THE CONSEQUENCES OF GRANTING MARKET ECONOMY STATUS (MES) TO CHINA: THE LAST THING THE EU NEEDS

Chinese enterprises dump more products into Europe’s open market than any other country in the world. Indeed, over 60% of all the EU's anti-dumping measures are against China.

The enormous EU-China trade deficit grows every year. China has been able to dramatically increase exports to Europe by an average of over 11% per year over the past fifteen years, rising from €75 billion in value in 2000 to €360 billion in 2015. Europe’s trade relationship with China is not balanced and is made worse by dumping.

The trade deficit between the EU and China reached an all-time record high of over €180 billion in 2015.

Dumping from China is wiping out European Jobs. European industry has already lost millions of manufacturing jobs to China e.g. China has an estimated 65 percent of the world's total textile production and European production has been decimated. Overall, China now makes and sells more manufactured goods than any other country, particularly steel. Driven by massive excess capacity more than twice the size of total EU steel demand, China has been dumping unprecedented volumes of steel into Europe. The EU steel sector has lost at least 85,000 jobs since 2008, over 20% of its workforce. Import volumes of steel from China into the EU have doubled in the past two years, with prices collapsing by about 40%. Steel is the backbone of many of Europe’s manufacturing and construction industries, providing direct and indirect employment to millions more European citizens.

Current anti-dumping measures safeguard tens of thousands of direct and indirect jobs in Europe, with thousands more in sectors or product types still undefended. Without the anti-dumping instruments currently available, up to 3.5 million jobs would be at risk from China’s unfair trading practices.

Granting Market Economy Status (MES) to China would affect the EU in the following ways:

• Increase EU imports of manufactured commodities by between €71.3 billion and €142.5 billion, or more. The growth of imports would increase EU trade deficits, reducing EU GDP by between €114.1 billion and €228.0 billion (1.0 percent to 2.0 percent of GDP) in the first three to five years after MES is granted, and eliminate 1,745,400 to 3,490,900 EU jobs (0.9 percent to 1.8 percent of total EU employment).
• Put 478,600 to 957,300 jobs directly at risk due to increased imports from China; an additional 537,100 to 1,074,100 jobs indirectly at risk in supplier industries, including manufacturing, commodity, and service industries; and, through the loss of wages supported by these direct and indirect jobs, potentially eliminate an additional 729,800 to 1,459,700 respending jobs throughout the EU economy. These totals could increase due to the threat of increased imports in import-sensitive industries.
• Potentially eliminate between 779,300 and 1,558,700 jobs in manufacturing (2.4 percent to 4.8 percent of total manufacturing employment), representing the largest number of jobs at risk of any major industry. Within manufacturing, the largest potential losses would be in textiles and apparel, with 187,000 to 374,000 jobs at risk—7.8 percent to 15.5 percent of total employment in textiles and apparel. Other manufacturing industries with large numbers of jobs at risk would include computer, electronic, and optical products, with 143,900 to 287,900 at-risk jobs, representing 9.2 percent to 18.3 percent of total industry employment; furniture, with 92,500 to 185,000 jobs at risk, representing 4.1 percent to 8.2 percent of total industry employment; and fabricated metal products, with 58,900 jobs to 117,800 jobs at risk, representing 1.6 percent to 3.2 percent of total industry employment.
• Place large numbers of jobs at risk in industries outside of manufacturing, including wholesale and retail trade (252,600 to 505,300 jobs, or 0.9 percent to 1.7 percent of total industry employment); and public, social, and related services (225,000 to 450,000 jobs, or 0.3 percent to 0.6 percent of total industry employment).
• Create the biggest number of potential job losses in the four largest EU economies. Germany has the largest number of jobs at risk (319,700 to 639,200 jobs), followed by Italy (208,100 to 416,200 jobs), the United Kingdom (193,400 to 386,800 jobs), and France (183,300 to 366,800 jobs). These four countries are also hard hit when measured by jobs at risk as a share of total employment, though the rankings shift slightly, with Italy at the top (jobs at risk constituting 0.9 percent to 1.9 percent of total employment), followed by Germany (0.8 percent to 1.7 percent of total employment), France (0.7 percent to 1.5 percent of total employment), and the United Kingdom (0.7 percent to 1.4 percent of total employment). The next four countries, in terms of total jobs at risk, are Poland (145,100 to 290,100 jobs), Spain (136,600 to 273,300 jobs), Romania (100,100 to 200,100 jobs) and the Netherlands (52,000 to 104,000 jobs).
• Have the biggest impact, in terms of the number of jobs at risk as a share of total employment, in the 10 countries in Central Europe. The top 10 hardest hit when ranked by jobs at risk as a share of total employment are led by Bulgaria (1.3 percent to 2.7 percent of total jobs), Romania (1.2 percent to 2.5 percent of total jobs), and Hungary (1.1 percent to 2.2 percent of total jobs). However, most of those countries are relatively small and have relatively few total jobs at risk. The largest countries in this group are Poland (where the 145,100 to 290,100 jobs at risk constitute 1.0 to 1.9 percent of total employment), Romania (100,100 to 200,100 jobs at risk constituting 1.2 percent to 2.5 percent of jobs), and the Czech Republic (46,900 to 93,900 jobs at risk, constituting 1.0 percent to 2.0 percent of total employment).
• Put an additional 2.7 million workers in a handful of highly vulnerable industries also directly at risk. The list of vulnerable industries includes motor vehicle parts (1.2 million jobs at risk), paper and paper products (647,000 jobs at risk), steel (350,000 jobs at risk), ceramics (338,000 jobs at risk), glass (100,000 jobs at risk), aluminum (80,000 jobs at risk), bicycles and parts (28,000 jobs at risk), and additional jobs in other industries such as chemicals and solar cells, which are at risk due to excess capacity and production in China. Job losses in these industries would also lead to up- and down-stream losses in supplier industries, and to multiplier losses due to the loss of wages. Thus, total job losses if the EU decides to grant MES to China could easily exceed the total of 3.5 million jobs at risk identified above.

December 2016 is the expiration date of a provision in China’s accession to the World Trade Organization 15 years ago that declares it a non-market economy. That designation provides the legal basis for many of China’s trading partners — most notably, the EU, Japan, and the United States — to impose anti- dumping duties on Chinese goods like steel and cement. China argues that it should automatically be granted market status for its economy with the expiration of the non-market provision. But the legal language is ambiguous at best: It is silent on whether automaticity of market status follows. The language of the WTO provision puts the burden of proof on China and/or Chinese firms to demonstrate that they operate based on market prices. While China has a vibrant, fast-growing, and productive private sector, major heavy industries — the majority of which are state-owned — operate with a host of direct and indirect subsidies, from government-directed cheap loans to land grants and price subsidies for inputs. China has to establish market status under the national law of the importing WTO member. For the EU, that means China must meet several criteria, including: a low amount of government influence in the allocation of resources and in decisions of enterprises, absence of distortion in the operation of the privatized economy, an effective legal framework for the conduct of business, and the existence of a genuine financial sector. China’s economy has clearly evolved in a market direction over the past 15 years — today, most of its growth comes from the private sector. But the dead weight of what are called “zombie industries,” fed by state support, persists. China’s financial system has also evolved substantively. But it is a bit of a stretch to argue that China meets the objective criteria for market status — certainly not enough to persuade the EU Parliament and European national governments to change their laws to reflect that status.

Absent the EU granting MES to China, Beijing will almost certainly take its case to the WTO for dispute resolution. Nasty legal battles are likely to ensue. Compromise formulas could emerge, phasing in MES on an industry-by-industry basis as Chinese market reforms gradually move forward.

With MES status, China could avoid effective enforcement of anti-dumping laws in the EU because authorities in anti-dumping investigations would be required to start with the presumption that prices and costs in that country are market determined, resulting in much lower or even zero duties in anti-dumping cases. In addition, if the EU decided to grant MES to China, it would also eliminate the threat that duties could be imposed on tens of thousands of China-manufactured products that benefit from depressed or subsidized input costs. Thus, Chinese exporters could lower prices substantially without fear of engendering anti-dumping complaints.

On the issue of MES, President Juncker has underlined that the EU will stick to its international obligations and is producing an impact assessment looking at the consequences for each EU Member State and only following this process, will the Commission take a decision.