Home » Opinion » Chinese Views
China deserves status of market economy
By John Gong |
July 31, 2009, Friday
|
Print Edition
Print Edition
IN the US-China Strategic and Economic Dialogue that ended on Tuesday, Chinese Vice Premier Wang Qishan urged the US, among other things, to recognize China's status as a market economy.
The status of market economy is important as it relates to the anti-dumping cases in international trade disputes. When China joined the World Trade Organization (WTO) in 2001, it made a great concession in the form of agreement to treatment as a non-market economy (NME) for up to 15 years.
A country that is subject to anti-dumping investigations is classified as either a "market economy" (ME) or a "non-market economy" (NME). Russia was recognized as a ME in 2002. Currently China is in the NME league together with Albania, Cambodia, Kazakhstan and Vietnam.
The nasty consequence of being classified as a NME is that in anti-dumping investigations, China's input factor prices cannot be used in the calculation of fair market value of end export products. Price data from a "surrogate" country, often times India, are typically used instead. The use of surrogate country data often leads to unfavorable rulings for Chinese exporters and higher dumping duties.
In many cases, the choice of surrogate country is a significant source of bias, often serving as a convenient tool to accommodate political pressures from domestic competitors.
In the famous furniture anti-dumping case against China in 2004, the US Commerce Department even arrogantly refused to consider this argument on the grounds that there was not enough time.
If you have stayed in China for over a week, you should reach the intuitive conclusion that China has a market-oriented environment similar to many countries in the Organization for Economic Cooperation and Development (OECD).
Barring a few strategic economic sectors with significant government ownership (ie banking, telecommunications, transport, energy), a phenomenon which is not abnormal in many other market economies, most other sectors are competitive with hundreds of companies as players with razor-thin profit margins.
6-factor analysis
And this is particularly true for the exports sector, where anti-dumping is most relevant. The majority of China's exports come from foreign-invested joint ventures and indigenous private firms.
Now of course arguing based on intuition and casual observations is never adequate. Let us quickly walk through the six-factor analysis that the US Commerce Department uses to review a country's market economy status.
This by no means implies the author's agreement with the logical connections between these criteria and the statutory definition of the market economy as it appears in the Tariff Act of 1930, 19 U.S.C. 1677(18), but we will leave its discourse for another day.
The first factor is probably the largest stumbling block - whether the country's currency is freely convertible. But China is on course to the free float of the yuan within a time period probably shorter than many experts would expect, with authorization this month of the yuan as settlement currency by overseas enterprises being a first step in such direction.
But on the other hand, while the US is paying lip service to urging China moving toward a market economy, it probably is the last country in blessing the free convertibility of the yuan, as the dominant global status of the US dollar is at stake.
As a result, it may be a good idea for China to announce a phased plan for yuan convertibility in exchange for Washington's recognition of its market economy.
The second factor concerns the degree to which wage rates were determined by free bargaining between labor and management.
Well, speaking of government's meddling in wages, the federal minimum wage in the US was increased from US$6.55 an hour to US$7.25 just last Friday, a whopping 11 percent increase.
The third factor addresses the extent to which foreign investment is welcomed.
No further explanation is needed here, given that China has attracted the largest amount foreign direct investment in the world consistently for decades.
The fourth factor examines the extent of government ownership in corporations in the economy. As alluded to earlier, Chinese government's shareholding is limited to a few strategic economic sectors, which is not uncommon among OECD countries.
The issue seems to be less thorny as the tide of government bailouts and corporate nationalization swept through much of Europe and the US lately.
The fifth factor looks at the extent of government controls over the allocation of resources and over the price and output decision of enterprises.
This actually refers to the functions of the old but now defunct national economic planning ministry in a Soviet-style planned economy. China bid farewell to this a long time ago.
The last factor refers to "other factors as the administering authority considers appropriate."
Although it can be subject to different interpretations, the Russia review in 2002 actually paid much of the attention to the incidence of barter transactions, a phenomenon long gone in China many years ago.
In short, the non-market-economy status for China has outlived its time to the extent that it would be even embarrassing to think of cities like Beijing and Shanghai as part of a non-market economy for any foreign expatriates living there.
As China and the US move toward a strategic and constructive relationship, recognizing China as a market economy is an important step in preventing future trade frictions.
(The author is an associate professor of economics at Beijing-based University of International Business and Economics. The views are his own. His email: johngong@gmail.com)
The status of market economy is important as it relates to the anti-dumping cases in international trade disputes. When China joined the World Trade Organization (WTO) in 2001, it made a great concession in the form of agreement to treatment as a non-market economy (NME) for up to 15 years.
A country that is subject to anti-dumping investigations is classified as either a "market economy" (ME) or a "non-market economy" (NME). Russia was recognized as a ME in 2002. Currently China is in the NME league together with Albania, Cambodia, Kazakhstan and Vietnam.
The nasty consequence of being classified as a NME is that in anti-dumping investigations, China's input factor prices cannot be used in the calculation of fair market value of end export products. Price data from a "surrogate" country, often times India, are typically used instead. The use of surrogate country data often leads to unfavorable rulings for Chinese exporters and higher dumping duties.
In many cases, the choice of surrogate country is a significant source of bias, often serving as a convenient tool to accommodate political pressures from domestic competitors.
In the famous furniture anti-dumping case against China in 2004, the US Commerce Department even arrogantly refused to consider this argument on the grounds that there was not enough time.
If you have stayed in China for over a week, you should reach the intuitive conclusion that China has a market-oriented environment similar to many countries in the Organization for Economic Cooperation and Development (OECD).
Barring a few strategic economic sectors with significant government ownership (ie banking, telecommunications, transport, energy), a phenomenon which is not abnormal in many other market economies, most other sectors are competitive with hundreds of companies as players with razor-thin profit margins.
6-factor analysis
And this is particularly true for the exports sector, where anti-dumping is most relevant. The majority of China's exports come from foreign-invested joint ventures and indigenous private firms.
Now of course arguing based on intuition and casual observations is never adequate. Let us quickly walk through the six-factor analysis that the US Commerce Department uses to review a country's market economy status.
This by no means implies the author's agreement with the logical connections between these criteria and the statutory definition of the market economy as it appears in the Tariff Act of 1930, 19 U.S.C. 1677(18), but we will leave its discourse for another day.
The first factor is probably the largest stumbling block - whether the country's currency is freely convertible. But China is on course to the free float of the yuan within a time period probably shorter than many experts would expect, with authorization this month of the yuan as settlement currency by overseas enterprises being a first step in such direction.
But on the other hand, while the US is paying lip service to urging China moving toward a market economy, it probably is the last country in blessing the free convertibility of the yuan, as the dominant global status of the US dollar is at stake.
As a result, it may be a good idea for China to announce a phased plan for yuan convertibility in exchange for Washington's recognition of its market economy.
The second factor concerns the degree to which wage rates were determined by free bargaining between labor and management.
Well, speaking of government's meddling in wages, the federal minimum wage in the US was increased from US$6.55 an hour to US$7.25 just last Friday, a whopping 11 percent increase.
The third factor addresses the extent to which foreign investment is welcomed.
No further explanation is needed here, given that China has attracted the largest amount foreign direct investment in the world consistently for decades.
The fourth factor examines the extent of government ownership in corporations in the economy. As alluded to earlier, Chinese government's shareholding is limited to a few strategic economic sectors, which is not uncommon among OECD countries.
The issue seems to be less thorny as the tide of government bailouts and corporate nationalization swept through much of Europe and the US lately.
The fifth factor looks at the extent of government controls over the allocation of resources and over the price and output decision of enterprises.
This actually refers to the functions of the old but now defunct national economic planning ministry in a Soviet-style planned economy. China bid farewell to this a long time ago.
The last factor refers to "other factors as the administering authority considers appropriate."
Although it can be subject to different interpretations, the Russia review in 2002 actually paid much of the attention to the incidence of barter transactions, a phenomenon long gone in China many years ago.
In short, the non-market-economy status for China has outlived its time to the extent that it would be even embarrassing to think of cities like Beijing and Shanghai as part of a non-market economy for any foreign expatriates living there.
As China and the US move toward a strategic and constructive relationship, recognizing China as a market economy is an important step in preventing future trade frictions.
(The author is an associate professor of economics at Beijing-based University of International Business and Economics. The views are his own. His email: johngong@gmail.com)
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