NOT all trade tension is made in America. China is suing the European Union at the World Trade Organisation (WTO). Hearings began this week. China thinks it deserves treatment as a “market economy”. The EU, supported by America, disagrees. As they lock horns, each side sees the other as breaking a promise.
China’s entry into the WTO in 2001 was part of a grand bargain. In return for market access, it promised economic reform. The deal laid out unusually strict terms. Any members’ exports can face anti-dumping duties if sold too cheap. But China’s accession agreement allowed others to erect stronger defences, and assume that it was a non-market economy when calculating the “fair” duty—using third-country prices for comparison. In practice this meant higher tariffs.
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China expected this treatment to be temporary and expire after 15 years. But as the deadline loomed and the share of imports covered by anti-dumping duties rose (see chart), the EU and America balked at the idea of giving up their trade defences. On December 4th the EU approved new rules to drop the label of “non-market economy”. But it will still apply third-country pricing on a case-by-case basis. Mei Xinyu of the Chinese Academy of International Trade and Economic Co-operation, an official body, calls this “a trick that avoids calling China a non-market economy”.
The legal dispute will take years. On November 30th the Americans published their legal arguments in support of the EU. They outlined historical instances where economies in transition were treated as non-market economies. When Poland, Romania and Hungary acceded, they got the same non-market treatment as China. As long as WTO members show that Chinese prices are distorted, they say they are within their rights to refer to different ones.
The Chinese say that there is no agreed definition of a market economy, and dispute the EU and American interpretation of their accession agreement. Whatever happens, at least one large member of the WTO will be extremely upset. “If China loses, the WTO will lose its fairness,” says Wei Jianguo at the China Centre for International Economic Exchanges, an official think-tank. That is an awful lot of pressure to put on a panel of judges in Geneva.