New Zealand announced April 14 that it will officially recognize China as a market economy, a breakthrough that paves the way to a better international trading status. Two days later, European Commission President Romano Prodi said in Shanghai that the European Union will come to a preliminary conclusion on China’s market economy status in June.

Although China has made tremendous advances in building its market economy, global economic powers such as the EU and US have not recognized China as such.

Although the EU removed China from its non-market economy (NME) list in 1998, it continues to regard China as a market-transition economy.

Because of its failure to afford this recognition, the EU’s anti-dumping rules use a third surrogate country to calculate China’s domestic production costs, from which it adjudges the “normal value” of Chinese exports. Because the surrogate’s production cost is different from China’s, and normally much higher, Chinese exporters have received unequal treatment and lost many anti-dumping cases.

Before 1993, China exported over 1 million TVs to the EU yearly. In 1993’s anti-dumping case against Chinese TVs, the EU selected Singapore, whose production cost was 20 times higher than China’s, as the surrogate. The Chinese companies lost the case and have now lost the entire EU market.

The EU is China’s second-largest trading partner, with bilateral trade exceeding 100 billion Euros (US$118 billion). When the EU bloc grows from 15 to 25 members in May, it will become China’s largest trading partner. At the same time, the EU has conducted nearly 100 anti-dumping investigations on Chinese commodities, covering almost every type of export to the EU and affecting US$4 billion worth of products.

The EC’s External Trade Commissioner Pascal Lamy said the commission is conducting a comprehensive technical analysis and assessment of China’s economy.

Commission spokeswoman Arancha Gonzalez said China had provided a comprehensive report about its market economy, which the EC will consider in drawing its conclusion.

According to Lamy the commission will pass its findings to the European Council. Only with the approval of the council will China win official recognition.

During the assessment, the size of the state sector and scale of government intervention in the market will be considered, particularly intervention in finance and insurance. It will also evaluate whether the market determines commodity costs and prices.

The technical assessment is expected to be finished by June 30. Although the commission’s conclusion does not represent European Council’s opinion, it should reflect the stance of the EU, as the commission will consider the opinions of all member countries, and industries and officials.

Obstacles remain

Although the European Commission has set a deadline for itself, the path to recognition as a market economy is not yet clear

An EU expert who prefers to remain anonymous says that technically, the EU feels that some of China’s commodity prices are subject to too much intervention by the Chinese government, especially resources. Further, the government has written off huge amounts of debt for many state-owned enterprises that are insolvent owing to weak operations and poor management. He also said that the EU has been scrutinizing China’s market economy qualifications since 1998, but only about 50 percent of its enterprises appear to meet market economy standards.

The EU decision makers are feeling double pressure on this issue, from both industries and member countries. Since tariff and non-tariff barriers are strictly restrained in international trade, many countries allege dumping as a form of protection that is allowed by the WTO. If the EU grants market economy status to China, the member countries will have fewer complaints, which also means higher trade deficits with China.

At present, the EU has a 55 billion Euro deficit in its China trade, and an increase would surely bring down pressure from industries and member countries.

Some analysts say that politics are also playing a major role in the decision. Many believe that China’s economy is more open than Russia’s and that China is more “marketized.” Yet the EU granted Russia, which is not a WTO member, market economy status in 2002.

The EU’s recognition of China as a market economy is important in part because, as a leading global economy, the EU’s decision may set an example for other countries, like the US. It would mean that the West recognizes China’s efforts at reform during the past two decades, not only commercially but also politically.

Of course, granting market economy status may also strengthen China-EU trade, while giving the EU more accurate calculations as the Chinese’s production costs. Anti-dumping investigations may become more transparent, manageable and fair. Finally, Chinese companies will be better protected themselves.

Granting of market economy status should, when all is said and done, lead to stronger, healthier Sino-EU trade.

(China Youth Daily, translated by Feng Yikun and Li Liangdu for China.org.cn, April 22, 2004)