It is time for the European Union (EU) to grant China market economy status (MES) given the importance of the China-EU relations and China's efforts for market-driven economic reforms, a global economic and policy analyst said in a recent report. "In Europe's view, the long-term benefits of China's MES would seem to outweigh the short-term costs," said Dan Steinbock, the founder of consulting firm Difference Group, in an article published by Brussels-based online newspaper EUobserver.
The EU granting China MES will offer a more solid long-term relationship with China, support Europe's quest for Chinese capital, Steinbock said, adding that China's transition to consumption and innovation will also create new opportunities for EU companies. The EU, a member of the World Trade Organization (WTO), has to decide whether to grant China MES by December according to a 2001 agreement the EU and China signed on China's accession to the WTO.
Brussels faces resistance from some lobbyist groups who claim that granting China MES will weaken the EU's trade defence against imported Chinese products and jeopardize the European labor market particularly in the steel sector due to China's overcapacity. "But times are changing. Chinese growth no longer relies on net exports, but increasingly on consumption and services," Steinbock said. "Even more importantly, China has committed to reducing excess capacity drastically, even if it will require lay-offs of some 2 million employees in steel and coal sectors in the next three years." Europe's MES opponents represent struggling traditional industries, such as steel, ceramics and textiles, which suffer from competitiveness challenges, in southern Europe.
"Indeed, much of the more competitive northern Europe -- including the UK, the Netherlands and Nordic countries -- does support China's MES," he said. The expert praised China's effort to carry out economic reforms. "Beijing, in contrast to Brussels, has argued that the state's presence in the economy has shrunk drastically in the past 15 years.
Conversely, some Chinese observers add that the role of state has actually increased in several EU economies," Steinbock said. Another way to assess the size of the public sector is to measure general government revenue as share of gross domestic product (GDP), the expert said, adding that in this aspect, the eurozone average of 50 percent remains far higher than that of the United States, 35 percent, and twice as large as that of China, which is 25 percent. "Moreover, after the global crisis, China has opted for market-driven structural reforms, which continue to linger in the US, Europe and Japan," Steinbock said.
Besides, Chinese competitiveness is no longer just about cheap prices, but also about innovation hubs. Despite its huge population, China's research and development spending per GDP today is higher than that of the EU on average, he said. For the EU, granting China MES is a politico-legal decision, not an economic one, said the expert. Washington reportedly warned Brussels not to grant China MES.
However, the U.S. arguments against China's MES are similar to what were used unsuccessfully a year ago against the Asian Infrastructure Investment Bank (AIIB), Steinbock said. A not-for-profit multilateral development bank initiated by China, the AIIB was officially established in December and started operating in January.
Seen as a challenge to U.S. efforts to maintain its grip on the world's leading multilateral economic institutions, the AIIB was blocked by Washington, which tried to marginalize the bank's impact and urged other Western countries to follow its lead and steer clear. But the strategy failed with 57 countries including Australia, Britain, France and Germany becoming the AIIB's founding members.
Now there are more than 30 countries waiting to join the bank. "Typically, the key countries that still regard China as a non-market economy include the U.S., its NAFTA (North American Free Trade Agreement) partners (Canada, Mexico) and security allies (EU, Japan), along with India. This opposition is fueled less by economics than geopolitics," he said. To date, more than 80 economies have recognized China's status as a market economy, including Russia and Brazil, as well as such advanced economies as Switzerland, Singapore, Australia and New Zealand.
China now is the EU's second largest trading partner and one of the biggest markets for the 28-member bloc, Steinbock said, adding that Brussels' MES decision will keep pace with the EU-China relations for years to come. Steinbock has served as research director of International Business at the India China and America Institute and visiting fellow at China's Shanghai Institutes for International Studies and Singapore's EU Center.
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