What is the state of play on China being called a market economy, and what effect does this continue to have?
November 2017
The United States has formally told the World Trade Organization (WTO) that it opposes granting China market economy status, a position that if upheld would allow Washington to maintain high anti-dumping duties on Chinese goods.
The statement of opposition, made public on Thursday, was submitted as a third-party brief in support of the European Union in a dispute with China that could have major repercussions for the trade body’s future.
China is fighting the EU for recognition as a market economy, a designation that would lead to dramatically lower anti-dumping duties on Chinese goods by prohibiting the use of third-country price comparisons.
The U.S. and EU argue that the state’s pervasive role in the Chinese economy, including rampant granting of subsidies, mean that domestic prices are deeply distorted and not market-determined.
A victory for China before the WTO would weaken many countries’ trade defenses against a flood of cheap Chinese goods, putting the viability of more western industries at risk.
U.S. Trade Representative Robert Lighthizer told Congress in June that the case was “the most serious litigation we have at the WTO right now” and a decision in China’s favor “would be cataclysmic for the WTO.”
The USTR brief, which follows a Commerce Department finding in October that China fails the tests for a market economy, argues that China should not automatically be granted market economy by virtue of the expiration of its 2001 accession protocol last year.
“The evidence is overwhelming that WTO members have not surrendered their longstanding rights … to reject prices or costs that are not determined under market economy conditions in determining price comparability for purposes of anti-dumping comparisons,” the brief concludes.
China has reacted with predictable hostility, restating its longstanding view that market economy status would simply become a fact on the 15th anniversary of joining the WTO, almost exactly a year ago, when China first filed a complaint at the WTO about the refusal of the U.S. and the EU to grant this recognition. According to a strict reading of their accession treaty, they have at least an argument. In this agreement, a 15-year period was assumed to be enough time for China to implement its many provisions and emerge, more or less, as a functioning market economy. Had China made faster progress, they could have made their case and been granted this status earlier, according to the agreement.
Many countries have, in fact, recognized China as a market economy: Singapore back in 2004, Australia in 2005, Brazil in 2004 (although Reuters reveals the picture is far more complex, with Brazil applying extensive anti-dumping measures but not wishing to harm relations by getting involved in the public dispute). But in each case, no effort was made to demonstrate that China was a market economy, as stipulated in the accession agreement. Instead it was usually appended to a Free Trade Agreement and made a condition of access to China’s market for foreign exporters.
WHAT’S MARKET ECONOMY STATUS?
A “non-market economy” is any foreign country that the U.S. Department of Commerce determines does not operate on market principles of cost or pricing structures. When this is the case, sales by the exporting country do not reflect fair value and the Commerce Department can take that into consideration when investigating potential trade remedies against Chinese manufacturers for selling products in the U.S. at prices lower than what they sell for in China. China has argued that it should automatically be granted Market Economy Status after the 15th anniversary of its accession to the World Trade Organization (WTO) in December 2016.
WHY DOESN’T CHINA QUALIFY?
China has argued that it should automatically be granted Market Economy Status after the 15th anniversary of its accession to the World Trade Organization (WTO) in December 2016.
We disagree. Here’s why:
China is still a Non-Market Economy.
While China has made a number of economic reforms in recent years, the Chinese economy remains fundamentally a non-market economic system dominated by the Communist Party and the state.
The party and the government today still play a major and direct role in many critical aspects of the economy, including the financial system, upstream resource and energy sectors and through ownership and control of many strategic industries.
China’s state-intervention in the economy hurts U.S. workers.
Government ownership and financial support encourage and enable overproduction in many sectors.
As supported production makes its way into the global marketplace, it displaces U.S. production. This non-market economic system has enabled China to maintain stability and long-term economic growth but at the expense of U.S. and other global manufacturers.
There’s a reason China is the subject of more anti-dumping actions globally than any other country. In 2014, 63 cases were initiated against Chinese manufacturers. Compare this with 11 against US manufacturers and 8 against EU manufacturers.
Price distortions can create an unlevel playing field for U.S. and global producers.
While China has made some important economic reforms in recent years, its progress is not even. In certain sectors, continued government support is encouraging overproduction, distorting prices and flooding the global market.
When Chinese producers do not have to bear the full cost of production, they can sell products overseas at prices that are less than fair value, creating an unfair price advantage.
U.S. trade remedy laws are designed to address this circumstance. To be effective, the U.S. government must retain the ability to evaluate the level of market distortion in China’s Non-Market Economy.
WHAT CAN WE DO ABOUT IT?
China argues that after December 11, 2016, WTO members must grant Market Economy Status to China, which would negatively impact the way U.S. trade enforcement and remedy laws are implemented.
WTO members, including the United States, who were using non-market economy procedures at the time of China’s entry in the WTO are free to make their own determinations before December of this year as to whether to grant China Market Economy Status.
The U.S. government can and should continue to apply its right to assess the non-market aspects of China’s economy that are relevant to any U.S. trade enforcement action.