What Makes a Market Economy?

What Makes a Market Economy?
Xi Jinping and Donald Trump meet at the 2017 G20 meeting in Hamburg.White House, photo by Shealah Craighead

By Alice Chessé

What makes a market economy? To many, the answer is simple: they are countries where the market is the main mechanism of resource allocation. Yet, this intuitive definition is at odds with the political impact of the dispute over China’s non-market economy status at the World Trade Organization (WTO). When China joined the WTO in 2001, its accession protocol included a special provision allowing WTO members to treat it as a non-market economy in antidumping (AD) investigations (Article 15 (a) (ii)). This allowed them to maintain AD duties against Chinese imports for up to 15 years after its accession.

At the expiry date of the provision in December 2016, China requested market economy status, which would make illegal the many duties that the US and the EU still maintain against Chinese imports. The US and the EU refused to accept this request, so China filed two disputes with the WTO in December 2016 and July 2017, which are still being adjudicated. Much of the legal debate focuses on the appropriate method of price comparison for Chinese imports. Many observers consider this dispute among the most important challenges currently facing the multilateral trade regime.

How could a technical debate over the definition of a country category possibly generate such systemic instability? The technical nature of WTO legal debate hides the deep significance of this political dispute. Labelling countries as “market” economies is a political process that shakes the moral foundations of the international economic order. It generates double standards based on the supposedly “fairer” and ethically superior behaviour of countries committed to market principles. Essentially, it justifies discrimination in a political order committed to egalitarian principles such as reciprocity.

The US and the EU argue that the Chinese economy is not liberalized enough to deserve to be treated as a peer in the multilateral trade regime. The intervention of the Chinese state in its domestic economy — notably through state-owned enterprises and the maintenance of a dual system of prices — constitutes unfair competition to other members of the trade regime, they argue. This narrative is dominant in Western policy and academic circles. Accordingly, the categorization of countries as market economies rewards a process of conversion to a liberal economic system. And the Chinese hybrid “socialist market economy” does not meet the liberal capitalist standards that the status rewards.

Yet this liberal conversion narrative is at odds with the historical record. Countries now recognized as market economies did not have to go through a screening process even remotely akin to China’s. The label actually hides a lot of diversity regarding the role that the state plays in these economies. It has also successfully glossed over the maintenance of significant protectionist measures.

Indeed, beyond some national definitions articulated by the US or the EU, the concept of a market economy has never been formally defined by any international organisation. It is instead characterized by pervasive ambiguity, and considerable incoherence in its application. This ambiguity is largely intentional, as country representatives have systematically refused to provide transparent criteria. In two traditional clubs of market economies, the GATT/WTO and the Organisation for Economic Co-operation and Development (OECD), member countries have consistently opposed the definition of clear standards in designing the accession policy.

Such ambiguity has been politically effective in integrating the community of US allies since the early Cold War. The new countries who have been granted market economy status never went through a formal process of conversion involving the adoption of a standardized set of liberal commitments. Both the GATT/WTO and the OECD accommodated their accession by adopting flexibility measures that hid rather than fixed their deviations from free market practices — either in the form of time extensions, reservations, or the normalization of discriminatory measures. As a result, labelling countries as market economies has historically tended to reflect their geopolitical alignment with the US rather than the adoption of any clear set of economic policies.

More fundamentally, this ambiguity cemented the moral foundations of the liberal international order. The “market economy” categorization comes with significant institutional privileges, from market access to membership in certain exclusive institutional spaces like the OECD or the European Union. While these privileges are largely arbitrary, the “market economy” label represents them as rightful. Building upon the meritocratic symbol that the free market constitutes in liberal domestic societies, it slowly became a benchmark to assess the moral worth of nations. This is why the categorization of countries as market or non-market economies generates fundamental political struggles over the legitimation of the post-1945 international political order. The label represents certain countries as morally superior, and more deserving than other members of the international community. In essence, it justifies the institutionalized hierarchies of the international order while hiding their arbitrariness.

This allows us to understand why China, and BRICS countries more generally, pose a structural challenge to the post-1945 international order. Their hybrid-economy success stories fundamentally challenge the international order. By requiring clear agreement on a set of standards defining what a “market economy” actually is, they threaten to reveal the arbitrariness of the institutionalized inequalities that structure the current international order.

Alice Chessé is a PhD candidate in Political Science at McGill University where she is completing her dissertation on club multilateralism and the enlargement of the OECD.

Thanks to Andrew Heffernan for his help proofreading this post.

 

This article is part of a four-blog series that follows from a workshop on Conceptualising Markets, funded by the University of Ottawa’s Office of the VP Research, the Centre for International Policy Studies, the School of Political Studies, the CN–Paul Tellier Chair in Business and Public Policy, the Centre on Governance, the International Political Economy Network, and the Institute for Science, Society and Policy. For other blogs in this series, click here:

—“Conceptualising Markets” by Pascale Massot and Julian Gruin

—“Is the Sky the Limit? Risk, Uncertainty, and Nature” by Sylvain Maechler

—“China, State Capitalism, and the Global Financial Order” by Johannes Petry

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