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United States Should Recognize Reality Of China’s Market Economy

May 01, 2011

The development of Sino-US economic and trade relations has created strong links between the two countries on the basis of economic interest. Although solid economic and trade relations don’t convert automatically into good political ties, they serve as a buffer to serious clashes between the two countries. The continuing healthy and sustained development of Sino-US commercial links will be not only beneficial to both countries but also favorable to maintaining peace and stability in the Asia-Pacific region and the world as a whole.

The non-market economy status issue between the US and China after China’s accession to the World Trade Oorganisation (WTO) in 2001 remains a point of contention. According to China’s Ministry of Commerce and its “Foreign Market Access Report,” discriminatory trade barriers against China notably and unexceptionally exist in its dealings with major trade partners, such as the US and the European Union. Due to some safeguard mechanisms, as well as other WTO members’ concern about China's rapidly growing international competitiveness, China faces more challenges than other members in terms of market access. This is the largely negative impact of the non market economy provisions of The Protocol of China's Accession to WTO. The term "non-market economy country" is drawn from the US Trade Act of 1974 which states the general provisions of the Act should not be applied to "Communist Countries" including the Soviet Union, Eastern Europe and China. The reason is that these countries operate a planned economy with public ownership, in that their governments seek to direct all economic activity, decide what needs to be manufactured, to whom it should be distributed and at what price, and the currency is not freely convertible. In the final stage of China's negotiations to obtain WTO membership, the US and EU collaborated to refuse recognition of China’s market economy status. At that time, in order to join the WTO as soon as possible, China made a concession to other WTO members that it be treated as a non-market economy country for the first 15 years.

This non-market economy provision is exclusively set for China, and China is the only country subjected to such discriminatory provisions while all the other WTO members can randomly invoke this provision to issue discriminatory restrictions to imports from China. Consequently, the non-market economy provision has become an excuse for anti-dumping legal action against China under fair trade practice provisions. China easily falls victim to anti-dumping investigations under this provision which in effect imposes restrictions on Chinese enterprise competitiveness. In all anti-dumping proceedings against China to date, the US and the European Union have been the two most active players. Obviously China’s non-market economy treatment has become an Achilles' heel for its exporters with respect to anti-dumping investigations.

China’s foreign trade has suffered the following damages under the non-market economy provisions:

(1) China can easily become a victim of anti-dumping and countervailing practices by other WTO members. For more than a decade, it has been the world's largest anti-dumping investigation subject. From 1995 to the first half of 2008, China's export products have been cited in 640 anti-dumping investigations, accounting for 19.4 percent of total global anti-dumping investigations; 441 of these investigations have resulted in implementation of Safeguard Mechanisms, which account for 20.9 percent of such cases. The US anti-dumping investigations against China have been blatantly discriminatory. Since the 1990s, China has become the No.1 target of anti-dumping investigations in terms of the number of investigations. In the resulting adjudications, China has suffered the highest proportion of anti-dumping penalty duties; very often China is deemed to be the only guilty party. Anti-dumping taxes levied against China average at the highest levels, and when China and other countries are charged the anti-dumping tax, the Chinese corporate tax rate is always higher than that of any other countries.

(2) China is more vulnerable to higher anti-dumping margins. In international anti-dumping proceedings, Chinese companies are often subject to the highest tax rate. For example, in the US color TV anti-dumping case, Chinese and Malaysian companies were both prosecuted. However, the Malaysian enterprises were exempted from half the charges while the Chinese firmss were charged the highest anti-dumping rate, as much as 78% in the final award in the United States in May 2004.

(3) Chinese enterprises have to pay high legal costs. In anti-dumping investigations, Chinese enterprises should not only actively respond with well prepared defenses, but also need to explain their manufacturing processes and how they are contributing to China’s market development reforms. This is a very difficult and bitter process and in defending an anti-dumping lawsuit, Chinese enterprises need deep pockets. For example, a lighter factory in Wenzhou spent 1 million RMB in responding to a European Union anti-dumping lawsuit. According to some estimates, total litigation costs may reach as high as hundreds of millions of RMB a year.

In order to obtain full market economy status – a high priority objective -  China needs to be recognized by the importing country. As discussed earlier, the United States and European Union refused to grant China market economy status, but in June and July 2002, despite the fact that China’s market had developed much better than Russia, both Western trade blocs respectively granted Russia full market economy status. Ironically, Russia still has not obtained WTO membership. In June 2004, China’s bid for market economy status was denied again both by the United States and European Union.

China has been working assiduously through diplomatic means to persuade WTO members to abolish its non-market economy status in their domestic anti-dumping laws. From 2004 to 2005, China convinced 51 countries, including New Zealand, ASEAN countries and Africa countries, to recognize its market economy status.

On the surface an economic problem, the non-market economy status is essentially a political issue. The US specified criteria which narrowed the focus to “the extent to which the currency of the foreign country is convertible into the currency of other countries” and “the extent to which wage rates in the foreign country are determined by free bargaining between labor and management”. Given the actual situation in China, its the non-market economy status seems only to be an economic problem. As long as China complies with the above criteria, the US should grant China market economy status. However, the US criteria don’t rely on quantifiable indicators, thus bringing considerable arbitrariness to the issue. The US had decided to press market economy status – a flexible standard to the US – as a bargaining chip to deal with China. For example, most Eastern European countries have been removed from the non-market economy list since the 1990s. And after the September 11 terrorist attacks, Russia adjusted itself to meet US requirements in terms of energy supply and counter-terrorist operations and won market economy status in 2002. Romania and Bulgaria were granted market economy status in 2003 because of their support for the Iraq war.
Winning market economy status depends on whether China makes strategic concessions to suit US interests. The China-US Strategic and Economic Dialogue (S&ED) meeting soon to be held in the US is the ideal high-level forum to pursue a favorable outcome on this issue. Without a win-win on chosen strategic interests, the US could keep restricting the negotiations to technical levels and continue to raise new problems with China. Only when the two sides reach a compromise on their strategic interests will China’s market economy status be recognized. Otherwise, it has to wait until the expiration of that initial provision in 2016.

Pan Rui is Professor of Center for American Studies, Fudan University.

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