Disaggregating China, Inc.

State Strategies in the Liberal Economic Order

Yeling Tan

• Publisher: Cornell University Press
• Year: 2021
• Print ISBN: 9781501759635
• eBook ISBN: 9781501759642
• Topic: History
• Subtopic: Chinese History
• Index: History

Set in the aftermath of China's entry into the World Trade Organization, Disaggregating China, Inc. questions the extent to which the liberal internationalist promise of membership has been fulfilled in China. Yeling Tan unpacks the policies that various Chinese government actors adopted in response to WTO rules and shows that rather than disciplining the state, WTO entry provoked a divergence of policy responses across different parts of the complex party-state.

Tan argues that these responses draw from three competing strategies of economic governance: market-substituting (directive), market-shaping (developmental), and market-enhancing (regulatory). She uses innovative web-scraping techniques to assemble an original dataset of over 43,000 Chinese industry regulations, identifying policies associated with each strategy. Combining textual analysis with industry data, in-depth case studies, and field interviews with industry representatives and government officials, Tan demonstrates that different Chinese state actors adopted different logics of adjustment to respond to the common shock of WTO accession. This policy divergence originated from a combination of international and domestic forces.

Disaggregating China, Inc. breaks open the black box of the Chinese state, explaining why WTO rules, usually thought to commit states to international norms, instead provoked responses that the architects of those rules neither expected nor wanted.

Chapter 1

China’s WTO Challenge

The establishment of the World Trade Organization (WTO) in 1995 was a critical turning point in the evolution of the global trading regime, an event that substantially increased the scope and depth of multilateral trade cooperation. No longer would trade negotiations be restricted to the reciprocal lowering of border barriers such as tariffs and quotas, as was the objective of the General Agreement on Tariffs and Trade (GATT). Instead, attention expanded to the dismantling of nontariff barriers as avenues for liberalizing trade.¹ The cooperative principles established at the WTO, it was argued, represented a move toward a deeper version of liberal internationalism—a less hierarchical and more inclusive order based on universal and binding rules, with coverage over expansive domains.² This push toward inclusivity on the one hand and deep integration on the other generates tricky tensions for countries that have joined the WTO since 1995, as they increasingly represent a variety of regime types and stages of development: China in 2001, Vietnam in 2007, Russia in 2012, and Afghanistan in 2016.

The WTO’s body of rules is articulated in a set of agreements, including GATT, the General Agreement on Trade in Services (GATS), and the agreements on sanitary and phytosanitary measures (SPS), subsidies and countervailing measures (SCM), trade-related investment measures (TRIMS), trade-related aspects of intellectual property rights (TRIPS), and technical barriers to trade (TBT). The SPS, TRIPS and TBT agreements all exert external demands on policy processes traditionally under the purview of domestic agencies, from regulating health standards to policing counterfeit products. The TRIPS agreement in particular “signaled a new era” for the trading system, given the substantial legal and institutional requirements placed on the state to establish a system of intellectual property rights protection.³ GATS imposes requirements on the state to disclose information related to services provision and to establish judicial bodies to deal with administrative disputes.⁴ The SCM agreement delineates categories of subsidies that are either prohibited (e.g., export subsidies) or actionable (e.g., specific production subsidies), while TRIMS prohibits the use of measures such as local content requirements.⁵

In other words, these WTO agreements do not just impose restrictions on what policies may not be conducted but also actively generate a set of demands for the establishment of regulatory and legal institutions grounded in liberal market economy norms, from health and safety standards to dispute settlement procedures, requiring states to undergo a “fundamental and intrusive restructuring” of domestic institutions.⁶ Such restructuring is an inherently political process, given its potential for altering the balance of power across different agencies within the state. These external demands generate pressures to enhance a state’s regulatory capabilities, thereby potentially empowering state agencies tasked with standards setting and monitoring, intellectual property protection, and other market regulation functions.⁷

WTO membership also raises the technocratic capacity required for nation-states to participate in international economic diplomacy, from negotiating complicated and highly technical agreements to managing the legal processes of trade disputes. The WTO’s dispute settlement mechanism allows member states to bring complaints about the policies of other members before a WTO panel. Certain trade-related agencies within the state’s governing apparatus will therefore gain increased responsibilities over bringing such cases as a complainant and, as a defendant, accounting for domestic policies accused of being in violation of WTO rules. These demands again generate the potential for political conflict within the state, as some of the offending policies might have been enacted by other economic ministries or authorities in the government. In the event that a member loses a case, the reputational costs and pressure to comply with panel rulings can generate disagreements between, for example, trade ministries and authorities in charge of industrial policy.

Member governments are further required to reach a high standard of information disclosure regarding their trade and economic policies.⁸ The WTO imposes over two hundred notification requirements on members and requires all members to make public their general laws, regulations, and administrative rules. The WTO itself provides comprehensive trade-related data on all members, from tariff and nontariff barriers to in-depth trade policy reviews of country practices. In the event of a dispute, both sides are obliged to present their own evidence at the WTO panel to support their arguments. Information on a WTO member’s trade and domestic policies has therefore come to carry high economic benefits, as such data can affect panel rulings. Moreover, meeting the WTO’s transparency requirements can potentially alter lines of information flow within the state. This in turn raises the potential for conflict between agencies charged with collecting information and those tasked with furnishing data about their activities for external scrutiny. Such changes are arguably more intrusive and demanding for authoritarian states accustomed to operating in opacity.⁹

Finally, while the GATT regime allowed members certain flexibilities and differential treatment in the application of rules, the WTO requires newly acceding members to sign on to all existing rules in a “single undertaking.” This single undertaking was a particularly onerous task for China, as it represented a process of change that was much at odds with the incremental and heterodox nature of reform that had marked its previous three decades of growth. Additionally, Article XII of the WTO Agreement states that a newly acceding member is to join the WTO “on terms to be agreed between it and the WTO,” effectively giving current members the power to impose on new members obligations and commitments that go beyond existing WTO rules. In the preaccession stage, the party seeking entry naturally has a weak bargaining position vis-à-vis existing members, allowing the latter to negotiate accession terms far stricter than those imposed on the members themselves. This raises the amount of domestic adjustment that the acceding party has to implement as a price for accession.¹⁰ In no case was this more true than that of China’s WTO accession, as the next section discusses.

The Political Economy of China’s WTO Entry

China had been an original signatory of the GATT when it was formed in 1947. After the Kuomintang was defeated by the communists in 1949, the Kuomintang fled to Taiwan and subsequently announced China’s withdrawal from GATT. In 1986, the Chinese Communist Party (CCP) government began the process of resuming GATT membership.¹¹ Little progress was made over the next decade not only because of the violent Tiananmen crackdown in 1989 but also due to ambiguity over how to treat China’s self-described “socialist commodity economy” within the ambit of GATT rules.¹² Further disagreement lay in whether China would be treated as a developing country, given its size and potential economic import.¹³ When the WTO was formed in 1995, China kept up its integration efforts by applying to join the organization as a contracting party. The process of WTO accession, however, would be substantively more difficult, given the enlarged scope of WTO rules described earlier. Negotiations would now have to cover not just liberalization in goods but also services as well as policies governing intellectual property, dispute resolution, transparency, and investment.¹⁴

Detailed accounts of the events and political dynamics leading up to China’s WTO entry can be found in a number of scholarly works.¹⁵ This discussion therefore focuses on why China’s accession commitments represented such an external shock to its domestic governing system. The analysis highlights the role that foreign economic powers—in particular the United States—played in shaping the specific commitments in China’s protocol of accession. Then, the analysis explains how China’s leaders overcame tremendous domestic resistance to WTO entry, why the resulting terms in the protocol went above and beyond ordinary WTO commitments, and why we might expect bureaucratic resistance to WTO-led liberalization.

US interests played a critical role in shaping the major terms and conditions for China’s WTO accession, because the United States was the most important gatekeeper to WTO entry. Once China came to a bilateral agreement with the United States on its accession terms (signed in November 1999), negotiations with other major trading partners such as the European Union and Japan proceeded much more smoothly.¹⁶ These US interests derived from a combination of commercial and geopolitical considerations. The commercial interests were grounded in the economic potential of China’s domestic market and exporting capabilities, while the political motivations were driven by a broader conviction that it was important to knit China closer into the international system and that WTO entry would strengthen the hand of reformers in China.¹⁷

In terms of economic interests, United States Trade Representative (USTR) Charlene Barshefsky spent two years of the accession process emphasizing to the Chinese that China had to accede to the WTO on commercial—not political—terms.¹⁸ These commercial demands were articulated in a road map to accession that Barshefsky presented to Chinese trade minister Wu Yi in 1995. The document set out the key commitments that China would have to undertake to join the WTO, including not just major cuts in tariffs on manufacturing goods but also substantive liberalization in sensitive areas such as agriculture and services (banking, telecommunications, and insurance).¹⁹ Every single tariff line came under intense scrutiny and discussion, a reflection of the broad range of US commercial groups interested in gaining access to China’s large domestic market. Therefore, to have the trade deal passed by Congress, the US negotiating team was under immense pressure to achieve deep and broad concessions.²⁰ On the protectionist side, the negotiators also had to incorporate concerns from textiles and steel groups that safeguards be built into the deal so they would not be hurt by surges in Chinese imports.²¹

As for broader geopolitical considerations, China’s WTO entry represented an opportunity to integrate China with the rules of the international economic order. As a former US official put it, “In the broadest form, the motivation was to ensure that China’s reemergence would be constructive, not destructive, to the global system of order.”²² This belief only deepened when the WTO was formed, since it had stronger enforcement powers via its dispute settlement mechanism.²³ US president Bill Clinton emphasized this point when drumming up domestic support for this deal, noting in a speech in 2000 that “under this agreement, some of China’s most important decisions for the first time will be subject to the review of international bodies with rules and binding dispute settlement.”²⁴ Treasury Secretary Larry Summers reinforced these views during his testimony to the House Committee on Ways and Means in 2000:

For the first time, China’s compliance will be subject to multilateral enforcement under the WTO dispute settlement mechanism, which will force China to comply with WTO rulings or be subject to trade sanctions.… [WTO membership] will both support the cause of market reform within China and provide an effective rule-based framework for future Chinese reforms to take place.… By learning to “play by the rules,” both internationally and domestically, China will strengthen the rule of law, which will enable it to become a more reliable partner and a fairer society.²⁵

What were the interests of China’s leaders in joining the WTO. and how did those interests line up with those of China’s bureaucracy? One historical reason for China’s WTO bid was that its paramount leader, Deng Xiaoping, had made the decision to reintegrate China into the international system.²⁶ Broadly, WTO entry would advance China’s efforts to gain recognition as...

Table of contents

• List of Figures and Tables
• Acknowledgments
• List of Abbreviations
• Introduction
• 1. China’s WTO Challenge
• 2. A Theory of State Strategies under Global Rules
• 3. The Hierarchical Politics of WTO Entry
• 4. Explaining the Rise of State Capitalism
• 5. FDI and the Quest for National Champions
• Conclusion
• A. Appendix to Chapter 3
• B. Appendix to Chapter 4
• List of Interviews
• Notes
• References
• Index