteners (rom China (DS397). WT,DS397/AB/R, AB Report adopted on 15 July 2011, para. 285,
footnote 460.

139

economies, being identifiable, aibeit in lesser leveis, in western market economies in different
moments of their history250.
As seen above, during the GATT period, the CONTRACTING PARTIES were mainly
concerned with two aspects of NME inconsistencies with Lhe Multilateral Trading System:
governments had the monopoly of international trade; and internal prices were fixed by Lhe
government.
The monopoly of international trade dictated that import tariffs, the main trade instrument to
measure market access and the base of multilateral negotiations, were either inexistent or
irrelevant. The inadequacy of import tariffs was overcome by import commitrnents from
acceding NMEs (Poland and Romania). This so!ved the immediate problem of market access
but could not be extended to ali acceding members since it created another market distortion
by forcing artificial leveis of import rather than regular market forces to dictate trade between
251.
the contractirig
The real probiem underlining the initiative was how to reconciie market access negotiations
and obligations with the state control of market decisions. The multilateral negotiations were
based under the premise that, apart froin the barriers to trade imposed by countries, econornic
agents wouid be free to seek products from whiehever market offered the best prices and
conditions, thus favoring competitive advantages and better productivity - a pular of liberal
economics (even of "embedded liberalism"). The fact that imports were aetually centraily
decided undermined this principie and was irreconcilable with the dynamics of multilateral
negotiations. In this sense, high leveis of government interference on import decisions by
economic agents might undermine the carefui!y negotiated market access conditions. Even if
one considers that only some economic sectors would be centrally controlied by the state in a
NME, this couid bring chaiienges to the way multilateral negotiations are conducted and,
particuiarly, to market aecess obligations under GATT Article II.
In fact, the GATT already acknowiedged lhe difficuities brought by import controi by the
State, through import monopoiies. !ts Articie 11.4 estabiishes that:
If any contracting party estabiishes, maintains or authorizes, formaiiy or iii effect, a monopoly of
Lhe importation of any product described ia the appropriate Schedule annexed to this Agreement,
such monopoly shall not, except as provided for ia that Schedule or as otherwise agreed between
the parties which initially negotiated the concession. operate so as to afford protection on Lhe
average lo excess of the amount of protection provided for in that Schedule. The provisions of
this paragraph shall not limit Lhe use by contracting parties of any form of assistance to domesric
proclucers permitted by other provisions of this Agreement. (Emphasis added).

In this sense, the GATT sought to restrain the domestie market protection afforded through
import monopoiy to the limits estabiished in each party's Schedule of Coneessions. These,
however, transiated market access obligations into import tariffs. It is thus hard to imagine a
practical and efficient way to translate the market access granted through a given bound tariff
250

Huang argues that the difference ia Lhe levei of government intervention in western countries was the cause of
"crisis" periods during GATT/WTO existence. See HUANG, Chien. "Non-market Economies Accessions to the
WTO: An Empire is Rising?". ISA Aunual C'orivention, San Francisco, CA, March 23-26, 2008. p. 17
251
As Polouektov argues, ir also brought a considerable levei of economie distress to Poland, since iL was
obligated by its accession commitments to raise its inports by not iess than 7 per cent annuaily. Sce
POLOUEKTOV. Alexander, "The Non-Market &onoiny" Issue in Iriternational Trade in the C'ontext o! WTQ
Accessions. Unctad report, 9 October 2002, UNCTAD/DITC/TNCDIMISC.20, p. lO.

140

rate imo import obligations, especially considering the development of international trade and
of terras of trade. Considering these difficulties, an Interpretative Note to Article 11.4 was
adopted stating that:
Except where otherwise specifically agreed between the contracting parties which initially
negotiated Lhe concession, the provisions of (his paragraph wilil be apptied in the Iight of the
provisions of Article 31 of lhe Havana Charter.

The relevant part of Article 31 of the Havana Charter for this analysis is its Paragraph 5 that
requires the contracting party that has imposed an import monopoly over a product to import
and offer for saie such quantities ofthe product as will be sufficient to satisfy the fui] domestic
clemand for the irnported product. This interpretation has been confirmed by two GATT
paneis 252 . Once again, the definition of what wouid satisfy the fuJi doniestic demand for the
importedproduct is hard to establish.
In any case, the direct reference of the Interpretative Note to Article 11.4 to an Article of the
Havana Charter highlights the difficulties imposed by the non-creation of the ITO for the
purpose of intcgrating NMEs in the Multilateral Trading System. The Havana Charter had a
whole section - Section D: State Trading and Related Matters - dedicated to deahng with
such issues. li is interesting to note that during the GATT Review Session of 1954-55, the
Review Working Party on Other Barriers to Trade considered proposals for amending the
state trading provisions of the General Agreement either by consoiidating them or by adopting
Articles 29-31 oU the Havana Charter, but these proposais failed to gather unanimous approvai
and were abandoned.
Another reaction to state moriopoly of internationai trade was the possibility of contracting
parties to apply special safeguards, specifically aimed at imports from the acceding NME
countries. Also, the existing quantitative import restrictions could be maintained regarding
these countries as long as they were progressively relaxed, although no final term was
provided. The justification was thc fear that, due to the weight of the State when compared
with individual enterprises, a decision by a NME country to export a particular product would
cause considerable damage to some sectors of market economy countries. The competition of
private owned enterprises with state backed ones was considered unfair and would justify
these "buffer" mechanisms. In this sense, in order to promote a fair competition between
members of The Multilateral Trading System, a separation between state and private
producers would be required.
GATT Articles
There are many chalienges in appiying the Multilateral Trading System rules, as they are, to
NMEs. Some of them are highiighted here.
Article XVII of the GATT regul.ates the participation of SOEs in the economy of thc
contracting parties so as to limit potentiai negative effects on fair trade between private and
SOEs. Ir states that:

252

GATI, lapa!? - Restrictions on Inports o! Ceriain Agricultural Products, 116253. Panei Report adopted on 2
February 1988, BISD 358/163, paras. 5.2.2.1-5.2.2.2 and the three parailel Pane] Reports on Republic o! Koren Rastrictions ou Jmports o! BeeI LJ6503. 116504, 1J6505, adopted on 7 November 1989. BISD 36S1202,2342 268

141

1. (a) Each contracting party undertakes that if iL establisbes or maintains a state enterprise,
wherever iocated, or grants to any enterprise. formally or in effect, exclusive or speciai
priviieges,* such enterprise shali, in its purchases or saies invoiving either imports or cxports, act
in a manner consistent with the general principies of non-discriminatory treatment
prescribed in this Agreement for governmental measures affecting imports or exports by private
traders.
(b) The provisions of subparagraph (a) of this paragraph shail be understood to require that
such enterprises shali, having due regard to the other provisions of this Agreement, make any
such purchases or saies solely in accordance with commerciai considerations,K including
price, quaiity, availabiiity, marketabiiity, transportation and other conditions of purchase or saie,
and shali afford the enterprises of the other contracting paries adequate opportunity, in accordance
wi(h customary business practice. to compete for participation in such purchases or saies.
(e) No contracting party shali prevent any enterprise (whether or not an enterprise described
in subparagraph (a) of this Paragraph) under itsjurisdiction from acting in accordance with lhe
principies of subparagraphs (a) and (b) of this paragraph.
2.
The provisions of Paragraph 1 of this Articie shail not apply to imports of proclucts for
irnrnediate or ultimate consumption in governmental use and not otherwise for resale or use in the
production of goods* for saie. With respeet to such imports, each contracting party shail accord to
the trade of the other contracting parties fair and equitable treatment. (Emphasis added)
Article XVII establishes lhe principies under which ali enterprises should operate (private and
state-owned), i.e., act in a manner consistent with the general principies of non-discriminatory
treatment and make purchases or saies in accordance with commerciai considerations. In this
sense, it seeks to obligate SOES to act as private enterprises so as to afford lhe enterprises of
other contracting parties adequate competition opportunity, guaranteeing fair trade. Atthough
answering theoretically to the chalienges posed by competition between private and SOE,
subsequent practice has shown the difficulties in analyzing whether purchases by SOES have
been made in

accordance with commerciai considerations253.

li is worth noting that the GA'VI' did not regulate government procurement and Article XVII.2
exiends Ibis to government procurement made through SOEs. In this sense, another chaflenge
is that one must separate purchases made for government purposes from those made in
regular comrnerciai tradc while anaiyzing whether these have respected commerciai
considerations. Article XV11.3 seems to acknowledge these chalienges and lhe potential
damage to fair trade of the abuse of SOES, stating that:
3.
The contracting parties recognize that enterprises of the kind described in Paragraph i
(a) of this Article might be operated so as to create serious obstacles to trade; thus negotiations on
a reciprocai and mutualiy advantageous basis designecl to limit or reduce such obstacles are of
importance to the expansion of internationai (fade
The solution proposed was that countries counting with SOES should negotiate speciai
agreements to iimit or reduce the obstacles posed by SOES. These special agreements
demonstrate lhe exceptionality of state-controlled production in lhe Multilateral Trading
System254 . Aiso, ii is interesting to note that lhe Interpretative Note paragraph 3 of Articie
253

The cases Korea - Various Measures 01? Beef and Canada - Wheat Exports and Gran Imports, in the
WTO, both demonstrated the difficulties in analyzing the rationale hehind SOE irnport decisions and of the
proof of whether they acted in accordance with commerciai considerations. To extend this ana]ysis to the number
of SOE present in NME wouid entail considerable chalienges.
254
The existence per se of SOEs was not considered a negative feature of an economy during GATT time. This
was stated. in 1964, by the Committee ou the Legal and Institutional Framework of the GATT in Relation to
142

XVII makes reference to lhe speciai agreements made under Article 11.4, which in turn refers
to lhe dispositions present in the Havana Charter. Yet again lhe dispositions of GATT were
considered insufficient to deal with NME features and the recourse to the non-adopted
Havana Charter has been deemed necessary. The extent and economic presence of SOES in
NMEs further enhance the chalienges posed by the subject and indicate the insufficiency of
GATT mies to discipline competition between private and SOES 255.
The second aspect of NMEs highlighted during GATT time was the fixing of domestic prices
by the State. This problem was mainly iinked to the difficulties in determining normal value
in anti-dumping investigations and lhe Ad Note to Paragraph 1 of Article VI of GATT was
considered as a suitable arrangement. Nonetheless, Lhe fact that internal prices were not
determined by market forces, but rather by lhe govemment, made it hard to guarantee any
levei of market access for certain products deemed as "sensitive" by each NME country. If the
government decided, due to pohcy options, that, for instance, the price of a good shou!d not
surpass a determined levei, it would be, in practice, impeding any imports of that product in
higher prices than the one estabiished. This problem, keen in Lhe case of NMEs, was already
highlighted by Lhe GATT, in its Article 111.9 that states:
The contractng parties recognize that internai maximum price control measures, even though
conforming to the other provisions of this Article, can have effects prejudicial to Lhe interests of
contracting parties supplying imported products. Accordingly, contracting parties applying such
measures shall take account of Lhe interests of exporting contracting parties with a view to
avoiding to lhe fullest practicable extent such prejudicial effects.
Although this practice has been used several times in Westem countries considered to be
market economes, lhe extent of its use and lhe economic justifications regarding NME
practices brings further chailenges to lhe implernentation of lhe Nationai Treatment principie.
Exchange rates
Besides Lhe issues above already highiighted in lhe accessions of NME during GATT time, it
is possible to identify other chailenges posed by Lhe presence of NME in lhe Multilateral
System, considering its present structure and legal order.
The control over exchange rales and the constraints on free currency convertibility has been
indicated as of particular concern regarding some NME. The manipuiation of exchange rates
can be detrimentai to imports both b1 its impact on tariffs as for lhe difficuities for economic
agents to deal in international lrade2 6 GATT Articie XV is Lhe logical reference to deai with
this issue, along with lhe surveiliance of lhe IMF. Nevertheless, this subject is under much
debate nowadays and an effective remedy against exchange rate manipulations is stiil under
discussion. This brings unpredictabiiity to lhe whole system, but is of particular concern
regarding NMEs.
Less-Developed Countries in reaction to a proposal ol' the representative of Egypt seeking an interpretation of
Alicie XVII. In this sense, the presence of SOEs bring rather new challenges tu Lhe multilateral system that
require further attention by the contracting parties and better transparency.
255
In light of lhe creation of lhe WTO, an Understanding on Lhe Interpretation of Article XVII of the GATT
1994 was adopted. It sought to enhance transparency in SOE matters and created a working party to review
notifications and counter-notifications in the subject. Flowever, no substantial modifications to lhe discipline of
Article XVII were promotcd and Lhe WTO provided no further development in the subject.
256
See, THORSTENSEN, Vera, MARAL, Emerson, FERRAZ, Lucas, (2011)- Impacis o! Exchange Rates on
fnternational Trade Po/icy Instnirnents: The Case o! Tarifs, Journal of World Trade, v. 46, i. 3. 2012
143

Subsidies
The practice of subsidies in NME also presents special difficulties related to lhe inherent
relationship between lhe source of the subsidies - lhe government - and their main
beneficiaries - SOE. The rules present in GATT Article VI and in lhe SCM do not solve ali
these specificities, making it difficult to identify mechanisms that would allow for a clear
separation between subsidy beneficiaries and benefactors.
It is worth recalling that lhe reason why subsidies might be considered negative in lhe context
of international trade is that they are governmental stimulus to direct resources to a particular
sector of lhe economy. In this sense, lhe government would be influencing in the aliocation of
resources that would otherwise be directed to whichever sector of Lhe economy presented
better comparative advantages and better efficiency. If one considers that a NME feature
would be precisely lhe aliocation of the resources of the economy by the govemment, lhe very
concept of subsidies may not fit properly to this reality 257 . Nonetheless, the surveiliance and
discipline of subsidy programs is an important part of lhe functioning of lhe Multilateral
Trading System and it would be to Lhe detriment of the system's coherence to exclude NMEs
from it.
Finally, the control over investments decisions/planning in NME can raise other kinds of
chailenges, which the narrow legal basis of Lhe WTO in the subject would not be apt to
resolve.
2. China's obligations
The accessions of NMEs to lhe WTO have produced much more debate and specific
obligations to the acceding country than those during OATT. One can argue that this is due to
lhe change in Lhe nture of WTO obligations compared to those of GATT 258 - being much
more concerned today with policy aspects of members' international trade. Nonetheless, lhe
accession of some countries to Lhe WTO, deemed to be NME, have entailed especial
obligations, reproduced in their respective Accession Protocols 259. These obligations can
serve as indications of which aspects of their economies were considered to be ia conflict with
the legal and economic order of the WTO.
The analysis of the Protocol of Accession of China and of its Working Party Report offer
some indications of lhe structural economic adaptations required of a NME in order to

257

This is the reasoning behind lhe recent decision of lhe U.S. Court of Appeals (Federal Circuit) that reaffirmed
a decision by the Department of Commerce of lhe U.S (DoC) from lhe 1980s, prohibting the application of
countervailing duties to countries considered to be NME. See GPX International Tire Corp. v. U.S., case ri' 08CV-0285, ofDecember 19, 2011, lhe U.S. Court of Appeals for lhe Federal Circuit,
258
Kent Jones demonstrates that lhe average Iength of time from application to accession for the 30 countres
joining the GArI' was 62 months, while the elapsed time for WTO accessions among Lhe first 25 new members
averaged 101 months. See JONES, Kent. "The Political Economy o! WTO Accession: The unfinished business
of universal membership", World Trade Review, vol 8:2, April, 2009, pp 292-293.
259
It is worth noting that WTO niembers have expressly considered China Lo be "in Lhe process of transition
towards a fuIl market economy". In this sense, they clearly considered China not yet to be a market econorny,
bearing aL least some NME features. See WTO, Report of lhe Working Party on lhe Accession o! China,
WT/ACC/CFIN/49, 1 October 2001, p. 29, para. 150.
144

integrate itseif in lhe Multilateral Trading System. Some key obiigations 26 are highlighted
next.

Uniform administration of WTO rufes over the territory

Iinder Article 2.A of Lhe Accession Protocol, China must apply WTO rules in a uniform
manner over ali its territory, including border trade regions and minority autonomous arcas,
special economic zones, open coastal cities, economic and technical development zones. This
is relevant since Lhe pianned-economy development model created severai special zones (of
which Lhe special economic zones are Lhe most often cited) in which trade rules could vary
substantialiy. The uniform application of trade mies represents a considerable adaptation. from
this model.

Rufe of Law
Article 2.0 and 2.D requ res Lhe estabiishment of an official journal and of a judicial system,
impartial and independent, with possibility of appeal. These two requirements can be
interpreted as being nccessary to implement Lhe rule of law in China. These obligations, rather
than economie adaptations, relate to the manner by which obiigations are negotiated,
monitored and implemented in Western countries. In this sense, these obligations are
considered imperative in order to adapt the Chinese system to the legal functioning of lhe
WTO.
In this sense, Lhe Working Party Report on Lhe Accession of China (China WPR) states that:
78. The representative of China confirmed that it wou!d revise its relevant laws and reguiations so
that its relevam domestic laws and reguiations would be consistent with Lhe requirements of Lhe
WTO Agreement and Lhe Draft Protocol on procedures for judicial review of administrative
actions. He further stated that Lhe tribunais responsible for such reviews wouid be impartial and
independent o!' Lhe agency entrusted with adniinistrative enforcement, and would not have any
substantial interest ia Lhe outcome of Lhe matter. The Working Party took note o!' these
commitments261.

Non-discrimination - foreign capital and individuais

The Protocol of Accession, in its Article 3, estabhshes Lhe obhgation of China to concede
national treatment for foreign individuais, enterprises and foreign-funded enterprises.
Aithough this obligation extends to ali WTO members, it has a special meaning for NME,
since it implies Lhat ali foreign individuais and enterprises shaii be free to participate in the
econorny of Lhe country, aL Lhe sarne rate as nationais. This has particular implications to Lhe
treatrnent conceded to foreign capital in NMEs.

260 Juha Qin refers to these speciai obligations as WTO-plus obhgations since they imposed stricter disciplines
than rcquired by Lhe WTO Multilateral Agreements. Part of these WTO-plus obligations refers to what Qin
characterized as being "obligations to practice market economy" and "obligations concerning domestic
governance". These are Lhe obligations object of Lhe present analysis. See QIN, Julia Ya. "China. India and WTO
Law", in SORNARAJAH, Muthucumaraswamy; WANG. Jiangyti. China, ndia and the Intemationa! Econoinic
Order, Cambridge University Press, 2010 .pp 72-173.
261 WTO, Report o! the Workng Party on lhe Accession o! China, WT/ACC/CHN/49, 1 October 2001. p. 15
145

Right to Trade - monopoly of international trade

The right to trade and the monopoly of international trade by lhe State are main concems for
lhe well-functioning of lhe Multilateral Trading System. In this regard, China WPR states
that:
80. Some members of Lhe Working Party noted LhaL China was in the process of liberatizing Lhe
avaitability of Lhe right to import and export goods frorn China, but that such rights were now only
availabte to some Chinese enterprises (totatling 35,000). In addition, foreign-invested enterprises
had Lhe right to trade, aithough Lhis was restricted to Lhe importation for production purposes and
exportation, according to Lhe enterprises scope of business. Those members stated their view that
such restrictions were inconsistent with WTO requiremenLs, ineluding Articles Xl and III of
OAYI' 1994, and welcomed Chinas commitment to progressively liberalize Lhe availability and
scope of the right to Inicie so that within Lhree years after accession ali enterprises would have Lhe
right to import and export ali goods ()262

Articles 5 and 8 of lhe Protocol of Accession dealt with this subject. In order to conduct
international trade Li a manner consistent wi.th lhe WTO Agreement, China must progressively
liberalize lhe availability and scope af lhe right to trade for both its nationai and foreigri
individuais and enterprises (Article 5). This adaptation shouid be done, generaily, in three
years. Also import and export licensing shouid be Iiberalized and a justification by China
would be required for niaintaining the restriction ar its scheduled date of termina tion (Article
8.b). In this sense, China undertook lhe obligation to:
83. The representative of China confirmed that during Lhe three years of transition, China woutd
progressivety liberalize Lhe scope and availability of trading rights.
The representative of China confirmed thaL, upon accession, China would etiminate for
(a)
both Chinese and foreign-invested enterprises any export performance, trade batancing, foreign
exchange balancing and prior experience requirernenis. such as in importing and exporting, as
criteria for obtaining or maintaining the righL to import and export.
With respect to whotty Chinese-invested enterprises, the representative of China stated
(b)
that although foreign-invested enterprises obtained timited trading rights based on Lheir approved
scope of business. wholly Chinese-invested enterprises were now required to apply for such rights
and Lhe relevam auLhorities apptied a threshold in approving such appticaLions. In order to
acceterate Lhis approval process and increase lhe availability of trading rights, the representative of
China confirmed thaL China would reduce the minimum registered capital requiremenL (which
applied only to wholty Chinese-invested enterprises) to obLain trading rights to RMB 5.000,000 for
year one. RMB 3,000,000 for year Lwo. RMB 1.000,000 for year three and would eliminate Lhe
examination and approvai system at Lhe end of Lhe phase-in period for Lrading rights.
The representative of China also contirmed that during the phase-in period. China
(c)
wouid progressively liberalize Lhe scope and availability of trading rights for foreign-invested
enterprises. Such enterprises would be granted new or additional trading rights based on Lhe
foltowing schedule. Beginning one year afLer accession, joint-venture enterprises with aninority
share foreign-investment would be granted fuil rights to trade and beginning two years after
accession majoriLy share foreign-invested joint-ventures would be granted fuil rights to trade.
The representative of China atso conl9rmed that wiLhin three years after accession, ali
(d)
enterprises in China woutd be granted Lhe right to trade. Foreign-invesled enterprises would not be
required to estabtish in a particular form or as a separate entity to engage in importing and
exporting nor wouid new business licence encompassing distribution be required to engage in
importing and exporting263.
262 1bid.p IS.
Ibid. p. 16

146

The Working Party took note of these commitments.

Price controis
Article 9 of lhe Protocol of Accession regulates price controis in China. This subject has been
of key interest when dealing with NME. Article 9 states that China shall "allow prices for
traded goods and services in every sector te be determined by market forces" and provides for
the elimination of "multi-tier pricing practices". In this manner, WTO members sought te
address the problem highlighted by Article 111.9 ef the GATT.
At lhe time of accession, Chinese representatves recognized that:
52. There were present!y three types of prices: government price, government guidance price and
market-regulated price. The government price was set by price administration authorities and
could not be changed without the approval of these authorities. Products and services subject to
government pricing were those having a direct bearing on lhe national economy and lhe basic
needs of lhe peoples Iivelihood, including those products that were scarce ia China 264.

Regarding this issue, China WPR states that:

50. Some members of lhe Working Party noted that China had made extensive use ef price
controls, for example in lhe agricultura! sector. Those members requested that China undertake
specific commitments concerning its system of state pricing. In particular, those members stated
that China should a!Iow prices for traded goods and services in every sector to be determined by
market forces, and multi-tier pricing practices for such goods and services should be eliminated.
Those niembers noted, however. that China expected te maintain price controts on lhe goods and
services listed in Annex 4 to the Draft Protoco!, and stated that any such controls shoutd be
niaintained in a manner consistent with the WTO Agreement, in particular Article lii o!' the
GATT L994 and Annex 2. paragraphs 3 and 4, of lhe Agreement on Agricu!ture.
51. Some members of the Working Party expressed the view that price controis and state pricing in
China a!so encompassed 'guidance pricing" and regu!ation of the range of proftts that enterprises
could enjoy. Such policies and practices would a!so be subject te China's commitnients. In their
view, price controls shou!d be adopted only in extraordinary circumstances and shou!d be removed
as soon as the circumstances justifying their adoption were addressed265.

China undertook the obligation to terminate, generaily, the price centrei systern, and to
maintain enly those contained at Annex 4 ef the Protocel ef Accession. In se, China also
agreed net te implement price controis in such way as te provide further protection for its
dornestie market:
62. The representative of China further conftrmed that price controis would not be used for
purposes of affording protection to domestiu industries or services providers. The Working Party
took note of this commitment.
63.Some members o!' the Working Party expressed a concern that China cou!d maintain prices
be!ow market-based ones in order to limit iniports.
64.In response, the representative of China confirmed that China would apply its current price
controls and any other price controis upon accession in a WTO-consistent fashion, and wou!d take
account of the interests of exporting WTO Members as previded for in Artic!e 111:9 of lhe GATT
1994- He also confirmed that price controts would not have the effect of limiting or otherwise
264 !bid. p. 10
265 1b1d.p. lO

147

impairing Chinas market-access commitments on goods and services. The Working Party took
note of these commitments2.

Subsidies and Countervailing Measures

Regarding lhe subsidisation of Chinese economy, the special characteristics of China's
development model bring further chalienges to lhe implementation of lhe SCM Agreement. In
this sense, China WPR stated that:
171. Some members of lhe Working Party expressed concern that lhe speciai features of Chinas
economy, in its present state ol' reform, still created lhe potential for a certain levei o]'
trade-distorting subsidization; this could have an impact not only on access to Chinas domestic
market, but also on lhe performance of Chinese exports in lhe markets of other WTO Mernbers,
and should be subject to effective SCM Agreement disciplines. ( ... ) The representative of China
( ... ) informed lhe Working Party of lhe efforts being undertaken, as part of its ongoing reform
process, to reduce lhe avaiiability of certain types o]' subsidies 267.
Annex 5.A of lhe Accession Protoco! of China brought a list of 22 types ol' subsidies 268 , 3 of
which should be phased out after accession (Annex 53). Those are: subsidies provided to
certain state-owned enterprises which are running at a loss; lhe priority in obtaining loans and
foreign currencies based on export performance; preferential tariff rates based on localization
rate of automotive production.
Also, due to the difficulties in identifying subsidies in NMEs and determining specificity
during countervailing duties investigations, Article 10.2 of the Protocol. of Accession

considered that subsidies provided to state-owned enterprises will be viewed as speci[ic if,
inter alia, state-owned enterprises are the predominant recipients of such subsidies or
state-owned enterprises receive disproportiorzately large arnounts of such subsidies. This
sought to surmount lhe chailenges in determining specificity of subsidies ia NMEs as
acknowledged by lhe Department of Commerce of lhe U.S (DOC) 269.

State-Owned Enterprises
The rate of participation of SOEs in lhe economy is considered one of the most important
features of NMEs. This has deep implications in lhe case of China. In this sense, China WPR
stated that:
44. In iight a lhe role that state-owned and state-invested enterprises piayed in Chinas economy,
some membcrs of lhe Working Party expressed concerns about lhe continuing governmental
influence and guidance aI lhe decisions and activities of such enterprises reiating to lhe purchase
and saie of goods and services. Such purchases and saies should be based sotety on commerciai
considerations, without any governmental intluence or application o]' discriminatory measures.
China undertook lhe obligation not to allow government interference in SOE commercial
decisioris, which would be dependent solely upon commercial considerations.

266
261
268

Ibid.

p. 12
Ibid. p. 34

These did not cover ali subsidies present in Chinese economy aI lhe time a accession, doe to difficulties in
data coltection, as acknowledge by lhe representative o]' China to lhe Working Party on its Accession. [bid, p. 34
269
See GPX International Tire Corp. v. US., case n 08-CV-0285. o]' December 19, 2011, lhe U.S. Court o]'
Appeals for lhe Federal Circuit.
148

45. The representative of China emphasizcd Lhe evolving nature of Chinas economy and Lhe
significant role of Fifis and Lhe private sector in Lhe economy. Given Lhe increasing need and
desirability of competing with private enterprises in Lhe market, decisions by state-owned and
state-invested enterprises had to be based on comnierciai considerations as provided in Lhe WTO
Agreement,
46. The representative of China further confirmed that China wouid ensure that ali state-owned
and state-invested enterprises wouid make purchases and saies based solely on commercial
considerations. e.g., price, quaiity, marketabiiity and avaiiabihty, and that Lhe enterprises of other
WTO Members wouid have an adequate opportunity to compete for saies to and purchases from
these enterprises on non-discriminatory terms and conditions. In addition, Lhe Government of
China wouid not influence, directiy or indirectiy, commerciai decisions on Lhe part of state-owned
or state-invested enterprises, inciuding on Lhe quantity, value or country of origin of any goods
purchased or soid, except in a nianner consistent with Lhe WTO Agreement. The Working Party
took note of these commitments.

Considering the chalienges posed by the separation between purchases made by SOE for
commercial purposes and ihose for govemment final use, China WPR stated that:
47. The representative of China confirmed that, without prejudice to Chinas rights in future
negotiations in the Government Procurement Agreement, ali iaws, reguiations and measures
reiating to Lhe procurement by state-owned and state-invested enterprises of goods and services for
cornmerciai saie, production of goods or supply of services for commercial saie, or for nongovernmental purposes wouid not be considered to be laws, reguiations and measures relating to
government procurement. Thus, such purchases or saies wouid be subject to Lhe provisions of
Articies II, XVI and XVII of Lhe GATS and Articie III of Lhe OATT 1994. The Working Party
took note of this commitrnent.

Transitional Product-Speciflc Safeguard Mechanism

Two "buffer" mechanisms were concejved to address WTO members' concerns about Lhe
impact on their economies of China's accession to the WTO. The first one is lhe reference to
special rules regarding price comparability in antiduinping and countervailing measures
investigations against imports from China. Due to Lhe high levei of controversy over Lhe
subjcct, this first buffer mechanism will be analyzed more thoroughiy in lhe next section of
this study.
The second buffer mechanism is the use of transitional product-specific safeguard mechanism
- one general and another specific to Lhe textile sector. This is a common feature of NME
accessions to Lhe Multilateral Trading System and has been reproduced in the Protocol of
Accession of China in its Article 16 and in China RWP Para. 242, respectively.
Transitional Review Mechanism
As a sign of the importance of ali the above-mentioned systemic changes required of China, a
special transitional review mechanism was provided for in Article 18 of the Protocoi of
Accession of China. This mechanism would examine China's implementation of its
obligations both under WTO agreements and under China WPR and Protocol of Accession.
China was subject to annuai reviews in the first eight years of its accession and to an
additional review by the tenth year (Lhe last one occurred ia 2011).
It is worth noting that the transitionai review mechanism operated in conjunction with Lhe
regular Trade Policy Review Mechanism to which ali countries are subject reguiarly. China is
subject to reviews each two years tinder the regular mechanism (Lhe first was conducted in
149

2006). The combination of both review mechanism made China's economy as the most
scrutinized since its accession, demonstrating the impact of its accession to the Multilateral
Trading System.
3. Conchisions
There are several WTO provisions that are not adapted to NMEs. Core principies such as the
national treatment, as well as rules on market access, estabiished in GATT Articie II, face
chalienges when appiied to NMEs. Furthermore, even Articie XVII, created to deal with the
issue of state-Lrading enterprises show itself as irisufficient to regulate NMEs and to assure
their compatibility with Lhe Multilateral Trading System.
The WTO members, therefore, decided to require new obiigations from acceding NMEs,
imposing substantial economic changes and eiiminating aspects considered incompatibie with
the multilateral system. Considering ali these deep systemic obligations to which China had to
adhere before acceding to the WTO, it is fair to argue that WTO members sought to guarantee
the adequacy of China's econorny to multilateral trading mies by demanding reforms that
would curb Chinese NME features. In this sense, Juha Ya Qin states that "as a result othese

obligations, whether China practices market econom4' is no longer a mete matter ofdomestic
policy; instead, it has become a matter o! WTO Iaw"2
O

QIN, Julia Ya. "China. India and WTO Law". in SORNARAJAH, Muthucumaraswarny; WANG. Jiangyu.
china. Ind/a and me International Econoinic 0Mev. Cambridge University Press. 2010. p 173

270

150

IV.4. NME AND ANTIDUMPING: LEGAL CONSEQUENCES OF 2016

The concept of NME has been particularly important for lhe application of antidumping
duties. The concept has been widely used to justify the application of altemative
methodologies, e.g. third countries' export prices, for lhe determination of normal value in
antidumping investigations, concerning exports from NME countries. In this sense, a country
that has been identified as a NME for antidumping purposes will have the "NME
methodology" of normal value calculations applied to him.
This methodology has been applied for a long time concerning planned and transitioneconomy countries, but the risc ol' China as lhe biggest global exporter and its accession to the
WTO have shed new light to Lhe issue. It is thus relevant to understand lhe legal aspects of the
NME concept in antidumping investigations.
1. The regular system of normal value determination
During an antidumping investigation, Lhe national investigating authority must determine the
margin of dumping, i.e. the difference between the export price of a product and its 'normal
value'. Article 2 of lhe ADA provides three methods to calculate a product's normal value.
The main one is based on Lhe product's price in the exporter's domestic market (Article 2.1).
2.1 For the purpose of this Agreenient, a product is to be considereci as being dttmped, i.e.
introduced into the commerce of another country at less than its normal value, if the export price
of Lhe product exported from one country to another is Iess than the comparabie price, in the
ordinary course of trade, for the iike product when destined for consumption in Lhe exporting
couritry.

In this sense, the investigating authority must use the price of the product in the domestic
market of Lhe exporting country as lhe normal value. There are two possible deviations. The
first possibility is when Lhe saies of lhe product in the domestic market have not been made in
lhe 'ordinary course of trade' and, thus, cannot be an appropriate basis for 'normal value'. In
this regard, the AB has stated that:
( ... ) Article 2.1 requires investigating authorities to exclude saies not marte "in Lhe ordinary course
of trade", from Lhe caiculation of normal vaiue, preciseiy to ensure that normal vaiue is, indeed.
the "normal" price of Lhe hke product, in Lhe home market ol' Lhe exporter. Where a saies
transaction is concluded on ternis and conditions that are incompatibie with "normal" commercia/
pra ctice for saies ol' Lhe like product, in the market in question. at Lhe relevam time. the transaction
is not an appropriate basis for caicuiating "normal" vaiue271.
The situations wherc lhe ,,ales in Lhe domestic market of Lhe exporting country are not made
'in Lhe ordinary course of trade' are established by ADA Articie 2.2:
When there are no saies of Lhe like product in the ordinary course of trade in the domestic market
of the exporting country or when. because of Lhe particular market situation or Lhe iow volume
of lhe saies in Lhe domestic market of the exporting country, such saies do not permit a proper
comparison ( ... ). (Ernphasis added).

In Eis case, two aiternatives are available: the price charged by Lhe exporter in a third
country; or a constructed price based 011 the combination of the exporter's production costs,
other expenses and normal profit margins. This would be Lhe regular system of normal value
271 AB report in US - Hot-Rolled Sreel (DS 184), para. 140, WT/DS i 84/ABIR

151

determination, and any deviation from the use of the price in the domestic market must be
made in a case-by-case scenario and considering the particular market situation of a given
economic sector. Note that it is not uncommon for saies ia market-economies' domestic
markets to be considered as not offering an appropriate basis for normal value considerations,
thus entailing Lhe use of exports for third countries or constructed prices instead. This couid
be due, e.g., to low intemai saies volume when compared to the volume exported.
The second possibie deviation is not sector-specific or dependent upon a case-by-case
analysis, but rather based on a consideration of the whoie economy of Lhe export country as
not offering conditions of "ordinary course of trade". It is established in Lhe Ad Note and
refers to NME countries.
It is interesting to note that there is no direct reference in lhe ADA to alternative
methodologies or lhe use of third countries' export prices in Lhe determination of normal
value272. The possibility of using alternative methodologies for determining normal value in
anti-dumping investigations is present in GATT Article VI, which establishes lhe general
mies under GA11T for anti-dumping and countervailing measures investigations. The Ad Note
to this article was introduced in 1955, at the request of Czechoslovakia, a NME, and states
that:
2. li is recognized tha, ia Lhe case of imports from a country which has a complete or
substantially complete monopoly of its trade and where ali domestic prices are rixed hy the
State, special difticulties may exist ia determinirig price comparability for Lhe purposes of
Paragraph 1, and in such cases importing contracting parties may find ir necessary to take into
account the possibility that a strict comparison with domestic prices in such a country may not
always be appropriate. (Emphasis added).

The Ad Note, thus, opens lhe possibility of moving away from lhe regular methods of
caiculating normal value, since, in countries where lhe State has "complete or substantially
complete monopoly of its trade" and where "ali domestic prices are fixed by the State", Lhe
three regular methods do not offer a plausible basis for price comparabihty, aithough the note
did not provide which should be Lhe alternative methodology.
Later, the use of lhe surrogate country method for the calculation of normal value in antidumping investigations regarding NME established itseif as lhe preferred altemative and
started to be used by lhe contracting parties to the GATT273.
The appropriateness of this method to deal with lhe issue was reaffirmed subsequently ia the
Working Party reports on lhe accession of several NME countries that later joined lhe GAri'
and lhe WTO, indicating lhe preference of lhe CONTRACTING PARTIES to it.
Ir is worth noting that the departure from the traditional methods of calculating normal value
was inciuded in GATT at Lhe request of Czechosiovakia, which, at the time, was transitioning
its economy to a socialist central pianned system. Czechoslovakia argued that the alternatives
272

Articie 2.2.2 (iii) refers to "any other reasonabie method" for Lhe calculation of profits when constructing Lhe
price for normal value, but this must be done considering lhe proftt margin normalty realized by other exporters
or producers in Lhe domestic market of Lhe country oforigin.
273
According to Polouektov, the first anti-dumping investigation in the U.S. to consider a country as a NME was
ia 1960, concerning lhe imports of bicycles from Czechoslovakia. See POLOUEKTOV, Alexander, "T/;e NonMarket Econoiny" Issue iii International Trade in the Context of WTO Accessions,
UNcTADIDITC/TNCD/MIsc.20, Unctad Report, 9 October 2002. p. 8.

152

foreseen in GATT were not proper to caiculate the normal value in centrally planned
economies. The country affirmed that "no comparison or export prices with prices in the
a'omestic market o! (fie exporting cour#ry is possible when such domestic prices are not
establisbed as a result of fair competition iii that rnarket, but are fixeci by the State ". The
main problem was that, since the prices iriside the country were fixed, they could often be
higher than export prices, even if those where based on market assumptions, which led to the
determination of dumping by other countries and consequent application of antidumping
75
rights"
The Ad Note was conceived, in this sense, as an exception to the regular systeni of normal
value determination, aimed at addressing the possibility of, when deaiing with exports from
NME, finding a greater margin of dumping than would be found if the product's normal value
was established considering market-economies prices. It was aimed at protecting NME
economies.
The GATT mechanism has since seen few developments and has been embodied by the ADA,
ia its Article 27. No further adaptation, however, has been made to address the adequacy of
the exception to the new rules established by the ADA. Furthermore, as the contracting parties
to the GATT had the autonomy to determine which countries would fit in the Ad Note
definition, as well as the adequate alternative method, the concept gradually expanded to
inciude ali NME countries, not only those that had a complete or substantially complete
monopoly of its trade and where ali domestic prices were xed by the State. Several countries
as the US, the EU and Brazii, started to compose lists of countries that would fit the
description of NME and be subject of the surrogate methodology during anti-dumping
investigations. The majority of these countries would hardly fit perfectly in the 1955
description of a NME, demonstrating the evolution of the concept nationally.
The regular system of normal value determination offers, ia this sense, two possibilities of
departing from the price of saies in the domestic market of the exporting country. The first
one may be applied when the domestic market does not offer "conditions that are compatible
with "normal" commercial practice"276 (i. e. market conditions) for the particular product. The
second one is an exception provided for dealing with countries whose economies are deemed
to, in general, not offer normal market conditions - the NME countries. The first must be
analyzed in a case-by-case context, while the second entails the application of the surrogate
methodology for ali anti-dumping investigations concerning the NME country.
2. The special system of normal value determination

The accession of NMEs to the WTO has created, however, another possibihty of using
alternative methodologies in determining normal value ia anti-dumping irtvestigations. In the
accession documents of Viet Nam 277 and of China278 a special system for the determination of
274 GArI', Article VI - Emposais by die Czechosiovakia Delegation - Revision, W.9/86/Rev. 1, Review Working
Party 11 cm Tariffs, Schedules and Customs Administration. Contracting Parties Ninth Session, 2 1 Deceniber
1954, W.9/86/Rev. 1
275 GATI. Anti -Durnping and Countervailing Duties. A'ernoranda received from the governinents o!

Czechoslovakia and Swenden, 26 November 1958, L/943. para. 8-11.

276 WTO, AB, US - .4nti-Dumping Measures on ('ertain Hot-Rolled Steel Products froni Japan (DS184),
WT/DS 1 84/AB/R, AB Report adopted on 24 July 200!, para. 140
277 See WTO, Report odio Working Party on the Accession o! Vier A tarn, WT/ACC/VNMJ48, II January 2007,
para. 255.
153

normal value is provided. Both are very similar and we will reter to the one present ia China's
accession protocol since it has been the source of much debate.
Article 15 of China's Accession Protocol establishes, in the relevant parts to this analysis,
that:
Price Comparability iii Deterrnining Subsidies and Duinping
IS.
(...)
(a) In determining price comparability under Article VI of lhe GAIT 1994 and lhe
Anti-Dtimping Agreement, the importing WTO Member shali use either Chinese prices or costs
for the industry under investigation or a methodology that is not based on a strict comparison with
domestic prices or costs in China based on lhe foliowing ruies:
(1) If the producers under investigation can ciearly show that market economy
conditions prevail in the industry producing the like product with regard to the
manufacture, production and saie of that product, the importing WTO Member shali use
Chinese prices or costs for the industry under investigation in determining price
comparability:
(ii) The importing WTO Member may use a methodology that is not based on a
strict comparison with domestic prices or costs in China if the producers under
investigation cannot ciearly show that market economy conditions prevail in the
industry producing the like product with regard to manufacture, production and saie of
that product.

The special systein created by Article 15 provides two alternatives for calculating the normal
value in anti-dumping investigations concerning exports from China. The investigating
authority can either use Chinese prices or costs for the industry under investigation or an
alternative methodology. In this sense it is similar to the regular systeni but to the fact that no
reference is made to the use of export prices to third countries. In this case, however, the main
rnethod of normal value determination is not the use of the prices of the domestic market
(China), but rather the alternative methodology.
Article 15(a)(i) and (ii) determines that in order for the investigating authority to use Chinese
prices or costs, the producers of the industry under investigation must cicarly show that
market conditions prevail in their sector. This means that the burden of proof lies in the
exporters side to prove that their sector offers market conditions and that, in this sense, the
saies made in the domestic market can be considered as in the 'ordinary course of trade'.
Otherwise, Article 15(a)(ii) states that the aiternative methodology may be used. As seen
above, this alternative methodology has estabhshed itself in the practice of WTO members as
being the use of surrogate countries' prices.
This special systern of caiculating normal prices ia anti-dumping investigations against
exports from China wiil be in place until one of two situations applies. Article 15(d) states
that:
(d) Once China has established, under the nationai law of the iinporting WTO Member,
that iL is a market economy, the provisions of subparagraph (a) shaii be terminated provided
that the importing Members nationai Iaw contains market economy criteria as of the date ef
accession. In any event. the provisions of subparagraph (a)(ii) shall expire 1 5 years after the date
of accession. In addition, shouid China establish. pursuant to the nationai iaw of the importing
278

See WTO. Pmtocol o! Accession ofPeople s Republie o! C/zftza to the World Trade Organization, WT/L/432,
23 November 2001. Article IS. p. 8-9

154

WTO Member, that market economy conditions prevail in a particular industry or sector, lhe
non-market economy provisions of subparagraph (a) shall no tonger apply to that industry or
sector- (Emphasis added)

The first situation provided for in Article 15(d) is when China establishes itself as a market
economy under a WTO member national law, i.e., when a WTO member considers China to
be a market economy under its law. National laws of WTO members vary broadly in relation
to NME concept and recognition. In any case, when this happens, ali the provisions of Article
15(a) shall cease to apply. This means, in practice, that Lhe whole special system will be
terminated. This is only logic since, whenever a country decides that China is a market
economy, there are no justifications for applying altemative methodologies that are based on
the inexistence of rnarket conditions. This recognition will also have impacts for Lhe regular
system of normal value determination, as will be further explored below.
It is importam to note that, in order to this first situation to be valid, the importing rnember's
national law must have contained market economy criteria as of Lhe date of China's accession.
This was included in the Article, presumably, to avoid political pressure by China to force
countries that did not previously use the NME concept in their anti-dumping investigations to
adopt such laws and recognize China as a market economy.
Note that under Lhe regular system WTO members are not obligated to apply the exception
contained in Lhe Ad Note or have national laws previewing the application of alternative
methodologies in anti-dumping investigations concerning imports from NME countries. They
may do so. In Lhis case, countries Lhat do not have legal provisions concerning NME countries
have only Lhe special systein to rely upon when applying alternative methodologies in
invcstigations concerning imports from China.
Another possibility is that China proves that market conditions prevail in a specific sector or
industry, but not for its entire economy. In this case, Lhe provisions of Article 15(a) will cease
to apply, i.e. Lhe special system will be terminated, but only for Lhis particular sector.
The second situation, when Lhe special system wili cease to exist, is after 15 years of Lhe date
of China's accession to Lhe WI'O. In this case, however, Article 15(d) states Lhat only the
provisions of Article 1.5(a)(ii) will expire, talher than ali. Lhe provisions of Article 15(a)
provided for in the first situation. This means that even after 15 years of China's accession,
Article 15(a)(i) will continue to be applicable until China is considered by Lhe investigating
country as a market economy.
The precise meaning of this legal passage has been subject to increasing scrutiny and debate.
A concrete legal analysis is due in order to fuliy understand Lhe meaning of 2016.
3. 2016Is it the end?
As seen, there are two different systems for establishing lhe normal value in anti-dumping
investigations regarding exports from NME countries. In Lhe regular system, a country can
cither apply one of Lhe three methodologies provided for in Lhe ADA or consider the country
of origin as a NME to apply Lhe Ad Note exception and use an alternative methodology, e.g.,
Lhe surrogate country.

155

The special system, provided for in Articte 15 of China's Accession Protocol, on the other
hand, does not require, necessarily, a country to consider China as a NME in the context of
the Ad Note. On the contrary, the system reverses the burden of proof and establisbes the
alternative methodology as the one to be applicabie to imports from China, as long as Chinese
producers do not prove that market conditions prevail in their sector or as long as China is not
recognized by the importing country as a market economy. Finaily, 2016 hangs as a deadline
for the application of the special system.
Much debate has taken place about the 2016 deadline. Positions vary from the understanding
that no change has to be made by investigating authorities 279 to a broad objective recognition
by WTO law of the market status of the Chinese economy 220 . Although the Protocol of
Accession has been widely criticized for its lack of legal acuity, the mies of treaty
interpretation present in the Vienna Convention on the Law of Treaties can be of help to solve
this dilemma.
According to Article 31 of Vienna Convention lIa] treaty shall be interpreted in good faith in
accordance with the ordinary rneaning to be given to the terms o!' the treaty in their context
and iii me light of lis object and purpose. From this Article derives the principie of textual
approach in interpretation and that every term present in a treaty must be given an ordinary
meaning. In other words, there can be no term in a treaty that is void of sense28t.
The Protocoi of Accession makes a clear differentiation between the two situations where the
speclal system ceases to apply in its entirety. Article 15(d) states that, in the first situation, i.e.,
when a country recognizes China as a market economy, ali the provisions of Articie 15(a)
cease to apply, while in the second situation, i.e. in 2016, only Article 15(a)(ii) will cease to
apply.
In this sense, in order to give fuli meaning to Article 15(d), iii 2016, the special system will
partially cease to exist and countries that relied only upon it to apply alternative
methodologies for normal value determination in anti-dumping investigations against exports
from China will have to discontinue doing so. This does not mean, however, that Lhe regular
systeni will also cease to exist. Members to the WTO wilt continue to be able to use the
exception of the Ad Note to deal with normal value determination for products from NME
countries, as long as they consider them to fit in Lhe Ad Note's quahfication.
Article 15(d), though, creates a special situation concerning China, since it establishes that,
after 2016, Article 15(a)(i) wiill continue to be apphcabie. Article 15(a)(i) opens the possibility
for Chinese exporters and manufacturers to prove that, in their respective sectors, market
conditions exist. This reminiscence of the special system wili create a possibihty for Chinese
exporters which is not open for the exporters of other NME countries under the Ad Note's
regular systern.

279

See O'CONNOR, Bernard. Market-econoniy status for China is not autornatc. VoxEu 27 November 2011.
Available ar hup://www.voxeu.or2/index.phc?cl=node/7345. Last access on 01.03.2012.
280
See OAO. Henry, ffyou don 't believe Lo the 2012 rnyth, do you believe ia the 2016 myth?. WTO and China,
20 Noveniber 2011. Available at lutp://wtoandcliina.blospot.com/20I 1/1 I/if-you-dont-believe-in-201 2-mythdo-yoii.html. Last access on 01.03.2012.
281
For further analysis on the rules of treaty interpretation see BROWNLIE, lan, Prnciples o! Public
InternationalLaw, Fifth Edition, Oxford University Press, 2002, pp. 631 to 638.

156

This interpretation makes sense if we look at the first situation, i.e. where a country
recognizes China as a market economy. In this case, ali of the provisions of Article 15(a)
cease to exist. If so, it would make no sense to maintain the application of Article 15(a)(i)
since the rnentioned recognition will prevent the country from using the exception to the
regular system provided for in the Ad Note. If it recognizes China under its national law to be
a market economy, it will not be able to apply the alternative methodology provided for in the
Ad Note. This rationale links the two situations to the existing practice at the time of China's
accession negotiations. Furtherrnore, the direct reference in Article 15(d) to lhe national iaw
of lhe WTO mernbers relating to market economy recognitions supports this interpretation.
The alternative interpretation that iii 2016 there would be an objective recognition of China's
market econorny condition wouid entail two legal inconsistencies. First, it would not give a
proper ordinary rneaning to Article 15(d) since it provides for two different situations with
two different legal consequences. By arguirig that, in 2016, the special system would cease to
exist, this interpretation would consider void of meaning the fact that Article 15(a)(i) would
continue to exist, while if the recognition was rnade under the national law of Lhe WTO
member, ali of Article 15(a) would be terininated. The legal consequences wouid be the sarne
for both situations, contrary to what establishes the textual approach to treaty interpretation.
Besides, the remaining Article 15(a)(i) would be void of purpose, since, if every WTO
member had to consider, from 2016 ou, China as a rnarket econorny, what would be the
purpose of Chinese exporters to prove that there are market conditions in their sector?
The second inconsistency is that, if WTO mernbers were obligated to recognize China as a
market econorny ipsis litteris and ad infinitum, for anti-dumping investigation purposes,
China would be Lhe only country Lhat would be protected from the application of the Ad Note.
Other NME' countries that do not have the sarne deadline established in their accession
documents (or were not subject to accession, i.e. original members) wouid be treated
detrimentaily.
On Lhe other hand, the interpretation that nothing wouid change after 2016, i.e. that there
would be no consequence for the national laws of WTO rnembers, also fails to give fuli
rneaning to Article 15(d).
2016 will be the end of the special systern of normal value deterrnination but will nol affect
the regular system and the Ad Note mechanisrn. Countries which already relied upon
al.ternative methods provided for in the Ad Note to calculate normal values in anti-durnping
investigations regarding NME countries, such as Brazil, US and EU, will continue to be abie
to do so.
Christian Tietje and Karsten Nowrot282, aithough stating a similar interpretation to the present
one, consider that it wouid be difficult for WTO Mernbers to continue to consider China as a
NME and apply the Ad Note rnechanism to it, since its definition is hardly apphcable to any
existing WTO Mernber. In this sense they state that:
For !awyers and governmentat officials clealing with anti-dumping law and practice. the II
December 2016 is certainly not a myth - it is reality. From that date onwards, it will be aniost
2S2

TWTJE, Christian and NOWROT. Karsten, "Myth or Reality? China's Market Economy Status under WTO
Anti-Dumping Law after 2016", PoJicy Papers on Transnational Economic Law. No. 34, Transnational
Economic Law Research Center. December 2011.

157

impossible - at Ieast from the perspective of WTO iaw - to make a determination of lhe normal
value of products targeted by an antidumping proceeding on lhe bases of analogous third country
methodology. The only possibitity to do so wouid be to make a positive, explicit determination of
China's NME-status based on lhe second Ad Note to Art. VI: 1 GATT 1994. However, taking mb
acount lhe high threshotd stipulated in lhe second Ad Note to Art. VI: 1 GATT 1994. chances to
convincingly and thus successfully do so are aimost non-existing283.

Although we dispute that in 2016 a renewed affirmative of lhe NME character of China would
have to be made by WTO Members that seek to continue to apply lhe alternative
methodology 284 , there is a wide perception that such an affirmative would be difficult to
sustain under WTO law. We further analyze lhe NME concept in the Ad Note and its scope.
4. Is the NME concept in the Ad Note impossible to reach?
As seen above, lhe Ad Note was conceived 57 years ago to address lhe particular case of
Czechosovakia. The concept included in lhe Ad Note has since evolved and was reaffirmed
as a plausible alternative for normal value considerations in anti-dumping investigations
against NME countries in several accession documents. The national laws have also been
adapted, exploring different aspects of NME and the use of the surrogate country
methodology.
The Ad Note however has not seen any such adaptation and has been integrated as it is imo
lhe ADA thus, into lhe WTO system. Until recently, there was no interpretation from lhe DSB
that would offer some clarification to whether the practice developed by WTO Members in
lhe application of lhe Ad Note mechanism was in disrespect of lhe textual conditions. The
case EC - Fasteners, however, offered such an opportunity, which was ceased by lhe
Appellate Body (AB). 1n a footnote to its decision on the case, Lhe AB stated that:
We observe that lhe second Ad Note to Artcle VI: 1 refers to a "country which has a complete or
substantially complete monopoly of lIs trade" and "where ali clomestic prices are fixed by the
State". This appears to describe a certa/a type of NME, where lhe State monopolizes trade and seIs
ali domestic prices. The second Ad Note to Article VI: 1 would thus not on its face be appllcable
to lesser fornn of NMEs that do nol fulflil both conditions, that is. the complete or substantially
complete monopoly of trade and lhe fixing of ali prices by the State 5 . (Emphasis added).

In this sense, the AB argues the existence oU different leveis or fornis of NMEs. The ones that
would entail lhe application of the Ad Note mechanism, i.e. alternative methodologies, would
only be those that fulfili both conditions entirely: complete or substantially complete
monopoly of trade and the fixing of ali prices by lhe State. According to this statement by lhe
AB, it would indeed be highly improbable that any WTO member would fulfill, today, both
conditions.
The direct application of lhe 1955 concept to today's reality does not seem, however, to fully
apply lhe approach of interpretation provided by lhe Vienna Convention of the Law of

283 Ibid, p.l 1

There is no such obligation in lhe Accession Protocol and ir would be unto lhe interested part to seek dispute
settlement if it feeis that the provisions of lhe Ad Note are being misapplied
285 WTO, AB, EC - Definitive A nti-Dwnping Measares on Crtain Iron or Steel Fasieners from China (DS397),
WT/DS397/AB/R, AB Report adopted on 15 July 2011, para. 285, footnote 460.
158

Treaties, which has been more than once indicated by the AB as relevant 1aw 286 . Article 31,
paragraph 2 of the Vienna Con.vention states that:
2. The context for the purpose of lhe interpretation of a treaty shall comprise, in addition to lhe
text, including its preamble and annexes:
(a) any agreement relating to Lhe treaty which was made between ali the parties in connection with
Lhe conclusion of lhe treaty;
(b) any instrument which was made by one or more parties in connection with the conclusion ol'
the treaty and accepted by Lhe other parties as ao instrument related to Lhe treaty.
In this sense, the Ad Note must be read in the context of other "agreement(s) relating to the
treaty". The Protocois of Accessions and Working Party Reports (WPR) of the NME
countries that acceded to the GATT after the creation of the Ad Note in 1955, ali refelTed to
the concept in the Ad Note as being adequate to deal with the economies of the acceding
countries. The Ad Note was usually referred to in the WPR of NME acceding countries as ao
adequate mechanism to deal with price comparabiiity probiems in Anti-dumping investigations
concerning imports from these countries. The mention to the Ad Note was reproduced lo Lhe
'88
Accession of Poiand 287 , Romania
and Hungary 289 . In other words, the CONTRACTING
PARTIES considered that the definition present in the Ad Note fitted the acceding members'
economies.
The Flungary WPR made a direct reference to the Ad Note, especially regarding the surrogate
country rnethodology290. The case of Hungary, however, was different from the precedem
NME accessions of Poland and Romania. Differently than those two countries, the
requirements made by GATT contracting members in Hungary Protocol of Accession were
lighter than those present in the accession of Poland and Romania. Hungary acceded in 1973
but had already started major economic transformations through its New Economic
Mechanism (NEM).
The NEM comprehended a series of reforms airned at decentralizing Hungary's economy and
aflowing for market economy conditions to determine part of its internal prices. Also, there
was a relaxation of state monopoly of foreign trade as weB as the establishment of import
tariffs. It was considered as the "most radical postwar change" of any Comecon country 29 ' and
those reforms were acknowledged by a GATT trade report Lhree years before the accession of
292
Hungary to the a-
Notwithstanding Lhe differences between the 1-lungarian econoniy and Poland and Romania's
economies at the moment of their respective accessions, the CONTRACTING PARTIES
found that the special provisions of the Ad Note would fit their economic situations alike. It

286

See WTO, AB. US-Standards o! Re!orruulated and Conventional Caso/me, WTIDS2/AB/R, AB Report
adopted on 29 April 1996, p. 23; See also WTO, AB, Japan - Taxes ou A/cobolic Beverages, WT/DS81ABIR,
AB Report adopted on 4 October 1996, p. 12.
287
GAIT. Accession o! Po/and, 19 September 1967, U285 1. para. 8; and GATT. Accession o! Po/and - Repon
o!the Working Party, L/2806, 23 June 1967, para. 13
288
GATIT, Accession o! Romania to tbe CA7T- Repor o!the WorkingParty5 August 1971, L/3557, p.3
289
Accession o! Hungary to flue C TT - Report o! the Working Party, BISD 205/34-38 (Twenticth
Supplement, Twenty-Ninth Session, [971-1972), January 1974. p. 3
290
Jbid, para. 18
291
GRANICK David. vrhe Hungarian Economic Reform". World Politics, Vol. 25, No. 3., April, 1973. pp.
414-429.
292
GATT, Accession ofHungary - meinorandum ou Foreign Trade Regime, U330 1, 26 January 1970
159

is, thus, difficult to retain a restrictive and crystal!ized interpretation of the concept of NME
present in the Ad Note.
If one was to apply this concept in lhe lines of Lhe AB decision, Hungary, which at Lhe
moment of accession no longer fixed afi 0w prices ia its domestic rnarket, as acknowledged
by lhe CONTRACTING PARTIES thernselves, would not fit the definition and would not be
a suitable country for the application of Lhe surrogate country methodology. Nevertheless, the
CONTRACTINO PARTIES decided differently, clearly considering that the concept in the
Ad Note had evolved.
Even Poland, that followed more strictly the soviet economic model, did not fully fit Lhe strict
definition of the Ad Note. In this sense, Horlicic and Shuman stated that:
The GATT Working Party, considering Poland's accession to the GArE, expticitly declared its
understanding that Lhe nonmarket exception to Lhe antidumping normal value test would apply to
Poland. This is interesting in two respects. It suggests that in lhe eyes of Lhe GATI' one need not
take at face value lhe apparently slrict GATT rcquirement for application of lhe NME exception
that a country have "a complete or subslanlially complete nionopoly of its trade" and that "ali
domestic prices [be] fixed by lhe State." Even ia 1967. Poland probably did not fit this test if it
were rigorously applied.293

This shows that, since Lhe beginning, Lhe CONTRACTING PARTIES took a f!exible
approach on Lhe application of the Ad Note, allowing its application for severa! different
NMEs, differently to how iL was interpreted by Lhe AB.
In this sense, Lhe NME concept present in the Ad Note cannot be considered the sarne as when
li was created in 1955, thus aliowing for an evolutionary approach that takes into
cotisideration the ways it has been applied by the contracting parties to the GATT during Lhe
subsequent years, especially regarding lhe accession of NME countries. Due flexibility must
be accorded to the concept's interpretation.
5. Conclusions
The subt!e distinction between the first and second phrase of Articte 15(d) of China's Protocol
of Accession disguise an irnportant difference in lhe app!ication of alternative methodology
for normal value determination in antidumping investigations against exports frorn China
after 2016.
The 2016 deadline makes the special system to partial!y cease to exist. This means that
countries that relied solely upon Lhe provisions of Article 15 of China's Protocol of Accession
to apply the alternative methodology wi!l have to cease to do so. Nevertheless, the regular
system remains applicable: i.e. the exception present in the GATT Article VI Ad Note can stiti
be used by WTO rnembers on investigations against NME countries, as tong as they consider
them to fit in Lhe Ad Note's qualification. Only if a country recognizes China as a market
econorny, under lis national law, wi!l he be prevented from using lhe exception of lhe regular
sys tem.

293 HORUCK, Gary; Shuman. Shannon. "Nonmarket economy trade and U.S. Antiduniping/Countervailing
Duty Laws". Thc International Lawyer. v. IS, n. 4. 1954, p.834

160

Here ir is important to recail the need to undertake an evolutionary interpretation of the Ad

Note, as ir was made by lhe Contracting Parties through GATT history, aliowing a more
flexible approach to the concept of NME.
A careful interpretation of Articie 15 (d) of China's Protocol of Accession shows that Lhe
deadline of 2016 does not imply the end of the use of the aiternative methodology for the
normal vaiue determination in antidumping investigations against China. The Ad Note of
GATI' remains appiicabie, regardless of the provisions of the Protoco! of Accession and the
deadline shali only have effect over the special system created under the Protocol.

161

IV.5 CONCLUSIONS ON THE NME ISSUE

The present study has anaiyzed lhe systemic chailenges posed by the integration of NMEs
into the Multilateral Trading System. The reiationship between market and planned
economies has seen an interesting evolution on how the GATT and the WTO dealt with the
specificities of trade between the two economie systems. The accession of China has, in this
sense, required 15 years of intensive negotiations, including extensive economic and legal
analysis to conclude a set of systemic adaptations required of China so as to allow for its
accession.
These systemic adaptations comprise obligations in the fields of: foreign exchange; state
ownership and privatization; pricing policies; trading rights; subsidies; industrial policy; state
trading enterprises; investment; rule of law and transparency. These obligations were
considered by lhe members of lhe WTO as indispensable for the establishment of a levei
playing field regarding trade with China and for lhe well-funetioning of the WTO legal order.
After 10 years of China's accession, however, trade disputes and tensions between China and
some of the most important members of the WTO, especially the US, have arisen over
China's compliance of WTO obligations. In the wake of the worst financial crisis since the
Great Depression, trade rows and resentment over China's trade and industrial policies have
been present daily in international and local news. This study argues that much of the tension
expressed by men1bers of the WTO is due to the fact that the Multilateral Trading System is
not apt to deal with NME features still present in China's economy.
By analyzing some key NME features of lhe Chinese economy - notably, the exchange rate
manipulation; the economic importance of SOEs and their relationship to the central
goverument; and the subsidization of its economy - this study has demonstrated that China
has not, yet, promoted the reforms needed in order to completely adapt its economy to the
Multilateral Trading System. Most alarming, the international press, experts and
governmental offices are expressing their concerns that China has slowed the pace of reforrn
and gives signs of not intending to move forward with the liberalization of its economy294.
The analysis of China's Accession Protocol and Working Party Report demonstrates that
there was an expectation by WTO members that China would move towards a inarket
econorny by impiementing the systemic adaptations provided for in those documents. The
non-fulfillment of this expectation, especially with the proximity to lhe symbolic 2016
deadline, has paved the way for extreme ideas of how to deal with lhe situation, some even
proposing the revocation of China' s membership to the WTO.
The Multilateral Trading System, however, has provided for rnechanisms to deal with the
breach of trade obligations. A WTO member has lhe right to address the DSB if it believes
that another member is not complying accordingly with its obligations under WTO Law. This
study analyzed briefly the options of WTO members regarding the fulfiliment of China's
obligations in relation to NME features. Further fact and data collection would be needed in
order to build a case against China, but the obligations toward a market economy that are
present in its Protocol of Accession are judiciable in the same inanner as other WTO rules.

294 See, inter alia, LJCESRC, 2011 Report to Congress of US-China Econornic and Securiy Review Corninission,
112h Congress, 1 ` Session, November 2011.

162

More broadly, however, the complex scenario of the presence of NMEs in the Multilateral
Trading System is not a new one. Neither, as iL has been seen in the case of Czechoslovakia, is
it impossible for countries to adopt NME features that would demand considerable adaptation
of WTO law. The Multilateral Trading System, in its present state, does not offer the
necessary mechanisms to allow a leveled playing field in trade between market and NMEs.
Besides a cornprehensive adaptation of WTO rules, two more immediate solutions can be
undertaken te deal with the tension concerning NME features in the WTO.
One possibility would be the creation of a special Working Party to analyze thoroughly the
impacts of NMEs te the Multilateral Trading System. The Working Party on NMEs would
analyze both economic and legal adaptations to trade niles iii order to allow for a fair trade
between ali parties involved. It woutd also identify which NME features were the most
harmful to international trade and pressure for the end of such features in the economies of
every WTO member.

163

V. ARGUMENTS TO BUILD A CASE AGAINST CHINA

Reviewing the main features of China's participation in the WTO, in the presem moment,
some concerns can be expressed about lhe compliance of China with lhe commitments made
upon its Protocol of Accession. Some of its policies, as it was presented in Chapters III and
IV, can cause significant negative impacts on other members markets, by granting Chinese
products some competitive advantages that were not or could not be foreseen ai the moment
of lhe negotiation of its accession and, thus, result in a change in the equilibrium of
negotiations on which the WTO is based.
Such imbalances could either arise due to a violation of China's commitments to the WTO or
could constitute a non-violation, which might nonetheless be subject to consultation and even
a complaint under lhe DSB.
1. Exchange rate misalignments
The first concem related to unfair competitiveness of Chinese products is lhe one conferred
by exchange rates. Several economctric estimates show that lhe Chinese currency is
devaluated &om 1.5% tili. 20%, causing advantages on Chinese exports and disadvantages to
other members' exports, as shown in Chapter 111.1.1., having impacts both on Chinese imports
and exports.
Regarding imports, the Chinese currency would represent a greater barrier to foreign products
than lhe one that was negotiated at lhe WTO, in China's Schedule of Concessions. If the
tariffs adjusted to the exchange misalignment surpass the bound tariffs, there will be a
limitation on lhe country's market access.
to the one
Regarding exports, Chinese products would have an advantage equivalem to
conferred by subsidies, since by the conversion of currency based on a devaluated exchange
rale, these products will have a smaller price when exported to other countries than they
would have if lhe conversion was being made based on a exchange rate at its equilibrium.
Both these impacts could constitute a violation of some of WTO provisions, as presented in a
deeper analysis made in Chapter 111.1.2.
There are a few provisions under lhe WTO agreements that can be applicable to the exchange
rale issue. A more developed case study is, nonetheless, required in order to conclude on lhe
possibility to chailenge China under lhe DSB due to its currency devaluation. Some
arguments are developed here.
The above mentjoned limitation on lhe Chinese market access could constitute a violation of
GATT Article 11.1, which states:
(a) Each contracting party shall accord to the comnerce of lhe other contracting parties treatment no
less favourable than that provided for in lhe appropriate Part of lhe appropriate Schedule annexed to this
Agreement.
(b) The products described in Part 1 o! lhe Schedule relating to any contracting party. which are lhe
products of territories of other contracting parties, shall, on their importation into lhe territory to which
lhe Schedule relates, and subject to lhe ternis, conditions or quatifications ser forth in that Schedule, be
exempt from ordinary customs duties in excess of those set forth and provided therein. Such products
shall also be exenipt from ali other duties or charges of any kind imposed on or in connection with lhe
164

importation in excess of those imposed on the date of this Agreement or those directly and mandatorily
required to be imposed thereafter by legislation in force in the importing territory on that date. ( ... )
Paragraph 1(a) assures that the market access negotiations made at WTO are not impaired by
any treatrnent imposed by a member that might increase or impose new barriers to
international trade, reducing such market access. In this sense, a "!east favorable treatrnent"
should be understood as a measure that adversely affects the conditions of competition for a
specific product On its turn, Paragraph 1(b) requires countries to keep their applied tariffs in
an equal or lower level than their bound tariffs and to not impose any other kind of duty
connected with importation that exceeds the negotiated duties under lhe WTO.
When lhe effect of lhe current Chinese devaluated exchange rate is applied on its tariffs, lhe
final barrier imposed to imported products will be greater than its bound tariffs at the WTO,
reducing the market access, which negativety affects the conditions of competitiori resulting,
thus, on a less favorable treatment. This effect c!early impairs the aim of Article 11.1.
To constitute a violation, however, one must prove that such less favorable treatment is
accorded by a measure of the Chinese government and it is not a resu!t of other externa!
circumstances.
Furtherrnore, tariffs adjusted to the exchangc rate misalignment may be considered as charged
in excess of the ordinary customs duties settled on the Chinese Schedule. The renminbi
devaluation increases all applied tariffs over the bound tariffs. This tariff in excess of the
bound tariff would constitute a de facto violation of Article 11:1(b) and consequent!y of
Article 11:1(a), since thcre is a reduction on the market access.
Even if one considers that there is no violation of the lelter of Article 11:1, it is still possible to
argue that its intent has been frustrated, since there are adverse effects on the conditions of
competition. In this case, lhe frustration of such aim may give rise to a chaflenge under GATT
Article XV:4, combined with Article II.
Artic!e XV:4 states that:
Contracting parties shalt not, by exchange action. &ustrate the intent of the provisions of this Agreement,
by trade action, the intent of the provisions ol' the Articles of Agreenient of the International
Monetary Fund.
The provision recognizes that exchange rale issues can affect internationat trade and demands
WTO members to avoid exchange rale measures that could harm any of the purposes of
GATT.
In order to determine a violation of Article XV:4, it must identified that a provision of GATT
(Article 11.1, in this case) has had its intent frustrated, even if there has been no violation of
the letter of the Article. The meaning of lhe word "frustrate" is given in the Notes and
Supplenientary Provjsions (Annex 1) of Article XV, which explain that its intention is:
(...) to indicate, for example, that infringemenls of the Ietter of any Article of this Agreement by
exchange action shall not be regarded as a violation of that Article if, in practice, there is no appreciabte
departure from the intent of the Article. ( ... )

165

Exchange actions operated in accordance with the Articles of Agreement of IMF wi!l not be
deemed to contravene GATT Articles because there is no departure from the inlent of those
Articles. In order to find a violation of Article XV:4 it is, thus, necessary to find a violation of
Article IV of IMF's Articles of Agreement, which specifica!!y dea!s with exchange rate.
To declare a violation of Article XV:4, combined with Article 11:1, it is also necessary to
determine that China is taking an exchange action which is having consequences on trade,
therefore frustrating the intents of WTO. One has to argue that China is implementing a
distinguishable policy to devaluate the renminbi and that this policy can be c!assified as
exchange action.
If a member can present evidence that the Chinese exchange policy is an exchange action and
that it is frustrating the intent of GATT Article II:!, there wili be a violation of Artic!e XV:4,
that could be object of a complaint under the DSB.
Besides the instruments argued above, one can also resort to a non-violation comp!aint.
GATT Article XXIII:! (b) states that, if a member considers that a benefit accruing to iL is
being nuliified or inipaired as a result of Lhe application by another member of any measures,
whether or not it conflict with the provisions of GATT, the member may take the issue to the
DSB.
The reason.ing of a non.-violation comp!aint is Lhat some measures, even if considered
consistent with. GATT, can frustrate competitive opportunities, legitimately expected from
tari.ff concessions. Therefore, it is necessary to provide means to redress the misbalance
caused by such measures, even though there is no direct violation of GATT provisions.
The currently devaivated reriminhi, which is presenting an impact of nullifying other
members' tariffs, cou!d be considered as affecting the market access accorded by other WTO
members. This couid give risc to a complaint of non-violation if three elements are met:
appiication of a measure of currency devaluation by the Chinese government; the existence of
a heneit accruing to WTO members, in the case, Lhe of balanced levei of concessions
between members, as weil as the benefit of the negotiated Chinese market access; and
impairment of these benefits (incentive to Chinese exports, that affect the balanced levei of
market access and the restrictions caused on its own market access by the devaluated
currency) as result of the application of the measure of currency devaivation.
First, one has to argue that there are govemmentai policies that aim to keep exchange rates in
a certain levei be!ow its fundamental equi!ibrium and that those policies couid be considered
as a measure under the meaning of Articie XXIII. It is importam to
to notice that the Articie
requires an action by a government, which results on Lhe misa!ignment. The misaiignment
itself cannot be object of a complaint under Article XXIII.
Regarding the irnpairment of the benefit, it should be understood as upsetting the competitive
re!ationship between domestic and imported products, c!early caused by the measure at issue.
It is possible to argue that in a Chinese market with devalued currency, other members will
face a more restricted market access, with higher tariffs, once considered the effects of
exchange rates, which can easi!y be c!assified as an impairment of the legitimate expectation
of irnproved market access. The opposite reasoning can also be done: when China exports its
products using a devaluated exchange rate, it is, by giving an incentive its exports through a
deva!ued exchange rate, making other members concede a !arger market access than the one
166

that was negotiated, impairing expectations of a balanced levei of concessions between these
members and China.
An important aspect of those expectations on such benefits is that, in order to it be legitimate,
lhe measure of currency devaluation must not have been reasonably anticipated at the time of
the tariff concessions.
Article XXIII may be a useful action to redress the negative impacts caused by the devaluated
Chinese exchange rate.
The provisions presented above are the possible tools that could be raised on an eventual
complaint against China due to its exchange rate misalignments. Further analysis of Chinese
exchange rate policies and measures is required in order to evaluate the concrete measures
applied by China.
2. Commitments on subsidies, state owned enterprises and other NME features
China's Protocol of Accession provides a series of obligations to which China should commit
regarding the functioning of SOEs and the granting of subsidies. As shown in Chapters 111.2
and 111.3, these two features of Chinese economy are of great importance since they can cause
significant distortions on competition with Chinese products impacting on other members'
imports and exports.
Considering severai commitments made by China and the current stage of transition of
China's economy, especially relating to the massive granting of subsidies and the
administration of SOEs, one can ask if, ten years after its accession, China is complying with
the WTO.
Some difficulties arise to complete this analysis: the lack of transparency of Chinese
govemment regarding the disclosure of the list of its subsidies programs and the data about
SOEs makes it difficult to obtain up-to-date and complete information. The considerations
made hereinafter are only indications of possible violations of Chinese commitments. A
deeper analysis wouid be required in order to state that there is a violation of such
commitments.
Regarding subsidies, China committed itself to eliminate ali export subsidies, including those
on agricultural products (Protocol of Accession, Articles 10.3 and 12.1). Subsidies are
considered by the WTO as unfair trade, as they can cause distortions on international trade.
The SCM considers a subsidy as: (i) a financial contribution by a public body (such as loans
and guarantees, fiscal incentives, provision of goods and services, etc) or any form of income
of price support; and (ii) that confers a benefit (SCM Article 1). It is important to stress that a
subsidy may be granted by any public body, including local govemments, central government
and ali other administrative leveis.
The Agreement classifies subsidies imo two categories: export subsidies and subsidies
contingent upon the use of domestic goods, that may give rise to a complaint under the DSB,
as specific subsidies. Specific subsidies that cause injury to the domestic industry of another
member may be object of countervailing duties. Specific subsidies that nullify or impair other
members' benefits accruing from the GATT or that cause serious prejudce to the interest of
another member may be chailenged at lhe DSB.
167

China presents significant amounts of subsidization of its econorny. lis stimulus package
calcu!ated in 2010 by the US amounted to 13% of its GDP, and included several kinds of
subsidies295.
Several of these subsidies, once demonstrated their specificity, may be object of
countervailing duties if they cause injury in other members' domestic industry. The specific
subsidies can a!so be taken to Lhe DSB if they impair another member's benefits accruing
under GATT or if they cause serious prejudice to the interests of another member, i.e. if it is
affecting other members' exports by an unfair competition at the domestic market of a third
country.
Furthermore, it should be noticed that China's Protocol of Accession provides that subsidies
provided to SOE will be viewed as specific if SOEs are the predorninant recipients or receive
disproportionate!y large amounts of such subsidies (Article 10.2).
Besides those actionabie subsidies. several subsidy programs that are oriented to boost
China's exports were identified. Those subsidies, such as tax reductions for export-oriented
FIEs, tax reductions for FIEs and other foreign enterprises purchasing Chinese inade
equipment; VAT rebates on FIE purchases of domestically-produced equipment, export
interest subsidy program, amongst others, as presented in Chapter 111.3, are likely to be
considered as prohibit subsidies at the DSB, due to the elements of contingency to exports and
use of Chinese made products.
Another important Chinese commitment that has not been respected is the ob!igation to notify
annually to the WTO ali of its subsidy programs. China has made notifications to the
Committee on Subsidies only upon its accession, in 2001, in 2006 and 2011(SCM Article 25
and China's Protocol of Accession, Article 10.1).
Regarding the issue of SOEs, China committed to not influence directly or indirectly on
commercial decisions on the part of state-owned or state-invested enterprises (Working Party
Report Para. 46). Neverthe!ess, as presented in Chapter 111.3, there is some evidence that the
Chinese government, in the past years, decided to retain direct command of key sectors of its
economy, by the maintenance of control of several SOEs and enhancing the state owned
economy's controlling power. This direct controi aimed by the government and exerted
through SOEs could indicate that China is not complying with ils commitment te not
infiuence such enterprises.
Furthermore, there are concems of other WTO members that SOEs are benefitting
disproportionate!y from governmental measures to boost the economy by granting subsidies
and providing iarger access to credit than it is granted to private companies. Such preferences
could indicate a vio!ation of GATT Article III that establishes that national treatment
principie, since private foreign companies would not be able to benefit of these preferences.
Arother issue is the direct investments contingent on de facto transfer of technology. China
committed to only impose measures regarding such transfer that were consistent with the
WTO Agreements (RWP, Para. 49). Nevertheiess, as presented before, stitdies have shown
295

IJSTR. US Department of Conimerce, Subsidies Enforcernent, Annual Report to the Congress, Fcbruary
20I0,p. [4.

168

that in some sectors foreign investors are not allowed to have a controiling share in
enterprises, what would result ia a de facto obiigation oU transfer of technoiogy that might be
considered inconsistent with WTO mies.
Finaily, one shouid analyze China's compiiance regarding its commitment of ensuring that aii
state owned and state-invested enterprises wouid make purchases and saies based solely on
commercial consideratioris (RWP, Para. 46). Considering the possibiiity of state infiuence on
SOEs, as presented above, one can wonder if those enterprises are acting according to market
conditions or are making decisions based on other factors. China affirmed that ali laws and
measures relating to Lhe procurement by state owned and state invested enterprises of goods
and services wouid not be considered to be iaws and measures relating to govemment
procurement. Thus, these procurements cannot be influenced by state policies neither can
benefit from the exemptions of the principie of nationai treatment regarding government
procurement, foreseen ia QATT Article 111:8.
China aiso undertook commitments regarding: a uniform administration of WTO rules over
its territory; Lhe estabiishment of an officiai journai and a judicial system; the concession oU
national treatment for foreign individuais and enterprises; the progressive hberalization of Lhe
right to trade; the determination of ali prices for traded goods and services by market forces.
The compliance of China with ali those commitments, essentiai to its transition towards a
market economy, must aiso be evaluated.
More broadly however, the fact that China has stopped its transformation process imo a
market economy means a vioiation of other members legitimate expectations regarding the
benefits accrued from China's accession to the WTO. The anaiysis of China's Accession
Protocol and Working Party Report demonstrates that there was an expectation by WTO
mernbers that China wouid move towards a inarket economy by implementing the systemic
adaptations provided for in those documents. The non-fuifiliment of this expectation couid
have brought some impairment to other members benefits accruing from the WTO
agreements, as presented in Chapter IV.3, and thus, could be brought before the DSB under a
non-violation complaint concerning Articie XXIII.
3. Conclusions
As shown above, China is likely to be vioiating a series of commitments to the WTO, both
under its Protocol of Accession and under the WTO agreements. The exchange rate issue, the
massive granting of subsidies and the managernent of SOEs ali bring major negative irnpacts
to other member's trade and seem to be inconsistent with the mies of WTO. It is possible to
identify specific vioiations of the country's commitments, which shouid be addressed at the
DSB.
The WTO presents a consistent set of ruies that aims to reguiate its members trading
practices, in order to prevent unfair trade. The negative impacts caused by China ia Lhe arcas
of subsidies, SOEs and exchange rate constitute distortive practices that prevent a fair trade
between WTO members and are inconsisteat with these WTO mies. The vioiation oU express
commitments under China's Protocol of Accession and oU WTO mies should be raised at Lhe
DSB, ia order to recommend China to bring the chalienged measures into compiiance, so as
to eiiminate the distortions caused to internationai trade.

Ira

The study has presented the legal reasoning of the applicatiori of severai WTO instruments
which China is likely not to be complying with the analysis of the specificities of each of
China's subsidy programs, the acts and mies regarding SOEs and the policies that affect
exchange rates, one should be ready to submit to the DSB a complete compiaint against
China.

1.70

VI. SUMARY AND CONCLUSIONS

The astonishing growth of China's exports represents a major chalienge to Brazil and to the
textile sector. In 2011, China's exports amounted to US$ 1,9 triltiori In 2012, Brazilian
textile imports amounted to US$ 6,6 billion. against US$ 6,2 biilion ia 2011, while the
imports from China in lhe sector amounted to tJS$ 3,3 billion ia 2012, against US$ 2,9 billion
in 2011. Apparei and made up articles represent a significant part of the Brazilian imports
from China. In 2012, Brazilian apparei and made ap articles imports amounted to US$ 1,5
billion, against US$ 1,2 billion in 2011297, showing a significant increase on Lhe country's
imports that affected Lhe Brazilian textile industry.
China acceded to Lhe WTO in 2001, after 15 years of negotiations. The benefits accruing from
China's accession to Lhe Organization, combined with Lhe competitive prices of Chinese
products resulting from their extensive array of subsidies have heiped to boost the country's
exports and its deveiopment.
The accession of China to Lhe WTO has brought chailenges to otha WTO members. In one
hand, China would be obliged to comply with the mies of the Multilateral Trading System,
thus protecting other members from unfair trade practices, while iL would be assured that
China did not receive any discriminatory treatment against its products or unfair barriers to its
trade. On the other hand, Lhe significant weight of Chinese economy and the fact that the
couritry was still in transition from a socialist economic model towards a market-oriented one
brought impacts to other member's economic activities and uncertainties about the application
of WTO ruies.
The Multilateral Trading System was created ia Lhe 1940's with the GATT, with clear
objectives to liberalize trade and to promote trade as an instrument of economic deveiopment.
The system was estab!ished by market econornies, based ia market ecoriomy principies and
rules. Aiming to be multilateral, it gave support and incentives to other market and nonmarkets economies to participate in its activities, as a way to develop a universal trade system.
During its history, GATT gave little consideration to the impacts of NMEs to Lhe system,
once they were either small or in transition to market orientation.
With Lhe estahlishment of the WTO in 1995, this little concem was transformed in a clear
presumption that ali acceding countries - in transition or NMEs would transform themselves
in market economies, accepting the principies and the rules guided by a modei under rnarket
orientation.
The anaiysis presented in this research clearly shows that these presumptions were negotiated
and accepted in ali accession processes. Ali economies invited to participate in the WTO
negotiate and agree to the commitment to transform their econornies to market economies
with Lhe objective to participate fully in Lhe Multilateral Trading System.
China was Lhe first major hybrid economy 298 containing NME features to accede to the WTO
and was followed by others. In China's accession, iL committed to undertake several reforms,
296

WTO Statistic Database - Time Series on International Trade.

Al ice web - Ministry oDeveloprnent. Industry and Foreign Trade - Brazi/
298
The Working Party Report on the Accession of China constantly refers to Lhe Chinese economic model as in
transition towards a Sociatist Market Economy. The clefinition of a Socialist Market Economy is not given. but
Mernbers signal to the fact that the Chinese economy bears characteristics of both market and non-market
171

297

regarding, for exampie, the granting of subsidies and Lhe management of SOEs, and to
liberalize its banking system which would lead Lhe country towards a market-oriented system,
assuring a levei piaying field between China and other economies under the WTO System of
internationai trade rules.
Nevertheless, there is strong evidence to the effect that, after ten years from WTO accession,
China still has not compieted its transition process. The World Bank has published in 2012 a
study about China - China 2030 - where it affirms that China is still not a market economy,
despite Lhe reforms it has aiready undertaken, and that there are distortions on its economy
that impacts on Lhe fairness of competition.
In truth, China stiil relies heavily upon SOEs to impiement public policies conceived by the
Communist Party. Considering Lhe internal opposition to further liberalization and
privatization reforms, some commentators are starting to doubt that China could ever
complete its transformation into a fuli market economy, given the intrinsic political links
between the Communist Party, SOEs and the means by which public policies are
implemented
These NME features of China bring several. impacts to the Multilateral Trading System. Since
WTO was not designed to supervise or regulate trade practices of NMEs, neither to force then
to transform its economies toward market ones, it is unable to properly supervise China's
international trade, faihng to prevent unfair trade such as the practice of subsidies, SOEs and
exchange rates.
As questioned at the beginning of this study, some relevant questions should then be
answered by WTO members:
Is the WTO an organization created under market economy principies and rules?
Or is this Organization providing rules for two systems: market and NMEs? If so, are the
niles of Ad Note GATT Article VI and GATT Article XVII sufficient?
The accessions of China, Russia and other countries to the WTO can be assumed as a
commitment to transform themselves in market economies, or mo economic systems can be
allowed?
Is the WTO properly equipped with mechanisms to prevent NMEs to circumvent Lhe
principies and rules established by the market econornies in the WTO?
Is it possible to foresee a negotiation of a set of rules to deai with NMEs or these rules would
be incompatible with WTO rules?
With growing impacts of big NMEs participating in the WTO and no clear progress in their
transition processes, what can be done to answer this new chailenge: A panel? A new round?
A China Round? A NMEs Round?
Shouid some preiiminary steps be taken such as a Worlcing Party on NMEs to discuss the
issue?
economies. In this sense. Chinese economy coulci be considered as a hybrid economy. See WTO,
Wor*ing Party ori the Accession o! China, WT/A Cc/cHN149, October 2001. para. 4

Report o! the

172

With ti-te impasse of the Doha Round and no political will to unblock the System, either WTO
members take the chailenge to their hands and negotiate new rules to accommodate this
chalienge, or, once again, this explosive issue will go to the DSB to solve a dispute through
rulings of the Appeilate Body.
This research analyzed three main issues of the Chinese competitiveness: exchange rate,
SOEs and subsidies. Ali three issues point to Lhe conclusion that, after ten years from its
accession, China has not complete its transition process to becom e an econorny based on
market rules, and it is still a NME.
Considering those issues of China's participation at lhe WTO, some actions can be proposed
on each of these themes:
The issue of exchange rate
As presented in Chapter 111. 1, due to the functional division between the WTO and IMF, the
subject of exchange rates was never dully incorporated in the WTO. Nevertheless, after the
financial crisis of 2008, currency misalignments became, once again, a concern of countries.
In 2011, Brazil presented two submissions to the WTO Working Group on Trade, Debt and
Finance, with a work prograni of an academic research on the reiationship between exchange
rates and international trade. including lhe examination of the available toois and remedies
under the WTO agreements that could redress the effects of exchange rate misalignments.
The WTO Secretariat has already produced a review of economic literature on the impacts of
exchange rate on trade and a WTO seminar on the topic took place in March 2012, althotigh it
only dealt with the impacts of exchange rates on trade, discarding the discussion of the effects
of currency in the existing WTO mies. New proposai is foreseen tilI the end of 2012.
The discussion of the issue at Lhe WTO is of most importance, since only through deep
studies and through the negotiation of new mies that directly deal with exchange rates can the
issue be properly addressed. Therefore, a strong support to the development of discussions
under the Working Group on Trade and Finance is fundamental to assure that the issue
remains relevant at the international agenda and a positive outcome is found.
Despite the lack of provisions under the WTO abie to regulate the effect of exchange rates on
trade in a consistent manner, there are legal instruments that can be used to prevent some of
the negative effects caused by misaligned exchange rates. GATT Articles II:!, XV:4 and
XXIII provide the legal basis for a complaint under the WTO Dispute Settlement System
about the negative effects caused by devaluated currencies as the Chinese renminbi. A request
of consultations and a panei on exchange rates may be the only immediate alternative, since
negotiations under the Working Group shouid be extensive before a solution is accorded.
The resort to the Dispute Settlement System wili aliow the AB to further interpret this
Articles under the perspective of exchange rates, which can provide more guidance on how
the effects of misaligned currencies can be addressed by the existing toois and remedies of the
WTO, subject not yet on discussion under the Working Group.

173

The issue of subsidies

Chapter 111.3 presented a list of subsidies granted to Chinese industry particularly textiles.
Several of those subsidies are likely to be considered prohibited under the 5CM, due to their
contingency upon exports. It is important to further investigate those subsidies, which may
affect the Brazilian industry, in order to gather the required information to pursue a complaint
under the DSB.
Furthermore, even the subsidies that are not considered prohibited can be actionable, if they
are deemed to be specific and it causes injury to another member's domestic industry. Here it
is important to recail that China's Protocol of Accession has a relevant provision on the
specificity of subsidies granted to SOEs, that is broader that the requirements under the SCM.
An investigation on those specific subsidies that cause or threaten to cause injury to the
Brazilian industry can lead to the application of countervailing duties against those subsidies.
Trade defense measures are efficient instruments provided by the WTO to address unfair trade
practices and should be used in a more consistent manner by Brazil. The country has never
applied a countervai!ing duty against China, despite the massive subsidization of Chinese
industry, as shown in Chapter 111.3.
The issue of state owned enterprise
The management of SOEs is very little regulated by the WTO Agreements. As presented
before, the only rule dealing with state trading enterprises is GATT Article XVII, which only
has superficial provisions on the obligation of state trading enterprises to act in a
nondiscriminatory manner and lii accordance with commercial considerations.
The provision is insufficient to regulate the several impacts to intemational trade that can be
caused by SOEs. GATT Article XVII:3 already stated that: The contracting parties recognize
that enterprises of the kind described in Paragraph 1 (a) of tbis Article might be operaied so as
to create serlous obstacles to trade; thus negotia dons cii a reciprocal and mui ual/y
advantageous basis designed te lirnit or reduce such obsta cles are af importarice to the
expansion of international trade.
The WTO system, that has created a comprehensive regulation of inteniational trade, cannot
leave the issue of SOEs, so relevant after China's accession, to bilateral negotiations. The issue
must be regulated in a more consistent fashion, which allows a clearer determination of the
actions that may be considered inconsistent with market considerations, giving more
predictability to the administration of SOEs and limiting its negative effects on trade.
Therefore, the negotiation of new rules, in order to deepen the provisions of Article XVII are
the only available solution to prevent, under lhe Multilateral Trading System, that SOEs may
constitute a barrier to international trade.
NME and antidumping: legal consequences of 2016
The main discussion on antidumping investigations against China is the deadline of 2016
provided by the country's Protocol of Accession. As presented in Chapter IV.4, in 2016, the
special system of the Protocol will partially cease, and WTO members will have to resort to
the provisions of lhe GATT and ADA in order to justify Lhe application of alternative
174

methodologies for the determination of the normal value in antidumping investigations

against China.
A relevant question is, therefore, if the Ad Note is applicable. The AB has stated that the
definition of the Ad Note refers to a specific type of NME and the provision can only be
applied to it (EC-Fasteriers). Nevertheless, the Protocois of Accession of Poland, Romania
and Hungary, that followed different non-rnarket economic modeis, none of them fully in
accordance to the definition of the Ad Note, made express reference to the applicability of the
provision to these countries. This is strong evidence that the CONTRACTING PARTIES
interpreted the concept of NME provided by the Ad Note in an evolutive manner, in order to
accommodate different kinds of NME, interpretation that was disregarded by the AB.
Therefore, despite the deadline of 2016, countries should still be allowed to apply the
alternative methodology on anti-dumping investigations against China, if they fulfili the
requirements of the ADA and the Ad Note, with due consideration to the evolutions on the
interpretation on the definition of NME.
Nevertheless, it is importam to
to recali that Article 15(d) creates a special situation conceniing
China, since it establishes that, after 2016, although the application of Article 15(a)ii of
China's Protocol of Accession ceases, Article 15(a)(i) will continue to be applicable. Article
1 5(a)(i) opens the possibility for Chinese exporters and manufacturers to prove that, in their
respective sectors, market conditions exist. This reminiscence of the special system wili create
a possibility for Chinese exporters not open for the exporters of other NME countries under
the Ad Note's regular system.

Consequences of China being a hybrid economy with NME features

As shown through this entire worlc several features of Chinese economy create major impacts
to the rules of the Multilateral Trading System, which are not able to assure a levei piaying
fieid between hybrid and market economies. The negotiation of new mies to deal with the
specific concerns raised by NMEs is imperative. The concerns brought by Chinese accession
wili likely increase in the foliowing years, due the country's continuous economie growth.
After ten years of China's accession trade disputes and tensions between China and some of
the most important members of the WTO, especia!ly the liS, have arisen over China's
compliance of WTO obligations. In the wake of the worst financial crisis since the Great
Depression, trade rows and resentment over China's trade and industrial policies have been
present daily in intemational and local news. This study argues that much of the tension
expressed by members of the WTO is due to the fact that the Multilateral Trading System is
not apt to deal with NME features still present in China's economy.
By anaiyzing some key NME features of the Chinese economy - notably, the exchange rate
manipulation; the economic and political importance of SOEs and their relationship to the
central government; and the subsidization of its economy - this study has demonstrated that
China has not, yet, promoted the reforms needed in order to completeiy adapt its economy to
the Multilateral Trading System. Most alarming, the international press, experts and
govemmental offices are expressing their concems that China has siowed the pace of reform
and gives signs of not intending to move forward with the liberalization of its economy.

175

The concern over China's !ost appetite for economic reforms, especially with the proximity to
the symbolic 2016 deadline, has paved the way for extreme ideas of how to deal with the
situation, some even proposing the revocation of China's membership to the WTO. There are
two possible ways to dealing with this growing tension without resorting to such extreme
measures.
Firstly, the Multilateral Trading System has provided for mechanisms to deal with the breach
of trade obligations. A WTO member has the right to address the DSB if it believes that
another inember is not complying accordingly with its obligations under WTO Law. As
shown above, China is likely to be violating a series of comrnitments to the WTO, both under
its Protocol of Accession and under the WTO agreements, !inked to several of its NME
features. The exchange rate issue, Lhe massive granting of subsidies and the management of
SOEs ali bring major negative impacts to other member's trade and seem to be inconsistent
with the mies of WTO. It is possible to identify specific vioiations of the country's
commitments.
Specifica!!y, some obiigations to irnplement economic changes to its system, present in China
Accession Protoco!, such as the ones reiated to SOEs and Subsidies, seem not to have been
fo!lowed through by China and cou!d give way to formal complaints under the DSB.
More broadly however, thc fact that China has stopped its transformation process imo a
market economy means a vioiation of other mernbers legitimate expectations regarding the
benefits accrued from China's accession to the WTO. The ana!ysis of China's Accession
Protocol and Working Party Report demonstrates that there was an expectation by WTO
members that China wou!d move towards a market economy by impieinenting the systemic
adaptations provided for in those documents. The non-fuifii!ment of this expectation cou!d be
brought before the DSB under a vio!ation complaint concerning Article XXIII.
Secondly, the negotiation of new provisions to reguiate specific features of China and other
NMEs, if the transition of those countries towards a market oriented model remains
incomplete.
The first action that should be taken is the creation of a Working Group under the WTO that
would study the impacts caused by NME features to muhilateral trade ruies. The Working
Group would be able to evaluate the specific elements of NMEs that may be considered
incompatible with the Multilateral Trading System and which e!ements require an adaptation
of the Multilateral Trading System in order to allow a better application of WTO mIes.
This study has already foreseen the urgent need to adapt the existing rules on trade defense:
antidumping - especially the Ad Note, considered outdated, subsidies and safeguards. Special
attention must be given to GATT Article XVII on SOEs. A deeper study in this Working
Group couid reveai more provisions that wouid need to be discussed.
ft is essential to WTO members to deal with the concerns raised by NME's participation at the
WTO. The rules of the Multilateral Trading System are no longer able to provide a consistent
trade regu!ation that assures the respect of the organization's core princip!es. The conflicts
raised by the issue of NMEs between WTO members have the potential to undermine the
WTO. Members must negotiate a solution urgent!y.

1.76

Either WTO members take care of NMEs and hybrid economies or both NMEs and hybrid
economies will create a dual system of mies in the WTO, undermining the whole
Intemationa! Trading System.

1.77

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ANNEX 5 - Remaining List of Subsidies Programs notified by China to the

Committee on Subsidies and Countervailing Measures in 2011299
Preferential tax treatment to anti-HTV-AIDS medicine.
Preferential tax treatment to numericaliy controlled machine tool products.
Preferential tax treatment to dies products.
Preferential tax treatment for casting and forging products.
Preferential tax treatment for raw copper materiais.
Fund for high technoiogy R&D for packaging industry.
Fund for deveiopment of eiectrical information industry.
Fund for research and development of integrated circuit industry.
Preferential tax policies for integrated circuit industry.
Subsidy for scrapping oid vehicles.
Exemption of tariff and import VAT for the imported technologies and equipments.
Preferential tax treatment for endangered wiid animais and piants as weil as their
products returned by foreign governments, by the government of Hong Kong, China or
the government of Macao, China to China.
Preferential tax policies on irnports of seeds (seediings), breeding stock (fowl), fish fries
(breeds) and non-profit-making wild animais and piants kept as breeds during the period
of the "Eleventh Five-Year Plan".
Preferential tax policies ou imports of seeds (seediings), breeding stock (fowl), fish fries
(breeds) and non-profit-making wild animais and plants kept as breeds during the period
of the "Tenth Five-Year Plan".
Preferential tax treatment for imported products for the purpose of repiacing the
planting of poppies.
Preferentiai tax treatment for tea sold iii the border arcas.
Tnterest discount for pouitry industry.
Preferential tax treatment for pouitry industry.
Preferentiai tax policies for the reiief grain and disaster relief grain, compensation grain
for returning cuitivated iand to forests and to grossland, and the grain rations for the
migrants from the reservoir arcas.
Preferential tax policies for the imports of China Grain Reserves Corporation for the
purpose or rotation of grain reserves.
Preferentiai tax policies for enterprises of grain or oil reserves.
Subsidy for grass seed sowing by airpianes.
Subsidy for prevention from control of pest and disease in forestry.
Preferential tax policies for the enterprises engaged in forestry.
299

Programs extracted from CHINAJWTO.New and Fui! Notifica tion Pursuant to Article XVI:] of the
GA TT 1994 and Article 256 ofthe Agreernent on Subsidies and Countervading Measures. Committee on
Subsidies and Countervailing Measures, O/SCM/N/155/CHN and GISCM/N/I86JCHN, 21 October 2011.

195

SLrbsidy for national key construction projects on water and soil conservation.
Fund for iriterest discount of loans for the purpose of agricultural water-saving
irrigation.
Fund subsidizing agricultural industrial ization and agricultural products processing.
Fund for agricultural comprehensive development.
Direct subsidy to farmers.
Comprebensive subsidies for agricultural inputs.
Subsidy for purchasing agricultural machinery and tools
Subsidy for promoting superior strains and seeds.
Fund for subsidizing transformation of agricultural technology.
Fund fort popularization of agricultural technologies.
Fund for training of youngster farmers on science and technology.
Fund for subsidizing the training of rural rnigrant labour force.
Fund for specialized economic cooperatives of farmers.
Preferential tax policies for enterprises engaged in projects of preliminary processing of
agricultural, forest, animal and fishery products.
Preferential tax policies for key leading enterprises engaged in agricultural
industrial ization
Fund for promotion of coordinated development of foreign trade and economic relations
arnong regions.
Fund for optimizing the impori and export structure of mechanical and electrical
products as well as high-tech products.
Special fund for establishment of service system for SMEs.
Development fund for SMEs.
Research and development fund for industrial technologies.
Preferential tax policies for enterprises transferring technology (2).
Preferential tax policies for the research and development enterprises.
Preferential tax policies for scientific research institutions under transforrnation.
Preferential mx policies for enterprises which provide ernployrnent for unemployed
people.
Preferential tax treatment for products for the disabled people
Preferential tax treatment for imported products exclusively used by the disabled people
(2).
Preferential tax policies for enterprises that employ disabled people (4).
Special fund for the industrial ization of wind power equipment.
Preferential tax treatment for renewable resources.
Preferential tax policies for Clean Development Mechanisrn.
Special fund for the industrializatiori of wind power equipment.
Preferential tax treatment for renewable resource.
196

Preferential tax treatment for products produced with integrated utilization of resources
Preferential tax treatment for buiiding material products produced with integrated
utilization of resources.
Preferential tax treatment for building material products produced with integrated
utihzation of resources.
Preferential tax policies for enterprises wichi utilize the waste materiais.
Prefereritial tax treatment for public infrastructure projects that are particularly
supported by the State
Fiscal fund to alieviate poverty.
Preferential tax policies for enterprises established in the poverty stricken arcas.
Preferential tax policies for ewnterprises ia Binhai New Arca of Tianjin.
Preferential tax policies in the western regions.
Preferential tax policies for foreign-invested enterprises engaged in agriculture, forestry
or animal husbandry and foreign-investede enterprises established in remote
underdeveloped arcas.
Preferential tax policies for foreign-invested enterprises engaged in energy,
transportation infrastructure projects.
Preferential tax policies for Chinese-foreign equity joint ventures engaged in port and
dock construction.
Preferential tax policies for enterprise with foreign investment in the border cities.
Preferential tax policies for enterprises with forcign investment recognized as high or
new technology enterprises established in the State high or new technology industrial
development zones.
Preferential tax policies for high or new technology enterprises.
Preferential tax policies for enterprises with foreign investment established in Special
Economic Zones (excluding Shanghai Pudong arca).
Preferential tax policies for enterprises with foreign investment established in Pudorig
arca of Shanghai.

197

ANNEX 6 - NCTO Iist of 28 subsidies programs for Chinese textile sector 300

1) Income Tax Programs:

a. Tax Exemptions and Reductions for "Productive" Foreign Invested
Enterprises (FIES);
b. Provincial Income Tax Exemptions and Reductions for FIEs;
e. Tax Refunds for Reinvestrnent of FIEs;
d. Tax Reductions for FIEs in Designated Geographic Localions;
e. Tax Offsets for Research and Development at FIEs;
f. Tax Reductions for High and New Technology Enterprises (HNTEs);
g. Tax Reductions for FIEs that are also HNTES and are Located in
Development Zones;
h. Tax Reductions for HNTEs Located in Economic Zones;
i. Tax Reductions for Enterprises Located in Special Economic Zones;
j. Tax Reductions and Exemptions for Enterprises lnvested in Western
Regions.
2) Indirect Tax Programs30t:
a. Value Added Tax (VAT) and Tariff Exemptions on Iniported
Equiprnent;
3) Preferential LendinglDebt Forgiveness:
a. Preferential Lending, Debt Write-Off & Other Preferential Programs by
Chinese "Poliey" and "Commercial" Banks;
li Preferential Lending, Debt Wrtite-Off & Other Preferential Programs at
Regional and Municipal Banks;
4) Government Provision of Goods and Services:
a. Discriminatory Land Policies by the Government of China;
b. Discrirninatory Land Policies by Regional and Municipal Governments
in China;
e. Discounted Electricity Rates by Provincial Authorities for Textile
Producers;
d. Programs to Ensure Access to Lower Cost Cotton;
e. Programs to Ensure Access to Lower Cost Man-Made Fibers;
5) Grant Programs:
a. Special Textile Funds Authorized under the "Administration of Textile
Special Funds" Program and the "Circular on Relevant Policies to
'Ni CT0."Statement to the hearing Record U.S. Trade Representative - Chin&s Compliance with W'J'O
Commitments", submitted by Mr. Cass Johnson (Presidem o! NCTO), 5 October 2011. pp. 4-7.
301
VAT taxes are altowed under wTo rules, but not a discriminatory use of VAT taxes to develop
"encouraged" industries.
198

Promote Chinese Textile lndustry to Shift to New Ways for Growth in

Foreign Trade and Support Chinese Textile Enterprises to 'Go Global".
According to reports. the funds available amounted to 1.36 bihion RMB;
b. State Key Technology Renovation Project Fund;
e. State Scienee and Technology Support Scheme;
d. "Famous Brands" awards;
e. Clean Production Technology Fund;

The tax rebate and currency manipulation programs were considered non-WTO, thus
they were not inc!uded in this list. The subsidies programs under Article 3 (Prohibited)
of the SCM are not Iisted here either because they were already listed in item 3.4. of this
chapter.

199