March 18, 2016
Guest blog post by Milan Nitzschke, spokesperson for AEGIS Europe & President of EU ProSun.
Any partnership or friendship must be based on clarity and openness. In contrast the relationship between Europe and China, as understood by many Europeans is all about not upsetting the Chinese government and not communicating clear positions vis-a-vis issues of political and economic significance to both parties, such as trade. Yet, if the primary objective of EU-China relations is to create a sustainable, long-term economic partnership the current modus operandi is flawed because China’s economy is a state-planned, government controlled economy. China has never been a market economy since it joined the WTO in 2001 and undertaken no serious reforms to become a market economy.
China’s 5 Year Plans: Global dominance in strategic sectors
China’s 12th Five Year Plan, which expired last year in 2015, created massive overcapacity globally in strategically important sectors. Despite the claims that China is reducing its overcapacity, their 13th five-year plan 2016-2020, adopted by the People’s Congress this month, again identifies important targets for massive over-production. These include strategic sectors such as mechanical engineering, automotive, energy and environmental technology.
If allowed to continue on its current trajectory, China’s manufacturing capacity will be even further expanded in sectors where Chinese industry is already able to cover more than 100% of global demand. This will lead to even greater over-production and flood the market with products at dumped prices. Those who want to manufacture in China – and receive Chinese government funding – are forced to sell their products by any available means. This lead to prices being set below the cost of production and often even below the cost of raw materials. Losses in China are financed by debt restructuring orchestrated by state-owned banks. The result is ‘value destruction’ in China itself and in the European Union, where companies, which comply with the rules of a market economy simply cannot compete with enterprises funded by a state-planned economy. Investment, innovation and millions of jobs, are in peril in Europe as a result.
Since China’s government is not able or want to prevent the reduction of excess capacity, and Europe’s current policy is not in a position to enforce basic market rules on China, anti-dumping measures remain the only proven method to address these imbalances. Either duties are imposed to compensate for price dumping, or alternatively minimum import prices need to be agreed, allowing Chinese, as well as producers from Europe and the rest of the world, to sell their products at prices that cover their costs and the need to invest in technology and innovation.
WTO: Finding a common sense approach to China
China is calling on WTO members to treat its companies under trade law as market-based producers and thus prevent the imposition of effective anti-dumping measures. Instead of rejecting this demand, which would be the common sense response, the European Commission is considering how it can meet the demand of the People’s Republic of China, while somehow limiting the negative impacts of this decision. But the Commission’s approach simply will not work. If China is treated as a market economy, this would prevent the EU from taking effective actions against dumping, as long as prices for Chinese products in Europe are at the same price as, or just over prices, in China. Given the state’s distortion of prices throughout China, this would be the case for all products. Europe, as the economic area with the highest environmental and social standards in the world, would only take action against ruinous dumping when we see prices in the EU below the level of the distorted prices in China.
Now, as a smokescreen, the Commission has indicated an intention to employ so called “mitigation” or “additional” measures. None of the previously proposed measures would have a lasting or significant enough impact or could outweigh the impact of treating China’s state-planned economy the same as that of other WTO members. Most of these measures would be open to challenge at the WTO. With a false sense of security, the EU is pursuing a path that could easily cost millions of European jobs and lead to massive economic losses, both here in Europe and in China. Today the focus is on steel, aluminum, solar and ceramics. Tomorrow it will be machinery, chemicals and automotive engineering, all of which are sectors that are identified in China’s 5 year plan.
Case study: Effectiveness of anti-dumping measures in the European Photovoltaics sector
In just three years, even an emerging high-tech industry such as solar photovoltaics has had the experience of seeing half of European industry destroyed by Chinese dumping. It was only after the introduction of anti-dumping measures in 2013 that this strategic destruction of European industry was halted. Today, the European photovoltaics sector is once again investing and setting some of the highest technological standards, globally. If market economy status had already been granted to China three years ago, the EU could not have introduced anti-dumping measures, and this technology would be lost today in Europe. The same applies to all other industries where anti-dumping measures are in place today. Moreover, this concerns all manufacturing industries in Europe, which may be of strategic importance for China in the future and are highlighted in the sectoral five-year plan. The ban on dumping is an important market rule, it exists to serve the interests of all market participants, including those from China in the long-term. But, without the ability to enforce anti-dumping rules, fair competition cannot be guaranteed, in any industry.
Message from the United States: Say ‘No’ to China MES
Our transatlantic partners have understood this fact. Common sense has prevailed in the United States. Under no circumstances will the US give up effective anti-dumping rules. Representatives of the Obama administration and all presidential candidates have stated a similar position. For example, Hillary Clinton has said: “We should reply with only one word: No…if China wants to be treated like a market economy, it needs to act like one.” In contrast, EU Commissioner Malmström, when addressed by the influential US Senator Ron Wyden, who said that the U.S. and Europe should stand together against MES, said according to Reuters: “In the end every country has to make an independent decision on this and it could happen we don’t land in the same decision, but as long as we are transparent…I don’t believe that it is a problem.” A more naive approach is hardly imaginable. If this is the view then the EU risks weakening itself through disunity, but also because of a lack of judgement regarding our manufacturing and trade assets in an international context.
European Parliament does its own Impact Assessment
On March 17, the European Commission will organize a Stakeholder Dialogue Conference on the possible impacts of effectively giving China market economy status. The consultation process will run until April 20. The consultation process does not meet the requirements for a full impact assessment, and as a result, Members of the European Parliament have announced that they are opening their own consultation process, which addresses the key issues which the European Parliament believes the Commission has not adequately addressed.
The key elements lacking in the options the European Commission says it is currently considering is accurate implementation of WTO law by treating any economy as a market economy, only if it is a true market economy – and by treating any non-market economy as such – and for the period of time it remains so. The US, Canada, Japan, and all main trading partners of the EU, are calling for this to be recognized. It is time that the European Commission reviews its options and presents a proposal that can be properly implemented, transparently communicated and based on the principles of a sustainable and long-term partnership with China.