China controls its WTO destiny

Fifteen years ago, on Dec. 11, 2001, China joined the World Trade Organization. As part of that deal, China was to be recognized for the first 15 years of membership as a “nonmarket economy,” a status that made it easier for other countries to sue it for violating antidumping rules. Beijing believed, however, that at the end of that 15-year period, it would graduate to “market economy status” (MES) and new rules would apply.

Beijing has been angry to discover that its transition to MES was not automatic. That grievance has been intensified by the discovery that its main trading partners now refuse to confer that status. They believe that China is exporting unemployment by keeping export prices artificially low to spur domestic production. Adding insult to injury, the European Union last week filed a new dumping claim against China, alleging unfair practices in the steel sector. China has made great progress toward marketization of its economy, but to say it is a market economy goes too far. China needs to be reminded that it must play by internationally accepted rules before it is afforded the status it seeks. It cannot enjoy the advantages of market economy status while avoiding the costs it entails.

If China is considered a nonmarket economy, then its trade partners can use third country export prices as a benchmark for Chinese behavior. In other words, a country like Japan can use the price of Chinese exports in Canada to help determine if steel is being dumped — sold at artificially low prices — in Japan. If China is considered a MES, then the appropriate benchmark price is the domestic price charged in China.

Virtually all Chinese officials and analysts, and many free trade advocates, believe that graduation to MES was part of the WTO accession agreement. Claude Barfield of the American Enterprise Institute, a conservative U.S. think tank that cannot be considered soft on China, claims that every U.S. trade representative since Charlene Barshefsky, who negotiated the agreement that brought China into the WTO, has affirmed that Beijing would claim MES on the 15th anniversary. (Barfield does concede that the U.S. position changed in 2012.) Free trade purists also believe, rightly, that nonmarket economy status allows plaintiffs to manipulate data to make the case that China is an unfair trader. That is one of the most important reasons why China wants MES status.

China has committed to a market-oriented economy, and has continually expanded the private sector since liberalization began under Deng Xiaoping. Unleashing the power of the private sector has driven China’s economy to once-unthinkable heights, overtaking Japan as the world’s second largest economy, and putting it on course to surpass the U.S. as number one in several decades, if not sooner.

But market-oriented is not a market economy. The relationship between the public and private sectors in China remains opaque and the Chinese government retains significant — if not complete — control over certain sectors. While investment opportunities in China have exploded — inward foreign direct investment in China swelled from $46.9 billion to $126.3 billion during the time of its WTO membership, reaching a cumulative total of $1.2 trillion — many foreign businesses complain that the playing field is uneven, with domestic firms retaining many important advantages. A sense of continuing unfairness prompted the EU’s suit alleging that China was dumping corrosive resistant steel in Europe. The European Commission is also investigating whether certain cast iron products from China and India are being dumped and studying whether to continue current duties on Chinese steel seamless pipes and tubes for five more years.

China has responded with anger. China Daily, the official mouthpiece of the Chinese Communist Party, erupted when Japan decided last week to not extend MES status. An article in the newspaper called the decision “covert protectionism,” and charged Tokyo with violating the spirit of the WTO accession agreement, injecting “negative impetus into its cooperation and relations with China” and poisoning “the recovery of the global economy.” The move, which follows similar decisions by the U.S. and the EU, makes Japan “the ‘third domino’ in unleashing the monster of protectionism” and “will trigger a new wave of mistrust in East Asia, dampen the hard-won momentum of development in its ties with China and consequently put regional peace and stability at risk.”

That is an overstatement. It is true that China’s trading partners are engaging in zero-sum calculations, but so too is Beijing. It continues to restrict access to its market in ways that it finds intolerable when it encounters those same constraints.

WTO membership has served China well: Guaranteed access to global markets has been instrumental in China’s phenomenal economic growth and all the benefits that have flown from it. But there is no missing the limits of China’s commitment to free and open markets and a level playing field. Until China is prepared to quit hedging, and extend the same benefits to its trading partners that it demands of them, nonmarket economy status is appropriate. China’s destiny is in China’s hands.

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