EU Lawmakers Debate China "Market Economy" Status

19 May 2016

EU parliamentarians approved a non-legislative resolution last week calling for treating China’s exports to the 28-nation bloc in a “non-standard” way until the Asian economic giant meets EU requirements for being deemed a market economy.

The 12 May vote had 546 lawmakers in favour, 28 against, and 77 abstentions.

The text of the resolution highlights the importance of the bilateral EU-China trade and investment relationship, while “stress[ing] that China is not a market economy and that the five criteria established by the EU to define market economies have not yet been fulfilled.”

These five criteria specifically involve the level of government intervention in company decision-making and resource allocation; lack of government distortions in “the operation of enterprises linked to privatisation;” the use of non-discriminatory, transparent company laws; an effective, transparent legal system protecting property rights; and a “genuine financial sector which operates independently from the state.”

It also calls for a discussion on the market economy issue in the next bilateral summit between the two sides. The EU and China hold annual bilateral meetings at the leaders’ level, along with bringing together key ministers.

Furthermore, the resolution says that the European Parliament “is convinced that, until China meets all five EU criteria required to qualify as a market economy, the EU should use a non-standard methodology in anti-dumping and anti-subsidy investigations into Chinese imports in determining price comparability.”

This provision cites Section 15 of China’s WTO accession protocol, which the resolution says allows for applying this “non-standard methodology,” and asks that the European Commission prepare a proposal in this context.

The Parliament resolution also calls for the EU to coordinate with its main trading partners at the upcoming G-7 and G-20 summits – the latter of which is being hosted by China – in order to counter “any unilateral granting” of market economy status to the Asian country, among other recommendations.

Another section of the resolution refers to efforts aimed at reforming the EU’s trade defence instruments (TDIs). While a “modernisation package” was tabled by the Commission over three years ago on the subject, this has not advanced past the level of the Council.

The Parliament “stresses the imminent need for a general reform of the EU’s trade defence instruments in order to guarantee a level playing field for the EU industry with China and other trading partners in full compliance with WTO rules; [and] calls on the Council to rapidly seek agreement with Parliament” on the subject, the resolution says.

While the current resolution is not a legislative one, the Parliament will have to vote on the Commission’s future proposal, as part of the co-decision process that also includes the Council.

Timing

The EU’s executive arm is expected to announce its proposal on the subject later this year, possibly before the summer break, with the Commission putting off an earlier February announcement for the sake of conducting further study and consultation. (See Bridges Weekly, 24 March 2016 and 18 February 2016)

The European Commission completed last month a public consultation on how and whether to revise its anti-dumping legislation in relation to China. (See Bridges Weekly, 18 February 2016)

Behind the ongoing discussions is an upcoming deadline including in the terms that Beijing agreed to when joining the WTO in December 2001.

At the time, it agreed to terms regarding how to address price comparability when determining subsidies and dumping, among others. Outlined in Section 15 of the document, these terms allow for China’s fellow WTO members to treat the country as a non-market economy in anti-dumping probes, specifically as it relates to determining price comparability under Article VI of the General Agreement on Tariffs and Trade (GATT) 1994 and the WTO’s Anti-Dumping Agreement.

While WTO members are to use Chinese prices or costs if the producers being investigated can demonstrate that market economy conditions “prevail” in their industry, according to subparagraph (a)(i) of that section, the following subparagraph provides for an alternative methodology if this is not the case, allowing for an importing member to deviate from using a “strict comparison” with Chinese domestic prices or costs.

This must occur if those producers are unable to prove the existence of market economy conditions in their industry. However, a later subparagraph notes that these terms “shall be terminated” once Beijing has established under an importing member’s domestic laws “that it is a market economy.”

It then notes that, “In any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession. In addition, should China establish, pursuant to the national law of the importing WTO Member, that market economy conditions prevail in a particular industry or sector, the non market economy provisions of subparagraph (a) shall no longer apply to that industry or sector.”

Whether such a change would be automatic, however, has fuelled debate in trade circles, particularly in light of the global steel crisis and China’s role as a major trader.

EU Parliament stance not “constructive,” says Chinese official

The result of last week’s vote drew criticism from Chinese Foreign Minister Wang Yi, who told reporters in Beijing that the move was not “constructive at all.”

“The decision about whether or not to give China its market economy status or MES cannot be based on the implementation of Article 15 in China’s Protocol of Accession to the WTO. These are two different things,” he said, in comments reported by CRI English.

Wang then added that the same article “clearly stipulates that WTO members stop the ‘surrogate country’ practice in anti-dumping investigations.”

Council-level discussions

During a meeting last Friday of EU trade ministers under the European Council, France and Germany reportedly pushed for changes to current trade remedy investigations, for instance in terms of timeframes or retrospective application of duties, especially given the ongoing steel crisis affecting the bloc’s sector. The two countries also referred to the ongoing market economy discussions, according to Reuters.

The international steel market has struggled to deal with heavy overcapacity, with prices dropping dramatically and trade flows significantly affected. As the world’s top supplier of steel, China has faced growing questions over what it can – or should – do as a result, and what responsibility falls on other countries. (See Bridges Weekly, 21 April 2016)

The EU’s steel industry has been among those advocating against granting China market economy status, cautioning that doing so could be hugely damaging to an already struggling job market. Axel Eggert, Director-General of industry group EUROFER, welcomed the Parliament’s vote, calling the message “abundantly clear.”

“A significant majority of [EU parliamentarians] do not believe it is the right time to grant China market economy status. China is not a market economy, and thus cannot be treated as such for the purpose of anti-dumping investigations,” said Eggert.

ICTSD reporting; “China Slams EU Legislature’s Refusal to Grant Due Market Economy Status,” CRI ENGLISH, 17 May 2016; “France, Germany urge tighter trade defence in face of China steel,” REUTERS, 13 May 2016; “MEPs: China is not a market economy,” EU OBSERVER, 11 May 2016.

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