What is “trade cheating”?: An examination of China and illegal dumping.

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[ Crista Huff| December 13, 2016 |Goodfellow]

Promptly upon the December 11, 2016 expiration of certain World Trade Organization (WTO) Accession Protocols, China requested that the U.S. participate in WTO consultations. China is protesting being labeled a “non-market economy” (NME) by the U.S. The U.S. Commerce Department countered that expiration of the Accession Protocol does not automatically grant China market-economy status. If the consultations do not yield satisfactory results within 60 days, China can then formally proceed with a WTO dispute resolution process.

An NME usually operates with substantial government control of industry, and price-fixing. A government can afford to sell products at a loss, because it has vast financial resources to draw from. In a free market economy, a company is required to sink or swim on its own, without infusions of capital from the government.

When companies within free market economies compete against companies within NME’s that sell their products at below-market prices (a.k.a. illegal dumping), they are put at a serious disadvantage; not unlike when Olympic athletes are forced to compete against athletes who ingest illegal performance-enhancing drugs. In both cases, the playing field is not fair, and the legal practitioner has the odds stacked against them.

When Americans hear vague stories about “trade cheating” harming the economy, illegal dumping is just one of many such practices that directly result in American job loss and lower GDP.

When an American company loses market share due to dumping, there is no easy work-around without WTO intervention; no acceptable way to solve the problem that leads to continued profitable product sales. If the American company lowers its product prices to the level of the Chinese product prices, then the American company loses money. There is no benefit in selling products that deliver a net loss for a company. If the American company therefore stops selling the money-losing product, or continues to sell the product at a loss, there is less revenue and less profit at the company. When a company’s budget is cut, it therefore has to cut expenses, which invariably leads to worker layoffs, because salaries are a big expense. In more extreme situations, pricing on the American company’s entire product line can be undercut by foreign competition, driving the American company into bankruptcy. This situation is playing out right now within the American steel industry, where production fell 27% in 2015. 

China is currently being investigated for its dumping practices; selling products in the U.S. at prices below fair market value. During the dispute resolution process, it makes a big difference if the defendant country is labeled a market economy or a non-market economy. NME’s are more likely to be involved in unfair trade practices, and therefore are treated less favorably during dispute resolution than are market economies. Specifically, the calculations used to determine fair pricing are more liberally applied to the benefit of the market-economy country than to the NME country. China is therefore protesting its NME label, with the goal of being labeled a market economy, and thereafter receiving lesser penalties over its dumping practices.

This week marks the 15th anniversary of China’s membership in the WTO.


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