WTO , China and Market Economy

WTO , China and  Market Economy
25 Jun

WTO , China and Market Economy

World Trade Organisation (WTO) members need to be market economies. China is a member of WTO but has the status of a non-market economy.

China appealed to the World Trade Organisation (WTO) dispute settlement body in 2016 to force the European Union to recognize it as a market economy in trade investigations. It withdrew the appeal last week.

China lost an interim ruling on the matter in 2019 after the WTO rejected China’s case that it is a market economy. Therefore, it did not want a probable negative ruling to be delivered again and so dropped the petition.

Last week, India also rejected China’s demand to grant it market economy status.


So, what is the issue here?

China was a command economy when it joined the WTO in 2001. That is, its economy was controlled by government. Therefore, it was given the status of a non-market economy. However, there was a clause that the NME status would be reviewed after 15 years which was 2016. The grant of market economy may take place if China reforms its economy. China never did so and hence it was not given the status till now.


What is a non-market economy?

Non-market economy (NME), in international trade language, is generally a country where the various factors of production including costs of inputs, raw materials, technology, labour, and investments are not made in response to market signals but are often regulated or controlled by the government.


Why is it an issue at all?

Chinese economy is export-driven. But the price of its exports is challenged by the importing countries. The reason is that pricing is not transparent due to the fact that Chinese economy is heavily regulated and subsidised. Importing countries believe that China is dumping its goods and it hurts their own producers and the production base.


What is dumping?

Dumping of goods is a term in international trade. It is said to take place when the exporting country sells goods to another country in any of the three following ways:

  1. At price Less than cost of production
  2. At price Less than the domestic market price
  3. At price Less than fair value or normal value

When a country is not a market economy, the price it quotes is not accepted and the price is taken from another market economy country. It turns out to be higher than the Chinese quotation.

Thus, Chinese goods which dominate the global markets are subjected to anti-dumping duty to ensure that the domestic production is protected from unfair trade practices of China.


How can we connect it to Indian economy?

As long as China is denied the status of a market economy, India can continue to keep out many Chinese goods on grounds of dumping. India initiated 18 anti-dumping proceedings in 2019, most of them against China, according to the WTO website.

But isn't India-China bilateral trade worth about $90 billion?

Yes it is. Most of it is fair trade. It is genuinely cheap. But after the brutal killing of our soldiers by China last week in Ladakh, India is initiating measures to limit Chinese goods’ access to our markets. Inessential imports will be curtailed.