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US Reaffirms China’s Non-Market Economy Status—What it Means

With President Trump headed to Asia for a two-week trip starting Friday, to visit Japan, South Korea, China, Vietnam and the Philippines, the National Council of Textile Organizations lauded the administration’s determination in reaffirming China’s non-market economy (NME) status for antidumping purposes, and called for aggressive U.S. enforcement to crack down on unfair trade practices.

“The evidence could support no other decision,” said Auggie Tantillo, president and chief executive officer of NCTO. “Properly defining China as a non-market economy simply confirms what every U.S. manufacturer already understands—China has a set of unfair and extraordinary advantages that allow them to displace investment, production and employment in our market.

The NCTO also encouraged Trump “to use his trip to Asia to reaffirm his commitment to enforcing America’s trade laws fairly, but resolutely,” Tantillo said.

The Commerce Department concluded this week that China remains a non-market economy country for purposes of assessing antidumping duties. According to trade law firm Sandler, Travis & Rosenberg, the action was immediately criticized by China, which has cases on this issue pending at the World Trade Organization against both the U.S. and the European Union.

China’s protocol of accession to the WTO allowed members to use calculations in anti-dumping proceedings involving Chinese products that are not based on the actual costs of Chinese producers if they can’t demonstrate that market economy conditions prevail in their industry. The U.S. has used this provision to automatically assign NME status to goods imported from China, which typically results in higher antidumping duties than would otherwise be the case.

STR noted that when this provision expired in December 2016, China asserted that WTO members would have to stop using NME-type methodologies with respect to Chinese goods. The U.S. and others, however, believe they could continue to use such methodologies as long as the petitioners show that market economy conditions do not prevail in the industry at issue. As a result, as part of its ongoing antidumping duty investigation of aluminum foil from China, the International Trade Administration conducted an inquiry into whether it should continue to treat China as an NME.

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In an Oct. 26 memo, the ITA determined that China continues to be an NME for antidumping purposes because it does not operate sufficiently on market principles to permit the use of Chinese prices and costs for purposes of antidumping analysis.

The ITA explained that at its core the framework of China’s economy is set by the Chinese government and the Chinese Communist Party, which exercise control directly and indirectly over the allocation of resources and do not seek economic outcomes that reflect predominantly market forces outside of that control. The government’s and the CCP’s legal and actual ownership and control over key economic actors and institutions pervades China’s economy, the memo noted, and authorities use this control selectively to affect the interaction of supply and demand and accordingly distort the incentives of market actors.

[Read more about Commerce action against China: Commerce Department Finds Unfair Subsidies on Polyester Fiber from China and India]

Meanwhile, China is expected to fortify the value of the yuan in conjunction with Trump’s trip.

Trump promised while campaigning that, if elected, he would name China a “currency manipulator” for artificially depressing the value of the yuan to make its exports more competitive. Since he took office, though, the Treasury Department has twice declined to do so because China has not met the necessary criteria.

Beijing has allowed the yuan to rise more than 5 percent against the U.S. dollar this year, after it plunged around 6.5% in 2016, thanks to tighter management of capital outflows and broad weakness in the greenback. On Friday, the yuan was trading at 15 cents to the dollar, with minor fluctuations over the last few months.

CNBC reported that currency strategists and traders expect the People’s Bank of China, which controls the exchange rate, to prop up the yuan. Some believe the currency will be made slightly stronger while others said they think it may move in either direction.

Gao Qi, a currency strategist at Scotiabank in Singapore, told CNBC the yuan is likely to see “a strengthening bias” against the dollar in the run up to Trump’s trip. “It will be a friendly sentiment.”

However, Sue Trinh, head of Asia FX strategy at RBC Capital Markets in Hong Kong, said Beijing is “apt to appease Trump…with currency appreciation to avoid being criticized for engaging in competitive devaluation for the purposes of boosting exports.”