Economy

Feeling dumped on

Why China’s keen to get market economy status

No longer welcome: US chicken

Chicken feet should count as a win-win for Sino-US relations. In America there are few takers for the sinewy fare, much more likely to end up as pet food than on the dining table. But over in China they count as a desirable snack.

Which makes the latest round of chicken confrontation all the more frustrating, following the filing of an American case recently to the World Trade Organisation (WTO) against duties imposed by the Chinese on US chicken imports over the past year. One opinion is that the original Chinese action was tit-for-tat, launched in response to duties levied on their own tyre exports (a forlorn tactic in terms of protecting American tyre manufacturers, as WiC noted in issue 31).

China’s Ministry of Commerce had responded to the tyre duties with its own: on the sale of American chicken (feet included).

The background here is growing Chinese frustration at how many of these trade cases are put together before they go for judgment at the WTO.

When China joined the WTO 10 years ago, Beijing agreed to be treated as a ‘non-market economy’ for the next 15 years. The label has an important application in a narrow but contentious area of trade politics – disputes over the ‘dumping’ of goods at below-market prices.

Because China lacks market economy status, the other party in the dumping argument is entitled to use another country as a “surrogate” to determine whether the prices being charged for Chinese goods are at ‘below market’ levels.

Proponents say that this is because China’s economy continues to benefit from the types of government favour and subsidy that make it impossible to reach an accurate calculation of fair prices for inputs like land and labour.

Instead plaintiffs can look elsewhere for their benchmarks.

This riles the Chinese, who argue that the comparison data overlooks the true competitiveness of the ‘China price’. Officials argue too that the current rules give plaintiffs too much leeway to make their case. For example: exporters from Zhejiang province might be accused of benefitting from artificially low land rents. But to get a ‘fairer’ assessment of what the rental should be, the accuser may then elect to use data from Thailand as the benchmark, despite the major differences between the two countries, their economies and their uses of land.

Or the plaintiff might query the determination of freight costs in the market price calculation, saying that the shipping comes courtesy of subsidised prices from a state-owned shipping line. Then he chooses a higher-priced international provider as an alternative.

Add up all of these higher costs, and it becomes easier to make the case that the price being charged overseas for Chinese shrimps or textiles is lower than the market cost of producing them at home.

China’s sense of injustice at the handling of these cases has been growing. In part that is because it feels unfairly singled out. Russia – yet to join the WTO – won market economy designation from Washington in 2002. Further, Western governments have been intervening with trillions of dollars to prop up their banks and bail out their carmakers, blurring some of the boundaries between the free market and the state. Another Chinese grievance is that its economy has changed since accession to the WTO, and should now qualify for market economy status in most areas.

But despite securing revised status in bilateral deals with countries like New Zealand, Malaysia and Thailand, Beijing has not been able to persuade either the US or the EU that its designation deserves a rethink.

Then factor in a growing Chinese sense of having “saved” the global economy in the aftermath of the global financial crisis (with its stimulus campaign). In recent weeks, officials have been donning their saviour suits once again, this time via the debt-ridden eurozone.

True to form, this has also prompted another round of debate on market economy status. An editorial in Xinhua was pretty typical in lamenting, “the EU side still shows no sincerity” in the matter.

Officials then denied that any link was being drawn between China’s (potential) cash for Europe, and a change to its designation in trade dispute cases. But that doesn’t look entirely accurate. With another five years to run, Chinese frustration on this issue looks like festering.


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.