GENEVA (Reuters) – The United States warned China on Thursday that it had not done enough to qualify for market economy status, especially in steel and aluminum, sowing the seeds for a trade battle between Washington and Beijing at the end of 2016.

Upon China’s admission to the WTO in 2001, it was told by other members that they would not use its published, state-controlled prices to judge whether or not it was “dumping” exports unfairly in their markets, but rather “surrogate” prices reflecting what it should be charging without state subsidies.

That was written into its WTO membership agreement in a clause that would expire after 15 years, on Dec. 11, 2016.

If the United States, European Union, and other WTO members begin to take Chinese export prices at face value, it will be much harder for them to challenge China’s cheap exports.

U.S. trade diplomat Chris Wilson told the WTO meeting that the expiry of the clause did not require other WTO members to automatically grant China market economy status on Dec. 11.

Instead, China must establish under each WTO member country’s domestic law that it is a market economy, he said, according to an outline of his remarks seen by Reuters.

“Second, there is little doubt that China’s market reforms have fallen short of the expectations that were held by many members when China joined the WTO,” he said.

“This is particularly evident in the steel and aluminium industries where China’s pervasive interventions have led to a significant overcapacity of global supply that is threatening the viability of competitive firms in these industries around the world.”

China’s envoy at the WTO meeting said Beijing agreed that the expiry of the clause did not require automatic granting of market economy status, according to a WTO official who was present at the meeting.

However, he said its expiration would eliminate the legal basis for countries to continue to use “discriminatory anti-dumping methodology” against China, the WTO official said.

The official said it was believed to be the first time the United States had responded to China on the issue at the WTO. U.S. Treasury Secretary Jack Lew said last month that the stance on China’s market economy would be determined ultimately by the U.S. Commerce Department.

The European Union is also debating China’s market economy status. In a non-binding vote in May, the European Parliament overwhelmingly rejected the idea of loosening trade defences against China.

German Chancellor Angela Merkel, Europe’s most powerful leader, has said she favours, in principle, granting China market economy status.

(Reporting by Tom Miles; editing by Stephanie Nebehay)

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