China and the WTO

Why Multilateralism Still Matters

Petros C. Mavroidis, Andre Sapir

• Publisher: Princeton University Press
• Year: 2021
• ISBN:
  9780691206608
• Topic: Économie
• Subtopic: Économie internationale

An examination of China's participation in the World Trade Organization, the conflicts it has caused, and how WTO reforms could ease them China's accession to the World Trade Organization (WTO) in 2001 was rightly hailed as a huge step forward in international cooperation. However, China's participation in the WTO has been anything but smooth, with China alienating some of its trading partners, particularly the United States. The mismatch between the WTO framework and China's economic model has undermined the WTO's ability to mitigate tensions arising from China's size and rapid growth. What has to change? China and the WTO demonstrates that unilateral pressure, by the United States and others, is not the answer. Instead, Petros Mavroidis and André Sapir show that if the WTO enacts judicious reforms, it could induce China's cooperation, leading to a renewed confidence in the WTO system.The WTO and its predecessor, the General Agreement on Tariffs and Trade, are predicated on liberal domestic policies. They managed the previous accessions of socialist countries and big trading nations, but none were as large or powerful as China. Mavroidis and Sapir contend that for the WTO to function smoothly and accommodate China's unique geopolitical position, it needs to translate some of its implicit principles into explicit treaty language. To make their point, they focus on two core complaints—that Chinese state-owned enterprises (SOEs) benefit from unfair trade advantages, and that domestic companies, private as well as SOEs, impose forced technology transfer on foreign companies as a condition for accessing the Chinese market—and they lay out specific proposals for WTO reforms.In an age of global trade disputes, China and the WTO offers a timely exploration of unprecedented challenges to the current multilateral system and fresh ideas for lasting solutions.

1

The Rise and Rise of China

(AND WHAT SHOULD BE DONE ABOUT IT)

But the shore will never look more attractive than it is now. A man may stand here and put all the world behind him.

—HENRY DAVID THOREAU

On November 11, 2001, the day after the WTO membership unanimously approved the admission of China to the organization as its 143rd member, Mike Moore, the WTO director-general, said that this day would be remembered as “one of the most significant events of the 21st century for China, the WTO, and the world.”¹ This view was widely shared around the world.

Thoreau’s windswept confidence in new vistas captures the euphoria surrounding China’s accession to the WTO to perfection: a widespread feeling of optimism that the world trading community had turned a corner. The end of communism in Europe had begun the process of integrating the Soviet bloc into the world economy. Now the accession of China to the WTO, the culmination of a long process that had started in the late 1970s to early 1980s with the reform agenda of Chairman Deng Xiaoping, continued that integration and seemed to justify the exuberance of economic observers.

In Washington, D.C., in a statement welcoming China into the international trading system, President George W. Bush said that “we look forward to the great benefits we know that greater trade will bring to all our peoples.”² The European reaction echoed this sentiment:

15. In reality, China’s accession can only lock in and deepen market reforms, empowering those in the leadership who support further and faster moves towards economic freedom. The opening up of telecommunications, the internet and satellite services will inevitably expose the Chinese people to information, ideas and debate from around the world. The rule of law will be strengthened as China finds herself obliged to play by the global trade rules. The spillover of economic freedom and respect for commercial law into the political and social sphere will be gradual, but the contribution made by WTO entry will be positive. Many human rights activists and members of the foreign policy community agree that bringing China into the world trading system will be a push in the right direction in these spheres also.³

Western exuberance was echoed within China as well. In Beijing, the government-run newspaper, the People’s Daily, proclaimed in a front-page editorial that “this is a historic moment in China’s reform and opening-up and the process of modernisation.”⁴

There was, to be sure, reason to celebrate. Blustein cites interviews he conducted with high-ranking trade policy experts that underscore this universal feeling of great achievement. For example, one expert looked confidently at the road ahead: “Their [i.e., China’s] policies will align with ours—not over months, but it’s going to happen. There was great confidence in that. And if you’re confident about the endpoint, it allows you to be more patient about missteps along the way” (2019, 123). As Blustein summed it up excitedly, “With the inclusion of China, a nation of 1.25 billion at the time, the ‘W’ in the trade body’s acronym attained validity that it previously lacked” (4).

The mood was celebratory among the delegations present at the WTO General Council meeting with China. Was it justified? Looking back, one wonders whether the negotiators had thought beyond China’s accession to the difficult process of actually integrating its vastly different economy into the WTO’s system. Their feeling of accomplishment was, perhaps, not sustainable.

The Process of China’s Accession to the WTO

China was one of the original contracting parties to the GATT in 1947, but its status was deactivated in 1950 after the formation of the People’s Republic. For the next three decades, China had practically no contact with the GATT. The situation changed in the late 1970s and early 1980s, following Deng Xiaoping’s economic reforms. Deng first politically transformed China, then liberalized its economy unilaterally through his decision to open the door to China’s participation in the Asia-Pacific Economic Cooperation (APEC), and, finally, knocked on the door of the GATT itself.

TRANSFORMATION STARTS AT HOME

Deng’s strategy, aptly described by Lardy (2002), Vogel (2011), and Kroeber (2016), consisted of two pillars: reform and opening (gaige kaifang). The phrase he and other reformers used to describe gaige kaifang was “crossing the river by feeling for the stones.” They would embark on this exercise through trial and error, feeling their way partially blind through unfamiliar territory.⁵

Deng was a pragmatist. Vogel notes (2019, 426) that one of his favorite mottoes was Mao’s dictum “seek truth from facts.” He could be blunt when criticizing China’s failures to address basic human needs; he was eager to borrow ideas from others when warranted, if he thought they had something to offer. He did not shy away from bold decisions on sensitive issues as he pursued his goal of gearing the Chinese economy toward efficiency.

Accounts about China’s reforms start from Deng’s chairmanship. And of course, it is only fair to give Deng the lion’s share of credit for China’s reform process. Nevertheless, as Gewirtz (2017) correctly underscores, Hua Guofeng and Hu Yaobang, a Deng protégé, had been promoting reform even before Deng acceded to the chairmanship. But Deng co-opted and expanded their originally hesitant reforms. He buried the hatchet with Japan by signing the 1978 Treaty of Peace and Friendship, and having appeased his neighbors, he turned to the world.⁶

He looked into Singapore’s and Japan’s experiences in Asia⁷ and learned from Western countries as well.⁸ He asked for technological assistance, for example, from the Japan External Trade Organization (JETRO), as he did from various Western establishments. Dozens of scientific and technical delegations visited China, and slowly Chinese entrepreneurs and bureaucrats and increasingly even Chinese students visited the West. One thing was clear to him: China could and should work to join the world economy by loosening the iron grip of the state on certain economic sectors.

Farming was the first sector to privatize, as Kroeber explains in his authoritative short history of China’s transformation (2016, 27ff.). This was not a paradox. Speaking in 1979, Chen Yun, the head of the China Development Bank, mentioned that of the 900 million people then living in China, 80 percent were farmers, and they were poor.⁹ Change had to start there. Originally, the most common privatized firm was a household enterprise (getihu), which by law could not comprise more than seven employees. This is, of course, a far cry from the size of today’s Chinese behemoths.

In the 1980s, rural reform picked up speed and was implemented by Township and Village Enterprises (TVEs). Unlike SOEs, which originally were entirely statist entities, TVEs could adjust to market conditions. They were a huge success and arguably provided the impetus for the gradual transformation of SOEs as well.¹⁰

The next step was the establishment of special economic zones (SEZs), in which trade and investment were liberalized and a strong emphasis on building infrastructure paved the way for the change. Having collected evidence from eighty-odd countries that had implemented SEZs, China embarked on a similar adventure in 1980—the culmination of Deng’s experiments. The idea was that SEZs would be given enough flexibility to effectively be regulated by the market. They would be free-trade areas, where goods would be imported without being subjected to tariffs and would be reexported following transformation in the SEZ. Guangdong (Canton), Fujian, Shenzen, and Zuhai were the first four SEZs, and their success was phenomenal. The combination of developing country labor costs and rich country infrastructure led unavoidably to the Chinese export-led growth model.¹¹ Uninhibited access to the world markets was the next logical frontier.

Deng faced criticism from various directions, the economic success of the experiment notwithstanding. In Guangdong and Fujian especially, to bring transaction costs as low as possible, local officials saw the value of establishing “one-stop shops,” where investors and traders alike could procure all the necessary information regarding the transactions they were involved in. It did not take long for the most conservative sections within the party to react, attempting to thwart the opening up of the economy. Guangdong and Fujian officials had to tread very carefully in order to assure foreigners that it was business as usual while not arousing the reactionary forces in Beijing. Was China about to change?¹²

According to Vogel, Deng managed to find a compromise (2011, 420ff.). Although fourteen coastal states received authorization to open their own SEZs, Deng reassured the party that there was no risk that China would become a capitalist country. While his decision to move China toward market liberalization was clear for all to see, Deng was equally clear on another issue: institutions had to be built to support the market opening, and the Chinese Communist Party should manage the process.¹³ The party would, in his conception, be the pillar upon which an economic transformation could stand. Deng was apparently convinced that the party could continue to operate as it always had, the transformation notwithstanding. Deng scoffed at the broader transformation happening in the Soviet Union at the same time; in his view, Mikhail Gorbachev had abdicated the necessarily central role of the party in his haste to liberalize. Vogel quotes Deng’s son relaying the Chinese leader’s opinion: “my father thinks Gorbachev is an idiot.”¹⁴

Deng could not understand the lack of perspective in the Russian leader’s model to call for transformation of the economy without ensuring the central role of the party first. He presciently predicted that the people would remove Gorbachev, which, more or less, eventually happened. Deng wanted to avoid a similar fate. Preserving the role of the party was a priority. We cannot underscore this point enough. It is, in our view, the source of the grievances that many WTO incumbents have raised in recent years against China, and we will be returning to it in various places in this volume.¹⁵ Martin and Bach (1998) explain that China initiated important reforms in the realm of state trading because of the anticipated accession to the WTO. Sixteen foreign trade corporations (FTCs) had practically monopolized import and export trade before Chairman Deng’s reforms. Their number increased substantially as a result of reforms (with exceptions in some farm goods and oil), eventually eliminated exchange rate distortions, and allowed prices to become a decisive factor in resource allocation.

Deng’s commitment to push on with reforms impressed many outsiders. Vogel explains in detail how Robert McNamara, then president of the World Bank, overruled even the pleas of his country of origin, the United States, and accelerated...