China’s Market Economy Status and the European Interest

Written by | Monday, August 22nd, 2016
European Values

François Godement (European Council of Foreign Relations)

By 11 December 2016, the European Union will have made a decision on whether China should join the ‘exclusive club’ of countries with market economy status. However, the rules against Chinese dumping, which are being applied in the Union and are about to expire in December 2016, seem to be more important than the market economy status itself. Should trading with China, if its market economy status is recognized, be subject to the policy of specific duties or not? And what will happen once anti-dumping rules have expired?

China joined the World Trade Organization (WTO) in 2001, and with that began its 15-year interim period. During this period, other WTO members have had the opportunity to apply anti-dumping duties in response to the unfairly low prices of the Chinese exporters. China has promised to carry out economic reforms during this period with the aim to become a market economy. However, since 2004, China has met only one of the five criteria set by the European Commission, which the country must meet before it can be granted the market economy status. With the end of the interim period, China has also begun to focus on a intermediate target, which is the cancellation of anti-dumping measures by European states, since Beijing perceives the market economy status to be more less of a symbolic value.

China is certainly not yet a market economy. Unlike in Europe, the price of land for business, energy prices and other forms of financing, which the companies acquire, are determined by the government. Thanks to these relative comparative advantages, Chinese companies are capable of buying even such European companies as Volvo and Syngenta. As a result of the government support and subsidies, China floods the international market with products with the prices lower than their actual production costs. Thus, the question is how should the EU deal with this market asymmetry? There are several possibilities that may occur after 11 December. The Union may change anti-dumping criteria without implementing mitigation measures that would protect European producers, it can modify the criteria and implement mitigation measures, or may not do anything at all. In that case, a lawsuit from the Chinese side can be expected.

Granting the market economy status for China could be a possible approach. The status is moreover poorly defined and the failure to grant it would cause an unnecessary conflict. Moreover, it can also encourage China’s current efforts to transform to a market economy. The Union should not change its anti-dumping measures for the time being since the overall reform of the protective instruments is not possible before 11 December. Brexit will also most likely delay this process even more. The EU should also renew its efforts to prompt China to commit to the economic dialogue and take measures to avoid a sudden surge in exports.

(The study can be downloaded here:http://www.ecfr.eu/publications/summary/chinas_market_economy_status_and_the_european_interest_7050)

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