Although many readers may not have heard, the New Zealand government announced in late April that it recognized China as a "market economy" and plans to implement a formal free trade agreement between the two countries by early next year.
On June 3 the US Commerce Department will hold a hearing to discuss whether to officially designate China a market economy. Also this month, the European Union is set to announce its preliminary verdict in response to a formal request for market economy status (MES) that China made to the EU in June 2003.
So is New Zealand, a prosperous but tiny nation of less than four million people at the bottom of the globe, really "showing the way for the rest of the world" as the headline in China's state-run People's Daily proclaimed? Could this be a signal that the rest of the OECD nations are ready to award nominally Communist China with the coveted 'market economy' title and even pursue bilateral free trade agreements with it?
Australia has also promised to confer MES on China and recently brought forward plans to implement its own free trade agreement, which it initially said would not be considered before October 2005. Australia, like New Zealand, is a country that earns its trade dollars mainly through the export of primary industry products such as iron ore, natural gas, unwrought aluminum, copper, wool and wheat.
From a macroeconomic perspective it makes good sense for these countries (which, incidentally, have both spent years of diplomatic toil trying to secure elusive free trade deals with the United States) to implement free trade agreements with a "complementary" economy like China which provides them with a steady and increasing stream of cheap computers, toys, machinery, clothing and electronics goods.
New Zealand is barely a drop in China's foreign trade ocean, but China is New Zealand's fourth-largest trade partner, with trade between the two nations soaring 30.5% year-on-year in 2003. China currently is Australia's third-largest trading partner with Australia taking ninth place on China's list. Considering geographic proximity and current economic growth trends, it is very likely that China will become the top trading partner for these countries in the not-too-distant future.
China is of course also very important to America and Europe, not to mention the rest of Asia, as a consumer of commodities and exporter of finished goods. One need only look at China's voracious appetite for raw materials and its ability to affect commodity prices for evidence of its growing economic influence.
But, as politicians in the US continually remind us, China's economic strengths are not so complementary with the world's big trading players. The likelihood of anything like a free trade agreement being established between China and the US is very remote indeed, especially in an election year in which China is sure to play a major role as the political bogeyman. Robert Kapp, President of the US-China Business Council, told CER recently of his hunch that the US will insist on a long list of specific changes to the Chinese economic system if China is to escape from the 15-year non-market economy designation it agreed to in order to join the WTO. He says that the Chinese may figure that it's easier to wait than to actually accomplish what the US will insist China do to get out early.
The European Union as a whole seems more receptive to talk of freer trade with China, but most reports suggest that the EU is unlikely to grant official recognition of China as a market economy in its preliminary ruling this month. Incidentally, it is also unlikely (despite efforts from economic heavyweights Germany and France) to lift an arms embargo imposed after the 1989 Tiananmen Square crackdown.
You may be asking yourself why a government that calls itself communist would care so much about receiving the market economy stamp of approval from the paper tigers, especially when it is often at pains to convince its own people of its socialist credentials. Quite apart from the symbolic global respectability of the title, the answer comes down to pure economic pragmatism. By designating China a non-market economy under WTO rules its trade partners can more easily prove anti-dumping charges against its products and then impose punitive tariffs and duties.
Since the WTO was founded in 1995, more than 300 anti-dumping charges have been leveled against Chinese exports, mainly by the US and EU. China is a target for one seventh of the world's cases. When calculating whether a Chinese company has dumped a product, its trade partners are allowed to use a third country, such as Mexico, Turkey or even Japan, as a surrogate to decide whether the price it is being sold for as an export is less than the cost of production. If the cost of producing the good in that third country is less than the price it is being sold for then penalties can be imposed. China complains that there is no country in the world that can match the low costs it achieves through its enormous pool of labor and therefore the mechanism is an unfair, protectionist device.
And the question remains: how much of a market economy is China really? It is sometimes called the "freest economy in the world" because of the enormous regulatory gaps and gray areas that have opened up as the country undergoes its rapid economic transition. But the economy remains in the midst of its meteoric transition with government still setting some price controls, banks still favoring lending to the politically-connected unprofitable state-owned dinosaurs and a constitution that still talks of 'socialist public ownership' as the foundation of the economy.
China and its many defenders point to the fact that huge numbers of former state-owned enterprises are being rapidly privatized, much more than half of the country's GDP growth comes from the private sector, the government increasingly uses the mechanisms of the central bank to steer the economy rather than issuing directives and the country's trade and investment regime is one of the most liberal of any developing country.
China is probably already much closer to being a market economy than most people imagine and many Western governments will admit. We may wake up one day and find that China's new market economy already operates on the same terms and conditions as everyone else. And New Zealanders will be able to say that they knew it all along.
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