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NO. 35 SEPTEMBER 3, 2009
Newsletter> NO. 35 SEPTEMBER 3, 2009
UPDATED: August 31, 2009 NO. 35 SEPTEMBER 3, 2009
Conditional Commitment
Washington's pledge to recognize China's market economy status does the country good—but with strings attached

In the joint fact sheet on the economic track of the first China-U.S. Strategic and Econo-mic Dialogue held in Washington D.C. in late July, the United States pledged to "consult through the JCCT (Joint Commission on Commerce and Trade) in a cooperative manner to work toward China's market economy status in an expeditious manner."

To give a most optimistic prediction, Washington may announce the decision during U.S. President Barack Obama's planned visit to China in mid-November, which offers an excellent opportunity.

Eight years after China's entry into the World Trade Organization (WTO), 79 WTO members have recognized China's market economy status—except for the United States, the European Union (EU) and Japan. Upon entering the organization in 2001, China agreed with other WTO members that it would be regarded as a "transition economy" for 15 years before automatically gaining a market economy status in 2016.

During these years, China is obliged to undergo review procedures to have its market economy status recognized.

Without a universally recognized market economy status, however, China often finds itself at a disadvantage when it comes to anti-dumping investigations.

According to WTO rules, a country can be blamed for "dumping" if it exports products at prices lower than normal. The WTO allows importing countries to take protective measures if dumping causes substantive damage to their industries.

Since they do not recognize China's market economy status, some Western countries deny that China's domestic prices as "fair." Instead, they use prices in subrogate countries to determine whether Chinese companies are dumping their products. But the WTO has no limits on the choice of subrogate countries—making it possible for Western countries to choose countries whose costs are much higher than in China.

Consequently, these countries can, in turn, easily accuse Chinese exporters of dumping, and the latter have been subject to anti-dumping tariffs for a long time.

The United States poses the biggest barrier to China's attainment of a market economy status. In 2005, the EU was ready to recognize China's market economy status, but gave up because of U.S. objections.

From a political point of view, the consensus reached in the first China-U.S. Strategic and Economic Dialogue on recognizing China's market economy status indicates that China's achievements since adopting the reform and opening-up policy more than 30 years ago have won the approval of major Western countries.

From an economic perspective, this signifies that Chinese companies will no longer suffer from frequent anti-dumping investigations.

It will also lead to more relaxed hi-tech export restrictions against China. In its efforts to contain the Soviet Union and other communist countries during the Cold War, the United States, along with other Western countries, founded the Coordinating Committee for Multilateral Export Controls (COCOM) in Paris in November 1949.

The COCOM had since evolved to strictly control Western countries' hi-tech exports to China. After the fall of the Berlin Wall, however, COCOM members realized their practice of imposing export embargoes based on the East-West distinction was no longer realistic under the new international political order.

The successor to the COCOM, the Wassenaar Arrangement—which was established in the Dutch town of Wassenaar in 1996—now restricts hi-tech exports to countries without free-market economies.

After they recognize China's market economy status, Western countries will hopefully begin to relax their restrictions on hi-tech exports to China.

While exploring the significance of Washington's commitment, we need to be cautious of the phase, "cooperative manner." Put bluntly, it means the United States will recognize China's market economy status, but only if China cooperates with American policy.

Washington may, thus, place a variety of onerous demands on Beijing—not limited to the convertibility of Chinese currency, the freedom of wage negotiations between labor and capital and the freedom of establishing joint ventures or foreign-invested companies.

Although China has met most U.S. demands, its currency remains unconvertible. And since its current currency regime serves as a firewall against external economic risks, China is not expected to succumb to U.S. pressure to make its currency convertible.

In fact, many of the countries that the United States recognizes as market economies do not have freely convertible currencies either.

The United States certainly had its own considerations when it promised to recognize China's market economy status. In the face of the economic crisis, Washington has had but two ways to raise money—either by printing greenbacks, or issuing Treasury bonds.

But in the end, the United States counts on China—its biggest creditor nation—to continue to purchase its Treasury bonds.

In addition, there are only seven years to go before China automatically gains a market economy status. Consequently, as time progresses, the United States will be less able to use this as a bargaining chip.

Recent Anti-dumping Cases

India initiated anti-dumping investigations against Chinese-produced refrigerant R-134a on August 19.

The EU launched a series of anti-dumping actions against Chinese sodium gluconate, steel cables and aluminum road wheels from August 11 to 13.

Turkey started anti-dumping investigations against Chinese textiles including curtain cloth on July 25.

(Source: Ministry of Commerce of China)

The author is a senior fellow with the Research Center for China-U.S. Relations at Tsinghua University in Beijing


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