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Beijing's long-awaited status update

Zhang Danhong / jtm
July 11, 2016

Until now, China has forgone being titled a market economy, a matter far beyond semantics. It believes the time to change this has come. But it still has to convince the EU of the same - either through talks or threats.

People under the EU's and China's flags in Beijing
Image: AP

When representatives of the EU and China kick off a two-day summit in Beijing on Tuesday, one matter will loom above the rest. For quite some time, the Chinese government has pressed the EU to grant it "market economy status". The EU, however, is torn.

Many hailed China's 2001 entrance into the World Trade Organization (WTO) a big success - after all, one of the world's most important economies had submitted itself to global regulations. But the move also presented challenges for both China and its trading partners. A massive increase in competition, triggered by the drastic drop of import duties, would have put companies on both sides under pressure. Special rules and transitional periods were set up to prevent future trade conflicts.

One such measure, Article 15 of China's accession treaty to the WTO, stipulated that China, whose government continues to wield certain influences and planning powers over domestic industry, wouldn't be recognized as having a market economy for 15 years. This has made it easier for trading partners to pursue anti-dumping lawsuits against Chinese businesses and impose higher duties on Chinese imports.

A stand-off over steel

Now this transitional period is coming to an end in December. China sees no need for discussion about what comes next. An end is an end; a transition leads to something new. An assessment by the European Commission, the EU's executive arm, also leans in this direction.

But the European Parliament hasn't gotten on board. In May, its members voted to withhold market economy status from China, amid protests by Europe's steel industry against competition from the east. Facing less domestic demand, Chinese steel producers have exported higher volumes to the EU. Local producers haven't been able to compete with Chinese steel's low price, leaving many worried for their future.

Beijing hopes to alleviate the problem by reducing overcapacity in Chinese production. But it isn't likely to take any measures that could affect its economy too greatly for this purpose.

The threat of a trade war

The European Commission now has to ask itself, which side to upset. The parliament's decision is not binding. But Brussels is out to combat its reputation as overbearing that proved costly in the Brexit vote. The commission will have to think through ignoring the EU's most democratic arm. And to seal the status change with Beijing, it will ultimately need the parliament's approval anyways.

On the other hand, China could end up retaliating if the EU denies its request. "Europe should think twice before it makes a final decision about China's market economy," warned the state-run news agency Xinhua in response to the parliament's resolution. Germany's auto industry, which has done good business in China, could suffer the consequences.

So talk of a trade war has already begun, a trade war, which is likely to hurt both sides. The EU is China's most important trading partner - it has twice as much invested in Europe than the other way around. Some sort of compromise will likely be necessary, but time is short.

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