May 16, 2016
Last week, we briefly covered the decision by European Union lawmakers to vote against the application by China to be considered a market economy, a recognition China says it is due automatically by December following an agreement in 2001 set to mature this year.
We also published an in-depth look at what China market economy status would mean for U.S./E.U relationship with China.
The European Parliament’s decision was overwhelming, 546 votes in favor and only 28 against, with 77 abstentions so, while the vote is non-binding, it raises the stakes for the European Commission, which will decide shortly whether China deserves to have its status upgraded.
Terrible Timing For Europe
For both sides the debate is at the wrong time. Europe’s steel industry is being decimated by cheap imports from China, raising the stakes for politicians otherwise inclined toward a more free-market approach. The British, in particular, find themselves (not for the first time) somewhat isolated in wanting more open engagement even though their domestic steel industry has been hit harder than most.
In reality, the decision is much more political than practical. Market economy status matters when it comes to deciding whether a country is “dumping,” exporting goods at below cost price. Nations deemed to be market economies can resist anti-dumping measures if they can show that domestic prices are no higher than the price at which goods are sold overseas.
This makes it harder for trade partners to claim they are selling abroad at unfair prices. But there are other mechanisms Europe could adopt to protect its steel industry such as tightening its guidelines on anti-dumping procedures.
Lack of Reform
Most politicians in Europe are arguing that China does not deserve ME status, pointing to cheap and commitment-free credit granted by state banks, free land and subsidized energy that many Chinese state-owned companies enjoy. In addition, China has made little progress in reforming state-owned enterprises in recent years, despite promises to do so.
State-owned companies control a similar majority of the manufacturing sector today as some five years ago. Talk of closing 150 million metric tons of steel capacity over the next five years are undermined by new capacity under construction. The country’s estimated 400 mmt of excess capacity will remain a major threat to steel producers the world over for years to come.
If the EU follows the European Parliament’s lead in denying China ME status, it will be a further nail in the coffin of free trade at a time when populist politicians in Europe and the U.S. are gaining support on the back of protectionist policies. In the case of steel, it is hard to argue otherwise from a European perspective, but where China’s ME status goes, North America’s TransAtlantic Trade and Investment Partnership could follow.