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EU-China economic ties will withstand disputes over MES

By Fraser Cameron

27 July 2016

Just a week after the issue of market economy status dominated the EU-China summit in Beijing, the Commission discussed on 20 July the results of the impact assessment undertaken by DG Trade.

The discussion focused on the political, economic and legal implications of a decision on MES which must be taken by the end of the year. For China the matter is clear. China was promised MES 15 years after it joined in 2001. There can be no arguing – the promise must be kept. For the EU there is a strong legal view that the Chinese are in the right and failure to grant China MES would result in a lengthy fight at the WTO which the EU would probably lose.

The problem is that everyone expected China to be more advanced towards a market economy by now. This was and remains the intention of the Chinese leadership. But it has proved difficult to reform the many state owned enterprises that are financed out of the state’s coffers. In the eyes of many EU Member States, and especially industrial sectors like steel that have been suffering from cheap Chinese exports, this means that there is unfair competition.

Pressure from the steel sector has promoted the Commission to undertake an impact assessment on whether, and if so how, the EU should change the treatment of China in anti-dumping and anti-subsidy investigations after December 2016.

At the orientation debate this week, the Commission discussed the three options examined in the impact assessment: (1) leaving the EU legislation unchanged; (2) removing China from the list of “non-market economies” and applying the standard methodology for dumping calculations; (3) changing the anti-dumping methodology with a new approach which would maintain a strong trade defence system, while giving effect to the EU’s international obligations.

It seems most likely that the EU is heading towards the third option although there may still be major obstacles to overcome. The political side of the argument focuses on potential job losses and the impact on certain regions. DG Trade received more than 5,000 responses to its public consultation of which 80% were against granting China MES. There is, however, no united view on the MES issue either among Member States or industrial sectors. Some pro-market Member States such as the UK (still with a vote) and Sweden are strongly in favour of MES.

Others such as Italy and France are more hesitant. The European Parliament adopted a resolution in May calling on the Commission to take action against Chinese dumping practices.

The Commission is convinced that the current situation of overcapacity, notably in steel, has shown that we need effective trade defence instruments to uphold fair trade and address market distortions in the future. This means that we now need to adapt to new economic realities and sharpen the tools at our disposal, as Commissioner Cecilia Malmström pointed out.

The Commission will now follow a dual strategy. It will continue to press China to make significant and verifiable cuts in industrial over-capacity based on a clear timeline of commitments and an independent monitoring mechanism. Following the summit in Beijing, an EU-China bilateral platform on steel was established to monitor overproduction.

At the same time it will prepare new trade defence instruments that can deal with the current realities of overcapacities in some sectors. This step would speed up anti-dumping and anti-subsidy procedures and would allow the Commission to impose higher duties in certain circumstances.

There is also a transatlantic dimension to consider. The US has made clear that it will not grant MES to China and is lobbying the EU to do likewise. Donald Trump has called for 45% tariffs on Chinese goods to stop dumping. EU officials, however, stress that they will make a decision based solely on European interests

Although MES is placing a strain on EU-China relations there are many positive aspects to consider. First, most trade takes place without any problems. Second, both sides are negotiating a Bilateral Investment Treaty that should further promote economic cooperation. Third, Chinese investment in Europe is increasing rapidly. Four, China has agreed to contribute a sizeable sum to the Juncker Plan. Five, there is huge potential for economic cooperation as the Chinese One Belt, One Road project gets underway. Six, many sectors such as tourism are booming.

Overall the economic ties between the EU and China are of such importance that they will withstand the disputes over MES. It could even be argued that such disputes are a sign of the maturity and depth of the relationship. The EU still has fare more trade disputes with the US than China.