An early salvo in a trade war between America and China?

ANNIVERSARIES should be happier than that on December 11th, marking China’s 15 years as a member of the World Trade Organisation (WTO). On that day, China expected to be unshackled from its legal label as a “non-market economy” and attain “market-economy status”. In the event, America and the European Union refused to give it the nod. On December 12th the Chinese reacted: see you in court.

The fight will focus on the wording in the original accession agreement. The Americans and the Chinese are both confident of winning. Legal experts are divided. The WTO does not provide a clear definition of a “market economy”. And clumsy legal drafting does not help.

The meat of the row is over the method WTO members use to protect their industries against cheap Chinese imports. Alleging that Chinese companies enjoy subsidised credit, energy and raw materials, America and the EU slap anti-dumping duties on 7% (see chart) and 5% respectively of their Chinese imports. The agreement welcoming China into the WTO explicitly gave other members licence to treat it as a non-market economy until December 11th 2016. This meant they could ignore domestic Chinese prices when working out the appropriate value of Chinese imports. Mexican prices, for example, help set the 48.5% duty on EU imports of Chinese bicycles.

As China interprets the original accession agreement, it was promised that, after 15 years, it would be treated like any other market economy in the WTO: it would be guilty of dumping only if the export price was lower than the price in China. America’s reading is that after December 11th, China is no longer automatically a non-market economy. But WTO members can use their discretion as to whether it is a market economy. Since, according to America’s own criteria (and any simple smell test), China is not, it can keep using third-country prices in anti-dumping cases.

The European Commission is convinced it has found a better way. In November it offered proposals that would rip up the list of market and non-market economies, and use a “country-neutral” method for calculating anti-dumping duties. But this is unlikely to placate the Chinese: it would still give plenty of discretion to refer to third-country prices when setting duties. Tu Xinquan, of the China Institute for WTO Studies in Beijing, concedes it is an improvement, but “we want full implementation of WTO rules, not half.”

A long legal slog lies ahead. Officially, China will wait for the WTO court decision—probably at least two years away—before applying retaliatory duties. Unofficially, the Chinese may start poking their trading partners sooner.

A defeat for China would represent humiliation, and a broken promise. An all-out trade war would also be disastrous for the Chinese economy. But some sort of descent into tit-for-tat protectionism seems highly likely, against the background of Donald Trump’s “America First” tough talk on trade. Even if China wins the initial set of cases, WTO law does not force other countries always to use exact Chinese prices in their anti-dumping measures. The full scope of what they can do is still legally uncertain. Mark Wu, an assistant professor at Harvard Law School, thinks that “what we’re seeing now is the opening salvo of a long series of litigations.”

The underlying difficulty is that China’s particular type of capitalism makes it difficult to fit into a binary view of a market, or non-market, economy. “That makes it really hard for the WTO to adjudicate this type of issue,” says Mr Wu. Ultimately, these heavyweights of the world economy will have to reach a political settlement if they want to avoid years of destructive, competitive protectionism. For now, such a settlement seems improbable. A highly technical issue has been simplified into a crude nationalistic argument. In America and the EU it may seem obvious that hopes in 2001 that China was on the road to becoming a market economy have been dashed. For China, this is beside the point: the West should keep its promise. Mr Trump may get a trade war without even trying.