The Morning After: First Cubs, Then Trump, Now…China Market Economy Status?

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Put the dragon fruit back on the shelf, guys; it's still a bit too green — er, red.

That's the metaphor that U.S. Commerce Secretary Penny Pritzker forced us to take one step further, when she went on record stating that "at this moment, [the time is] not ripe for us to change our protocol," regarding a decision on whether China has taken necessary steps to achieve market economy status (MES).

In China's view, that time for the U.S. — and many other WTO-member nations — came precisely yesterday, Dec. 11, 2016. That's the date that China claims it should be given MES automatically, according to a line item in the country's WTO Accession Protocol made official exactly 15 years ago. (Our sister site MetalMiner explains everything you need to know about that here.)

So what has happened? Do we all of a sudden live in a world where China is given free reign in trade, on equal footing with the U.S. and E.U. when it comes to treatment under the WTO? Not so fast.

We're Now in Trumplandia

According to a co-authored two-part PRO analysis by Jason Busch and Lisa Reisman, here's the high-level lowdown:

Issues concerning China from a trade perspective seem a bit clearer under a Trump regime, at least in certain areas. At a minimum, China MES (market economy status) is dead. It will not happen, and China will still be held to the same rules as it currently is with regard to the filing of U.S. anti-dumping cases. In effect, there will be no policy change.

Essentially the only thing that would force the U.S. Commerce Department to formally confront the China MES question is a trade lawsuit filed by China, or one naming China as a respondent, in which China would be explicitly able to make that type of request, according to Tim Brightbill, partner at Wiley Rein LLP. (Japan, for one, has said it won't grant MES either.) And although the European Union has been toying with giving China MES, they are certainly considering new trade rules that would make it harder for China to dump into its 28 individual country markets — but enacting anything will take several more months.

One Manufacturing Industry's Perspective: U.S. Steel

The steel industries in the United States and Europe have been the most vociferously opposed to China achieving this status, since they stand to lose the most as the sector with the greatest number of trade complaints (namely anti-dumping) and cases lodged against China.

Tracy Porter, executive vice president of operations for Commercial Metals Company (CMC), and chairman of the Steel Manufacturers Association, captured the high stakes of the current situation for domestic manufacturing and trade, highlighting the U.S. standard of living, national defense and security, and millions in trade costs, in a recent video interview with MetalMiner:

Of course, back when we were covering the run-up to this milestone date earlier this year, Donald J. Trump was not yet our president-elect. We featured a series of great coverage on what this may mean for the steel industry and U.S. manufacturing in general last week from MetalMiner Editors Stuart Burns and Jeff Yoders:

But outside steel, how does the reality of a President Trump change the China landscape?

3 China/Trade-Related Outcomes Under Trump

Spend Matters' analysis suggests the following regarding China and related trade issues:

  • Trump will likely not slap 45% import duties on Chinese goods, as he promised in the campaign. There is simply too much at stake, and large U.S. exporters are putting pressure on the incoming administration to avoid this level of confrontation.
  • China still may get labeled a currency manipulator. This would mean that the U.S. government could enter into negotiations with China, asking them to make some changes to their foreign exchange regimes. Whether China will do anything is not clear.
  • The Trans-Pacific Partnership (TPP), which was in part designed to counter China’s strength in the region, right now appears dead, but that could change depending on who Trump installs as the U.S. Trade Representative.

It would be good if the first bullet, at least, does not become reality just yet, only because of one large elephant in the room.

What If China Retaliates?

On Nov. 10, a day after the E.U. announced a proposal of a new anti-dumping framework, the Chinese trade ministry issued a statement saying the nation would retain “the right to take all necessary means, and resolutely safeguard their legitimate rights and interests,” according to the Wall Street Journal.

As with a lot of things regarding China, what could that even mean?

If it means retaliation in the form of counter-tariffs or otherwise (which, according to a report by economists Gary Clyde Hufbauer and Cathleen Cimino-Isaacs published by the Peterson Institute for International Economics, could indeed happen), here's why it's important that it doesn't happen: using the steel industry example again, the majority of interested parties, whether in the U.S. or the E.U., is not composed of the primary producers.

"There is a danger that the benefit of the few, the steelmakers, could take priority over those of the many," wrote MetalMiner's Editor at Large Stuart Burns. He goes on to sum it up quite well:

Steel consumers are an extremely diverse group spread across metal-consuming companies and the markets they serve. By contrast, the impact of actions that limit imports or influence import costs may be individually small but collectively large for the wider economy. The impact on the economy of higher steel costs could be significant, raising prices for consumers and reducing the ability of U.S. manufacturers to compete on exports of finished goods.

The same goes for industries outside of steel in the U.S. and E.U., especially those that have outsourced parts of their supply chain to China. According to the WSJ, the automotive and chemical sectors in Europe may have a tough time with higher import duties places on Chinese goods. (Meanwhile, solar panels, ceramics clothing and textiles industries would benefit from higher duties.)

Ultimately, as Hufbauer and Cimino-Isaac state in the Peterson report, "the United States may in the end lose more than it gains from withholding MES...US-China broad commercial relations would likely suffer in exchange for a targeted benefit to US industries that back anti-dumping proceedings under current NME procedures."

The Other Side of the Coin

According to an article in Deutsche Welle, "economists like David Dollar, a senior fellow at the Brookings Institution and a leading expert on China's economy and US-China economic relations, argue that the next US administration should use market economy status as a 'bargaining chip' in its negotiations with the Chinese government.

"The United States can also use leverage over China's desire to be granted market economy status in order to negotiate significant reductions in excess capacity in steel and other heavy industries," wrote Dollar in an article published by Brookings in October, according to the German news service.

So what does this all mean for procurement? The "trifecta" of areas procurement should be exploring, in light of China MES and a host of other 2017 issues on the table (see new webinar below):

  • TCM/Landed Cost Models
  • Supply Chain Risk and Visibility
  • Commodity Volatility

We're all fascinated to see what happens next year.


Join us this Tuesday, Dec. 13 at 10 a.m. Central as Jason Busch (founder and head of strategy, Spend Matters) and Marco H. de Vries (senior director, product marketing at OpenText Business Network) discuss what the oncoming Trump administration means for global trade, the environment and economic policy. How will the supply chain and risk and visibility be impacted? You'll have to register today to find out!

Webinar: Trade, Environment, and Economic Policies in 2017: Is Procurement Ready?

Can't make it live? Sign up anyway and we'll send you a link to the webinar for you to view at your convenience.

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