Sometimes the driest debates lead to the hottest arguments. That paradox was on full display on May 12th when the European Parliament set out to air its grievances with China’s pretense of receiving Market Economy Status (MES) by the end of the year.

In a non-legislative resolution backed by 546 MEPs, the Parliament sent out a strong signal that it would use a “non-standard methodology” in treating China’s exports to the EU as long as Beijing doesn’t satisfy the five basic criteria required to qualify as a market economy. Even if the EP’s resolution carries no legal value in and of itself, China’s reaction was swift, with the Foreign Minister accusing the EU of breaking its WTO promises, and China’s former chief WTO negotiator Long Yongtu saying the resolution is protectionist and goes against globalization.

However, both Chinese officials are wrong – and while the European Parliament has too often succumbed to populist temptation or petty power plays in its institutional tug-of-war with the other European institutions, the majority of MEPs were clearly in the right.

The first issue that needs explaining is what this rather technical brouhaha is all about. Essentially, the MES China covets would be the ultimate status symbol for the leadership as it would bestow recognition upon the country that it is playing according to market-rules – and that by extension the Party’s third way, “Socialism with Chinese Characteristics” philosophy has paid off. On the practical side, the MES enhances the access of Chinese exports to third countries, including the European Union, and would make it far harder for regulators to slap China with anti-dumping tariffs and other retaliatory trade measures. With the European bloc beset by grave uncertainties in the steel and aluminum sector, which have suffered after world prices were driven down by unfair Chinese overproduction, concerns about relaxing protective levies have spiked.

Indeed, according to the European Commission, China produces 325 million metric tons of excess steel a year, or twice Europe’s entire production. This production spree has put at risks tens of thousands of jobs across the continent, most poignantly the 15,000 British jobs that Tata Steel will axe if it cannot sell its UK assets this year. Trade and worker unions alike have been turning the screws on the Brussels bureaucrats and have threatened with massive strikes if their industry isn’t protected from China’s avalanche of underpriced steel.

In this tense context, it’s obvious why the European Parliament caved in. But putting aside the pressures coming from the street, the EP’s justification was nevertheless sound: China is very far off from respecting the minimum standards for a market economy, as they are set out under European law. Concluding otherwise would be not just a probable death sentence for large swathes of Europe’s industrial production, but also in blatant contradiction of European regulations.

The EU’s five criteria are concerned with a) the nature and frequency of governmental intervention in the decision-making process of companies, b) the lack of government distortions in “the operation of enterprises linked to privatization;” c) the use of non-discriminatory, transparent company laws; d) an effective, transparent legal system protecting property rights; e) and a “genuine financial sector which operates independently from the state.” According to a 2009 paper, China had fulfilled only one criteria – the one linked to privatizations - with a lot more ground to cover for the remaining four.

Indeed, as recently as April, the European Commission expressed its deep concerns with China’s overbearing state in handling the affairs of state owned companies (SOEs), when it investigated a proposed joint venture between China General Nuclear Power Corporation and EDF. After regulators concluded that Chinese SOEs involved in the energy sector have no independent decision making powers whatsoever, the EC took the unprecedented step of analyzing the market impact of the deal by looking at the entire corpus of SOEs involved.

This decision is perhaps the most obvious example of China’s total disregard for market rules as it sets in stone the fact that 45 of the Fortune 500 companies, are under the direct control of the Chinese Communist Party with a combined worth of $4.5 trillion. The EC’s reasoning nullifies therefore any semblance of corporate independence in the Middle Kingdom and provides fodder to those arguing that the Chinese state is directly responsible for the overcapacity issues in the steel industry for example.

It is widely expected that the Commission’s reasoning will be rehashed in the upcoming review of yet another Chinese deal involving one of the SOEs from the energy sector – the proposed tie up between Syngenta and ChemChina, Beijing’s largest outbound investment to date, clocking in at $43 billion. The deal is already strained by delays and subdued market expectations, insofar that any further hand wringing stemming from regulatory concerns could easily derail ChemChina’s hopes of becoming the world’s largest agro giant.

Rebuffing critics, the European Parliament took the only course of action that was available to it and sent a strong message that China is simply not prepared to join the ranks of other market economies. At this point, even if the political will to award China MES exists in certain European quarters, the Parliament’s resounding “no” has undoubtedly made them reconsider.

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