China today is like the EU in the 1980s: It needs help to address its success
We all know that the China Way has been successful. There is hardly an economic statistic that is not phenomenally positive. But the very success of the China Way is now a problem. It’s a problem for China and it is a problem for the global market. And the only way to solve the problem is to find solutions together.
China is in the same situation today that the EU found itself in during the 1980s. The second world war set European agricultural production back decades. Food had to be imported. The Common Agricultural Policy was designed to promote production by isolating the market and pouring money into production. Like the China Way today, 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. We had the beef mountain, the milk lake, the cereal surpluses. We were even using denatured wine to keep roads free of ice.
By the 1980s it became clear that attempts within the EU to limit the surpluses by introducing production limitation schemes weren’t working. Productivity gains defeated schemes for the idling (setting aside) of agricultural land, introducing production quotas for milk, beef and most other agricultural products.
The EU began, slowly at first but then in massive quantities, to dump agricultural product on world markets. Agricultural exporting countries with comparative advantage in Australasia, in north and south America and in south east Asia began to get into difficulty. Protests from these countries rained down hard on Brussels but the CAP was so bedded-in that agreement on reform could not be reached within the context of the EU.
The EU needed help from the outside. And that help came in the form of the GATT Uruguay Round of negotiations leading to the WTO. One of the pillars of the Uruguay Round was the Agreement on Agriculture. This agreement introduced limits on agricultural domestic support, on export subsidies and increased access to closed markets. The EU could not change alone. It needed the framework of what became the WTO. As well as the recognition of the EU’s problems by our trading partners allowing a balance of interests between all countries to emerge.
The EU could not change overnight. The Agreement on Agriculture set a framework that allowed the EU to move, over a 20 year period, from subsidising production and creating uncontrollable surpluses to subsidising farmers on the basis of need.
All global agricultural players compromised in reaching agreement on agriculture in the Uruguay Round. But a framework was put in place that allowed all agricultural producers, including the EU, to find a place in the global market. This is what we need today. Like the EU in agriculture, China has arrived.
The simple fact is that the China Way produces surpluses. The five-year plans exacerbate the problem. They cannot solve it. Excess capacity is emerging in many sectors. The most obvious sector is steel where China today produces more than twice its own domestic need. But like for the CAP surpluses emerge in all sectors. So it’s not just steel. It can already be seen in aluminium, in cement, in rare earths, in bicycles, in candles, in fasteners and many more. It’s a system that inherently produces surpluses and it is the system that needs to change just like the EU had to change the CAP.
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 public procurement and investment protection and mercantilist deals on solar panels and shoes. 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. It has not been able to meet this commitment for a variety of reasons. Quite reasonably, from a domestic political if not an international economic or legal point of view, China has wanted to build up its capacities before it subjects its economy to global competition. China might not think that it has achieved its goal. But EU manufactures know that it has.
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 China Way to another way that meets its needs but does not produce uneconomic and destructive surpluses that unfairly damage manufacturing in the EU and the US.
This is not just about a bilateral SinoEU agreement on investment or the conclusion of the TPP and the TTIP to counter China. Here Merkel is wrong. China is now a global player and China and the EU and the US need to work out the new rules to make sure that competition can be fair, consumers can be protected and standards can be reasonable in this global market. This must be the focus of the international trade agenda. It must be a multilateral effort just like for agriculture in the 1980s.
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 their different sectors. This means that the anti-dumping rules must remain effective. 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. If China is not a market economy how can it even be considered that those prices should be the basis of the measures needed to ensure a level playing field?
The UK has called for a special meeting of the EU Council of Ministers to discuss the closure of steel plants in the UK. The meeting is fixed for 9 November. Closure of steel plants is not a UK only problem. All steel production in the EU is under threat. And it’s not just a steel problem. The China Way is affecting all European manufacturing. Steel is merely the first dramatic symptom of the success of the China Way. Other symptoms are emerging. So the problem must not be addressed from a defensive perspective and in relation to steel only. Like agriculture twenty years ago, it must be addressed recognising the source of the problem and the need to talk openly and globally with China to find solutions that respect the needs of all players.