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Robert A. Manning: G-7 divide on market status for China

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A worker walks past a pile of steel pipe products at Youfa's plant in the Chinese city of Tangshan, Hebei province, in this Nov. 3, 2015, file photo.   © Reuters

A quiet storm is brewing that may harm an already fragile European economy, illuminate a trans-Atlantic divide on China policy, and force difficult choices for Japan. The issue is whether or not to grant "market status" to China.

     A decision on the issue is being forced by the expiry in December 2016 of a provision in China's accession to the WTO 15 years ago that declares it a non-market economy. That designation provides the legal basis for many of China's trading partners -- most notably the EU, U.S., and Japan -- to impose anti-dumping duties on Chinese goods like steel and cement. The consequences of giving China market status could cost several million jobs in Europe and the US.

     There are currently 52 anti-dumping measures against China in the EU in major industries like steel, chemicals and ceramics. In the U.S., there are a host of anti-dumping cases ranging from the steel and aluminum industries to solar panels. Not to mention likely Republican presidential nominee Donald Trump calling for 45% tariffs on Chinese goods. If China is granted market status, the legal tool of anti-dumping measures in regard to Chinese exports will need to be redefined and may be greatly diminished.

     A number of countries have accepted that China now has a market economy. But most major economies - the U.S., EU, Japan, India, Canada, and Mexico - do not. Some countries, like Australia, are negotiating the issue with Beijing. China argues that with the expiry of the non-market provision, it should automatically be granted market status for its economy. But the legal language is ambiguous at best. It is silent on whether automatic market status follows.

     But the language of the WTO provision puts the burden of proof on China and/or Chinese firms to demonstrate they operate based on market prices. While there is a vibrant, fast-growing and productive private sector in China, major heavy industries, the majority state-owned, operate with a host of direct and indirect subsidies - from government-directed cheap loans, to land grants and price subsidies for inputs.

     Cecilia Malstrom the EU's trade chief has said that she sees no automaticity on the expiration date, and told one interviewer that "you cannot say today that they (China) fulfill all the criteria."

     China has to establish market status under the national law of the importing WTO member. For the EU that means China must meet several criteria, including: a low amount of government influence in the allocation of resources and in decisions of enterprises; absence of distortion in the operation of the privatized economy; an effective legal framework for the conduct of business, and the existence of a genuine financial sector. The US would insist on similar criteria.

     China's economy has clearly evolved in a market direction over the past 15 years - today most of its growth comes from the private sector. But the dead weight of what are called "zombie industries" fed by state support continues. China's financial system has also evolved substantively. But few would argue that China meets the objective criteria for market status, certainly not enough to persuade the EU Parliament, European national governments or the U.S. Congress to change their laws to reflect that status.

     Already, European and U.S. industry groups are mobilizing opposition. AEGIS Europe, an alliance of 30 manufacturing industry associations said in a statement this month that, "Europe cannot grant Market Economy Status (MES) to a country that does not merit it." With EU growth tepid already, some think-tank estimates project that granting China MES status would cost well over one million jobs and a 1-2% decline in annual growth.

     Similarly, US steel, aluminum, and textile industries are stepping up pressure on the Obama administration to oppose MES for China, arguing it would costs tens of thousands of jobs. The US Commerce Department has responsibility for making a determination on the issue and recommending action to the President.

Trans-Atlantic disconnect

     While private industries impacted by Chinese exports on both sides of the Atlantic share similar concerns, there is precious little dialogue about China policy between the U.S. and EU - nor with Japan or other major Asian governments.

     There is a potentially dangerous dearth of trans-Atlantic dialogue on China at the most senior levels of policy-making, and even less trans-Atlantic discussion with Japan and other major Asian economies.

     Europeans have tended to have a one-dimensional view of their policies toward China - it's singularly focused on business opportunities and exports. This is a source of irritation to many U.S. officials and analysts. In a major interview in The Atlantic magazine, President Barack Obama complained about "free-riding" allies in Europe.

     This charge is frequently leveled against Europeans who often seem to view larger political and security issues in Asia as something the Americans are responsible for -- a de facto division of labor. When pressed, EU officials concede that at the Summit level, Asia often gets crowded out of the agenda by other priorities, Russia, the Middle East, climate change, etc.

     It was viewed as a rare major sign of trans-Atlantic solidarity, when the EU issued a statement in support of freedom of navigation in the South China Sea last year. Some in the U.S. fear that Europeans, perhaps fearing Chinese "punishment" may go soft on Beijing on the MES question.

     What lies ahead? Absent the EU and U.S. granting market economy status to China, Beijing will almost certainly take its case to the WTO for dispute resolution. Nasty legal battles are likely to ensue. It is possible that compromise formulas will be worked out, phasing in MES on an industry-by-industry basis as Chinese market reforms gradually move forward.

     Prime Minister Shinzo Abe has hinted at putting Asian issues on the already crowded G-7 agenda. In light of the MES and South China Sea issues, this appears a wise move. The G-7 could be a useful forum for the U.S., EU and Japan to think through a coordinated response to trade and investment with China. The prospect of a Bilateral Investment Treaty (BIT) with China looms for all three. To the extent that all three can agree on minimal requirements for both market economy status and a bilateral investment treaty with Beijing, the global economy and reform in China will both benefit hugely.

Robert A. Manning is a senior fellow of the Brent Scowcroft Center on International Security at the Atlantic Council. He served as a senior counselor to the U.S. undersecretary of state for global affairs from 2001 to 2004, as a member of the U.S. Department of State Policy Planning Staff from 2004 to 2008, and on the National Intelligence Council Strategic Futures Group from 2008 to 2012.

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