Trade Tensions Mount as China Vies for Market Economy Status
Global trade tensions have come to a head in recent months as a surge in cheap Chinese steel exports have flooded world markets, pushing steel mills across the United States and Europe into the red. Industry representatives from the European Union and United States argue that the exports have been unfairly subsidized and ‘dumped’ on global markets, breaching rules on international trade.
The steel crisis comes at a critical juncture in China’s strategic ambitions within the World Trade Organization (WTO), namely its bid to attain “Market Economy Status” (MES) by the end of the year. When China first joined the WTO in 2001, its accession protocol designated it a “Non-Market Economy” (NME) on account of the extensive role that the state played in economic coordination. In this context, the NME designation makes it easier for foreign governments to impose punitive tariffs in response to Chinese dumping.
China’s WTO accession protocol expires in December this year, and Beijing argues that the NME designation naturally expires with it, and that the shift to MES is automatic. The EU and the United States, however, are skeptical that market forces can be said to play a decisive role in China’s economy. Industry pressure from steel manufacturers on both sides of the Atlantic have forced their respective administrations to embolden this position. Chinese steel imports have been blamed for the deepening malaise hitting American rust belt states, with over 1,500 steelworkers laid off in Ohio over the past year, and for the loss-making operations of Britain’s biggest steel producer, Tata Steel, which continues to look for potential buyers while its 11,000 jobs remain in jeopardy.
The United States has often taken a stark retaliatory approach to Chinese dumping, and in June, it levied tariffs of over 500 percent on Chinese imports of cold-rolled steel products. While Europe has previously struck a more conciliatory tone in trade relations with China, the EU currently has several anti-dumping investigations into Chinese steel imports. Furthermore, legislators in the EU Parliament passed a non-binding resolution in May that overwhelmingly opposed granting China MES. The EU Commission is set to discuss the issue later this month.
However, the global steel crisis has also highlighted deeper vulnerabilities in China and the West, which threatens more debilitating consequences than the usual fare of trade frictions and tariffs and prompts deeper reflection over the forces of globalization and the international economy at large.
First, the exodus of steel exports from China was wrought not by an elaborate industrial strategy to punish foreign steel-makers, but by ill-fated overcapacity and slowing domestic demand in a core industry. It is also expected to lead to mass lay-offs of its own, with up to 400,000 Chinese steelworkers slated to lose their jobs.
Second, globalization and international trade have thrived to the extent that markets have become highly porous, interconnected and interdependent. While Chinese manufacturers are directly responsible for supply gluts in world markets, they have also stoked global appetites for affordable goods and have made large contributions to global economic growth.
As both the fruits and burdens of global markets are shared collectively, national responses to crises such as overcapacity call for global coordination. This is echoed by EU Trade Commissioner Cecilia Malmström, who recently stated “the European Union knows that trade defense measures are not, on their own, going to solve the problem” imploring leaders to refrain from retaliatory trade tariffs.
Nonetheless, a wave of protectionist and anti-trade sentiment appears to breaking across the developed world. On the back of a fragile world economy, the WTO reported that 2016 would be the fifth consecutive year of subpar growth in international trade at below 3 per cent. In a later report released in June, the WTO observed that protectionist trade measures had grown in the G20 economies at a rate not seen since the 2008 financial crisis.
The unforeseen strain of economic populism and nationalism in the West is also forcing political establishments to adapt.
If he wins the U.S. presidential content in November, Republican nominee Donald Trump has pledged to repeal NAFTA, scrap the Trans-Pacific Partnership (TPP) and impose a blanket 45 percent tariff on Chinese imports. Democratic nominee Hilary Clinton has also come out against the TPP, despite having lauded it as the ‘gold standard’ during her tenure as secretary of state.
Britain’s recent exit from the EU further underlines the seismic impact of a working class who feel disenfranchised by globalization. While many of the Leave campaign’s arguments have been exposed as woefully distorted, the political drama of recent months has revealed globalization to be a complex and imperfect enterprise, and the need to reassess its perception and impact among the broader electorate must be embraced.
In the context of free trade, it forces a reckoning that open markets are equally capable of producing losers as well as winners, challenging the conventional wisdom that it results in plainly justifiable net gains for all. Recent studies by the Massachusetts Institute of Technology and others highlight the oft-overlooked setbacks on the US labour market arising from Chinese import competition, which estimate that China’s rise has eliminated at least one million domestic factory jobs.
Yet despite its complexities, free trade has coincided with an unprecedented era of global peace and prosperity, moulding a world order based on interdependence, coexistence, and mutual benefit between nations. To ignore this connection would be disingenuous, given the fact that protectionism has also historically been a key precursor to conflict and war. As Christine Lagarde, head of the International Monetary Fund, stated: “I hope we can be informed by history to actually address the negative impact of globalization in order to leverage the benefits it can deliver.”
To this end, Western politicians must seek to heal the disconnect between the valuable yet nebulous ideal of globalization and the real discontent felt by its people. In China, structural economic reform is needed to address the roots of overcapacity and restore balance to global markets.
China should also consider deferring its claim to MES until after the steel crisis has been resolved. While a setback to its strategic ambitions, a delay would give it time to continue market reforms and lobby for further international support, which would imbue a later transition to MES with greater credibility. In the meantime, such refrain may be considered as a sign of good faith, which could be rewarded with fewer tariffs being levied by Europe and the United States.
Earlier last week, the EU and China agreed to set up a bilateral working group to monitor Chinese commitments to reduce steel exports. This encouraging and rational effort at collaboration should be praised at a time when the underpinnings of globalization are distending. This sets the stage for a controlled and deliberate response to overcapacity to be ironed out by policymakers, while reducing uncertainty, maintaining trade growth and avoiding the risk of harmful reprisals. It is towards these broad, but very consequential goals that globalization strives, and must continue to strive.
Image: Steel mill (credit: Goodwin Steel Casings/Flickr)