Defence & Foreign Policy HKFP Voices

China, Europe and the WTO – much is at stake over market economy status

By Alex Kwok

European leaders have an unspoken rule – don’t talk politics with China.

The hope is that by doing this, in the heady world of international affairs, these two economic behemoths can get on with the business of trade without the frustrating distraction of political agendas.

This was certainly the hope of the European Commission and some Member States of the EU on the issue of China’s Market Economy Status (MES) within the World Trade Organisation (WTO), for which 2016 is a make or break year.

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But with China dumping cheap steel on EU markets at a record rate in the past few months, a politically toxic situation has come to a head for domestic politicians and struggling post-industrial work-forces, such as those in Britain, France and Italy.

China is not yet legally classified as a Market Economy, but the deadline for the transition is the end of 2016. If this status is recognised by the EU, it will make it harder to impose trade tariffs on the glut of below-market price Chinese steel that has contributed to the closure of steel plants across post-industrial Western Europe. The latest closure occurred in Redcar, England, just before Christmas, and it has sparked a wave of industrial action from European trade unions.

As sensitive trade issues go, this ticks all the boxes: endangered diplomatic relations between two of the world’s largest economies, restive blue collar work-forces across Europe staring down the barrel at unemployment, and far right nationalists gaining ground in key votes in France and Britain.

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Steel mill. Photo: Wikicommons.

All of which sets the stage for a hue and cry to be raised by the European Parliament over the apparent lack of concern for this 2016 deadline by the European Commission. Both the hue, and the cry, was duly raised in February during the Parliament’s last Plenary debate. It will be raised again on March 8th and 9th in a sitting of the whole house in Strasbourg. The Commission, it is fair to say, will be in for an Oxford debating society-style lynching.

The issue for the EU hinges on the interpretation of the conditions of China’s accession to the WTO back in 2001. Contained within the accords that welcomed China into the WTO was a condition for it to move towards full Market Economy Status by the end of 2016. European Commission lawyers argue that China does not have to fulfil the conditions of a Market Economy and that come what may, China will receive MES classification by the end of 2016. Conversely, European Parliament lawyers argue that because the conditions have not been fulfilled, it cannot receive Market Economy Status.

The Commission would prefer to let the deadline pass, and address the legal ramifications when China brings the first case against European trade tariffs on Chinese steel in 2017. For Members of the European Parliament and the constituents they represent, this is not enough.

It is important to note that what the EU decides will not be binding for the WTO, but both the British and German governments would prefer to avoid a major falling out with their current preferred trade partner.

The Obama Administration has however made clear its views and has warned the EU not to grant China MES. Politically, it will leave the US isolated and put pressure on them to accept China’s Market Economy Status.

A study published last September by the Washington-based Economic Policy Institute said “an EU decision to unilaterally grant MES to China would put between 1.7 million and 3.5 million EU jobs at risk by curbing the ability to impose tariffs on dumped goods.”

The pace and growth of the public campaign for protection of European jobs will be the ultimate arbiter for a political decision in the EU. Thousands of European workers gathered on Monday 15th February to march through Brussels in protest against the Commission’s proposal, setting the stage for a monumental showdown between workers and the steel industry on one side, and the Commission and consumers in heavy industry on the other.

The legal agreement for Europe must ultimately be negotiated between the European Parliament and governments of the Member States, with the Commission only able to recommend its opinion.

China has friends in the British and German governments. But a 2017 federal election in Germany and the impending British referendum on membership of the EU may upset the apple cart. Indeed, Brexit would have serious ramifications for China if the UK leaves and one of the most pro-China governments no longer sits around the European negotiating table.

A decision will likely be made by the EU towards the end of 2016. It is a dense technical issue but one that has already ignited passions in work-forces, trade unions, and politicians across Europe, and it has the potential to wreck the relationship between the EU and the new Chinese administration.

The case, as they say, continues.

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China, Europe and the WTO – much is at stake over market economy status