Don’t let MES woes affect EU-China ties

Trade wars make great headlines. But they are a terrible way to conduct international commerce.

With global trade in goods and services worth trillions of euros – and millions of jobs and economic growth at stake – battles over tariffs (too high or too low), market access, quotas, subsidies, dumping and non-tariff barriers are to be expected.

But such confrontations have a nasty way of infecting not just the conversation on trade between states but also their over-all “beyond trade” relationship.This is exactly what must be avoided as the debate in the EU heats up over granting “Market Economy Status” (MES) to China.

The story goes back to 2001 when China joined the World Trade Organisation (WTO) and agreed to liberalise trade and undertake a swathe of economic reforms. The deal was that China’s partners would continue to treat it as a “non-market economy” until December 2016. China believes that under WTO rules, it should be granted MES automatically at the end of the year. The EU is split on the issue.

So what’s at stake? China is the subject of a host of EU anti-dumping actions and if it is granted MES, it will become more difficult – but not impossible – to impose anti-dumping fines or duties on Chinese products believed to be sold in Europe at unfairly low prices.

The discussion is further complicated by the global oversupply of steel and the recent increase in Chinese steel exports to Europe.Disgruntled European steel workers have poured onto the streets of Brussels demanding that the EU stop any moves to grant MES to China because, they claim, this will trigger even more job losses.

One look at the bigger picture and it’s clear that things are not that simple. An estimated 3 million European jobs depend on sales of goods and services to China. Total trade between China and the EU comes to almost one billion euros a day while anti-dumping actions only account for a small 2% of such trade. And many European companies rely on imports of low-cost Chinese components and raw materials.

Also, while European investors have long been active on Chinese markets, now it’s China’s turn to start investing in Europe. In 2015, Chinese companies invested €20bn euro in the EU, a 44%increase compared to 2014. The upward trend is expected to continue, making it even more important that China and Europe complete ongoing negotiations on a bilateral investment treaty.

Three options are on the EU table as it ponders the next moves on MES for China.

First, the EU could leave things as they are and wait until next year, when China would almost certainly haul it before a WTO dispute settlement panel. Second, China could be removed from the list of non-market economy nations without conditions. Third, the EU could grant MES to China while at the same time strengthening aspects of its trade defence legislation.

The European Commission is conducting public consultations, carrying out a full economic impact assessment – and crossing its fingers that things will turn out right. A decision on MES will likely be made by the end of 2016. In addition to the European Commission, the European Parliament and national governments will need to give their approval.

It’s going to be complicated. But both sides need to move with care

In the meantime, tempers are rising. The discussion is becoming acrimonious and increasingly politicised. If both sides are not careful, the disagreement could spiral out of control. That would be a pity. The EU and China have worked long and hard over the years to build a strong relationship which covers not just trade and investments but also cooperation in areas such as connectivity, urbanisation, innovation, science and technology and people-to-people relations. An EU-China summit is planned for July this year.

It’s going to be complicated. But both sides need to move with care. The EU and China have settled their trade spats in the past and if cool heads prevail, they should be able to do so again this time around. It would be unfortunate if the discussions over MES are allowed to threaten the carefully-crafted and multi-faceted overall relationship between the EU and China.