Market economy status: China in the dumps

Without the status, Chinese firms are vulnerable to anti-dumping accusations by business rivals in other countries

BEIJING - At least one Chinese maker of television sets is being driven to the wall by business rivals quick to pounce on a rule that makes it easy to file anti-dumping complaints against China.

Sichuan Changhong Electric Company's exports of TV sets to the United States, once making up two-thirds of its total output, have dwindled to a drip since the US Department of Commerce slapped a 24.48 per cent duty on the import of its 21-inch or larger models.

The punitive action was taken in May after a year-long probe into a complaint by the only TV manufacturer left in the US and some labour unions that Chinese and Malaysian sets were being sold in the US below production costs.

This case illustrates just how vulnerable China can be to accusations of dumping when it does not have market economy status (MES).

'We hope that China will be given this recognition soon. Otherwise, Chinese products will suffer from unfair treatment by many countries,' said Mr Liu Haizhong, vice-director of Changhong's sales planning division.

Indeed, China is now a target of more anti-dumping investigations than any other country in the world, not least because it is not considered a market economy by most of its trading partners.

This allows investigators of anti-dumping complaints to use the production costs in a surrogate market economy as a basis for determining whether Chinese exporters are dumping their goods.

China says this is unfair, arguing that investigators should use its labour costs for computation instead.

In 1993, when the European Union (EU) investigated Chinese TV manufacturers, it used Singapore as the surrogate country to measure against China.

Since Singapore's labour costs are, roughly, more than 20 times higher than China's, 87 Chinese TV manufacturers, including Changhong, were found guilty of dumping in Europe.

For the past year or so, to discourage such complaints, the Chinese government has marshalled its diplomats and trade negotiators in a campaign to persuade other World Trade Organisation member-nations to recognise China as a market economy.

Since April, Beijing has won such recognition from Singapore, Malaysia, Thailand, New Zealand, Kyrgyzstan, Benin and Togo.

But countries that have granted China MES tend to be relatively small ones whose trade relations with China have not been marred by anti-dumping suits. For example, last year, out of those seven countries, only New Zealand filed anti-dumping suits (two) against China.

The two most important WTO members that China needs to win over are the US and the EU, which have a combined 84 anti-dumping measures in effect against Chinese products, ranging from steel and bicycles to fluorescent lamps.

China ran into a major setback this past week when the EU rejected granting it MES 'at this stage' despite lobbying by Premier Wen Jiabao during his state visit to Brussels in May.

'This was a completely political decision because there is no consensus over what defines a market economy,' said Mr Li Yushi, a researcher at the Ministry of Commerce-affiliated Chinese Academy of International Trade and Economic Cooperation.

'If the US doesn't recognise China as a market economy, the EU will be hard pressed to do so.'

Yet the irony is that both the US and EU granted Russia MES in June 2002 even though the ratio of Russia's government expenditure to gross domestic product, a measure of state interference, is more than twice that of China's.

President Vladimir Putin reportedly considered the re- cognition as a reward for Russia's support of the US war against international terrorism since Sept 11.

What irks China is that Russia won MES while still negotiating entry into WTO, which China joined in 2001.

However, there are some analysts who feel that China's WTO membership may have hurt its MES cause more than it helped.

'Market economy status is a useful carrot to dangle in front of the Chinese,' said Mr Stephen Green, head of the Asia programme at the Royal Institute of International Affairs in London.

'From a political point of view, it's very good encouragement for China to better implement other WTO commitments which they've made and which the Europeans feel that they're not implementing, particularly in financial services.'

But the EU's memo on China's market economy status application stressed that 'MES assessment is not a political statement...It is a technical analysis exclusively linked to trade defence investigations'.

The EU assessment is that China still falls short on four of the five criteria used to determine MES. It said MES would be granted only if China:

'There is some truth to this,' said Professor Feng Qiwen, director of the WTO Institute at Hubei University of Economics.

'The state's interference is still too much. Although product prices have been liberalised, China's financial sector still hasn't been opened to foreign competition.'

With the recent rejection by the EU and the US insistence that China let the market set the foreign exchange rate for the yuan, there is little hope of winning MES in the next couple of years.

Under the WTO accession agreement, China has to be accorded that status in 2015 at the latest.

Yet, there may be a silver lining to all this. As a non-market economy, China is not subject to US subsidy laws because everything is considered subsidised by the government in non-market economies.

Once China obtains MES, this will open the doors to an avalanche of anti-subsidy lawsuits against not only state-owned enterprises that receive government subsidies but also industries that receive tax breaks and use water, land and energy at prices set by the government.

'The benefit that might accrue from this different treatment on dumping will be more than offset by the negative outcome on the subsidy side,' said Ms Charlene Barshefsky, former US Trade Representative and now a senior international partner at the law firm of Wilmer Cutler Pickering.

'The US and Europe, on their own, can determine that China is a market economy and at some point, undoubtedly, each will. But if I were China, I don't think I'd push the issue.'

As a non-market economy, China is not subject to US subsidy laws because everything is considered subsidised by the government in non-market economies.

My, my. So China doesn't believe in free trade any more than I do. Imagine that.

Ok, who were the people that thought China had us by the economic 'short and curlies' with our trade deficit? Come on, where are ya. China couldn't wean itself off of the US if it wanted to.

40% of China's GDP is due to exports. They stand to lose BIG TIME.

As a non-market economy, China is not subject to US subsidy laws because everything is considered subsidised by the government in non-market economies.

Our ever vigilant government uses Indian prices as a benchmark.

It's a good point. China's growing economic influence will naturally provoke tougher requirements from the EU and the US.

Reduced state interference and treated all companies equally;

* Increased compliance with existing accounting law;

* Ensured equal treatment of all companies in bankruptcy procedures; and

* Removed discriminatory barriers in the banking sector.

But in the end, this tougher stance against China will only help them, as forcing the Chinese to live by market rules can only be helpful. Being tough on the Chinese now and forcing them to comply, will only help in the long term, even if doing so will cost them on short term gains.

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