China and the Elusive Market Economy Status

new China

The year began with US President-elect threatening to cite China as a currency manipulator and to impose a tariff on Chinese imports.   Neither step was taken.  The US withdrew from the Trans-Pacific Partnership, which had been negotiated for several years and was an important economic component of the US “pivot to Asia.” 
 

Into the summer and early fall, top administration officials reportedly saw encouraging signs.  Treasury and Commerce secretaries were highlighting constructive developments.  President Trump himself boasted of $250 bln in new deals with China from is recent visit.  However, more recently, the tone has soured.
 
Malpass, the Under-Secretary of Treasury for International Affairs was quite candid in a recent interview carried in the Financial times.  Malpass was explicit:  China is not moving toward a market economy.  This has stalled the Comprehensive Economic Dialogue, which is the Trump Administration’s version of the structured bilateral talks that began under Bush and continued under Obama.

The role of state-owned enterprises, and stalled, if not reversed, price liberalization is frustrating, and this serves to strengthen the hand of the trade hawks in the administration, like Navarro and Lighthizer.   The Commerce Department has conducted investigations into steel and aluminum trade on national security grounds, without conclusion.  Concerns about retaliation appeared to have prevent stronger action.

Even in the effort to isolate North Korea, the US has been careful about antagonizing China.  China’s declaratory policy is to resist what it calls the extraterritorial intervention.  Chinese banks are not subject to US law so sanctions imposed on Chinese companies are not legitimate.  Still, the US applied sanctions to one of China’s smallest banks Bank of Dandong).  China has also moved against the few Chinese executives the US has identified as helping North Korea.
A battle that does not involve the US directly is heating up at the World Trade Organization.  China is arguing that under the 2001 accession to the WTO, China should automatically be considered a market economy.  The market economy status (MES) is important for China.  It would make it for difficult for countries to demonstrate dumping accusations against China.
Although the WTO rules are for market economies there are exceptions.  Some central European countries joined the WTO predecessor during the Communist era.  Other members need to be protected from the risk that non-market economies could sell their products at unrealistically low prices.  For market economies selling goods cheap abroad than charged domestically would be a tell.  However, for non-market economies, prices available in a third market can be used.
President Trump is reversing many policies of the Obama Administration.  However, it is retaining its predecessor’s position that China does not qualify as a market economy.  The US reiterated its stance last week on behalf of the EU in a dispute with China.  The WTO will have to judge, and the trade hawks in the US Administration who have been critical of the WTO see it as key test for the conflict resolution mechanism.  If the WTO recognizes China as a market economy, it risks increasing US-China trade friction.

In about two weeks, the EU is expected to adopt a new set of anti-dumping duties rules.  The EU intends on including data containing data and analysis of market distortions.  The EC will provide these reports that then can be used to help determine the applicable methodology of calculating the duties and as evidence for industry complaints.  The criteria dovetails with the five used so far to determine that China did not qualify for market status.   The steel industry may be the first sector to see anti-dumping duties under the new regime.

Germany, France, Italy and Spain account for 2/3 of the employment in sectors/products that are currently subject to EU anti-dumping duties.  These include iron, steel, ceramic, building material, electronic equipment and mechanical products.  Of course, some industries that use some of these products as inputs prefer lower duties on Chinese products.   Anti-dumping duties aid competing producers rather than consumers (not just households).
 

The EU’s new rules will be challenged at the WTO.  Reports suggest that Russia, which was granted MES by the EU 15 years ago could now face higher duties and sides objects to the new rules.  In some ways, the EU’s new rules, which were formally adopted yesterday, bypass the MES debate by focusing on “market-distorting practices.”  It introduces new elements into consideration, including environmental and labor factors, which current WTO have not integrated in doing so, the burden of proof shifts from the foreign exporter to the EU.  As Russia fears, the new rules mean that more companies and countries may face higher duties.