Trade Politics Mars Debate Over China's WTO Market Economy Status
Yicai Global
/SOURCE : Yicai
Trade Politics Mars Debate Over China's WTO Market Economy Status

(Yicai Global) Feb. 17 -- US President Trump is a bully who "folds like a cheap tent" when facing a tougher opponent, said a letter on China-US relations published on the Financial Times website on Feb. 10. The analogy is reminiscent of one of the basic characteristics of international trade where the rules of the game seem to be implemented selectively. Granting a country market economy status is a case in point.

The debate over what qualifies a country as a market economy or non-market economy has intensified since the end of last year, which marked the 15th anniversary of China's accession to the World Trade Organization on Dec. 11, 2001. Billions of dollars in lost trade and foreign direct investments are at stake and relations are strained.

China's accession agreement, which stipulated it would be granted Market Economy Status at the end of 15 years, has been interpreted differently. The US, EU and a number of other countries have declined to recognize the world's second-largest economy as being a market economy now, while China argues it should be granted the status. Article 15 of the WTO Accession Protocol considered China as a non-market economy. China asserts it should have been granted Market Economy Status automatically when Article 15's provisions expired in December.

Interpretation of international law may differ according to sides and their views involved. However, varying implementation of international law, which consists of rules, principles and customary law, in a given case could cause disorder in relations among states. This is self-evident in the case of Article 15. Some countries have already granted Market Economy Status to China. Some haven't. The EU, China's largest trade partner, has no legal procedures and set rules on how to decide a country's economic status.

A European Parliament research paper from November 2015 admits the contradictory situation on the matter. "Some importing countries have … granted market economy status to some transitional economies for diplomatic reasons," it says. "Several WTO members have agreed to recognize Market Economy Status for China earlier, for several political reasons, including the conclusion of trade, investment or loan agreements with China."

One of the important considerations for western countries regarding China's market economy status under the WTO seems to be its steel exports, which they claim are being 'dumped' in their markets. These countries argue the need to protect their steel industries from cheaper Chinese products. One of the dangers of a single-line approach is to reduce the debate to a narrow framework that may score points with voters and a 'few' industry people, but risks not seeing the bigger picture.

"There is a danger that the benefit of the few, the steelmakers, could take priority over those of the many," said Stuart Burns, editor-at-large at MetalMiner. "Steel consumers are an extremely diverse group spread across metal-consuming companies and the markets they serve. By contrast, the impact of actions that limit imports or influence import costs may be individually small but collectively large for the wider economy. The impact on the economy of higher steel costs could be significant, raising prices for consumers and reducing the ability of US manufacturers to compete on exports of finished goods."

Not to mention it was western countries that demanded cheap Chinese steel to start with. Moreover, the impact of ant-dumping tariffs may not be limited only to steel products. "The same goes for industries outside of steel in the US and EU, especially those that have outsourced parts of their supply chain to China. According to the WSJ [Wall Street Journal], the automotive and chemical sectors in Europe may have a tough time with higher import duties placed on Chinese goods," Burns added.

Granting China market economy status under the WTO has its own political dimensions. The politics of trade economics is at play in this process. There have been suggestions to use the issue as a 'bargaining chip' in relations with China, as MetalMiner has indicated. It quoted David Dollar, a senior fellow at the US Brookings Institute and an expert on China's economy and China-US relations, as saying, the US "can also use leverage over China's desire to be granted market economy status in order to negotiate significant reductions in excess capacity in steel and other heavy industries."

It is this political aspect of the debate that mars an objective assessment of China's market economy status in the age of Trump. How much of it is related to competition in international affairs is a question that begs an answer. And how much of it is aimed at voters in Trumpland is another.

When China is a fully functioning market economy, will the West be happy with China's dominant global economic position? There is a large elephant in the room.

Follow Yicai Global on Facebook @yicaiglobal and Twitter @yicaichina.

Follow Yicai Global on