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Home / Opinion / How China gamed the multilateral trading system | Opinion

How China gamed the multilateral trading system | Opinion

Perhaps the most disturbing thing from a free market perspective is the role of state-owned enterprises in China’s trade policy.

opinion Updated: Aug 09, 2020 07:23 IST
Mohan Kumar
Mohan Kumar
The Chinese flag flutters at the office of the Government of the Hong Kong Special Administrative Region in Beijing.
The Chinese flag flutters at the office of the Government of the Hong Kong Special Administrative Region in Beijing.(Reuters File Photo)

China, which was a founding member of the General Agreement on Tariffs and Trade (GATT) in 1948, pulled out of it in 1950 for political reasons. By the time the Uruguay Round of trade negotiations was launched in 1986, China became an “observer” of GATT with the express purpose of re-joining the multilateral trading system. Interestingly, Hong Kong acquired membership of GATT as a separate customs territory in 1986 and to this day enjoys full membership of the World Trade Organization (WTO) as “Hong Kong, China”. It is also worth noting that Taiwan has been a full member of the WTO from 2002 onwards with the appellation: Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu or quite simply “Chinese Taipei”.

But it is mainland China’s journey in the GATT and subsequently the WTO that should interest all of us. Every country that desires membership of the WTO has to conduct what is known as “accession” negotiations. Essentially, it means that the applicant country has to painstakingly negotiate with each and every WTO member on its trade concessions with regard to Goods, Services and Intellectual Property Rights. The decision to admit a country to the WTO is not just based on trade issues alone; it is also enormously political. The period of accession negotiations for countries usually ranges from 4 to 5 years. In China’s case, the period of accession lasted nearly 15 years. China, having been an observer in the GATT from 1986, became a full member of WTO at the Doha Ministerial Conference in 2001.

Normally, when a country joins the WTO, it must ensure the conformity of its laws, regulations and administrative procedures with its WTO obligations. In the case of China, such an undertaking alone was not considered enough for two reasons: one, there was lack of trust between the major players of WTO led by the US on the one hand and China on the other; two, the “ hybrid state capitalist” model followed by China was not something the WTO Rules were framed for. The decision to admit China was based on the following assumptions:

• It was better to have a country like China within the system rather than without;

• Membership of the WTO would enable China to shed the “hybrid state capitalist” model and become an open free market economy; and

• The political reasoning of countries led by the US was also that economic liberalisation in China will inevitably, over time, lead to democratic change.

Keeping the above in mind, a special Protocol of Accession was signed between the WTO Membership and China in 2001.The main obligations for China in this Agreement were:

• In the case of domestic laws, regulations and administrative procedures, the Agreement enjoins transparency, uniform application of law and judicial review;

• China to be treated as a non-market economy for fifteen years;

• China to fully liberalise trade in services in due course;

• Full compliance with TRIPS (Trade Related Intellectual Property Rights) Agreement of the WTO; and

• Reduce and/or eliminate subsidies to State-Owned Enterprises (SOEs) and a pledge by China that SOEs will run on a commercial basis.

On the all-important aspect of transparency and uniform application of law, it is well known that the Chinese trade policy regime is characterised by remarkable opacity. For instance, China has not provided a full and complete list of subsides provided by the Federal government let alone those provided by its provincial governments. On trade in services, it is well known that China does not allow foreign payment companies such as Mastercard and Visa and instead favours China Union Pay which dominates the domestic market. Chinese banking sector is pretty much closed to foreign players too. Again, in the case of the digital and data economy, the Chinese strategy is the same: disallow foreign companies such as Google, Amazon, Twitter, Facebook etc and allow Alibaba and Tencent to dominate the market. With Telecom services, it is the same story: the domestic company Huawei is ubiquitous.

The two areas of real concern are IPRs and SOEs. In both these crucial areas, US and some other key WTO players are furious about Chinese non-compliance with the Protocol of Accession. In the case of IPRs, the Americans have long complained about forced technology transfer and IP theft by China. These are well detailed in the US Section 301 report on China. Perhaps the most disturbing thing from a free market perspective is the role of state-owned enterprises in China’s trade policy. There is evidence that between 2001 and 2003 there was some effort by China to reduce the role of SOEs in the economy. But there is incontrovertible evidence that over the last five years, the role of SOEs has increased significantly in the Chinese economy.

The above outlines the classic saga of how China has gamed the multilateral trading system for its own benefit. It is now safe to conclude that the original assumptions about China’s entry into the WTO were fundamentally flawed.

(Dr Mohan Kumar is a former Indian negotiator at the WTO and the former Indian Ambassador to France. Views are personal.)

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