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European Commission Outlines Proposal to Address Mainland China MES Issue

On 20 July 2016, European Commission officials outlined their intended revisions to trade defence legislation. Hong Kong traders will likely be aware that this is fortuitous timing in light of the 11 December 2016 expiry of certain provisions to mainland China’s World Trade Organization (WTO) accession protocol.

In light of this timeframe, the EU will have to decide whether or not mainland China is a “market economy”. The approach being presented reflects movement within the Commission towards a “political solution,” an attempt to appease both mainland China and opposition inside Europe.

The revisions were explained during a press conference in Brussels by Jyrki Katainen, European Commission Vice-President responsible for Jobs, Growth, Investment, and Competitiveness, and Cecilia Malmström, European Trade Commissioner. “Today’s discussion was not about whether or not China is a market economy,” said Katainen, referring to talks within the College of Commissioners. “It is about how to adapt our trade defence instruments to deal with the realities of overcapacity and a changing international legal framework.”

A formal legislative proposal is still being thought through and is allegedly due during the autumn of this year. This will not give the upcoming proposal much time to go through the EU legislative process: specifically, its necessary approval by the Council of Member States and European Parliament.
 
During the 20 July press conference, Katainen and Malmström explained that their proposed approach would entail three main components. The first of these would be to change anti-dumping rules so they no longer differentiate between countries labelled as “market economy” or “non-market economy”. Under the current regime, should a country be classified as a non-market economy, then the EU determines the “normal value” of a good using a “price or constructed value” from another country that is a market economy.

The European Commission will propose changing to a “country-neutral” calculation method. This new approach would apply to all trade partners, including Hong Kong. The measures would direct EU trade officials to compare a country’s export prices with international prices, rather than those of a third country, during a dumping inquiry. Officials claimed that this would ensure that the EU is upholding its international obligations at the WTO. “We will not grant market economy status to China. But we will fulfil our international commitments,” said Katainen.

Meanwhile, under the upcoming proposal, there would also be provisions for a “transition period” that would see existing anti-dumping measures, as well as ongoing investigations, being treated under the old rules. The EU would also compare mainland Chinese prices with international prices in its future investigations, officials said, while working to speed up the timetable for such probes. Officials also indicated that they would aim to revise their rules on conducting anti-subsidy investigations, also known as countervailing duty investigations, in order to allow for new subsidies uncovered during a probe to be worked into the final duties.

Secondly, the European Commission will continue to press Member States in the EU Council to approve proposed changes to the bloc’s Trade Defence Instruments (TDIs), which have been tabled since April 2013. The proposed changes to the TDIs included telling companies two weeks ahead of time of provisional anti-dumping and anti-subsidy measures; and allowing the Commission to launch investigations without the industry having to first file a complaint, for instance in cases where retaliation might occur. “We have been pushing hard to find a compromise with Member States”, Katainen told reporters. “We can make our procedures both faster and firmer, strengthening our ability to enforce fair trade and bringing us closer to the American model of trade defence.” In the past, nations such as Britain, Sweden and the Netherlands have opposed such reforms, however Britain’s influence in the EU has diminished since the Brexit results.

Lastly, the two Commissioners said that the joint EU-China steel platform announced at a bilateral summit earlier in July would be key in addressing the growing anti-globalisation sentiment found in some part of Europe. “[Overcapacity] is a serious challenge in China and they have recognised the problem there,” said Katainen. Addressing it within the Asian economy will likely lead to factory closures; he added that it will not be “an easy task” for mainland China.

The urgency for revising the EU’s anti-dumping rules comes in light of the December 2016 deadline involving the terms under which mainland China became a member of the Geneva-based WTO. When mainland China joined the global trade body in 2001, it agreed in Section 15 of its accession protocol to certain terms (adverse to it) regarding the determining of “price compatibility” under the WTO’s General Agreement on Tariffs and Trade (GATT), and Anti-dumping Agreement. However, that subparagraph then adds that “in any event, the provisions… shall expire 15 years after the date of accession”.

The 15-year deadline has set off an intense debate over how WTO members that treat mainland China as a non-market economy in their own anti-dumping probes will need to proceed following 11 December 2016, in order not to run afoul of WTO rules. The members that have particularly come into focus in this debate include the US, Japan and the EU.

This potential approach from the European Commission bears strong contrasts to Washington’s position. The United States has been unequivocal: mainland China cannot be considered as a market economy. The US plans to wait and see whether mainland China launches a dispute at the WTO if its market economy status designation is not recognised by the end of the year. American trade officials argue that Brussels’ attempts to both maintain current trade barriers while sidestepping the market economy status issue are undermining hopes of winning any ultimate case against mainland China in the WTO.

It remains to be seen how mainland China will react to these developments. Attaining market economy status has been a mainland Chinese foreign policy goal since the country joined the WTO in 2001. Should Beijing be dissatisfied with Europe’s redefinition of market economy status then the possibility of a retaliation (similar to the 2012 solar panels dispute, where mainland China had threatened to limit French wine imports) remains.

In addition, mainland China has additional leverage as the nation is currently deliberating on the amount they want to contribute to the Commission’s €300 billion infrastructure spending plan. Although, given that only 1.38% of EU imports from mainland China are subject to anti-dumping measures (as at end-2015), observers hope that the potential costs of a “trade war” would outstrip whatever gains mainland China hopes to garner from retaliation. In the meantime, EU officials have the rest of the summer to mull over the proposed changes.

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