"It Could Reshape The Global Trading System For Decades" - US Rejects China's Bid For "Market Economy" Status

The US has filed a legal submission to the WTO as a third party, intervening in a case that China has brought against the European Union. The US rejects China’s argument that under the 2001 agreement, which confirmed China’s WTO status, it would should automatically be considered a “market economy” fifteen years after joining. The dispute could affect both America's and China’s future within the international body and, as the New York Times contends, “shape the global trading system for decades to come.” It goes without saying that this will only ratchet up the current tensions between the US and China over trade, which has been a cornerstone of Trump’s rhetoric since he launched his election campaign.

Briefly, the US submission sets out the legal arguments explaining why China should not be designated as a market economy, which would give it preferential treatment under existing WTO rules. China is currently designated a “nonmarket economy” which allows the US, EU and other countries to decide whether China is dumping products at unfair prices under a WTO framework. If they decide that China is dumping, countries can add an extra duty to protect domestic manufacturers.

According to the Financial Times, "the Trump administration has opposed China’s bid for recognition as a “market economy” in the World Trade Organization, citing decades of legal precedent and what it sees as signs the country is moving in the opposite direction under Xi Jinping. The US opposition to China’s efforts to be recognised as a market economy in the WTO came in a legal submission due to be released on Thursday in a case brought by Beijing against the EU. Market economy status would make it more difficult for the US to prove anti-dumping cases against Chinese companies at the WTO."

The move comes as the Trump administration has stepped up trade pressure on Beijing and as Washington faces growing international isolation over what critics fear is a populism-fuelled attack on the global trading system. In the 40-page filing seen by the Financial Times, the US rejected Beijing’s argument that under the 2001 conditions of China’s accession to the WTO it would automatically be considered a market economy 15 years after joining, when it faced anti-dumping cases from fellow members.

In “big picture” terms, the US and EU are arguing that China has failed to meet its part of the 2001 agreement by reducing the Chinese state’s role in the economy, which significantly distorts costs and prices for exports. The US argues that there are precedents for using benchmark pricing from third countries to determine whether products are being dumped.

The US also argued that regardless of those conditions, China remains subject to the same WTO rules as other members and points to the treatment of eastern European countries such as Poland when they joined the precursor of the WTO while still under Communist rule in the 1960s and 1970s. Those rules, the US contends, allow countries to use prices in third countries when dealing with non-market economies to determine whether goods are being exported below cost to gain an unfair advantage. “The evidence is overwhelming that WTO members have not surrendered their longstanding rights…to reject prices or costs that are not determined under market economy conditions,” the US lawyers wrote. US officials say their interpretation is shared by the EU and other countries such as Canada, Japan and Mexico.

When the China-EU is eventually settled, it is likely to serve as a precedent for China’s challenge to the US which the WTO’s panel will hear next. The Trump administration is watching closely since it will be much more difficult to levy anti-dumping duties against Chinese exporters if the EU fails. As the FT notes.

The case in which China is challenging the EU’s refusal to grant it market economy status is seen by the Trump administration as an important test of the WTO’s dispute system. Washington has expressed scepticism at the way the WTO resolves disputes and has even been accused of seeking to sabotage the system. China has been proceeding more slowly with a similar WTO case against the US. The senior US official also expressed frustration with the fact that in arguing against China’s bid to be labelled a market economy, the US had been forced to deal with at least one past ruling by the WTO’s appellate body that Washington deemed inappropriate.

The “past ruling” refers to a 2011 case when the WTO found in favor of China against the EU regarding annti-dumping tariffs on fasteners. Going beyond the boundaries of China’s complaint, the WTO declared that China’s accession protocols “do not contain an open-ended exception that allows WTO members to treat China differently”. The US criticized the seven-member panel for making laws instead of interpreting the existing WTO rules.

A Chinese victory over the EU will strengthen the belief of some officials in the Trump administration that the WTO was not set up to deal with a (largely) centrally-planned economy like China’s and that it will never defend American interests. As the New York Times explains, this includes America’s Trade Representative.

Those officials include Robert E. Lighthizer, the United States trade representative, who in his confirmation hearing before the Senate in June described China’s challenge against Europe and the United States as “the most serious litigation matter we have at the W.T.O. right now.” Mr. Lighthizer said that he had “made it very clear that a bad decision” on China’s status “would be cataclysmic for the W.T.O.”

We should emphasize that WTO disputes aren’t resolved quickly. An initial ruling on the current China-EU dispute may not happen before 2019, with the possibility of a subsequent appeal. The China-EU case will obviously take even longer. Some commentators are speculating that a Chinese victory over the EU could lead to the WTO’s demise. From the New York Times.

Nicholas R. Lardy, a senior fellow at the Peterson Institute for International Economics, said Mr. Lighthizer’s statements called into question whether the United States was looking for a reason to withdraw from the W.T.O.

“I don’t know what the outcome is going to be, but I think there’s a pretty good chance China is going to prevail,” he said. “Maybe this is going to be one of the nominal excuses to taking us out.”

On Wednesday, senior United States officials said that the W.T.O. served a number of purposes, but that they would like to see it work the way members intended it to work.

The NYT alludes to the fact that when the WTO was set up, the underlying assumption was that emerging economies would become more market-driven, like the more developed nations. With China arguably becoming more centralized under Xi, the current “rules of the game”, established by organizations like the WTO, are under threat.