The EU Division Over China’s Market Economy Status

The EU Division Over China’s Market Economy Status

photo: AK Rockefeller

The dispute over China’s “market economy status” (MES) divides Europe by countries and industries.

It stems from China’s 2001 agreement to join the World Trade Organisation (WTO), which Beijing believes required countries to grant MES to China within 15 years – by December this year.

Reportedly, EU lawyers reached similar conclusions over year ago. While the opinion did not necessarily suggest what the European Commission itself would decide, it did provide legal guidance to trade commissioner Cecilia Malmstroem and commission president Jean-Claude Juncker.

Today, China is the EU’s second-largest trading partner and one of the biggest markets for the 28-member bloc. Brussels’ MES decision will pace EU-China relations for years to come.

Opponents claim that the WTO accession deal does not imply China will be granted MES automatically by the end of the year. They argue that the state still plays a substantial role in the Chinese economy.

Against China’s MES

These critics include industrial lobbyists, trade unions and NGOs. They fear that the MES would hinder Europe’s steep tariffs on Chinese goods.

For instance, Eurofer, which represents European steel firms, claims that in a post-MES environment the industry would have to operate “in a constantly depressed price environment”. They complain that China uses government subsidies to support exports and undermine overseas competition.

But times are changing. Chinese growth no longer relies on net exports, but increasingly on consumption and services.

Even more importantly, China has committed to reducing excess capacity drastically, even if it will require lay-offs of some two million employees in steel and coal sectors in the next three years.

Nevertheless, China’s MES opponents are likely to take advantage of the fact that the MES must be approved by the European Parliament and its national governments – both of which remain divided. They are urging particularly southern Europe – including Italy, Spain and France – to opt for a tougher stance against China.

The opposition is occasionally justified by calls for Trans-Atlantic cooperation. After all, the US, Europe’s greatest trading partner, has warned Brussels over granting the MES to China.

For China’s MES

In contrast to Brussels, Beijing argues that the state’s presence in the economy has shrunk drastically in the past 15 years. Conversely, some Chinese observers add that the role of state has actually increased in several EU economies.

Another way to assess the size of the public sector is to measure general government revenue as share of GDP. On this view, the eurozone average (50%) remains far higher than that of the US (35%) and twice as large as that of China (25%)

Moreover, after the global crisis, China has opted for market-driven structural reforms, which continue to linger in the US, Europe and Japan.

Chinese competitiveness is no longer just about cheap prices, but also about innovation hubs. Despite its huge population, China’s R&D per GDP is today higher than that of the EU on average.

In Europe, MES opponents represent struggling traditional industries, such as steel, ceramics and textiles, which suffer from competitiveness challenges.

For instance, ArcelorMittal is the result of the takeover of the French Arcelor by the Indian Mittal Steel. Of its 209,000 employees, about 40% are in Europe, a minority in non-EU Eastern Europe and most in Nafta (the North American Free Trade Agreement betwee Mexico, the US and Canada), Brazil, Asia and Africa. At its headquarters, Luxembourg, ArcelorMittal is one of the largest private employers, however.

The proponents of China’s MES argue that EU opposition to China’s MES may be less about legal doctrines than industrial policies to revive fading industries in southern Europe. Indeed, much of the more competitive northern Europe – including the UK, the Netherlands and Nordic countries – does support China’s MES.

The Obama administration’s arguments against China’s MES are similar to those that were used unsuccessfully a year ago against the Asian Infrastructure Investment Bank (AIIB). Typically, the key countries that still regard China as a non-market economy include the US, its Nafta partners (Canada, Mexico) and security allies (EU, Japan), along with India. This opposition is fuelled less by economics than geopolitics.

Both Brussels and Washington like to quote a study by the US-based Economic Policy Institute that says granting China MES would risk up to 3.5 million EU jobs.

Yet, in the US, the White House has ignored the trade union-funded EPI, which opposes its Trans-Pacific Partnership (TPP) because “US trade deficit with the TPP countries cost 2 million jobs in 2015” alone.

Time to act

More than 80 countries have already recognised China’s status as a market economy, including BRIC economies, such as Russia and Brazil, but also advanced economies, including Switzerland, Singapore, Australia and New Zealand.

So what should Brussels decide?

In the final analysis, granting China market status is a politico-legal decision, not an economic one.

Nevertheless, if Brussels chooses not to support China’s MES, it will risk a new era of economic friction and Chinese investments in the €300 billion infrastructure fund.

In Europe’s view, the long-term benefits of China’s MES would seem to outweigh the short-term costs.

First, like major trade deals, China’s MES is likely to harm some entrenched interests in Europe but it will offer a more solid long-term relationship with China.

Second, it would support Europe’s quest for Chinese capital.

Third, China’s transition to consumption and innovation will create new opportunities to EU corporates and SMEs.

Fourth, China may be willing to give some concessions because it still prizes the MES.

But things are changing. In the early 2000s, EU GDP was still seven times bigger than that of China; today, the ratio is barely two, and China’s GDP growth remains four times faster than that of the EU.

As the old adage goes, it’s now or never.

The original version was released by EUobserver on March 16, 2016.