How disciplining China would save the WTO

Susan Ariel Aaronson, VOXEU, 9 de febrero de 2010

2010 could be a daunting year for the WTO. Many observers believe it is condemned to irrelevance if it does not find common ground among its 153 member states on the Doha Round – now in its tenth year. Many of these same countries bypass the WTO as they seek to expand trade. As an example, WTO members completed some 25 new preferential trade agreements in 2009, bringing the total of such bilateral or regional agreements to 186.

But the WTO’s most difficult challenge may be to discipline trade relations among China and other WTO member states. China today is now the world’s third-largest trading nation, the world’s largest recipient of investment, the world’s fastest growing consumer market, and the world’s leading provider of manufactured goods. China’s regulatory and trade practices can move global markets.

There is no doubt China’s growth has led to global growth. Chinese demand for raw goods and materials have created jobs. The World Bank notes that the efficiency and scale of China’s manufacturing has pushed down the price of many manufactured products relative to other goods and services (Commission on Growth 2009). Investors, consumers, and taxpayers have benefited from these developments.

But China’s competitive advantage is to some degree based on its inadequate governance; its failure to enforce its own laws in a transparent, even-handed manner. As part of its accession to the WTO, however, China was required to enforce the rule of law throughout all of its territories.

Pseudo communism

China’s political economy has two key attributes: authoritarian governance and inadequate governance. At the national level, the Communist Party sets the rules, yet it is sometimes willing to ignore its international commitments in order to maintain power. In addition, the Communist Party owns and operates or is tied to private enterprises in key sectors such as transportation, energy and banking. Some have described the government as both a market competitor and referee.

China’s inadequate governance at the provincial level also reflects many factors including corruption, a lack of uniformity among rules, and arbitrary abuse of power. Local officials often have financial stakes in the same companies they are supposed to regulate. These officials sometimes ignore or circumvent governmental mandates from Beijing. Finally, China has a culture of non-compliance, where bad actors set the norm, where laws and regulations are often ignored or unevenly enforced, and where many citizens and market actors don’t know or can’t obtain their rights under the law.

Inadequate Chinese governance is a trade problem because of the country’s dominance in global markets. Its failure to enforce the rule of law threatens the concept of mutual benefit that underpins the trade regime. China is broken, and a broken China could break the WTO.

On one hand, China’s leaders have tried very hard to comply with its WTO obligations. China has changed many of its laws and met most of its market access commitments. On the other hand, it has yet to meet many of the obligations delineated in its protocol of accession. European and American business groups investing in China believe that the country is becoming more interventionist and protectionist (European Business in China 2009 and US China Business Council 2009).

WTO members deliberated a long time before they let China join the WTO. And they used the accession to hold China on a tight leash. The 2001 Protocol on the Accession of the People’s Republic of China (WTO 2001) explicitly calls on China to:

“apply and administer in a uniform, impartial and reasonable manner all its laws, regulations and other measures of the central government as well as local regulations, rules and other measures…pertaining to or affecting trade…. China shall establish a mechanism under which individuals and enterprises can bring to the attention of the national authorities cases of non-uniform application.”

It also calls on China to ensure that:

“those laws, regulations and other measures pertaining to and affecting trade shall be enforced.”

The rule of law was a key element of China’s accession agreement because trade policymakers understood that how China was governed could distort trade.

In recent years, China has become infamous for its failure to enforce its own laws, whether those laws related to intellectual property, product or food safety, human rights, or employment.

In both its 2006 and 2008 Trade Policy Review at the WTO, member states lauded Chinese trade diplomats for their export prowess but also complained that China was not transparent, accountable, or sufficiently even-handed (WTO 2006, 2008). Nor could they trust Chinese statistics or assertions on enforcement related to key trade issues such as product and food safety or intellectual property protection. Meanwhile, Chinese leaders argued that they are a developing country and thus deserve patience as they learn to govern effectively.

What can the WTO do?

WTO members have the ability to encourage China to address its inadequate governance. They could begin by using the trade policy process more effectively to discuss the rule of law and how it distorts trade. And they could threaten a trade dispute on some aspect of inadequate governance. Under GATT Article XXIII, any country in the WTO is entitled to a "right of redress" for changes in domestic policy that systematically erode market access commitments even if no explicit GATT rule has been violated.

Such a "non-violation" complaint entitles the aggrieved party either to compensation in the form of other tariff concessions to "rebalance" market access commitments or the complaining partner may withdraw equivalent concessions of its own. According to legal scholar Joost Pauwelyn, "In non-violation cases a WTO panel could, indeed, be called upon to refer to non-WTO rules […] in its assessment of whether certain governmental measures, though not in violation of WTO rules, have affected the ‘legitimate expectations’ that could have been derived from a trade concession” (Pauwelyn 2003).

A trade dispute may not succeed because it would be hard to prove that market access was undermined by China’s failure to enforce its own laws and international standards. But a multilateral approach would bring the issue to global attention and could move China to do a better job of educating managers, policymakers, and workers on the importance of the rule of law.

China’s membership in the WTO has no doubt provided benefits for the people of the world. But China is exporting its inadequate governance. At the WTO, member states can work collectively to encourage China to change its behaviour. And in so doing, they may bolster the WTO.

References

- Commission on Growth (2009), “The Growth Report: Strategies for Sustained Growth and Inclusive Development,” 93-94.

- European Business in China (2009), “Position Paper 2009-2010,” Executive Summary; USTR, National Trade Estimates Report

- Pauwelyn, Joost (2003), Conflict of Norms in Public International Law: How WTO Law Relates to Other Rules of International Law, New York: Cambridge University Press, 456.

- US China Business Council (2009), “US Companies China Outlook,” Member Priorities Survey Results 9-13.

- WTO (2001), “Accession of the People’s Republic of China, Decision of 10 November 2001,” November.

- WTO (2006), Trade Policy Review China, Minutes of the meeting, 19 and 21 April.

- WTO (2008), Trade Policy Review China, Minutes of Meeting, 21 and 23 May.