China and the Multilateral Trading System: Misunderstandings, Criticisms, and Options
CHINA’S ROLE in the multilateral trading system established under the auspices of the World Trade Organization (WTO) has been much debated and remains highly controversial. More often than not, however, the labelling of China as a ‘bad player’ in the system results from significant misunderstandings of both the WTO’s functions and China’s behaviour.
Amid the rising tensions between the United States and China since 2017, the Trump Administration frequently and aggressively repeated the claim that the US, under the Clinton/Bush Administration in 2001, mistakenly supported China’s accession to the WTO.1 It accused China of failing to adhere to WTO rules and failing to transform into a fully fledged market economy. It also accused China of refusing to implement the rulings of the WTO’s dispute-settlement system when it lost a case. The Trump Administration’s argument also blamed the WTO for failing to come up with ways to tackle China-specific problems such as these.2 The European Union (EU) and Japan have shared some of these concerns.3 However, these claims are untenable and misleading.
As a global institution, the WTO does not mandate any particular type of economic and political structure or model of development. Its members are at various stages of economic development, with different economic structures, policy priorities and regulatory regimes. Nor does the WTO require members to change the structure of their markets or patterns of ownership. While China may not have a free market economy,4 it is not unique: state-owned enterprises (SOEs) play a significant role in many economies and regulatory intervention in markets is widespread.5 The WTO and its predecessor, the General Agreement on Tariffs and Trade (1947–1994), have admitted many other transitional economies, including Poland, Romania, and Hungary in the 1950s and 1960s, and Russia and Vietnam more recently. When negotiating to join, China insisted on its own development model of a ‘socialist market economy system’.6 It is both unreasonable and unrealistic to expect or demand that China adopt a Western model of market capitalism. While its accession commitments involved massive market-oriented reforms, nothing in those commitments required China to change its economic model.
To join the WTO, China made unparalleled commitments. Then US Trade Representative (USTR) Charlene Barshefsky observed that the concessions it made ‘far exceeded what anyone would have expected’.7 To date, China’s obligations remain the most extensive and onerous among all WTO members, and many go far beyond those demanded of the most developed nations.8 To implement these obligations, China made tremendous efforts, including amending numerous laws and regulations, significantly reducing tariff and non-tariff barriers, opening up a range of service sectors and achieving outstanding and well-documented successes along the way.9 The USTR report on China’s WTO compliance in 2007, the year immediately after China was required to complete implementation of most of its WTO concessions, acknowledged that ‘China has taken many impressive steps to reform its economy, making progress in implementing a set of sweeping commitments’. It also noted that China’s WTO membership had delivered ‘substantial ongoing benefits to the United States’.10 Thus the claim that China failed to observe its WTO commitments is misleading.
This is not to say that China has never breached WTO rules. However, whether a member has breached a rule must be assessed through the WTO’s dispute-settlement mechanism (DSM), based on evidence and detailed legal examination rather than through unsubstantiated allegations.
Having been involved in many WTO disputes both as a complainant and as a respondent, China has become an experienced and sophisticated player in the DSM.11 When it was less experienced in the early years of its membership, China settled most of the disputes in which it was a respondent by amending or removing the challenged policies, laws and practices without going through the adjudication process. In the past decade, China has changed its approach to vigorously pursuing or defending selected cases.12 In almost all of the cases it has lost, China has implemented the findings and recommendations of WTO tribunals. It has done so in a way that delivers the minimum level of compliance required while maintaining its own interests, showing full comprehension of the limits of the rulings. Overall, China’s record of compliance compares favourably with those of the other key players in the system, and particularly the US. China has never been subject to any demand for retaliation (the final and most serious consequence that a member can face in the DSM). Yet the US has been a major target of retaliation, the most recent being a WTO-authorised retaliation worth US$4 billion by the EU due to its failure to remove subsidies to Boeing that are illegal under WTO rules — a dispute that has lasted for sixteen years.13
This is not to suggest that China poses no challenges to the multilateral trading system. Industrial policies and subsidies, the role of SOEs in the economy, the growing influence of the government on private enterprises and insufficient protections for intellectual property rights are prominent and long-standing issues. Although similar situations persist in other member states, China has been at the centre of academic and policy debate given the scale and impact of its policies and practices. In this regard, the global community has been overwhelmed by allegations that WTO rules are inadequate to cope with China. However, to determine whether the rules are in fact insufficient, one would have to undertake a meticulous study of the Chinese laws and practices in dispute and all the applicable rules including those specifically tailored to China. Contrary to the allegations of the Trump Administration, one such study has found that ‘the WTO’s existing rules on subsidies, coupled with the China-specific obligations, provide sufficient defence against the encroachment of Chinese SOEs beyond their own shores’.14 Therefore, the issue is perhaps not the lack of rules but the lack of utilisation of the rules.
WTO rules rely, of course, on enforcement. The DSM has managed nearly 600 trade disputes since commencing operations in 1995.15 It has been largely effective in enforcing compliance and influencing domestic policy-making,16 including in China, where its decisions have prompted gradual and systematic adjustments to the country’s complex regulatory regime. However, the ongoing crisis in the DSM — the result of the US under President Trump blocking the appointment of judges to the WTO’s Appellate Body (its appellate court) — has weakened the effectiveness of the system as a whole. In the absence of a functional Appellate Body, a losing party may abuse the right of appeal to avoid adverse decisions of WTO panels (the WTO’s lower court) and implementing their decisions,17 as several members have done in recent cases. As the most frequent abuser to date, the US, in two recent cases, ‘appealed into the void’ a panel ruling against the trade war tariffs it imposed on China,18 and another panel ruling against its anti-subsidy tariffs on softwood lumber originated in Canada — both in breach of WTO rules.19 Such abuse of the right of appeal will only further damage the DSM and encourage similar actions, furthering the crisis and generating more tensions and uncertainties in international trade.
The unilateral and confrontational approach of the US has in any case proven to be counterproductive in dealing with China. As China’s economic power and influence grow, its foreign policy is becoming more assertive, as is evident in its (relatively moderate) response to the US’s trade war tariffs and its ongoing trade sanctions against Australia.20 With China asserting that it is a staunch defender of the multilateral trading system,21 a co-operative approach would be more effective. But this would need to entail adopting an objective and country-neutral stance on China.
As flagged above, the so-called China problems of industrial policies, subsidies and SOEs are also issues in many other member nations of the WTO. The COVID-19 outbreak has led many governments to resort to such policies as export restrictions, stimulus packages and subsidies to maintain domestic economic resilience and stimulate recovery.22 Global problems require global solutions based on collective efforts and actions that target the problems themselves. The WTO provides a unique forum for multilateral solutions: when a government suspects that China has not played by the rules, it should resort to the DSM to push China to change its behaviour. This approach has worked very well in the past, though it may not be as effective today given the impasse over the Appellate Body caused by Washington. If the WTO is to function properly, with regard to China or any other member state, it needs a functioning Appellate Body and rules that are based on multilateral negotiations and that reflect the shared interests of all nations involved.
The recent completion of the Regional Comprehensive Economic Partnership (RCEP), the world’s largest free-trade agreement to date, embracing 30 percent of global output,23 has shown the strong political will for international co-operation of the fifteen member countries, including China, even in times of crisis, populism, and anti-globalism. While the US’s trade policy agenda remains to be uncovered, there are some positive signs of moves towards a more co-operative approach to China and the WTO under the incoming Biden Administration.24 This approach will offer greater hope for working with China on the challenges faced by all nations and the multilateral trading system.
See, for example, United States Trade Representative, 2018 Report to Congress on China’s WTO Compliance, Washington, DC: Executive Office of the President of the United States, February 2019, p.5, online at: https://ustr.gov/sites/default/files/2018-USTR-Report-to-Congress-on-China%27s-WTO-Compliance.pdf
See, generally, United States Trade Representative, 2019 Report to Congress on China’s WTO Compliance, Washington, DC: Executive Office of the President of the United States, March 2020, online at: https://ustr.gov/sites/default/files/2019_Report_on_China%E2%80%99s_WTO_Compliance.pdf
See, for example, Office of the United States Trade Representative, ‘Joint statement of the trilateral meeting of the trade ministers of Japan, the United States and the European Union’, Press release, Washington, DC, 14 January 2020, online at: https://ustr.gov/about-us/policy-offices/press-office/press-releases/2020/january/joint-statement-trilateral-meeting-trade-ministers-japan-united-states-and-european-union
See, for example, International Trade Administration, ‘Memorandum from Leah Wils-Owens, to Gary Taverman: “China’s status as a non-market economy” ’, US Department of Commerce, Washington, DC, 26 October 2017, online at: https://enforcement.trade.gov/download/prc-nme-status/prc-nme-review-final-103017.pdf; European Commission, ‘Commission staff working document on significant distortions in the economy of the People’s Republic of China for the purposes of trade defence investigations’, SWD(2017) 483 final/2, European Commission, Brussels, 20 December 2017; Mark Wu, ‘The “China, Inc.” Challenge to Global Trade Governance’, Harvard International Law Journal, vol.57, no.2 (2016): p.261.
See, for example, Joshua Kurlantzick, State Capitalism: How the Return of Statism is Transforming the World, Oxford, UK: Oxford University Press, 2016; Lisa Toohey and Jonathan Crowe, ‘The Illusory Reference of the Transitional State and Non-Market Economy Status’, Chinese Journal of Comparative Law, vol.2, no.2 (2014): p.314; Andrew Lang, ‘Heterodox Markets and “Market Distortions” in the Global Trading System’, Journal of International Economic Law, vol.22, no.4 (2019): p.677.
See, for example, General Agreement on Tariffs and Trade, ‘Working Party on China’s Status as A Contracting Party: China’s foreign trade regime — Note by the secretariat’, 1, Spec(88)13/Add.4/Rev.1, Geneva, 4 March 1993; Henry Gao, ‘China’s Participation in the WTO: A Lawyer’s Perspective’, Singapore Year Book of International Law, vol.11 (2007): p.41 and p.47; Daniel C. K. Chow, ‘The Myth of China’s Open Market Reforms and The World Trade Organization’, University of Pennsylvania Journal of International Law, vol.41, no.4 (2020): p.939.
See Committee on Ways and Means, ‘Hearing before the House Subcommittee on Trade of the Committee on Ways and Means, House of Representatives, 106th Congress, 43 (2000)[Statement of Charlene Barshefsky]’, Washington, DC: US Government Printing Office, p.53.
See, for example, Julia Ya Qin, ‘ “WTO-Plus” Obligations and Their Implications for the World Trade Organization Legal System: An Appraisal of the China Accession Protocol’, Journal of World Trade, vol.37, no.3 (2003): p.483; Aaditya Mattoo, ‘China’s Accession to the WTO: The Services Dimension’, Journal of International Economic Law, vol.6, no.2 (2003): p.299.
See, for example, Nicholas Lardy, Integrating China into the Global Economy, Washington, DC: Brookings Institution Press, 2001; Ricardo Melendez-Ortiz, Christophe Bellmann and Shuaihua Cheng eds, A Decade in the WTO: Implications for China and Global Trade Governance, ICTSD Programme on Global Economic Policy and Institutions, Geneva: International Centre for Trade and Sustainable Development, 2011.
See United States Trade Representative, 2007 Report to Congress on China’s WTO Compliance, Washington, DC: Executive Office of the President of the United States, 11 December 2007, p.4, online at: https://ustr.gov/sites/default/files/asset_upload_file625_13692.pdf
For a comprehensive and detailed analysis of China’s implementation of WTO rulings, see Weihuan Zhou, China’s Implementation of the Rulings of the World Trade Organization, Oxford, UK: Hart Publishing, 2019.
See, generally, Henry Gao, ‘China’s ascent in global trade governance: From rule taker to rule shaker, and maybe rule maker?’, in Carolyn Deere-Birkbeck ed., Making Global Trade Governance Work for Development: Perspectives and Priorities from Developing Countries, Cambridge, UK: Cambridge University Press, 2011, pp.153–180.
European Commission, ‘Boeing subsidy case: World Trade Organization confirms EU right to retaliate against $4 billion of US imports’, Press release, European Commission, Brussels, 13 October 2020, online at: https://trade.ec.europa.eu/doclib/press/index.cfm?id=2192
See Weihuan Zhou, Henry Gao and Xue Bai, ‘Building A Market Economy through WTO-Inspired Reform of State-Owned Enterprises in China’, International and Comparative Law Quarterly, vol.68, no.4 (2019): p977 and p.1021.
See World Trade Organisation, Dispute Settlement Gateway, 2020, online at: www.wto.org/english/tratop_e/dispu_e/dispu_e.htm
See, for example, Arie Reich, The effectiveness of the WTO Dispute Settlement System: A statistical analysis, EUI Working Papers Law 2017/11, Florence, Italy: European University Institute, 2017, online at: https://cadmus.eui.eu/bitstream/handle/1814/47045/LAW_2017_11.pdf?sequence=1
See, generally, Joost Pauwelyn, ‘WTO Dispute Settlement Post 2019: What to Expect?’, Journal of International Economic Law, vol.22, no.3 (2019): 297; Weihuan Zhou, ‘WTO Dispute Settlement Mechanism Without the Appellate Body: Some Observations on the US–China Trade Deal’, Journal of International Trade and Arbitration Law, vol.9, no.2 (2020): p.443.
See US Mission to International Organizations in Geneva, ‘Statements by the United States at the October 26, 2020, DSB Meeting’, 26 October 2020, p.12, online at: https://geneva. usmission.gov/2020/10/26/statements-by-the-united-states-at-the-october-26-2020-dsb-meeting/
See World Trade Organisation, ‘United States — Countervailing Measures on Softwood Lumber from Canada, Notification of An Appeal by the United States under Article 16 of the Understanding on Rules and Procedures Governing the Settlement of Disputes’, WT/DS533/5, WTO, Geneva, 29 September 2020.
See Weihuan Zhou, ‘Rethinking Economic Coercion as Australia–China Relations Fracture’, East Asia Forum, 23 May 2020, online at: www.eastasiaforum.org/2020/05/23/rethinking-economic-coercion-as-australia-china-relations-fracture/
See, for example, White Paper on China and the World Trade Organization 《中国与世界贸易组织》白皮书, Beijing: Information Office of the State Council of the People’s Republic of China, 28 June 2018, online at: www.scio.gov.cn/zfbps/32832/Document/1632334/1632334.htm; World Trade Organisation, ‘Joint Statement by the European Union, China, Canada, Norway, New Zealand, Switzerland, Australia, Republic of Korea, Iceland, Singapore, Mexico, Costa Rica and Montenegro’, WT/GC/197, WTO, Geneva, 14 December 2018.
See, for example, World Trade Organisation, COVID-19: Measures Affecting Trade in Goods, Geneva: WTO, 18 November 2020, online at: www.wto.org/english/tratop_e/covid19_e/trade_related_goods_measure_e.htm
See Peter Petri and Michael Plummer, RCEP: A new trade agreement that will shape global economics and politics, Brookings Southeast Asia Insights, Washington, DC: The Brookings Institution, 16 November 2020, online at: www.brookings.edu/blog/order-from-chaos/2020/11/16/rcep-a-new-trade-agreement-that-will-shape-global-economics-and-politics/
See, for example, William Mauldin, ‘GOP report, like Biden, urges multilateral approach to China’, The Wall Street Journal, 18 November 2020, online at: https://www.wsj.com/articles/gop-report-like-biden-urges-multilateral-approach-to-china-11605703493