A new China emerges on trade battlefield
A Chinese laborer loads coal into a furnace at an unauthorized steel factory on November 3, 2016 in Inner Mongolia, China | Kevin Frayer/Getty Images
Expect China to be on the trade warpath from now on.
Starting Sunday, Beijing will style itself as a so-called market economy and retaliate hard against any trading rival that disagrees.
That coveted political goal means it will be far harder for other countries to impose anti-dumping duties on China. This is one of the most pressing economic concerns for developed nations that say China floods their markets with ultra-cheap steel, toys, bicycles, ceramics and textiles, manufactured way below the price of production thanks to lavish state subsidies.
As long as a country is a “non-market economy,” it is relatively easy to hit back and prove dumping, as Chinese prices can be compared with those in a third — or analog — country, where market forces are agreed to determine fair costs.
China says its main trading partners must now drop that methodology. It’s something Beijing insists that it has won automatically from December 11, based on its terms of accession to the World Trade Organization. The date has come to be seen as a decisive threshold that epitomizes the Middle Kingdom’s breakneck transformation into the world’s biggest trader and manufacturer.
Beijing has already fired off a salvo of stark warnings to the U.S., Japan and the EU that it will counter-attack if they fail to treat China with a new respect in trade disputes.
Two days before the December 11 deadline, Shen Danyang, spokesman for China’s commerce ministry, threatened to take “necessary measures” against all those using the old methodology.
The U.S. position is only likely to harden under the presidency of Donald Trump.
He was quoted by local media saying China would “defend its lawful rights and interests against the small number of members who persist with the ‘surrogate country’ approach in their anti-dumping investigations.”
Court battles and other trade skirmishes are now inevitable.
Washington, Tokyo unmoved
Undaunted by Beijing’s threats, the U.S. promptly declared that it would not change the way that it calculates its anti-dumping duties. “The United States remains concerned about serious imbalances in China’s state-directed economy … China has not made the reforms necessary to operate on market principles,” said a senior Department of Commerce official.
The U.S. position is only likely to harden under the presidency of Donald Trump. The president-elect has wasted no time in criticizing Beijing’s military buildup in the South China Sea and complaining that China is not pulling its weight to rein in nuclear-armed North Korea.
There is little doubt that China will challenge Washington’s position on market economy status at the WTO. “In my judgment, the United States is on solid ground,” said Sander Levin, a senior Democrat in the U.S. House of Representatives.
“If [China wants] to file a case, so be it,” Levin continued. “But it will only expose to the world how China is rigging the economy, in so many respects. They’re not a market economy, for example, in terms of how they treat their workers.”
Acting in lockstep with the U.S., Japan has also flatly refused to treat China as a market economy.
China’s state news agency Xinhua condemned Beijing’s opponents in a clear sign of the ruling party’s displeasure. “The refusal is nothing short of covert protectionism,” it wrote.
China’s critics argue that the complex terms of Beijing’s accession protocol to the WTO do not entitle it to market economy status automatically. Some lawyers say that Beijing cannot become a market economy until it abides by a broader set of economic criteria related to state intervention. Others dispute the language of the accession accord itself, saying that it only means that individual countries are free to take their own view on China’s market economy status claim after December 11.
Europe in a mess
The European Commission has tried to fudge the issue of whether China is a market economy, creating an excruciating legal limbo for industry.
Brussels is trying to win approval from the Council and European Parliament for a proposal that effectively erases the distinctions between market economies and non-market economies. This will mean dropping the analog methodology in EU investigations and shifting to largely untested anti-dumping calculations based on far more fluid “market distortions.”
These market distortions can include easy access to credit, low raw material prices and cheap electricity, but are often hard to prove in court.
Gerd Götz, director general of European Aluminium, noted that the transition period “does cause legal uncertainty and raises many questions for the European aluminum industry.”
Iain MacVay, a partner at law firm King & Spalding said: “The EU legal situation is less than ideal … China could theoretically sue Brussels from December 12.”
“Whenever China chooses to sue it will take years for the case to unravel at the WTO” — Laurent Ruessmann, partner at law firm Fieldfisher
European industry is also well aware that China has a strong track record in turning to unconventional, asymmetric warfare in trade disputes. In 2013, Beijing threatened to block French wine imports in response to an EU probe into alleged dumping of solar technology.
Leopoldo Rubinacci, the Commission’s director of trade defense, has tried to play down the prospect of legal showdowns immediately after December 11. He argued that Brussels’ current attempt to change its rules would grant it relative security.
But others are more skeptical and expect trouble. In an ominous sign of what is to come, Beijing has slammed Brussels’ new strategy as “the same ideology of trade protectionism in a new package.”
Several lawyers and industry representatives interviewed said it was a question of “when, not if” China will take the EU to court. During a closed-door meeting in Brussels organized by BusinessEurope, the main lobby for European businesses, a Chinese official openly said Beijing was readying for legal action.
The only consolation is that it won’t be quick.
“Whenever China chooses to sue it will take years for the case to unravel at the WTO,” Laurent Ruessmann, a partner at Fieldfisher, a law firm, and the lawyer representing Aegis, a lobby representing 30 European manufacturing industries that opposes granting China market economy status. “We are talking about an end around 2020.”