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Global trade conflict looms over China's market status

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A container is loaded onto a ship at a port in China's Jiangsu Province. Disputes over anti-dumping laws could lead to a new trade conflict between China and the West.   © Reuters

Amid spiraling concerns about global growth, fresh wobbles in financial markets and threats by Donald Trump, front-runner for the Republican Party's U.S. presidential nomination, to impose punitive tariffs on Chinese exports, the last thing the world economy needs right now is a bruising new trade conflict between Beijing and the West.

     But that is what it may be about to get. China and the U.S. -- and quite possibly the European Union -- appear headed toward a collision that could further strain their already tense relations, trigger economic retaliation and create a giant headache for the World Trade Organization and the independent adjudicators charged with ensuring that its members abide by the rules of international commerce.

     The looming clash is over the methods used by China's two biggest trade partners to determine whether its exports are being "dumped" on their markets: that is, sold at excessively cheap prices that harm producers in the importing countries. Though the issues are highly technical, the dispute could affect billions of dollars worth of trade, spill over into the U.S. election campaign and divide the EU's 28 members down the middle.

Dumping on dumping

Anti-dumping laws, which are employed by many countries, including China, are a glaring exception from world trade rules that prohibit governments from unilaterally raising import tariffs. The laws allow for duties so high that they can eliminate all the profit on many basic products, and the mere opening of an anti-dumping investigation can cause trade in the relevant sector to dry up almost overnight.

     Advocates of anti-dumping policies -- mainly weak and troubled industries and their lawyers -- insist they are an essential defense against unfair foreign competition. Critics argue that they are a form of backdoor protectionism, enabling the authorities implementing them to act with impunity as judge, jury and executioner. Furthermore, they say, anti-dumping procedures are so complex and opaque that they amount to a dark art.

     In China's case, it is particularly dark because the U.S. and EU refuse to grant the country the so-called Market Economy Status in anti-dumping investigations that they award to many other WTO members. In practice, that entitles Washington and Brussels to calculate Chinese exporters' costs -- a key element in judging whether their products are being dumped -- on the basis of the costs of exporters of comparable products located in other countries. That allows a lot of latitude in setting anti-dumping duties; so much so that it has been estimated that they are as much as four times higher than they would be if China benefited from MES.

     China has complained bitterly about its treatment but has been powerless to do anything about it -- until now. Beijing says WTO rules oblige other countries to grant it MES automatically from the end of this year and has threatened to hit back if they do not. However, the U.S. insists it is legally entitled to continue denying China MES indefinitely and is urging the EU to do likewise.

     Which side is right? It is impossible to say, because the WTO's rules are highly ambiguous. On the one hand, they call for importing countries to grant China MES from December, provided it fulfills their national definitions of a market economy. On the other, they leave it to the importing countries to decide what those criteria are and whether China matches up, in effect allowing them to do whatever they choose.

Legal black hole

In short, there seems to be a large legal black hole. If the U.S. and EU continue to deny China MES after this year, Beijing will almost certainly launch a challenge in the WTO, accusing them of violating its rules. That would present the organization's trade disputes adjudicators with one of the toughest and most politically charged cases to ever come before them.

     As in most trade disputes, this one does not turn on legal niceties, but on raw politics and the influence of special interests. For China, gaining MES is a matter of national pride and prestige that is at least as important to its rulers as are the economic benefits to its exports, on which the country's dependence is in any case diminishing.

     Washington's stance, meanwhile, is heavily influenced by intense lobbying led by the steel industry and the labor unions, which is particularly hard to resist in a presidential election year, and by growing hostility to China in Congress, which is disinclined to grant Beijing any favors.

     In the EU, industries that have been sheltered by anti-dumping regulations are also lobbying hard against granting MES. They claim that doing so could cost Europe as many as 3.5 million jobs and 2% of its gross domestic product, while causing imports from China to increase by as much as 50%. These figures seem extraordinarily high, considering that only 2% of China's exports to the EU are currently subject to anti-dumping duties

     Politically and institutionally, the EU is divided. The European Commission, which oversees trade policy, appears to be leaning toward granting MES. However, the EU's Council of Ministers and the European Parliament, both of which will have a say in the eventual decision, are split between economically liberal northern and more protectionist-minded southern European states. Which way the balance will finally tilt remains an open question, though the recent closure of several European steel plants -- widely blamed on cheap Chinese imports -- cannot have worked in Beijing's favor.

     Some in the EU have more Machiavellian motives. They insist that MES is a bargaining chip that offers Brussels valuable leverage over China and should only be granted in exchange for concessions on trade. Such arguments have cut no ice in Beijing, which has made clear that it regards MES as its right and will react strongly if it is not granted this year.

Fog of law

     Almost lost in these maneuverings are strategic clarity and policy consistency. For the U.S. and EU to shelter behind legal ambiguities in order to perpetuate a particularly opaque form of trade protection sits decidedly oddly with their constant insistence that China should open its market further, adopt more transparent policies and adhere more strictly to global rules.

     Furthermore, the criteria by which the U.S. and EU judge whether countries have market economies are so broad and generalized that they are open to multiple interpretations. They have not prevented both powers from granting MES to Russia and Ukraine, neither of which appears unambiguously to be more like a liberal market economy than China. Indeed, if the EU's criteria were strictly applied, some of its own members might have difficulty meeting them.

     This seems a poorly chosen platform on which to take a stand against China -- and also a dangerous one. If Beijing is denied MES, its response may well not be limited to bringing a case in the WTO. It could decide to step up its own anti-dumping actions against U.S. and EU exports -- as it has done in past trade conflicts -- and to exploit legal loopholes in WTO rules to discriminate against them and against American and European companies operating on the mainland. That in turn could draw Washington and Brussels into a cycle of tit-for-tat retaliation.

     The consequences of such a standoff between the world's three largest trading powers could be politically destabilizing and further sap confidence in the global economy. There would be no winners from such a confrontation -- except, of course, for the highly paid lawyers jousting over how to interpret world trade rules at the WTO's headquarters next to the placid waters of Lake Geneva.

Guy de Jonquieres is a senior fellow at the European Centre for International Political Economy, a Brussels-based think tank, and formerly a journalist with the Financial Times.

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