Debate Over China’s Market Economy Status Heats Up

Bown says the United States would still have tools to fight unfair trade competition from China even if it grants the country ‘market economy’ status as was promised under the country’s 2001 entry into the WTO.

Chad P. Bown (PIIE)


Pedro da Costa: Hi, I'm Pedro da Costa and this is Peterson Perspectives. Chinese market economy status is suddenly in the news with the 15th anniversary of the country's accession into the World Trade Organization. Now, Chad Bown is senior fellow here at the institute is writing a paper about just that and I watched president-elect Donald Trump speak on television and he addressed this issue:

[Recording of Donald Trump: The nation of China is responsible for almost half of America's trade deficit. China is not a market economy. They got a little help. And that's why we designate them as being a nonmarket economy. Big thing. They haven't played by the rules and I know it's time that they're going to start. They're going to start.]

Pedro da Costa: So first Chad, let's talk about the significance of this 15th anniversary and why you decided to write this policy brief exactly at this moment.

Chad Bown: So December marks the 15th year that China has been a member of the WTO. When China was allowed in, it was granted nondiscriminatory tariff treatment into what are now more than 160 different countries markets for its exporters. In exchange for that, it had to open up its own import market to trade and investment. But what it also did is it granted the other 160 now countries access to this special thing called nonmarket economy status for their antidumping investigations.

Pedro da Costa: So, we heard the president-elect essentially criticize China with the same tone that we've heard throughout the campaign. And, he was arguing that there's no way that he's going to grant market economy status and he was essentially blaming China for being anticompetitive.

 Now, I know that dumping disputes are part and parcel of trade relations between the United States and China. Can you explain a little bit what antidumping is and how US policy works on that front?

Chad Bown: So, antidumping is a law that the United States has access to and what it does is it allows a place for US manufacturing companies, agriculture to come forward and say, "Listen, a trading partner, maybe China, maybe somebody else is selling their product into our market and it's hurting us. And it's because the prices are just far too low. They are unfair".

 So, in the case of China, we've been using this policy for a number of years. What's special about this nonmarket economy distinction is it allows for the US government to adopt the special kind of process. The idea is we don't really understand what prices and quantities look like in China because they're not a market economy, the government is heavily involved. And so, instead of looking at information in China, we'll look at information from other countries to try to figure out what their cost might look like.

 So we've been doing that. And, if you'll look at this chart, over the years, we now have about 7% of US imports from China that are subject to these kinds of import restrictions. And the idea for China is, well, after 15 years, if you take off this nonmarket economy distinction, they might like to see these sorts of import restrictions tend to go away.

Pedro da Costa: So Donald Trump says he's not going to give them that status. How is China going to react and is that really a fair thing to do given that that was the expectation in the agreement in 2001?

Chad Bown: So, we're not clear as to how China will react. There's a couple of different paths that they could take. It's likely that their initial response will be to say there is this thing called the World Trade Organization out there and there is a court essentially that operates to adjudicate disputes between the United States, China, countries that feel like they haven't been treated fairly in the process. So it's likely that China will file a dispute against the United States and there'll be a ruling. That will take a couple of years, but there'll be a ruling to judge how to interpret their entry into the organization.

 The concern is that though that might not be the only thing that they do. That they might start seeking to retaliate outside of the rules and outside of the WTO system and potentially retaliate by themselves imposing higher tariffs on US exports. They've done this in the past. I've got a chart up here that will show you over the period starting around 2009, they substantially escalated their use of antidumping against US exports reaching about 8% or so in 2011.

 And the concern for today is if we don't address this somehow, that things could also sort of spiral out of hand in terms of US exporters being hurt by these kinds of policies.

Pedro da Costa: And would there be a great cost to actually granting them market economy status if that were the case?

Chad Bown: I think the answer to that is no and yes. So, first, no. I think the legitimate concern is if you would take away this nonmarket economy distinction from the United States in terms of how it could treat China in this antidumping, this very technical trade policy, these antidumping investigations, what would happen?

 My estimation is actually not much might happen and the reason there is over the last eight or nine years, the United States government has developed a separate trade policy tool to deal with unfairly low priced or subsidized imports coming in from China. And so, all of a sudden if you took this one tool away, the antidumping away from the United States government, it has something else to use in its stead.

Pedro da Costa: Tell us a little bit about what that is and --.

Chad Bown: So that policy, it's a little bit more complicated than antidumping, but not much. It really looks at whether the products that are coming in from a trading partner are subsidized or not. And this has been what the main concern is with China under its evolution under the WTO. It certainly made tremendous progress and strides to becoming more market-oriented than when it started out in 2001.

 But the United States would argue it still has a long way to go and where and what products that there are government interventions, subsidies if not direct funding from the government, but indirect subsidies of some sort. The United States having access to this other trade policy countervailing duties could seek to stem that.

 And if we go back to that first chart that I was showing, that shows how over the last seven or eight years, United States has started to actually ramp up the use of that other policy and it could probably replace a lot of what it has done historically with antidumping through this new one.

Pedro da Costa: So finally, given the tone of anti-trade sentiment that's been rising around the world, what do you expect from US and China trade relations and really trade across the world and what's the impact on economic activity?

Chad Bown: So, I am a little bit worried about the heightened rhetoric and the potential for a trade war to break out. What I would hope to happen is that China and United States might use this opportunity, the 15-year anniversary of China being in the WTO to kind of reboot, reset, to reestablish some new dialog to confront really these issues that now need to be dealt with.

 The fact that, yeah, we do still see lots of imports coming in from China into the United States and we're at a moment in time where that's really politically sensitive. And we're also worried that China really hasn't made the full complete transformation to a market-oriented economy that I think we would be more comfortable if it made in the United States. But also, there's arguments and reformers within China that would also like to see that kind of activity taking place there as well.

 So, I think if the two sides were to see this as an opportunity to take advantage of reestablishing dialog, that might be more fruitful.

Pedro da Costa: Interesting. Thank you so much, Chad. I appreciate your time.

Chad Bown: Thank you.