The Chinese Trade Issue Trump Should Hammer

China could be granted Market Economy Status this year, obliterating American manufacturing

by Edmund Kozak | 16 Sep 2016 at 5:25 AM

While Donald Trump has talked tough on combating Chinese currency manipulation, and Hillary Clinton has softened her stance on the Trans-Pacific Partnership, there is one crucial trade issue they have not addressed: the possibility that China will soon be granted Market Economy Status by the World Trade Organization.

As China is obviously not a market economy, the WTO’s granting China economic status would hamper the United States’ ability to contest damaging Chinese trade practices within the WTO, and open the U.S. market to increased dumping by Chinese manufacturing industries that would threaten the very survival of the US manufacturing industry.

“We’re talking about all manufacturing in the United States being exposed to the Chinese machine.”

“What’s so shocking is that we’re not just talking about [aluminum] extruders going out of business, we’re talking about all manufacturing in the United States being exposed to the Chinese machine,” Jeff Henderson, president of the Aluminum Extruders Council, told LifeZette.

When the WTO admitted China in 2001, it was done with the provision that China had 15 years to make reforms conducive to creating a market economy, and that other members would not use China’s published margins as a basis for tariffs to prevent dumping, but would instead rely on “surrogate” costs in countries with similar-sized economies to China’s.

What is Dumping?
  • "Dumping is the export by a country or company of a product at a price that is lower in the foreign market than the price charged in the domestic market. As dumping usually involves substantial export volumes of the product, it often has the effect of endangering the financial viability of manufacturers or producers of the product in the importing nation" — Investopedia
Source: Investopedia

“When you have a trade case,” explained Henderson, “what happens is our government would go out and research production cost numbers and they’ll solicit numbers of the country of the subject merchandise. They’ll say, ‘Show me your production numbers — what are your labor rates?'” he said.

“With a non-market-based economy it’s just gibberish — it doesn’t make any sense, so what they’ll do today is that they would go to a third country, someone who has got a similar economic development level, as a substitute,” he said.

Henderson’s own industry is the perfect case study of why this is important. By the time the Aluminum Extruders Council began to lobby the U.S. government to protect the industry from predatory Chinese trade practices, Chinese extruders’ share of the US market went from “5 percent up to 25 percent … in about nine months,” Henderson explained.

The Chinese “went from shipping 60-70 billion [tons] to less than a million” and “domestic production increased by 20 percent when the rest of the country was in recession,” Henderson said. The combined protective tariffs on Chinese aluminum are around 106 percent, Henderson explained, but if the government had to rely on Chinese numbers they would be closer to 5 percent.

On Dec. 11, 2016, the 15-year period will end. China maintains that they’ve reached Market Economy Status and is demanding that designation from the WTO, while the E.U. and the U.S. vehemently disagree. The U.S. government cannot “support a decision by the WTO to designate China as a market economy simply because China is not a market economy,” economic analyst Alan Tonelson said.

“Not only does the state play the predominant economic role, but that predominant role by all accounts has been growing greater under the current government of Xi Jinping rather than shrinking,” Tonelson added. “Since it’s important in its own right to identify countries and economies accurately, China should not receive Market Economy Status.”

“Calling Chinese enterprises businesses is completely misleading, because to some degree or another they’re always controlled by the Chinese government, especially if they’re large enough to attract the U.S. trade law system’s attention,” Tonelson said.

Tonelson however noted that granting China Market Economy Status is really only a problem if the U.S. maintains its current trade policies. “Assuming that either no major changes in U.S. trade policy will be made in the foreseeable future — or can be made — then it is important to a limited extent to prevent China from winning MES,” he noted.

"It's important because it would result in the United States retaining some internationally recognized legal authority to employ its own trade law system to respond to various instances of predatory Chinese trade practices," Tonelson explained.

Preventing China from obtaining Market Economy Status is only important because of the United States' already weak trade position. Were the U.S. to pursue a more aggressive, America-first trade policy, then China having Market Economy Status in the WTO wouldn't pose as much of a danger to American industry as it does currently.

"I can certainly understand the anxiety of the manufacturing industry at the prospect of China receiving MES," said Tonelson. However, "industries that have made extensive use of the US trade law system [need to] recognize that it's a very threadbare Band-Aid, at very best, even when it works," he added. "Much more comprehensive approaches to America's trade problems are desperately needed."

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