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Market Avenue

Print Edition> World
UPDATED: August 31, 2009 NO. 35 SEPTEMBER 3, 2009
Status Update: China Is A Market Economy
By granting China market economy status, the United States could help promote China's market reform and increase global competition

Facebook and Twitter are revolutionizing how people communicate with one another. In a simple sentence or two, you can let all your friends know where you are, what you're doing or how you feel just by updating your status. In a similar manner, China's economy should have its status updated, but it's the United States that should be doing the updating.

By granting China market economy status, the United States could play an important role in liberalizing the country's economy and increasing global competition.

For decades, the Chinese economy has undergone some impressive transitions to a more market-oriented system, and the latest talks coming from the Strategic and Economic Dialogue between China and the United States suggest that the United States wants to move the transitions even faster.

Although China's economy has some significant strides to take before it can be labeled "free market," in admitting China's market economy status, Washington would be offering a welcoming step in the right direction for a freer, more prosperous China.

China has been the beneficiary of global trade and financial investment for years, and is emerging as an economic power with unlimited growth potential in its own right. Since joining the World Trade Organization (WTO) in 2001 and reforming its labor laws, China's increased individual liberties have resulted in unprecedented growth in economic activity and free trade.

Nevertheless, the state continues to have the ultimate economic decision-making authority, and property rights in many areas of the country are poorly defined or protected. Despite some labor reform, there remain unnecessary regulations in place that reduce economic growth.

Though improved, the government's central control and strict regulations thwart entrepreneurial activity, and the state has a stranglehold on the nation's financial system and macroeconomic policies.

U.S. officials should not ignore the fact that trade relations between the United States and China represent one of the most important bilateral economic partnerships on the globe. In 2008 alone, trade between the two countries generated $406 billion in wealth—almost double that between the United States and Japan.

Clearly, a sweeping privatization policy cannot occur overnight. Despite statist-led agendas (hidden or not so hidden) and the inefficiencies they may cause in China, the United States should recognize the developments in market liberalization China has made, as well as the gains from trade that improve the standard of living for both countries' citizens.

Discussion at the Strategic and Economic Dialogue between China and the United States is often just that—talking and addressing challenges with little constructive action. Expeditiously granting China market economy status could be that constructive action.

Failure to acknowledge China's market economy status could hamper trade relations between the United States and China. The United States is a much wealthier nation because of China; similarly, China's export industry flourishes because of free trade, and a lot of Chinese jobs fall within the export industry. Simply stated, free trade makes people better off while protectionism makes them worse off.

U.S. protectionist threats could very well lead to retaliatory protectionist policies that ultimately hurt China's path toward a free market economy, and hurt U.S. citizens' enjoyment of cheap foreign imports.

Refusing to grant China its market economy status is largely a political battle but also an economic one. Still, it is nonsensical and, in a sense, discriminatory. Treating China as a non-market economy is at odds with willingly recognizing Russia as having a market economy status.

According to the 2009 Index of Economic Freedom, China ranks well ahead of Russia. Neither country is swimming in the "free" end of the pool; the index categorizes both as "mostly un-free." Nonetheless, China's 132nd ranking sits 14 spots ahead of Russia.

Furthermore, losing anti-dumping authority may concern government officials in the United States, but it could benefit U.S. consumers. Anti-dumping laws and countervailing duties are complex and often subjective—rewarding few at the expense of many.

If China has a genuine comparative advantage in producing textiles, steel and other goods, producing them at a lower cost will benefit the United States by means of cheaper imports and increased global competitiveness that would spur innovation, thereby improving quality.

Market economy status does not provide China exemption from anti-dumping laws, and it does not mean the United States cannot put forth anti-dumping allegations. It could, however, improve trade relations between the two economic powerhouses by reducing any tensions and improving willingness to work together.

There's no doubt China can implement measures that would make awarding China market economy status an easier decision for the United States. Although somewhat loosened over the past few years, the People's Bank of China still tightly controls currency fluctuations.

Deregulating foreign investment practices as well as structural and political reform will be critical to remove any imbalances. Commitment from the Chinese to liberalize exchange rates and interest rates would be a prudent step in the eyes of Uncle Sam.

Trade between China and the United States is a dynamic and mutually beneficial economic relationship. While nowhere near skating on thin ice, this relationship still has much room for improvement. But it will take effort from both sides. Granting market economy status will go a long way to improving China's long journey toward market reform.

The author is a Washington, D.C.-based economist who focuses on free markets and environmental issues

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