EUobserver opinion: EU should not rush into granting China market economy status

When China became a member of the World Trade Organization in late 2001, the expectation was that by 2016 its economy would be based on market principles. This turned out to be an illusion; hardly anyone doubts that China is still operating as a fundamentally state-driven economy where industries are sometimes heavily subsidised.

But the wording of China’s WTO accession protocol is now putting the debate over China’s market economy status (MES) at the top of the EU’s agenda.

Beijing argues that the expiry of a key provision of Article 15 at the end of 2016 obliges other WTO members to automatically accept China as a market economy. This status would make it more difficult for China’s trading partners to impose anti-dumping duties on cheap Chinese imports.

European decision-makers are under increasing pressure to develop a stance on the issue, which addresses both Chinese demands and unfair competition between China and the EU. The European Commission had a first ‘orientation debate’ on China’s MES in mid-January.

The European Parliament also started to discuss the issue in various hearings, debates and a Q&A session with European trade commissioner Cecilia Malmstroem. Meanwhile, differences between EU member states became apparent during a foreign affairs council meeting in Amsterdam last week.

Brussels should therefore not rush into proactively granting MES to China but rather seek a better deal for the Union and its member states at the negotiating table.

Economic and political risks

Seen by many as the European Commission’s preferred course of action, granting MES to China would pose significant economic and political risks. These risks are difficult - if not impossible - to quantify and are also unlikely to be fully clarified by the forthcoming European Commission impact assessment.

Preliminary findings suggest that Chinese imports in sectors with existing anti-dumping measures will increase between 17 and 27 percent. Job cuts across Europe will be significant, if not as bad as claimed by some industry lobbyists.

Currently, the European Commission expects the loss of 79 percent of the 234,300 jobs in manufacturing industries covered by anti-dumping measures in Italy, Germany, Spain, France, Portugal and Poland.

Proactively granting MES to China would also come at the expense of Brussels’ political credibility both at home and abroad. Affected European industries have politicised the issue among their constituencies, raising the expectation that the EU will undertake serious efforts to protect national industries.

Domestically, the EU would almost certainly lose political capital with Europe’s business community and citizens if it failed to strike a settlement with Beijing that yields more favourable economic results for European industries.

Engagement with China on the issue of MES also constitutes an important litmus test for the EU as an international actor. Failure to define collective EU interests as a basis for MES negotiations with China and the proactive granting of MES on legalistic grounds would reaffirm the Union’s image as punching below its weight in international affairs.

At this stage, by proactively granting MES the EU would lose its leverage over China when it comes to promoting open markets and fair competition.

US, Canada and Australia

Current developments put additional pressure on the EU to seek pragmatic solutions with China. Due to the stagnation of economic reforms, Beijing’s negotiating position is weakening. At the same time, the economic slowdown in China is heightening the prospects of a trade war with the EU.

Increasing exports of excess production combined with a further devaluation of the Chinese currency will add to tensions.

When they develop their negotiating position vis-à-vis Beijing, EU policy-makers could draw inspiration from some of the EU’s most important strategic partners with similar economic systems, namely the US, Canada, and Australia.

The US administration’s current rhetoric suggests that it is intent on pursuing a confrontational approach by simply not granting MES to China. While likely to soften over time, the US views MES as one of the few remaining issues through which China might be pushed towards accepting and implementing Western standards on key economic issues.

Canada continues to use the WTO accession protocol as a legal basis for effective anti-dumping measures. In contrast to the US approach, Canadian authorities have backed up their non-granting of MES by removing the automatic expiry dates for so-called ‘prescribed countries’, including China, from Canada’s ‘Special Import Measures Act’.

Unlike the US or Canada, Australia has already granted MES to China. However, Canberra attempts to legitimise and to continue using effective anti-dumping measures by taking recourse to existing WTO law beyond the accession protocol.

EU strategy

Given the EU’s legalistic nature and the diverging interests of its member states when it comes to China, none of these approaches constitutes a perfect match for the EU. But a possible EU strategy could include a mix of the following elements:

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  Brussels could seek to strike transitional and sectoral bargains with China. The EU could grant MES in steps, taking into account determinations of whether or not specific industries in China operate according to market principles.

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  The EU could aim for package deals, encouraging Beijing to make concessions in exchange for MES. Such concessions could include output and export self-restrictions or establishing more of a level playing field for European and other foreign companies in China.

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  At the very least, the EU should push China toward better compliance with its WTO commitments and to push China towards joining the WTO agreements on government procurement and OECD rules for export credits.

No matter what the EU’s eventual strategy will look like, its success will depend on close coordination among the EU institutions, European leaders and key allies. Perhaps even more importantly, the EU should seek pragmatic solutions by working with reformers in China.

At the same time, the EU needs to brace itself for retaliation and WTO litigation from China.

Now is the time for the EU to defend the core economic interests of its member states and to set its long-term relations with China on the right track. If it fails to do that, it risks losing its credibility as an international actor, active rule-maker and standard setter in the global economy.

Jan Gaspers is Head of Research of the European China Policy Unit at the Mercator Institute for China Studies in Berlin. Mikko Huotari is Head of the Foreign Relations Programme at the Mercator Institute for China Studies.