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China in the WTO

Trading Places

The campaign to join the World Trade Organization was the most powerful external force behind China’s unprecedented economic liberalization. But now, with reform losing momentum, has China outgrown WTO influence?

January 2012 Issue | by Li Jia

Pigs symbolize wealth in Chinese tradition, and modern China’s accumulation of wealth was not without porcine contribution; from World War II to the late 1970s, pig bristle exports to the US were the primary source of China’s meager foreign exchange reserves. Now, Chinese exports are part of the daily life of consumers worldwide, and while China still dominates the world’s bristle market,  it is manufactured goods that have underwritten prosperity. A wealth of investment in and export from China’s manufacturing industry has made the country the world’s biggest exporter and second biggest importer. Millions of Chinese have been lifted out of poverty, many of them through work in the export sector.

Along China’s dramatic path towards industrialization and integration into the global economy since 1978, external forces have taken a lead role. The country’s world-beating export achievements, for example, may not have been possible had it not been for China’s acceptance into the World Trade Organization in 2001.

While membership of the organization brought with it an influx of foreign capital and access to the global market, it also came with great responsibility. “Encouraging development and economic reform” is enshrined as one of the fundamental principles of the WTO, and in practice, living up to the organization’s stringent requirements served as one of the most important external forces behind China’s economic reform from the mid-1980s onward. Pascal Lamy, director-general of the WTO, said in Shanghai last year that “Joining the WTO was, for China, a process inextricably linked to its own domestic reforms,” an opinion shared by many in China.

But while efforts are still being made to improve China’s economic structure, they have slowed drastically, and in a time when China can’t afford to lose momentum; the distribution of the nation’s wealth is becoming more and more uneven by the day. This lack of enthusiasm for change has not only hindered the growth of domestic consumption, but has also increased the risk of social instability. Internationally, developing countries have taken defensive stances against cheap Chinese imports, while developed ones have turned to more powerful measures, like attacking aspects of China’s macro-economic policy and intellectual property protection.

Meanwhile, within China, the last 10 years of interaction with the WTO are largely seen as a success story. Staggering growth in trade and GDP figures, and a clean record of prompt fulfillment of requirements dominate the State media. Deeper reflection, if any, has been either limited to academic discussion, or focused on how better to use WTO rules to defend Chinese products in trade disputes. The WTO’s role as an impetus for future economic reform has rarely been mentioned.

None of China’s economic headaches can be cured without renewed enthusiasm for economic reform, and the government has recognized the need to shift to a more balanced, innovation-oriented growth pattern. But, with China’s economy in a much stronger position than a decade ago, some have suggested that the WTO no longer has the clout to steer China in the right direction.

Pressure

While China began to encourage export in the early 1980s, talk of a “market economy” remained taboo until 1993, when the government finally declared that the ultimate goal of its economic reform was to create a “socialist market economy.” That declaration not only broke the seven-year stalemate in negotiations over China’s entry to the international trading system, but also ushered in a 10-year surge of sweeping reforms in nearly every aspect of China’s economic system, including changes in fiscal framework, the role of State-owned enterprises (SOEs), housing, government institutions and investment practices.

Unsurprisingly, resistance was strong. “Chinese reformers at that time, led by Zhu Rongji as vice-premier and then premier, saw the potential of using the WTO negotiations as an external leverage to resist domestic interest groups that preferred oligarchy and monopoly,” said Joerg Wuttke, who has witnessed China’s economic development over 20 years as a senior executive of several multinational companies, in an interview with NewsChina.

To fit into what Wuttke, currently Chairman of the China Task Force of Business and Industry Advisory Committee to the OECD (BIAC), described as the “WTO socket,” China had to make itself into the “right plug.” This involved efforts to reduce or remove tangible barriers like tariffs, quotas and restrictions, but more significantly, it encouraged China to make drastic changes the very structure of its economy in order to comply with WTO rules.

The year 2003 saw China on a legislative fast-track towards a market economy. According to Professor Li Shuguang at the China University of Political Science and Law, who participated in the legislation of most market economic laws in China, almost no law consistent with market economy existed before 2003. Although some laws, such as the Corporate Law and Securities Law, had been established years earlier, they were “more pro-SOE, rather than pro-competition,” Li said. Those laws were later revised to reflect WTO principles promoting fair competition.

In the first two or three years of membership, the government also launched a nationwide campaign to promote the understanding of WTO rules and principles. Government officials at all levels, businesspeople and the general public were all encouraged to attend training courses. In an effort to adapt society as a whole to the WTO era, State-run newspaper the People’s Daily called for better awareness of integrity and observance of rules.

Since China’s transition period concluded in 2005, the WTO has served as an external surveillance body over the development of China’s economic reform. The WTO Trade Policy Review evaluates a member’s consistency in fulfilling its commitments. In all three reviews to date, the focus has been placed heavily on government intervention and policy transparency, reflecting the trade community’s focus on China’s business environment as a whole rather than just policies directly related to trade and investment. Issues raised include progress in the public sector, overinvestment in certain sectors as a result of government “guidance,” and intellectual property rights protection.

Out of Fashion?

However, times have changed. In the chairperson’s concluding statement for China’s WTO Trade Policy Review in 2010, trading partners expressed concerns for the first time that “progress towards market liberalization had showed signs of slowing down,” and urged China to “give new impetus to its reform program.”

Criticism has come not only from outside, but also from within China, with both domestic and foreign stakeholders voicing dissatisfaction. “Items on the list of complaints from European and American businesses in China have scarcely changed over the past 10 years,” said Wuttke. Transparency and intellectual property protection, in particular, have always been among the hottest issues. That, he insisted, shows that systematic improvements expected years ago have still not been made.

Prominent Chinese economists share similar concerns. For example, Professor Yao Yang, Director of the China Center for Economic Research at Peking University, openly warned in an article last year that China’s current growth model had caused social discontent domestically and trade frictions overseas. Wu Jinglian, one of China’s most vocal advocates of market-oriented economic reform, repeatedly called for progress on the rule of law in the country’s economic governance.

But Wuttke does not think the WTO is as potent a source of change now as it was a decade ago. One reason, he argues, is that China’s position as a world trading power has led to complacency, and a lack of motivation to change. The other reason is that the efficiency of the WTO itself has been called into question; the Doha Round negotiations, aimed at building a fairer trading system within the organization, have been fruitless since 2008.

To make matters all the more complicated, while the WTO can spot areas that need improvement in China’s economic reform, the right to properly assess those areas is problematic, as China has technically fulfilled its WTO commitments. In its 2010 review, the WTO hardly questioned China’s performance in relaxing restrictions on trade and investment. Even the European Union recognized in its 2008 report that in certain key areas, China “has in place almost all the necessary legislation” for a market economy by the EU’s definition. As a result of the technical fulfillment and establishment of WTO-consistent rules, China’s system has been “made rigid enough to respond to pressure,” said Professor Li Shuguang.

If the WTO mandate to move to a rule-based economy is forgotten, resistance to China’s Reform and Opening Up process could be on the horizon. Professor Li Shuguang warned that at the local level, improper business practices are still rife, showing clear signs of that dangerous prospect. He has noted that in cases where debtors are politically connected, creditors often choose to appease them rather than resort to legal means.

There is no doubt that, with or without the WTO, China needs further reform of its economic system just as urgently as it did ten or twenty years ago. But now, having jumped through the necessary hoops, China’s member status keeps its attractive economy, theoretically open to all comers, leaving it with little reason to continue to reform. But while the days of WTO pressure may be gone, China cannot overlook the benefit that its membership can still bring in terms of ideas and culture, arguably as important to an economy as capital and goods. The dynamic between the two may have changed, but China and the WTO still have a lot to learn from each other.

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