China’s WTO membership can help the country achieve economic reforms and greater prosperity.

by James Bacchus

The advantages of World Trade Organization (WTO) membership have helped accelerate China’s historic return to global economic prominence in the past 10 years. Since entering the WTO in 2001, China has benefited from WTO rules that lower tariff and nontariff barriers to trade for all WTO members and that prevent WTO members from engaging in trade discrimination against each other. Basic WTO rules that require non-discriminatory “national treatment” and “most-favored-nation treatment” for the traded products of WTO members benefit China worldwide. Without the legal entitlements and the legal protection of these rules, China’s export boom might have gone bust, and Chinese exports would likely have been targeted worldwide for discriminatory protectionism.

Though China’s WTO membership has helped boost its economy, the global financial crisis that began in 2008 and continues with a sluggish global recovery has shown that China can no longer depend on selling low-value-added goods to Western consumers for economic growth. For China’s economy to expand, the country must climb the global ladder of comparative advantage. China must rely much less on exports and much more on domestic demand from an expanding middle class of consumers. Chinese membership in the WTO has already helped begin this process by facilitating openness and increasing competition in the country’s economy. Conscientious compliance by China with WTO rules can accelerate the additional reform and restructuring within China that can help rebalance the country’s economy. WTO membership will be even more essential for China’s continued economic growth over the next decade.

China has made remarkable economic progress, but challenges remain

China’s economy has risen rapidly—by opening and connecting with the complex supply chains of the wider world—since former PRC leader Deng Xiaoping’s decision to open the Chinese economy to market forces in 1978. China has been one of the world’s most successful economies, growing at an annual rate of at least 8 percent per capita since entering the WTO in 2001. Buoyed by hard work and benefiting from relatively low wages, China has risen to become the world’s leading exporter and the world’s second-largest economy after the United States. Once among the world’s poorest countries, China now has nearly $3 trillion in foreign exchange reserves, including at least $1.1 trillion in the debt obligations of the United States.

Though the people of China can be proud of their economic accomplishments, the country still faces enormous challenges. For example, several million citizens have emerged from poverty in China, but in 2009 roughly 150 million Chinese were still living in extreme poverty on less than $1.25 per day, according to the World Bank. The country lacks national social safety net, pension, and universal health insurance systems, and millions of new jobs are needed every year just to keep up with an increasing population. Rising prices are contributing to increasing wages, and thus to the loss of the lower labor cost advantage that has helped fuel much of China’s rise in the global economy. The PRC government’s efforts to create jobs and economic growth while fighting inflation are complicated by numerous fundamental institutional challenges, including overly-aggressive lending by state-run banks, local government debt totaling 27 percent of GDP, uncompetitive state-owned enterprises, and China’s overall national economic regulation and governance structure.

For all its phenomenal growth, China’s $5.8 trillion economy remains, for now, roughly one-third the size of the United States’ $14.6 trillion economy—and China’s population is more than four times larger than the US population. According to the International Monetary Fund, the per capita income in the United States was roughly $47,000 in 2010—still more than six times the per capita income of about $7,500 in China. Moreover, the per capita income of China’s economically developed coast is several times that of the underdeveloped interior. China cannot hope to narrow significantly its remaining income gap with the United States and other long-developed countries without domestic rebalancing. To expand its economy further, PRC officials have said that China must shift from an export-led to a consumption-based economy. Many of the economic reforms needed to make this shift involve opening China much more to foreign competition and to permitting foreign participation on equal terms in the Chinese economy. More openness will result from concerted compliance with China’s treaty obligations as a WTO member.

Commitment to WTO processes

The general view among WTO members is that China has acted responsibly as an emerging leader in the organization and has largely complied with WTO rulings. This may be because the basic benefits of WTO membership for China are clear to PRC leaders. Chinese products that face lower trade barriers in other countries because of WTO membership boost Chinese exports and thus contribute to Chinese prosperity. Without the benefits of WTO membership, many Chinese products would face far higher tariffs—taxes at the border that would diminish the competitiveness of Chinese products in foreign markets—as well as an array of discriminatory non-tariff barriers to trade that are illegal under WTO rules. In addition, the mandatory WTO dispute settlement process protects China from unfair discrimination in trade by enforcing the international rule of law. China’s first case in the WTO—a dispute in which China and other countries successfully challenged illegal restrictions on steel imports imposed by the United States in 2003—is just one example where China has prevailed in WTO dispute settlement.

Yet some at the highest levels of the PRC government seem hesitant to embrace the broader benefits of WTO membership despite the enormous potential for WTO rules to assist with China’s economic transition. The PRC government is slow to implement some obligations and refrains from implementing others. For example, the government has refused to permit foreign companies to provide electronic payment services for credit card and other consumer transactions in China, despite China’s clear obligation to permit free competition in such services under the WTO treaty. In numerous aspects of commerce, the openness, transparency, and fundamental fairness mandated by WTO rules can help the Chinese economy open further to the wider world. This can help create the freer and more open society that is essential to the establishment of an innovative value-added Chinese economy.

Policy concerns

In many ways, China continues to open its economy. Yet some of the PRC government’s recent actions—such as restricting exports and implementing indigenous innovation policies that favor domestic industry—have caused foreign traders and investors to fear that China may be rigging the laws against them. In a number of critical arenas relating to WTO obligations and extending beyond WTO obligations, renewed state intervention seems to have supplanted market-oriented reforms, and China seems to have shifted away from a commitment to freer trade and investment toward a policy of protectionism.

Protectionism can seize market share for the moment, but it does not guarantee lasting value-added growth and is ultimately self-defeating. Protectionism insulates domestic producers from the incentivizing spur of competition and denies them the advantages of efficiencies and innovations that are supplied by foreign trade and investment. For example, US manufacturers have argued that trade barriers against Chinese steel and other imports have kept the US steel, auto, and other industries that use steel in their production from being as competitive as they could be.

China is certainly not the only country that boosts its domestic enterprises. The United States and others have likewise flirted with a sort of economic nationalism after the global financial crisis. Economically, critics have argued that the US government’s “Buy American” policies can be as self-defeating as the PRC government’s “Buy Chinese” policies. Protectionism would be especially harmful to China now because it would undermine China’s attempts to shift toward an advanced and innovative economy based on domestic consumption and value-added production. Chinese workers and companies would also find it more difficult to move up the global competitive value chain.

The PRC government should focus on actions and inactions that may discriminate against foreign commerce and that, though intended to strengthen China, actually weaken China’s ability to move up the global value chain. Some examples of self-defeating policies, which have far-reaching WTO implications, follow.

Government procurement

Government purchases account for about 20 percent of China’s GDP. A decade ago, China agreed to be bound by WTO rules that forbid discrimination in government procurement, but China has still not signed the WTO Agreement on Government Procurement. The PRC government recently agreed to eliminate some catalogues that granted preferences to indigenous innovation products during government procurement, but concerns about discriminatory practices in government procurement remain. China’s economic transition will not be advanced by favoring higher-priced and lower-quality domestic providers over lower-priced and higher-quality foreign providers in China’s government purchases. Many foreign government officials and companies hope China will sign the government procurement agreement soon.

Domestic innovation

The PRC government has engaged in efforts to create value-added growth by favoring strategic industries that promote indigenous innovation. The government in late 2010 released a plan to develop seven strategic industries to drive economic growth over the next 10 years. The plan encourages domestic innovation in industries such as biotechnology, energy efficiency, information technology, and new-energy vehicles. Not only are many of these efforts to prop up inefficient state-owned enterprises inconsistent with WTO rules, they are also inconsistent with China’s aim of creating comparative advantage. The innovation needed to take China up the global value chain is much more likely to occur in an environment with the free exchange of ideas—one that includes the fair and equal treatment of foreign trade and investment.

Intellectual property rights (IPR)

Despite clear WTO commitments, foreign companies and foreign IPR holders complain that the PRC government mainly offers lip service in response to pleas to protect foreign IPR. They stress that occasional crackdowns are no substitute for consistent enforcement. Pirated and counterfeited goods are rampant in China, and pirating and counterfeiting employ millions of Chinese. But China can move up the global value chain and improve its overall standard of living only by vigorously upholding WTO rules that require the enforcement of patents, trademarks, copyrights, and other IPR.

Export restructuring

China’s future as a value-added economy will not be served by an increasing array of taxes, quotas, and other restraints on exports of rare earth elements and other vital raw materials. Many of these restrictions may violate WTO rules and are inconsistent with China’s own voracious hunger for a host of raw materials and basic commodities needed to fuel growth. Perhaps more than any other country, China depends on imports of basic commodities and raw materials—iron, oil, coal, soy, and much more. If China is free to impose such export restrictions, its trading partners may also wish to do the same, which may hurt China in the long run.

WTO disputes

Continuing to resist protectionism by complying with WTO rules and enhancing WTO commitments can help China immeasurably in making the shift up the global value chain. A number of China’s recent policy initiatives raise serious legal issues under WTO rules that invite recourse by other WTO members to dispute settlement. For example, Japan, the United States, and the European Union have stated that they will consider pursuing WTO dispute settlement if China continues policies that restrict exports of rare earth elements essential to manufacturing many high-tech products. In July 2010, the PRC Ministry of Commerce capped export quotas on China’s rare earth minerals for the second half of 2010—reducing exports by 72 percent over the same period in 2009. Binding dispute settlement decisions could compel China to reconsider the discriminatory aspects of the rare earth restrictions and other recent initiatives under legal threat of economic sanctions by other WTO members.

Compliance with existing WTO rules can help China make needed reforms domestically, and the negotiation of new WTO agreements that address additional trade and investment concerns can spur changes in China that will make Chinese products even more competitive internationally. Foreigners tend not to appreciate how much China has changed domestically in the past decade in an effort to comply with WTO obligations, and many Chinese tend not to appreciate how much more must still be done.

China and its future in the WTO

The ingenuity of the Chinese people is known throughout the world. But to advance by moving up the global value chain, the Chinese must continue to work side by side with others who share their hopes for China’s future. To make the transition, China will need imported foreign products, the sophisticated skills of foreign service providers, the advanced technologies and economies of scale of foreign companies, and the long-term capital and managerial know-how of foreign investors. Such access can only be secured and sustained in a setting where they are treated fairly and without discrimination. Protectionism is always tempting, and it may appear to work in the short term. In the long term, however, protectionism does not work.

When opening China in 1978, Deng said he was “crossing the river by feeling for the stones.” Deng learned by doing. Following his example, China has learned much by doing in the years since economic reform began. Today, China must continue “feeling for the stones” in “crossing the river” to a shared and lasting prosperity.

[author]James Bacchus is a former trade negotiator for the United States, a former member of the US Congress, and a former chairman of the Appellate Body of the World Trade Organization. He chairs the global practice of the Greenberg Traurig law firm and is based in Washington, DC.[/author]

Posted by Ben Baden