Graduation Year

2017

Date of Submission

12-2016

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics-Accounting

Reader 1

Richard Burdekin

Rights Information

© 2016 Maxwell N. Macey

Abstract

Under World Trade Organization (“WTO”) rules, the United States and other developed countries are specifically permitted to treat the People’s Republic of China (the “PRC” or “China”) as a Non-Market Economy (“NME”). Under U.S. trade laws, China’s designation as an NME allow imposition of tariffs to protect U.S. industries from “dumping” and to offset subsidies provided by foreign countries to their producers. However, on December 11, 2016, 15 years after China’s accession to the WTO, the U.S.’ legal right to automatically treat China as an NME expires under WTO law. The U.S. government has created NME methodologies under U.S. trade laws that impose often staggering duties on imports from China in a wide range of industries—duties that often have little relationship to economic reality. In effect, the U.S. is engaged in a guerrilla trade war with China, with NME status as the primary weapon. There is immense political resistance to ending the automatic NME treatment of China. For example, even Hillary Clinton, who was less openly confrontational towards China than Donald Trump, stated in her recent Presidential campaign, “Right now, Washington is considering Beijing’s request for ‘market economy’ status…if they get market economy status, it would defang our anti-dumping laws and let cheap products flood into our markets. So we should reply with only one word: No.”[i] This intense political anger is fueled by the displacements that China’s rapid rise and exports to the U.S. have engendered.[ii]

Trade policy with respect to China needs to be considered in light of the critical importance of the relationship to both countries. China has become the United States’ largest single trading partner. Although the size of the trade deficit with China clearly accounts for the current heated political rhetoric about unfair trade with China, the fact is that China is by far the U.S.’ largest export trade partner (excluding our NAFTA neighbors Canada and Mexico), with exports almost twice the size of the next nearest country, Japan. This alone indicates it is in the United States’ interest to have a rational trading relationship with China.

The U.S. should end the treatment of China as an NME. The policy is both ineffective and irrational. The capital markets do not consider the policy effective: recent relevant case studies show that protected U.S. companies often do not experience the intended benefit of trade law protection—a healthier business—based on analysis of their stock price performance beyond short term effects. After controlling for overall market fluctuations, companies will, at most, experience a short-term jump in their stock price. In the examples studied below, the stock price typically returns to pre-trade law protection figures within weeks. Such results imply two important points: 1) the company’s long-term fundamentals, which typically determine long-term stock performance (e.g. growth rate, cash flows, and margins), are unchanged by trade law protection; and 2) investors do not believe that these policies have a significant, long-term positive impact on U.S. companies.

Regular “market economy” U.S. trade law provides real and sufficient remedies to address subsidies and dumping. Not only does the treatment of China as an NME exacerbate tensions with China[i], it imposes both unpredictable and excessive costs on U.S. consumers who purchase Chinese goods and makes U.S. businesses that use Chinese products to produce final goods less competitive with foreign competitors not facing such artificial costs[ii].

[i] Hornby, Lucy and Shawn Donnan, “China Fights for Market Economy Status”, May 9, 2016, Financial Times,

https://www.ft.com/content/572f435e-0784-11e6-9b51-0fb5e65703ce.

[ii] Mankiw, Gregory N. and Phillip L. Swagel, “Antidumping: The Third Rail of Trade Policy,” Foreign Affairs,

Vol. 84, No. 4 (Jul. - Aug., 2005), pp. 107-119.

[i] Clinton, Hillary, “Commentary: If Elected President, I’ll level the Playing Field on Global Trade,” Portland Herald Press, February 23, 2016, http://www.pressherald.com/2016/02/23/commentary-if-elected-president-ill-level-the-playing-field-on-global-trade-clinton-says/

[ii] Autor, David H., David Dorn and Gordon H. Hanson, “The China Shock: Learning from Labor Market Adjustment to

Large Changes in Trade,” NBER Working Paper Series, Working Paper 21906, National Bureau of Economic Research, January 2016, http://economics.mit.edu/files/11675.

This thesis is restricted to the Claremont Colleges current faculty, students, and staff. It is not available for interlibrary loan. Please send a request for access through Contact Us.

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