The Impact of Granting Market Economy Status to China

A recent analysis by Robert Scott and Xiao Jiang at the Economic Policy Institute looks at how Europe's trade relationship with China could change over the coming years as the World Trade Organization considers whether to grant market economy status or MES to China. 

According to the original Protocol of Accession to the World Trade Organization signed by China in December 2001, other member countries were to consider China to be a Non-Market Economy (NME) as shown in Articles 15(a) of the Protocol:

"15.  Price Comparability in Determining Subsidies and Dumping

 Article VI of the GATT 1994, the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 ("Anti-Dumping Agreement") and the SCM Agreement shall apply in proceedings involving imports of Chinese origin into a WTO Member consistent with the following:

         (a) In determining price comparability under Article VI of the GATT 1994 and the Anti‑Dumping Agreement, the importing WTO Member shall use either Chinese prices or costs for the industry under investigation or a methodology that is not based on a strict comparison with domestic prices or costs in China based on the following rules:

   (i) If the producers under investigation can clearly show that market economy conditions prevail in the industry producing the like product with regard to the manufacture, production and sale of that product, the importing WTO Member shall use Chinese prices or costs for the industry under investigation in determining price comparability;

   (ii) The 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.” (my bold)

Looking just a bit further into the Protocol, we find this:

“   (d)  Once China has established, under the national law of the importing WTO Member, that it is a market economy, the provisions of subparagraph (a) shall be terminated provided that the importing Member's national law contains market economy criteria as of the date of accession.  In any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession.  In addition, should China establish, pursuant to the national law of the importing WTO Member, that market economy conditions prevail in a particular industry or sector, the non‑market economy provisions of subparagraph (a) shall no longer apply to that industry or sector.” (my bold)

This means that by December 2016, Canada, Japan, the United States and Europe must present a case for whether or not China has met the criteria as a market economy.  Assuming that either trading partner takes a hardline position on the issue, the stage will be set for China to initiate legal action under the World Trade Organization.

Some WTO members already consider China to be a market economy, however, Europe, Canada and the United States have not yet done so.  While all of this may seem rather academic to most of us, it will have a significant impact on both the European, Canadian and American economies.  

As background, under Article 15 of China's Protocol of Accession to the WTO, other WTO members were to disregard Chinese prices and costs in antidumping cases and were to base the calculation of dumping margins using external surrogate benchmarks.  Since China is a leading target of dumping cases on a worldwide basis, the current NME method is a sore point and has led to a vigorous diplomatic campaign by China with its trade partners.  This campaign led to New Zealand, Singapore, Australia and Malaysia declaring that China met the criteria as a market economy.

Dumping is defined as follows:

"...the export by a country or company of a product at a price that is lower in the foreign market than the price charged in the domestic market. As dumping usually involves substantial export volumes of the product, it often has the effect of endangering the financial viability of manufacturers or producers of the product in the importing nation.
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Obviously, preventing the occurrence of dumping is very important to the economies of importing nations.

In case you wondered how prevalent it was, here is a table showing the main targets of anti-dumping investigations in 2014:

Here is a table showing the number of anti-dumping investigations against China by a number of OECD nations between 1978 and 2011 and which of those nations have already granted market economy status to China:

As you can see, the greatest number of anti-dumping investigations against China were instigated by the United States (165), India (147) and the European Union (143).  

Why is gaining market economy status so important to China?  With MES status, China could avoid effective enforcement of anti-dumping laws in these and other jurisdictions for two reasons:

1.) anti-dumping investigations would have to presume that prices and costs in China are market determined which would result in much lower or even zero duties in anti-dumping cases.

2.) it would eliminate the threat that duties could be imposed on Chinese products that benefit from depressed or subsidized input costs.  Subsidies of inputs including energy, raw materials, land and the cost of capital are common in China's economy.  These subsidies have led to sustained overproduction in the steel, aluminum, ceramics, motor vehicle parts, paper and paper products, voltaic solar cells and other industries.

Now that we have that background, let's return to the EPI analysis on the impact of granting market economy status on Europe's economy, keeping in mind that there will also likely be a similar impact on both the American and Canadian economies.

Let's start this section by looking at the growing trade deficit between Europe and China between 2000 and 2015:

Between 2000 and 2015, overall European imports from China increased by an annual rate of 11.1 percent.  In 2015, the EU trade deficit with China is expected to hit an all-time peak of €182.8 billion.

According to the analysis, a decision to grant MES status to China would expose industries in Europe, the United States and Canada to a flood of cheap products sourced in China.  Domestic industries would have very little ammunition to protect itself from underpriced manufactured goods.  Here is a table showing how the granting of MES status to China will impact manufacturing imports and Europe's gross domestic product:

Obviously, the granting of MES by Europe would have a significant impact on an already struggling European employment picture as shown on this table which looks at both low and high impact scenarios:

In addition to the 1.745 and 3.49 million jobs at risk, an additional 2.7 million jobs in import-sensitive industries like paper, ceramics, steel and motor vehicle parts would be at risk as shown on this table:

The biggest job loses would be in Germany (between 319,700 and 639,200 jobs) followed by Italy (208,100 to 416,200 jobs), the United Kingdom (between 193,400 and 386,800 jobs) and France (183,300 to 366,800 jobs).  In Italy, this would impact up to 1.9 percent of total employment, in Germany up 1o 1.7 percent of total employment and in the United Kingdom up to 1.4 percent of total employment).

Here is a table showing jobs at risk for all EU members ranked by number of jobs at risk:

While governments love to tout the advantages of trade agreements, this analysis by the Economic Policy Institute shows us that there is a significant downside, particularly when it comes to trade with China.  While this analysis looked at the impact of granting market economy status to China on Europe's economy, it is likely that there will be a similar impact on the economies of Canada and the United States once they grant MES status to China.  This impact will be felt by the already beleaguered manufacturing sectors in both nations.