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Europe Sides With the U.S.: Sorry, China, You’re Still Not a Market Economy

Europe Sides With the U.S.: Sorry, China, You’re Still Not a Market Economy

The European Parliament on Thursday may have dashed China’s hopes of winning “market economy” status, a potentially crushing blow to Beijing hopes after a 15-year wait.

The Parliament said China does not yet meet the criteria to be deemed a market economy like the United States and Europe, where prices are determined by supply and demand rather than government diktats. The Parliament also rejected relaxing anti-dumping measures used to push back against unfair Chinese trade. It also noted that China is in violation of 56 of the European Union’s current 73 anti-dumping measures.

The United States has long called on Europe to refuse China market status. The resolution passed Thursday is nonbinding, but puts pressure on the European Commission, which will consider granting China the status later this year. The European Parliament then will vote on whether to approve that proposal.

China covets the prized classification. Beijing believes it is a necessary condition following its accession to the World Trade Organization 15 years ago. It would make it harder to file grievances against China for flooding the market with its goods. However, Chad Bown, senior fellow at the Peterson Institute for International Economics, said he does not think Beijing will get this status automatically.

“There is no precedent for this, so it’s likely it is going to be litigated,” Bown told Foreign Policy. “It will take a couple of years before we know” if WTO accession is enough to grant China market status.

The main issue for the EU is steel, particularly China’s severe production overcapacity, which is flooding global markets, depressing prices, and putting steelworkers on the dole. In the resolution, lawmakers note that China’s overproduction has “strong social, economic, and environmental consequences in the EU.” It was backed by 546 lawmakers, with only 28 voting against. Seventy-seven abstained.

China is the European Union’s second-biggest trading partner. Daily trade flows between the two total more than $1.1 billion.

But when it comes to steel, the two are at odds. The European steel industry, particularly in Britain, has been struggling as China floods the global market with cheap product. In the last two years alone, Beijing has produced more steel than Britain has since mass production began there during the Industrial Revolution.

Beijing has pushed back hard against this argument. In an op-ed published in the Daily Telegraph last month, the Chinese ambassador to the United Kingdom, Liu Xiaoming, wrote: “It is regrettable that some people in Britain blamed China for what is happening in the British steel industry. Making China the ‘scapegoat’ only misleads the public and contributes nothing to the solution of the problem.”

The amount of steel China produces is staggering. According to the World Steel Association, Beijing is responsible for nearly 50 percent of the global steel supply. The chart below, based on association data, shows just how much more than its rivals China has produced in the first three months of this year.

This year alone China has produced nearly 10 times as much as the United States, its closest rival. And this has driven the price of steel into the ground. At the start of 2012, a tonne of steel cost $544. As of yesterday, the same unit went for $50.

According to Bown, this won’t change until China decelerates its steel production. As its economy surged over the last decade, Beijing pumped it out in order to build factories, homes, cars, and other products.

“The problem is their economy has started to slow down. They now don’t need nearly as much steel as they once did,” Bown said. But closing plants to curtail production carries a political and social cost — laid-off workers — that leadership in Beijing can hardly afford as it tries to deal with overcapacity in other industries, like coal.

Bown added: “Are they going to wind [production] down? Are they going to bring inefficient plants off-line? We don’t know the answer.”

Photo credit: CHRISTOPHER FURLONG/Getty Images