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 In a draft letter seen by Reuters, the head of the European
Commission's Legal Service, Luis Romero Requena, warned the head of
the trade directorate that the EU would not have a good case to
disregard the effects of the World Trade Organization viewing China
as a more market-based economy -- a status that will make it harder
for other powers to justify current high tariffs.
In asking its lawyers to help it decide, the EU executive has shown
how it is caught in a dilemma between shielding local industry and
jobs and seizing a chance to win friends in Beijing and gain an edge
over U.S. rivals as China opens up its markets.
A spokesman for EU Trade Commissioner Cecilia Malmstrom declined
comment on the letter but stressed that legal opinions would only
form one part of a broader reflection currently under way on the
implications of expiring WTO limitations on China's right to claim
equal treatment with its free-market competitors.
European manufacturers say the future of EU industry depends on
preventing China from flooding markets with illegally cheap goods,
but rules allowing the EU to protect itself with some ease expire
next year and Europe is divided over how to act.
The WTO recognized when Communist-ruled China joined the free trade
body in 2001 that its local prices are not set by market forces. WTO
members can normally apply punitive "anti-dumping" tariffs on others
only if export prices are below those in the exporter's home market.
But with China, the EU and others have been able to ignore low
domestic prices and set tariffs to make Chinese exports as expensive
as in wealthier countries.
However, those WTO limitations on China appear to expire on Dec. 11,
2016 -- though there is some room for interpretation.
Trade experts expect the United States to take the view that U.S.
law makes no requirement for the government to change its treatment
of China. Washington has not made its position public.
Europe must take a decision soon because the legislative changes it
will entail must be approved by the European Parliament and
translated into the bloc's 23 official languages.
In the internal draft document seen by Reuters, EU lawyers
recommended recognizing the expiration of the current rules, warning
that "arguments to the contrary are not well-founded".
In its five-page, line-by-line scrutiny of China's WTO accession
agreement, the EU Legal Service lawyers conclude it is "a high-risk
approach" to try to argue that Beijing should still be treated
differently from other major trading partners.
Trade Commissioner Malmstrom's spokesman told Reuters: "The
Commission is currently looking at the legal implications of the
expiration of certain provisions of the protocol of accession of
China to the WTO relating to the treatment applied to China in trade
defense investigations. This will take some time."
China is certain to launch a case at the WTO if the European Union
chooses to maintain the status quo and can exert pressure in other
ways by restricting EU access to its markets or by retaliating.
Just last month, the EU slapped anti-dumping duties of up to 25.2
percent on some Chinese steel, using prices in the U.S. domestic
market as a reference. The process is complex, but if the WTO
modifies its view of how free China's market is, tariffs might have
to take more account of Chinese domestic prices.
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"PLAYING FOR TIME"
Not everybody in Europe agrees with the EU lawyers' view, as China's
accession treaty to the WTO is written in a way that allows for
different interpretations.
A group of more than 20 European industries, from footwear to solar
panels, wrote to Malmstrom on March 4 warning that changes to the
rules on China would see the "survival of many European
companies...seriously threatened, with severe adverse consequences
for European jobs".
They argue that China can get better treatment only if it is
recognised as a market economy -- meaning decisions are made based
on supply and demand, not the state -- but that remains a long way
off, EU and U.S. officials have repeatedly said.
"Some in Commission are trying to play for time, some in the
Commission are trying to be too clever and think that the longer
they postpone a decision, the more they can squeeze China," said
Fredrik Erixon, the director of the Brussels-based European Centre
for International Political Economy.
There is a lot at stake and not just for Beijing. The European Union
has more than doubled trade with China since 2003, making it its
second largest trading partner after the United States. Europe is
China's most important trading partner.
Last month, Britain, Germany, France, Italy and other states joined
a nascent, Chinese-led Asian Infrastructure Investment Bank (AIIB)
in defiance of Washington's misgivings, as China seeks a greater
role in shaping global economic governance.
Beijing and Brussels are also negotiating an investment treaty to
give the EU greater access in China, from banking to telecoms, and
to push Beijing to drop onerous requirements that Europeans must
hand over sensitive know-how to expand there.
China eventually wants a free-trade deal.
But in the short term, there is friction as China seeks to produce
the kind of sophisticated products that compete directly with Europe
and the changes would be huge for European industry.
(Additional reporting by Krista Hughes in Washington; Editing by
Alastair Macdonald and Angus MacSwan)
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