Deciding whether Canada should grant China with market economy status looms in the backdrop of a potential bilateral free trade deal.

China’s latest push to be granted market economy status (MES) under World Trade Organization (WTO) rules could become an irritant in Sino-Canadian relations. The issue threatens to stand in the way of a bilateral free trade deal that could create an estimated 25,000 domestic jobs and increase Canadian exports by CAD $7.7 billion by 2030.

When China joined the WTO in 2001, Section 15 of China’s Accession Protocol allowed members to treat China as a non-market economy (NME) for a period of fifteen years to protect domestic producers from low-cost Chinese imports. A special provision was created that allowed WTO members to use anti-dumping tariffs – known as non-market economy (NME) methodologies – on Chinese goods being sold at unfair prices. This provision expires on December 11, 2016.

While the United States and the European Union have had heated policy debates over China’s market economy status, the same discussion has been fairly muted in Canada. Part of this is because Canada has applied a caveat that allows it to ignore the expiration of the NME provisions in 2016. Under Canadian law, China and Vietnam are the only two countries that are targeted for anti-dumping practices under Section 20 of the Special Import Measures Act (SIMA). Although Canada adopted a 15-year time frame under the Act in 2002, this was later repealed through a 2013 amendment that allows Canada to extend anti-dumping tariffs.

A recurring topic of debate is whether China is actually a market economy. Skeptics – particularly those in affected industries and protectionists – argue that granting China MES would leave Canadian producers and manufacturers defenceless to a flood of cheap imports and unfair competition. Canada currently has anti-dumping duties in place through SIMA against eighteen products exported from China primarily in the steelmaking and solar panel sectors.

These concerns are understandable. By its own admission, China is struggling to deal with overcapacity in a number of its industrial sectors – particularly in steel, coal, and aluminum – that have benefited from favourable subsidies and government intervention. But this discounts the fact that many other parts of China’s economy arguably function according to market principles, prices, and competition as witnessed by the remarkable growth of its private sector.

Prime Minister Justin Trudeau might decide that granting China market economy status at the WTO is worth the potential improvement in commercial relations.

The question of whether to grant China market economy status is as much political as it is economic. For Beijing, being recognized as a market economy is a matter of national prestige as much as it is a boon to its struggling exporters. But for Ottawa, conflating MES as a potential bargaining tool towards a bilateral free trade agreement with China would be a mistake. If Beijing is denied MES, it would mostly likely pursue its own legal challenge for what it views as a violation of existing WTO rules, regardless of any free trade negotiations between the two countries. That being said, Prime Minister Justin Trudeau might decide that granting China market economy status at the WTO is worth the potential improvement in commercial relations.

Canada is not the only country weighing its options on whether to recognize China as a market economy. While Australia, New Zealand, Singapore, and Switzerland have already granted China with MES, a number of major global economies including the United States, European Union, Japan, India, and Mexico have yet to come to a decision. In May 2016, EU lawmakers in Brussels dealt a blow to China’s bid for MES on grounds that there was no case for relaxing existing anti-dumping measures against Beijing.

A closer reading of China’s WTO accession suggests that the question of whether China is a market economy is irrelevant. The original section does not legally require Canada to name China as a market economy by 2016, but merely to end the use of NME methodologies. While Section 15 of the protocol allows for the NME provision to expire, it does not stipulate that Beijing should be automatically granted market economy status afterward.

This is where Canada needs to be clear. Rather than focusing on whether to grant MES to Beijing, Ottawa should honour its original 2002 commitment and repeal the anti-dumping amendments made to SIMA in 2013. More importantly though, it should act quickly to avoid setting a dangerous precedent with Beijing that it is acceptable behaviour to break previous agreements.

Applying anti-dumping tariffs on all Chinese products will hardly alleviate Canadian concerns with market distortions or other unfair practices from China. By the same token, Ottawa should send a clear message that Beijing’s overcapacity problems are not to be exported to Canada which threaten not only China’s own domestic economy but international markets as a whole. This could be done by establishing a similar process that the Americans have adopted through the Trade Preferences Extension Act whereby alternative criteria for calculating duties is adopted in cases involving sectors where market distortions exist. Instead of adopting the NME provisions, a different approach may be to create a rigorous procedure that is compliant with WTO regulations.

Mishandling the situation could lead to a considerable loss in credibility and have a detrimental impact on Canada’s engagement with China for years to come. Whatever the current government decides, it serves as an early litmus test for a prime minister that has previously declared his party as ‘pro-trade’ and professed his desire to pursue deeper commercial relations with Beijing.

Photo: John Kwan / Shutterstock.com

This article is part of the Canada-China Relations Special Feature.

 


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