[SCMP Column] Dumping Grounds

January 11, 2016

As if China and the US did not have enough issues to squabble about, a new and potentially angry trade dispute surfaced between them last week – all about whether or not China can be regarded as a market economy.

As with most international trade disputes, at first sight this looks technical and tedious. But scratch the surface, and it becomes fascinating. At least, for sad trade policy specimens like me. Everything goes back to China’s bad old Maoist days, and the liberalization process started by Deng Xiaoping, leading eventually to China joining the World Trade Organisation in 2001.

Back then, China was quite properly seen as a centrally planned economy that danced to the Communist Party’s tune. As far as the democratic open markets of the west were concerned, proper price competition did not exist. Prices were fixed by the party without regard for the true cost of manufacture.

This was of no concern to us while China was a market cut off from the rest of the world, but when it started competing in international markets to sell everything from shrimps to high speed trains and wind turbines, the pricing of Chinese products became a matter of serious concern. For this reason China was marked as a “non-market economy”, along with the Soviet economies and pariahs like Vietnam.

If you were a “non-market economy” it was taken as given that your exports were arbitrarily priced, depending on politically-motivated decisions to subsidise exports in order to grab market share in foreign markets.

Remember rule number one of international trade: every domestic company is led by principled, ethical, honourable bosses who compete fairly by the rules of international trade; by contrast every foreign company is led by conniving, untrustworthy cheats who happily bend or break trade rules if that means they can undercut plucky local companies.

Combine rule number one with “non-market economies”, and it was assumed that every zip or pair of trousers or child’s toy being exported from a “non-market economy” was being dumped in your market, with prices not reflecting true costs of production, but being fixed at a level deliberately to undercut local producers.

Herein was born the local protectionist’s primary weapon of choice in fighting off foreign competitors: as tariffs tumbled towards zero around the world under successive rounds of trade liberalization, companies began resorting to anti-dumping investigations. Between 1995 when the WTO formally replaced the General Agreement of Tariffs and Trade (GATT) and 2014, the WTO has handled over 4,700 anti-dumping investigations. The complaint of the plucky, honest local company was invariably the same: we produce (for example) our garden tables for a cost of US$100, but this conniving deceitful foreign competitor is selling in our market for US$50. Since we are honest, trustworthy, competitive even though we treat our workers well, then this foreign competitor could not possibly get their garden tables into our market without selling them at a deliberate loss – in other words, dumping them.

After making the complaint, then came the difficult bit: proving it. Again and again, our plucky local companies failed to prove that the competitor was dumping. Salaries in the foreign company were low. Perhaps input costs like energy or oil were low. Corporate taxes were low.

Certain countries were giving us such a bad time because of the cheapness and comparable quality of their products that local companies began to beat down the doors of trade officials to bring anti-dumping allegations. The obvious primary target was China. In 2014, out of 236 anti-dumping cases launched, more than a quarter – 63 to be exact – were targeted at Chinese exports. South Korea and India were distant second and third.

Anti-dumping complaints against China proliferated not just because Chinese products are so ferociously cheap, but because China, critically, is deemed to be a “non market economy”. And why is this important? Because if the “dumping” company is based in a market economy, WTO rules say you have to take all of the cost data from that same economy. But if the dumping target is based in a “non-market economy”, then local data are regarded as suspect, and the complainant is free to draw data from another economy of his choice. This makes it hugely easier for a complainant to “prove” dumping. So for example in 2003 the US accused colour TV exporters from China and Malaysia of dumping in the US. Because Malaysia is a market economy, they were forced to use local data, and no case was found. Because China was a non-market economy, the US Commerce Department used India as the surrogate to determine the cost. Because India had huge duties on most TV components, costs were high, and China was “found” to be dumping. A duty of 78% was levied on China’s colour TVs. The comparison may have been implausible, but for WTO purposes, it was valid, and “dumping” was comparatively easily proved.

When China joined the WTO in 2001, its understanding was that after 15 years of WTO membership (that is, the end of 2016) it would be allowed to “graduate” from non-market to market economy status. There have been recent indications from the European Union that they are agreeable. But guess who has thrown a spanner in the works? As a Financial Times article noted last week: “Beijing is an easy target in the crowded US presidential field.” A study by the Washington-based Economic Policy Institute concluded that giving China market economy status would result in a surge in Chinese exports, and a loss of 1.6 million jobs in the US: “China has extensively subsidized a range of industries and used currency manipulation to support production and exports, allowing it to accumulate widespread gluts of goods that it can export at discount prices.” Of course, the US’s plucky, honest and principled companies would expect nothing less from those conniving, untrustworthy foreign competitors. Always was it so.
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