Will engaging China in WTO multilateral trade discussions help reset relations?

Jan 15, 2023
Communication, globalisation, economic

The current WTO rules were negotiated during the Uruguay Round without China involved or even in mind. The expectation was that China would evolve into a market economy and WTO rules would apply. China has not evolved as expected; should China change its state-controlled economy, or should WTO rules be rewritten to accommodate China?

In a private exchange with John Menadue, John put the question: “To what extent would engaging China in multilateral trade discussions within the WTO help in a reset with China?” This is certainly one of the most important questions facing the trade policy community today. Given the variety, number, and importance of the issues to be addressed, the challenge is to identify and prioritise what needs to be reset, and then how to do it.

Given the contribution of the WTO trading system to China’s growth, it is clearly in China’s interest to restore a well-functioning rules-based trading system. China is the major trading partner of more than 120 of the 164 WTO member countries and the total value of goods imported over the next ten years is expected to exceed USD 22 trillion. Like others, China is aware the WTO urgently needs reform; importantly, a “reset” without the participation of China would be futile.

The first encounter of China with the multilateral trading system was brief. The Republic of China was a founding member of the GATT in 1948 along with Australia and 21 other countries. The government in Taipei withdrew shortly after. Following Deng Xiaoping’s economic reforms, Beijing commenced GATT accession negotiations in 1987. These had not concluded in 1995 when the WTO succeeded GATT. Importantly, at the time of the creation of the WTO, China was still far from being a fully-fledged market economy. Negotiations continued for another 6 years to establish the “accession” conditions to be met by China for its transition to a market economy within the WTO.

When China joined the WTO on 11 December 2001, euphoria reigned.

According to President Clinton at the time of accession: “the agreement addresses state trading; bans forced technology transfer and provides protection from abusive export practices like dumping”. Charlene Barshefsky, the chief US trade negotiator at the time declared, ‘no agreement on WTO accession has ever contained stronger measures to strengthen guarantees of fair trade and to address practices that distort trade and investment’.

Why has this euphoria degenerated into such antagonistic relations, particularly between China, the United States, and other western nations?

At the most fundamental level, WTO negotiations during the Uruguay Round proceeded without China being involved or even in mind. Negotiations went ahead with the expectation that the pre-WTO socialist economy of China would evolve into a fully-fledged market-based economy. This has not happened with important consequences today.

An interesting comparison can be made with the accession of Japan to GATT and then the WTO. Japan applied for accession to the GATT in 1952 and it was officially endorsed in 1954. At the time Japan was far from being a market economy. In fact, 14 out of the 34 GATT members invoked a provision ensuring GATT rules would not apply if a member did not consent to such application.

Unlike China, Japan evolved into a market-based economy and was a founding member of the WTO.

Against this backdrop, an important question for future reform is whether China ever intended to become a market-based economy and fully integrate into the WTO legal system.

The constitution of China states: “The State-owned economy, namely, the socialist economy under ownership by the whole people, is the leading force in the national economy.” The stated goal of China in the WTO accession working party was to achieve: “accession in line with the objective of economic reform to establish a socialist market economy as well as a basic national policy of opening to the outside world”.

In other words, the Chinese government would continue to exercise control over virtually all domestic firms – State Owned Enterprises (SOE) or private – internally while trading openly with the world. In the words of President Xi Jinping, China is: “a socialist market economy with Chinese characteristics.”

While there are many interpretations of what constitutes a socialist market economy, the common element appears to be a mix of private initiative and state planning, where, unlike Western economies, the state’s (or the Communist Party’s) role is paramount. Consequently, Chinese SOEs enjoy considerable subsidies and other advantages unavailable to private enterprises (domestic or foreign), with an impact on domestic prices. Companies can survive without having to earn the market-based returns required of companies competing in open markets.

This situation does not sit well with WTO rules written to accommodate trade between market economies.

Interestingly, much of the dissatisfaction with China on the part of the US, EU and others is precisely within the three areas President Clinton considered to be solved with China’s accession: SOEs, forced technology transfer, and anti-dumping.

In terms of SOEs, disciplines are absent from both the China accession agreement and WTO rules.

While there are WTO rules to constrain the use of subsidies, this must constitute a “financial contribution” to an enterprise by “the government” or a “public body”. WTO litigation has ruled that “financial contributions” to SOES fall outside the disciplines of the Subsidies Agreement.

While WTO governments could have adopted new rules to discipline China’s SOEs, this would require agreement among all WTO members, including China. Given the extent to which China has benefited from the current arrangements, it is not realistic to expect that it would agree to far reaching WTO disciplines for something as important as SOEs.

Nevertheless, there are attempts outside the WTO to deal with SOEs. A Trilateral Trade Initiative of the US, EU and Japan has an agenda for WTO reform targeting SOEs. It is certainly difficult to envisage progress in a group that does not include China.

Another attempt comes from the eleven members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) of which Australia is a member. The agreement contains progressive trade-based regulations on SOEs. These regulations may be useful in setting the standard for future SOE rules in trade agreements, and countries (such as China) keen to join the CPTPP in the future will see their SOEs being regulated by the agreement.

However, neither China nor the US is currently a party to the agreement … although China has applied for membership.

In short, future negotiations to discipline SOE as part of any reset of the WTO look bleak. In the 2021 WTO Trade Policy Review of China, the official position of the government was that: “reform to convert SOEs into standard companies has basically been completed … China strictly abides by the WTO rules when making and implementing economic and trade policies …”. Also, the agenda for the reform of the WTO which China submitted to the WTO states: “SOEs engaged in commercial competition are equal players in the market as other types of enterprises”.

President Clinton’s concern relating to forced transfer of intellectual property remains unresolved. The former Chief U.S. negotiator, Ambassador Lighthizer, stated: “The WTO is completely inadequate to stop China’s harmful technology practices … the Trump Administration will not let China use the WTO to take advantage of American workers, businesses, farmers, and ranchers.”

There have, however been attempts. The Trump Administration imposed penalty tariffs on approximately $350 billion of Chinese imports (66 per cent of total imports) at an average tariff rate of 19 percent to address “harmful technology practices”.

Understanding how discriminatory restrictions on imports can protect intellectual property rights requires some quite creative thinking.

China retaliated immediately with its own increased tariffs and without recourse to the WTO. The US-China Trade war was then underway … completely outside the WTO.

To contain the ensuing out-of-control spiral of tit for tat tariff increases, President Trump signed what he described as an “historical trade deal” (the Phase One Agreement) committing China to purchase $200 billion additional US exports before December 31, 2021. This has failed. China delivered less than 60 per cent of its commitments. The deal has resulted in significant negative effects for both countries.

There could have been an important contribution to a WTO “reset” if the Biden administration had removed its penalty tariffs and China followed suit. A subsequent WTO panel, initiated by China, found that the US had not acted in accordance with its WTO obligations. Unfortunately, the Biden administration has not only retained the penalty tariffs and but extended the “Phased One Agreement” to other areas, creating the “Phase Two Agreement”.

In the words of renowned international economist Anne Krueger: “The future of the international economy hangs critically on the outcome of US-China talks … retaliatory moves by the Chinese and others … have tragic implications for geopolitics and growth prospects for the entire international economy”.

President Clinton’s third concern involved “abusive export practices like dumping” which is where an imported product is sold at less than “normal value” (which is considered to be the everyday selling price in the exporting country).

Contrary to popular belief, there are no international rules prohibiting dumping and many countries welcome it in non-competing sectors. However, should dumping cause “injury” in the importing country, anti-dumping duties may be applied if strict WTO conditions are met.

Thus, prior to applying anti-dumping duties, it needs to be established that the imports are in fact “dumped”, that the dumped imports cause “injury” to competing producers in the importing country, and that there is a causal link between injury and dumping. None of this is easy or clear cut.

According to China’s authorities, imported Australian wine and barley fulfill all conditions and anti-dumping duties have been imposed.

The press and elsewhere have opted for an emotive description of these restrictions as “embargoes on Australian exports to China”. They are not.

An embargo is an official ban on an imported commodity. China did not embargo imports of Australian wine and barley. It imposed anti-dumping duties of 116–218% on bottled wine and a 73.6% anti-dumping duty on barley.

From a policy perspective, the difference between “embargos” and “anti-dumping duties” is far from semantic. Anti-dumping duties are not designed to prohibit trade, but if excessive, may have that effect.

Clearly, Australia is not happy with these extreme restrictions. The duties are currently under review at Australia’s request in the WTO dispute settlement system. It is important to note that both Australia and China are following procedures agreed to when joining the WTO. Australia is not challenging the agreed rules of the Anti-Dumping Agreement, it is challenging the process followed by China to justify the imposition of anti-dumping duties. It is not the rules that require a reset, but how they are used.

For example, the Australian submission to the relevant WTO panel draws attention to obfuscation of China’s data and domestic procedures making it difficult for Australian officials to challenge their actions. To quote the submission: “China’s decision to impose anti‐dumping duties on imported Australian wine … was an absurd decision that was reached on the basis of findings that lacked any logical relationship to the facts on the record …”

Apparently, China moved forward with the imposition of duties regardless of the strength of the underlying procedural claims.

While Australia may seek the removal of the duties, it is unlikely that China would accept the loss of face that would come by abandoning its charges of dumping. It would equate to admitting: “we were wrong” or that “we provided false information”.

From the Australian point of view, unsubstantiated anti-dumping duties (of this magnitude) are clearly not acceptable. They do not reflect exports at artificially low prices but perhaps a poorly conceived proposal for an inquiry into the origins of the Covid pandemic.

As part of the often cited warming of relations with China, can a compromise be struck?

As the dispute has been kept within the confines of WTO rules, a face saving way out exists in the WTO Anti-dumping Agreement, via provisions for voluntary undertakings on both sides.

The Agreement provides for Australian companies increasing the export price of their wine to remove the injurious effect of the alleged “dumping”. While Australian wine would continue to be more expensive, the important difference is that the price increase would be pocketed by Australian exporters.

As far as China is concerned, it could reduce the duties claiming, the duties have served their purpose as the injurious effects of the dumping have lessened and Chinese wine has now become more competitive.

Our free trade agreement with China provides for duty free access for both Australian wine and barley. If duties remain after discussions, Australia and China could negotiate their timed phase out to meet the requirements of the free trade agreement.

While these undertakings could be pursued outside the WTO, an important consideration is that the nature and conditions for such undertaking are already found in the text of the WTO Anti-dumping agreement and agreed to by both China and Australia. Within the WTO, there are certainly precedents where price undertakings such as this have been undertaken resulting in little, if any, loss of face for the parties involved.

While reaching agreement would test the negotiating skills of Minister Penny Wong, Minister Don Farrell and others to the full, the crucial and indispensable ingredient for success is the political will on both sides to improve Australia/China economic and international relations.

In drawing policy conclusions for the original question “Should China be engaged in multilateral trade discussions within the WTO to achieve the necessary resets”, adherence to existing WTO rules coupled with their modification and clarification would certainly help in a reset.

But while working within the WTO is a necessary condition for a reset, it is not a sufficient condition; more fundamental change is required. The outstanding issues are too multifarious, complex and important in terms of international relations to expect the WTO to provide global solutions.

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