Rogue Nation, Rogue Market

China Is Not A Market Economy, And The WTO Won't Survive Recognizing It As Such
By Douglas Bulloch

Bob Lighthizer, U.S. trade representative, a noted China hawk recently added his support to the EU in insisting China not be recognised as a 'market economy'. 

China's status as a 'Market Economy' is once again under dispute. 

Not, of course, by anyone who knows anything about the Chinese economy, but within the councils of the WTO, where the issue is being argued between the EU and China. 

The U.S. Trade Representative – Robert Lighthizer – has notified the body that the U.S. also–in support of the EU's case–opposes China's recognition as a 'market economy'.
China has reacted with predictable hostility, restating its longstanding view that 'market economy' status would simply become a fact on the 15th anniversary of joining the WTO, almost exactly a year ago, when China first filed a complaint at the WTO about the refusal of the U.S. and the EU to grant this recognition. 

According to a strict reading of their accession treaty, they have at least an argument. 

In this agreement, a fifteen year period was assumed to be enough time for China to implement its many provisions and emerge, more or less, as a functioning market economy. 

Had China made faster progress, they could have made their case and been granted this status earlier, according to the agreement.
Many countries have, in fact, recognised China as a market economy; Singapore back in 2004, Australia in 2005, Brazil in 2004 (although Reuters reveals the picture is far more complex, with Brazil applying extensive anti-dumping measures but not wishing to harm relations by getting involved in the public dispute). 

But in each case, no effort was made to demonstrate that China was a market economy, as stipulated in the accession agreement. 

Instead it was usually appended to a Free Trade Agreement and made a condition of access to China's market for foreign exporters.

The 'Super Markets'
Nevertheless, success in strong-arming smaller economies and exporters to recognise China as a market economy, cuts no ice with the EU or the U.S. who remain implacably opposed, for the simple reason that this would restrict anti-dumping measures against China's vast export surplus. 

Equally, China has made no inroads in persuading either the U.S. or the EU that it is, in fact, a market economy, doing nothing to ensure EU or U.S. companies actually gain market access to China without endless conditions and habitual delays. 

Specifically, China continually promises to open market access for EU and U.S. exporters, but then frustrates them in practice, demands investment takes place through joint ventures, often with SOEs, and routinely insists upon technology transfer.
Ironically, all of these restrictive practises are forbidden in the same accession agreement upon which China relies in its case for market economy status in the first place, but because the WTO's enforcement procedures are simply not strong enough to enforce all the provisions in the accession agreement the issues are continually raised as future concessions, when they are simply 16 years overdue.
For many years the lure of market access to China has been enough for foreign exporters to soft-peddle their demands, and the recent U.S. action to 'self-initiate' an anti-dumping action over aluminium is an indicator that supply chains are complex enough for individual companies to fear retaliation. 

But there is no mistaking that the slow, cross sectoral and inter-departmental ratchet of U.S. pressure is rising on China trade. 

Even the new National Security Strategy is said to make much stronger linkages between political and economic questions than in the past, with a particular focus on China.

Is the WTO threatened?
Since Davos in January, where Xi Jinping was hailed as a new defender of free trade, much hyperbole has bypassed the reality of China's actual trade policy and practice and instead focussed on U.S. retreat. 

But Robert Lighthizer's recent remarks clearly indicate that U.S. patience is running thin with the WTO as a arbitrator of trade disputes, suggesting that the U.S. will start to draw upon an arsenal of dormant unilateral powers that may undermine the centrality of the WTO to world trade. 

This may or may not be understood as a retreat from free trade, but it is obviously inspired by a frustration with the inability of a rules based system to enforce the rules it is based on. 

In other words, while the WTO won't disappear, it does risk being sidelined.
Recognising China as a 'market based' economy then, has become a real dispute with an extra helping of symbolism. 

Not only is it about China's ability to resist anti-dumping measures, but also whether a serious international organisation, dedicated to the serious business of trade, can withstand its central provisions becoming mere polite fictions. 

So when Lighthizer says that a decision to recognise China as a market economy "would be cataclysmic for the WTO," it might be worth taking him seriously. 

Moreover, if joining the WTO was the spur to Chinese economic development that most economists claim it was, policy makers in Beijing might want to conduct an impact assessment on the risk of it all falling apart.

China Doesn't Deserve Its 'Market Economy' Status By WTO

There is no automatic provision for China to be accorded market economy status

By Douglas Bulloch 

China's status in the WTO will attract increasing attention over the next few weeks and months. 

Not only has recent Twitter activity from the U.S. President drawn attention to long-standing arguments over whether China has really lived up to the conditions of its accession agreement, but Dec. 11 marked the 15th anniversary of that accession.
According to Beijing, this anniversary marks the point at which China "automatically" gains 'market economy status' within the WTO, thus constraining the potential use of anti-dumping measures against China by the U.S. and the EU, who are holding out against such recognition.

Steelworkers hold placards as they protest in front of the European Commission building during a demonstration of steelworkers around the EU quarter of Brussels on Monday, Feb. 15, 2016. Thousands of steel workers from across the European Union demonstrated against the import of cheap Chinese products and warned EU leaders not to acerbate the situation by granting Beijing market economy status. Sign reads 'Stop China Dumping'.

Devil in the Detail
A closer look at the treaty reveals this to be a generous interpretation, but not without some justification. 

In fact, Article 15 of the treaty provides importers with the means to enact anti-dumping measures according to two broad approaches. 

First of all, and generally, "the importing WTO Member shall use Chinese prices or costs for the industry under investigation in determining price comparability."
However, in Paragraph (a), subsection (ii), it states that "[t]he importing WTO Member may use a methodology that is not based on a strict comparison with domestic prices or costs in China if the producers under investigation cannot clearly show that market economy conditions prevail in the industry producing the like product with regard to manufacture, production and sale of that product."
Clearly the agreement was written to incentivize China to 'show that market economy conditions prevail' before anyone was obliged to treat them as a 'market economy' when considering whether China was guilty of 'dumping' or not. 

Until they do so, foreign importers are allowed under WTO rules to compare prices and conditions in China to those in other countries when assessing the nature and extent of any suspected dumping practices. 

The alternative, using Chinese prices, makes the foreign importer dependent on information provided by China, and might make it harder -- though not impossible -- to demonstrate unambiguously that dumping is actually taking place.

'Market Economy Status' is Not Automatic
Until now, the onus was on the Chinese producer to prove that 'market economy' conditions prevailed in that particular sector in China. 

But there is a further clause -- Article 15 (d) -- in the agreement that states "the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession."
Now, therefore, China are demanding that they be recognized as a 'market economy' in line with their interpretation of the agreement. 

Unfortunately this is not, technically, what the agreement says. 

China is, however, correct that the agreement should limit the ability of foreign importers to use non-Chinese prices as a reference point for their anti-dumping actions.
In other words, the mere fact that 15 years have passed since the signing of the agreement should entail that the methodology by which foreign importers are permitted to calculate whether dumping has taken place is constrained, but there is no automatic provision for China to be accorded 'market economy' status.
Indeed, if China were to be considered a 'market economy' the relevant importer would be forswearing the need for anti-dumping measures altogether, which, in the current climate, is unlikely to happen.
More importantly, according to the agreement, there is no basis for it to happen. 

The onus remains on China to prove that it is a 'market economy'. 

Indeed, the fact that China have been simply running out the clock on Article 15 could be taken as evidence in itself for the fact that China is not a 'market economy.' 

They have had 15 years to demonstrate that they are a 'market economy' after all, and even today it may be arguable true of some sectors, but it is not -- on the whole -- taken seriously.

Xi Jinping (right) shakes hands with Director-General of the World Trade Organization (WTO) Roberto Azevedo to the G20 Summit at the Hangzhou International Expo Center on September 4, 2016 in Hangzhou, China.

Diplomatic Pressure
Furthermore, it should be noted that many countries have granted 'market economy status' to China, although they tend to be countries that export to China under a Free Trade agreement. 

In each case, the granting of 'market economy status' was a consequence of diplomatic agreement rather than technical proof, and even these countries still apply anti-dumping measures on Chinese products. 

Australia, for example, recognized China as 'market economy' as long ago as 2006, yet still applied anti-dumping measures on Chinese steel earlier this year.
The difficulty China will face is that this rather technical issue will now simply be added to the great number of other disputes over whether China has actually lived up to the conditions in its WTO accession agreement. 

These are detailed annually in a report to U.S. Congress by the U.S. Trade Representative (December 2015 edition can be downloaded here, 2016 edition pending).
There is, however, the prospect of diplomatic pressure coming from China at being refused 'market economy' status: threats even of a 'trade war' from some quarters. 

Nevertheless, given the wider climate in which China's trading relations are coming into question, this issue may have to take its place in a long line of ongoing problems with a diminishing likelihood of resolution. 

In any event, China is not a market economy and there are limits to the ability of diplomacy to turn fiction into fact.