In an interview with Borderlex, L. Alan Winters asks if the unfolding crisis in the steel sector should be the overarching consideration for a forthcoming EU decision to grant China ‘market economy status’ in its antidumping policy this year. Winters also warns that if the West refuses to do so, there could be consequences for China’s commitment to the World Trade Organization.
The China ‘market economy status’ or ‘China MES’ debate is raging in Europe, and it is deeply polarising. We’re interviewing a few experts to ask them what is at stake.
2016 is the year in which the EU and other major economies will need to start pairing back the ‘non-market economy’ treatment they offer Chinese firms in their antidumping laws and procedures. This status allows them to use other methods than those enshrined in the World Trade Organization’s Antidumping Agreement. China’s 2001 WTO accession protocol stipulates that China will need to be treated as a normal WTO member starting in 2016 – though to what extent exactly is debated.
China’s ‘non market economy’ status contributes to making Chinese firms the top target of the EU’s antidumping measures. And the EU’s crisis-ridden steel sector is the biggest beneficiary of the policy. The fresh launch of a new state aid investigation by the Commission targeting an ailing Italian steel plant in Taranto run by Ilva and a decision to recoup €211 bn of state aid from to the benefit of a now defunct steel company Duferco in Belgium has put EU trade defence policy yet again in the limelight.
We have asked a few experts to share their views on this matter. We have already asked China expert Guy de Jonquières, and a Brussels-basedtrade lawyer, Laurent Ruessman, to share their views. Now it’s the turn of an eminent trade economist, L. Alan Winters, Professor of Economics at Sussex University.
Q: Professor Winters, is China a market economy? Does this issue have anything to do with the EU’s WTO commitments?
A: The Chinese economy has some characteristics that we wouldn’t associate strongly with being a market economy. But every economy in the world has some degree of state intervention. To me it is more a matter of degree than of absolutes. China is not yet a fully liberalized economy. But that is also very true of other emerging economies.
The difficulty is that market economy status is not something the WTO’s Antidumping Agreement deals with very explicitly: we are not equipped with indicators nor definitions. But by and large it seems to me that there may be cases, perhaps slightly more frequently in China than elsewhere, where you can argue that state intervention has really distorted prices. But these are specific cases.
The other element is what’s in China’s Protocol of Accession [to the WTO, of 2001]. In one sense it is very clear that the current approach must change, but it doesn’t quite tell you where to go from there. For the sake of antidumping duties, it talks about valuing Chinese goods not based on a strict comparison of domestic prices or costs in China. And it’s said that after fifteen years after accession that [approach] will no longer be used. It is very clear because it says: “in any event”. The difficulty is that [the protocol] does not specify what will then be done. Neither does the general antidumping regime [in the WTO] really deal with that. So there certainly is room for some ambiguity. My guess is that the lawyers would conclude that it is a pretty binding requirement that there would no longer be a use of comparisons that are not based on domestic prices or costs in China.
Q: What is the risk to European and industry – especially the steel industry – of granting China market economy status?
A: The effect on Europe of granting China market economy status does depend on what other countries are doing too, because exports excluded from one market will often flow to another market in homogenous products such as simple steel. Europe’s steel sector has quite a lot of stakes in this decision. If we assume that non market economy status increases antidumping duties by, say, 25 percentage points, then European steel will be more vulnerable if [imposing such high duties] is no longer possible.
There is however the other issue: international trade is about specialising on some sectors and not specialising on others. There are two elements to this. One is usage of steel. There are two sides in market transactions: the producer and the consumer.
The other element is the following: you might also want to ask why, because of one specific industry, you want to maintain a general rule that could also end up distorting other industries. And merely because steel is so organised and prominent, you might want to ask if having such a general rule is of major interest for the whole economy. There may be other sectors, for instance solar panels – which are good for the environment and create jobs – in which having high antidumping duties is not necessarily the greatest policy. Should we have a general rule just because steel has an interest?
Q: What happens if the EU and the West more broadly do not grant China market economy status treatment in 2016? Are there systemic implications of the decision? And should the EU coordinate its views with the United States and other WTO economies facing a similar decision?
My reading is that there is a fairly significant systemic danger. The Chinese have been smarting about the market economy issue ever since the Protocol of Accession [in 2001]. They take it very seriously. I think they would not let is pass unremarked. But quite what their reaction would be is difficult to know. It is very likely that one would see a series of retaliatory antidumping actions. These actions then may or may not be legitimate and one may or may not be able to get dispute settlement in the WTO to overturn them. But that would be an extremely messy and rather unpleasant, inefficient process.
An other issue to worry about is that the Chinese declare that rather than being very good WTO citizens, which they absolutely have been over the last fifteen years, they are going their own way, and withdraw from cooperation in the WTO. I don’t know what the probability of this is, but it is clearly a possibility. Even if they don’t do it, they could threaten to do that.
The market economy status issue is iconic for China. It raises systemic pressures between the EU and China. A coordinated view is going to look like the rest of the world is ganging up on China. I do agree that one could start a negotiation such as postponing some aspects of market economy status recognition. The Chinese are very pragmatic. That is something one could well be done in a coordinated fashion. And China might be moderately cooperative. But the idea that the big Western powers are going to get together and say “you know what, none of us is going to give you market economy status”, I feel that would be awfully aggressive.