China and the WTO: Toward the Fateful Date of Dec. 11, 2016

China and the WTO: Toward the Fateful Date of Dec. 11, 2016

On May 10, Vytenis Andriukaitis, a member of the European Commission (EC), stated in his address to a European Parliament plenary session in Strasbourg that «China is not a market economy, by any standards».

The next day the EUobserver in Brussels reported that the EU does not have a unified stance on whether to grant China market economy status. The United Kingdom, Netherlands, Finland, Sweden and Denmark, and Germany are all in favor. The strongest opposition to granting China the status of a market economy is found in Italy. 

But meanwhile Beijing is intently watching as two transoceanic partnerships – one in the Pacific and another in the Atlantic – are being created. The Americans are spearheading the formation of these two giant integrative blocs, and they are doing so on one hand in order to strengthen their own global trade position, and on the other – to prevent China, Russia, and other large, non-Western countries from bolstering their situations in a similar manner.

The Americans are especially worried about a stronger China. By creating the Trans-Pacific Partnership (TPP), Washington hopes to shut China out of markets in the neighboring countries where Beijing does much of its trade (Japan, South Korea, Taiwan, Australia, New Zealand, Vietnam, Singapore, and the Philippines).

How is Europe a more important trading partner for China than America?

With the help of the Transatlantic Partnership (TTIP), Washington wants to wrest the European Union (an alliance of 28 countries) away from China. Yet for China the EU is just as important a trading partner as the US. Although the European Union and the US share first and second place in terms of their overall volume of trade with China, Europe is a much more significant import partner for China than America.

When it comes to the European Union’s foreign trade, China also takes top honors (it is the biggest source of imports and second biggest destination for exports). In terms of their total trade with the EU, China and the US are pretty evenly matched.

Europeans are good at math and understand that the creation of the TTIP will provide them with only ephemeral benefits. The increase in exports headed for the US, the creation of additional jobs, the improvement in the trade balance of a unified Europe – these are the empty dreams upon which Washington is basing its propaganda. But the loss of China as a trading partner, plus the resulting unavoidable, direct economic toll, is something quite real. In particular, China surpasses all other EU partners in purchases of machinery and equipment.

China supports Europe’s leadership in the production of many kinds of advanced technical products and keeps European machine-building companies busy. Although officials in Brussels are doing all they can to prepare a draft agreement to establish the TTIP in 2016 and then get it signed, there is powerful opposition to this partnership in many European countries. The European business community is retaining its tight grip on China.

What lurks behind the academic dispute about the «market» or «non-market» nature of China’s economy?

The EU currently has 68 anti-dumping measures in effect, 51 of which are levied against Chinese goods. These duties can exceed 65% and are imposed on a wide range of products, ranging from steel to solar panels.

The rationale for these anti-dumping duties is that Beijing is violating the principle of «fair competition» by providing state support to its exporters. Government officials claim that this is a «non-market» economy, which gives them an excuse to levy higher import duties on Chinese goods.

On Jan. 13 of this year, the authorized representatives of the EU countries discussed whether to grant China market economy status, a move they seemed inclined to support. Back on Dec. 11, 2001, when the WTO’s Protocol on the Accession of the People’s Republic of China was signed, China was given up to 15 years to restructure and create a «market» economy. Thus Beijing is hoping to win recognition by Dec. 11, 2016 from its leading trading partner – the European Union – of the Chinese economy’s market qualities. And then the practice of imposing anti-dumping duties on Chinese goods will be abandoned.

But this will be a difficult year for China. It is possible that the government will instead have to increase its support of many sectors of the nation’s economy. Beijing will try to couple this with a simultaneous surge of activity on the diplomatic front. The media is also suggesting that China could ramp up the scale of its investments in the European economy, as payment for the decision that China needs.

The outcome of the meeting in Brussels on Jan. 13 has clearly alarmed Washington. It saw Europe’s expected recognition of the market nature of the Chinese economy as a significant risk to the creation of the TTIP. Not to mention the fact that such a decision could deal a blow to US exports to Europe. Back in December, the Financial Times reported that Washington had taken preemptive action – strongly «warning» Brussels not to grant China market economy status.

At the end of the last decade the Americans verbally recognized the market nature of the Chinese economy. However, this was never legally documented, and from time to time, the US has introduced countervailing duties against many Chinese goods. Additional duties have been assessed on many types of products coming from China, including solar panels, wind-powered generators, coated paper, steel sinks, citric acid, various types of pipes including products for the oil industry, aluminum wire and extrusions, etc. Between 2007 and 2012, the US Dept. of Commerce introduced countervailing duties on Chinese goods 17 times. Over $7 billion of the products subjected to additional tariffs are exported each year on average. In 2012 China was forced to appeal to the WTO court to get Washington to revoke the unreasonable trade barriers. In 2014, the WTO court ruled in Beijing’s favor. The WTO decision states that Washington could not legally prove that the Chinese exporters are state agencies. For this reason, the so-called countervailing duties could not be imposed against those companies. In other words, the WTO court essentially recognized that China has a market economy.

This entire story is very reminiscent of the events surrounding the decision to grant the yuan reserve currency status. In early 2015, Washington issued a stern warning that the yuan would not be awarded such status. But on Nov. 30, 2015 the International Monetary Fund decided to include the yuan in its basket of reserve currencies.

For the rest of the year the issue of the status of the Chinese economy (is it «market» or «non-market»?) will dominate the relationships between China and the EU and the US and the EU. If China wins its new status during that period, it will find it easy to challenge the US grip on the European market and then become the EU’s biggest trading partner. However, this will only happen if Washington is unable to foist the transatlantic partnership agreement upon Europe. If China is not awarded the official status of «market economy» by December 2016, this will raise the tricky question of the legal basis for China’s remaining in the WTO. Time will be the decisive factor here.

Events of recent days prove that the trade conflicts between Beijing and the West have become more inflamed. On April 18 the ministers and trade officials of more than 30 countries gathered for a meeting organized by Belgium and the OECD. At the meeting they discussed the problem of overcapacity in the global steel industry, which is triggering a drop in prices for ferrous metals and doing serious damage to steel businesses in Western Europe and the US. China took part in the meeting but was raked over the coals by representatives of the West, who demanded that Beijing reduce its capacity and stop subsidizing its ferrous metal industry. The US delegation was responsible for the loudest accusations at the meeting. It is crystal clear that Washington is trying to scrape together a unified Western front to fight China’s «non-market» trade expansion. So far nothing is working. But as the fateful date of Dec. 11, 2016 nears, the trade conflicts between China and the West will only heat up, and the US will pour oil on that fire trying to undermine trade relations between Europe and China.

UPDATE. It became known that on May 12 the European Parliament voted overwhelmingly against granting China the market economy status. Once again, the non-market status of Chinese economy can be used as a weapon by trade protectionists.