Free Trade

China Hankers to be a Market Economy

  • Why it matters

    Why it matters

    If China gains market economy status, it would be difficult to impose punitive tariffs on the country in response to its alleged dumping of prices.

  • Facts

    Facts

    • After completing a 15-year transition period in the WTO on December 11, China could be due for market economy status.
    • Upon China’s admission to the WTO, other members made it clear that they would not use China’s state-controlled prices because of alleged dumping.
    • The European Commission has proposed altering global trade policy instruments to steer clear of having to make a decision on the issue.
  • Audio

    Audio

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China stock market
China wants to be recognized as a market economy. The E.U. is holding its breath. Source: dpa

While U.S. President-elect Donald Trump declared the painstakingly-negotiated Trans-Pacific Partnership dead even before taking office, China’s ruler Xi Jinping traveled to Peru precisely to deliver a fiery speech advocating for free trade.

According to China’s state-run news agency Xinhua, China is already a pioneer in aerospace, biotechnology, table tennis. The president’s latest speech suggests it wants to add global free trade to that list.

Mr. Xi spent half an hour outlining his vision of an interconnected Asian-Pacific economic region with 3.5 billion inhabitants and a third of the world’s global economic output – one that would be in contrast to the usual Western design, without the bothersome pressure to comply with working standards or the protection of intellectual property.

Added to that, China hopes to finally be officially recognized as a market economy after joining the World Trade Organization, the WTO, in 2001.

However the European Union may be standing in its way.

Washington's Economic Policy Institute calculates that up to 3.5 million jobs could be at stake if China officially became a market economy.

It was always the promise. Upon joining, China was told it could gain “market economy” status after completing a 15-year transitional period. Now a major global power, China takes for granted that this promise will automotically fulfilled after the transitional period passes on December 11.

Many countries in the WTO have already agreed to back China. Members of the 28-nation European Union, however, are hesitating.

It’s a complicated business that comes down to whether or not China is subsidizing some of its exports. Upon China’s admission to the WTO, other members made it clear that they would not use China’s state-controlled prices to judge whether or not it was dumping exports in foreign markets. Surrogate prices have been used to reflect charges free of state subsidies.

Market economy status would make it difficult to impose punitive tariffs on China in response to dumping prices for products such as steel, ceramics or aluminum. Members would have to take Chinese export prices at face value, making it much more difficult to compete with cheap Chinese exports.

It leaves the European Union worried about jobs. Washington’s Economic Policy Institute calculates that up to 3.5 million jobs could be at stake if China garners the official status.

Truth be told, the Asian country would not be a shining example of a market economy. Entire industries in China are controlled by the directives of political officials. What if state-run steel producers Baoshan and Wuhan Steel were merged together, for example, to form the world’s second largest producer of steel?

As a solution, the European Union is thinking of shifting the burden of proof. China would likely have to prove that it is a market economy under each WTO member country’s domestic law in order to gain the status, and establishing that it is not dumping specific products.

Brussels is also trying to avoid the issue of “market economy” status altogether. The European Commission has proposed altering global trade policy instruments to keep the status from becoming a talking point. Berlin is leaning towards such a solution.

Beijing won’t be happy about that. State-owned newspaper China Daily has just written, “For 15 years, Chinese companies have suffered under the WTO’s discriminating policies.”

 

This article originally appeared in Handelsblatt’s sister publication WirtschaftsWoche. To contact the author: wirtschaft@wiwo.de

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