More than a decade after it launched market-oriented reforms, China has become the world's largest anti-dumping target - largely because it has been labelled a "non-market economy."

This paradox, amid rising trade frictions worldwide, needs to be addressed within the World Trade Organization (WTO) framework.

WTO records show that since the organization was founded in 1995, 308 anti-dumping charges, mainly from the United States and the European Union (EU), have been levelled against Chinese exports. The country is now defending a seventh of the world's overall anti-dumping cases.

By defining China as a non-market economy, the US and EU anti-dumping rules refuse to recognize China's domestic costs of production. Instead, they use costs of production in a third "surrogate" country to calculate the so-called "normal value" of Chinese exports.

The use of a surrogate, usually an emerging economy such as Turkey or Mexico where material and labour costs are much higher than in China, often means Chinese exporters are deemed to be selling below normal value. As a result, they become subject to tariffs that in some cases exceed 100 per cent.

"There are many ways to assess price, and the surrogate measure is the most unfavourable, resulting in a large number of unreasonable rulings," said Fu Donghui, a veteran lawyer specializing in anti-dumping cases.

It is "unthinkable" to many Chinese firms that their products, which already have a sound profit margin factored in, can be accused of selling below cost, he said.

Experts suggest China should try to address its status as a non-market economy under the WTO dispute-settlement mechanism.

China agreed to be treated as a non-market economy in dumping cases for 15 years to gain entry to the WTO. It has since seen its status used to justify myriads of anti-dumping charges against Chinese products.

"The concession did give the United States and EU a handle to invoke the surrogate measure, but as a prerequisite there should be clear and impartial criteria on what a market economy is," said Li Yushi, deputy director of the Chinese Academy of International Trade and Economic Co-operation.

US and EU market criteria are in some ways biased against China, he said. "Their division between 'market' and 'non-market' economies is not based on universal norms but their political and economic interests."

Li noted the EU and the United States have granted market status to Russia and some Eastern European countries because their markets have opened wider to the West - although these former Soviet members started market reforms much later than China.

By joining the WTO, China wanted to free up its domestic market and establish wider trade links with international partners under recognized and reciprocal rules, said Li.

"But the discriminatory use of the market economy criteria in dumping cases has distorted many trade activities and become an obstacle to free trade," said Li.

How to establish a fair and unbiased criteria for market economy status will prove a litmus test for the WTO's dispute-settlement mechanism.

In every anti-dumping case, Chinese firms have to prove that their operations are fully market-oriented to escape extra tariffs. To do so, they have to have their cost structures recognized in anti-dumping investigations, incurring legal fees of up to US$200,000 in the process. These costs are a burden even for a medium-sized company.

In the United States, where dumping rules are tougher, Chinese companies are denied market treatment as long as one company in the industry receives some State support.

The best Chinese exporters can hope for is a separate ruling which gives qualified Chinese firms an anti-dumping tariff lower than that on the whole industry.

"Should China be granted full market status and domestic prices be recognized, Chinese exporters will experience far fewer problems," said Fu.

In an anti-dumping action against Chinese lighters which closed last month, the European Federation of Lighter Manufacturers that launched the action withdrew its charges shortly after EU officials verified the domestic cost of Chinese lighter makers.

A plastic lighter is sold for one yuan (12 US cents) at home and 2 euros (US$1.77) or so in Europe, which is still cheaper than similar European-made lighters sold for four or five euros (US$3.50 or US$4.40).

As global economy stagnates, anti-dumping actions are often launched at the request of local companies seeking to reduce pressure from low-priced Chinese imports, said Fu.

He said the strict system of deciding market status case-by-case does not suit China's fast developing market system.

A Beijing Normal University report commissioned by the Ministry of Commerce concluded that 69 per cent of China's economy was market-based by 2002 - above the recognized minimum level of 60 per cent for a market economy.

Some 63.37 per cent of China's GDP growth was created by the non-State sector in 2001, according to the report.

Of State companies, 89.4 per cent make decisions free of government influence and have introduced a modern corporate system.

The government's direct intervention in the economy has reduced substantially and the market plays a dominant role in financing, land use and labour services.

An ever-improving market environment and legal system has also made China a lucrative destination for foreign investors, the report noted.

China's Constitution, in an amendment in 1993, stipulates that the country should adhere to a market economy system.

"A market economy status is not the trump card that will overcome anti-dumping charges, but it will still be important in making the anti-dumping actions against Chinese products fairer," said Li Xiaoxi, an economics professor at Beijing Normal University and head author of the report.

He said China's non-market economy status is the result of compromise rather than objective assessment.

"It is understandable that some countries, out of self-interest, do not want China to have full market status," Li said. "But with the constant development of China's market system and enhanced understanding between China and other WTO members, China's market status should be a negotiable issue."

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