In December 2001 China joined the World Trade Organization (WTO). The accession was a major step for China towards liberalisation of its economy and has resulted in significant growth of the country’s GDP, as well as several economic reforms. Over the last few years China has become a major trading partner with the EU. With over €520 billion of trade, China is the EU’s second largest trading partner, while the EU is China’s largest trading partner. The trade relationship is dominated by industrial and consumer goods. Trade in services and investment flows remain more limited. While Chinese investment in the EU could reach over €28 billion this year, the EU’s investment in China remains static, due to remaining market barriers and lack of confidence in China. To address this, in November 2013, the EU and China started negotiations on a comprehensive EU-China Investment Agreement, which will provide progressive liberalisation of investments, elimination of restrictions and simpler and more secure legal framework for investors of both sides. Commission Vice-President Katainen is ‘hopeful’ that the agreement will be finalised in the first half of 2017.

On 11 December, meanwhile, China celebrated 15 years of membership of the WTO. This was not just any anniversary, but an important milestone for China’s future trade relations. Under Article 15 (a)(ii) of the Accession Protocol to the WTO, 15 years after China’s accession, the WTO Members should grant China Market Economy Status (MES), which means no longer using the analogue country methodology, where the level at which pricing is said to be “dumping” - when manufacturers export a product to another country at a price either below the price charged in its home market or below its cost of production - of Chinese products is calculated on the basis of domestic prices or costs in a third country, rather than in China itself.

So far, so good. While the EU does recognise China’s progress, automatic recognition of China as a Market Economy is not, however, going to happen on schedule. Lack of transparency, government intervention, subsidies and cheap financing – all factors involved in the so-called “dumping” or predatory pricing of Chinese goods – are the reasons for several disputes opened by the EU, resulting in 52 anti-dumping measures. For the EU, whose industry is threatened by Chinese imports (steel, mechanical engineering, chemicals and ceramics), strengthening of trade defence instruments seems to be the only solution.

In 2013, therefore, the European Commission adopted a proposal on the Modernisation of Trade Defence Instruments. The centrepiece of the proposal was to no longer apply the “lesser duty rule”, which caps the level of duties that can be imposed, for exports which benefit from significant raw material distortion (such as dual pricing, export taxes etc.) and in cases of country subsidisation. The European Parliament supported the proposal, but the Member States could not reach an agreement. One block, led by France and Germany, pushed for higher tariffs, and the other, composed of the UK with Ireland, Sweden, the Netherlands and others, advocated for less protectionism.

In view of the looming WTO deadline on China MES - but also to exert pressure on the Commission to push for an agreement on the new trade defence instruments - in May 2016, the European Parliament adopted a non-binding resolution on China’s Market Economy Status, to express general concerns.

Then, in October 2016, the Commission published a Communication on Robust Trade, followed by a proposal, to address the increasing “challenge of unfair trade practices by third countries” causing market distortions in several sectors. The proposal removes the “market economy status” and suggests new methodology to change the way dumping is calculated in EU anti-dumping investigations concerning WTO members going forward by allowing the use of other benchmarks in such cases. These benchmarks could include undistorted international prices or corresponding costs of production in another country with a similar level of economic development as the exporting country.

According to Yao Ling, deputy director of the Europe research department under China’s Ministry of Commerce, ending the “analogue country” methodology would result in a decrease of 27% of Europe’s anti-dumping measures, 19% lower prices of China’s exported products and an increase in market share of these products in the EU by approximately 20%. Therefore, when the European Commission adopted the new proposal, China’s Ministry of Foreign Affairs was not happy. The ministry criticised the new methodology claiming that it only replaces the concept of “non-market economy” with “market distortions” and simply repackages the “analogue country” methodology, preventing China from growth. They urged the EU to terminate the “analogue country” approach and avoid new forms of discrimination in accordance with the WTO rules and warned that “China will retain the right to take all necessary means to safeguard its legitimate rights and interests”.

And so they did: on 12 December, a day after the 15-year anniversary, China notified the WTO Secretariat that it has requested dispute consultations with the United States and the EU regarding special calculation methodologies used in anti-dumping proceedings.

A day after, on 13 December, The Council of the EU reached agreement on its position on the Commission’s proposal on the Modernisation of Trade Defence Instruments from 2013. The Member States called this "a major breakthrough" adding that “Europe cannot be naïve and has to defend its interests, especially in the case of dumping. This is a crucial step towards a solid solution that would help EU producers cope with unfair competition and practices." Without a solution to the dispute, Chinese MES appears to be out of question and it seems that with this methodology, the EU at least has found a way to continue to protect its market and industries from imports of countries, such as China. On the other hand, China, as illustrated by their WTO action, is not about to give up and will continue the fight against the analogue country methodology. Whatever happens, the EU-China trade relations will continue to be of key importance to both sides – and to grow. 

Tanja Albreht

Tanja Albreht is a project consultant based in APCO Worldwide’s Brussels office. She is a member of the energy and environment practice. Read More

Feng Feng

Feng Feng is an associate consultant in APCO Worldwide’s Beijing office. Read More