By Cyprien de Massol de Rebetz
The debate over China's access to market economy status
The European Union has a privileged trade relationship with China, with €1 billion in trade every day. Nevertheless, China remains the country the most affected by the European Union's anti-dumping activity. China's move towards a market economy has changed the legislation applicable to Chinese imports into the European market. The European Union has always been reluctant to grant China the market economy status. Despite everything, the European Union had to change its regulations, which were no longer in line with WTO rules. That is why in 2018, the European Union adopted its new parade aimed at protecting its economy from possible distortion from third countries by indirectly targeting China.
China became a member of the WTO as a non-market economy on 11 December 2001. Non-market economy status provided an opportunity for WTO members to put in place provisional anti-dumping measures and derogations from WTO treaties with regard to Chinese exports. This derogation system was justified at the time by the fact that China did not meet the criteria of a market economy. Indeed, the Chinese market was strongly based on the institutional control of the Communist Party, the importance of public ownership and the regulation of the market by macroeconomic means. Public subsidies to companies and privatisations were also very high.
Today, the evolution of the Chinese economic model with less and less State intervention gives China the legitimacy of a market economy. Article 15 of China's WTO Accession Protocol provided such as this conversion of the Chinese economic model, by limiting the derogations for calculating the dumping margin until 12 December 2016. Thus, according to the generalist interpretation of the Protocol, China was granted market economy status on 12 December 2016.
The recognition of China as a market economy is under discussion in Europe. The criteria used for the recognition by Member States of market economy status to a third country are not established by WTO rules and are left to the discretion of Member States. For the European Union, the criteria relating to a market economy are defined in the Regulation of 30 November 2009. Thus, the European Union establishes 5 criteria determining the granting of market economy status. At the 19th China-EU Summit held in Brussels in June 2017, the European Union reiterated its statements and did not recognize China as a market economy state. The non-recognition of this status has been the subject of significant diplomatic incident. Indeed, China considered that the opening and liberalisation of its markets would lead to the recognition by Europeans of its market economy status. The Chinese Government had based its defence on the fact that the extinction of the term in the Protocol necessarily entailed market economy status. Despite everything, Europe has so far refused to recognise China as a market economy, perhaps qualifying it in a reducible way as a socialist market economy.
The non-recognition by the European Union of China's market economy status is based on the fact that by signing the accession protocol, China had undertaken to comply with WTO rules based on a market economy. Nevertheless, for Bernard O’Connor (Equity Partner at NCTM), China has not fulfilled these commitments. He supports the European position by stating that
"China is not a market economy (...) In 2001, when it became a member of the WTO, China signed an agreement containing a whole series of commitments. She respected one or two of them, but not the majority".
There is general disagreement among WTO members on the interpretation of China's WTO accession protocol. Nevertheless, it must be noted that the WTO will in future recognise China as a market economy, which will push Member States to amend their anti-dumping and anti-subsidies legislation. As a result, decision-making was not long in coming in the EU. At the beginning of 2018, the European Commission gave priority to granting China market economy status and a more general reform of trade defence procedures.
Issues related to the recognition of China by the WTO as a market economy
In accordance with the GATT, WTO members are bound by the principles of non-consolidation of customs duties and non-discrimination. However, if a dumping situation is found, the importing country has the possibility to impose anti-dumping duties in order to compensate for the injury suffered by European companies. In addition, in the case of imports from a non-market economy country, as was the case for China, the importing country has the right to apply measures derogating from WTO treaties in calculating the anti-dumping margin. This method was not reciprocal, China had to apply the traditional WTO method to imports from the European Union.
As we have seen, when China joined the WTO, countries considered that China did not respect the conditions of a market economy. Thus, from 2001 to 2016, WTO members were allowed to derogate from the traditional method for calculating the dumping margin. The use of alternative method was justified by the fact that interventionism in China was omnipresent and that the exchange rate was regularly manipulated. The alternative analogue country method was used by the European Commission from 2001-2016, on products from China. The analogue country method allowed a comparison of Chinese products, not to the value of the product in China but to the prices of similar products in a market economy. The use of the analogue country method made it possible to remove all distortions of competition from Chinese products.
In order to prepare for the 2016 deadline, the European Commission had launched surveys on the use of the alternative method. The Commission concluded that
'a change in market economy status would have an impact on the European economy'.
Indeed, without the analogue country method, 90% of the anti-dumping measures applied to China could no longer be applied. In addition, the Commission has acknowledged that the recognition of China as a market economy would have potential consequences for 250 000 European jobs, particularly in the steel industry.
In December 2016, China lodged a complaint against the method used by the European Union to calculate the dumping margin. China's complaint was justified by the fact that the European Union was not complying with WTO provisions. The European Union had to comply with WTO treaties. This is why the European Union undertook a major amendment to its 2009 Regulation by adopting Regulation No 2018/825 on 8 June 2018. This new regulation is part of a European strategy to strengthen its anti-dumping legislation while implicitly recognising China as a market economy.
The European Union's regulatory response to the expiry of Article 15 of China's WTO Accession Protocol
According to Christofer Fjellner MEP, the European Parliament's new Regulation 2018/825 is "the biggest reform of the EU's trade defence instruments in 23 years. We can now ensure that our instruments are adapted to the modern trading system of the 21st century". The new rules on trade defences came into force on 8 June 2018 and will apply to all investigations launched on or after that date. In this regard, Mr. Jean-Claude Juncker said:
"The European Union believes in open and fair trade but it is not a naïve supporter of free trade. And now we're tightening our rules".
Jean-Claude Junker, through this quotation, introduces an important point of the new reform. As a partner in liberalisation, the European Union must, however, sanction practices that distort competition. Thus, Jean-Claude Junker indirectly aims at European developments regarding the rule of lesser duty.
At the end of 2012, 102 anti-dumping measures were imposed in the European Union, half of them against China. Thus, China occupies a major place in the European Union's anti-dumping policy. The solution for the European Union was to indirectly target China by changing the method of calculating anti-dumping duties. This change allowed the European Union to remain in compliance with WTO rules while adopting protective legislation for European Union companies. With this reform, it was clear that China would be directly affected by the implementation of these measures.
The new regulation brings five major advances:
The lesser duty rule, which penalises dumping situations to a minimum is amended. It will allow the Union to compensate for the full damage suffered by European companies. The European Union is the only WTO member to apply the lesser duty rule, this amendment is one more step towards a Europe that protects.
The European Union is changing the target price, which will allow the Commission to take into account the costs incurred by European companies in order to comply with environmental and social standards. For MEP Yannick Jadot, "the European Union is leading the way by becoming the first WTO member to include social and environmental standards in its calculations when it decides to impose anti-dumping duties".
The procedural deadlines are shortened, which will allow provisional anti-dumping measures to be put in place more quickly.
The Commission will draw up an annual distortion report on the third countries most affected by the European Union's anti-dumping measures.The purpose of these reports is to provide European companies with evidence to support their complaints and speed up the process.
Finally, the Commission will support SMEs in the anti-dumping procedure through a specific helpdesk.
The new anti-dumping tools are intended to protect European companies and defend their interests in European market where Chinese exports are increasing. The European response is not synonymous with a trade war. The old continent is not reluctant to engage in free trade, it is a historical example and a strong advocate. Nevertheless, Europe cannot be a naive partner. Thus, the new rules, in accordance with the GATT, allow for the establishment of a more restrictive regime for importers who import in situations of unfair competition.
For more information :
European Parliament :Market Economy Status for China after 2016 ?
European Parliament :Granting of market economy status to China
Robert Schuman Institute :
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