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Rejecting China's Market Economy Status Could Have Huge Implications For U.S.-China Trade

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Last Thursday, it was made public that the U.S. submitted a statement to the World Trade Organization (WTO) against granting China market economy status. The statement was made to support the European Union in a dispute with China. Both the U.S. and the EU make the case that China’s economy has not yet transformed into a market economy due to the use of subsidies which distort market prices, a viewpoint which could potentially harm U.S.-China trade relations.

Opposing views

The United States, in a statement to the WTO, made the case that due to the presence of the Chinese government within the economy, prices are distorted and not market-based, which means that China cannot be given market economy status. China's Ministry of Commerce responded to the assertions by the U.S. with "strong dissatisfaction and firm opposition."

This battle represents an ongoing disagreement between China and the U.S. China holds that it should have gained market economy status as of December 11, 2016 under Section 15 of the Protocol of Accession and should not be viewed as a potential target for anti-dumping charges under WTO rules. The U.S. and EU strongly oppose this stance, stating that market economy status is not automatically given but must be earned. China counters this argument by asserting that the U.S. may not use its own methodology, but rather the Chinese production price, to calculate the fair cost of production. The U.S. believes that the forces of supply and demand, rather than the government, should determine the price of production.

China’s history of price controls

True, China has greatly reduced its price controls since 2001, viewing the removal of price controls as an opportunity. It was just before this time, in the late '90s, that China reduced the role of the state by imposing massive layoffs at state-owned firms. The private sector was still under development, taking off after China’s accession to the WTO. Over 100 price controls were lifted in 2001 in preparation for this accession, marketizing prices on goods like sugar, silk and natural rubber, while maintaining a host of price controls in areas like train tickets and telecommunications services. Many of these controls have been removed since that time; for example, in 2015, China eliminated 80% of its existing price controls. China also eliminated a wide range of price subsidies for exporters in 2016, after the U.S. filed a complaint with the World Trade Organization.

However, price controls and subsidies continue to exist. The Office of the U.S. Trade Representative under President Obama reported to Congress for 2016 that “China has continued to provide substantial subsidies to its domestic industries, causing injury to U.S. industries. Some of these subsidies also appear to be prohibited under WTO rules.” The current administration under President Trump and Robert Lighthizer of the Office of the U.S. Trade Representative is even more hawkish toward China. Lighthizer has stated that China represents an “unprecedented” threat to the global trading system and that if the WTO grants China market economy status this “would be cataclysmic for the WTO."

China’s price controls are not disappearing fast enough for the United States. For example, China implemented a new color coded system for coal prices in January. The U.S. sought import duties on aluminum foil coming from China in August due to the presence of state subsidies. Government subsidized purchase prices on essential grains such as wheat are viewed as harming exporters of the grain.

Impact on trade relations

The effect of this dispute on U.S.-China trade relations is likely to be negative, but it is up to the WTO to resolve. Unfortunately, the U.S. has expressed a lack of confidence in the WTO to encourage China’s market status. David Malpass, Under Secretary of the Treasury for International Affairs, stated last Thursday, “the World Trade Organization has shown an inability to resolve disputes, limit subsidies or draw China into the market status that was envisioned when China joined the WTO….”

If the WTO does side with China, allowing it market economy status, this will anger China hawks in the current U.S. administration and most likely cause a further breakdown in trade relations between the two nations. The present state of affairs is precarious. While Presidents Trump and Xi have a warm relationship on the surface, the policy relationship is far from solid. Trump is viewed as weak on representing U.S. business interests in talks with China, but, at the same time, he and his administration have been harsh on China’s trade practices.

The issue comes to the forefront at a time when U.S. policy on and negotiation with China is inadequate. The outcome of the WTO dispute may define the U.S.-China trade relationship in the coming years.

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