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Home » Opinion » Foreign Views
China deserves 'market economy status'
By Sean Maguire |
June 21, 2010, Monday
|
Print Edition
Print Edition
QUESTION: When is a market economy not a market economy?
Answer: When the market economy in question is that of the People's Republic of China, at least according to the United States.
The granting of market economy status is more than a matter of simple nomenclature, but would instead have a deep and lasting impact on Chinese exporters and their foreign markets.
When joining the WTO in 2001, China accepted a fairly narrow characterization of its economy - as one that is undergoing "transformation" - a characterization which is reflected in Article 15 of the Document on China's accession to the WTO which provides that China would not automatically attain market economy status until 2016.
Notwithstanding this, 97 countries have thus far granted China MES, New Zealand being the first in 2004.
Amongst other things, the appellation "market economy status" means that the costs of production of all goods and services within an economy are subject to the demands of market forces unfettered by state influence, whether they be in the form of subsidies or price controls.
This is crucial for a nation whose economy is largely predicated upon exports as, in the absence of these three golden words, they are vulnerable to the accusation that they are exporting products at a price below their real production costs, thereby "dumping" these products into other nations that play by free market rules.
Dumping is a huge issue in US-China relations. US manufacturing groups and labor unions have long complained that domestic producers are being undermined by a tidal wave of under-priced Chinese manufactured goods, goods that benefit from government subsidy, price controls and artificially imposed wage restraints.
They continue to exert considerable pressure on their government to ensure that the trade watchdogs remain vigilant.
WTO statistics suggest that China was the principal target of trade remedy investigations in 2008, subject to 73 anti-dumping actions and 10 countervailing cases which accounted for 35 percent and 71 percent of global cases respectively, with the US instituting the biggest number of actions. This has proved very expensive for Chinese business.
In the absence of MES, an investigation of dumping is supported by a procedure which involves the more or less arbitrary selection of a third-party country which is then used as a comparator, or surrogate.
Investigating authorities will then assess the production costs of a particular item in that surrogate country, and then base their assessment of the alleged product dumping allegation on that analysis.
The problems with such a method are pretty obvious.
Every market will have its own set of unique variables against which to calculate the cost of production of a particular type of good and, as such, Chinese exporters argue that is inherently unjust to impose this kind of artificial parity.
The costs of production cannot simply be smudged across intrinsically different markets.
On the face of it, the US has invoked what is left of the Smoot-Hawley Act, which retains provisions against anti-dumping, to confirm its current position and it is not difficult to detect the background noise created by resentful murmurings about the valuation of the yuan.
China does maintain significant restrictions on both the inter-bank foreign exchange market and capital account transactions, which appear to interfere with the ability of market signals to impact the exchange rate.
However, although China's reforms to date cannot ensure that the yuan is wholly market-based, the currency is not completely insulated from market forces.
The jury is still resolutely out on the merits of revaluation, but in the interim it would be prudent of the US to bow to the inevitable and recognize the Chinese economy for what it is. However, the US Congress is likely to stall any potential overtures in this area unless the yuan is allowed to rise substantially against the US dollar and/or there is a significant reduction in the size of the bilateral trade deficit.
(The author is a lawyer at Allbright Law Firm. The views expressed are his own. His e-mail: sbjmaguire39@yahoo.co.uk)
Answer: When the market economy in question is that of the People's Republic of China, at least according to the United States.
The granting of market economy status is more than a matter of simple nomenclature, but would instead have a deep and lasting impact on Chinese exporters and their foreign markets.
When joining the WTO in 2001, China accepted a fairly narrow characterization of its economy - as one that is undergoing "transformation" - a characterization which is reflected in Article 15 of the Document on China's accession to the WTO which provides that China would not automatically attain market economy status until 2016.
Notwithstanding this, 97 countries have thus far granted China MES, New Zealand being the first in 2004.
Amongst other things, the appellation "market economy status" means that the costs of production of all goods and services within an economy are subject to the demands of market forces unfettered by state influence, whether they be in the form of subsidies or price controls.
This is crucial for a nation whose economy is largely predicated upon exports as, in the absence of these three golden words, they are vulnerable to the accusation that they are exporting products at a price below their real production costs, thereby "dumping" these products into other nations that play by free market rules.
Dumping is a huge issue in US-China relations. US manufacturing groups and labor unions have long complained that domestic producers are being undermined by a tidal wave of under-priced Chinese manufactured goods, goods that benefit from government subsidy, price controls and artificially imposed wage restraints.
They continue to exert considerable pressure on their government to ensure that the trade watchdogs remain vigilant.
WTO statistics suggest that China was the principal target of trade remedy investigations in 2008, subject to 73 anti-dumping actions and 10 countervailing cases which accounted for 35 percent and 71 percent of global cases respectively, with the US instituting the biggest number of actions. This has proved very expensive for Chinese business.
In the absence of MES, an investigation of dumping is supported by a procedure which involves the more or less arbitrary selection of a third-party country which is then used as a comparator, or surrogate.
Investigating authorities will then assess the production costs of a particular item in that surrogate country, and then base their assessment of the alleged product dumping allegation on that analysis.
The problems with such a method are pretty obvious.
Every market will have its own set of unique variables against which to calculate the cost of production of a particular type of good and, as such, Chinese exporters argue that is inherently unjust to impose this kind of artificial parity.
The costs of production cannot simply be smudged across intrinsically different markets.
On the face of it, the US has invoked what is left of the Smoot-Hawley Act, which retains provisions against anti-dumping, to confirm its current position and it is not difficult to detect the background noise created by resentful murmurings about the valuation of the yuan.
China does maintain significant restrictions on both the inter-bank foreign exchange market and capital account transactions, which appear to interfere with the ability of market signals to impact the exchange rate.
However, although China's reforms to date cannot ensure that the yuan is wholly market-based, the currency is not completely insulated from market forces.
The jury is still resolutely out on the merits of revaluation, but in the interim it would be prudent of the US to bow to the inevitable and recognize the Chinese economy for what it is. However, the US Congress is likely to stall any potential overtures in this area unless the yuan is allowed to rise substantially against the US dollar and/or there is a significant reduction in the size of the bilateral trade deficit.
(The author is a lawyer at Allbright Law Firm. The views expressed are his own. His e-mail: sbjmaguire39@yahoo.co.uk)
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