Beaten in the WTO's name game

It exports more than any other nation and was the world's second-largest importer last year. But China, labelled a non-market economy, is still treated as an inferior member of the global trade family.

China has wanted to be recognised as a market economy since it decided to seek WTO membership in the mid-1980s. But in the final stage of negotiations to join the organisation, the United States, European Union, Japan and a few smaller economies teamed up to refuse that recognition.

China was then forced to make a concession, agreeing to be treated as a non-market economy for the first 15 years of its WTO membership. It finally joined the trade body in 2001.

The restrictions imposed on a 'non-market economy country' are based on the US Trade Act of 1974, designed to expand US participation in international trade and reduce trade disputes but whose general provisions cannot apply to communist countries.

'These countries operate a planned economy with public ownership, in which their governments seek to direct all economic activities, decide what needs to be manufactured, to whom it should be distributed and at what price and whose currency is not freely convertible', it states.

What irks Beijing most is that this provision applies exclusively to China, allowing other WTO members to impose restrictions on its exports. Party leaders, including Premier Wen Jiabao , have said that granting China market economy status would be a sign of the West's 'strategic trust', political sincerity, wisdom and vision to expand bilateral relations.

In a recent meeting with European Commission president Jose Manuel Barroso, Wen said: 'To show one's sincerity on this issue ... is the way a friend treats another friend.'

About 150 nations have acknowledged China's status as market economy, but none of its main trading partners - the US, Europe, Japan or India - has agreed to do so, believing that China has a predatory export-promotion strategy. This allegation has become a bargaining chip for main trade competitors to press Beijing for concessions - a predicament that Chinese officials attribute to a lingering 'cold war' mentality.

Chinese exporters have frequently faced charges and investigations raised by the US and EU for dumping - unfairly charging a lower price for goods - for products ranging from stainless steel and fasteners to clothes and shoes. And non-market economy status has become an Achilles' heel for China's exporters with respect to anti-dumping probes.

For more than a decade, China has been the world's top target for anti-dumping investigations, and in the resulting rulings China has also suffered the highest proportion of anti-dumping penalties.

China has been hit by 602 trade-remedy investigations during the past 10 years, involving US$38.98 billion. Between 2005 and 2009 it was the target of more than one-third of the world's anti-dumping cases.

America and the European Union have been the two most active players in anti-dumping proceedings against China, which in effect impose restrictions on the competitiveness of Chinese enterprises.

Ba Shusong, a leading government economist and deputy director of the Finance Research Institute at the State Council's Development Research Centre, describes non-market status as a political trick played by some Western nations that 'inserted political ideals into an economic assessment system'.

In its latest annual report, the congressional US-China Economic and Security Review Commission said China's economic system was still characterised by many distortions which produced false market signals and trade flows not reflective of a market-based system.

The US has specified criteria that China must meet in order to qualify for market economy status: the extent to which the currency of the foreign country is convertible into the currency of other countries and the extent to which wage rates in the foreign country are determined by free bargaining between labour and management.

John Lee, a China observer at the University of Sydney's Centre for International Security Studies, said market economy status was based on assessments about the state of corporate governance and transparency, the government's role in setting prices and the government's role in influencing supply and demand.

He said Beijing regarded market economy status as the first step towards the West treating it as 'different but equal' and an indication of Western acceptance of China's political and economic strategy.

'In other words, China takes a largely political view of what market economy status would mean [if] China [were] to be recognised as such,' Lee said.

If China is deemed a market economy, its main trade partners cannot as easily impose anti-dumping duties on Chinese exports under world trading rules.

But as long as the country is branded otherwise, other nations and trade partners can cite a surrogate market economy's price for a certain product and declare a cheaper Chinese substitute as a clear case of dumping.

At the root of the dispute is the question of the trade advantage that China's state-subsidised manufacturing colossus enjoys in producing goods at the lowest possible cost, edging out export competitors.

A market economy, by definition, gives its companies a level playing field by refraining from subsidies, tax benefits and currency manipulation - all of which can boost exports.

Henry Gao, an expert on international trade law at Singapore Management University, said China had sought to limit trade partners' abuse of its economic status by seeking clarification of WTO clauses through the organisation's trade dispute settlement panels.

Beijing is also making strides in convincing other WTO members to recognise its market economy status with the help of bilateral free-trade agreements.

Since joining the WTO, China has drastically reduced import tariffs, cancelled non-tariff measures and liberalised foreign trade, while taking steps to tighten corporate laws, improve its investment climate and protect intellectual property rights. But it has not reduced state power in the economy, with state-run conglomerates dominating industries.

Jianguan Shen, chief China economist with Mizuho Securities, said China could only achieve its coveted status through fundamental reforms.

'The road to a market economy is still hindered by ... monopolies in certain sectors, state-owned enterprises and many barriers to private and foreign enterprises, which need more [solutions],' Shen said.

Given that China's economic model is unlikely to change by 2016 - when its non-market status should expire - a change in its status will be a political question. 'The bottom line is that the US and/or EU will continue to use the market economy status issue as a bargaining chip, and hold off granting China market economy status until China offers something of political value in return,' said Lee, the Sydney-based observer.

After such 'discriminatory terms' expire, Gao said China could focus more on the overall development of the WTO and become a leading voice directing the trade body's future.

Additional reporting by Matt Ho