Dear President Juncker,
We, the Presidents of European industry associations, are writing to you in view of the upcoming College of Commissioners’ orientation debate on 13 January 2016 to warn you of the serious damage that granting Market Economy Status (MES) to China could cause to many EU industries and jobs.
AEGIS Europe brings together nearly 30 European associations representing a broad variety of industries including traditional and innovative manufacturing industries, consumer branches, SMEs and renewable energy sectors, accounting for more than €500 billion in annual turnover and millions of jobs across the EU.
Fair competition, prevention of unfair trade practices and a strong anti-dumping tool are essential to ensure a level playing field for our industries. As you know an effective anti-dumping system is vital to preserve fair trade conditions for EU’s competitiveness on the global market, especially considering the huge overcapacities accumulated by China in many sectors. Chinese producers are able to sell at extremely low prices due to massive State intervention and China’s aggressive export policy is not expected to stop especially now that it is being fed by domestic growth slowdown.
It is publically and widely understood that China is not a market economy and that it has not fulfilled all the criteria set by the EU, in compliance with WTO law, to be considered as such. China is an economy still predominantly governed by State intervention and planning and its exports are driven by Five Year Plans impacting practically every single factor of production. Therefore, Chinese distorted prices must not be used as a basis to determine the normal value in anti-dumping investigations.
Furthermore, we wish to reiterate that there is no "automaticity" in the granting of Market Economy Status to China in 2016. On the basis of the remaining provisions of Section 15 of China’s WTO Accession Protocol there is no clear-cut obligation for the EU to swiftly recognise such a status. Even after 2016, China will still need to demonstrate that it meets the criteria set by the EU for obtaining MES.
In addition, any unilateral EU decision to grant MES is irreversible and would have severe consequences for EU growth and employment. The risk of adopting a methodology using local Chinese prices and costs could result in a loss of 300,000 direct EU jobs linked to the products covered by anti-dumping measures, affecting hundreds of thousands and potentially millions of indirect jobs. Moreover, given that the existence of a strong anti-dumping instrument is a clear deterrent against dumping, granting MES may lead to increased dumping, putting additional sectors not currently covered by anti-dumping measures at severe risk of job losses.
In view of this very complex and sensitive issue, it is imperative that any decision on this matter is based on a carefully thought out and, above all, transparent decision making process and that the EU coordinates with its major trading partners. Therefore, before any decision is taken by the College we would greatly appreciate if the Commission could:
- Evaluate to what extent China has made progress towards meeting the EU’s five criteria. To date, as far as we know, China meets only one, which means that they have not reformed in many areas of the economy as the EU would have expected. Allowing China to get MES today on this basis would jeopardise the approach the EU has been following over the last 15 years and would put the EU’s credibility at risk.
- Assess where China stands with regard to the fulfilment of its WTO obligations. In the Protocol of Accession, China committed, for instance, to allow all its prices to be determined by market forces (Section 9). Ensuring that China meets its WTO obligations is a key pre-condition for granting MES to China.
- Make a fully-fledged and comprehensive impact assessment of the economic, social and environmental consequences that such a decision would have on the EU. This is essential to ensure that an informed and transparent public debate can take place, in line with the Better Regulation approach.
In this framework, we remain open to exploring with the Commission how best to ensure that:
a. EU law – and particularly the wording of the EU's Basic Anti-Dumping Regulation – is consistent with WTO law, including with regard to the post-11 December 2016 scenario, so as to ensure that the EU fully complies with its international obligations;
b. The EU’s trade defence system remains cutting-edge and effective in the face of challenges from an increasingly globalised economic environment and in particular the subsidised build-ups of massive overcapacities in various sectors in China.
We hope that at the upcoming meeting of EU Commissioners you will take our views and concerns into account in order to avoid damages to the competitiveness of the EU industry and to the EU’s growth and jobs prospects.
We remain of course at your disposal for any further information you may require.
Presidents of European industry associations represented by AEGIS Europe
Context on the issue of MES is available in this short background note and document about the 10 myths and realities of MES. Below are some additional points that are important to keep in mind during the orientation debate on 13 January.
1. The European Commission has repeatedly stated that if China were granted MES, it would continue to ensure effective trade defence measures against unfair Chinese imports. One of these proposed tools would be “cost adjustment”, namely using specific market prices and costs outside of China to construct the normal value in anti-dumping proceedings. However, the use of distorted Chinese prices (the result of granting MES) cannot be adequately compensated by the mere application of “cost adjustment”: the EU practice of cost adjustment for MES countries is already under attack at the WTO (as noted, inter alia, by a recent report by the Research Service of the European Parliament) and, as anticipated by a recent MLex report, it has reportedly been found to be in violation of the EU's WTO obligations in the Argentina-Biodiesel case (the provisional WTO panel report on this case is understood to have been provided to DG Trade in early December 2015). If “cost adjustment” is successfully challenged at the WTO, EU industry would be left entirely defenceless, given that the other supposed “mitigating factor” usually referred to - the anti-subsidy instrument - is not designed to address large-scale subsidies such as the ones prevailing in China. Moreover, China has yet to honour the many commitments that it made when it joined the WTO, not least of which is a commitment to allow all prices to be determined by market forces.
2. It is worth noting that other than the Commission's Legal Service and the Chinese Government, few legal analysts believe there is an obligation to grant China MES in 2016. Most, including the European Parliament's Legal Service, conclude there is no clear-cut obligation to cease – as of December 2016 – applying non-market economy methodologies in investigations of imports from China. This is confirmed by a recent in-depth analysis carried out by the DG EXPO Policy Department of the European Parliament, which states that: “A published (leaked) extract of an opinion by the European Parliament's legal services appears to follow this line of reasoning. At the very least, the opinion argues, that the EU would have to adapt its legal and administrative framework – the Basic Regulation. The EU could use an alternative methodology in investigations against Chinese imports, as long as China does not met the EU five criteria.” (The leaked extract of the EP Legal Service opinion is publicly available at the following link). Moreover, even the US Government seems to believe that “the protocol doesn't contain any requirement that WTO members treat China as a market economy country for antidumping purposes by the end of 2016” (quote from Bloomberg article, also referred to in a recent FT article). A note on the proper legal interpretation of China’s WTO Accession Protocol can be found here.
3. Two key European social partners organisations, BUSINESSEUROPE and ETUC, agree on the fact that there is no requirement to automatically grant MES as a direct consequence of the expiry of subparagraph 15 (a)(ii) of China’s Accession Protocol to the WTO, because the remainder of Section 15 remains in place. They also agree on the need for a transparent decision-making process, involving a proper stakeholder dialogue, as well as on the need for a coordinated approach with the EU's major trading partners on this sensitive issue. This view seems to be shared also by large sections of the European Parliament and by several EU Member States.
In the light of all of the above, the question of granting MES to China is likely to be the most important international trade issue of 2016. Therefore, as AEGIS Europe has repeatedly requested, including to President Juncker and to Mr Demarty, it is imperative that, prior to any decision, the Commission carries out a full and transparent impact assessment in accordance with the Commission's own Better Regulation guidelines, including a public consultation, carefully assessing the effects of all the different policy options.