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December marks the 15th anniversary of China joining the World Trade Organization. According to documents signed upon joining the WTO, China will be granted market economy status this year.
But the idea has sparked debate in both the U.S. and the European Union. So why does market economy status matter and how does it affect China and its trading partners?
China is the European Union's second biggest trading partner with a daily trade volume between the two regions in excess of 1 billion Euros. Experts say whether the bloc decides to accept China as a market economy is very important, because a series of anti-dumping tariffs are stopping trade relations from moving forward.
"There are two repercussions. First, there is not an international standard for what makes a market economy, so whether the EU or the U.S. would see China as one, is quite subjective. If they deny such a status for China, other economies might imitate such protectionist actions." said Yao Ling, deputy director of Europe&Eurasia Research, CAITEC, MOFCOM.
"Second, because we are not recognized as a market economy, the EU can charge anti-dumping duties that are 20% higher than on others. That hurts Chinese businesses and creates unemployment."
In recent months, both the EU and the U.S. have said they would not automatically grant market economy status on China by December. A big talking point is the claim that Chinese steel makers are dumping their products. As the global market for steel shrinks, Chinese steel manufacturers are giving their Western competitors a hard time.
But experts say the reason why Chinese steel is particularly low-priced is that steel makers have low labor costs and economy of scale. It's a market-oriented result instead of price manipulation.
Professor Lu Feng from Peking University is one of the most active researchers on this issue, and he frequently talks to steel industry groups.
He said, "The world is around the bottom of an economic cycle, and overcapacity in steel is a byproduct world-wide. Another reason why developed countries reacted so strongly is that Chinese steel export jumped in 2014. That's why it has become a talking point. But this and China's market economy status should be independent issues."
Lu says at the center of the market economy status debate is a measure called surrogate country. To determine whether an exporter is dumping, export prices are compared with domestic prices. If the export price is lower than the domestic price, then the exporter is dumping.
But, this only applies to market economy countries. If an exporter is in a non-market economy, their export prices can be compared with the domestic prices of another similar country. Since China usually produces cheaper products compared with other countries, this is often labelled as dumping.
Yao also said, "Because the anti-dumping calculation usually uses a third country, China has been the biggest victim of the EU's anti-dumping measures. This situation has not changed since China joined the WTO."
Because of such as system, China has received 638 anti-dumping measures between 2000 and 2014. That's 27 per cent of the world's total.
