China’s Play for Market Economy Status – A Targeted Fight with Global Consequences

In its 2001 accession protocol to the World Trade Organization (WTO), China agreed to provisions that would allow other countries to treat it as a nonmarket economy for the purposes of certain trade disputes, leveling the playing field for companies that otherwise could not compete with China’s production capacity. A key element of those provisions expired in December 2016, and the Chinese government insists that its trading partners are now legally obligated to treat it as a market economy – a designation that would limit the tariffs that WTO members could levy on Chinese exports. The United States and European Union disagree with China’s claim, and maintain that – regardless of its interpretation of the accession protocol – China does not meet the standards required by U.S. and EU law for the designation of market economy status, and will not be treated as such until it does.

China has begun the process of challenging its two largest trading partners at the WTO Dispute Settlement Body (DSB), having set up official consultations with the United States and requested the formation of a panel of arbitrators for its dispute with the EU. In a June 21 hearing on President Trump’s trade agenda before the Senate Finance Committee, U.S. Trade Representative Robert Lighthizer stated that the question of China’s treatment as a nonmarket economy “is without question the most serious litigation matter we have at the WTO right now,” and that “a bad decision…would be cataclysmic for the WTO.”i.

China’s integration into the global economy over the past fifteen years has transformed manufacturing, trade and employment not only within its borders, but throughout the rest of the world as well. Some U.S. and European lawmakers and industry leaders assert that a range of domestic industries, from agriculture to high-end electronics manufacturing, will be threatened if the EU, United States and other countries are obligated to treat China as a market economy in the context of WTO dispute settlement. Although President Trump has diverged from traditional transatlantic partners on a number of issues during the first six months of his tenure, his administration shares a common interest with EU leaders in resolving these disputes. To the extent that collaboration is possible, the EU and United States should work together to establish fair and effective identification and mitigation strategies to deal with market-distorting practices of trading partners. For its part, China should work towards implementation of the market-oriented reforms it announced in 2013, which include financial sector modernization and new rules for state-owned enterprises (SOEs). China’s evolving disputes with the United States and EU may have lasting effects on East-West political-economic relations and each trading partner’s place in the global trade system. Any lasting solution should be fair to exporters and importers alike, and more importantly, must not disrupt the highly interconnected economic relations of the world’s three largest economies.

i. https://www.finance.senate.gov/hearings/the-presidents-trade-policy-agenda-and-fiscal-year-2018-budget

Michael McKeon is project manager for transatlantic relations at the Washington, DC-based Bertelsmann Foundation.