A market economy is an economic system where decisions regarding investment, production, and distribution are based on the interplay of supply and demand, which determines the prices of goods and services.
-> Under WTO norms, once a country gets market economy status, exports from it are to be accepted at the production costs and selling price as the benchmark.
Why china wants market economy status:
-> Grating the market economy status will mean acknowledging that China’s market is no longer unfairly controlled to distort international trade.
-> It would mean other world market will need to accept Chinese goods at their face value.
-> It will increase China’s trade.
-> to avoid anti-dumping duties on its products in the importing countries.
-> According to Section 15 of the Protocol of Accession, China is liable for an automatic upgrade to the status of market economy on the completion of 15 years of its WTO membership in 2016.
Why MES is one of China’s prime Foreign Policy Objectives?
-> Because of higher anti-dumping duties, and the fact that China faces the highest number of anti-dumping investigations, obtaining earlier recognition of Market Economy Status (MES) has been one of the China’s major foreign policy objectives since 2003.
-> It is to be noted that because of Non Market Economy (NME) status, China and EU have not made great breakthroughs in the China-EU relations.
Why Countries oppose recognition of Market Economy Status to China?
-> The main countries which still consider China as NME are US, Canada, JAPAN, Mexico, EU and India.
-> To deny China the ‘MES’, India and others countries have been saying that unlike in ‘market economies’ where prices are mainly determined by market forces (of demand & supply), there is significant government influence in China that in turn causes distortions in international trade.
-> These countries have also been citing factors such as huge Chinese government subsidies, ‘price fixing’, ‘absence’ of proper business accounting standards, besides lack of transparency in not just loan rates, but also in minimum wages and property rights in China.
-> Recently, The US Commerce Department has found that China dumped aluminum foil on the U.S. market and imposed duties ranging from 97% to 162%.
-> Japan introduced a non-binding deadline to grant MES to China by Dec-2016. However, Japan has made no official commitment to automatically grant MES.
-> Many countries would lose the economic war – A victory for China before the WTO would weaken many countries’ trade defenses against a flood of cheap Chinese goods, putting the viability of more western industries at risk.
How China’s upgradation will affect India?
-> The main impact of China being granted MES would be on ‘anti-dumping’ cases. India has extensively used anti-dumping duty to offset the losses caused to the local manufacturers due to dumping.
-> Of the 535 cases where anti-dumping duties were imposed by India from 1994-2014, a maximum of 134 has been on goods from China.
-> Once China is granted MES, it will severely limit India’s ability to resort to anti-dumping as the authorities (DGAD) will have to accept the production costs and selling price in China as the benchmark.
-> India cannot easily levy anti-dumping duties against unfairly priced Chinese goods to protect local industries as it has done in the case of steel imports in 2016 to protect domestic steel industry => hurt the credit flow in the economy.
-> It will further widen trade deficit with China. It can hurt Indian exports to other countries.
-> It will have negative impact on India’s manufacturers in chemicals, steel, electrical and electronics sectors as they will be severely hurt by unfairly low-priced imports from China.
-> Strategic impact – Rise in economic status of China can further fuel its aggressive stance in the region to the detriment of India.
How India is trying to deal with the issue?
-> The Directorate General of Anti-Dumping and Allied Duties (DGAD), an autonomous body under the commerce ministry) has begun consultations with stakeholders including Int’l trade experts & lawyers on the issue.
-> Like India, the EU is also undertaking stakeholder consultations on the ramifications of granting MES to China.
What is Dumping?
-> Dumping is said to occur when the goods are exported by a country to another country at a price lower than its normal value.
-> This is an unfair trade practice which can have a distortive effect on Int’l trade.
What is Anti dumping & Anti Dumping Duty?
-> Anti dumping is a measure to rectify the situation arising out of the dumping of goods and its trade distortive effect. Countries levy an anti dumping duty to deal with dumping cases.
-> The purpose of anti dumping duty is to rectify the trade distortive effect of dumping and re-establish fair trade.
-> The use of anti dumping measure as an instrument of fair competition is permitted by the WTO.
-> It provides relief to the domestic industry against the injury caused by dumping.
India must not grant MES to China unless the subsidy and dumping issues are resolved. India can cooperate with the US and European Union in this regard.