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This is our final top-rated post of 2016. Chinese market economy status was a huge issue for the entire year and this interactive package, originally published in May, put all facets of the problem into one package. How China will change its economy to compete with the rest of the world without overproduction for export is still an open question and a major threat to market stability. — Jeff Yoders, editor
Dan Simmons has seen a lot during the 38 years he’s worked at U.S. Steel’s Granite City Works in Illinois, just outside St. Louis.
From starting out as a general laborer, to swinging hammers on the track gang, to “feeling like Mr. Haney from Green Acres” while trucking around the mill, Simmons took it all in. There were days “you were whistling when you came in, and whistling when you left,” he said.
But nothing compares to what he’s seeing now.
“I have grown men coming into my office, crying,” said Simmons. “You see the pain, the ‘what ifs,’ the blank stares…”
Simmons, who just turned 56, is now the president of the United Steelworkers Local 1899, and some of the grown men coming to him are pipefitters just like he had become during his long tenure, which began in 1978.
However, those men and women aren’t coming to him because they’ve been hurt on the job. They are coming to plead for help, because they have lost their jobs, and in many cases still don’t know when they’ll land their next one.
Cyclicality in steel production is nothing new, but it wasn’t until 2008 — when the global markets began crashing — that USS Granite City Works endured its first indefinite idling in its history.
“We had the unemployment office cycling 400 people through at a time,” Simmons told MetalMiner. “The biggest fear is not knowing. If I could have given them a definitive timeframe, they would’ve said, ‘OK, I can handle that.’ But after two to three months, people come to me and don’t know what to do with themselves.”
And now, after the mill went idle a second time in December 2015, some of those workers have been without a job for nearly half a year. Last December, 1,500 people were laid off — 75% of the mill’s total workforce. Across the country, a total of 13,500 steel workers have been laid off over the past year.
Simmons knows what it’s like to feel that fear firsthand. “I got a brother that works here, a brother-in-law that works here, so it’s personal. You worry about where your whole family will be.”
So what’s different today, compared to 2008?
For Simmons and scores of others in the country’s steel sector and other manufacturing industries, much of the pain can be traced back to one main source: China.
A History of Unfair Trade?
The world may have never encountered a more crucial Year of the Monkey than 2016.
That is, at least as far as global trade between China and the Western world is concerned. At the end of this year, China believes it ought to receive Market Economy Status (MES). This would allow China to enjoy the same market status as the U.S. and European Union when it comes to anti-dumping investigations before the World Trade Organization.
In its quest to grow its economy over the past two decades, China has become the leading producer — by far — of steel, aluminum, cement and other industrial materials.
Because of this, global steel overcapacity has now reached upwards of 700 million metric tons. China’s aluminum production has increased from 11% of global output in 2000 to more than 50% today. And imports of paper from China nearly tripled from 2012 to 2014, from 23,600 metric tons to 62,400 metric tons, with eight uncoated paper mills having closed or are in shutdown, according to Scott Paul, president of the Alliance for American Manufacturing (AAM), in recent Congressional testimony.
However, since China’s economy — and the role of its government within it — operates differently than much of the rest of the world, that country is effectively able to export and offer its products much more cheaply to many of its trading partners. Depending on the circumstances, this has spurred allegations of “dumping” over the past several decades, and has now come to a head.
Currently, China is considered a ‘non-market economy’ under WTO rules. Achieving market economy status would ultimately put China on the same level as the U.S. and E.U. in the eyes of the WTO, taking what some already consider a global trade war to new heights.
That last point is what has stirred up controversy. A change in status would impact Western manufacturers as well as importers, distributors and several other parties on many levels. In part, the controversy has become all the more heated due to countless allegations — in the form of trade cases and other trade complaints and disputes — levied by the US and EU against China since its accession to the WTO in 2001, essentially maintaining that China does not yet operate as a market economy.
In China’s defense, after being battered by falling demand and corresponding growth levels the past few years, the country is struggling to deal with supporting its developing economy — and its citizens. According to the Wall Street Journal, job protection is the government’s key concern, with the primary aim of “maintaining social stability,” according to a provincial Department of Finance official who spoke to the WSJ.
The country’s key tool for that has been to over-produce products such as steel and aluminum, and since Beijing’s plan to shift to a consumption-led domestic economy has cooled lately, those products make their way into China’s export market.
That’s why in 2014 alone, China was the subject of 55% of all global anti-dumping investigations.
The main driver behind the dumping claims is essentially the role China’s government plays in influencing the country’s economy, and — many say, unfairly — subsidizing industries to be more competitive with those of their trading partners. China also stands accused of outright theft of intellectual property from some U.S. companies.
In other words, many parties are concerned that China’s foreign trade actions, and how they reflect the interplay between its government and its domestic economy, may belie Beijing’s insistence that the country has outgrown its non-market economy status.
Let’s Define a ‘Market’ vs. ‘Non-Market’ Economy
Broadly speaking, the definition of a market economy implies that
- Prices are determined by supply and demand through free competition
- Investment decisions, production and distribution are also determined by supply and demand
- Economic decisions and price decisions involving goods and services are conducted by a country’s citizens — not the government
The NAFTA countries — Canada, Mexico and the U.S. — are classified as market economies.
This contrasts starkly with a centrally planned economy, in which the government shapes and controls everything from costs, prices, wages, output quotas, the value of its currency and more. The former Soviet Union and China are both prime examples; these are considered “non-market” economies (NME).
Poland was the first orthodox centrally planned economy to become a GATT (pre-WTO) contracting party in 1967, followed by Romania in 1971 and Hungary in 1973. After the collapse of the Soviet Union in 1991, former satellites moved from centrally planned to market economies, formally becoming transition economies.
In the immediate years after the WTO came into being in 1995, 10 more transition economies became members, recognizing special treatment in their protocols of accession.
Here’s Why Everyone is Talking About China and Market Economy Status Now
China has the opportunity to be treated fully as a market economy since accepting its Protocol of Accession and becoming a WTO member on December 11, 2001.
Because of the way China’s Communist government operated at the time, the protocol established the “governing process in granting China WTO status.” According to this E.U. policy analysis:
“China committed to adhering to the rules and obligations of the WTO system, which is based on market economy principles, and to the WTO’s policies of pro-competition and non-discrimination; to granting market access for imported goods and services; and to promoting a transition towards a ‘socialist market economy.’”
Since China’s 2001 accession, countries such as those comprising NAFTA have treated China as a non-market economy in anti-dumping cases due to the Chinese government’s influence in economic enterprise.
However, based on the Accession Protocol’s language, China believes that after December 11, 2016, it will automatically achieve MES due to the expiration of one particular clause within the protocol. The interpretation of the language within that specific section is at the heart of the dispute.
Here’s The Meat of the Debate
How the Non-Market Economy (NME) Methodology Works
Basically, non-market economies pose a problem when it comes to appropriately determining the margins used to compensate for products unfairly dumped into another market.
This is mainly because the two factors used for purposes of comparison — the exporting country’s “home” prices, and its costs of production — are both too skewed in a non-market economy due to heavy governmental involvement. Using either would lead to inaccurately calculated margins.
Therefore, under the General Agreement for Tariffs and Trade (GATT), it was agreed to construct the home market price on the basis of prices from a “third country” — in essence, a similar country with a market economy. The Tokyo Round of 1979 incorporated this component into the GATT, after which it got wrapped into U.S. law, according to this study.
Since the early 1980s, the U.S. Department of Commerce has applied this NME methodology for purposes of calculating anti-dumping margins in cases involving China. Will it be applying a different methodology to China cases come December?
The Legalese at Play: It All Hinges on ‘Price Comparability’
In order for China to join the WTO as a member in 2001, all negotiating parties (including China) agreed to a different standard in that country’s Protocol of Accession regarding anti-dumping investigations.
As part of China’s promise to move toward fully becoming a market economy, that standard required China to demonstrate “that market economy conditions prevailed in the industry producing the product under investigation,” and, if it couldn’t, the importing country could compare prices or costs based on an economy of similar economic development to China — rather than Chinese prices and costs.
The exact language resides in Section 15 of the Accession Protocol:
“a) In determining price comparability under Article VI of the GATT 1994 and the Anti-Dumping Agreement, the importing WTO Member shall use either Chinese prices or costs for the industry under investigation or a methodology that is not based on a strict comparison with domestic prices or costs in China based on the following rules:
- i) If the producers under investigation can clearly show that market economy conditions prevail in the industry producing the like product with regard to the manufacture, production and sale of that product, the importing WTO Member shall use Chinese prices or costs for the industry under investigation in determining price comparability;
- ii) The importing WTO Member may use a methodology that is not based on a strict comparison with domestic prices or costs in China if the producers under investigation cannot clearly show that market economy conditions prevail in the industry producing the like product with regard to manufacture, production and sale of that product.
Here’s the kicker: China’s argument for achieving automatic market economy status hinges on one specific sentence in Section 15, which states that “in any event,” the second provision above “shall expire 15 years after the date of accession” — that is, on December 11, 2016.
Certain legal experts argue that based on a plain reading of the protocol language, this will not happen. Attorneys at Wiley Rein LLP, a firm based in Washington, D.C., argue on the grounds that if this was to be the actual ‘intent of the law’ as written, then the rest of Section 15 would be nullified. Based on the length of these types of WTO negotiations and the ways in which treaties such as this one are meant to be interpreted, this expiration is not likely to happen.
Others note that based on the language, WTO “member countries, including the NAFTA countries, can continue to apply the NME methodology (or similar ones) until China (or Chinese producers) can demonstrate that it operates under market economy conditions.”
Therefore, the debate boils down to…
- The interpretation of the WTO Accession Protocol, specifically Section 15
- The ability of the Chinese government and/or producers to prove market economy conditions prevail for a particular producer, industry or the economy as a whole
- How each individual WTO member’s national law allows for China to become a market economy
So Is China a Market Economy Now?
Many indications point to an uphill battle for China in officially proving its market economy status. Long known as a currency manipulator, China has been accused of purposely devaluing their yuan in the past to gain economic advantage.
Government subsidies at local and state levels have also given Chinese companies a leg up on global competition. According to the World Bank and other bodies, China and its government continue to eschew market economy conditions. For example, land prices in particular are subject to comprehensive government control, causing fundamental distortions in land prices in China.
“Because all local governments are the owners of urban land in their jurisdiction, they have strong incentives to supply cheap land for industrial use to generate economic growth,” according to a World Bank report.
The World Bank has also noted that the Chinese government continues to exercise control over prices for transport, energy, utilities and credit.
Not only that, Chinese state-owned enterprises and how they operate are a cause for concern. Indeed, according to a recent Wall Street Journal analysis of nearly 3,000 domestic-listed Chinese companies in 2015, “reported government aid rose to more than 119 billion yuan, or more than $18 billion, last year compared with about 92 billion yuan in 2014.”
China’s Tianjin Pipe Corporation (TPCO) is one such example, with an operation outside Corpus Christi, Texas. According to Tim Brightbill, partner at Wiley Rein, these Chinese companies get preferential capital and other government subsidies to set up steel mills; or, if they don’t get subsidized initially, two years after starting production they begin operating on preferential treatment such as being less subject to regulation, not being traded on stock markets, and enjoying a different ownership structure.
Philip Bell, president of the Steel Manufacturers Association, noted back in 2015 that when the Texas branch of Tianjin Pipe Corporation applied for membership in that U.S. trade association, and was subsequently informed that SMA only accepted companies whose business was entirely market-based, TPCO responded that the U.S. operation was market-based while “traditionally Chinese.”
SMA did not admit the producer.
China’s official line on market economy status is evident from China Foreign Ministry Spokesperson Hong Lei’s statement in a recent press conference: “China has been working faithfully to fulfill its obligations as a WTO member since its accession.”
Although China has made comparatively small strides recently, such as agreeing to stop steel export subsidies for some of its small companies after receiving pressure from the U.S. Trade Representative’s office, the country may have a long way to go to prove it operates as a market economy.
Who Decides Whether China Gets Market Economy Status?
With all the talk surrounding the WTO’s role in China market economy status, it is up to individual countries’ governments to make the MES decision.
Certain WTO member countries have already granted China MES, largely through existing trade agreements. However, the countries that have filed the most anti-dumping cases are the ones that will likely make a decision this year on market economy status.
Politically and economically, the E.U. (collectively China’s largest trading partner) and the U.S. are seen as the most important decision-makers. Many experts say the E.U. may make its final decision before the U.S.
In fact, on May 12, the European Parliament voted overwhelmingly to reject MES for China, which is a significant step in getting the European Commission and E.U. governments to do the same later this year.
Although the U.S. currently treats China as a non-market economy, U.S. law allows an entire country, producer or industry to “graduate” to market economy status and, in China’s case, to show why Chinese prices or costs should be used for dumping comparisons.
The U.S Decision – Six Criteria to Say Yes to MES
U.S. law requires the International Trade Administration, under the U.S. Department of Commerce, to consider six criteria in determining if a country has achieved market economy status:
- The extent to which the currency is convertible into the currency of other countries,
- The extent to which wages in the country are determined by free bargaining between labor and management,
- The extent to which joint ventures or other foreign investments are permitted,
- The extent of government ownership or control of the means of production,
- The extent of government control over the allocation of resources and over the price and output decisions of enterprises,
- Other factors considered appropriate by the administering authority.
However, “no one has asked Commerce to look at the question yet,” Tim Brightbill told MetalMiner. A formal request to consider China a market economy must explicitly come up in a new U.S. trade case for the Commerce Department to begin the process, according to Brightbill — essentially it can be any anti-dumping case in which China is a respondent. A Chinese company, for example, could raise the question within a new case or an existing one, knowing that a final decision won’t come for several months. This is likely, as MES is “a No. 1 priority for China right now,” Brightbill said.
According to Scott Paul, AAM’s president, his conversations with the Commerce Department so far make him optimistic. “I think we’re in a pretty good place,” he said. “I have no reason to believe that the administration has proactively decided to initiate granting China market economy status.”
Based on those conversations, “they have a deep understanding of the six criteria,” he said. Representatives from Commerce and the International Trade Administration have not responded to MetalMiner’s requests for comment on this issue.
The Latest Timeline for the MES Decision
- China has maintained that it will automatically achieve market economy status on December 11, 2016, when those Section 15 provisions are due to expire.
- The U.S. International Trade Administration will be forced to confront the MES criteria as soon as a respondent officially requests it in a trade case.
- The EU will likely make a final decision on China MES well before this date, as they do not have a “MES criteria test” on the legal books and cannot wait until an official request via a trade case comes along. The first few months of the summer should be particularly interesting to watch, especially now that the E.U. Parliament has voted “No.”
Latest Trade Developments
Many traditional anti-dumping and countervailing duties cases are still in process, alleging China has subsidized or dumped everything from metals to chemicals. U.S. Commerce recently placed import duties of 265.79% on all investigated Chinese producers of cold-rolled steel because none of them responded to requests for information during the investigation.
This was only a preliminary determination and the investigation is ongoing. Even, still, many Chinese producers simply do not respond to Commerce during this phase of the WTO process and wait to present evidence to the U.S. International Trade Commission during the appeal phase.
There are also still ongoing intellectual property theft cases being investigated under Section 337 of U.S. trade law involving allegations by U.S. companies such as U.S. Steel, Allegheny Technologies, Inc. Alcoa, Inc. and the U.S. branch of multinational SolarWorld AG.
The Million-Dollar Question
How can the world bring China and its developing economy into a proper place within the WTO and the global trade ecosystem, while preserving jobs, economic prosperity and security for Western trading partners?
That’s a complex question that has no easy answer. International politics and trade economics intertwine to make China’s market economy status a highly sensitive issue for the United States to deal with.
“There are lot of factors that go into the mosaic that makes up our economic relationship with China,” Scott Paul of AAM conceded. “I don’t expect extreme rhetoric from the U.S. administration, but I do think they’re going to follow the law.”