A dream unfulfilled

Sunday will mark the 15th anniversary of China becoming a member of the World Trade Organization (WTO), the body that regulates global commerce. When it joined the WTO, China agreed to be treated as a non-market economy (NME) for up to 15 years in return for assurances that it would attain Market Economy Status (MES) afterwards. 

As the date nears, there is increased focus on whether or not China's major trade partners and competitors like the US and the EU will  grant MES status to Beijing.

Recognizing China as a market economy would mean that other countries would have to treat the Communist-governed Asian giant as a free market equal when it comes to resolving trade disputes. It's unsurprising that China wants the MES, which puts an end to these countries treating it as an unequal partner.

US law defines an NME as any country that "does not operate on market principles of costs or pricing structures, so that the sales of merchandise in such a country do not reflect the fair value of the merchandise."

The current NME status has placed China in a disadvantageous position in anti-dumping litigations. The arrangement gives wide discretion to the US or the EU in determining whether Chinese exporters are "dumping" goods – meaning selling them at below their production costs – in their markets. It also permits them greater flexibility on how they calculate the duties levied on Chinese goods in anti-dumping cases. 

Deep disagreements

Washington and Brussels cherish these discretionary powers and are reluctant to part with them, particularly at a time when they are engaged in a multitude of trade spats ranging from aluminum to steel and solar panels.

For instance, many Western countries blame China for the crisis shaking the global steel industry, with Chinese manufacturers accused of dumping their excess production on global markets, thus contributing to a plunge in the commodity's prices. The steel rout has put a number of European and American firms at risk of bankruptcy, threatening massive job losses. 

The MES decision is further complicated by a growing backlash against free trade in Europe and North America - epitomized by the British vote to leave the EU and the victory of Donald Trump in the US presidential elections. 

In May, the European Parliament even passed a non-binding resolution saying that China did not meet the criteria to be titled a market economy.

The European Commission, the EU's executive arm, also proposed a new formula in November to assess trade partners and calculate anti-dumping tariffs. The criteria would take into consideration a country's policies and government intervention in the markets. They allow the Commission to impose high tariffs on any nation, regardless of their status as a market economy.

Beijing criticized the EU's proposals, saying that the new measures "have no basis" in WTO rules.

On the other side of the Atlantic, US Commerce Secretary Penny Pritzker said last month that the time was "not ripe" for the US to grant China the MES.

The US has domestic benchmarks that must be fulfilled by China before Washington can confer an MES label on Beijing. These criteria examine "the extent to which the government has receded from state planning, which is to say, state control over pricing, production, investment and resource allocation, but also whether market forces are firmly rooted in the economy," according to the US Department of Commerce.

It is open to argument whether or not China's economy complies with these requirements.

Furthermore, President-elect Trump has repeatedly lashed out at China and threatened to declare Beijing a currency manipulator and impose punitive tariffs on its exports amounting to hundreds of billions of dollars.

Meanwhile, Japan has said that it will not initially recognize China as a market economy starting from December 11.

A 'bargaining chip'

Economists like David Dollar, a senior fellow at the Brookings Institution and a leading expert on China's economy and US-China economic relations, argue that the next US administration should use market economy status as a "bargaining chip" in its negotiations with the Chinese government.

"The United States 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," wrote Dollar in an article published by Brookings in October.

Some European experts warn the EU against "proactively" granting MES to China, noting that it poses significant economic and political risks.

"While the net effect of granting MES to China on the EU economy remains unclear, some industries can be expected to suffer, including negative effects on employment levels. This will trigger political backlash among domestic constituencies and further weaken the Union's legitimacy across member states," wrote Mikko Huotari, Jan Gaspers and Olaf Böhnke, authors of a report released in January 2016 by the Berlin-based Mercator Institute for China Studies (MERICS).

"If MES status is granted to China proactively, the country will have even less of an incentive to move in the direction of strengthening market mechanisms," the report said. "At stake are the EU's ability to defend the core economic interests of its member states, important building-blocks of the EU's long-term relations with China, and the credibility of the EU as a powerful actor on the international stage," the authors underlined.

Litigation at WTO?

But how would China respond if some WTO members continued to treat it as a non-market economy?

The Commerce Ministry in Beijing says it would take appropriate counter measures against countries which fail to treat it as a market economy and stop referring to third-party countries in calculating costs in anti-dumping cases against China.

Observers say China is also likely to challenge such a move by its trade partners at the WTO, arguing that their failure to grant it MES recognition amounts to an infringement of the trade body's rules.

According to a report by economists Gary Clyde Hufbauer and Cathleen Cimino-Isaacs published by the Peterson Institute for International Economics, if Beijing wins the case and is granted MES, it could request the right to retaliate with duties of its own if the United States and EU persist in imposing duties on the grounds that China is not a market economy,

"If history is a guide, WTO judges could authorize China to retaliate by an amount defined by the value of trade that China can show it is 'losing' because of continuation of NME treatment," they noted. "The United States may in the end lose more than it gains from withholding MES," emphasized the authors. "US-China broad commercial relations would likely suffer in exchange for a targeted benefit to US industries that back anti-dumping proceedings under current NME procedures."