Trump, stand firm against China’s risky ‘market economy’ gambit

As China’s President Xi Jinping and President Trump meet today at Mar-a-Lago in Florida, a key issue on the agenda will be whether to accede to China’s claim that it is a “market economy” under WTO rules.  The determination affects a somewhat arcane aspect of World Trade Organization (WTO) procedure, but it is extremely important to China.

China is regularly accused of selling its exports at prices lower than what it charges at home, or at a price lower than the exporter’s cost of production.  The practice, called “dumping,” is intended to undermine competitors in foreign markets, gain market share, and, ultimately, drive foreign competitors out of business.  It is a predatory pricing practice strictly prohibited under the WTO.

{mosads}Exporters who are held to have engaged in dumping are subject to import duties equal to the difference between the actual market price of the goods imported and the price at which the exporter offered them.  The big question for China, and the basis for China’s objection is: Whose market determines the “market price?”

If it is held that China is a “market economy,” then the import duty collected by the U.S. for “dumped” products will be the difference between the price of the goods in China less the price exporter charges in the United States.  

But if China is not a “market economy,” then the import duty is computed using the price of comparable goods in “surrogate”economies where market conditions are known to exist.

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The difference between the two calculations is often substantial and, thus, a very high stakes issue for China because it is the largest target for anti-dumping claims in the WTO. (China has had over 1,000 anti-dumping cases brought against it since 1995; the U.S. filed 28 claims in the first nine months of 2016 alone.)

The Dispute

China interprets a subparagraph of the document whereby China entered the WTO, the “Accession of the People’s Republic of China to the World Trade Organization”, to its favor.

In China’s reading,  Article (Paragraph) 15 of the accession allows China to be treated as a market economy automatically  with the elapse of 15 years from the date China joined the  WTO, Dec. 11, 2001.

But many Western analysts, and U.S. trade officials, dispute China’s interpretation, believing that China is still required to prove it is a market economy before China’s domestic prices can be used to establish import duties. Some WTO countries, most notably Australia, have nevertheless granted China market economy status (“MES”) under the anti-dumping rules, but the G-7, including Japan, the U.S., Canada, and the EU, deny it is.  

Given the Chinese government’s overbearing and ubiquitous involvement in almost every strategic aspect of China’s economy, it would seem highly unlikely China is able to pass the U.S. Department of Commerce standards of a market economy.  In the words of the U.S. Council on Competitiveness, “Beijing continues to use state-owned enterprises (SOEs) as a tool to pursue social, industrial, and foreign policy objectives, offering direct and indirect subsidies and other incentives to influence business decisions and achieve state goals.” Commerce will, nevertheless, re-assess whether China falls within its standards of a market economy.  

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Ultimately, though, the decision is that of the administration.

The president may decide to draw a harder line against China or he might take a more lenient view in pursuit of other objectives in diplomacy or trade.  Australia, for example, took the more lenient view in order to secure negotiations for a free-trade agreement with China, its biggest trading partner.  President Trump may could take a similar course and grant China market status in exchange for a larger diplomatic objective, like having President Xi take a direct role in eliminating North Korea’s nuclear program.

President Xi can be expected to insist on China being treated as a market economy at his meeting with President Trump; China filed claims to that effect with the WTO within hours of the of the passing of the 15th anniversary of its entry into the agreement.  

But the president should draw a hard line, and only concede to China’s market economy demands if he can achieve a much larger and far more important diplomatic or trade objective.  

J.G. Collins is the Managing Director of the Stuyvesant Square Consultancy in New York.  A “Never Trumper” during the 2016 election, he is a long-time critic of the bipartisan U.S. policy of unlimited free trade. He has previously written on U.S. trade policy for Forbes, The Daily Caller, and The American Conservative.

The views expressed by contributors are their own and not the views of The Hill.