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Recent Developments on Issue of Mainland China’s Market Economy Status, and EU’s Possible New Approach

During the first half of July, Hong Kong traders may have noticed a flurry of activity and statements as Brussels prepares a strategy for the approaching Chinese “market economy status” (MES) deadline. The current trend suggests that the EU will grant MES, but with so many conditions that it may end up being a distinction without a difference.

Exporters with interests in the Chinese mainland will have been hoping to gain increased access to European markets. However, European lawmakers appear to be taking a protectionist turn by encouraging barriers on Chinese imports despite the WTO accession agreement’s 11 December 2016 status change.

It was clear from the outset that the British referendum to leave the EU would alter the rhetoric in Brussels. The tone set by EU institutions has been increasingly protectionist, partly due to the growing concern from Member States that feel threatened by a possible “flood” of mainland Chinese products. The UK’s role in the EU has traditionally been that of a free trade advocate. Yet, due in part to voter discontent over globalisation and fear of related unemployment, the Brexit vote to leave the EU has weakened the UK’s legitimacy in influencing EU trade policy.

Consequently, only a few, such as Sweden and the Netherlands, remain as States which traditionally provide resistance to stronger trade defences, both generally and when it comes to mainland China. Given this novel scenario, the possibility of the EU not fully honouring a mainland Chinese MES seems increasingly likely.

The European private sector has also begun to voice its concerns. As reported on 11 July 2016, top European metal, ceramic and alloy manufacturers made a plea for EU leaders to refuse to recognise mainland China as a market economy, warning that to do so would “appear weak”. Guy Thiran, the director general of metals association Eurometaux, warned that mainland China’s (alleged) subsidising of its aluminium industry has already forced three European smelters to close in “just over a decade”.

Alfonso Panzani, chief executive of Italian ceramics maker Ceramiche Settecento Valtresinaro, said proposed changes in EU trade law would put some 100,000 ceramics jobs at risk. Strongest criticisms came from Milan Nitzschke, a spokesman from AEGIS, a European industry alliance of more than 30 sectors, who said MES for mainland China would flood Europe with cheap products and “wipe out millions of European jobs”. An analogous change in discourse from EU officials has been noticeable.

Speaking in Beijing on 13 July, Jean-Claude Junker, President of the European Commission, made the statement that “for us there is a clear link between the over capacity of China and the market economy status for China”. Cecilia Malmström, EU Trade Commissioner, used similar language in a speech in Beijing on 11 July, asking: “Why do European steelmakers have to lay off workers when they are competing with Chinese firms who benefit from huge subsidies?” Such questions are at the heart of European concerns around accepting mainland China’s MES.

Chinese Premier Li Keqiang did, in response, reiterate mainland China’s position that it expected the EU to honour a clause in its WTO accession agreement that reads: “in any event”, provisions allowing Chinese goods to be compared with those of third countries “shall expire 15 years after the date of accession.” Premier Li additionally noted that “90 per cent” of China’s steel output is consumed domestically, denying that his country subsidised its steel exports. Premier Li added that global excess capacity in steel “needs everyone to cooperate. It’s not a problem for any one country to solve”.

It remains to be seen whether the reassurances from Premier Li will be sufficient to mollify mainland China’s MES opposition in Europe. Commissioner Malmström is not expected to publicly voice the Commission’s preferred strategy until she has discussed the topic with her fellow commissioners.

Nonetheless, a draft proposal by the European Commission apparently suggests that EU officials might adopt a new technique of measuring the fair price of a product. This would resemble a US trade-defence procedure that breaks the manufacturing costs of a product into different categories and checks them against different countries.

This proposal could, in theory, allow the EU to grant mainland China MES while still having the power to strip market economy status on an industry-by-industry basis. Such a compromise would be in keeping with comments made by Jyrki Katainen, EU Commission vice-president for jobs, growth, investment and competitiveness. “We are in favour of free trade…[but] as long as overcapacity is harming free trade it’s very difficult to do free trade,” Katainen said at an event in Hong Kong. He added that “we are willing to fulfil our legal commitment but we are not naive.

Should the EU adopt stricter trade defence policies it would be in keeping with the United States’ current trade policy with mainland China. The US has tried to counteract the negative impact of cheap Chinese steel by increasing its tariffs on imports of cold rolled steel from China to 522%. The EU, by comparison, has a tariff of only 16% on Chinese cold rolled steel. On 13 July 2016, the US went further as President Obama launched a formal complaint with the WTO against Beijing: a clear expression of US resistance to mainland China having MES which may spread to Europe.

Whether or not trade between the EU and mainland China proves to be an exception, there is increasing resistance to globalisation generally. Gary Hufbauer, senior fellow at the Peterson Institute for International Economics, has warned that anti-globalisation sentiment is on the rise. “Even before Brexit, the World Trade Organisation’s Doha Round was dead, the Trans-Pacific Partnership faced political hurdles, and micro-protectionist measures were sprouting like summer dandelions,” Hufbauer wrote in a recent article.

Exactly how the European Commission will balance the approaching Chinese MES deadline and the public sentiment against global trade will likely become clearer in the coming days and weeks, as the Commission unfolds its proposal on the MES issue.

Content provided by Picture: HKTDC Research
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