MELISSA YIN explains the global controversy over China’s Market Economy Status.

    In 2001, in order to attain World Trade Organization (WTO) membership, China agreed in its WTO accession protocol to be considered a non-market economy (NME) for the purpose of calculating anti-dumping tariffs. In international trade, dumping occurs when an exporter sells a product in foreign countries at a price (known as the export price) below the price at which the same product is sold domestically (known as the normal value of goods).

    The significance of the NME designation is that in calculating the normal value of goods, the importer can use prices found in a surrogate third country rather than using the domestic selling prices found in the exporting country, as such prices are believed to be artificially low due to government intervention. For example, in determining whether Chinese exporters have committed dumping in the U.S., the U.S. antidumping investigation authority may use the market price in a surrogate country to approximate the normal value, disregarding the actual market price in China. Essentially, if the surrogate country sells a comparable product at a price higher than the price at which the China-exported product is sold in the U.S., then China is at fault for dumping.

   Therefore, direct consequences of China’s NME status include greater scrutiny and harsher punishment for alleged dumping because the surrogate country’s market price is often higher than China’s. The NME is set to expire on December 11, 2016, fifteen years into China’s WTO membership. China believes it should automatically be granted market economy status (MES), but this demand has remained highly controversial.

   Why does MES matter so much to China? China is the target of the largest volume of anti-dumping investigations in the world, and Chinese exporters suffer significant financial losses due to the NME status. For example, in a trade dispute over fasteners with the E.U. that eventually was filed in the WTO Dispute Settlement Body in July 2009, China argued, with some degree of success, against the E.U.’s approach of treating NME exporters. China believed the EU approach had unfairly required exporters to demonstrate they were not linked to the state, thus resulting in heavy financial losses for Chinese exporters.

   Similar to having the yuan recognized as a World Bank reserve currency, gaining MES status not only helps China financially but also boosts China’s prestige. In its pursuit to be seen as a major economic power, China has long desired to be recognized as a market economy. Following its accession to the WTO, China has often asked for MES recognition by its trading partners as a condition for entering into bilateral free trade agreements (FTAs), as is the case in its FTA with Australia in 2005.

   The main opponents to China’s MES goal are the U.S. and the E.U. The U.S. and the E.U. have frequently used the surrogate country methodology in antidumping investigations against Chinese exports, levying enormous tariffs on China. Under WTO rules, if China is granted MES, then it would be more difficult for the U.S. and the E.U. to levy antidumping duties on Chinese exports. However, the U.S. and the E.U. insist they have established procedures and criteria in their domestic laws for granting MES to trading partners, and that China has yet to comply. Essentially, the U.S. and the E.U. maintain that the expiration of NME does not automatically lead to the granting of MES.

   On the surface, whether or not expiration of NME automatically leads to MES is a legal issue. Lawyers and scholars are debating the various interpretations of ambivalent WTO statutes, but more importantly, countries use international law to defend their economic and political interests.

   The U.S. and E.U. have economic incentives not to grant China MES, as they believe China’s marketization is not yet up to par. When China first joined the WTO, the country was expected to take on structural reforms to become a market economy during the fifteen-year interim period. “Despite the Communist Party’s decision in 2013 to let market forces play a ‘decisive’ role, and despite the continued growth of the private sector in China,” The Economist commented this May regarding China’s NME status, “there has been no fundamental transformation of its economic structure.”

   Today, China still maintains a strong state sector, subsidizes exporters nationally and locally, and controls currency exchange rate and capital flow. For example, nearly all of China’s steel manufacturers are state-owned, which means steel production receives government subsidies even when it is not profitable. Excess Chinese steel is flooding the global market, and both the U.S. and the E.U. have continuously complained about what they see as China’s unfair advantages—over-capacity and government subsidy. Currently, the U.S. and the E.U. have placed high anti-dumping tariffs on Chinese steel exports compliant with WTO rule. If China receives MES, then other countries can no longer impose such tariffs and will lose considerable tariff revenue.

   The U.S. and the E.U. are also opposing China’s MES bid for political reasons, as a response to the dissatisfaction within their electorate over the inflow of Chinese imports. Deputy U.S. Trade Representative Michael Punke asserted this February that “the mere change of date at the end of the year does not automatically result in a change of status for China.” A nonbinding vote by the European Parliament this May rejected granting China MES, which might prelude a formal decision on the matter.

   However, the foreign policy risks of refusing China MES are tangible. A refusal might instead present an opportunity for China and a challenge for the U.S. and the E.U. “China is now turning its tactical defeat in achieving recognition as a market economy into an advantage,” a macro analyst commented on investment website Seeking Alpha in August this year. “Without the market economy title, it has abandoned its commitments and the economic burden of playing a leading role in the creation of global economic growth.” With less to lose, China may become a more disruptive actor in global trade. Ultimately, in denying China MES, the U.S. and the E.U. must be careful what they wish for.

Melissa graduated from the Woodrow Wilson School of Public and International Affairs at Princeton University in 2016 and now works at PwC Strategy&, a consulting firm. Contact her at melissayin24@gmail.com.

Illustration // Sonia Ruiz