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28/09/2016

Ignore the fear-mongers and grant China market economy status

Trade & Society

Ignore the fear-mongers and grant China market economy status

Granting China MES will force the EU to cut tariffs on some Chinese products.

[Miquel Angel Pintanel Bassets/Flickr]

Free trade has brought the EU peace, prosperity and advancement. We have nothing to fear from levelling the playing field for China, argues Diego Zuluaga.

Diego Zuluaga is the Deputy Director of EPICENTER, the European Policy Information Centre.

The EU is built on free trade. The so-called “four freedoms” – of movement for goods, capital, services and people – are the foundations of European integration. They reflect a belief that increased exchange between individuals and businesses not only improves their economic welfare, but also furthers additional objectives such as greater understanding and peace. And indeed, Europe’s most prosperous economies – Germany, Britain, the Netherlands – are largely built on trade with other countries, both within and outside the EU.

The EU is committed, in principle as well as practice, to open trade with countries outside the bloc. Yet, in recent years, we have seen powerful backlash from member state governments, interest groups and activist factions against pro-trade policies. We have seen that shift most clearly in the course of the TTIP negotiations, and the latest iteration of this protectionist, inward-looking attitude is the refusal by some of our politicians and business groups to support granting China market economy status, known as MES.

The reasons given for their objection will be familiar to those who have followed any previous trade negotiation. China, it is alleged, heavily subsidises the production of certain goods via cheap financing, energy, land and other supports. That, in turn, enables it to dump its exports on European consumers. Dumping is normally defined as selling substantially below the domestic market price in the exporting country by using subsidies.

The EU currently has anti-dumping legislation in place, which enables it to impose duties on goods deemed as dumped. Some of the goods subject to such duties come from China. But granting China official MES status would limit the EU’s ability to continue to enforce these measures, as per agreements at the World Trade Organisation (WTO) to which both the EU and China are party. Opponents of the MES move argue this would severely undermine the competitive position of European industry and endanger between 1.7 and 3.5 million jobs (their figures).

There are a number of objections to anti-MES arguments. First of all, I know of no economy which has subsidised its way to prosperity, and indeed China right now is starting to experience the hangover from years of state-sponsored spending on construction and infrastructure, often financed by the country’s opaque state-owned banks and regional governments.

Secondly, even if one is in principle opposed to any government subsidy to industry, EU countries are not unfamiliar with such “pro-business” practices, from tax credits to state-sponsored training to financing from government-owned development banks to cheap or free education, and so on. The differences with China may be quantitative, but they are not qualitative – the temptation to use taxpayers’ money to support domestic industries is universal.

Finally, there is no mention anywhere in the sceptical analyses of the impact of granting China MES status of the potential benefits to European consumers. Whether or not one agrees that they outweigh the costs to domestic producers, there are clearly substantial benefits in giving customers access to cheaper goods and services from abroad. That has in fact been the characteristic feature of China’s opening up to the world since 1979: a dramatic reduction in the price of many products in more developed markets. The present case will be no exception.

Furthermore, European economies are living, dynamic and constantly changing. Competition from abroad may undermine the profitability of certain businesses and industries, but that will release resources for the production of more valuable goods and services – things that Chinese producers do not readily provide such as advanced IT solutions, high-end manufactures, financial services and human capital production. European firms are at the forefront in many of these fields.

It is sad to see a continent that was made rich, advanced and peaceful by free markets and free trade retreat within the confines of the Single Market, as if we had something to fear from exchange with similarly developed (USA, Canada) or poorer countries (like China) whose people wish the same as us: to continue to improve their prospects and leave a more prosperous legacy for their children. We have allowed powerful lobbies and fringe activist groups to dominate the narrative around Europe’s trade strategy. For our own sake, that has to change.