A batch of domestically made cast-steel pipes are ready for export at a bulk cargo terminal of Lianyungang Port, Jiangsu Province, on January 1 (XINHUA) 

A recent resolution urging the EU not to grant China market economy status (MES) has signaled darkness gathering on the horizon for China-EU relations.

On May 12, EU lawmakers voted with an overwhelming majority—546 votes in favor of and 28 against the resolution—and insisted on treating China's exports into the EU in a "non-standard" way in the non-binding resolution. The lawmakers decided against granting China MES since China allegedly failed to meet five EU criteria defining a market economy.

China is to be recognized by the EU as a market economy after December 11, 2016 under the accession protocol that came into force when China joined the World Trade Organization (WTO) in 2001.

"China's excess production capacity and the resulting cut-price exports are already having strong social, economic and environmental consequences in the EU," said members of the European Parliament in a press release on May 12. They also urged the European Commission (EC) to listen to the concerns of EU industry, trade unions and stakeholders.

The EC will first give its suggestion on whether or not to grant MES to China. If it's then approved by the members of the European Parliament and the EU Council, the suggestion will become the official position. Hence, what really matters is the standpoint of the EC, which is expected to give a formal expression of its opinion in the latter half of this year.

The EU is an important member of the WTO as well as a vital force supporting multilateral trade and international legal systems, said Hong Lei, spokesman of China's Ministry of Foreign Affairs. Hong urged the EU to fulfill its commitments agreed upon at the time of China's entry into the WTO and stop its unfair treatment toward China.

Over 80 of the WTO's 162 member countries have recognized China's status as a market economy, including developed countries such as New Zealand, Australia and Switzerland. After joining the WTO, China quickly grew into the largest cargo trading country. The Chinese Government further stressed the decisive role of the market in resource allocation during the Third Plenary Session of the 18th Central Committee of the Communist Party of China, held in November 2013.

"Denying MES to China goes against globalization. The move was made with the EU's interests in mind, but they've picked the wrong target," said Long Yongtu, former Vice Minister of Foreign Trade and Economic Cooperation at the Second China & Globalization Roundtable Forum on May 15, suggesting that trade protectionism within the EU should not be aimed at China.

China is the EU's second largest trading partner, with daily trade flows of over 1 billion euros. Moreover, members of the European Parliament have admitted that the Chinese market has been the main engine of profitability for a number of EU industries and brands.

As a matter of fact, developing a market economy is an essential part of China's economic reforms. As far as China is concerned, it's necessary to follow the direction of a market economy, not for the purpose of gaining recognition from other countries, but to achieve self-development, said Wei Jianguo, Vice Chairman of the China Center for International Economic Exchanges, in an article. According to Wei, it's ridiculous to deny MES to the world's largest trading country.

Currently, the global economy has entered a period of new normalcy, and as such, trade and currency wars are likely to reemerge. Under such circumstances, if some major economy falls into trade protectionism, the prospect of a global recovery will become more uncertain, said Zhang Jingwei, a research fellow with the Charhar Institute. Trade protectionism is unsustainable and will do harm to all parties involved, he added.

Dumping woes 

According to the rules of international trade, if a country deemed a market economy undergoes an anti-dumping or anti-subsidy investigation, the production costs in that country will be used for reference when calculating the normal value and dumping margin.

In China, however, investigators would refer to production costs in a "surrogate country" to decide if a Chinese product is sold at an artificially low price in a foreign market when carrying out anti-dumping or anti-subsidy probes.

Since 1979, a total of 34 countries, most of which are used to taking advantage of the "surrogate countries" method, have initiated about 700 anti-dumping and anti-subsidy probes against China-made products. These investigations have caused an estimated $400 billion worth of losses to the country, which have exerted a counterproductive influence on China's endeavor to promote its financial reforms and opening up policies, said Wei.

The EU often chooses emerging economies and small manufacturing countries as references for these investigations. "Products manufactured in these countries are priced higher and have lower quality than those made in China. Therefore, the method is unfair and makes exports of Chinese products look like dumping," said Zhang.

Right after the resolution, on May 13, the EC launched a new investigation on Chinese hot rolled flat steel, over which "anti-dumping" investigations had already been previously taken.

On February 13, the EC imposed anti-dumping and countervailing duties on hot-rolled flat steel products originating in China as a result of the investigation. The practice was deemed illegal by the European Court of Justice due to lack of evidence.

In response, China's Ministry of Commerce said the EC should follow WTO rules in its anti-dumping investigation and suggested that the EC's protectionism does not help in tackling global steel overcapacity but instead hurts the sustainable development of the international steel industry.

So far, the EU has launched 73 anti-dumping investigations in total, among which, 56 cases involve China-made products, including steel, machinery, ceramics and chemicals.

EU's motivations 

A main driver of the MES debate is the fear of job losses in Europe's less competitive manufacturing industries. For example, the brunt of the opposition to granting China MES within the EU primarily comes from southern European countries, where steel, textile and other manufacturing industries are staggering under pressure and are struggling. Yet, in 2015, only one fifth of the steel imported by the EU came from China, according to an article published by the People's Daily on May 16. It's unfair to lay the blame on China-made steel products from this perspective.

As early as in 2011, exports to China created roughly 3 million jobs for the EU, according to a study carried out by the EC in 2015.

It's time for the EU to reflect on why its ability to compete with other economies is getting worse in many sectors, Luigi Gambardella, President of ChinaEU, a business-led association, told Xinhua News Agency in an interview on May 14. He believes it's the EU's over-regulation that has hampered the region's overall ability to innovate and invest in industry.

For one thing, the EU is reluctant to give up the benefits it gains from the "surrogate countries" method. Also, considering that the EU has not completely escaped from the sovereign debt crisis and the effect of its negative interest rate policy is uncertain, some protectionists within the EU hope to protect the interests of EU members by setting trade barriers, according to Zhang's analysis.

However, there is some divergence among members of the European Parliament. The EU is a large and complicated group of countries. It's difficult for all its members to reach a consensus on trade barriers. Therefore, trade wars against China were not only waged by China's major European trade partners but also by small EU countries for their own national interests, said Zhang.

Future impacts 

The EU denying MES to China would be a strategic mistake, and it may well cause a deterioration of the political relationship between the EU and China, said Gambardella.

Europe could also suffer from negative consequences if it were to deny China MES. "It could threaten the positive outcome of the ongoing negotiations for the bilateral investment treaty, and it has the potential to conclude a free trade agreement between China and the EU, which, according to the EC's estimates, raises 250 billion euros worth of prosperity in Europe," said Gambardella.

"Moreover, China is the first and only non-EU country that has so far generously committed to investing in the Juncker Plan," stated Gambardella, noting that closing the door to China may signal turbulence in bilateral relations.

A wise decision would be to adopt a forward-looking political approach. European authorities should grant MES to strengthen bilateral dialogue with Chinese authorities in support of their efforts to facilitate the business activities of EU companies in China, said Gambardella.

"As the saying goes, the best way to win a dispute is to avoid it. History has demonstrated that dialogue and cooperation, not conflict, are able to overcome misunderstandings and reduce distances," he said.

Copyedited by Bryan Michael Galvan 

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