EU’s refusal to grant China MES would affect ties
April 21, 2016, 1:05 pm

By the end of the year, the European Union must decide whether it will recognize China as a market economy or not. The global economic crisis and the recent trade dispute over steel, make this problem much more complicated. EU’s refusal to grant China Market Economy Status (MES) is bound to have a significant impact on the political trust between China and the EU.

The European Commission has initiated discussions on this sensitive issue in January this year. According to the additional terms of China’s accession to the World Trade Organization (WTO), the method of applying “alternative country” cost data in the anti-dumping investigation against Chinese exports should be terminated by the end of 2016. The Chinese government, as well as some experts in the EU argue that this automatically leads to granting MES to China, but that remains controversial within the EU.

The debate over China’s MES is not entirely a technical issue. In the past ten years, the Chinese government has been trying through negotiations to get the EU’s early recognition. The advocates of EU’s positive normative policy emphasized the value differences between the EU and China and tried to apply arms embargo and MES as leverage to oblige Beijing to accept European “values” on “human rights” and “rule of law”, but it is generally believed that this policy has failed.

German Chancellor Angela Merkel (R, center) and British Prime Minister David Cameron (L, center) talk during a family photo session at the start of an EU Summit in Brussels, Belgium, Oct. 15, 2015 [Xinhua]

On the issue of granting MES to China, the positions of the EU member states and interest groups are divided. The strongest resistance comes from the steel industry.

On the trade policies towards China, some southern European countries such as France and Italy prefer to apply trade protection measures, whereas Germany and the UK advocate traditionally free trade. But the Sino-European trade dispute in steel sector is mainly related to the labor market in the UK and Germany. The steel workers in both countries went on strike recently arguing the cheap steel export from China puts the European steel market under intense pressure. Facing resistance from trade unions and interest groups, some European politicians who initially supported the EU’s recognition of China’s MES changed their position. However, the main reason for steel overcapacity is the global economic recession that could not be improved in a short time. EU’s refusal of granting China’s MES will not solve the real problem.

Washington is trying to prevent Brussels from granting China’s MES and as EU’s most important trading partner could also influence EU’s final decision. On the trade policies to China, the EU and the US might strengthen their coordination in the future. The Transatlantic Trade and Investment Partnership (TTIP) negotiations will enter into a final stage this year. Whether the agreement can be concluded successfully, is related to the balance and competition of the global economy in transatlantic and transpacific regions. After the successful conclusion of Trans-Pacific-Partnership (TPP) agreement, the EU is willing to accelerate the TTIP talks. One of the backgrounders and motivation for the EU and the US to start free trade talks is to rewrite global trade rules outside the WTO, faced with the rise of Asia.

The evolution of global financial crisis has driven the EU to re-evaluate its relations with China. Based on the political and economic trade-offs, the European Commission would likely make a decision in favor of China. From an economic point of view, granting MES to China would further stimulate bilateral trade and investments.

China is the EU’s biggest source of imports and one of the EU’s fastest growing export markets. Since the European debt crisis, Chinese market has been regarded as an important opportunity to promote economic growth in Europe. From a political perspective, an unfavorable decision against Beijing could put this mutual trust at risk.

Beijing has urged the EU on several occasions to fulfill its commitments as WTO member and recognize the China’s MES. On responding to global challenges, the establishment of a multilateral system, strengthening global governance and seeking common solutions to international problems, China and the EU need to enhance mutual understanding and support.

To balance the differences among the interest groups within the EU, the European Commission may grant MES to China in exchange for urging Beijing to enhance intellectual property protection and reduce non-tariffs barriers.

Meanwhile, the EU might take transitional trade protection measures to limit Chinese products to overflow the European market in order to alleviate the economic shock especially to its labor market. So far, more than 80 countries have already recognized China’s status as a market economy, including some developed economies such as New Zealand and Australia. If as expected the 28 EU member states would grant MES to China by the end of the year, other countries that reject China’s MES or adopt a wait-and-see attitude might change their positions.

Economic and trade cooperation is the foundation of Sino-EU relations. China’s policy towards the EU is based on three principles: 1. A united and integrated Europe instead of a disunited Europe; 2. Sino-European relations both on the super-national and member states level; 3. Co-operation beyond differences.

Since the European debt crisis, the power balance between the EU member states has changed and consensus cannot be reached on many issues, such as Sino-European co-operation. Since 2006, the EU has not released any new policy paper on China as expected. The EU has already signed a free trade agreement (FTA) with South Korea and announced the conclusion of the negotiations for a FTA with Vietnam. At the same time, the EU is negotiating a FTA with Japan and India respectively, but FTA talks with China have been not put on the agenda. Granting MES to China is one of the pre-conditions of FTA.

If the MES issue remains unsettled in this year – which means the problem would be postponed indefinitely- Sino-EU relations will suffer a drawback.