PRC Sets Out Its Conditions for 'Bailing Out' EU

♠ Posted by Emmanuel in ,,, at 9/14/2011 01:16:00 PM
This post is a quick follow-up on an earlier one I made concerning the rather incredulous suggestion that PRC sovereign wealth fund the China Investment Corporation (CIC) was seriously thinking about buying Italian debt. I thought it was a fairly frivolous thing to entertain such an idea, and the latest news doesn't do much to reduce my perception of how things stand.

Ever since China joined the World Trade Organization on 11 November 2011--the PRC will soon commemorate its tenth year of membership--it has sought designation as a "market economy." In its accession, China was made to accept a 15-year period during which it would be considered a "non-market economy" (NME) Why does this distinction matter? On a technical level, China's NME status has made it more vulnerable to anti-dumping cases filed against it by the United States and the European Union. The China US Trade blog has a straightforward explanation of its mechanics, but briefly it works like this: Since China is not considered as a "market economy," anti-dumping cases brought against it invoke the use of surrogate countries (i.e., those which are already considered market economies at a similar stage of development) in defining the domestic cost of production. This process disadvantages China since the arrived-at costs are often deliberately those which are among the highest possible, artificially increasing the margin of dumping. It is an egregious "kick China" practice that will be phased on in 2016. However, China has been quite annoyed in the meantime with being considered an NME and has always sought designation as a market economy in PTAs involving it--such as that with ASEAN.

In terms of prestige, it is of course damning that the world's second largest economy is not even considered as having a functional market. That hurts. It's another contradiction with modern China: While Party leaders still pay regular lip service to following Marxist-Leninist thought (however that is possible nowadays), they too are in a hurry to be recognized as having that most capitalist of accoutrements, the market mechanism. Go figure.

This slight detour completes my explanation of China's wish to immediately do away with NME status. Once again underlining its importance, it is significant that the first thing which came to mind among the PRC leadership in helping out troubled EU economies is precisely this among many other things China could ask for such as going easy on its hoarding of rare earth metals. From the Financial Times:
Wen Jiabao, Chinese premier, has called on debt-laden European countries to put their “own houses in order” before asking China for a bail-out, in a sign of Beijing’s reluctance to be cast as a saviour for the global economy.

Speaking at the opening on Wednesday of the World Economic Forum in Dalian, China, Mr Wen also publicly linked Chinese investments for the first time with long-standing political demands, indicating a possible hardening of China’s position towards crisis-hit Europe...

He said Europe needed to take “bold steps” in order to receive Chinese help and the first of those steps was a decision to formally grant China full “market economy” status. This is a technical definition that has long been a key demand from Beijing and would allow Chinese companies to avoid or at least mitigate many costly and time-consuming trade disputes.

European officials say China does not meet the criteria of a market economy and stiff opposition from some member states makes it very unlikely the European Union will grant China this status soon.
Incredulity aside, I think the EU will baulk at this demand since being able to file anti-dumping cases that stick is one of the few areas where the EU is still able to whack China with regularity. Will the EU easily relent on the privilege of whacking the PRC on anti-dumping grounds and lose the ability to appease politically important manufacturing interests five years early? Again, the answer is probably "no." Still, it does illustrate how trade matters tie into the credit crisis in interesting ways.

UPDATE: Also see Fareed Zakaria on this very topic.