China’s Struggle For Market Economy Status

Recently, the Trump administration joined the EU and rejected the view that under the WTO terms China should have graduated last year to market-economy status. Now Trump is using Obama’s accession legacy to undermine world trade.

The accession debacle intensified a year ago when then president-elect Trump stated categorically in Iowa that “China is not a market economy.”

In the prior months, Trump had pledged to beat back the Trans-Pacific Partnership TPP (which he buried on his inaugural day), undo the North-American Free Trade Agreement NAFTA (whose fifth round of talks ended recently in simmering friction), and impose huge tariffs on China and rewrite the rules of world trade – in which the accession mess could prove a milestone.

However, the credit for the trade ploy to influence the World Trade Organization (WTO) belongs to President Obama.

Toward the end of the post-1945 trading order

Toward the end of his presidency, Obama opened a trade case against China. Officially, litigation was launched at the WTO to target illegal subsidies, which China used to support its aluminum industry, or so the US claimed.

In public, Obama accused China for using low-interest state bank loans, cheap electricity and government subsidies, which would contribute to global overcapacity in aluminum and steel. But in reality, the administration’s move handed over a systemic case to Trump, who pledged to confront China – a case that would be supported by US allies in Europe and Japan, which remained in secular stagnation.

Yet, Machiavellian designs fare poorly at times of rapid, disruptive change.Instead of using the WTO as a strategic hammer against China’s alleged violations, Trump sees world trade organization as a strategic target that should be buried along with the TPP.

The collapse of the TPP and the potential downfall of the NAFTA precipitate new trade conflicts with Mexico and Canada, but also with all economies that have a major trade surplus with the US, including key NATO allies, Germany and Japan.

The MESS mess

The path to potential trade wars was paved over a year ago when the US, the EU and Japan realized that it would soon become harder to blame China for trade violations. Indeed, the key issue in the market-economy status (MES) debacle is the effort of the key WTO members to continue to rely on methods resulting in overstated tariffs against Chinese goods.