How Trade Agreements Come Back to Bite Us – China’s Market Economy Status

You’ve heard it a thousand times.  The devil is in the details.  Nothing proves that point more than China’s insistence that, in December 2016, WTO countries – including the US – must grant them market economy status (MES).  Why is this detail such a devil?  Because if China is granted MES, it will lead to the massive dumping of excess China manufacturing capacity into the US and other countries, further eroding our manufacturing base.  To understand how we find ourselves in this predicament, we need to go back to 2001.

At the turn of the new millennium, the US facilitated China’s entry into the WTO.  As a direct result, we lost over 2 million manufacturing jobs in this country.  By manipulating their currency, paying manufacturing workers extremely low wages, putting those workers in often substandard or unsafe working conditions, and directly subsidizing state-owned enterprises, China was able to undercut the prices of US manufacturers and flood the US with cheap imports.  The net result is a trade deficit with China that ballooned from $84 billion in 2000 to $366 billion in 2015.

With the Chinese economy now in a skid, Beijing, afraid of labor unrest, is doubling down on this strategy, and subsidizing factories to keep producing even when there is decreasing worldwide demand for their factories’ products.  Because of the subsidies, the excess can then be dumped into the US at below market rates, further undercutting domestic manufacturers.

Under normal circumstances, to prove that a country is dumping, one uses the production costs in the dumping country to prove the case.  That doesn’t work with China because so many of their manufacturers are either state-owned enterprises or subsidized by the government.  As a result, because China was not a market economy when it joined the WTO, a clause was added to the original agreement to protect other countries from China dumping by allowing the plaintiff country to use cost comparisons from third party countries to prove their case.

Now, back to the devil.  When the agreement was drafted, a sub-clause was included in that provision which states that after 15 years the exception allowing a plaintiff to use a third party country for cost comparisons expires.  China is arguing that this sub-clause negates the entire clause.  If that is the case, then China must be granted market economy status under WTO rules.  This would open the floodgates to even more dumping by China, and the US would have little recourse.  Others argue, and I agree, that the sub-clause does not negate the entire clause, and that the use of a third party country for cost comparisons is still valid.  So the future of thousands of factory workers’ jobs throughout the country rests in the semantic interpretation of an arcane clause in a 15-year old trade agreement.

This is where Washington DC should draw a line in the sand.  Anyone with a shred of common sense knows that China is not a market economy.  According to Fortune magazine, the top twelve Chinese companies aren’t even privately held; they’re state-owned enterprises.  There are no circumstances under which this administration – or the next one – should grant China market economy status.

Of course, this is also a precautionary tale about TPP.  Are there any ticking time bombs in that agreement?

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