China’s big moment of choice on trade policy

Author: Tom Westland, ANU

It’s twenty years this week since China was admitted to membership of the World Trade Organization (WTO). That presaged a remarkable surge in Chinese trade, an industrial transformation on a scale not seen before in human history, China’s emergence as the world’s largest trading nation and its integration into the global economy in a way that was hardly possible to imagine just two decades earlier. It’s little wonder that the WTO is among the most widely respected international institutions in China today.

China’s rapid growth since its accession to the WTO — per capita incomes are now well over four times as high today as they were in 2001 — was the single most important poverty-reducing event of the past century. China’s decision to join the WTO, and the stringent conditions it had to meet to be accepted, have been major drivers of the vast structural change away from subsistence agriculture, making China the undisputed factory of the world economy. Its rise as a manufacturing powerhouse has profoundly shaped the way the world economy operates, leading to soaring demand for raw materials, challenging manufacturing industries in other industrial countries, and leading to a major shift in the balance of geopolitical power away from the United States and Europe and towards Asia.

The sailing has not always been smooth: while China has a good record of abiding by the letter of WTO law, it has not always lived up to its spirit.

Last month, the WTO completed its latest Trade Policy Review of China, the eighth to take place since China’s accession twenty years ago this month. The mood at the Review was rather darker than in the past, as a number of countries, including Australia, the United States, Japan and India, took the opportunity to stick the diplomatic boot in over China’s recent attempts to use economic coercion — mainly by application of strategically chosen import bans — in the service of its geopolitical goals. Other delegations, while drawing attention to work still to be done by China, were more positive.

These complaints are not new, nor are all of them unjustified: in more-or-less every one of China’s reviews since the first in 2006, Western countries have needled Beijing over what they see as reform backsliding. Perennial grievances include opaque customs procedures, trade bans with flimsy or non-existent justifications, and lack of transparency over the vast array of subsidies it has doled out to domestic industries. On the other hand, subsidies on the wind turbine industry, for example, were wound back at WTO instigation.

China’s record in the WTO is much better than Western narratives suggest. It implemented its WTO accession protocols not only because it agreed to them but because they propelled the domestic reforms the leadership wanted to put in place. The accession agreement roadmap only ran for 10 years. If China has not always stuck to the spirit of its accession agreement, it has usually accepted the rulings of the WTO’s arbitration.

Perhaps the harshest critic of China’s track record, the US-China Business Council, has been clear in the past that although ‘China has fulfilled most of the specific obligations of the accession agreement, China has not implemented a number of important commitments’. Specifically, ‘new areas not envisioned at the time of the accession negotiations were not covered by the agreement’. The rules are outdated and have not kept up with commerce in this century, a problem that is not entirely China’s fault as the United States itself has opted out of playing by the old WTO rules and forging new ones.

The dominant view in Washington these days is that China’s declared desire for a more open, market-oriented economy is not to be taken seriously, and that it will continue to operate a dirigiste model of state intervention in the economy for decades to come. This is more than a little hypocritical, given the recent bipartisan American embrace of industrial subsidies and managed trade with China and Europe. It also seriously underestimates both the major role that markets place in allocating resources within the Chinese economy and the political will for reform in Beijing. China’s recent application to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) will require a major commitment on Beijing’s part to dismantle the role of state-owned enterprises in the Chinese economy.

If the United States no longer has the will to lead in the global trade system, it is far from clear that — despite the progress it has made in the twenty years since it joined the WTO — China has the ambition or the capacity to superintend it, either. This is a dangerous time for a lack of global leadership. Pandemics breed protectionism. Given its weight in the world economy, Asia (including China) needs to step up with collective leadership that will defend, preserve and extend the remit of the WTO. As China’s experience since 2001 has shown, participation in a rules-based liberal trading order is a precondition for sustained catch-up growth, a lesson from which lower-income countries, particularly in South Asia and Africa can learn a great deal. But that trading order can only endure as long as its participants commit to abiding by the rules of the game — and updating those rules when necessary.

At Davos in January 2017, Chinese President Xi Jinping stood up for globalisation and the order that secured it as ‘the right strategic choice’. China’s — and, by extension, Asia’s — interest in new leadership to defend that order requires that its actions are now true to its President’s word.

Tom Westland is Research Director in the Asian Bureau of Economic Research in the Crawford School of Public Policy at the Australian National University.

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