Is China a Market Economy?

2016 is set to be an important year for the People’s Republic of China’s external trade, because Article 15 (ii) of China’s WTO Accession Agreement will expire in December. The issue of China’s market economy status (MES) has been described as “the mother of all trade issues now”. For the EU, I recommend a pragmatic approach granting China Market Economy Status, but introducing specific conditions to avoid negative impact on EU economies.

Chinas accession agreement to the WTO included some provisional conditions, among them Article 15 (ii), set to expire in December 2016.

“The importing WTO Member may use a methodology that is not based on a strict comparison with domestic prices or costs in China if the producers under investigation cannot clearly show that market economy conditions prevail in the industry producing the like product with regard to manufacture, production and sale of that product.”

This provides justification and a basis for treating China as a non-market economy in anti-dumping investigations.

Market Economy Status (MES) and Dumping

“Dumping is, in general, a situation of international price discrimination, where the price of a product when sold in the importing country is less than the price of that product [or the cost of its production] in the market of the exporting country.”

Treating a country as a market economy means that the normal price used to evaluate whether certain products are “dumped” is their price in the domestic market. If market distortions in the domestic market are present, these prices, however, are not a fair basis for comparison. Therefore, other ways of comparing prices are used. The EU currently uses third country prices for determining the normal price when dealing with China.

Market economy status, simply put, determines the burden of proof in anti-dumping proceedings. Currently, the Chinese producer has the burden of proof to show that market conditions prevail in their industry. If the EU were to treat China as a market economy, the burden of proof would fall on European producers. They then have to show that this specific industry in China is not organized according to market principles.

China is target Number 1 of anti-dumping proceedings worldwide, as well as by the EU. While the absolute number of anti-dumping cases is small, their reach and symbolic importance is high. Because Chinese producers know that their products are likely to face anti-dumping proceedings, these products are often not exported/exported at a higher price.

Hot Issue for Chinese Leadership

The granting of MES is therefore a major issue for Chinese leaders. Wen Jiabao, then China’s Premier already in 2009 stated: “The EU should recognize China’s market economy status as early as possible,” and even linked MES to investments during the Eurozone crisis.

Moreover, granting China market economy status is usually a precondition for China to enter into a Free Trade Agreement (FTA) with a trading entity. Granting China MES could thus be a first step to a China-EU FTA.

Until recently (2014/2015) most commentators read the WTO accession agreement such that China would automatically be granted market economy status in 2016:

“Once China has established, under the national law of the importing WTO Member, that it is a market economy, the provisions of subparagraph (a) shall be terminated provided that the importing Member’s national law contains market economy criteria as of the date of accession. In any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession.”

The interpretation of this provision has come into question recently.

What should the EU do?

The European Commission has just decided to postpone its decision regarding granting China MES to the second half of 2016. Because this is such a hot issue for Chinese leaders, not granting China market economy status at this point would strain relations between China and the EU significantly.

Additionally, information about the Chinese economy is much more easily available to European companies than in 2001. Thus, they have an easier time proving non-market conditions in specific industries. Moreover, those industries with the most government intervention in China tend to also see many government subsidies. The EU could thus shift some of its anti-dumping investigations to anti-subsidy ones.

At the same time, however, China does not fulfill the technical criteria for treatment as a market economy status, as set forth by the EU. But then again, neither does Russia, which is recognized as a market economy. Estimates predicting that a unilateral granting of market economy status would decrease EU GDP by 1 to 2%, are likely to be overdrawn and overstate the impact of MES.

My Recommendation

I would therefore recommend something akin to Market Economy Status light. Ideally, this would be a coordinated policy between the EU, US and Canada The EU should also carry it out alone, if necessary. While granting China market economy status would put the burden of proof on the European side, the impact on European producers could be alleviated. Important measures would include treating missing information from China like negative information and to have a negative list of industries that is in effect for at least 3 (better 5) years or until proven otherwise.

This would ensure that there is no bad blood between China and the EU over the market economy issue, while still protecting European industries from Chinese price dumping. It would also encourage Chinese economic actors to provide reliable, up-to-date information.

Having a clear-cut, proactive strategy also makes sure that there are no bad surprises coming our way in the near future. Trade lawyers disagree on the interpretation of Art. 15. There is a real chance that WTO dispute settlement lawyers would side with China, and demand that China be treated as a market economy for anti-dumping purposes. The EU would then no longer have the bargaining position to introduce important measures as described above.

If you are interested in this topic, we recommend also reading up on these further blogs:

http://www.blog.rielcano.org/en/should-the-eu-grant-china-market-economy-status-machiavellian-approach/

http://blogs.wsj.com/brussels/2014/12/11/malmstrom-no-automatic-market-economy-status-for-china-in-2016/