Economic development and trade: The challenge of a rising China
Published 04 May 2020 | 6 minute read
Globalization was in its heyday when China joined the World Trade Organization (WTO) in 2001. It was widely believed that WTO accession would help to transform China from communism to capitalism, with more freedom granted to the people in both economic and political spheres.
This article was originally published in the Centre for International Governance Innovation on 4 May 2020.
While China had to undertake substantial commitments itself, it was able to harness the opportunities brought by greater access to world markets and saw exponential growth in its exports.
In 2009, China became the world’s top goods exporter. Four years later, China unseated the United States as the top trading nation in the world. In contrast to the ascent of China, the United States and Europe have been suffering from economic decline since the 2008 global financial crisis. China regards its rise as a long overdue restoration of its rightful position as the world’s largest economy, which it has occupied for most of history, except for the past 150 years. The West, however, views China’s rapid development with suspicion, attributing China’s success mostly to its state-led development model, with stateowned enterprises, massive subsidies and heavy government intervention playing a major role.
The most notorious example of the Chinese development model is the Made in China 2025 plan, which was created in 2014 by more than 50 academicians from the Chinese Academy of Sciences and the Chinese Academy of Engineering under the leadership of China’s Ministry of Industry and Information Technology, along with the National Development and Reform Commission and 20 other ministries and agencies. Officially adopted by the State Council in 2015, the plan sought to move China up the value chain of industrial activities, turning the country into a manufacturing power that would control core technologies in key sectors by 2025. In particular, the plan aimed to achieve 70 percent self-sufficiency in high-tech industries by 2025, and a dominant position in global markets by 2049 — the centennial of the People’s Republic of China. To achieve these goals, the plan employed problematic tactics such as direct government intervention, huge subsidies, investments and acquisitions in foreign markets by state-owned enterprises (SOEs), and forced technology transfers. These practices led to widespread criticisms of the plan by many foreign governments, which regarded it not only as economic aggression but also a potential national security threat.
To achieve these goals, the plan employed problematic tactics.
To counter the Chinese threat, the United States led a concerted effort by like-minded countries to “level the playing field.” Building on “China, Inc.,” an influential paper by Harvard law professor Mark Wu, the US-led coalition argues that the existing WTO rules are insufficient in dealing with the problems created by China’s state capitalism. At the eleventh WTO Ministerial Conference in Buenos Aires, Japan, the European Union and the United States issued a joint statement condemning “severe excess capacity in key sectors exacerbated by government-financed and supported capacity expansion, unfair competitive conditions caused by large market-distorting subsidies and state-owned enterprises, forced technology transfer, and local content requirements and preferences” as “serious concerns for the proper functioning of international trade, the creation of innovative technologies and the sustainable growth of the global economy.” To address these concerns, they vowed to “enhance trilateral cooperation in the WTO and in other forums.”
Since then, the trilateral group has intensified its work with six more joint statements (the latest one was issued on January 14, 2020). In turn, these statements have morphed into WTO reform proposals, with the key players all chipping in on the issue.
Proposals for reforming the WTO
The first set of proposals, entitled “WTO modernisation: Introduction to future EU proposals,” was issued by the European Union in September 2018. Three days later, Canada followed suit with its own discussion paper on “Strengthening and Modernizing the WTO.” The United States has not issued any comprehensive proposal, but used stand-alone proposals to address many specific issues directly. In addition, Canada also convened a series of meetings with a group of like-minded countries. Informally referred to as the Ottawa Group, the group includes most of the key players in the WTO, except China, India and the United States.
While they all differ from each other, the proposals by Canada, the European Union, the United States and the Ottawa Group as a whole share a lot of commonalities — especially regarding three categories of particular relevance to China.
First, the proposals align on the need to update the substantive rules of the WTO. This includes clarifying the application of “public body” rules to SOEs, expanding the rules on forced technology transfer and addressing barriers to digital trade. All of these are long-standing issues that have been litigated in the WTO. They each reflect a major concern about China’s trade and economic systems, which employ measures that are perceived as unfair trade practices. This first basket of issues includes concerns about China’s unique state-led development model, which emphasizes the role of state-owned firms in the Chinese economy, often blurring the boundary between the state and the firm. Other issues of concern include China’s overzealous drive to obtain and absorb foreign intellectual property rights, where foreign firms are met with explicit or implicit demands to trade their technologies for access to markets. Another concern touches the core of China’s authoritarian regime, especially its tight control over information and the internet.
The second category addresses the procedural issue of boosting the efficiency and effectiveness of the WTO’s monitoring functions, especially those relating to compliance with the notification requirements of the WTO, such as those on subsidies. While no WTO member may claim a perfect record on subsidy notifications, China’s failure in fulfilling the obligation is deemed particularly egregious. This seems to be a perennial problem that the US Trade Representative has been complaining about ever since China’s accession to the WTO. To address the problem, the joint draft on strengthening the notification requirements (authored by Canada, the European Union, Japan and the United States) proposed some rather drastic measures, such as naming and shaming the delinquent member by designating it as “a member with notification delay,”
curtailing the member’s right to intervene in WTO meetings and nominations to chair WTO bodies, and even levying a fine at the rate of five percent of the member’s annual contribution to the WTO.
Given the mounting pressure on China, however, most of the Chinese proposals directly address the aforementioned reform proposals.
The third category of issues relates to development. Again, this is another long-standing issue stemming from the call by the European Union and the United States for more “differentiation” among WTO members. The underlying rationale is that, while developed countries are willing to extend special and differential treatment to smaller developing countries, they are rather reluctant to extend the same treatment to large developing countries such as China, which are economic powerhouses in their own right. Thus, in their proposals, Canada and the European Union call for the replacement of “blanket flexibilities” for all WTO members by “a needs-driven and evidence-based approach” that “recognizes the need for flexibility for development purposes while acknowledging that not all countries need or should benefit from the same level of flexibility.” The United States’ proposal is the most radical. It proposes the automatic termination of special and differential treatment for members that fall into any of the following four categories: a member of the Organisation for Economic Co-operation and Development, a member of the Group of Twenty (G20), being classified as “high income” by the World Bank, or having at least a 0.5 percent share of global goods trade. Such a classification system would strip many WTO members of their developing-country status, especially China, as it meets two criteria (G20 membership and having a large share of trade).
Realizing that it has become the unnamed target of WTO reform, China quickly responded with two documents. The first is a position paper on WTO reform issued in November 2018, which set out China’s three principles and five suggestions for WTO reform. In May 2019, China submitted a formal proposal on WTO reform, which further elaborated the main issues of concern for China, as well as the specific actions that need to be taken. In the two documents, China adopts an interesting strategy.
While many of the suggestions directly respond to the China-related reform proposals mentioned earlier, China also tries to turn the table against developed countries by launching its own offensive. For example, China suggests that the first priority should be solving the existential issues facing the WTO, such as the impasse over the Appellate Body member appointment process, the abuse of the national security exception and the resort to unilateral measures. Given the mounting pressure on China, however, most of the Chinese proposals directly address the aforementioned reform proposals.
First, China expresses willingness to consider some of the issues (such as electronic commerce and investment facilitation), but it objects to many other issues. For example, one of the five suggestions in China’s position paper is the need to “respect members’ development models,” which means that China “opposes special and discriminatory disciplines against state-owned enterprises in the name of WTO reform.” This is duly reiterated in the reform proposal itself, listed under the heading of “Principle of Fair Competition in Trade and Investment.”
One might wonder why China takes such an adamant position on the SOE issue, but it is not surprising at all, given that SOEs bolster two of China’s three core interests, as famously defined by State Councillor Dai Binguo in 2009. Moreover, even on issues where China seems to agree with the other members, the Chinese position sometimes comes with a different twist. Electronic commerce is one such example: the Chinese proposal focuses on “cross-border trade in goods enabled by the Internet, as well as on such related services as payment and logistics services.” This is very different from the position taken by the United States, which emphasizes the digital transmissions and the associated issue of free flow of data.
To move forward, however, China’s concerns also need to be taken into account.
Second, on the procedural issue of subsidy notifications, China adopts a dual-track approach. On the defensive side, China proposes that developing countries should only comply with the notification obligations on a best-endeavour basis, and that they should receive more technical assistance.
On the offensive side, China throws the ball into the court of developed countries by calling on them to “lead by example in submitting comprehensive, timely and accurate notifications” and to “improve the quality of their counter-notifications.”
With regard to the third basket of development issues, China is taking a flexible approach. As a matter of principle, it made clear that special and differential treatment is an “entitlement” that China “will never agree to be deprived of.” At the same time, China also indicated its willingness to “take up commitments commensurate with its level of development and economic capability. This approach is consistent with what China has been doing for some time, such as its active participation in the negotiations on trade facilitation.
The way forward
It is often said that the multilateral trading system is all about the blind pursuit of free trade, but this could not be farther from the truth. As both the Havana Charter for an International Trade Organization and the Marrakesh Agreement Establishing the WTO explicitly recognized, promoting economic development is one of the key objectives of the multilateral trading system.
With its stellar record in economic and trade growth, the Chinese model provides an attractive alternative to other developing countries. At the same time, China’s unique economic system also raises challenges for the world trading system. Such challenges need to be properly addressed within the multilateral trade framework, lest the wrong lessons be learned by other countries. In this regard, the current reform discussions in the WTO are a good start. To move forward, however, China’s concerns also need to be taken into account. In particular, the rules need to be neutral regarding the ownership structure of the firms that might constitute “public bodies,” so that it would not be perceived as China-specific. This is also in line with the evolution of WTO jurisprudence, where ownership is only one of the factors taken into consideration.
While the rules are being negotiated, the other WTO members may also consider better utilizing existing WTO rules to challenge Chinese trade barriers and practices. Recent developments within China, especially initiatives to build Communist Party cells in Chinese firms, have made it easier to fulfill the public body requirement in WTO litigation. This, in turn, requires the restoration of the WTO dispute settlement mechanism; without it, all rules — old or new — are little more than words on paper.