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Address on EU's Obligation to Honor WTO Rules and Market Economy Status of China
2016/01/29

Distinguished members of the European Parliament,

Ladies and Gentlemen,

Thank you for inviting me to speak to you today.

Over the course of any particular day or week lately, it is easy to find articles in the local and international press or heated debates within and without the EU institution about whether or not China shall be granted market economy status. Not surprisingly today's event is also focused on the issue.

Realizing that many questions and much concerns and even fears have been raised, my colleagues of the Chinese Mission to the EU and I myself are more than willing to engage in an informal and constructive exchange of views so as to shape the mood and set the right tone and trajectory.

Instead of making a speech, I will go straight to some of the outstanding questions or myths and offer China's views and perspectives.

Question 1: What are we talking about and what exactly the issue is?

While the local discussion has been dominated by attempts to focus on whether or not the EU should grant China market economy status, some somber-minded observations have put fingers on the crux of the matter: the real issue is about the EU honoring an international legal obligation, namely Section 15 of the Protocol on the Accession of China to the WTO which requires Members to stop using "analogue country method" in anti-dumping investigations against China as of December 11, 2016.

It is not about revisiting or reinterpreting a WTO agreement which was the outcome of long and hard multilateral consultation and negotiation. It is not about using one's domestic law to evade the compliance of a multilateral legal obligation.

It must be emphasized here that this provision was explicitly temporary, and is due to expire after 15 years in December this year [Paragraph 15(d)]. Thereafter, trade with China will be governed by the same normal as that with any other WTO Members.

In short, what we are talking about is clear and simple. It is about WTO Members' compliance with a WTO legal obligation and this issue is confined to the realm of multilateral rules.

Agreement must be kept [Pacta sunt servanda in Latin] is a basic principle and obligation in international law. Whether or not China's market economy status is recognized, WTO Members are under the obligation to apply the rules of the WTO and duly terminate the anti-dumping surrogate country methodology.

The EU as "a matter of principle" is a vocal proponent of multilateralism, rule of law, international order as well as free and fair trade. The "progressive abolition of restrictions to international trade" is a constitutional objective of the EU under the Treaty of Lisbon.

Now, here comes the moment of truth. We have faith in the EU's standing by these values and demonstrate its commitment to fair trade and rules-based international order and send a strong message against protectionism by fulfilling its WTO obligation contained in Section 15 of China's WTO Accession Protocol and applying equal terms to China in its calculations of anti-dumping duties. I hope our faith is not misplaced.

Question 2: Does China enjoy a market economy status?

I have no intention engage in a theoretical or technical debate. I only wish to flag the following points.

First, while there is major defining characteristic of market economy in which decisions regarding investment, production and distribution are based on supply and demand and prices of goods and services are determined in a free price system, market economies do not exist in pure and unified form. Societies and governments regulate them to varying degrees.

In reality, market economies range from hypothetical laissez-faire and free market variants to regulated markets and interventionist variants. There are also different perspectives as to how strong a role the government should have in both guiding the market economy and addressing problems caused by market inefficiency and market failures. Most existing market economies include a degree of economic planning or state-directed activity. Market socialism is also of many variations with some models involve public ownership of the means of production where capital goods are allocated through markets.

Simply put, there is no single yardstick to measure market economies.

Second, subjectively or objectively, China is a market-driven economy in the true sense of the word.

It has been widely recognized that the market-oriented economic transformation taking place in China since the late 1970s is the greatest success story in human history. Within just three decades, China has succeeded in transforming itself from a centrally-planned closed economy into one of the world's most dynamic and globally-integrated market economies, achieving significant socioeconomic progress.

Market-oriented reforms centered on changes in the price system has led to improved resource allocation and enabled the most dynamic private sector to flourish and increase the overall level of efficiency in the economy.

Liberalization programs have expanded trade and foreign direct investment. Decentralization and ownership transformation has enhanced the performance of firms and local governments. Institutional reforms that abandoned restraints on the mobility of labor have unleashed enormous entrepreneurial energy, and unprecedented scale of urbanization.

The dynamics generated by market oriented reform and opening-up and institutional changes fundamentally transformed the Chinese economy and propelled continuous social progress, and contributed greatly to global growth and well-being of humanity.

Truth speaks for itself. It is unreasonable and unfair to deny and argue against China' market economy status just because it is not cast in the same mould of the EU.

Third, whether China's market economic meets the criteria laid out in U.S. or EU law for market economy or non-market economy treatment is irrelevant. It is irrelevant because market economy criteria are not part of WTO law. WTO regulations do not specify the definition of a market economy, nor do they measure whether or not a country qualifies as a market economy.

It is irrelevant because market economy status and compliance with the WTO agreement are two different things. As a WTO member, China is entitled to all the WTO rights. However WTO Members interpret a market economy, they should not use their argument as a pretext for not fulfilling their international obligation.

Question 3: Will recognition of China's market economy status and entry into force of the WTO agreement have devastating consequences?

Lately, sensational outcries including the assertion that by placing Chinese producers on a level playing field will lead to an influx of cheap Chinese goods and cost the EU up to 3.5 million jobs have sent chills down the spines of the local public.

This fanfare and protectionist sentiment is unbelievable and incomprehensible.

Once again it would be better to let truth speak for itself.

One, remarkable expansion of trade and investment ties between China and 88 countries that recognized China's market economy status proved to be unfounded the assertion that granting China market economy status could have significant negative effects. Rather, they laid bare the fact that free trade increases aggregate wealth, and long-term benefits of increased trade would far outweigh the short-term gains of protectionism in specific sectors, and that countries as a whole stand to benefit substantially from the full liberalization of trade.

Two, it is a matter of principle for China to mainly rely on its own strength, reform and innovation to develop and tackle key problems. China is accelerating economic restructuring and expanding internal market as key countermeasures to cope with the downward pressure. To effectively deal with the overcapacity problems the global steel industry is faced with, China has made unremitting efforts to control new capacity and eliminate outmoded capacity. Painful as it is, China, through relentless efforts, has cut its steel industry capacity by more than 90 million tons over the past few years and investment in iron and steel assets by 13% last year. Now the growth of Chinese steel production has basically come to a halt, and China will continue to take tough measures to address overcapacity, including cutting the steel industry capacity by another 100-150 million tones.

Three, China is fully committed to win-win. We are firmly opposed to the old mindset of zero-sum game and "winner takes all" approach. It is our persistent stance that while pursuing one's own interests the interests of others must be accommodated, and while seeking one's own development common development must be promoted. China has enhanced coordination of macroeconomic policies to prevent negative spill over effects that may arise from economic policy changes in individual economies. The One Belt One Road initiative and industry cooperation will help boost demand and bring about win-win for all the parties.

Four, bilaterally China and the EU have established and well-functioning mechanism to resolve disputes. The proper settlement of the solar panel and telecom disputes were testament to the fact that China and the EU both have the wisdom and capability to identify options that are agreeable and achievable, and manage and resolve trade frictions in a positive and mutually beneficial manner. We stand ready to continue to be guided by this approach and work together with the EU to creatively and successfully address critical challenges and find smart, prudent and most effective way forward on measures to strengthen and deepen our trade and investment.

Last but not least, Anti-dumping Agreement of the WTO lays out detailed rules for how Members implement anti-dumping measures. WTO dispute settlement mechanism provides ways and means to deal with breaching of obligation by its members. Fulfilment of the legal obligations under Section 15 of the Protocol implies the termination of the "surrogate country" approach, but does not affect normal anti-dumping investigation on Chinese products according to WTO regulations.

Question 4: What will be the objective impact assessment and scenario of China-EU relations?

My short answer is the EU and China have everything to gain from a more equal and open approach to trade.

First, our future trade relationship is built on our shared commitment to reform, restructuring, open markets and rules-based trade.

The EU has been a strong proponent of free trade and one of its biggest beneficiaries. The EU single market is the foremost example of the success of tearing down barriers to trade. For the EU, "trade rules that apply in 161 countries are much easier to sue than a web of subtly different bilateral agreements."

China is committed to comprehensive reform and opening up and shifting its economy away from manufacture driven export model to an innovative one so as to push its economy toward a medium-to-high growth rate and a medium-to-high level.

China's new round of high-quality opening up and building of a new open economy, including a more active import policy augurs well for the rest of the world. In the coming five years, China's import of goods will exceed more than US$10 trillion, Chinese investment abroad will exceed US$500 billion, and more than 500 million outbound visits will be made by Chinese tourists.

According to the World Bank, 90% of economic growth in the coming decades will be generated outside Europe, on third from China alone. As Commissioner Malmstrom has put it "We [the EU] need to be there."

Second, the uniqueness and unprecedented scale of China-EU trade relationship remains an essential source for our mutual growth, job creation and global prosperity.

As two of the biggest and strong trading partners, China and the EU together account for 29% of total global trade in goods, and in recent years trade between the two sides stand around US$ 600 billion, which breaks down to more than 1 billion Euros every single day.

According the EU Commission, EU's exports to China supports over 4 million jobs across the EU. In 2014, on average, each additional 1 billion of Euro exports supported 15,000 additional jobs across the EU. Accordingly, the EU's 165 billion Euro export to China created 2.5 million job opportunities. With the EU's export to China grew by 4% last year, around 100,000 new jobs have been added to the job market. Despite occasional disagreements, the interdependence and integration of China-EU economies have and will continue to promote wealth, jobs, development and innovation, and remain a stimulus for progress and economic opportunities.

Among others, the Commission estimated that the conclusion of the FTAs currently under negotiation would raise European prosperity by EUR 250 billion. Fully liberating trade also with China would massively boost this figure. In the immediate term it can be expected to provide good quality products to EU consumers and raw materials to EU producers at more favorable prices.

FDI flows mean that China has a direct stake in the European economy and vice versa. Chinese FDI in the EU exceeds US$ 54.2 billion. China has invested in and set up more than 2000 companies which directly employ more than 74,000 European staff. Chinese investment in European firms also saves jobs: e.g. China's Geely Group acquisition of Volvo saved 15,000 jobs; China's investment to build nuclear plants in the UK will generate 25,000 jobs. According to a study released by the European Commission, Germany's exports to China in 2011 supported more than one million jobs across the 28 countries in the EU.

Third, it is in the interest of both China and the EU to continue to keep their eyes on the larger picture and long-term fundamental interest and join hands to make the cake of mutually beneficial cooperation bigger and bigger.

We can't afford to allow our relationship to be defined by disputes least narrow interest and short-sightedness which are disproportionately represented in the news coverage, and when in fact we are faced with window of opportunities to further expand our massively successful and significant trade relationship.

China's supply side structural reform and all-round opening up and the EU's re-launch of structural reforms and deeper integration process compliment each other and will broaden converging interest and generate greater market, business and investment opportunities.

China and the EU can and should do even more to tap the full potential of their reform and restructuring to boost growth, support more and better jobs, and collectively meet the competitive challenges of the coming decades. This recognition and consensus have been amply reflected in the Joint Statements by our top leaders and China-EU 2020 Strategic Agenda for Cooperation.

Capitalizing on our respective reform and development agenda and our shared aspiration, China and the EU are vigorously exploring new dimensions of cooperation with a strong focus on delivery: negotiation and early conclusion of bilateral investment agreement and thereafter a potential FTA, building synergies between the One Belt One Road initiative with the Juncker investment plan, promoting connectivity, strengthening cooperation on innovation, high-tech, digital economy, smart cities and smart energy, urbanization, modern agriculture, circular economy and sustainable development, just to name a few.

It's worth mentioning here that China is the first non-EU country to announce its contribution amounting to billions of Euro to the European Investment Plan, which will contribute to stimulating the economy and create more and high quality job opportunities.

There is no question that we should address differences and legitimate concerns. While we do so we must not lose sight of our overriding interest and we should remind ourselves the need to guard against protectionist impulses.

In a globalized world, protectionism is a false solution and should be guarded against. As market economies we both rely heavily on free trade, open economy and rule of law to provide a level playing field for our businesses, workers, farmers, manufacturers and service providers.

China has been following the debate in the EU closely, not because we are keen on picking up a tit-for-tat or cut-throat competition with certain industry sectors, rather we are concerned about what sort of message the EU is sending.

Whether or not the EU remains committed in letter and spirit to free trade will have implications for the overall environment of China-EU trade relations.

At a time when our cooperation is picking up steam, China and the EU should shoulder the responsibility to promote open markets and rules-based trade in our common quest for more robust economic growth not just in our countries but worldwide.

That said, we trust in the EU's political wisdom and look forward to the EU's timely compliance with the WTO agreement and recognition of China's MES. Such a constructive move will strengthen an open and reliable bilateral economic environment, boost trade and investment and reduce trade frictions.

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