Does China have a (non) market economy status?


The Bottom Line:

Asia-Pacific Insights: Whether or not China should be considered as a market economy country is a polemical topic at the moment. On the one hand, Beijing claims that it has made significant efforts to open its economy to world markets since its accession to the WTO. On the other hand, the major competing countries such as the United States or the European Union complain that such effort are not significant enough and argue that China should not be considered a market economy. In this China business insight, Antoine Martin comments on recent EU and US talks regarding the issue.


Does China have a (non) market economy status?

[ By Antoine Martin ]

 

There are many comments at the moment on whether China has a ‘market economy status’ or a ‘non-market economy status’. Discussing whether China is a market economy may seem odd when taking a public debate perspective because, obviously, the country and its powerful economic policies leave no real doubt as to how Chinese businesses and world markets rely on each other to move on.

Still, the question has an impact in terms of political economy and international affairs as many businesses around the world could be impacted.

The point is in fact extremely political (and somehow legal) because the ‘market economy status’ vs ‘non-market economy status’ debate has a strong anti-dumping and protectionism taste. For the records, dumping occurs when a country exports products at a price below the normal cost of production or below the price paid in the exporting country.

Background on China & anti-dumping

Simply put, when China joined the WTO in 2001 its Protocol of Accession to the World Trade Organization (available here) contained a clause (Article 15) which gave tools to developed economies to protect themselves against potential dumping. The idea, by then, was to help China’s new partners to face low price policies (considered as dumping) using different criteria as a threshold unless Chinese producers were able to ‘clearly show’ that the local Chinese industry respected market economy standards.

In practice, however, foreign countries hardly agreed that Chinese industries could be given a market economy status because it would not meet the market economy standards. The Chinese economy was in fact given as a ‘Non-Market economy’ status following various antidumping investigations which, by the same token, allowed applying significant anti-dumping duties on Chinese exports. As a result of diplomatic pressure, China eventually obtained Market Economy status recognition by various regional trading partners such as Australia, New Zealand, Malaysia or Singapore but major actors such as the U.S or the European Union never signed-in for a change.

The 15 years limitation

Then come the complications. According to the Protocol, the special differentiation allowing WTO members to treat Chinese products differently is to end after 15 years, meaning that a solution will have to be found by December 11, 2016. In other words, Chinese imports could have to be treated without the screen of antidumping protections, thus shifting de facto from a Non-Market economy to a Market system to which normal WTO rules apply.

The difficulty actually comes from the wording of the contentious Protocol Article 15, which says that it is for China to decide whether it does have a market economy, taking as a basis the requirements imposed by WTO partner countries when China signed the Protocol 15 years ago.

And of course, interpretations differ. For the Chinese, the first part of the sentence means that China is to have the final word while other countries will then have to adapt. European and US partners, unsurprisingly, do not agree with this perspective and consider that under the second part of the sentence their standards are key in deciding whether China has a Market Economy. These, in fact, might thus come to argue that the requirements for concluding that China has a Market economy have not been met.

The EU and US position

As of 2008, the EU Commission for instance suggested that China had made significant progress in fulfilling the five technical requirements (related to the influence of state intervention on prices and costs) necessary to the finding that the country qualified for a Market Economy Status.

Talking about a ‘considerable achievement’, the Commission admitted that China had ‘clearly fulfilled’ Criterion 2 (relating to the absence of state intervention in enterprises linked to privatization and the absence of non-market forms of exchange or compensation).

However, whilst it added that the country had also made ‘considerable progress’ on the remaining four criteria it nonetheless emphasized that a lot of work still had to be done. If ‘remarkable’ and ‘substantial’ progress had been achieved in relation to Criterion 3 (use of appropriate modern accounting standards) and Criterion 4 (bankruptcy, intellectual property and property laws), Criterion 1 (government intervention in the allocation of resources or business decisions in the economy) and Criterion 5 (existence of a financial system independent from the state) were still far from being satisfying.

This means that the debate over China’s market economy status is not done yet.

The EU, as of today, might thus consider that Chinese prices are still not solely driven by markets in practice or that the Chinese market lacks of intellectual property protection, still misses a reliable bankruptcy law, or even that access to the Chinese financial market is uncertain (edit 15/02/16: see for instance ‘China, Capital Controls, Lagarde and Kuroda’).

At the same time, China is to become a key actor in EU development-financing since the country is to contribute significantly to Jean-Claude Juncker’s (EU Commission President) 300 million investment plan for the future of the EU Economy so it seems difficult to guess what the EU policymakers might eventually decide.

The US are using another set of six criteria when assessing the country’s Market Economy Status: currency convertibility, the ability to freely bargain for wages, foreign investment freedom, government ownership or control of production, government control over the allocation of resources and … ‘other appropriate factors’ – whatever that means. In early 2006, the Department of Commerce however concluded that, ‘despite recent and ongoing reform efforts, the significant extent of continued government intervention in certain important sectors of the economy warrants maintaining China’s designation as a Non-Market Economy country’. As of today, the trend seems identical as, in fact, the US has warned the EU about the danger of granting China a Market Economy Status.

What’s the impact then?

As far as the people’s everyday life is concerned, the politics do not matter as alarming reports as to potential job losses – essentially in the EU – have stolen the show.

Antidumping measures taken against Chinese exports have one essential goal: protecting EU jobs, industries and markets against an invasion of cheaply produced textile and electronic goods. Given the lower cost of labor and production in China, the fear – as reported in a study by the Economic Policy Institute – is therefore that 3,5 millions of jobs might disappear in the EU by 2020.

But more than jobs, the issue is very political. In fact, it is perhaps more political than economic in essence and it makes a lot of noise because the stakes are, as usual, about ensuring that China does not gain too much weight and influence as far as international trade is concerned.

 

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Bottom to top vs. top to bottom adjustment?

Alternative voices – such as the French economist Charles Sannat – formulate different views, suggesting that fears might actually be unfounded. To the economist, interestingly, moving forward is actually the solution as globalization cannot succeed until countries like China, India or Russia are not fully integrated into world markets. The solution, he says, might be two-folded. The products made in China might in the future be sold at the same price as European or US-manufactured products. Or European products might have to be sold at the price of Chinese products.

The first option, that is, requires that Beijing agrees to lose its competitive advantage (the price) to the benefit of EU industries. The second option would rather require that developed markets agree to dump social norms and salaries to sell at a cheaper price.

From dots to trends

Not a month after the Chinese RMB joined the IMF’s pool of global reserve currencies, the question is therefore not about jobs or about admitting that China’s economy is indeed a market economy.

It is about how international politics (and the World Trade Organization) will serve to cope with the unbalances and competing needs of today’s globalized political economy. The US, for instance, warns about the consequences of such a recognition for EU markets which, if granting a market economy status to China, will have to abandon anti-dumping trade barriers against Chinese goods. By fear, perhaps, that an increase in Chinese trade might particularly benefit the EU…

 

 


Dr Antoine Martin | Co-Founder & Head of Insights

Personal Profile Antoine Martin Founder The Asia-Pacific CircleDr. Antoine Martin is the Head of Insights of The Asia-Pacific Circle, which he co-founded in Hong Kong in 2016 with Philippe Bonnet. Antoine follows analyzes and comments on developments in international trade and Fintech policy, with a particular focus on Asia-Pacific relations. He is also a scholar at The Chinese University of Hong Kong, Faculty of Law, a leading academic institution in Asia.

Beyond following Asia-Pacific trends, Dr. Martin enjoys pushing, challenging and helping entrepreneurs, lawyers, bankers and experts of all kinds to identify their message and formulate their ideas. His ultimate goal being, of course, to give them more tools to engage in value-creating discussions with their interlocutors. Now, can you see a trend? Would you like to share some thoughts? Please get in touch!

– Read more contributions by Antoine Martin –


Disclaimer: The views expressed are those of their author(s) only and do not reflect those of The Asia-Pacific Circle or of its editors unless otherwise stated.


 

 

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