A staff member of China’s Zoomlion Heavy Industry Science & Technology Co. Ltd. introduces a product to visitors at the AGRITECHNICA 2015 exposition held in Hannover, Germany, on November 8-14, 2015 (XINHUA)

The European Commission (EC) will discuss the issue of granting market economy status (MES) to China throughout 2016.

On January 13, the EC had the first orientation debate on whether, and if so how, the European Union (EU) should change their treatment of China in their anti-dumping investigations after December 2016. The debate arises because at that time, certain provisions in China's Protocol of Accession to the WTO will expire. A decision has yet to be reached, and the EC will continue developing options for a way forward in this matter, according to a statement by the EC on the same day.

"We will come back to it later because the president [of the Commission, Jean-Claude Juncker] very clearly concluded that this issue has to be looked at from all important angles given the subject's importance for international trade, but also for the EU's economy," EC Vice President Frans Timmermans said at a press conference after a special debate on the issue.

The commission is set to offer a proposal to the European Council and European Parliament on whether to grant China MES. According to Timmermans, the question should be put back on the table sometime in the second half of 2016.

China recently urged the EU to adhere to WTO rules and grant MES to China. "Pacta sunt servanda--Latin for 'Agreements must be kept'--is a basic principle and obligation in international law. No signatory party can evade its obligations under international treaties by citing domestic laws as an excuse, and treat Chinese enterprises in an unfair, unjust, unreasonable and discriminative manner," Chinese Foreign Ministry spokesperson Lu Kang said on December 31, 2015.

"As a WTO member, China has been earnestly honoring each of its legal obligations since its accession, and must be entitled to all the WTO rights," he added.

China became a WTO member in 2001. In its WTO Accession Protocol, a transitional period up to December 11, 2016, was agreed in respect to several topics, one of those being the potential granting of MES.

Under standard rules for normal market circumstances, dumping is calculated by comparing the export price of a product with the domestic prices or costs of the product in the exporting country.

For non-market economies, domestic prices are not used as a benchmark against which to compare export prices. Instead, WTO and EU anti-dumping rules allow the use of data from another market economy country--an "analogue country"--as the basis for calculations.

EU's options 

According to an analysis made by the European Parliament in December 2015, whether or not China is a market economy is not a matter of interest to the WTO; the organization has, in fact, no rules in place to define what constitutes a market economy or how a market economy should function. What matters to WTO members is the extent to which the prices of Chinese exports reflect the influence of state intervention. MES is relevant then, when China's trading partners launch anti-dumping investigations.

A Xinhua News Agency report on January 14 said the analogue country approach makes Chinese products more likely to be subject to anti-dumping investigations when they are sold to Europe, which has dampened the competitiveness of products made in China.

A change in the status of the Chinese economy under the EU anti-dumping rules would also change the methodology of calculating anti-dumping duties which, in turn, would have an impact on the European economy. Therefore, the EC is carefully assessing the potential impact of any change in methodology on jobs in the EU. All relevant stakeholders, including industry, will be fully involved, said the EC statement on January 13.

In the European Parliament report, four scenarios are described for what the EU would do: China does not automatically acquire MES, and the EU may continue to apply the analogue country methodology; China does not automatically acquire MES, while the EU may only continue to apply an alternative methodology under certain conditions; China is granted MES; China's MES would be determined on a case-by-case basis.

Uncertain horizons 

MES status is important because, if granted, it reduces the EU's ability to impose anti-dumping tariffs on Chinese imports. This could only happen if Chinese export prices were beneath its already low domestic prices, according to a report by Reuters on September 18, 2015.

The EC statement on January 13 said that currently there are 52 anti-dumping measures in force against China, covering 1.38 percent of the EU's imports from the country. The main industries concerned are steel, mechanical engineering, chemicals and ceramics. There are presently about 250,000 jobs in industries in the EU under the direct protection of the Chinese anti-dumping measures. Nonetheless, various agencies have expressed their concerns.

In a study report published on September 18, 2015, the Economic Policy Institute, a Washington-based think tank, forecast that an EU decision to grant MES to China would put between 1.7 million and 3.5 million EU jobs at risk by curbing the ability to impose tariffs on dumped goods. The increased imports arising from granting MES to China would reduce EU output between 114.1 billion euros ($125 billion) and 228 billion euros ($250 billion), a 1-2 percent reduction in EU's GDP.

The European Trade Union Confederation (ETUC) issued a position statement on January 11, calling upon EU institutions not to grant MES to China.

"Europe cannot grant MES to China," said Milan Nitzschke, a spokesman for AEGIS Europe, an industry alliance representing 30 European manufacturing sectors, in a statement on January 12.

EU member states also hold different viewpoints on granting MES to China. The United Kingdom, the Netherlands and Nordic countries support China's promotion to MES, while Italy is strongly opposed to the action. German Chancellor Angela Merkel said in October 2015 that Germany, in principle, favored granting China MES.

Denial will hurt both 

If the EU denies granting MES to China after the expiration of China's WTO Accession Protocol, Chinese experts think it will set a bad example for other WTO members and bring adverse impact to the multilateral trade system.

Chen Xin, Director of the Department of Economy at the Institute of European Studies of the Chinese Academy of Social Sciences, said that although MES is only a concept involved in anti-dumping, it reflects the respect of the adherence to the international multilateral trade system. EU has always been proud of its rule of law, and it is also an architect of the multilateral trade system. If the EU denies China's MES, it would impact adversely on the multilateral trade system and discourage the desire of China and other WTO members to participate in multilateral trade.

Chen thinks that the EU should recognize China's MES as soon as possible for the long-term interests of both sides. Fifteen years after its accession to the WTO, China has made very rapid progress in learning and obeying multilateral trade rules, which has been widely acknowledged by the international community. Currently more than 80 countries, including those with developed economies such as New Zealand and Australia, have recognized China as a market economy, which has significantly advanced trade relations between China and those nations. EU member states with more open and competitive economies are also in favor of granting MES to China.

The EU is now China's largest trading partner and China is the EU's second largest trading partner. China-EU trade relations complement each other and provide mutual benefits--their relationship is strengthening by the day, said Wang Yiwei, a professor at the School of International Studies of Renmin University of China. Since the two sides have established new trade cooperation channels such as the Belt and Road Initiative and the Juncker Plan, the issue of China's MES should not block the sound development of the political and economic relations between China and the EU, said Wang.

Copyedited by Bryan Michael Galvan

Comments to wangjun@bjreview.com