What China Really Wants: ‘Free Market’ Status

Despite initial amity, WTO dispute puts Washington and Beijing on collision course

Is China a market economy? At first glance, given the pervasive — and, in fact, growing — role of the state in every aspect of Chinese industry and finance, the question seems inane.

Of course it isn’t.

But even if the situation were genuinely uncertain, why do the fully sovereign American people need an international organization to make the decision for them?

The Trump administration is expected to make this obvious truth the official policy of the federal government in the coming weeks. But so eager is China to earn the “free market” distinction that the move could trigger a trade dispute that threatens to embroil most of the world’s major economies — a dispute that promises to become a major, and pointless, time and resource sink for American officials.

The issue of China’s economic status is coming to a head because of the disastrous American decision to support China’s admission into the World Trade Organization (WTO). The main effect was to grant China broad immunity from America’s authority under international trade law to use tariffs to counter predatory Chinese trade practices, which even in the late 1990s were decimating U.S. manufacturing production and jobs.

Of course, Beijing’s trade transgressions had nothing to do with free trade or free markets. But multinational interests pushed former President Bill Clinton to pursue the WTO deal (which enabled China to join officially in 2001, under George W. Bush) because many of the goods China had been selling to the United States came from factories that American-owned businesses had offshored to or built anew in China.

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In fact, China’s admission turned out to be so controversial that multinationals and their hired Washington guns had to accept some provisions aimed at providing domestic industry and its employees some shelter from floods of Chinese imports. One of them permitted all WTO members to treat China as a non-market economy (NME) whenever their governments sought to prevent Beijing from swamping their economies with goods that were dumped — i.e., sold at below-market prices — and often due to Chinese-government subsidies.

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This NME status authorized China’s trade partners to calculate the extent of Chinese underpricing — which in turn usually helped determine the scale of the offsetting tariff — through methods that recognize how easily China’s government-mandated prices could let China largely off the hook.

The main problem: Since Beijing was so free to require enterprises to sell their goods at home so cheaply to begin with, standard methods of identifying the degree of underpricing wound up starting from an artificially depressed baseline. The dumping “discount,” therefore, was easy to understate. The NME provision, however, allowed plaintiffs in China-dumping cases to ignore Beijing’s rigged pricing system and use other benchmarks — often the price levels at which these goods were sold in other third-world countries, where market forces played a much bigger role.

As with all trade-law-related responses to Chinese predation, the NME agreement was too slow-moving, too reactive, and too episodic to adequately safeguard American interests. But it was at least a small finger in an immense dike. Unfortunately, even this modest measure was flawed in a more fundamental way: The NME designation that permitted the use of realistic pricing methods for Chinese goods had a 15-year limit — and it officially arrived last December 11.

The Obama administration insisted that China shouldn’t be promoted from NME status until its economy is genuinely market-dominated. The Trump administration so far has agreed, and in this case, the United States has had important allies — the European Union (EU) and Japan. But the Chinese have sued the EU at the global trade body, and President Trump’s Commerce Department has announced that it will revisit the matter and issue a final judgment by mid-May — when it’s also required to rule in a preliminary way on related charges of dumping aluminum products leveled at China by the domestic U.S. industry.

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America’s own trade-law system sets out a thoroughly commonsensical definition of a market economy. It’s one that allows its currency to be freely traded, permits wages to be set by unfettered labor-management bargaining, and allows foreign firms to invest without major interference. It also lets private interests own or control most of the means of production, allocate resources, set prices, and decide on output levels.

Beijing has not yet challenged these U.S. practices at the WTO. Perhaps it’s waiting for a final Trump NME decision. And Chinese restraint might even be part of the quid pro quo the two countries have reached in their efforts to defuse the North Korea nuclear crisis.

But a WTO ruling against the EU could also quickly mean that none of the American criteria — or even the question of whether China is meeting them — can still legally warrant continuing to discriminate against Chinese imports. The reason? The language of the NME agreement is easily read as stating that China’s special treatment was to end once the 15 years were up whether it had progressed toward market practices or not. In fact, it’s all too likely that the Clinton administration agreed with China in 1999 to fudge the issue deliberately to pretend to address American concerns about subsidized Chinese competition.

Worse, China’s position seems to be supported by a numerical majority of WTO members — which will further incline the organization’s dispute-resolution system to rule in Beijing’s favor. (An official tally of members’ stances has not yet been compiled.)

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The real question that Washington should be asking, however, is why this kind of pseudo-legalism should have any influence over American efforts to defend its legitimate international economic interests. China’s devotion to free market capitalism cannot seriously be asserted — especially considering that Beijing, for example, has recently been cracking down harder on foreign firms doing business in China, and that China’s officially state-owned sector has been growing much faster than its so-called private sector.

But even if the situation were genuinely uncertain, why do the fully sovereign American people need an international organization to make the decision for them? It’s not as if the United States, whose market generates more trade earnings for China than any other country, lacks economic leverage over Beijing. Indeed, it’s WTO rules that represent the biggest obstacle to Washington using this unilateral leverage — as the offshoring multinationals and other globalist interests that championed the organization’s creation fully intended.

Encouragingly, the Trump administration has just announced that America’s participation in the WTO is one of several major longstanding trade-policy decisions that it will be reexamining. It could strike a big blow on behalf of an America First approach to the global economy by announcing that it will keep treating China as a non-market economy whether China or the organization’s other members like it or not.

Alan Tonelson, who writes on economic and security policy at RealityChek, is the author of “The Race to the Bottom” (Westview Press, 2002). Follow him on Twitter: @AlanTonelson

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