- Beijing's free-market credentials face year of scrutiny
- European producers fear market-economy status for China
European Union policy makers are poised to kick off deliberations to determine whether EU industries ranging from steel to solar can keep relying on import tariffs to fend off aggressive Chinese competitors, the opening salvo in a political and economic battle due to last all year.
The European Commission, the EU’s executive arm, will hold an initial debate Jan. 13 about whether the bloc should recognize China as a market economy starting in December. Such a step would make it more difficult for European manufacturers such as ArcelorMittal and Solarworld AG to win sufficiently high EU duties meant to counter alleged below-cost -- or “dumped” -- imports from China.
The talks will pit free-trade governments in northern Europe against more protectionist ones in the south, put Europe on a possible track that the U.S. is staying off and produce a political verdict on whether communist China has come of age economically 15 years after it joined the World Trade Organization. In addition to being a political prize for Beijing, market-economy status would be a business boost for China, whose growth has slumped to the weakest since 1990 and which suffered a 10 percent fall in stocks last week.
“This is one of the hottest issues on the agenda,” Jo Leinen, a German member of the European Parliament who chairs its delegation for relations with China, said by phone from Saarbruecken, Germany, on Jan. 7. “It’s a hot potato. The Chinese are pushing for market-economy status and interests are divided in Europe.”
The matter combines top-level political calculations with tricky economic and legal considerations. With the EU struggling to bolster economic growth and keep Greece in the euro area, leaders across Europe have courted China for investment in infrastructure and orders of goods such as Airbus Group SE planes.
While it’s the EU’s No. 2 trade partner behind the U.S., China is grouped with the likes of Belarus, Kazakhstan and Mongolia in seeking market-economy designation by Europe and faces more European anti-dumping duties than any other country. The import levies cover billions of euros of Chinese exports such as stainless steel, solar panels, aluminum foil, bicycles, screws, paper, kitchenware and office-file fasteners, curbing competition for producers across the 28-nation EU.
Market-economy status for China would signal more European trust in Beijing by ensuring the EU uses Chinese data for trade investigations affecting the country. The bloc currently uses other nations’ figures to calculate anti-dumping levies against China on the grounds that Chinese state intervention artificially lowers domestic prices and makes them an unreliable indicator of a good’s “normal value.” This practice results in higher EU duty rates against Chinese exporters and -- by extension -- more protection for European manufacturers.
Under the agreement that led China to join the the Geneva-based WTO in 2001, WTO members pledged to scrap in December 2016 a shortcut for applying a non-market economy standard in calculating anti-dumping duties on China. At the same time, this development won’t grant China blanket status as a market economy.
Burden of Proof
“There will be a change in the burden of proof that favors China,” said Jacques Bourgeois, a senior adviser at law firm Sidley Austin LLP in Brussels. “China’s trade partners will have to demonstrate that, in a particular Chinese industry, domestic prices are unreliable because they don’t reflect normal market circumstances.”
Within the global framework are the EU’s own rules -- specifically, five criteria -- for determining whether trade partners can be considered a market economy. The bloc conducted an initial assessment of China’s eligibility in 2004 and concluded the nation fulfilled just one of the five conditions -- a requirement for an absence of state-induced distortions in the operation of enterprises.
The last EU market-economy-status -- or MES -- report was shared with China in 2008 and no consultations on the matter with Chinese authorities have taken place since 2011. In an August 2015 report, the commission said it “remains willing to discuss further progress made by China toward fulfilling the MES criteria.”
China argues that the terms of its WTO accession require recognition of the country as a market economy in dumping cases beginning in December. The U.S. government disagrees and isn’t planning a policy change, risking a Chinese complaint to the global trade arbiter.
In Europe it falls to the commission to decide whether to propose MES for China. Europe’s national governments and the EU Parliament would have to approve any changes to the bloc’s treatment of China in dumping cases.
EU trade chief Cecilia Malmstroem, in charge of steering the matter through the commission, has signaled openness to recognizing China as a market economy while saying the consequences of such a step for European industries need to be assessed.
“The commission is undertaking, through an internal evaluation as well as an independent study, a careful analysis of the economic impacts of a possible change in method to calculate dumping in relation to China, especially on jobs,” Malmstroem said in a Dec. 15 written reply to a question from the EU Parliament.
More than 25 European industry associations, including a group representing steel producers, have banded together to argue in favor of the status quo. The alliance hailed a study released last September by the U.S.-based Economic Policy Institute alleging that unilateral recognition of China as a market economy by the EU would put as many as 3.5 million jobs in Europe at risk.
The EU Parliament’s Leinen said that steel and ceramics producers in his constituency are “highly alarmed” about the prospect of China winning market-economy status and that any EU decision to grant it must be accompanied by a “Plan B” offering the option of “equivalent” trade-defense measures against the country.
Bourgeois of Sidley Austin held out the possibility of a grand European compromise on the issue.
“I think that the EU will have to recognize China as a market economy in dumping cases and that, because the matter is politically sensitive in Europe, the bloc may well reserve the right to resort to non-market-economy treatment in particular cases where it thinks it can prove that Chinese exporters don’t fulfill certain conditions,” he said.