When is a market economy not a market economy?
By Chris Gelken

BEIJING - What looks like a market economy, thinks like a market economy and works like a market economy? Why China, of course. What has foreign capitalists beating down the doors to enter its market economy? Why China, or course. But when is a market economy not a real market economy? When it's China, of course.

While much has been said about China's sweeping market reforms, extraordinary growth and its capitalism vigorously elbowing out socialism, the Middle Kingdom is still inching its way toward international recognition as a full market economy. Having full market economy status (MES) is a valuable legal and trade appellation with implications for the issue of dumping, a major issue in the West.

Eventually MES will give Beijing extra leverage in negotiations when Chinese companies are accused of dumping their products at an unfairly low price on a foreign market.

Being a real market economy means, among other things, that the production costs of all goods and services are subject to the demands of market forces, without state interventions such as subsidies or price controls. This is important when a country is accused of exporting products at a price below their real production costs - or dumping, thereby shutting out those who "play by the rules".

Just last week Malaysia became only the third country to officially recognize China as a full market economy, having MES. The others are New Zealand and Singapore. The big prizes, however, are the United States and the European Union. US recognition of China's market economy remains a distant goal, and the US shows no signs of relenting, especially in an election year.

EU recognition, however, could be much closer and a decision - some predict a favorable one for China - is expected by the end of this month. During a visit to China in April, the EU commissioner for external trade, Pascal Lamy, promised a preliminary verdict on China's MES by the end of June.

Dumping is an especially big issue in the US, where manufacturing associations and labor unions claim that their domestic producers simply cannot compete with the massive imports of low-priced Chinese goods. They claim these goods are subsidized by the government and produced by workers who are being exploited with low wages and toil in poor working conditions.

China accused of dumping
In recent months, China has been accused of dumping everything from bedroom furniture and color televisions to women's bras on the American market.

For seven consecutive years, China has been the No 1 worldwide "culprit" in anti-dumping cases. The total seven-year figure now stands at a staggering 500 cases.

Malaysia's recognition of MES for China came after talks between visiting Malaysian Prime Minister Ahmed Badawi and Chinese President Hu Jintao. And it came just one day after Chinese Minister of Commerce Bo Xilai was in Auckland to sign the China-New Zealand Trade and Economic Cooperation Framework, which also confirmed China's market economy status, at least as far Auckland is concerned.

"Accepting China as a full market-economy is very important to China's economy. That is to say, when China is accused of dumping, we can negotiate with them on the same status. New Zealand is the first developed country to accept China as a market economy. Our country greatly appreciates the move," Bo told China Central Television shortly after the signing ceremony in Auckland.

It was back in April when New Zealand first acknowledged China's market economy status, and a month later Singapore did the same. With Malaysia now on board, China is beginning to see the fruits of extensive efforts over the past couple of years to achieve recognition as a full market economy. The big prizes - recognition by the US and the EU - are still elusive, but EU recognition is not a fantasy.

It has been more than 20 years since China began dramatic reforms to open up its economy to the world. In 1992 Beijing clarified its ultimate goal was a market economy with Chinese characteristics: a socialist market economy. In 2002, Beijing announced that it had achieved this - the country was indeed a market economy, complete with those Chinese characteristics - unfettered capitalism but with safeguards in place to protect the domestic economy and workforce from exploitation.

As stated by Bo, MES, among other things, will indeed give Beijing extra leverage in negotiations when Chinese companies are accused of dumping their products on a foreign market. Beijing will then be able to say that the state has not intervened to tip the balance and alter the playing field in its own favor with subsidies or price controls.

But it will take more than Malaysia, Singapore and New Zealand for China's MES to carry weight.

Special procedure used to determine 'dumping'
Because China is not universally recognized as a market economy, a special procedure is used to calculate whether or not China is selling its manufactured products at below market price or dumping. This calculation procedure involves the use of a third country, known as a surrogate. Investigators calculate how much it would cost to produce the same item in the surrogate country, and base their dumping conclusion on the result.

The Chinese side argues that this is a fundamentally flawed system. A whole range of unique variables can determine how much it might cost to produce an item in one country as opposed to another. Consequently, China says, the use of a surrogate is unfair and at best gives a distorted version of reality.

Stephen Green heads up the Asia Program at the British Royal Institute of International Affairs. He told China Central Television's English language channel that he was fairly optimistic that the EU would grant China MES.

"The EU has sent an investigation team to China. They are very careful, doing very detailed investigation of the conditions on the ground. My feeling is they probably want to find China to be a market economy this time around," Green told Asia Times Online

But the EU's verdict may be influenced, at least in part, by events in Washington.

In early June the US Department of Commerce will open a hearing to discuss China's bid for MES. But this is an election year, traditionally the season when incumbents and challengers alike play to the domestic audience and engage in a round of China bashing. China critics, such as Republican Representative Phil English of Pennsylvania, says granting MES will cost American jobs.

"Our manufacturers continue to suffer from unfair competition at the hands of subsidized Chinese producers," English said in a statement released by his office. "As evidenced China's lethargic, if not reluctant implementation of some of its WTO [World Trade Organization] commitments, the probability that the country will transition to a full market economy seems unlikely."

But Chinese trade officials and academics are quick to challenge the charges.

"Of course China is a market economy. Ninety-eight percent of China's commodities are priced according to market demand and supply. Enterprises operate independently, without the control of government," said Zhou Shijian, permanent counselor at the China Association of International Trade in Beijing.

That view is reinforced by Li Yushi, vice president of the Beijing-based China Academy of International Trade and Economic Cooperation, who is also a former first secretary at the Chinese Embassy in Washington.

"Since the early 1990's China scrapped subsidies to companies engaged in the export trade, and since WTO accession [three years ago], subsidies have been cut on China's agricultural exports," Li told Asia Times Online.

A private research institute based at the Beijing Normal University was recently commissioned by the Chinese Ministry of Commerce to conduct a survey on the development of China's market economy in 2003. According to the report, China is about 69 percent a market economy, when measured by internationally accepted standards. Usually 60 percent is regarded as enough to be considered a full market economy. The survey also concluded that about two thirds of China's gross domestic product is created by the non-state or private sector.

The United States is using a domestic law, the Tariff Act of 1930, as its benchmark for granting China market economy status. Also known as the Smoot-Hawley Act, the legislation raised US import tariffs to their highest levels in history, promoting US trading partners to adopt their own retaliatory trade barriers. Some of the act's provisions have been eliminated, but the amended law still contains trade provisions covering the agricultural sector, anti-dumping duties and country-of-origin labeling. Two provisions that US trade officials and legislators frequently use against China concern labor standards or rights, and a requirement that a country has a fully convertible currency.

"These statutory criteria, together with China's strong interest in being recognized as a market economy under US laws, provides us with significant leverage on labor, currency, subsidy and other issues," US Trade Representative Robert Zoellick told a press conference at the end of April in Washington.

US labor and manufacturing organizations have frequently claimed that unfairly low wages paid to Chinese workers distorts the real cost of China's exports. And US trade officials say the value of the Chinese currency, the Renminbi, or yuan, is pegged artificially high to the US dollar, making exports cheap and contributing to a huge US trade deficit with Beijing. The exchange rate is about 8.20 yuan to the US dollar.

US officials demand changes
Commerce Secretary Don Evans, who is due to visit China in June (the exact date still to be set), was equally as uncompromising as Zoellick. Speaking at a separate press conference on China on April 28, Evans said: "The law is clear, China will fail to meet market economy status until market forces set labor and currency rates."

Li, of the Chinese Academy of Trade and International Cooperation, says China meets the requirements, has done enough to meet the international standards and thus should be granted MES by Washington.

"In many industries in China, there is an oversupply of labor, and consequently wages are low. This is a case of market forces at work," he told Asia Times Online. However, in China we do have minimum wage mechanisms. This is a tool to protect the interests of the lowest of the low income earners, and is not an effort to set wages."

On the currency issue, Li said the US persistently has been lobbying China to allow an appreciation of the yuan, claiming that the value of the Chinese currency has contributed to the US trade deficit with China. Li dismissed the claim, citing several prominent academics worldwide, including in the United States, who say the US deficit with China is due to internal structural problems in the US - and is not the fault of any external factors.

But Li said it seems that Washington is now holding MES hostage to some concessions by Beijing on its currency, and he is not optimistic about the outcome.

"I think this is just political posturing in the United States, and I don't think there is any real possibility that we will be granted MES by Washington in the foreseeable future. I think they plan to make as much use of Article 15 as they possibly can."

Article 15 of China's agreement to join the WTO gave other members the right to treat China as a non-market economy for 15 years after accession - it acceded three years ago.

Russia, late reformer, granted MES by US and EU
By contrast, Li noted, Russia - which is currently negotiating for WTO membership - began its economic reforms later than China but is already recognized as a market economy with MES by the US and the EU.

"I think this just reflects the different political perception those countries have when comparing Russia and China," Li said. "Their definition of 'market' and 'non market' economies is not based on universal norms but their political and economic interests."

Li says granting market economy status will be good for Chinese businesses and international trade. Noting the very large number of European and American multinationals that have opened joint ventures or even wholly-owned businesses here, many of them export-oriented, Li called on the chambers of commerce of various countries to join China in lobbying their respective governments to grant MES.

Both the EU and the US Chambers of Commerce in Beijing were asked to contribute to this article; both declined.

"I think they are being a little ungrateful," Li said. "They come here and take advantage of low cost labor and other start up concessions."

The former diplomat also suggested that given the very high number of anti-dumping cases against China, perhaps some of the companies that make up the chambers might be a little embarrassed about their position, saying, "Perhaps they have been involved in dumping cases themselves!"

An interesting possibility.

Chris Gelken is an award-winning broadcast and print journalist currently based in Beijing where he anchors a business program on CCTV 9. He can be contacted at chris@gelken.com.

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