Market Economy Status: Does China deserve it?

Fifteen years after its accession into the World Trade Organisation (WTO), China is now looking forward to seeing its status as a non-market economy (NME) expire this December. With this accession protocol about to expire, China has the ability to be considered for Market Economy Status (MES) and therefore be allowed to export its goods without needing to bear the burden of proof when called to arbitration cases in the WTO.

In 2001, when China joined the WTO, several developed economies like the U.S. and the European Union (EU) argued that China should be treated as a NME due to government subsidies in heavy industries and currency policy. Such subsidies arguably give Chinese state and non-state companies an unfair advantage in the European market. For example, dumping products like steel at a lower-than-normal price into a market to undercut the domestic industry of the importing country and therefore unfairly increase its market share. This has remained a prominent and controversial issue. In such cases brought forward to the WTO, China’s status as a NME would normally lead to higher anti-dumping duties if they cannot prove they were not involved in dumping.

With MES however, the arbitration process – the process by which the WTO deems practices illegal – is different, in that the burden of proof falls on the complainant. Instead of China having to prove it was not dumping, the EU would have to prove China had dumped products. On December 11th, it will be up to the countries that previously saw China as a NME to decide whether to maintain that China is a NME or decide that it should have MES. To be considered for such status, the country must prove that there is limited government involvement and intervention in allocation of resources, and transparent and non-discriminatory company law.

The socialist market economy was adopted in China as part of Deng Xiaoping’s Open Door policy, where industry and commerce are run by the open-market economy but within limits that are set by the government. Needless to say, this is not enough for economies like the US and the EU, but over 80 countries now recognize China as a market economy, including Singapore, Australia, and Russia – these countries will then have to prove China is breaking the rules instead. The US is firmly planted in its policy of inaction regarding China’s status, which would force China to challenge them in the WTO, putting the onus on Beijing to prove that its economy has met all the criteria for MES.

The biggest contention with China’s MES comes from the EU, where the debate revolves around how beneficial, or risky, the removal of trade barriers will be for the economy. The question of whether WTO members like the EU unilaterally decide in December 2016 that China still has to prove MES according to their own criteria, by industrial sector, or case-by-case remains to be seen. China of course wants its MES instated automatically after 2016, although the WTO and its members are under no obligation to do so.

Now this is where it could get awkward – your biggest trading partner arguably is not a market economy based on your definition, and yet urges you to treat it as such. In the EU, the glut of steel coming in from over-producing factories in China has led to the closure of several steel plants in the region. This has created a tense situation within the EU, where up to 3.5 million jobs are at risk in heavy industries according to the Economic Policy Institute, which has triggered protests among heavy-industry work forces in Britain, France, and Italy.

The EU has been having a rough time lately. Economically it has been struggling to keep up with the likes of US and China. The economic struggle is underlined by the financial problems Greece has been suffering over the past years. Currently the refugee crisis is at the fore of many minds in Europe, but the next big economic decision is already on the table; the EU has to reach a consensus regarding the market economy status of China.

Through the latest free trade agreements that have been in the making, such as the Transatlantic Trade and Investment Partnership and the Trans-Pacific Partnership, China could be sidelined in the global economy. If the EU would approve the nation as a market economy this would, without a doubt, strengthen their relationship with China, which could turn out to be warmly welcomed in the EU’s economically tough times, despite the potential downfalls. Currently the EU is negotiating an investment deal with China that would open up the Chinese market for European investors – a deal for which the price would be giving China its MES.

Besides the likely positive consequences that are connected to the acknowledgement of China as a market economy, there are also negative consequences if they do not. The EU granted MES to another ‘doubtful’ market economy, Russia, back in 2002, which at the time was not even a member of the WTO. Refusing MES status to China would be interpreted as applying double standards and could provoke retaliation. Examples include tariffs and quotas on EU imports, as well as restrictions on Chinese exports of raw materials. Even so, the EU could, in the WTO’s arbitration system, challenge this further and will most likely win if China is not considered for MES.

This is clearly a decision that will take time to be made, which makes sense, as this is a big decision with significant consequences for the EU. Countries’ stances on both sides of the argument within the EU only make the decision a more difficult one. It seems however, that with growing trade pressures from China only making things more tense in the political arena, it may be with great reluctance that the EU will have to grant China market economy status.

By Ceinwen Thomas