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China, EU Commission edge towards deal on market economy status

[BRUSSELS] The European Commission and China may be near a deal to avoid a dispute at the World Trade Organization and a wider trade war, diplomats say, but must convince EU lawmakers angry over record Chinese steel output.

The Commission is set to accept a change to China's trade status at the WTO by treating it as an economy controlled by the market, not the state. That would benefit Beijing and make it easier for it to export into the bloc.

But the Commission also wants to enhance the bloc's ability to defend itself against cheap Chinese imports.

"Everyone has to know that if somebody distorts the market, Europe cannot be defenceless," Commission President Jean-Claude Juncker said at the G7 summit in Japan.

Chinese envoys have signalled they could live with the dual approach, which is designed to assuage fears of European industry that Europe's economy will suffer if China is able to undercut its industries with heavily subsidised goods.

"Every country has a legitimate right to make full use of trade defence measures, within WTO rules," a Chinese diplomat said. "If they follow the WTO rules, there's no problem for us." Without a deal, China is willing to retaliate.

"A trade war is not our choice," a second Chinese diplomat said.

"But our confidence in doing business with the EU would be affected, if we find our trading partners don't respect the rules."

China is the European Union's second-largest trading partner after the United States. Europe is China's top trading partner.

Europe's concerns have been worsened by record Chinese steel production in April amid a global steel glut. After world economies failed to find agreement on how to deal with overcapacity, the United States put hefty duties on China.

G7 leaders discussed the issue in Japan.

Beijing's private stance contrasts with public remarks that changing China's status at the WTO is not for negotiation.

"This is the consensus reached between China and other WTO members during the negotiation on China's accession," Chinese Foreign Ministry spokesperson Hong Lei said earlier this month."It must be observed by all WTO members as their obligation."

The WTO recognised when Communist-ruled China joined in 2001 that its local prices were not set by market forces. WTO members can normally apply punitive tariffs on others only if export prices are below those in the exporter's home market.

But with China, the EU and others have been able to ignore low domestic prices and set tariffs to make Chinese exports as expensive as in wealthier countries.

However, those WTO limitations on China are due to expire on Dec 11, though there is some room for interpretation.

European commissioners from the bloc's 28 members debated the politically sensitive issue for the first time in January and are expected to come back to it again in late June or July.

After an EU-China summit in Brussels on July 15, the Commission will make specific proposals on China's market economy status before the end of the month.

However, the European Parliament must approve the Commission plan and EU lawmakers have so far rejected considering China as a market economy in trade disputes, in part because of steel.

"China is not a market economy and should not be recognised as one when calculating anti-dumping sanctions," said David Martin, an EU lawmaker from Britain's Labour party. "Granting them market economy status in the current circumstances would tighten the noose around the UK steel industry's neck," he said.