June 12, 2017    4 minute read

Tensions Escalate Over European-Chinese Trade

Deterioration in International Relations    June 12, 2017    4 minute read

Tensions Escalate Over European-Chinese Trade

The 19th bilateral EU-China summit held on June 1st – 2nd concerning Chinese trade came to a disappointing end, as both sides failed to adopt a final common communique. This result was to some extent predictable, as the EU has been hesitant to award market-economy status (MES) to China, certifying that domestic prices in China are being determined by fair competition rather than the government. Predictably, this stance has caused friction between the two trade powers. In particular, the EU is unhappy about the Chinese government’s support for its steelmaking industry, with subsidies creating a flood of Chinese steel imports which may threaten European mills.

China’s Classification under the WTO

China joined the World Trade Organization (WTO) in December 2001, but the European Parliament adopted a resolution refusing to grant China the market economy status on account of it not meeting the EU’s five criteria. These criteria call for MES to be granted only if, in the EU’s determination, a government’s influence over the allocation of resources and decisions of enterprises is very low; the state does not interfere in the operation of enterprises linked to privatization; there is a transparent and non-discriminatory company law, ensuring adequate corporate governance; and property rights are respected and financial sector operates independently from the state. Despite this framework, however, Beijing claims that, according to Section 15 of the WTO accession protocol, it is automatically entitled to receive MES starting from December 2016, no matter what the EU continues to believe. On these grounds, it legally challenged the EU’s refusal by filing a complaint under the WTO framework in early 2017.

The EU’s position is that Chinese firms have so far failed to prove that they operate by market rules. Somewhat ironically, the same Section 15 allows for the use of non-market methodologies to calculate the so-called “dumping margins” of Chinese goods, which in turn may lead to enforcement of anti-dumping duties. Needless to say, these clashing interpretations make Section 15 highly controversial and could instigate a protracted legal battle between two parties.

The Contentious Chinese Steel Industry

Much of the wrangling over China’s “market” status is related to an area near and dear to the EU, mainly the Chinese steel industry and the heavy state support provided to this sector. The Chinese government poured vast amounts of money into the steel industry when its economy was booming prior to the 2008 global financial crisis while growing demand for steel led to high capacity-utilization rates. However, as the slowdown of economic growth has accelerated in China, domestic and external demand for steel has also declined. Driven by political imperatives rather than market ones, Chinese authorities appeared unable to stop the spigot of funds from flowing, and continue to overinvest in industrial steelmaking facilities, pushing them to join the ranks of ‘zombie companies’. Ample governmental subsidies, combined with reduced demand, created structural overcapacity in China’s steel sector and triggered a flood of cheap Chinese steel on the international markets.

One of these markets was the EU, which has been reluctant to turn a blind eye to Chinese dumping. In 2016, the European Commission’s (EC) investigation concluded that Chinese companies were selling steel products in the EU well below half of the price of the producers’ home market. Moreover, European steel association claimed that Chinese steel dumping has been the key cause of the loss of tens of thousands of steel jobs in Europe in recent years. Seeking to protect European steel producers, last January the EC imposed anti-dumping duties ranging from 30.7% to 64.9%  on steel products from China. In total, out of 85 anti-dumping measures that were imposed by the EU against Chinese products between 1995 and 2014, 17 concerned steel imports.

Overall, the stakes for this dispute are high. Should China obtain MES, importing countries will find it harder to impose anti-dumping measures against Chinese imports, which are already the subject of the largest number of anti-dumping probes in the world. The Chinese government’s principal aim is naturally to protect jobs in China to maintain social stability. To this end, it abundantly subsidises its internal economy and sells its exports at low prices abroad. So long as the value of Chinese product is largely determined by government interference and not by market prices, the EU is ill-disposed to put its own industries at a disadvantage by granting Beijing MES.

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