EU tries to skirt problem of market economy status for China

ROME–Pushed to the corner on the issue of whether or not to grant “market economy status” (MES) for China, the European Commission, the executive body of the European Union (EU), has tried to change the game. It shifted the focus at an orientation debate on July 20 from the possible recognition of MES for Beijing to the elaboration of a new European trade defense system that should be applied to any non-EU state, regardless of its political-economic regime and structure.

EU institutions have been discussing MES for China since December 2015. Under the provisions of its 2001 accession agreement to the World Trade Organization (WTO), the Chinese government expects the status’ recognition from the EU by the end of 2016. For 15 years, Brussels and other WTO members have been allowed to use prices and production costs in a third or “surrogate” country to verify whether Chinese enterprises were exporting goods at unfairly low values.

EU countries are split on the issue, with northern members – including Britain – appearing more favorably disposed toward the concession in accordance with their inherent free trade soul and debt-ridden southern nations staunchly opposing it. The European industrial complex is also divided; retailers moderately back the granting of the status, as big manufacturers are largely against.

On May 12, the EU Parliament passed, by an overwhelming majority, a non-binding resolution against the acknowledgement of MES for Beijing. EU lawmakers justified their vote with China’s excess production capacity and cheap exports, which would both hurt employment and business investments in many vulnerable industrial sectors throughout Europe.

China's Premier Li Keqiang, European Commission President Jean-Claude Juncker and European Council President Donald Tusk attend the China-EU summit at the Great Hall of the People in Beijing, China, July 12, 2016. REUTERS/Jason Lee

China’s Premier Li Keqiang, European Commission President Jean-Claude Juncker and European Council President Donald Tusk attend the China-EU summit at the Great Hall of the People in Beijing, China, July 12, 2016. REUTERS/Jason Lee

New trade defense approach

With the “neutral” approach proposed by the EU Commission, there will be no distinction between market and non-market economies in the EU trade relations down the line. In this sense, it is the EU commissioners’ view, the potential recognition of Beijing’s market status will be no longer an issue for Europe, even though, at the end of the debate, EU Commissioner for Trade Cecilia Malmström overtly stated that “China is not a market economy.”

EU Commission Vice President Jyrki Katainen also underlined that the EU will have to adjust its system to that of the United States, which has tougher trade defenses against dumped and subsidized goods, and rely on international prices as a benchmark to determine whether a country dumps its products.

The EU Commission aims to adapt the bloc’s trade defense instruments to deal with industrial over-capacity – notably in the steel sector – and market distortions; the EU will have to speed up anti-dumping and anti-subsidy procedures while abiding by the WTO legal framework. It is an overarching strategy, directed at any trade partner of the EU, but it is evident that the real target are China’s state-subsidized companies. Of 73 anti-dumping measures that the EU is currently applying, 59 are against Chinese items, according to data from the EU Commission.

China’s doubts

In the lead-up to the orientation debate within the EU Commission, some EU stakeholders called for a compromise: a conditioned status for China, in which anti-dumping measures could be applied to industrial sectors at risks, with the provision that they will be ditched progressively and on a case for case basis. But Beijing has repeatedly stated that the issue is not a matter of further debate and that the EU must implement Article 15 of the WTO accession agreement, renouncing its anti-dumping measures against Chinese goods.

Chinese official media outlets have raised doubts about the new anti-dumping and anti-subsidy regime outlined by the European Commission. As a commentary in the state agency Xinhua put it, if the use of international prices as the new benchmark “means the EU will continue to compare the prices of Chinese imports with that of other countries, the only difference between the old and new methodologies will be in scope and name.”

During the recent EU-China summit in Beijing, Chinese leaders contended that industrial overcapacity is a false problem, as Chinese low value-added products are complementary to the EU market’s needs, and cheap exports are not the root cause of Europe’s plummeting competitiveness. Still, China’s argument is that the potential recognition of MES would increase Chinese investments in the Old Continent and, accordingly, boost the creation of new jobs.

Smokescreen to gain time

Now, on the basis of its July 20 deliberation, the EU executive will put forward a final proposal later this year. For it to come into force, it will have to be passed through by the European Council (i.e. by the EU member states) with a qualified majority and approved by the EU Parliament.

It seems that the EU institutions are striving to find a middle way to skirt the problem of recognizing MES for China. It is also possible that the current EU Commission’s debate on MES for China boils down to a simple smokescreen to gain time, given that EU institutions and member countries have always disagreed over the opportunity to change trade defense regulation.

Against this backdrop, the EU Parliament might become the political killer that ultimately scuttles Beijing’s demands, in an attempt by single member nations to try to reduce their own responsibility in the eyes of Chinese leaders and thus hope to limit the damages to their bilateral relations with Beijing, which inevitably will retaliate against the move by sparking a dangerous trade war. An obvious first victim is the EU infrastructure fund which runs the risk of seeing China’s announced $2.21 billion investment evaporating.

Emanuele Scimia is a journalist and foreign policy analyst. He is a contributing writer to the South China Morning Post and the Jamestown Foundation’s Eurasia Daily Monitor. In the past, his articles have also appeared in The National Interest, Deutsche Welle, World Politics Review, The Jerusalem Post and the EUobserver, among others.

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