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Stock Market Trend Forecast March to September 2019

China's Unfinished Trade Revolution

Economics / China Dec 14, 2016 - 12:24 PM GMT

By: STRATFOR

Economics

Dec. 11 marks the 15th anniversary of China's accession to the World Trade Organization. Measured by its impact on the Chinese economy, which has grown almost tenfold since 2001, accession to the WTO was no less momentous than the epochal changes ushered in by the start of "Reform and Opening" in 1978 or the fiscal and political recentralization that followed the 1989 Tiananmen crisis. In the scale and speed of changes it wrought on Chinese society and politics, WTO accession was hardly less revolutionary than the Great Leap Forward of 1958-1961 or the Great Proletarian Cultural Revolution of 1966-1976. And in terms of their import for the structure of the global economy, few events in recent memory equal China's entry into the organization. By virtually any indicator, Dec. 11, 2001, was an inflection point not only for China's economy but also for much of the world's. But the anniversary also highlights how Chinese integration into the global economy remains incomplete.


On Sunday, a key provision contained in Article 15 of China's WTO accession protocols will expire. At issue is what countries must do to make the case that China is subsidizing exports as a way to undercut competition abroad. The provision stipulates that unless producers in China can "clearly show that market conditions prevail" in a given sector, WTO members importing Chinese goods from that sector can use a different methodology for assessing whether to impose anti-dumping measures. Rather than compare Chinese domestic and export prices for a good (the standard procedure for market economies), the provision allows WTO members to compare Chinese prices with rates for the same good in countries with similar levels of development. In practice, this provision makes it much easier to launch anti-dumping investigations in the WTO and to impose protective tariffs on Chinese imports than if China were recognized as a market economy.

The expiration of the provision will leave open the question of how WTO members should now assess under what conditions to impose anti-dumping measures against China. For Beijing, the answer is clear: Because the provision is the only mention in the accession protocols of a procedure for judging Chinese trade practices differently than those of market economies, its expiration should make China, by default, a market economy. Therefore, Beijing argues, WTO members must treat China the same as they would other market economies: by comparing Chinese domestic and export prices. For key industrial goods such as steel, which China produces far more than it consumes and thus exports in large volumes and at low prices, this would make it much more difficult for countries to impose anti-dumping measures on China, at least by WTO regulations. After all, though Chinese steel exporters may undercut their U.S. and European competitors, the prices are not systematically or artificially lower than what they charge at home.

But while the accession protocols nowhere clarify that on Sunday China will not automatically be granted market economy status, neither do they state that other WTO members will be required to regard it as such. And therein lies the rub. Not all WTO members agree with Beijing. The United States and Japan, driven both by domestic protectionism and a rising sense of strategic competition with China, have indicated that they do not yet regard China as a market economy and thus will not use market economy-based measures to judge China's dumping practices. It is unclear whether other major WTO players such as Canada, India and Mexico will follow suit.

Against this backdrop, the question of whether the European Union will grant China market economy status has drawn considerable attention. Initially, an EU decision on China's status was expected by midyear. And with the strong backing of the United Kingdom and the modest support of Germany, the prospects of an affirmative vote looked promising. Brexit upended both expectations. The United Kingdom, which has heavily courted Chinese investment in recent years, was perhaps the strongest EU proponent for granting China market economy status. But with London's negotiating power now substantially diluted, the calls of countries strongly opposed to rendering China a market economy — and thus to loosening controls on imports of Chinese industrial goods — will undoubtedly grow louder. 

Italy, home to a long-struggling steel sector, leads the opposition, followed by Spain and much of Southern Europe. Germany, with advanced steel and industrial sectors that are less vulnerable to cheap Chinese imports, is unlikely to actively block an affirmative decision. But whether it has the will or interest to actively champion China's market economy claim at a time of rising protectionism at home, across Europe and globally is another matter. Whatever Europe's decision regarding the extent of China's market orientation, the expiration of the provision will likely require some reformulation of EU laws regarding Chinese dumping practices. 

China has threatened to take its case to the WTO for arbitration. In the meantime, Beijing will do what it can to secure an at least partial relaxation of existing tariffs on European imports of China steel and other industrial goods. This endeavor is becoming more urgent given U.S. President-elect Donald Trump's pledge to ramp up U.S. duties on imports of Chinese goods, particularly steel. Though Beijing will continue its long-running efforts to consolidate its steel and other heavy and construction-related industries in 2017, its overriding imperative to maintain stable economic growth — all the more pointed in light of President Xi Jinping's push to consolidate his power ahead of the 2017 Party Congress — means those efforts will likely bear only limited fruit next year.

Measured in terms of gross domestic product, trade, energy consumption and any number of other economic indicators, WTO accession revolutionized the Chinese economy. But the very fact that Beijing and its WTO counterparts are still haggling over the meaning of Article 15 points to the incompleteness of that revolution. In all likelihood, the provision's vagueness on the matter of China's status reflects the fact that in 2001, neither China's leaders nor those of other WTO members imagined that come Sunday China would not be, clearly and for all to see, a market-driven economy. One need look no further than its state-dominated financial system to see how China has fallen short. Former Chinese Premier Zhu Rongji, who drove China's arduous WTO accession process, envisioned membership as a means to force his country out of its cycles of inwardness and irreversibly into the world. In some ways, his vision was quickly realized. In others, it remains a dream deferred.  

"China's Unfinished Trade Revolution is republished with permission of Stratfor."

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