How should China respond to rising trend of protectionism?

A worker walks past shipping containers at the Port of Shanghai January 19, 2011. Photo: Reuters

The anti-globalization sentiment has been growing since Donald Trump was elected as US president and Britain sought exit from the European Union. Under the circumstances, protectionism looms, triggering trade frictions around the world.

Since its admission to the World Trade Organization in 2001, China has made great contributions to globalization and has become the world's largest goods trader. The country is now eager to be treated as a market economy, as the US, the EU and Japan are reluctant to give that recognition.

For Europe, the anti-globalization sentiment is rooted in fears of immigration and refugee inflows, while for the US the fears stem from trade and manufacturing decline, said Ian Bremmer, founder of Eurasia Group.

The 737th issue of the Caixin Weekly magazine, which was published on January 9, 2017, ran a cover story which discusses what China could do to deal with the challenges from trade protectionism and promote economic globalization.

Below is the excerpt of the article.

Fifteen years after it joined the WTO, China has become the world's largest trader and integrated itself with the global markets under the WTO framework. The proportion China holds in the global goods trade jumped to 11.9 percent in 2015 from 0.92 percent in 1980.

As a condition of joining the WTO, China agreed in 2001 that WTO member nations could treat it as a non-market economy, which was written into a clause of its WTO membership agreement which expired on December 11, 2016. The clause stipulated that WTO member nations had the advantage of using a third country's prices to gauge whether China was dumping its goods in their markets.

Since entering the WTO, China has sought to be treated as a market economy, as it has suffered from hefty anti-dumping tariffs imposed by the US and the EU. Over the past 15 years, 81 countries including Russia, New Zealand, Australia, Switzerland and Brazil have recognized China as a market economy by stopping to use the "surrogate" clause. However, the US, the EU and Japan remain reluctant to recognize China as a market economy after the expiration of the "surrogate" clause.

"It makes us realize that China still has a long way to go, and we need to make long-term efforts," said Feng Hui, deputy dean of the School of Law at the University of International Business and Economics. The most important thing for the government and the enterprises to do is to make full preparations because whether or not China is treated as a market economy is just a problem of form rather than substance, said Feng.

China facing tightened anti-dumping policies

The then US secretary of commerce Penny Pritzker once said in November 2016 that it was too early for the US to recognize China as a market economy. Pritzker's remarks were followed by a December statement in which the US Department of Commerce said that China "has not made the reforms necessary to operate on market principles". The WTO agreement did not require member nations to grant market economy status to China automatically and allowed continued use of "alternative anti-dumping methodologies", said the statement.

"Article 2 of the Anti-dumping Agreement sets forth an alternative anti-dumping method, which allows the prices of goods to be calculated on the basis of a third country's prices under a particular market situation," said Yang Guohua, former deputy director general of the Department of Treaty and Law at China's Ministry of Commerce.

The Anti-Dumping Agreement is called the Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994. Article 2 of the treaty says that when there are no sales of the like product in the ordinary course of trade in the domestic market of the exporting country or when, because of the particular market situation or the low volume of the sales in the domestic market of the exporting country, such sales do not permit a proper comparison, the margin of dumping shall be determined by comparison with a comparable price of the like product when exported to an appropriate third country, provided that this price is representative, or with the cost of production in the country of origin plus a reasonable amount for administrative, marketing and general costs and profits.

The EU was planning to use a new method to replace the "surrogate" practice.

On May 12, 2016, the European Parliament overwhelmingly passed a nonbinding resolution, voting against granting China the market economy status. The resolution said that European industries, trade unions and stakeholders were worried about the possible consequences of jobs, the environment and economic growth in the EU after allowing more Chinese goods to be sold in the EU.

Later on November 9, 2016, the European Commission presented a proposal for a new method for calculating dumping on imports from countries where there are significant market distortions, or where the state has a pervasive influence on the economy. The purpose is aimed at making sure that Europe has trade defense instruments that are able to deal with current realities in the international trading environment, while fully respecting the EU's international obligations in the legal framework of the WTO.

On December 13, 2016, 28 EU member countries voted by a qualified majority to allow higher punitive tariffs if exporters are found to benefit from artificially low raw material costs. Other reforms included shortening the period that the European Commission can take to set provisional import duties and allowing the commission to initiate its own investigations without an industry complaint.

Xiang Songzuo, deputy director of the Center for International Monetary Research at the Renmin University of China, said that these policies took aim at China and were used as a replacement of the "surrogate" rule, as imports of the US, the EU and Japan from China are on the rise.

Yang attributed WTO member countries' measure of using a third party's prices as a reference when it comes to evaluating Chinese goods to their fears over the authenticity of prices set by the Chinese exporters. "They are just using a new method (referring to market distortions) to perpetuate the 'surrogate' rule," said Yang, adding that the two methods are the same in substance.

On December 8, 2016, Japan followed the US and the EU in refusing to grant China the status of market economy, saying that it would continue to levy higher anti-dumping duties on the Chinese goods.

Trade war looms?

According to the statistics from China's Ministry of Commerce, China has long been the target of anti-dumping investigations since the establishment of the WTO in 1995. To date, a total of 48 WTO member countries have initiated 1,149 trade remedy investigation cases against China, accounting for 32 percent of the total. China has become a country facing the most anti-dumping investigations for 21 consecutive years.

These anti-dumping investigations have centered on the steel sector. The year 2016 saw elevated frictions on the steel trade between China and the US. On March 4, 2016, the US Department of Commerce launched anti-dumping and countervailing duty probes into stainless steel sheet and strip imported from China. On May 17, 2016, the US department slapped Chinese steelmakers with import duties of 522 percent on Chinese-made cold-rolled steel. The action intensified on May 26, when the US International Trade Commission launched an investigation into complaints by US Steel Corp that Chinese competitors stole its secrets and fixed prices, identifying 40 Chinese steel makers and distribution subsidiaries as respondents including Baosteel Group and Wuhan Iron and Steel Co Ltd.

During the election campaign, Donald Trump threatened to impose 45 percent import duty on Chinese goods, labeling China as a non-market economy. It is imaginable that the Trump administration would adopt a tougher stance on trade with China, as the new president's cabinet includes Wilbur Ross and Robert Lighthizer, who are inclined to be protectionist and were critical of China.

On December 21, 2016, Trump announced to establish a new organ called the National Trade Council, which will be led by economist Peter Navarro, who co-wrote with Ross the New White Paper on Donald Trump's Economic Plan, which said that the Trump administration will not allow billions of Chinese goods receiving unjustified subsidies to be dumped in the US.

The Trump administration's tougher policy toward China has triggered global speculation over a possible breakout of a trade war between the world's two largest economies.

Xiang did not dismiss the possibility that the US would launch a trade war with China, citing the fact that the core members of its cabinet are hawks. But he said that how much the US would pay for the trade war remains to be seen, as Trump's China policy is elusive at present.

Xiang's view is echoed by Tu Xinquan, director of the China Institute for WTO Studies at the University of International Business and Economics. Tu said that the US may take some measures going against WTO rules, which he identified with a trade war. "Trump's appointment of the conservative rightists as the cabinet members will be detrimental to the trade ties between China and the US," said Tu.

Gary Hufbauer, a senior researcher at the Peterson Institute for International Economics, is not confident in the prospects of the US-China trade and even the global trade. Hufbauer has his reason: Trump is a mercantilist who prefers bilateral treaty to multilateral or regional treaty.

Tu suggested that the Chinese government and enterprises should be well prepared for a possible trade war with the US. "For the Chinese enterprises, they should sell out their products in the domestic market as possible as they can in order to reduce exports and reduce the reliance on the US market. For the Chinese government, cutting production overcapacity should be accelerated," said Tu.

In recent years, the Chinese government is committed to reducing overcapacity, especially in the steel making industry, a main source of the country's heavy smog.

What China should do?

On December 12, China launched a complaint at the WTO against the US and EU after they failed to treat China as a market economy and continued to use the "surrogate" pricing.

According to WTO rules, the process of dispute settlement normally needs about two years, which includes four phases of consultation, panel verdict, appellate body verdict and enforcement of the ruling.

Tao Jingzhou, managing partner of US-based law firm Dechert, described the WTO's dispute settlement mechanism as "a tiger with teeth", which allows the accuser to take punitive measures against the defendant in order to stop the use of what the accuser calls unfair trade policy. Those measures include tariff and non-tariff barriers such as customs collection, import quotas and licensing system.

But Tao said that China should not take the punitive measures before being empowered by the WTO in order to enhance the legitimacy.

However, some experts said that the negative effect of the "surrogate" pricing was exaggerated because it will not affect China's foreign trade very much.

"The 'surrogate' pricing has been used for decades and the anti-dumping investigation has become a common practice in international trade. The key to avoiding anti-dumping investigation is to produce products that cannot be replaceable. Only in this way can (China) avoid an anti-dumping investigation," said Tu.

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