How Brussels should deal with the question of China’s Market Economy Status

The European Union should not rush into granting Market Economy Status to China. Such a step would not only make it harder for the EU to impose anti-dumping duties on Chinese imports, exposing vulnerable European industries to a new price war. It would also risk creating a publicly visible clash of member states’ interests, further suffering of the EU’s legitimacy in the eyes of citizens and business communities, and another blow to the EU’s credibility as an international actor.

In their China Policy Brief the MERICS experts Mikko Huotari, Jan Gaspers and Olaf Böhnke analyse the implications of removing one of the last roadblocks against unfair competition from EU-China trade relations. The authors urge European policy-makers to formulate common European interests from a position of strength and to enter into hard-handed negotiations with China. At the same time, the EU should shore up its trade defence regime to prepare for possible conflicts with China.

The EU should aim for a deal with China

For the EU, the question of whether or not to grant Market Economy Status (MES) to China should not be on autopilot, regardless of China’s expectation to reach that status in December. EU policymakers should aim to find a solution between fully accommodating China and seeking open confrontation. In doing so, the EU should adopt and combine elements of approaches already pursued by some of the EU’s key Western partners, such as Australia, Canada, or the US. A possible EU strategy could include one or more of the following elements:

  • Transitional and sectoral bargains: The EU could grant MES in steps taking into account determinations of whether or not specific industries in China operate according to market principles.
  • Package deal: China would make concessions in exchange for MES. These could include export self-restrictions or a more level playing field for foreign companies in China.
  • WTO compliance: At the very least, the EU should push China for better compliance with its WTO commitments and to seek progress on concluding the planned WTO agreement on government procurement.

According to the MERICS authors the December 2016 deadline must be pushed back, giving the EU more time to develop a coordinated approach. In the meantime, the EU needs to modernise its trade defence mechanisms to prepare for the impact of the MES decision and possible retaliation from China.

When China joined the World Trade Organisation in 2001, a clause of China’s accession protocol explicitly allowed other states to use specific calculation methods to determine whether imported Chinese goods were unfairly priced. When this clause expires in December 2016, China expects to be automatically accepted as a full market economy by other WTO member states. The granting of MES would make it harder for those states to protect their trade interests from on-going unfair competition against China’s state-led economy.

Proactively granting MES carries economic and political risks

China has not evolved into a full-fledged market economy in the 15 years since its accession to the WTO. Economic competition between China and Europe remains unfair. China’s current economic slowdown heightens the prospects of a trade war as China is increasingly trying to push its own overcapacities into the global market and to improve its export competitiveness with a further devaluation of its currency.

The prevailing preference in the European Commission to proactively grant MES to China poses significant economic and political risks. Taking this step at this point in time would increase the impact of Chinese dumping and put pressure on a number of European industries, especially on heavy industries in Italy, Germany, Spain, France and Poland. Though the net effects are hard to predict, the EU is almost certain to lose credibility among its business community and citizens if it is not seen as fighting for a better deal for its own companies. The EU would also look weak in comparison with other international actors, most of whom are taking a more strategic stance towards Beijing on this issue.  

 

Media contact