European Commission president Jose Manuel Barroso said ahead of his visit to China this year that the EU was not ready to grant China market economy status, a distinction that would make it easier to avoid dumping charges and consequent punitive measures like quotas and tariffs. Earlier, Britain's minister of state for trade, Ian Pearson argued for recognizing China as a full market economy. And with Britain having ascended to the EU presidency in July, it may become clear that this technical designation really comes down to politics.
China covets the designation of "market economy status" (MES), which says that market mechanisms-not the central government- are the dominant forces in an economy. Thus, when charges of dumping and unfair production are leveled, the country of origin can say that its cheap costs are not unfair, that they are just a condition of production and that different standards should be applied in investigating its costs.
Because China does not have market economy status, when it is accused of dumping-exporting products at a price below their production cost-investigating countries invoke the costs to produce the goods under a market-based economy, rather than China's production costs. Being accorded MES status, however, would not negate the investigations, but it would make them easier to fight.
MES recognition from the EU and US, China's top trading partners, would be an answered prayer for Chinese exporters who currently face a range of anti-dumping investigations. In the last seven years, more than 500 anti-dumping suits have been leveled against China, making it the world's top anti-dumping target, and they continue to mount.
In August, the EU imposed duties of up to about 35% on China's exports of tartaric acid, an additive used in the food and winemaking industries. The EU is currently investigating a number of other Chinese imports, including CD disks, frozen strawberries, and safety shoes.
The US and China, meanwhile, are engaged in a seemingly never-ending textile row, fueled largely by pressure from US lawmakers representing an American public anxious about losing jobs to its Asian rival. Pressured by domestic home-appliances producers, the Turkish government recently charged 46 Chinese television set producers with dumping, slapping a 50% penalty tariff on the imports. China-made air conditioners are next on Turkey's list, according to the China Chamber of Commerce for the Import and Export of Machinery and Electric Products. In late July, India initiated an anti-dumping investigation into China's export of silk yarn.
Whatever the economic criteria used in evaluation may be, each investigation comes complete with political posturing. Stephen Green, senior economist at Standard Chartered Bank, described the use of MES as a "tool for flagrant protectionist actions".
By bestowing China MES, other nations could lose a powerful bargaining tool. For example, keeping the MES card on the table gives the US room to negotiate intellectual property rights-an issue that played a major part in July's round of US-China trade talks in Beijing.
In the US, the MES battle serves to distract voters from the fact that America may be losing the larger trade war, according to Green. Even anti-dumping investigations and protectionist quotas cannot keep the US's trade deficit with China from ballooning.
The US, less likely than the EU to budge on the MES issue, will probably wait until after 2010-the date agreed upon in China's WTO negotiations-to genuinely consider the matter, experts say.
China, meanwhile, seems to view MES as not just a legal label but also a designation that China believes will put it on a geo-political par with developed nations. "For China, it has this huge symbolic aura about it," Green said.
As for the technical issues, the EU claimed in its recently issued report that China continues to fail in four out five measures of market status, including "the absence of State-induced distortions".
From the Chinese side, things look quite different: a 2003 report conducted by Beijing Normal University, claims China is already 69% market-oriented, well over the 60% usually required to meet international standards. Observers, including Britain's Pearson, point out that Russia was given MES recognition in 2002 by the EU. On most free market measures, China is arguably farther along the free market road than Russia.
As for Pearson's thoughts, a spokesman for the EU Commission in China, says, "Britain's stance on this matter has not changed the process, which is, as noted, a technical one."
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