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  October 20th, 2016 | Written by

Is China a Market Economy?

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  • The Congressional Executive Commission on China's annual report did not support China as a market economy.
  • Some WTO members have already granted MES to China through existing trade agreements.
  • To attain MES, China would have to stop subsidizing industries.

Earlier this month, the Congressional Executive Commission on China issued an annual report on U.S. trade relations with China, as it had done since 2001. But this year that report is garnering much more attention, for the role it will play in whether China is granted market economy status by the United States and other nations.

The verdict? Not one that will please the Chinese government. The CECC report lauded improvements in China’s legal system and the elimination of its one-child policy. But that was not nearly enough to offset concerns over the consolidation of Chinese Communist Party rule, continued human rights violations, allegations of theft of intellectual property, internet and global media censorship, and suppression of political dissent, usually with prison terms.

What Happens Next

By any objective assessment, China is nowhere near market economy status (MES). However, some WTO members have already granted MES to the nation through existing trade agreements. Ultimately, it will be up to each individual country to make its own determination.

The votes that really matter belong to the United States and the European Union.

Back on May 12 the European Parliament rejected MES for China, and EU governments will likely do the same.

A yes vote from the U.S. figures to be just as doubtful. The Department of Commerce and the International Trade Administration review six criteria for MES. These take into account everything from currency conversion and how worker wages are determined, to the extent of government control over the means of production and the allocation of resources. China lags far behind these standards.

What’s at Stake

Should China achieve market economy status, the nation would become an even more prominent player on the world stage.

But before that level playing field becomes a reality, it must demonstrate a willingness to play by the same rules as other market economies. That means the prices of its goods would be determined by supply and demand through free competition, and set by the country’s citizens and not its government. It also means China would have to stop subsidizing industries to be more competitive with trading partners.

So the outlook seems clear enough – as long as the Chinese government continues to control costs, prices, wages, production and currency value, market economy status should be a non-issue.

But here is where it gets murky.

On December 11, 2001, China became a World Trade Organization member and accepted a Protocol of Accession that required adherence to market economy principles. But additional language in the agreement, related to the expiration of one clause within the protocol, may provide a path to market economy status as of December 11, 2016. It all depends on how you parse the language.

Here is the Cliff’s Notes version: in the section of the protocol on anti-dumping investigations, China would be held to the same standard as every other market economy nation. But in Section 15, the following sentence appears: “In any event, (the provision on this standard) “shall expire 15 years after the date of accession”—that’s December 16.

Does that mean China becomes a market economy no matter what it has or has not done in other areas? Most legal experts don’t think so, but the debate is still underway.

On October 18, the European Commission proposed an “entire package” on how it fulfills the obligations in the accession protocol. Discussions will continue, with China pressing its case that it is entitled by right to Market Economy Status come December.