Secrets of the Coming Trade War with China

Beijing has now launched WTO disputes against persistent classification of the People’s Republic as a “non-market economy”.

Just last week, China’s Ministry of Commerce initiated proceedings against both the United States and the European Union over a critical dispute that will help you to understand whether there is going to be a trade war. After all, it may well be that Donald Trump is not just full of Big Macs!

It could well be that the Donald is merely bluffing about a trade war with China! But, wouldn’t you prefer to be prepared so that you can start hedging your bets?

Way Back

When China joined the WTO in 2001, it did so only after extensive negotiations with the U.S. To protect domestic incumbents, China’s accession protocol provides that it may be treated as a ‘Non-Market Economy’ (NME) in certain circumstances. In particular, NME-status applies to anti-dumping proceedings and allows importing countries — this includes Canada as well as the U.S. — to impose higher duties against a greater number of Chinese imports.

Yes, you are right, China’s constitution explicitly states that it is a socialist state. It is thus, by its own definition, not a “market economy”. You are also right that this topic is technical. However, the dispute over these technical details at the WTO, may just help you prepare for a trade war between Uncle Sam and Winnie the Pooh!

China’s Ascension Protocol

Here is the key take-away: Non-Market Economy in China’s ascension protocol is what lawyers call a ‘term of art’: the notion of China as a NME was designed to be a stop-gap, provisional arrangement. And, according to China’s Ministry of Commerce, it therefore does not matter whether the Chinese economy is dominated by State-Owned Enterprises or technology transfer is a mandatory part of doing business on the mainland.

Beijing relies on the fact that Article 15d states:

“Once China has established, under the national law of the importing WTO Member, that it is a market economy, the provisions of subparagraph (a) shall be terminated provided that the importing Member’s national law contains market economy criteria as of the date of accession.  In any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession.”

As you can see, on its face, 15(d) is clear: since 15 years have now passed, the NME designation “shall expire” and must be removed. That is the Chinese position, and up until recently it was hard to find anyone with the chutzpah to disagree.

Enter the Donald

The final paragraph of 15(d) is clear “In any event, the provisions of subparagraph (a)(ii) shall expire 15 years after the date of accession.” That would mean more Chinese imports and reduced discretion for Washington. However, as you also know, Western businesses and politicians are starting to look at Chinese imports and ask “why did I want that again?”

There is a growing perception that China has gained from WTO market access in a non-reciprocal manner. The result is an unwillingness in Trump’s Washington to acknowledge that China is no longer a Non-Market Economy. Over the coming months, both the US and the EU will hit domestic law deadlines related to China’s NME status. This will force Washington to start playing its hand: is the United States Department of Commerce really going to persist with NME treatment, and if so how are they going to justify it?

For China, this persistent designation as a non-market economy not only feels like a betrayal but also poses massive problems vis a vis powerful domestic industries. It has thus filed the WTO challenges to push-back against Washington. The trajectory of these disputes will therefore serve as a useful barometer for broader bilateral frictions.