China and the WTO: An uneasy relationship

Petros C. Mavroidis, André Sapir 29 April 2021

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Editor's note: This is the second in a three-part series on China and the WTO. Read the first column here.

On 11 December 2001, China officially joined the WTO. Its achievements since then have been truly remarkable. In 2001, China was the sixth largest exporter of goods in the world (fourth, if the European Union is counted as one unit). Since 2009, it has been the world’s largest goods exporter, surpassing even the EU bloc from 2014 onwards. 

Fast export (and import) growth has boosted GDP growth and income levels. According to the IMF’s April 2021 WEO database, China’s GDP amounted to barely 13% of the US GDP in 2001. Twenty years later, this ratio is likely to reach 73%. During the same period, China’s per capita income (measured at purchasing power parities) rose from the level of Sudan in 2001 to nearly the level of Mexico today. 

But China’s integration in the world economy has created frictions, especially with the US, which has long had massive trade deficits with China. In 2019, US goods and services trade with China totalled an estimated $635 billion. Exports were $163 billion; imports were $472 billion. The US goods and services trade deficit with China was $3091 – a far cry from the forecast when China joined the WTO (see the first column in this three-part series here). Economists rightly argue that bilateral trade balances reflect many factors other than trade policies and that the WTO is about establishing competitive opportunities for nations to exploit their comparative advantage, not about having bilateral balanced trade. But the politics of trade in different, especially in the US.

Critics of China’s trade policy, not only in the US but also in the EU and elsewhere, often argue that China has done well by not respecting its WTO obligations. But has this been the case?  

China’s WTO obligations

When China joined the WTO, it negotiated three distinct layers of obligations: 

  • The multilateral framework that applies to all WTO members and consists of the General Agreement on Tariffs and Trade(GATT), the General Agreement on Trade in Services (GATS), the agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs), and the Dispute Settlement Understanding (DSU); 
  • A plurilateral framework that applies to only a subset of WTO members wishing to join the Government Procurement Agreement (GPA) and/or the Agreement on Trade in Civil Aircraft
  • China’s own Protocol of Accession. China promised to join the GPA but has not done so up to now, nor does it belong to Civil Aircraft agreement. 

Consequently, the legal benchmark to judge whether China has respected its WTO commitments is the sum of the WTO multilateral framework and China’s Protocol of Accession. 

The multilateral framework was negotiated during the Uruguay Round, without China in mind. The most glaring evidence to this effect is the fact that the term ‘SOE’ (state-owned enterprise) – a key feature of China’s economic system, though also present in many other countries, including EU member states – is totally missing in the WTO Agreements. A few years later, President Obama adopted the opposite strategy. He negotiated the Trans-Pacific Partnership (TPP) with China in mind, without implicating China in negotiation. If China ever wished to accede to TPP, it would have to adjust to a very demanding discipline regarding SOEs, as Viet Nam ¬had to do to join the Comprehensive and Progressive TPP (CPTPP), the trade agreement among the remaining TPP signatories after President Trump decided to bow out of the TPP. As we will discuss in the third part of our series, it is the latter approach that gets our vote. All the more so, since the Protocol of Accession did not address the gaps.  

The Protocol of Accession: Hope, and the legitimate limits of hope

The Protocol of Accession reflects the Zeitgeist at the time when China was negotiating its accession: exuberance, probably irrational exuberance. Incumbents even set a date, 2015, when they expected China to have become a market economy. And this provision probably explains the spirit permeating all remaining provisions as well.

The Protocol contains many best-endeavours clauses, which reflect the spirit of the negotiated contract but do not translate into legally enforceable obligations. So, while we observe various best-endeavours clauses on privatisation or pricing policies, there is precious little in the Protocol in terms of binding commitments in these areas.   

And, of course, the Protocol of Accession could have never been a perfect substitute for deficient legislative foresight. Both the statutory language as well as practice  – discussed in exemplary manner by Williams (2008) – confirm this point. The extensive margin of obligations included in the multilateral agreements (and the plurilateral agreements, assuming the acceding country agrees to adhere to one or more of them) circumscribe the sum of obligations that a Protocol of Accession can include. The intensive margin (e.g. the level of tariffs) is of course a matter of negotiation, and very much an item for inclusion in any Protocol of Accession.

The Doha Round mandate

China joined the WTO when the Doha Round was initiated. The Doha Round mandate included renegotiation of various WTO Agreements, including the Agreement on Subsidies and Countervailing Measures (SCM), which could have been used to ‘complete’ the deficient SCM Agreement and add important details to explicitly acknowledge, for example, that SOEs are ‘public bodies’ in the SCM sense of the term. 

Abandoning the ‘Trade and Competition’ and ‘Trade and Investment’ initiatives at the WTO Ministerial Meeting in Cancun (in 2003) did not help either. Various investment-related practices have continued to plague market access for foreigners in China. The EU recently tried to remedy this situation (but only for EU investors) with the bilateral EU-China Comprehensive Agreement on Investment (CAI), which has been assessed by Dadush and Sapir (2021). Similarly, enforcement of competition law by the Chinese authorities continues to pass the trading community by stealth.

Now, the Doha Round is all but gone and we are back to square one. 

Can litigation do what negotiation did not do? 

Dissatisfaction with China on the part of the US, the EU, and other Western countries has centred mainly around two issues: the manner in which SOEs have been operating, and the (lack of) enforcement of intellectual property rights (typified by the de jure or de facto obligation for foreign investors in China to enter into joint venture agreements with Chinese companies and transfer them their technology). 

Two WTO complaints have been raised so far implicating Chinese SOEs, and both have been raised by …China. This is telling, in and of itself. If the membership complains about the involvement of SOEs in the Chinese economy, then why not litigate more? 

There is a general claim that there has been under-enforcement against China by its trading partners, and there is probably some merit to this claim. If we use a country’s share of global trade as a predictor for the number of disputes it faces at the WTO as respondent, then China is definitely under-represented. It is plausible that various foreign investors prefer to ‘bite the bullet’ and stay in the Chinese market rather than provoke the wrath of the Chinese authorities by litigating their rights. There is some evidence to this effect.

But when litigation has occurred, the outcome has not been exhilarating for complainants. The WTO Appellate Body has eviscerated the legal discipline imposed by GATT Article XVI on state-trading enterprises (STEs) – a sub-set of SOEs – by narrowing the obligation imposed to non-discriminatory behaviour, making the obligation to act in accordance with commercial considerations essentially redundant. In a similar vein, the Appellate Body has held that SOEs 100% owned by the Chinese state are not even presumptively ‘public bodies’. Its eventual finding in a subsequent case that even private companies could be considered ‘public bodies’ – a complete U-turn over the prior case law – was too little too late. By that time, the Trump Administration had pulled the rug under the Appellate Body, condemning it (provisionally at least) into abeyance. Legislators could have provided clearer legislative guidance, but WTO adjudicators failed in this context as well.

What about the vexed issue of forced technology transfer that foreign companies wanting to invest in China routinely complain about? There has only been one litigation against China, by the EU, in a WTO case that is still pending. Why nothing more? For one simple reason: the WTO does not punish the behaviour by private agents. Unless the obligation to transfer technology to a Chinese partner in a joint venture can be attributed to the Chinese state, which is rarely or never the case, foreign investors will not prevail in a WTO litigation.

Have complainants been pursuing the wrong legal strategy? Certainly, Charlene Barshefsky, a former US Trade Representative, thinks this way. In a recent (2019) speech at the US-China Business Council in Shanghai, she deplored the under-use of commitments made by China in its Protocol of Accession to litigate at the WTO. But apart from the anti-surge clause (which protects against ‘excessive’ Chinese exports), she did not point to any provision that would have obliged China to open its closed market. This is the main problem faced by China’s trading partners and is certainly a far bigger priority than slowing down the alarming pace of Chinese exports to their markets. 

What can be done to further open up the Chinese market under the existing WTO regime? ‘Not much’ is the simple answer. There is a lot in terms of ‘spirit’ but no binding language in the Protocol of Accession. A former member of the Appellate Body, Jennifer Hillman (2018) has claimed that non-violation complaints could provide an adequate means to channel disputes against China. In Mavroidis and Sapir (2021), we disagree. For starters, this instrument can be of almost no help when it comes to litigating Chinese measures (and there are many) preceding China’s negotiation of tariff bindings. This is because of the allocation of burden of proof under WTO law. But more to the point, prevailing in this context does not entail an obligation for China to amend its regime. It will simply have to part with a very small, infinitesimal portion of its huge surplus.  

The conclusion is that WTO adjudication is no substitute for deficient WTO legislation. Those who negotiated the terms of accession seem to have spent more time thinking ‘how can we block Chinese exports?’ than asking ‘how do we guarantee that China will open up?’

Is there a silver lining? 

We have, so far, painted a rather bleak picture. Is there light at the end of the tunnel? Maybe, but to get there the world trading community, China included, will have to behave like ‘responsible stakeholders’, as Zoellick (2020) has recently asked them to do. We will turn to this discussion in the third part of our series.

References

Dadush, U and A Sapir (2021), “Is the European Union’s investment agreement with China underrated?”, Bruegel Policy Contribution 09/21.

Hillmann, J (2018), “Testimony before the U.S.-China Economic and Review Security Commission”, US Senate, Washington, DC.

Mavroidis, P C and A Sapir (2021), China and the WTO: Why Multilateralism Matters, Princeton, NJ: Princeton University Press.

Williams, P J (2008), A Handbook on Accession to the WTO, Cambridge, UK: Cambridge University Press. 

Zoellick R B (2020), America in the World, A History of US Diplomacy and Foreign Policy, New York City, NY: Hachette Book Group.

Endnotes

1 See https://ustr.gov/countries-regions/china-mongolia-taiwan/peoples-republic-china

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Topics:  International trade

Tags:  China, WTO, Protocol of Accession, Doha Round, state-owned enterprises, SOEs

Edwin B. Parket Professor of Law at Columbia Law School, New York

Professor, Universite Libre de Bruxelles; Senior Fellow, Bruegel; Research Fellow, CEPR

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