China and the WTO: How China Won

The story of China and the WTO: How China Won is one of the great untold stories of the 21st. century.

In 2003 I congratulated a young Chinese banker on his country’s accession to the WTO, cautioning that the trade body was a Western ideological post-Cold War creation designed not merely to enshrine export-oriented development models but to advance neoliberal trade norms. After a moment’s reflection he responded, “I agree with your view of the WTO’s history but this is a game we can win”.  Global_Current_Account_Balances

‘Free trade’ has always been an imperial project and withdrawal from free trade pacts–whether formal or informal–always occurs when the imperial trading power wanes and its losses begin to outweigh gains. British governments practised free trade imperialism throughout the 19th century, forcing dependent members of the empire, like India, to accept free trade by using their naval power to cajole weaker nations into signing treaties which involved no concessions by Britain herself–a strategy that remained an important element in British imperial expansion until the early 20th century.

Until 1985, China had a trade deficit with the US. Then the imbalance shifted, and China registered a $60 million trade surplus with the US, which accounted for 0.3% of the total US external deficit. In 2016, however, the US trade deficit with China amounted to $347 billion, accounting for 44% of its total deficit. Second, the size of other countries’ surplus with the US has not increased much. Japan’s trade surplus with the US was $103 billion in 1985; by 2007, it had increased to only $130 billion.

The continued growth of US trade deficits, particularly since the mid-1980s, reflects monetary expansion by the Federal Reserve, which has inflated real estate and stock prices; thanks to the resulting wealth effect, consumption has increased and saving has decreased. At the same time, the US fiscal deficit has increased dramatically, owing especially to debt-financed US military intervention in the Middle East and elsewhere. Because the dollar is no longer pegged to gold and is an international reserve currency, the US can sustain its trade deficit by printing more dollars to support imports.

However, while China’s trade surplus with the US rapidly increased, the contribution of the East Asian region to the US trade deficit declined. As the ratio of its trade deficit with China to its total trade deficit rose to more than 40% from 0.3%, the ratio of its trade deficit with East Asia to its total trade deficit dropped to about 50%, from more than 100% in the early 1990s. In other words, East Asia, including China, is not the main cause of the rapid expansion of the US trade deficit.

Economist Justin Yifu Lin argues that using protectionism to appeal to US voters will backfire when these voters face higher costs. Moreover, the size of China’s trade surplus with the US has been systematically overstated, because the capital-intensive components of its labor-intensive manufacturing products are primarily imported from South Korea and Taiwan. This is a direct result of the international production network based on each economy’s comparative advantage. As China’s labor costs rise, its trade surplus with the US will be transferred to countries and regions that have lower labor costs and are willing to accommodate labor-intensive manufacturing.

When the WTO came into existence in 1994, the U.S. and E.U. owned 56% of global GDP and, because of the their huge markets, controlled the Uruguay Round negotiations that led to the WTO’s creation, which they viewed as a victory, in constitutional terms, for economic liberalism. In a memorable moment of triumphalism the US–never reluctant to claim victory prematurely–  promised that China’s membership would transform it into a market economy and move it towards liberal democracy.

China had requested membership of GATT in 1986 but was forced to wait until 2001, when WTO members granted accession, in Doha, after obliging her to

  • accept reduced rights against other members compared to standard WTO rules,
  • open her markets,
  • eliminate state monopolies on imports and exports and
  • significantly change her domestic laws, regulations, and practices
  • open its economy to competition
  • overhaul its domestic laws, regulations, procedures,
  • change administrative and judicial institutions across all levels of government,
  • make deep tariff commitments for imports,
  • significantly liberalize services and
  • agree that all regulations affecting trade would be nondiscriminatory and
  • that government standard-setting would be transparent and based on international standards.
  • China further committed to stringent IP protection and independent review of all trade-related administrative actions by judicial or administrative tribunals.

The country began revising its laws before it joined the WTO when, as gatekeeper to China’s accession, the U.S. pressed China to agree to China-specific rules that granted other WTO members greater rights against China than China had against them–thus violating the core nondiscrimination norm in WTO law–particularly galling provisions given China’s legacy of ‘unequal treaties’ with imperialist powers. China was also forced to accept market access tariff commitments far deeper than any comparable economy: the imposition of tariffs on trade goods reduced to 10% by 2008, for example, while richer Brazil agreed to 31% and India, 48%. China was also required to make broader and deeper commitments on services liberalization in key sectors like financial, telecommunication, professional, and distribution services than any comparable economy.

But by 2009 her rising economic power and strengthened legal capacity had changed the situation dramatically and, in 2010, China became the world’s largest economy and Nobelist Robert Fogel predicting that, by 2040, its GDP would be twice America’s and Europe’s combined.  In 2013 it became the world’s largest trader in goods and international legal scholars began talking of a “Beijing consensus”  displacing the neoliberal “Washington consensus.”EXPORTS AS % of GDP 2016

How did this reversal come about?

In 2001, Western negotiators were probably unaware that they were dealing with a nation so skilled in national trading that it had actually made profits on the ‘gifts’ that powerful barbarian tribes extorted from it for centuries so there was huge enthusiasm in China for the move. The government sponsored WTO centers around the country, staged thousands of seminars and published more of books on WTO law than the WTO itself. It organized a ‘WTO Knowledge Contest’ in which five million people participated and broadcast the final session on CCTV like a game show and the winner was feted and flown to Geneva to meet WTO Director-General Supachai Panitchpakdi. Hundreds of Chinese officials, judges, and scholars visited the U.S. for WTO law training and even more traveled to China to teach it.

Fast forward to 2018 and American officials increasingly view China’s joining the WTO as a bad bargain and, as a result, appear less committed to upholding the regime it created and its complaints now focus on how the rules it imposed asymmetrically help China. While China has learned to use the WTO legal regime to effectively challenge U.S. trade remedy measures, the U.S. has found it increasingly difficult to use WTO rules to address China’s trade barriers. When China required Internet companies to use local servers and software companies to hand over source code, the U.S. found WTO rules unavailing.  The US has been unable to make headway in modifying or introducing WTO rules to constrain China and has began seeking alternative arrangements in which China does not participate in negotiations. The Obama administration tried but failed to thwart existing WTO jurisprudence through the TPP in Asia and the TTIP in Europe but, since the Trump administration abandoned the TPP, China has taken the lead in negotiating trade agreements governing Asian economic integration by excluding the United States.

This apparent victory did not come easily. Chinese exports have faced close regulatory and legal scrutiny and have triggered far more anti-dumping, countervailing duty and import relief measures than products from any other country. By 2009, China was the object of forty percent of al anti-dumping investigations and seventy-five percent of countervailing duties in the world. For the first few years, China had tried to avoid litigation by settling every complaint brought against it while formally proposing to limit  to two the number of complaints that a developed country could bring against a developing-country member in a calendar year, since ‘the lack of human and financial resources as well as capacities and experiences of developing-country Members results in de facto imbalance in the participation in the dispute settlement mechanism’.  But in the meantime the government invested in studying the dispute settlement process by attending every WTO panel proceeding as a third party and learning from the example of the United States and E.U. Then, after learning how the system operated, China became active as a litigant, first as a respondent and then as a complainant.China USA WTO Disputes

Beginning with the China-Auto Parts case in 2006, she began to raise strong defenses in almost every case through substantive and procedural arguments. Its litigation strategy became even more aggressive and it advanced creative interpretations of its accession protocol commitments to reduce asymmetries, a change that represented a ‘transformation for China from the perspective that litigation is not the goal’ to one where ‘we now accept that multilateral dispute settlement process is an appropriate channel for resolving disputes. Although many in government feel shocked that we are a defendant in an international court, and still think that litigation is not good, which is a reflection of our heritage, our culture, we now accept it’. One official thought ‘highly of the system’ because it ultimately makes it ‘easier to settle’ disputes thanks to the third-party rulings.

The U.S. and the E.U. have lost four important WTO cases to China since 2010 involving billions of dollars of imports. The pneumatic tires case (DS379) against the U.S., involved $18 billion in imports while a case against the E.U. involving steel fasteners (DS397) involved almost $5 billion and created precedent regarding the legality of U.S. and E.U. anti-dumping and countervailing duty methodologies that affect China trade totaling $463 billion in imports to the U.S. and $368 billion in imports to Europe.

How did a Confucian, anti-legalist country fare so well in an organization where English is the governing language and build such trade law capability? Largely thanks to the Ministry of Justice’s 2001 “Accelerating the Reform and Development of the Legal Profession after China’s Accession to the WTO,” which it noted, “Chinese lawyers are weak in handling international legal business, and China lack talents who can comfortably handle foreign legal services, and the lawyers’ competitive capacity in the international legal service market are weak.” Today most Chinese WTO scholars have graduated from elite law schools and the have overseas experience. Zhang Naigen at Fudan University studied WTO law for a year under Professor John Jackson at the UMichigan and was a visiting scholar at Columbia, George Washington and the Max Planck Institute of Comparative Public Law and International Law in Heidelberg. Zhang founded and  directs the Center for Intellectual Property Study of international, domestic, and comparative intellectual property law and is Vice President of the Shanghai Society for Intellectual Property Law–which helped Shanghai to become a favored venue for international litigation.

Since WTO accession required China to participate in the The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), Chinese law firms have developed strong intellectual property practices and Chinese domestic courts often apply TRIPS in private cases. Although the Supreme People’s Court has vigorously rejected proposals that WTO law should be directly applicable before domestic courts it does suggest that, where possible, Chinese law should be interpreted to comply with WTO requirements and Chinese courts now reference WTO law in important decisions.

China and the WTO: How China Won…continue reading…

China has also made clever use of foreign lawyers to facilitate legal technology transfer. Huawei, with more than a hundred in-house counsel, hired famed international trade lawyer James Lockett, as its Vice-President and Head of Trade Facilitation and Market Access, for example. Lockett came from the U.S. Department of Commerce, had served as the Chairman of the American Chamber of Commerce in Brussels and been a lawyer for U.S. law firms in Brussels and Vietnam and was highly familiar with U.S. and E.U. regulatory systems. So strong is Huawei’s legal team that it has filed briefs at odds with the Chinese Government’s stated positions. China is a critical player in the WTO system–indeed, its strongest supporter–and a formidable and tenacious opponent of the U.S. and the E.U. It knows how the WTO works and does not hesitate to threaten litigation.

As China has begun shaping WTO jurisprudence to constrain the U.S. and E.U., U.S. and European perceptions of the WTO have changed but, since their proposed alternatives like the TPP and the TTIP have proven unattractive, they may be forced to retreat into bilateralism or participate in a world order shaped by China and designed to even the playing field for the majority of the world’s nations.

For those of the legal persuasion, I warmly recommend China’s Rise: How it Took On the U.S. at the WTO by Gregory Shaffer and Henry Gao, from which much of this post is derived. Their clearly written, generously footnoted legal howdunnit makes captivating reading.

Written by Godfree
Visiting China and studying it since 1967. Interested in its culture, politics, education and economy.