Events & News


Granting Market Economy Status to China Boosts EU Values and Interests

By Jason Ji Xianbai

Visiting Fellow, EU Centre in Singapore
PhD Candidate, S.Rajaratnam School of International Studies

The views expressed in this commentary are those of the author and do not necessarily reflect the views of the European Union or the EU Centre in Singapore. The author would like to thank Dr Yeo Lay Hwee for her comments on this piece.

A printable version of the commentary is available here.

19105220158_8775bf343e_bOn 13 January, the European Commission debated on whether to grant China market economy status (MES) at the World Trade Organisation (WTO), but could not reach a consensus. The Commission decided to delay issuing a verdict on China’s status to the second half the year saying that a comprehensive investigation “from all important angles” is warranted.

The debate was prompted by a “December 2016” deadline, or what one analyst calls the “urban myth that seems to have gone global”. When China joined the WTO in 2011, it was in Section 15 of its Accession Protocol to WTO that other WTO members can continue to treat China as a non-market economy (NME) for a maximum period of 15 years till 11 December 2016. There is much in-built legal ambiguity with respect to China’s status after 2016. Beijing’s interpretation has long been that universal market economy status (MES) will be automatically bestowed upon China after the specified deadline as the legal basis underpinning China’s NME designation will then expire.

During this 15-year transition period, recognising the need to bear the burden of proof in demonstrating the prevalence of market forces, China undertook far-reaching economic liberalisation reforms at home and mounted energetic diplomatic campaigns abroad asking trading partners to accord it MES. Beijing managed to win over the support of Singapore, New Zealand, Australia, Brazil, Russia, among other some 80 countries but failed to convince the United States (US), the European Union (EU), Japan and a handful others.

Pondering the scenario after 2016, however, Beijing believes it is the other WTO members that are obliged to apply WTO law in acknowledging China’s MES, and not the other way round, as some are now arguing. The sense of MES entitlement partly stems from the Chinese perspective that WTO members took a commitment after demanding a multitude of liberalising and privatising efforts from China before letting it into the WTO; now it’s their turn to return the favour and commit what they have signed up to. Also, the MES conferral, just as the Chinese renminbi’s inclusion in International Monetary Fund’s global reserve assets, Special Drawing Rights (SDR), as a “freely usable” currency, is seen by the Chinese authority as the international testimony and appreciation of China’s free market and financial reform, thus carrying political and symbolic values.

Washington’s stance towards China over trade issues has become increasingly hard-line; it recently went as far as to warn Brussels that granting China MES amounts to suicidal “unilateral disarmament” of European trade defence (which is not) and called for a perpetual adoption of NME methodology in anti-dumping investigations against cheap imports from China. Given America’s long history of bending global trade rules to its will, changes in its political rhetoric as well as trade practices against China after 2016 are not widely expected.

The sentiment in the EU is more subtle and less rigid. EU is increasingly sympathetic towards Beijing’s pleas (the EU legal service actually have concluded behind-the-door that China should be formally designated a “market economy”), despite backlash from more protectionist member states in the south, interest groups and activist factions. Nevertheless, in a world of real-politick, reclassifying China as a market economy before 2016 is a strategic as well as pragmatic move for the EU. It would be in line with the broad collection of EU economic and foreign policy priorities that necessitates a cooperative and rules-based approach to the integration of China in the world economy, boosting both values and interests of the Union.

Human rights and democracy aside, strong support for multilateralism is one of the core values of the EU. For the EU, “effective multilateralism” is the legitimate path towards global governance and managing multi-polarity. The WTO, as the most legitimate multilateral institution in regulating global trade (and trade is an area of EU’s exclusive competence), is the cornerstone of the EU’s vision of world trade. Today, however, the WTO is under stress and even existential threat given the moribund Doha agenda and the rapid proliferation of bilateral and regional free trade agreements (FTAs).

Against this backdrop, EU can hand the ailing global trade governing body a real fillip by granting China the long sought MES. On the one hand, the move will help anchor China firmly within the WTO, and the non-discriminatory trading system it presides over, by giving China a greater stake, proving that the incumbent structure – despite its Western operational and ideological domination – is not only fair and but also friendly to China’s peaceful development and national aspirations. Recognising China’s considerable progress in liberalising its economy in the past 15 years, and inducing more progress to come, through the MES conferral is a reasonable and timely step that the EU, and the wider global community, should take. On the other hand, any attempts by Brussels to side-step WTO law or to blur the Union’s international legal obligations would send a wrong signal about the Union’s willingness to sacrifice its commitments to multilateralism, the rule of law as well as free trade – the very principles that are enshrined in its constitutional blueprint for regional integration, weakening its footing as the world’s unique “normative power”.

Currently, the critical public opinion fermented in the EU is largely shaped by an alarming impact assessment carried out by the Washington-based Economic Policy Institute, which points to a potential loss of up to 3.5 million EU jobs and a drop between 1 and 2 percentage point in EU GDP if China is granted MES. Fortunately, this lopsided and methodologically flawed study is officially discredited by a European Parliament Policy Department report. The EU may have come to realise that its economic interests could be better served if China is regarded as a market economy.

Granting China MES will make China-EU trade freer. A reduction in the distortive anti-dumping remedies on imports from China benefits Europe’s consumers and multinationals whose goods are partially or completely manufactured in China by making the final products and the intermediate inputs less expensive. Healthy competition with Chinese import will also lead to more efficient allocation of EU resources by shifting the Union’s industrial composition towards firms with higher productivity, managerial capacity and global competitiveness. This is not to mention the benefits accrued to the EU producers and retailers located in China directly.

Furthermore, it is obvious that Beijing is determined to resolve the NME issue and has made it an important international economic policy goal this year. Ending NME on time will smooth over the fluctuating China-EU relations and create an amicable enabling environment for the two strategic partners to work on a variety of more important bilateral and multilateral issues, such as the negotiations on a China-EU bilateral investment agreement (which is expected by many to be the precursor of a comprehensive China-EU FTA), China’s financial contribution to several key EU investment initiatives such as the “Juncker Plan”, and Europe’s participation in the China-led “One Belt, One Road” scheme and the Asian Infrastructure Investment Bank.

Europe has welcomed China into its international development community – as shown in China’s rapid and trouble-free accession to the European Bank for Reconstruction and Development – (as a donor). Hence, matching progress is much expected when Beijing knocks on the door of Europe’s market economy club. Of course, the EU is not obliged to make any decision now and could simply wait until the deadline when the WTO has to rule on the issue. But there is no reason for Brussels to behave myopically in such a high-profile and politically charged case of granting China formal status, and treatment, of a fully-fledged market economy in 2016, especially when its values and interests converge for it to act decisively.