China: A market economy? What to do for Italy

Is China a market economy?

There are many ways to answer this question, even contradictory. That is, Yes and No. As expected, today Trump said that China is not a market economy, in an attempt to limit the US-China trade deficit, something we had already discussed. The implications are manifolds, because WTO treat countries that are market economies in a different way. However, the fundamental problem lies in the fact that this WTO rule was not designed for big economies like China, which in practice produces 50% of everything produced in the world.


According to the WTO rules, a country importer of goods can apply duties if it considers that the goods are imported at prices below the market. Which is the reference market? If the exporting country is a market economy, the domestic market is used, if instead the exporting country is not a market economy, the reference market is the rest of the world, i.e. the prevailing price on international markets, which is generally higher and therefore more there is more leeway to those who care to impose duties.


And here is big the dilemma linked to the enormous production capacity of China. This WTO rule was meant to be applied to exporting countries of excessive size, so if the price of goods in the domestic market were below the price on international markets, the hypothesis of subsidies, unfair competition in short, to price below cost would have taken hold and then duties to bring prices back to international levels. But in the case of China, this logic loses a bit of strength because China claims that prices in the domestic market are lower than those of , not because there are subsidies (which there are) and so goods are prices below cost, but rather because China has vast economies of scale that knock down so many fixed costs in the production chain and that, if anything, it is third countries that have too high costs because of their inefficiencies.


China argues against the use of third-country prices because it believes that the international market is China itself. At a minimum, one should also include the prices charged in China when calculating the average of third countries, a procedure which is not done now. It seems they have a point here.


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