Surrogate Country Approach Is Not Fair

By Lan Xinzhen

On June 15， the dispute settlement procedures launched by China against the European Unions surrogate country approach at the World Trade Organization （WTO） drew to a close. Chinas dispute was related to the calculation of anti-dumping measures against Chinese exports.

Some Western media outlets have since claimed that China lost this WTO dispute settlement case to the EU， and understood the outcome as a refusal by the organization to recognize Chinas market economy status. Chinas Ministry of Commerce itself responded on July 11 by saying that the end of the procedures has not produced any rulings， and thus there is no winner or loser in the case.

This result is unlikely to sway Chinas stance on the dispute， and neither will it undermine any right or interest of China under WTO rules. In accordance with Article 15 of the Protocol on Chinas Accession to the WTO signed when China joined the organization in 2001， all WTO members are required to honor their obligation to abandon the surrogate country approach when calculating anti-dumping measures against Chinese exports after its expiration.

When China began negotiations on its WTO accession， the United States and the EU called for the surrogate country approach out of fear of competition from Chinese commodities. Under this approach， WTO members use the costs of production in a third country to calculate the value of products from countries on its“non-market economy” list.

The practice allows countries to easily levy high tariffs in trade disputes. China accepted this approach at the time， but Article 15 of the accession protocol stipulated that the approach would expire in 2016， 15 years after Chinas 2001 accession to the WTO. Although the surrogate country approach has been dropped， the EU left open the option to use “international” prices and cost reference in further anti-dumping cases. China consequently launched dispute settlement procedures at the WTO against the EU on December 12， 2016.

The failure of WTO dispute settlement procedures to produce a ruling on this case is somewhat embarrassing for the organization itself. China had placed its faith in the WTO， believing it to be a rules-based， non-discriminatory system designed to promote trade liberalization. The WTOs unwillingness or inability to compel the EU to honor its obligations in the surrogate country approach case affects the credibility of the dispute settlement system as a whole， the WTOs authority and its members faith in the multilateral trade system. This result is disappointing.

The United States， the EU and Japan are the major WTO members that use the surrogate country approach in anti-dumping cases. Despite having made promises to drop the approach upon its expiry， they have instead backtracked. The only explanation is trade protectionism. Confronted with the competitive advantage of Chinese commodities， they have chosen to continue with the surrogate country approach at the detriment of their own credit and for the sake of protecting their own businesses， rather than boosting the competitiveness of their own products.

The excuse for reneging on their promise is that China is not a market economy. So what is a market economy？ Simply put， it is a country in which economic activity operates on the interaction between supply and demand. The United States calls itself as a market-economy state， despite the fact that the U.S. Government often interferes with business operations， bans domestic businesses from trading with foreign companies and restricts them from investing freely overseas. None of these measures are consistent with the actions of a market economy.

Western countries are maintaining their anti-China bias by regarding China as a non-market-economy state. This is not fair to China. According to the WTOs Anti-dumping Code， only those countries whose commodity prices are entirely dictated by the government can be seen as nonmarket economy states. For the past four decades， China has been opening its economy and the prices of its exports have been decided by businesses themselves. Therefore， to classify China as a non-market economy and continue with the surrogate country approach not only overlooks Chinas achievements in marketization， but also ignores the gap between China and true surrogate countries in terms of economic development， the productivity of various industries and labor costs.

Since joining the WTO in 2001， China has been the primary target of anti-dumping investigations launched by other member states， amounting to a total of more than 1，000. The use of the surrogate country approach when calculating anti-dumping measures against Chinese exports has incurred huge losses to China as， according to European Commission， anti-dumping duties calculated by the standard approach are 30-percent lower than those determined by the surrogate country approach.

Although dispute settlement procedures for the surrogate country approach have ended， China will not give up its efforts to counter this approach. In doing so， China is not only safeguarding its own interests， but maintaining the WTOs authority as well. Meanwhile， China will continue to safeguard multilateral trade during this time of rising unilateralism and trade protectionism and amid the spread of a global pandemic.