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For European leaders, it’s a balancing act between the short-term loss of jobs within the union, and avoiding disrupting warming relations with Beijing in the longer run.Getty Images/iStockphoto

Thousands of European steel workers marched through the streets of Brussels, Europe's de facto capital, on Feb. 15 demanding that the European Union protect their industries from competition with China.

The European Union has to decide by December whether to treat China as a market economy under the rules of the World Trade Organization. Turning it down would damage Europe's warming relations with Beijing, but classifying China as a market economy will expose European manufacturers, especially the steel industry, to fierce competition from cheap Chinese goods.

One of the conditions of Beijing's entry to the WTO in 2001 was that other members would be able to treat Chinese goods as coming from a non-market economy, meaning that they could continue to impose punitive import duties on cheap Chinese goods.

But that provision expires this December, and while China argues that expiry of this provision will automatically qualify them for market-economy status, this has been disputed by other countries – a legal issue that would have to be adjudicated by a WTO arbitration panel.

The European Commission met on Jan. 13 to make a recommendation but it postponed the decision. A 10-week online consultation was launched on Feb. 10, as part of an "in-depth assessment" to study the economic effects on the European market, said the European Commission in a statement.

Millions of jobs in the EU would be put at risk if it grants China market-economy status, argues a recent study by the U.S.-based independent think tank Economic Policy Institute.

It is ironic that many companies in Europe, particularly in the steel industry, are asking the European Union to protect industries that are no longer viable, and as such create non-market conditions, says Kerry Brown, professor and director of the Lau China Institute at King's College in London and associate fellow at Chatham House.

You typically hear only the negative side of dumping, says Andrew Wood, head of Asia research at BMI Research. But it also provides some sectors with cheaper inputs, "for instance for construction firms or manufacturers, who, if they do not directly compete with China, should actually benefit from lower input prices," he says.

The impact on the Chinese market of achieving market-economy status would not be significant, Mr. Wood says. China is coping with large overcapacity issues in its steel sector, and a "marginally higher demand for steel … does not really fix their problem of profitability."

"For [China] to be denied market-economy status would actually be a rather large [political] blow," Mr. Wood says.

But for European leaders, it is a balancing act between the short-term loss of jobs within the union, and avoiding disrupting warming relations with Beijing in the longer run. The EU has five criteria for assessing whether China would be considered a market economy, but according to these standards it is more of a "quasi-market economy," Mr. Brown says. However, he says, the EU should "accord it this status because it's in our interest eventually for [China] to become a market economy and this is the best way that we can help it achieve that."

Canada, on the other hand, has dealt with the issue through backdoor measures without much public debate. Canada incorporated the 2016 deadline into the Special Import Measures Regulations in 2002, but this was repealed in 2013. That allowed Canada to treat China as a non-market economy for the purposes of anti-dumping measures beyond December this year. "That action came out of the blue, I think largely, if not exclusively, because of lobbying by the steel industry in Canada," says Yuen Pau Woo, former President and CEO and currently Distinguished East Asia Fellow of the Asia-Pacific Foundation of Canada.

But Canada may have to face the issue eventually. "In my discussions with Chinese officials about a free-trade agreement with Canada, I have often been told that granting China market-economy status is a pre-condition for negotiations," Mr. Woo says.

Linda van der Horst is a journalism fellow at the Munk School of Global Affairs.

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