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30/09/2016

MEPs braced for fight over granting China ‘Market Economy’ status

Trade & Society

MEPs braced for fight over granting China ‘Market Economy’ status

From left to right: President Juncker, Prime Minister Li and President Tusk

[European Commission]

MEPs have started to draw their red lines on whether the EU should recognise China as a ‘market economy’,  ahead of a first orientation debate in the College of Commissioners on Wednesday (13 January). 

Prompted by a December 2016 deadline, the EU has to issue a verdict on whether Beijing has transitioned to a market economy in the last 15 years since it joined the World Trade Organisation.

Beijing has long insisted on the ‘automatic’ switch to a market economy at the end of the year.

EU trade Commissioner Cecilia Malmström has signalled some openness to recognise China market economy status (MES). But MEPs are concerned that the Commission’s position is dictated by fear of retaliation, especially of Beijing’s participation in the €300 billion Juncker investment plan to boost EU growth and jobs.

“The S&D Group is convinced that automatically granting Market Economy Status to China would be premature,” said the president of the Socialists and Democrats Group, Gianni Pittella.

Centre-right MEP Salvatore Cicu (EPP) echoed Pittella adding that “it’s not only a technical debate, the geopolitics are very important.”

Washington has already warned Brussels against granting China market economy status (MES), saying the long-sought trade concession could hamper efforts to prevent Chinese companies flooding United States and European markets with unfairly cheap goods.

Granting MES would make it much more difficult for the EU to impose tariffs on Chinese companies for unfairly dumping low-cost products while undermining Europe’s trade defences against China.

Deal-breaking

According to trade legal experts, there is no reason to please China, since Beijing has not complied with a number of its clear-cut obligations, including the one of having prices set by the market.

“China is not a market economy,” European lawyer Bernard O’Connor said during a debate in Parliament on Tuesday (12 January). “China has signed a deal with a whole series of commitments in 2001 when it became a member of WTO. It has met one or two of those, but has not met the majority of them.”

In its last economic update last June, the World Bank underlined that instead of promoting the foundation of a sound financial development, China has interfered extensively and directly in allocating resources through administrative and price controls, guarantees, credit guidelines, pervasive ownership of financial institutions and regulatory policies.

“These interventions have no parallel in modern market economies,” added the World Bank.

The EU has five criteria to grant MES: allocation of economic resources by the market, the removal of barter trade, corporate governance, property rights and an open financial sector. China has met only the removal of barter trade, stressed O’Connor.

 “We shouldn’t be afraid of stating our point of view, because the MES will have a huge impact on our companies and sectors,” added Sicu.

A study by the Economic Policy Institute (EPI) shows that the increased imports arising from granting MES to China would reduce EU output by up to €228 billion per year, or a two percent reduction in EU GDP, that translates between 1.7 and 3.5 million potential jobs lost among import-competing industries, their suppliers, and the companies that depend on the wages of displaced workers.

Licence to dump

“EU industry has already lost thousands of jobs, in large part due to the knock-on effects of China’s overcapacity and the resultant dumping. European industries affected include motor vehicle parts, steel, ceramics, glass, aluminium, bicycles and many others besides,” said Milan Nitzschke from AEGIS Europe, an industry alliance representing around 30 strategic European manufacturing sectors.

“Granting MES to China would be equivalent to gifting an unlimited licence to dump,” he insisted.

The Commission is supposed to make its decision as early as February, but stakeholders are concerned that it has not engaged in consultations with key EU stakeholders or carried out a thorough impact assessment.

MEPs across parties are building a consensus on having a reasoned debate and decision based on an impact assessment. However, divisions among member states might rock the EU boat.

Germany and the UK have been supportive of China’s pleas, while other EU governments, led by Italy, are strongly opposed. 

Positions

“The EU has set out five criteria establishing how China could be considered to be a market economy. Presently, the country meets just one of these conditions. China is simply not yet a market economy. There is still too much state involvement”, said Axel Eggert, Director General of EUROFER.

“China is placing political pressure on national and EU policy makers to prematurely grant it the status of a market economy. The country is arguing that its WTO protocol assures it MES by the end of 2016. However, the WTO protocol was established under the presumption that China would make sufficient progress towards becoming a market economy; progress that it has studiously failed to implement.”

Were MES to be granted, the anti-dumping measures that safeguard hundreds thousands of EU jobs against China’s unfair competition across a range of strategic EU industries would become ineffective. The EU’s other trade defence measures are either inoperative or simply insufficient to defend against the rising tide of dumped Chinese products, particularly steel. 

"With the College of Commissioners due to discuss MES tomorrow, EUROFER insists that policy makers think long and hard about the political direction of the EU’s trade relations with China, or else face the potential demise of the sector on which Europe was built.”

Timeline

  • December 2016: WTO to review terms of China accession and whether it has become a market economy.

Further Reading