Renowned Column: EU Recognizes China as State-Owned Economy

For decades, policymakers and analysts around the world have been pondering a crucial question: what kind of economy is China? Answering this question would have significant implications for policies and laws, as well as shape our understanding of the Chinese economy. It seems that Europe has finally provided a clear answer for itself and the world.

The question of what kind of economy China is can be traced back several decades. Since China joined the World Trade Organization (WTO) and gained Most Favored Nation (MFN) trade status with the United States, China has grappled with the unsettling political question of whether it is a “market economy” or a “non-market economy.”

Over the years, academia and policymakers in the United States have coined phrases trying to carve out new space for the Chinese economy, straddling a line between not quite a market economy and not quite a non-market economy. An economics professor at the Massachusetts Institute of Technology (MIT) dubbed it “Capitalism with Chinese Characteristics.” Meanwhile, China often refers to itself as a “Socialist Market Economy.” While these rhetorical labels may have held some truth a couple of decades ago, they no longer fit China in 2024, or for quite some time.

For Europe, the question of whether China is a market economy or non-market economy has become increasingly important as a large influx of electric vehicles (EVs) flood into Europe, competing with European car manufacturers. Recently, the European Commission based in Brussels, Belgium, has commenced an inquiry into China’s economic and financial practices, fearing potential dumping of Chinese products into the European market, to determine if China still meets the definition of a market economy.

Surprisingly, in its extensive 700-page, meticulously recorded report, the European Commission didn’t hold back in its assessment of the Chinese economy.

The report pointed out, “(China’s) Socialist Market Economy is characterized by the dominance of the state… an extensive and complex economic planning system… as well as interventionist industrial policies.” As a regime long known for adhering to the economic policies of the Chinese Communist Party (CCP), the European Commission documented why the Chinese economy cannot be seen as a market economy.

The report is comprehensive, backed by solid data, covering wide distortions in today’s China related to political and economic frameworks, distortions in production factors like labor and capital, and distortions in specific industries including new electric vehicles, renewable energy, steel, and telecommunications.

While detailed, the report emphasized the prominent issue of CCP control, highlighting how “the CCP exercises control over the economy through a variety of channels, including comprehensive control of strategic sectors, financial systems, and capital resources… control over personnel matters, including all key appointments… coordination of policy in state institutions and economic sectors through official networks of party entities/committees, as well as informal networks between industry entities and connections between the party and private enterprises.” All these distortions stem from the original sin of CCP authoritarian rule.

The Chinese economy serves the omnipotent power of the CCP; by definition, a CCP-led economy cannot be a free market. Through thorough investigation, the European Commission found that the CCP plays a crucial role through various levels of administration in guiding and subsidizing output, controlling specific sectors and companies. For instance, the state owns China’s traditional Big Four automakers and newer electric vehicle companies, which enjoy various fiscal privileges ranging from grants to debt forgiveness, as well as support from state-owned banks, and the list goes on.

Given the findings of the European Commission’s investigation, the only remaining question now is how Europe will deal with the challenge of a state-controlled and managed economy like China dumping goods into its markets?

This report grants the European Commission significant leeway to impose various punitive measures on CCP enterprises trading with Europe. The imminent question is, will the EU take such action? Considering the global political influence of the CCP regime and the many European exporters to China (such as German car manufacturers), what will actually transpire remains an open question.

The United States also faces a similar dilemma, but Washington has resorted to more trade law-compliant measures by invoking national security exemptions. For many Chinese export products, including electric vehicles and steel, it’s not an either/or issue but rather a combination of both. Electric vehicles often come equipped with advanced radar, navigation monitoring, and voice recording features, providing ample opportunities for surveillance. However, the high subsidies the CCP regime provides to Chinese enterprises tilt the competitive landscape, enabling Chinese companies to overshadow global competitors.

In light of concerns from Europe and the U.S., governments are likely to impose additional tariffs on Chinese products. The valuable report released by the European Commission simply confirms and records what people already knew. The pressing question now is, how will Washington and Brussels tackle this challenge?