Challenges for China—the world’s largest antidumping target
Bin Jiang
Doctoral Student in Business Administration,
University of Texas at Arlington
China has become the world’sbiggest target for antidumping investigations. WTO statistics indicate that since the early 1990s Chinese export products have attracted around 500 investigations that have resulted in more than 350 antidumping measures. What are the reasons behind the proliferation of these investigations against Chinese export products? And how can the Chinese government and export producers deal with such cases against the country in the future?
When a product is exported at a price lower than that normally charged for it in its home market, it is often assumed that the exporter is “dumping” the p roduct in the importing country. Antidumping (AD) is the legal framework countries use to place duties or import surcharges on products determined to have been dumped. The legal definitions are more precise, but basically the “Antidumping Agreement” of the World Trade Organization (WTO) allows governments to take action against dumping where there is a genuine (“material”) injury to the competing domestic industry. In order to take such action, the government must prove that dumping is taking place, calculate the extent of it (how much lower the export price is compared to the exporter’s home market price), and show that dumping is actually causing material injury.
Why is China targeted?
The reasons for the dramatic increase in antidumping cases against Chinese export products are both complex and diverse. Here we present and discuss four of these reasons.
Reason 1: Most Chinese export producers compete on cost because local economic conditions make labor- or resource-intensive Chinese products extremely competitive in international markets. The country’s labor rates are approximately one-twentieth of those typically found in developed countries and one-tenth of those found in developing economies like Mexico and Korea. Moreover, China has an abundance of natural resources such as minerals and raw materials. These indigenous advantages allow Chinese manufacturers to produce traditionally labor- or resource-intensive commodities more economically than their counterparts in other countries. However, such products tend to be relatively homogeneous, affording their manufacturers scant competitive advantage and creating minimal entry barriers. If a particular product succeeds in an international market, other Chinese firms can decide relatively easily to enter that market by producing and exporting similar products. This, in turn, precipitates the sort of price cutting that is characteristic of intensely competitive
markets, with the result that Chinese exporters find themselves competing against each other in cannibalistic price wars. Local government policies also motivate these internecine price wars.
Reason 2: China is still treated as a non-market economy (NME). For NME dumping cases, the benchmark of “normal value” is calculated by using data from a surrogate country, but the WTO’s Antidumping Agreement does not specify any criteria for determining which surrogate country is appropriate. Prior to the economic reform movement, China’s centrally planned economic system dominated all industry sectors. Over the last decade or so, this system has gradually shifted away from the socialist model toward a free market model. Today, the Chinese economy lies somewhere between the two and contains many “bubbles of capital-ism”—defined by Neeley (1992) as sectors in a centrally planned economy in which reforms have progressed to the point that all prices and costs faced by the producers in that sector are determined by the market.
However, many importing countries automatically treat Chinese export products as NME cases. In order to receive the market-economy case treatment, it is incumbent on Chinese producers to prove that inputs are bought and sold, and that labor is compensated at prevailing market rates. If they do not or cannot provide sufficient evidence that their products are made in the market-economy mode, the importing country will apply the surrogate country method to calculate the dumping margin of the products.
Reason 3: Many Chinese exporters do not have the capability or experience to defend themselves against AD charges, but relinquishing the right of self-defense against the charges simply encourages other countries to launch more AD investigations against China.
Another factor behind the large number of AD measures that have been enacted against Chinese exports is Chinese firms’ unwillingness to respond to dumping accusations and their general lack of knowledge about how to do so. Most Chinese export producers are medium or smallsized enterprises that lack the information and capability to deal with international trade disputes.
Reason 4: Chinese exports have been growing rapidly, with low-priced “Made in China” commodities significantly affecting less competitive domestic firms in importing countries; this motivates the countries to use AD strategies to protect local industries and prevent successful Chinese products from grabbing market share.
To minimize further economic losses from AD cases, the Chinese government and exporters will focus their efforts on activities designed to fix or ameliorate the issues that trigger the investigations. Here we offer some predictions about the nature of these activities.
Prediction 1: Chinese industry associations will be strengthened and improved as soon as possible so that firms can agree on baseline export prices for products and end the cannibalistic price wars among Chinese provincial exporters. A result of the economic reforms in China is that the government has relinquished its control of imports and exports to local enterprises and thus no longer dictates uniform export prices. This has created an administrative vacuum for pricing in the Chinese export sector. Exporters realize that pricing unions must be established to fill this administrative vacuum and protect their own interests. Accordingly, industry associations will play a growing role in deciding and monitoring the price levels of exports.
Prediction 2: If the pace of economic reform in China is maintained or accelerated, Chinese export producers will become increasingly more aggressive when confronted with AD investigations. Otherwise, responses will continue to be as passive as before. The Chinese government still controls the price-setting mechanism for some important products, such as gas, electricity, processed oil, and railway transportation. So an export producer that uses electricity as a significant input for its products has a relatively weak response to an AD charge because the government rather than the market determines the price on one of its key inputs. According to the agreement between China and the WTO, if a Chinese producer under AD investigation can clearly demonstrate that market economy conditions prevail in its industry with regard to the manufacture, production, and sale of that product, the importing WTO member shall use Chinese prices or costs for that industry to determine price comparability.
Prediction 3: More and more Chinese export producers will actively respond to AD investigations. Adverse experiences have taught Chinese businesses that they should not back away from confrontation when they are accused of dumping because failing to contest or appeal cases brings almost inevitable penalties. They have also realized that the best way to minimize AD lawsuit losses is to make every effort not to trigger investigations in the first place. To successfully avoid them, a quick response mechanism composed of government departments, import and export chambers of commerce, local foreign trade authorities, and other relevant organizations must be established. Many Chinese exporters are already coordinating with their relevant industry associations to establish early warning AD systems
that solve cases before they become lawsuits. Firms are also training themselves to follow market changes closely and identify potential AD cases early on. Because the Chinese textile industry is one of the largest targets on many countries’ dumping lists, the China Chamber of Commerce for Textiles has started to monitor the exports of member firms and maintains regular contact with foreign business offices, overseas law offices, and intermediary organizations to protect Chinese textile exports from AD investigations.
Prediction 4: The Chinese government will make full use of its WTO membership to resolve dumping issues by using its legal rights or by instigating retaliatory actions. China has suffered many trade sanctions from Western countries because of the 1989 Tiananmen Square political crisis. Since then, China has been seeking a way to separate politics from foreign trade issues. Attaining WTO membership status on November 12, 2001, provided it with the opportunity to legitimately focus on the protection of its international trade without being accused of political chicanery. The indications are that China is already making use of its new WTO member status. For example, during the four years immediately preceding its entry into the WTO, the government initiated only 11 AD investigations against foreign imports. However, during the first six months following its election to the WTO, China initiated eight investigations. In March 2002, when the US decided to impose an 8 to 30 percent tariff on Chinese imported steel products, China quickly retaliated by imposing a 24 percent additional tariff on US soybean oil.
According to Prusa (1999), in recent years new AD users have accounted for half the overall world total of these investigations. In fact, many of the heaviest accusers are countries that did not even have an AD statute a decade ago. It is possible these countries believe that precipitating AD investigations is the only way to defend themselves against other countries using the same process against them. China may have already adopted this perspective. The reasons why Chinese exports are so frequently involved in antidumping cases are quite diverse. The cost leadership strategy mandated by indigenous competitive advantages, cannibalistic price wars between provincial exporters, the treatment of investigations as NME cases, the unwillingness and lack of competency in responding to dumping accusations, and the ever increasing trade friction accompanying the surges in global commerce that have occurred over the last decade or so all help explain why China has been so targeted. It will not be easy to alter these factors in the short term. Moreover, China will still be habitually treated as an NME during the first 15 years of its WTO membership, which may even cause the number of AD cases against it to rise. To avoid further losses, Chinese enterprises and the
Chinese government will change their behaviors as follows: exporters will work closely with industry associations to avoid price wars; they will respond to AD investigations more actively than in the past; and the government will gradually transfer its role in the economy from market player to market watchdog and will act more aggressively to protect its foreign trade interests than it has been able to do in the past. In summary, although antidumping cases against Chinese exports may keep increasing in the foreseeable future, China will learn to fight back more aggressively and effectively.
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