For decades, the question on the minds of policymakers and analysts alike is what type of economy is China? Answering this question has important policy and legal implications and affects how we understand the Chinese economy. Europe seems to have finally answered this question definitively for itself and the world.
The question of what type of economy China is goes back decades. From entering the World Trade Organization to receiving “most favored nation” trade status, China confronted the politically uncomfortable question of whether it was a “market” or “nonmarket” economy.
For years, academics and policymakers coined phrases that attempted to create new space for the Chinese economy, making it neither a market nor a nonmarket economy. A professor from MIT called it “capitalism with Chinese characteristics.” China regularly referred to itself as a “socialist market economy.” While those rhetorical labels may have contained at least some veneer of truth 20 or 30 years ago, they are not true of China in 2024 and have not been for some time.
Whether China is a market or nonmarket economy gained greater importance to Europe, given the flood of electrical vehicles (EVs) competing with European car companies. Concerned about Chinese firms dumping into the European market, the European Commission (EC) began a study of Chinese economic and financial practices to determine whether China continued to meet the definition of a market economy.
Surprisingly, the EC, in its 700-page immaculately documented report, pulls no punches on its view of the Chinese economy. The report states that “the basic features of the socialist market [Chinese] economy are dominant State-ownership ... an extensive and sophisticated economic planning system ... as well as interventionist industrial policies.” For a polity known for its deference to Chinese economic policy, the EC documents why the Chinese economy cannot be considered a market economy.
This thorough and well-documented report covers the political and economic framework in China today, broad distortions in the factors of production such as labor and capital, and industry-specific distortions, including headline sectors such as new EVs, renewable energy, steel, and telecommunications.
Although exhaustive, the report highlights the salient issue of Chinese Communist Party (CCP) control, noting that the “CCP exercises its control over the country and its economy through a number of channels [such as] full control over strategic sectors of the economy including control of the financial system and capital resources ... control of personnel issues including all essential appointments ... policy coordination through a formal network of Party entities/committees across State authorities and the economy, as well as informal networks among industrial entities and links between the Party and private enterprises.” All other distortions flow from the original sin of CCP domination.
The economy serves the omniscient power of the CCP and, by definition, cannot be a free market. Drilling down, the EC found that the state, via the CCP, played a major role in directing and subsidizing output and controlling specific sectors and firms. For instance, the state owns the four major traditional Chinese automakers and newer EV firms that come with various financial perks, from grants to debt forgiveness to state-owned banks, to name a few.
Given the EC findings, the only question now becomes what will Europe do about the problem of a state-controlled and managed economy dumping goods into its market?
This report gives the EC wide latitude to impose various penalties on Chinese firms’ trade with Europe. The question now becomes whether it will do so. Given Beijing’s political influence and European exporters in China, such as German auto manufacturers, what will happen remains questionable.
The United States faces a similar dilemma, although Washington has taken a more trade law-defensible approach, citing national security exceptions. In the case of many Chinese exports, such as EVs or steel, it is not an either-or but rather a both-and. EVs—complete with everything from advanced radar, navigation monitoring, and voice records, just to name a few—present rich surveillance opportunities. However, Beijing’s high level of subsidies to Chinese firms tilts the playing field, allowing them to undercut global competitors.
Given the level of concern in Europe and the United States, governments will likely raise additional tariffs on Chinese products. This valuable report merely verifies and documents what has already been known. The question is, what will Washington and Brussels do about the problem?
