China and the WTO: American Buyer’s Remorse

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China’s trade policies are up for review by the World Trade Organization. This is a normal procedure undergone by the Member States, and not some sort of special investigation that we can get excited about. That being said, the occasion does allow for some sniping from the sidelines and the usual pushback and charges of hypocrisy by Beijing. (I never get tired of this stuff, do you?)

But along with the usual trade policy arguments, we can discern a big picture item here, one that is regularly discussed within trade policy circles but not necessarily by a wider audience. See if you can figure out the inherent problem highlighted by this passage from a Reuters article:

China has rejected U.S. criticisms during a review of its trade policies at the World Trade Organization and used the occasion to suggest many U.S. accusations were not only groundless but in some areas hypocritical.

U.S. Ambassador to the WTO Michael Punke leveled a wide-ranging salvo of criticisms during the two-day Trade Policy Review (TPR), which every WTO member has to undergo on a periodic basis, and said China was falling back into a “tighter embrace of state capitalism”.

But China swatted aside many of the criticisms, which included complaints about its failure to disclose subsidies and a lack of transparency and intellectual property enforcement.

China’s Assistant Minister of Commerce Yu Jianhua said he regretted that during the TPR process some WTO members had deemed China was practicing state capitalism.

“The term cannot be found in … WTO documents. It has nothing to do with the TPR or WTO rules. We strongly believe TPR should not be abused for the purpose of domestic politics,” he said.

Note in particular that last paragraph. The discussion concerned state capitalism, or the role of the government in China’s economy. Whether or not that role is optimal from an economic standpoint is a related but separate issue, one that Beijing has yet to determine itself if the recent mixed messages concerning state-owned monopolies are any indication.

But here we’re talking about the current role of government in the economy and how that comports with WTO legal mandates. The problem is that the WTO legal framework, which have their roots in the post World War II GATT, never envisioned the unique sort of state-sponsored capitalism currently practiced in the People’s Republic. Trying to apply that law to what goes on here in China is difficult at best, some would say impossible.

Professor and blogger Patrick Chovanec discussed the issue of protectionism in a recent post and summed up the problem as follows:

There’s a critical difference, though, between China and its trade partners.  They all may both have policies that can be called protectionist, but they come from different starting points.  In the U.S., trade restrictions and subsidies tend to be the exception to the rule, and when they do occur, are usually transparent.  There’s a public approval process and an overt policy that can be challenged at WTO.  In China, restrictions and subsidies are pervasive, due to the large state role in the economy, and often hard to pin down.

It’s this difficulty of “hard to pin down” that is the problem. From the U.S. perspective, this makes negotiations and dispute resolution extremely difficult. American transparency means that not only can its trading partners easily access data and policy information when challenging American rules in a formal setting, but they can also use this information in bilateral trade negotiations.

With China, problems may be well known yet very difficult to prove. For example, a perennial source of friction between the two countries concerns so-called forced technology transfer, where foreign investment deals into China are only approved conditionally upon inward licensing or transfer of high-tech know-how or registered intellectual property. However, since this is an informal policy at best, and not a law, rule, or regulation, proving that it exists in front of a WTO dispute resolution panel would be difficult.

The WTO was set up by the US and Western Europe with the vision of Member States being free-market capitalists that practiced transparency. The system, for a variety of reasons, is simply not equipped to handle modern China.

As Chovanec explains, the disgruntled voices in the U.S. are getting louder:

[T]here’s growing discussion among U.S. officials and trade experts about whether the WTO framework is at all suited to tackling the issues that really matter when it comes to trade with China.  WTO is a rule-based system that does a reasonably good job at striking down overt actions or practices that violate trade agreements.  If the real problem is that a nation’s court system is rigged in favor of state-owned or state-championed companies; that laws that are on the books aren’t enforced, or are enforced unevenly; that business executives are rewarded for pursuing the government’s policy goals, even at the cost of profits; that licensing, investment approval, and other procedures are used to extract commercial concessions such as the transfer of critical technologies — all of these deeply entrenched issues, and more, are beyond WTO’s scope.

He concludes with the admission that even given these systemic problems, there is no obvious preferable alternative to the multilateral trading system that we have now. So at the end of the day, the U.S. is stuck with the framework it created, which unfortunately means that the bilateral frictions that we’ve all come to know and love ain’t going away anytime soon.

3 responses on “China and the WTO: American Buyer’s Remorse

  1. G. E. Anderson

    Probably the best leverage the developed world has is to start putting in place reciprocal rules for Chinese investment in their economies. Want to buy a foreign bank? You’ll be limited to an equity stake of less than 20%. Want to build cars in a foreign country? You’ll have to partner up with a local automaker, and you can only own 50% of the joint venture. (Can’t find a partner in our country? Too bad.) Want to import cars? Fine, as long as you’re willing to pay the same 25% tariff you charge everyone else.

    Don’t like these rules? Fine. Change yours and we’ll change ours.

    If you can’t tell, I’ve been reading Kissinger’s book lately. :)

    1. KS Chin

      Sounds good but in real practice, you must wonder who in the end will be the loser particular when China sells more cars. So if both plays the same game, lets say both sides don’t get to sell cars in each other’s country, I wonder if Kissinger would sound so smug or would he advocate gunboat diplomacy then?

  2. H.Z.

    I don’t think China is allowed to buy banks in the West at all nor should they be that interested considering how tightly banks are coupled with governments everywhere. (One exception is the purchase of Bank of East Asia in the U.S. but that was already a Hongkong owned bank). Nor do they do any car manufacturing in the West — SAAB may be an exception but I doubt they will actually do any on a real scale. In general I think China has a much larger portion of its economy controlled by non-allied foreigners than the U.S. It didn’t have much choice since it needs to attract foreign investments for modern management and technical expertise.