NEW STUDY: The EU, Anti-dumping and China’s New Market Economy Status

CLICK HERE TO READ THE FULL STUDY ON CHINA’S NEW MARKET ECONOMY STATUS AND EU-CHINA TRADE RELATIONS IN GERMAN!

December 11, 2016 marks the 15^th anniversary of China joining the WTO. This also means that Article 15(a)(ii) of the Chinese accession protocol expires. From a Chinese point of view, the People’s Republic should therefore be treated as a country with market economy status (MES) in EU anti-dumping cases. This would make it more difficult for the other WTO member states to impose anti-dumping duties on Chinese products. In the EU, the handling of this situation has therefore not been without controversy. Less disputed, on the other hand, is the fact that China’s economic system is not a market economy. This, however, has little to do with awarding market economy status. The MES has so far been relevant for determining protective tariffs in the EU anti-dumping regulation. If the MES is to be abolished in the future, it will be crucial for the EU to retain effective anti-dumping instruments to protect EU firms against unfair competition – independent of the country of origin.

In November 2016, the EU Commission made a proposal to amend current anti-dumping regulations: Following the proposal, the differentiation between market economy status (MES) and non-market economy status is to be abolished. Instead, future anti-dumping procedures are to be carried out country-neutral. The Commission appears to be confident that protection against dumped export will be sufficient under the new regulation, too. The new regulation would allow for more leeway in imposing higher anti-dumping duties in case of “the existence of significant distortions” in the exporting country induced by state intervention.

The proposal has been submitted to the European Council and the European Parliament. But no agreement has been made public so far. A particularly sensitive issue is the compatibility of the proposal with WTO law. China has already announcedthat it will not make any compromise in this regard. Beyond these legal issues, there also is the question of economic effects, which may make it more difficult for the EU to address dumping of Chinese exports.

Figure 1: Chinese exports to EU member states

Source: cepii BACI world trade database and calculation ifo

EU-China trade relations: relatively speaking, dumping is a minor issue

China has become one of the major trading partners of the EU since the Chinese accession to WTO. In 2015, the bilateral trade volume amounted to around USD 521 billion, putting China in second place after the USA. The other way round, the EU is China’s largest trading partner worldwide. The 28 member states of the EU, however, boast very different production structures and specializations. Therefore trade relations between China and the EU member states are extremely heterogeneous. The same is true for the level of interest in regard to trade policy. Differences among member states became very clear during the debate on how to deal with the issue of China’s market economy status. Fact is though that China not being part of European production networks is inconceivable today.  This is shown by the high proportion of intermediate goods which the Chinese import into the EU, amounting on average to around 38 percent in 2014. For Germany it was 32 percent. In some Eastern European countries, such as Hungary or Romania, it was over 50 percent. Cost-effective Chinese intermediate goods offer a significant cost advantage for individual countries and sectors. Trade with China thus strengthens the competitiveness of local business sites. Nevertheless, the anti-dumping (AD) procedures of the EU against China between 2000 and 2014 increased from 28 to 50, accounting for approximately 47 percent of the total 108 EU procedures currently in place. This makes China the country with the most EU AD cases. Yet only three percent of total Chinese exports to the EU are affected. For individual sectors, this figure is higher: 10-15% in the metal sector for example. Chinese exports in this sector are also affected to a disproportionately high extent by AD procedures. It therefore is not surprising that the lobby against Chinese Dumping is especially strong here. This was demonstrated as well by protests of steel workers in Brussels in November this year.

Figure 2: Share of intermediate goods in imports from China, 2014

Source: cepii BACI world trade database and calculation ifo

Anti-dumping duties: effects not solely positive

The analysis by the ifo institute on behalf of Bertelsmann Stiftung shows that punitive tariffs for AD proceedings against China essentially fulfill their intended purpose at present: when duties are imposed on a certain good the good’s export quantity decreases on average by 29 percent compared with other export goods, while at the same time increasing export prices by 7 percent. Consumer prices will increase by more than 7 percent, since AD duties have to be added. This is an undesired side effect of punitive tariffs, since they are passed on in full to customers. Intermediary and finished goods thus become more expensive. For producers who rely on Chinese intermediate goods, production costs therefore increase. Consumers in turn have to face higher prices for consumer goods. Punitive tariffs may produce yet another adverse effect: They weaken the competition between Chinese suppliers, since less competitive Chinese exporters will exit the market. Those exporters remaining in the market become increasingly stronger as a result. In some sectors, Chinese exporters even broaden their exports after the introduction of punitive tariffs, as they partly fill the gaps left by their former competitors.

Figure 3: Share in Chinese exports imposed with AD duties, 2000-2014

Source: Bown(2016), cepii BACI world trade database and calculation ifo

Abolition of the market economy status: no surge of Chinese exports to be expected

If the market economy status should be abolished as a basis for determining anti-dumping duties against Chinese products, there could be two possible scenarios: in scenario 1, the same anti-dumping duties apply for Chinese exporters as they do for exporters who have already been granted market economy status under the current anti-dumping regulation. In this case, those Chinese exports to the EU that until now have been affected by anti-dumping duties, would increase by one percent or USD 150 million. That is just 0.03 percent of total Chinese exports into the EU in 2014 (USD 450 billion).

Scenario 2 is the extreme case that dumping can no longer be identified due to the change in the legislative situation, and therefore no anti-dumping duties are charged at all. If current anti-dumping duties would not apply anymore, Chinese exports of the products concerned in the EU would increase by 29 percent. This is equivalent to an export volume of approximately USD 4.3 billion – merely one percent of all Chinese exports to the EU (USD 450 billion).

So our study shows that even in an extreme scenario, no Chinese export surge is to be expected if China is not treated anymore on the basis of non-market economy status in future EU anti-dumping cases. In addition, the countries granting China market economy status (e.g. Australia) have sufficient restrictive and protective mechanisms against dumping.

Beyond the Market Economy Status: Continuing the struggle for reciprocity in EU-China relations

The results of our study show that the abolition of the market economy status as proposed by the Commission could be a reasonable step to modernizing current anti-dumping regulations. However, it will be crucial that there is enough room for determining anti-dumping duties, if competition is being distorted, e.g. through state intervention in price setting – as was the case with China in the past. The EU now has to meet the challenge to successfully complete the amendment of anti-dumping regulations, while at the same time ensuring compatibility with WTO law.

The market economy status issue might then be resolved for the time being. However, we should not forget that it was merely one piece of the puzzle of a much deeper lying problem in the economic relations between the EU and China: i.e. the lack of reciprocity. Distorted competition and discrimination against EU companies in China continues to exist – even 15 years after China’s WTO accession, there still is no level playing field.

With respect to China, the EU should call for reciprocity even more than before as an important basis for long-term stable economic relations. In the looming era of US President Trump, the USA will be a much more difficult economic partner for China than ever before. This means that in relations between the EU and China, the cards will be shuffled again. This could in turn strengthen the EU’s striving for competition on a level playing field vis-à-vis China.

CLICK HERE TO READ THE FULL STUDY ON CHINA’S NEW MARKET ECONOMY STATUS AND EU-CHINA TRADE RELATIONS IN GERMAN!

Readers note: An english version of the study will be available for download soon as well