Over the past several months, U.S.-EU economic relations have at best been static, if not uncertain and wobbly. Now, the EU’s weak reaction to China’s World Trade Organization claim demanding treatment as a market economy — with the resulting potential reduction of measures against dumped imports — emerges as a very serious strain on the trans-Atlantic relationship.

The latest development comes after the Transatlantic Trade and Investment Partnership (T-TIP) talks stalled last year in part due to domestic European politics and are now on hold under the new U.S. administration. Bilateral dialogues like the Transatlantic Economic Counsel were dormant during the T-TIP negotiations and do not show much sign of life. The U.S. and the EU often used multilateral or plurilateral negotiations to foster engagement, but none are active. Both economies now seem more interested in pursuing agreements with other countries.

Now, the situation could worsen due to one of the largest trade issues involving China. The issue concerns how antidumping duties are calculated to address dumped imports from China. For most exporting countries, the duties are generally calculated based on that country’s own prices and costs. However, the U.S., EU and many other economies long recognized that this would not work for China because China’s economy is heavily distorted by government intervention.

This resulted in China being treated as what is known as a “non-market economy,” using costs and prices from other market-based countries to determine antidumping duties for Chinese products.

The need to do this was recognized when China joined the WTO in 2001. The Accession Protocol allowing China to join the WTO specifically permitted China to be treated as a non-market economy, while requiring China to reform its economy with the goal of ultimately losing this designation. While a portion of this provision in China’s Accession Protocol expired last December, the remainder, which allows the U.S. and the EU to continue to treat China as a non-market economy, is still in force.

The problem is that China has now brought a WTO claim to insist that it be treated the same as market economies. Although China initially asked for WTO consultations with both the U.S. and the EU, China chose to have the EU case proceed more quickly, in an apparent move to isolate the EU.

Separately, last year the European Commission introduced a proposed change to EU law that could significantly alter how the EU calculates antidumping duties for China. The proposal was recently considered by the European Council with some amendments and is now before the EU Parliament.

Meanwhile, in the United States, both the White House and Congress strongly agree that China should continue to be treated as a non-market economy. This consensus is based on the fact that the Chinese economy remains significantly distorted due to government intervention, that China meets the U.S. statutory criteria for being a non-market economy and that this treatment continues to be allowed by China’s WTO Accession Protocol.

It is notable that this position is held by both Republicans and Democrats in the Congress. The Republican and Democratic leaders of the House and Senate committees responsible for trade sent a letter to President Trump urging, among other things, that China continue to be treated as a non-market economy.

With this view in mind, it is not surprising that there is broad concern in Washington, D.C. about what direction the EU should take at the WTO on the China non-market economy issue. The worry is that the EU will not vigorously defend itself and coordinate with the U.S., like the U.S. and the EU have in past WTO cases involving China.

An adverse outcome could then influence further WTO determinations and therefore directly affect trade defense measures in the U.S. and other major trading partners. There is also concern about the European Commission’s proposed changes to EU antidumping law.

Some argue that the proposal would weaken the ability of the EU to defend against unfairly-priced Chinese imports and that it needlessly abandons the authority given by the WTO to treat China as a non-market economy. Unfortunately, this is consistent with a less-than-vigorous defense against China’s claim at the WTO, which could also explain why China has proceeded first only against the EU.

The EU should keep these concerns in mind as it considers its way forward on this issue. An approach that weakens the EU — and therefore other WTO Members’ — ability to treat China as a non-market economy would clearly affect the view of trade sceptics in the White House and Congress about the U.S.-EU economic relationship.

Perhaps more importantly, it could also influence the view of those who traditionally support trade and fostering the U.S.-EU economic relationship, particularly in Congress. Given the state of U.S.-EU economic relations, this is something decisionmakers on both sides of the Atlantic have to worry about.

 

The op-ed was initially published on The Hill.