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Pressure on EU Mounts in Lead-up to Mainland China ‘Market Economy Status’ Deadline

As decision–time for the granting of market economy status (MES) to mainland China nears, the EU has given its first public description of new measures designed to tackle alleged Chinese dumping and illegal subsidies.

The EU is legally required under World Trade Organization (WTO) rules to start treating mainland China as an industrialized “market economy” before the end of 2016, meaning it will no longer be permitted to apply the tougher trade measures currently applied against the Chinese mainland by reason of its classification as a “non-market economy”.

Hong Kong traders may remember that the EU institutions will need to vote in favour of granting China MES before the end of the year, in order to comply with its WTO obligations.  This is, of course, an extremely ambitious – and almost certain to be missed – deadline.

Moreover, faced with the reality that a positive vote will run contrary to the clear wishes of the European Parliament, and, according to some, endanger many of the EU’s core industries, the Commission has been compelled to attempt to diffuse the significance of the contentious vote.

In July 2016, it proposed to change how it determines the rate of dumping duties for all countries, irrespective of whether a market or non-market economy is involved. The focus now for the EU is on developing a trade defence proposal which, in the eventuality that China transits to MES, will grant EU companies the same or a similar degree of protection to the one they currently enjoy.

Thus, it has been recently reported that this proposal may include plans to increase duties by proposing a series of exceptions to the so-called “lesser duty rule” (the rule that is currently routinely applied by the EU in anti-dumping proceedings) to cases involving a surplus in production. Under the “lesser duty rule”, the EU is limited to imposing tariffs calculated to offset any actual harm to European business. However, the possible introduction of a waiver to this standard system marks a shift towards the tougher U.S. scheme of penalties, which uses the amount by which dumped imports undercut production prices to calculate tariffs.

The Commission’s hard-hitting proposal is indicative of the fierce lobbying done by interest groups and high ranking political bodies in Brussels, who have voiced strong concern that opening the EU market further to mainland China will damage smaller businesses (SMEs), lead to significant job losses and decrease European competitiveness and innovation.

The European Economic and Social Committee (EESC), an influential EU body, has recently underlined the threat that granting MES would pose to many of Europe’s key industries - such as steel, aluminium, bicycles, textiles, glass and ceramics – which stand, according to the EESC, to make enormous losses, if protections against cheap imports are not imposed.

In its strongly worded opinion dated 14 July 2016, EESC rapporteur Andrés Barceló Delgado pointed to the disastrous impact “granting unconditional market economy status to China” would have in Europe and calls on the EU to use “efficient trade defence instruments [TDIs]”. The opinion notes that between 2000 and 2014, European industries lost 6.7 million workers, while the EU’s import volume index increased by 144% in the same period. Barceló Delgado insists that “as long as China does not meet the five [criteria the EU has developed for fulfilling MES,] it does not qualify as a market economy.” The EESC has stated that it intends to set up a dedicated project to monitor the issue of mainland China’s MES on behalf of civil society.

The Commission and other industry representatives have also expressed concern. A European Commission study has estimated that the EU could lose at least 211,000 jobs if mainland China were to be granted MES. Describing the consequences as “catastrophic”, Gerd Götz, Director General of trade association ‘European Aluminium’, said that “opening the door to China – regardless of mitigating measures – would jeopardise the EU’s long-term industrial future”. The aluminium industry further warned that the change in status would put 80,000 European aluminium workers at risk of losing their jobs, at a time when mainland China’s over capacity is, according to their reports, currently five times the size of the EU’s entire production.

The rising pressure from industry groups and civil society organisations was reflected in a statement made by Jean-Claude Juncker, President of the European Commission, on 4 September, at the 2016 G20 summit in Hangzhou. He expressed his determination to protect the European steel industry and its workers, and warned Chinese officials that the formal trade defence proposal, designed to target overcapacity, was imminent. 

The Commission may, however, face two obstacles when attempting to adapt to the new waiver system outlined above, expected under the proposal. Firstly, it has had repeated difficulty in obtaining reliable data on overcapacity from Chinese companies which is needed to impose TDIs. At the 2016 G20 summit, Juncker called on mainland China to agree “to set up a mechanism to monitor overcapacity in the steel sector”, stating that the matter of arranging a bilateral working group was agreed between the EU and mainland China last July.

The G20 communiqué, delivered at the end of the summit, included a call for increased information sharing and cooperation through the formation of a ‘Global Forum on steel excess capacity’. The forum would be facilitated by the OECD with the active participation of G20 members. The practical success of the Commission’s new proposal would depend on mainland China’s willingness to cooperate with its trading partners.

The second obstacle faced by the Commission stems from reports that there is a blocking minority of EU Member States that want to prevent the Commission from raising duties against mainland China. While Germany and France are insisting on dropping the “lesser duty rule” in favour of tougher measures, the UK and other northern European countries have been blocking any changes. They argue that hiking tariffs runs contrary to the principle of free trade.

It should be noted, however, that the UK’s influence in Brussels and its ability to advocate for free trade have been waning, ever since its government confirmed it would be leaving the EU at some point in the coming years. On the more positive side, on 5 September 2016, Xi Jingpin stated that his country would be “open” to a bilateral trade arrangement with the exiting Member State.

For the moment however, all eyes are on the Commission as it prepares the final details of its hotly anticipated trade defence proposal to address overproduction. Juncker has declared it could be published as early as October 2016.

Content provided by Picture: HKTDC Research
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