In line with its broader engagement in global economic governance, Beijing’s approach to the WTO has evolved as China’s economy has grown over the past two decades. Having initially adopted a low profile following accession, China then engaged in a long process of institutional learning and legal capacity-building. In later years it has become more proactive, participating in the reform of committees and calling for improvements in transparency and information-sharing. Informed by its own accession experience, China has also established initiatives to assist new and prospective WTO members, such as the Least-Developed Countries (LDCs) and Accessions Programme. In addition, it continues to push for greater recognition of the problems that trade liberalization presents for developing countries.
Despite progress in WTO reforms, fundamental disputes remain. Most prominently, China’s status as a self-identified developing country remains contentious among members, as does the country’s desire to be recognized as a market economy. These disagreements can be traced back to China’s accession process. On joining the WTO, China agreed to reduce tariffs on industrial goods further than other major developing countries, such as India and Brazil. It also agreed to make subsidies to SOEs subject to countervailing duties, and not to apply the Subsidies and Countervailing Measures (SCM) Agreement that allows flexibility in providing domestic subsidies. At the same time, China accepted being designated as a non-market economy for a stipulated period of 15 years. This has made it easier for other WTO members to successfully impose countervailing measures on Chinese exports. The accession protocol also required China to allow prices for traded goods and services to be determined by market forces, with only limited exceptions. As a result, the method for other WTO members to determine dumping margins on products from China is calculated using the non-market economy methodology, where Chinese exporters’ prices are compared using values from an ‘economically comparable country’. These values are used because prices in China are not viewed as being based on market principles. Consequently, if China were considered a market economy, dumping margins would be based on Chinese prices rather than surrogate values. The Chinese interpretation of the accession agreement was that its non-market economy status would lapse in 2016 but this did not occur. It has filed WTO disputes against the US and the EU over this issue, but without success.
To date, China has been party to 69 cases, 22 as complainant and 47 as respondent, with only the US and EU more active in this respect.
China’s approach to trade disputes more broadly has evolved. Chinese representatives initially took part in a large number of cases as a third party in order to gain a better understanding of the process. Only after 2006 did the country more actively participate in disputes. To date, China has been party to 69 cases, 22 as complainant and 47 as respondent, with only the US and EU more active in this respect. It has also seen important later successes in this process, notably in 2011, when the appellate body was asked to decide whether SOEs should be considered as ‘public bodies’ that grant subsidies and thus subject to countervailing measures by other states. The appellate body decided that SOEs do not automatically count as subsidy providers. This was an important qualification to an earlier ruling that SOEs were indeed public bodies that could provide subsidies to other Chinese firms and therefore be subject to countervailing measures. For China’s competitors, concerns persist that Chinese SOEs gain an unfair advantage through soft financing, guarantees and special access to energy and land. This may also mean that these companies indirectly subsidize downstream firms, while they are protected in the domestic market from foreign competitors due to China’s rules on joint venture requirements and public procurement.
One consequence of WTO disputes, such as the 2011 ruling on SOEs, has been the ongoing US dissatisfaction with the appellate body. This has culminated in the US blocking new appointments since 2016, eventually rendering the appellate body unable to perform its core function. China notably supported the largely EU-driven proposals on the multi-party interim appeal arrangement (MPIA), designed to replicate the functions of the appellate body. There are currently 23 signatories to the MPIA but the US is not one of them. As it stands, the effectiveness of the MPIA remains to be seen as decisions will be notified to the WTO’s Dispute Settlement Body but not formally adopted. Decisions are nevertheless intended to be binding.
Tensions over SOEs are unlikely to be resolved soon given the emphasis that Chinese officials place on China’s continued status as a developing economy, and the importance of SOEs in developing the country’s higher value-added advanced industries. For China, SOEs remain important in supporting domestic growth and employment policies. There are currently more than 15,000 SOEs operating, and the total assets managed by them increased by more than 11 times between 1997 and 2016. These SOEs perform an important function in domestic employment policies and have the capacity to hire excess labour during periods of high social instability. Consequently, while China shares common ground with the EU on the continued functioning of the appellate body, both the EU and US believe that Chinese SOEs are unfairly competing and dumping exports in foreign markets. The US, EU and Japan have in recent years coordinated to argue that China’s approach threatens fair trade and undermines core WTO objectives of preventing export subsidies and the dumping of products at below cost in international markets.
Meanwhile, as part of its 2019 reform proposals, China advocated for SOEs to be recognized as ‘equal players’ alongside private enterprises. The proposals, while emphasizing the continuing importance of multilateral cooperation, criticized a lack of progress in agricultural sector liberalization and the special and differential treatment of developing countries. In recent years, Beijing has increasingly pushed for WTO reforms that address the difficulties of developing countries ‘by providing developing members with flexibility and policy space needed for their economic development’. At the same time, the US has argued for reform of ‘special and differential treatment’ provisions at the WTO, which give developing countries more favourable treatment. US reform proposals in 2019 were particularly critical of China’s self-declaration of its developing-country status, arguing that the current definition does not distinguish between different kinds of developing country. Chinese officials have also criticized the growing use of national security exceptions to protect domestic industries, primarily by the US.
While pushing for reforms at the multilateral level, China is also active in concluding regional trade agreements that may be seen as a ‘hedge’ against slow progress on its objectives at the WTO. These regional agreements are often quite different from those concluded by the US, EU or Japan, and tend to adopt a more gradual and limited approach to the liberalization schedules of developing economies, particularly in agriculture. They also incorporate separate, more limited dispute resolution procedures, and include recognition of China as a market economy. The dispute resolution clauses in agreements, such as that with the Association of Southeast Asian Nations (ASEAN), also provide China with the potential to avoid the protectionist ‘special safeguards’ it often faces in export markets. These bilateral safeguard measures differ from those of the WTO as their application is more limited. If a dispute is pursued under the agreement with ASEAN, it implies that compensation is voluntary. However, these mechanisms are yet to be utilized and have had limited impact on the broader global trade regime. Beijing has also made recognition of its market economy status a condition of concluding bilateral agreements. Despite the potential challenge to multilateral rules on its market economy status, China’s bilateral moves on this front have thus far had little impact at the multilateral level due to the continuing opposition of other major economies.
A development with greater potential to affect global trade rules is the conclusion of the Regional Comprehensive Economic Partnership (RCEP). The agreement covers one-third of the global population and accounts for a similar share of global GDP. It includes US allies Japan, South Korea and Australia but not the US itself; this, combined with the failure of the Trans-Pacific Partnership (TPP), suggests that the RCEP may threaten the continued US role in ‘setting the rules of the road’ in trade. Notably, the RCEP incorporates relatively limited rules of origin standards, with only 40 per cent of a given product’s value needing to be added within RCEP countries. This is potentially important given the significant production networks across multiple countries in the region. It has been suggested that this may make it easier for China to avoid anti-dumping measures that have been contentious at the WTO.
Similarly, the EU–China Comprehensive Agreement on Investment (CAI), which is currently only agreed in principle, may well have an impact on the development of global trade rules. Given the EU’s significant high-tech sector, building up the investment relationship further is an important component of China’s strategy to develop its own high-tech industry. Currently, WTO rules entail limited coverage of investment issues and are largely focused on ‘mode III’ delivery: services supplied by one WTO member, through its presence in the territory of another member. The CAI is more wide-ranging, and the EU believes the deal will improve transparency in terms of China’s subsidies to SOEs, and reduce requirements for EU investors to share intellectual property with their Chinese joint venture partners.
Forced technology transfers to Chinese firms have been a concern for the US and EU for many years and were an important factor in the recent US–China trade war. China has implemented more international technology transfer measures related to foreign direct investment (FDI) than any country in the world. These measures include joint venture requirements that limit foreign equity and prohibit foreign investors from operating in China unless they partner with a local company, or in some cases, unless the Chinese partner is a controlling shareholder. Counting against the CAI is the lack of an investment protection chapter and the failure to secure an investment court system, instead relying on state-to-state dispute settlement. The likelihood of the agreement eventually coming into force will depend more on internal EU politics than on those of China; the European Parliament voted to suspend ratification in May 2021 due to human rights concerns in China.
The past two decades of China’s WTO membership illustrate the strategies pursued by Beijing at the multilateral and bilateral levels. Where China has not secured its objectives at the multilateral level, it has sought to exercise outside options at the bilateral and regional levels. The impact of the latter on the former has so far been limited, although this may change with recent developments such as the RCEP. China’s more successful efforts at securing its objectives (the MPIA and the RCEP) have usually taken place when cooperating with major partners; its less successful efforts (such as gaining market economy status) have tended to come when pursuing ineffective outside options that lack the support of these same major economic partners. This trend is likely to continue, with China only achieving its core objectives in trade when it has buy-in from major economies.
