You probably haven’t heard of this trade issue with China, but it’s a very big deal.
Why President Obama must tell Chinese President Xi Jinping that China’s not a market economy.
President Obama is meeting with Chinese President Xi Jinping today on the sidelines of the nuclear summit in Washington. Considering the reason for Xi’s visit, it’s a safe bet that the two will discuss some very specific Pacific Rim security issues like North Korea’s recent weapons tests.
It’s also a safe bet that the economic issues between our two countries are on the agenda. After all, the bilateral trade relationship between the United States and China is among the largest in history, in terms of sheer volume.
Simply put: We sell a lot of stuff to each other, and much more of it comes this way than we send over there. Our goods trade deficit with China was $365 billion in 2015 alone.
Yet that deficit could grow even wider, based on a decision the Obama administration will make as it prepares to vacate the White House. At issue is whether to change China’s non-market economy designation — a trade topic that you’ve probably never heard of, but is sure to come up when the two leaders sit down today.
If you’re unfamiliar with this debate, you’re hardly alone. It certainly doesn’t get a lot of press. But it’s very important nonetheless, judging by how actively Chinese officials are lobbying their U.S. and European counterparts to get that designation changed. If they’re successful here, it will seriously weaken America’s ability to address unfair trade.
So how did we get here?
It started 15 years ago, when China joined the World Trade Organization. It did so on the condition that other economies like the United States and the European Union could treat it as a “non-market economy” for 15 years, while China supposedly implemented a series of market-liberalizing reforms.
The U.S. and E.U. argued the Chinese government, not supply and demand, was setting the domestic price for commodities like steel. China intervened in its markets way too much. Therefore, China should be considered a non-market economy until reforms took place.
Why is such a designation important? Because rules are rules.
When one country considers duties against another that it suspects of offloading subsidized exports — also known as “dumping” — into their market for an impossible price, WTO rules stipulate the suspect country’s domestic prices must be considered … if the country holds market economy status.
That’s a very big if, because non-market economy status allows other governments to ignore a suspect country’s official numbers. Why? Because while you can trust a market, you can’t necessarily trust another government — especially when it takes an active role in managing its economy.
And instead of gradually transforming itself into a market economy over the past 15 years, China has, in many ways, doubled down on state control.
Just look at the massive overcapacity in the global steel industry. Half the world’s steel comes from China, but even as China’s domestic economy slows, its state-owned steel companies continue to push production. There’s now a glut of steel out there, far more than the world can consume, and China’s solution has been to flood Europe and North America with its excess capacity.
The result? Imports captured roughly 30 percent of the U.S. steel market in 2015, and roughly 12,000 laid off American steelworkers were laid off. Private firms in the United States or anywhere else, no matter how efficient they are, can’t compete with the Chinese government and its policies.
So should President Obama, in one of the last acts of his presidency, change China’s status?
This should be a simple answer. China keeps its mills churning for plenty of reasons, one of which is stifling social unrest by guaranteeing employment. But the market demand for Chinese steel is absolutely not one of them.
Steel is just one of dozens of key industrial and services sectors in which the Chinese government — not the market — control the terms.
China’s non-market economy status is correct, and should stay in place. Changing it only rewards the Chinese government for helping its state-owned mills cheat. It will add to the massive Chinese goods trade deficit. And it will dismiss out of hand all of those American steelworkers whose jobs were swamped by the machinations of a planned economy on the other side of the ocean.
I believe that President Obama knows this. But will his successor? We’ve heard plenty of crazy talk regarding trade in this election. I doubt if many voters will rally around the cry of denying China market economy status. But it’s the right call for American jobs and America’s economic security.
Scott Paul is president of the Alliance for American Manufacturing.