China’s overcapacity and unfair trade are a problem in Europe, too.
While in Germany to attend the Hannover Messe, my colleague Brian and I had the opportunity to meet with Milan Nitzschke, head of marketing, communications and sustainability for the German solar panel firm SolarWorld AG. Nitzschke’s also the spokesperson for AEGIS, a diverse coalition of industry groups and manufacturers across Europe.
We scheduled this meeting because of a poorly understood but extremely important trade debate going on right now, which has been largely drowned out by the vigorous debates over the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership.
At question is how global players like the United States and the European Union (EU) treat China’s economy regarding trade enforcement. Nitzschke and AEGIS have a part to play in this debate.
The deal with China’s “Non-Market Economy” Status
You can find a more comprehensive explanation here, but this is the gist:
- in 2001, when China joined the World Trade Organization (WTO), the United States and EU agreed to China’s ascension on the condition that it be automatically characterized as a “Non-Market Economy” (NME) for 15 years.
- China received this designation because of the central role its government plays in guiding its economy, instead of leaving the economy to the direction of market forces.
- This designation allowed countries to more accurately calculate tariffs when trade cheating occurs.
For example, when China makes steel and then illegally sells it below cost in the United States, the lack of transparency in the Chinese market – and the heavy state subsidies that industry there receives – makes it impossible to determine the “market price” of that steel. Thus, it’s very difficult to accurately set tariffs to combat trade dumping. So instead of using China’s suspect “prices,” its NME designation allows the United States to calculate the cost of inputs using prices a country with a level of development similar to China’s.
Here’s the problem: In the agreement that brought China into the WTO, the provision that established that automatic 15-year NME period expires in December. All China has to do to shed the NME tag is pass a six-part test to prove it has fulfilled its obligation to transition to a market economy and adhere to global trade rules.
But it’s clear that, to this point, the Chinese government has fallen far short of its promised transition.
In the United States, the Obama administration through the Department of Commerce can simply determine whether or not China is a market economy. In the European Union, though, legislation must be passed to designate China a market economy before December 11. Otherwise, the status quo remains in place – and China will remain an NME. Because of this, Europe’s industry and government officials are closely looking at the issue.
It would be hard to find someone who honestly believes that China’s central and provincial governments are not heavily involved in the Chinese economy. But due to China’s growing influence across Europe – and the reliance of many European economies on exports to China – it’s now a political question. If the EU Commission were to pass legislation affirming that China remains an NME, or is simply unable to address this question before December 11, China would likely bring a case to the WTO.
Enter AEGIS
And that’s where Milan Nitzschke comes in. As spokesperson for AEGIS, he communicates with the European public, media and elected officials to educate them about the importance of the NME issue. Without NME status, China would be able to more easily dump excess capacity into the EU, hurting EU manufacturers and resulting in plant closures and job losses. We’ve already seen that in the United States. Chinese manufacturers, with heavy subsidies from the government, lax labor and environmental rules, and the implicit (or explicit) backing of the government can sell goods below cost while European and American firms must respond to market forces and reduce production capacity. Operating for long periods at a loss is not an option for manufacturers in market economies.
AEGIS was formed in 2014 to combat the unfair trade practices by the state-run economies of countries like China. AEGIS has brought together groups from 30 different industries across Europe, representing a diverse array of manufacturers, from steel and other metals like aluminum, to solar, glass and ceramics. For more information about this organization or their research, check them out here (I especially recommend their very European example of what NME means for the EU and other countries impacted by Chinese trade practices).
When you listen to Milan explain the difficulties facing those in the EU who seek to maintain China’s NME status in order to enforce global trade rules, you can hear the passion in his voice. He knows this issue all too well, especially after seeing Europe’s budding solar industry harmed by a wave of dumped Chinese imports, that came with the support of illegal export credits and other government subsidies.
As an executive at SolarWorld, Milan witnessed firsthand the way the Chinese government uses its geopolitical influence to exempt itself from trade rules. After his firm joined with 24 other European solar companies to bring a case against China’s trade cheating, the Chinese government exerted pressure against EU member states to prevent the EU Commission from levying tariffs against the illegally dumped Chinese goods. This wasn’t only traditional lobbying, but retaliatory trade cases, too.
With the United States and the EU working together, a negotiated compromise with the Chinese government was achieved, but not before significant pain was felt by solar companies and workers in both the United States and EU.
As spokesperson for AEGIS, Milan also knows this problem does not stop at solar. As a quick look at the AEGIS membership list shows dozens of industries will be impacted by the NME decision and they’ve seen firsthand how the Chinese government has set its sights on a wide range of industries – and is using its ability to provide inexpensive credit and subsidies to undercut manufacturers in market economies around the world.
The Alliance for American Manufacturing (AAM) has its own partners in the United States who understand the urgency of this issue as well. This March AAM joined with 14 other trade groups to form the Manufacturers for Trade Enforcement coalition, and we’re excited to help educate the public and lawmakers about NME. We’re also excited to work with and learn from our counterparts across the pond at AEGIS.
While China’s government tries to force decisions in Europe and the United States that would run counter to the best interests of their economies, it’s more important than ever that those who care about free and fair trade works to ensure China takes the painful steps necessary to transition to a truly market economy. We’ll continue to update you on China's NME status in the coming weeks, and we’ll also give you an opportunity to take action on this issue.
Next up: An EU Steel Perspective on the NME issue, as well as why AAM cares whether Europe designates China a “Market Economy.”
(Also, for a more in-depth look at the hidden costs of cheap Chinese solar products, and why environmental advocates may want to think twice before cheering on artificially cheap solar panel exports from China, please check out Brian Lombardozzi’s four-part piece here (and here: Part 2, here: Part 3 and here: Part 4).