The EU Council of Ministers will meet on 9 November to discuss the closure of steel plants in the UK. With a surge of cheap Chinese steel imports blamed for the loss of thousands of UK jobs, steel is a good place to start the discussion. But it mustn’t stop there: ministers will need to discuss Chinese manufacturing as a whole, and how to stop the massive surpluses China is currently producing that are flooding global markets.
As the steel story shows, too many exports at any cost, are beginning to kill the very markets that China needs for growth.
Europe got itself in a similar mess in the 1980s, with the Common Agricultural Policy (CAP). Like today’s five-year plans underlying the so-called ‘China Way’, the CAP was phenomenally successful. By supporting and promoting production at all costs, Europe moved from being a net food importer to a producer of massive surpluses, dumping agricultural products on world markets. Protests followed from countries affected by the dumping. How did Europe resolve the problem? In cooperation with its trading partners, through the GATT Uruguay Round of trade negotiations that resulted in an agreement to limit domestic support for agriculture and export subsidies, and to increase access to closed markets.
Europe did not change its behaviour overnight, but a framework was put in place that allowed all agricultural producers to find a place in the global market.
This is what we need today for China.
The simple fact is that the China Way inherently produces surpluses. The most obvious example is steel – more than 100 million tonnes will have been exported by the end of this year, such is the scale of the excess production at nearly double domestic demand.
These surpluses are beginning to emerge in all sectors, with more European industries falling victim to the China Way. Just like for the CAP, the logic behind the system must change.
Angela Merkel is right when she says that China must at some stage be recognised as a market economy. She is also right when she says that China needs to do some homework before it merits such recognition. But it’s not just about public procurement and investment protection and deals on solar panels and shoes as she suggests. The problem is more fundamental.
When China joined the WTO in 2001 it agreed that prices for traded goods and services, in all sectors, should be, and would be, determined by market forces. China has not been able to meet this commitment. Quite reasonably, China has wanted to build up its capacities before subjecting its economy to global competition, and so China needs to be assured that the goals that it has achieved will not be taken from it. This is what the EU feared most in relation to agriculture: that it would have to give up the gains it had made in food production.
The EU and the US, as the traditional leaders in setting the international trade agenda, must now sit down with China to set the framework for resolving this crisis. China must be given the room to move away from the current production of uneconomic and destructive surpluses that unfairly damage manufacturing and markets in the EU and the US. China must also be given the right to enjoy the fruits of its labour. In other words, there needs to be compromise between equals.
Until that happens the EU and the US must not dismantle the limited tools currently available to EU and US manufacturers to try and ensure fair play in global trade. Anti-dumping rules must remain effective, and anti-dumping policy must start from the understanding that China is not a market economy and that Chinese prices cannot be the basis for determining the level of anti- dumping duties. Without these basic tenets, there is no hope of having a level playing field, and the Chinese surpluses that are drowning Europe’s manufacturers will continue to flood and ultimately destroy the sectors of the market that provide the basis for jobs, growth and innovation across the EU.