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Will the granting of market economy status to China put the European economy at risk?

15 February 2016 Coface

China has become the EU’s largest supplier at 18% of its goods imports. The European Union (EU) needs to decide by 11 December 2016 whether or not to grant China market economy status (MES)¹, to which it should theoretically be entitled 15 years after its accession to the WTO.

South Africa-China trade jumped by 32 per cent between 2012 from R205 billion to R270 billion in 2013, making China SA’s largest trading partner.

Official Chinese data shows trade between China and Africa exceeded $220 billion in 2014.

28 European Commissioners opened discussions on MES in January 2016. The legal opinion of the European Commission related to the granting of this status and a report on its possible economic impact are expected to be released in the next few weeks.

This comes at a time of deepening crisis for the European steel industry. Opponents to this decision (employers, trade unions and certain members of the European parliament) are becoming active. Aegis Europe, an alliance representing key industries for example, will organise a protest march on 18 February 2016 in Brussels. Steel is one of China’s most protected industries.

If China is formally recognised as a market economy, even if it does not appear obvious (see criteria below), this would curb the ability of European economies to carry out antidumping investigations and impose tariffs on dumped exports. This in turn would allow Chinese companies to flood the European market with cheap products.

Five criteria have been established by the EU for the granting of MES

1. A low degree of government influence over the allocation of resources and decisions of enterprises, whether directly or indirectly (such as public bodies), through the use of state-fixed prices or discrimination in the tax, trade or currency regimes.

2. An absence of state-induced distortions in the operation of enterprises linked to privatisation and the use of non-market trading or compensation system.

3. The existence and implementation of a transparent and non-discriminatory company law which ensures adequate corporate governance application of international accounting standards, protection of shareholders, public availability of accurate company information.

4. The existence and implementation of a coherent, effective and transparent set of laws which ensure the respect of property rights and the operation of a functioning bankruptcy regime.

5. The existence of a genuine financial sector which operates independently from the state and which, in law and practice, is subject to sufficient guarantee provisions and adequate supervision.

Risks

According to an American think tank study (EPI)², an EU decision to unilaterally grant MES to China would increase manufactured imports from China by between 25% and 50% from their base level in 2011 in the first three to five years after the decision. Imports would rise substantially faster than they have since 2000.

Such a decision would reduce EU output by between €114 billion and €228 billion (1% to 2% reduction in EU GDP) and eliminate a minimum of 1.7 to 3.5 million EU jobs among import-competing industries, their suppliers and services linked to these sectors.

In manufacturing, the largest potential losses would be in textiles and apparel, computer, electronics, optical products and furniture, but also in motor vehicle parts, paper, steel and ceramics, i.e. sectors targeted by China’s five-year plans as well as sectors currently subject to anti-dumping measures and where China is
developing substantial excess production capacity.

Germany would be most affected, followed by Italy, the UK and France with between 183 000 to 367 000 jobs at risk in France.

The first assessment of Brussels to be released soon³ would be much less pessimistic than the American study published in September 2015. According to the trade commissioner Cecilia Malmström, the EPI study implicitly assumes that China resorts to dumping practices in all its exports to Europe, while only 1.4% of Chinese exports are dumped.

Actually, imports from China would rise by 17 to 27% in sectors which today are protected. Job losses would mainly concern Italy, Germany, Spain, Portugal, France and Poland, where almost 80% (out of a total of 234,000) jobs of sheltered sectors are located. The industries most at risk would be ceramics (primarily in Italy), followed by steel, mechanical engineering and solar panels.

While the EU is split over giving China market economy status, with countries in the North of Europe in favour of the move and those of the South opposed, three options would be considered by the European Commission:

a) Maintaining the non-market economy status. Such a decision could probably prompt retaliatory measures from China. At this stage, it is impossible to measure its impact according to the report.

b) Eliminating all anti-dumping measures without the imposition of mitigating measures. This would be theoretically the case if China is granted MES. Prices of
Chinese imported products in protected sectors could fall by 19% and 188 000 jobs could be lost.

c) Granting MES to China with the introduction of mitigating measures. These measures still have to be defined and appears to be favoured by the trade commissioner.

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