The Morning After: China, Market Economy Status and Trade in TrumpLand

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Put the dragon fruit back on the shelf, guys; it’s still a bit too green — er, red.

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That’s the metaphor that U.S. Commerce Secretary Penny Pritzker forced us to take a step further, when she went on record stating that “at this moment, [the time is] not ripe for us to change our protocol,” regarding a decision on whether China has taken necessary steps to achieve market economy status (MES).

If China had its way, that time for the U.S. — and the whole gamut of WTO-member nations — came precisely yesterday, December 11, 2016. That’s the date that China claims it should be given MES automatically, according to a line item in the country’s WTO Accession Protocol made official exactly 15 years ago.

So what has happened? Do we all of a sudden live in a world where China is given free reign in trade, on equal footing with the U.S. and E.U.? Not so fast.

Although the European Union has been toying with giving China MES, they are certainly considering new trade rules that would make it harder for China to dump into its 28 individual country markets – but enacting anything will take several more months. Same with the U.S.: essentially the only thing that would force the U.S. Commerce Department to formally confront the China/MES question is a trade lawsuit filed by China, or implicating China, in which the latter would be explicitly able to make that type of request, according to Tim Brightbill, partner at Wiley Rein LLP. (Japan, for one, has said it won’t grant MES either.)

The steel industries in the United States and Europe have been the most vociferously opposed to China achieving this status, since they stand to lose the most as the sector with the greatest number of trade complaints (namely anti-dumping) and cases lodged against China.

Tracy Porter, executive vice president of operations for Commercial Metals Company (CMC), and chairman of the Steel Manufacturers Association, captured the high stakes of the current situation for domestic manufacturing and trade, as matters of the U.S. standard of living, national defense and security, and millions in trade costs, in our recent video interview with him:

…And Now We’re in Trumplandia

Of course, back when we were covering the run-up to this milestone date earlier this year, Donald J. Trump was not yet our President-elect. We featured a series of excellent coverage on what this may mean for the steel industry and U.S. manufacturing in general last week from MetalMiner Editors Stuart Burns and Jeff Yoders:

But outside steel, how does the specter of President-elect Trump change the China landscape?

According to a co-authored two-part analysis by our fearless leader Lisa Reisman and her better half Jason Busch on Spend Matters, here’s the high-level lowdown:

“Issues concerning China from a trade perspective seem a bit clearer under a Trump regime, at least in certain areas. At a minimum, China market economy status is dead. It will not happen, and China will still be held to the same rules as it currently is with regard to the filing of U.S. anti-dumping cases. In effect, there will be no policy change.

Beyond this, our analysis suggests the following regarding China and related trade issues:

  • Trump will likely not slap 45% import duties on Chinese goods, as he promised in the campaign. There is simply too much at stake, and large U.S. exporters are putting pressure on the incoming administration to avoid this level of confrontation.
  • China still may get labeled a currency manipulator. This would mean that the U.S. government could enter into negotiations with China, asking them to make some changes to their foreign exchange regimes. Whether China will do anything is not clear.
  • The Trans-Pacific Partnership (TPP), which was in part designed to counter China’s strength in the region, right now appears dead, but that could change depending on who Trump installs as the U.S. Trade Representative.”

It would be good if the first bullet, at least, does not become reality just yet, only because of one large elephant in the room.

What If China Retaliates?

On Nov. 10, a day after the EU announced a proposal of a new anti-dumping framework, the Chinese trade ministry issued a statement saying the nation would retain “the right to take all necessary means, and resolutely safeguard their legitimate rights and interests,” according to the Wall Street Journal.

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As with a lot of things regarding China, what could that even mean?

If it indeed means retaliation, here’s why it’s important that doesn’t happen: the majority of interested parties, whether in the U.S. or the E.U., is not composed of the primary producers.

“There is a danger that the benefit of the few, the steelmakers, could take priority over those of the many,” wrote Stuart Burns. He goes on to sum it up quite well:

Steel consumers are an extremely diverse group spread across metal-consuming companies and the markets they serve. By contrast, the impact of actions that limit imports or influence import costs may be individually small but collectively large for the wider economy. The impact on the economy of higher steel costs could be significant, raising prices for consumers and reducing the ability of U.S. manufacturers to compete on exports of finished goods.

The same goes for industries outside of steel in the U.S. and E.U., especially those that have outsourced parts of their supply chain to China. According to the WSJ, the automotive and chemical sectors in Europe may have a tough time with higher import duties places on Chinese goods. (Meanwhile, solar panels, ceramics clothing and textiles industries would benefit from higher duties.)

Regardless, the Big Unknown is what China would actually do in response to tariffs suddenly skyrocketing in this new Trumplandia.

We’re all fascinated to see what happens.

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Join sister site Spend Matters this Tuesday, Dec. 13 at 10 a.m. Central as Jason Busch (founder and head of strategy at Spend Matters) and Marco H. de Vries (senior director, product marketing at OpenText Business Network) discuss what the oncoming Trump administration means for global trade, the environment and economic policy. How will the supply chain and risk and visibility be impacted? You’ll have to register today to find out!

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