The Need for a Compromise on China's Bid for Market Economy Status: German Envoy

(Beijing) – German Chancellor Angela Merkel called for more expert-level talks with Beijing on its market economy status under the World Trade Organization at a joint press briefing with Chinese Premier Li Keqiang on June 13.

Merkel, who was her ninth trip to China, said: "It does not help us to emotionalize the whole subject," German news outlet Deutsche Welle reported.

The European Commission is expected to debate the issue in late June or July, amid concerns that China was flooding global markets with cheap steel exports due to excess capacity and a cooling construction industry at home.

However, lawmakers at the European Parliament passed a non-binding resolution in May not to grant China market economy status (MES), highlighting concerns over jobs, the environment and growth within the trade bloc.

Beijing sees Germany, China's largest trading partner in the European Union, as an influential voice in the 28-member bloc's ongoing discussion on this politically-charged issue.

In an interview with Caixin just before Merkel's visit, German ambassador to China Michael Clauss said: "Now the only possible solution would be a compromise on both sides to achieve a mutual agreement."

When China joined the WTO in 2001, it agreed to let members use production costs in a third-party country to determine whether a Chinese company was selling goods at cut prices during anti-dumping investigations.

That provision is set to expire on December 11, leaving questions about how to resolve trade disputes thereafter.

"If we don't settle recent trade disputes they might turn into trade conflicts," said Clauss. "Now is the time to talk and negotiate to reach an agreement."

The following are excerpts of Clauss' interview with Caixin.

Caixin: You mentioned that Germany hadn't decided whether to grant China MES during your interview with Caixin in January. Has Germany made a decision so far?

Michael Clauss: Not yet. It is complicated. The European Union (EU) has to amend the anti-dumping measures before granting China MES. In order to complete the amendment, 28 EU members have to reach a qualified majority, and it should be passed by the European Parliament, the EU lawmakers, at the same time. Two weeks before (on May 12), the European Parliament passed, by an overwhelming majority, a non-binding resolution against granting China this trade status.

Now the only possible solution would be a compromise on both sides to achieve a mutual agreement. It is time to discuss and negotiate how to compromise; there must be several ways to do that.

Merkel said during her last visit to China that, in principle, she understands how deeply China is concerned about this issue, but China needs to solve some (economic) problems first. As to Germany's attitudes, we can't make a decision before the European Commission puts forward its proposal.

Have China and Germany held talks over MES already?

The major concern Europe has is about China's excess capacity in certain industries including steel. Cheap exports dumped into the European market might influence related industries in the EU.

Experts have discussed various solutions, one of which is to set different anti-dumping requirements for different products and have these rules expire at different times and not all at once. Others suggested that the European Commission should reinforce the current anti-dumping measures, making sure that they abide by WTO rules and don't lead to discrimination.

There have been some anti-dumping protests in Germany against Chinese steel manufacturers. What is Germany's position on anti-dumping?

There have been such protests all over Europe. It is the European Commission that is in charge of this issue, not national governments. If the Commission identifies a dumping case, it will take action regardless of any member country's position.

The amount of steel exported from China to the EU only takes up 14 percent of all EU steel imports, according to the Chinese Ministry of Foreign Affairs. Given the small percentage, what impact have steel exports from China had on the EU market?

We shouldn't focus on the EU market alone. Overcapacity in steel production in China is as much as 400 million tons, and some of this go to overseas markets. We have to think of this issue in a global perspective as Chinese and European corporations are competing worldwide. Excess production capacity in China has caused steel price to fall, and European steel products have lost their competitive edge in third-party markets because their prices are higher due to the lack of state subsidies.

We have seen that steel exports from China have surged over the past two years, and imports from EU have declined. Anti-dumping rules have only affected 1 percent of the total Sino-EU trade volume.

Overcapacity exists not only in the steel sector, but also in coal, chemical engineering, shipbuilding, etc. We have noticed that China has been making efforts to solve this problem, but we don't expect the problem to be resolved quickly because it takes time.

Will steps to prevent dumping on steel influence EU's decision on China's MES?

I think it is very simple, the two issues are related. The need to stop dumping in steel has affected the mood at the European Parliament. Now that lawmakers have passed, by an overwhelming majority, a non-binding resolution not to grant China MES, members of the EU might be even more negative on this issue. It needs to find a compromise resolution.

You mentioned that Germany plays a key role in the EU's decision related to China's trade status during your previous interview with Caixin. Will the need to prevent a steel glut influence Germany's decision?

(If we are to grant China MES,) the process is: EC proposes first, and EU members vote to reach the qualified majority, which is a very high threshold. Of course, our goal is to find a solution that is acceptable to both China and the EU.

There are three possible consequences: First, grant China MES without additional conditions. So far it is unlikely to be approved by a majority EU member states; Second, don't grant it. This might trigger trade wars that no one wants; Third, compromise to achieve a mutual agreement. This is the most rational way out.

If we don't settle recent trade disputes they might turn into trade conflicts. Now is the time to talk and negotiate to reach an agreement (before the situation gets worse).

(Rewritten by Coco Feng)