SWP Research Paper
Stiftung Wissenschaft und Politik
German Institute for International
and Security Affairs
Hanns Günther Hilpert
China’s Trade Policy
Dominance without the Will to Lead
RP 1
January 2014
Berlin
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China's Role in International Trade: Dominance without the Will to Lead, Study Guides, Projects, Research of Economics and Law
China's growing role in international trade and its impact on the multilateral system, focusing on its relationship with the wto and the potential dissolution of international trade law. It also touches upon china's trade conflicts and its anti-dumping activities.
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SWP Research Paper
Stiftung Wissenschaft und Politik German Institute for International and Security Affairs
Hanns Günther Hilpert
China’s Trade Policy
Dominance without the Will to Lead
RP 1
January 2014 Berlin
All rights reserved.
© Stiftung Wissenschaft und Politik, 2014
SWP Research Papers are peer reviewed by senior researchers and the execu- tive board of the Institute. They express exclusively the personal views of the author(s).
SWP Stiftung Wissenschaft und Politik German Institute for International and Security Affairs
Ludwigkirchplatz 34 10719 Berlin Germany Phone +49 30 880 07- Fax +49 30 880 07- www.swp-berlin.org [email protected]
ISSN 1863-
Translation by Meredith Dale
(English version of SWP-Studie 22/ [without Annexes II–V])
Dr. Hanns Günther Hilpert is Deputy Head of SWP’s Asia Division
SWP Berlin China’s Trade Policy: Dominance without the Will to Lead January 2014
Problems and Conclusions
China’s Trade Policy Dominance without the Will to Lead
In less than thirty years China has risen from a mar- ginal player in world trade to become the largest trading nation in absolute numbers. Especially acces- sion to the World Trade Organisation at the beginning of the twenty-first century gave a huge boost to China’s integration into the global economy. Even as the exist- ing domestic and external economic growth curves level off, it is foreseeable that China will come to dominate international trade in the way the United States did until into the 1970s. China’s rise as a lead- ing trading nation has immediate repercussions on the production and income of its trading partners and indirect consequences for multilateral trade policy. China stands at the centre of numerous trade conflicts and plays an ever more important role in shaping international trade relations and structures, but with- out as yet possessing the ability or will to lead. This poses the pressing question of the implications for international trade policy, especially given that there is no other area of international politics where China is yet so dominant and influential. Against that back- drop, this study examines the latest developments and trends in Chinese trade politics, the institutions involved, and the internal decision-making mecha- nisms. Despite far-reaching market opening and liberalisa- tion, China’s implementation of its WTO accession obligations remains incomplete. Deficits persist espe- cially in observance of general WTO principles such as non-discrimination, transparency and rule of law. The period of unilateral Chinese external economic liberalisation definitely belongs to the past. To further the domestic development of income and employ- ment, the external economic priority of the Hu Wen administration (2002–2012) lay in protecting the large state-owned enterprises and establishing globally com- petitive industries. Although China’s growing presence in world trade and the WTO has led to frictions, fears expressed before its WTO accession that it would undermine the multilateral system have proved to be unfounded. China behaves like an established actor in the WTO world trade system. It sometimes breaks rules and grants its own trade interests greater importance than the existence and stability of the system as a whole,
SWP Berlin China’s Trade Policy: Dominance without the Will to Lead January 2014
China’s Rise – Consequences for Trade Politics
A Whirlwind in World Trade
China’s epochal economic rise is manifested most of all in international trade. In 1980, at the beginning of the reform process, China was but a marginal figure in world trade, with an external trade volume of $37.6 billion. Twenty years later, China’s external trade already represented 3.7 percent of world trade, at $474 billion. By 2012 exports and imports totalled $3,869 billion, corresponding to 10.6 percent of world trade. China has thus drawn almost level with the United States in 2012, and in fact took the lead in the table of trading nations in 2013 (see figure, p. 8 ).^1 China’s rise in foreign trade is even more dynamic than in domestic production. Whereas GDP rose at an annual average rate of 10.0 percent from 1980 to 2012, exports and imports grew by 15.6 percent per annum over the same period.^2
China’s rise in international trade is not over yet. Even if the growth trends flatten out, IMF forecasts for coming years suggest that China’s exports and im- ports will still grow faster than world trade overall, causing its relative share of world trade to continue to grow. According to the IMF, China’s share of world trade is expected to reach 11.5 percent in 2014, 12. percent in 2016 and 13.7 percent in 2018.
There is certainly a connection between the development of domestic production and international trade. Economically, China’s integration into the global economy has turned out to be a growth engine for the domestic economy. Politically, the liber- alisation of foreign trade was always at the heart of the reform process.
3
1 Absolute values and relative shares on the basis of statisti- cal data from the International Monetary Fund, Direction of Trade Statistics , June 2013, http://elibrary-data.imf.org (accessed 11 June 2013).
Barring
2 Calculations on the basis of statistical data from the Inter- national Monetary Fund, World Economic Outlook Database , April 2013, http://www.imf.org/external/pubs/ft/weo/2013/01/ weodata/index.aspx (accessed 11 June 2013); International Monetary Fund, Direction of Trade Statistics , June 2013 (see note 1 ). 3 Calculations on the basis of IMF forecasts of growth rates for Chinese external trade and world trade, see International Monetary Fund, World Economic Outlook Database , 2013 (see note 2 ).
unexpected reversals, China will come to dominate world trade in the way the United States did until into the 1970s.^4 Globally China has more than doubled its share of trade in industrial goods since the turn of the century, from 7.9 to 17.7 percent (2000 to 2012); its trade and current account surpluses initially grew rapidly, moder- ating slightly since 2008. The speed with which Chi- na’s industrial goods conquered world markets after it joined the WTO in 2001 is remarkable. Even in emerging economies that impose high import tariffs (Brazil, India) or employ discriminatory trade agree- ments to give Chinese products a price disadvantage compared to other imports (Mexico, Turkey), China’s share of industrial imports has more than quadrupled (see Table 1, p. 9 ). Chinese exports are especially strong in textiles, leather goods, clothing, and clocks and watches: sectors which are protected by high tariffs and therefore especially sensitive areas of trade policy.^5 However, the aggregated foreign trade figures obscure the dominance of foreign invested enterprises in China’s external trade. According to official statis- tics for 2011, these entities accounted for 52.4 percent of exports, 49.6 percent of imports, 86 percent of high- tech exports (2010) and 21.6 percent of China’s value added. 6
4 For longer-term forecasts see Arvind Subramanian, Eclipse: Living in the Shadow of China’s Economic Dominance (Washington, D.C.: Peterson Institute for International Economics, 2011), 99–104.
China’s exporters are overwhelmingly sub- sidiaries of foreign companies and China’s external trade consists largely of business-to-business trans- actions between final assembly processes located in China and foreign manufacturers of high-value com- ponents. Chinese-owned manufacturing multination- als with a global brand, proven technological expertise
5 Aaditya Mattoo, Francis Ng and Arvind Subramanian, The Elephant in the “Green Room”: China and the Doha Round , Policy Brief 11-3 (Washington, D.C.: Peterson Institute for Inter- national Economics, May 2011), 2f, tables, 7–11, http://www. iie.com/publications/interstitial.cfm?ResearchID= (accessed 30 November 2012). 6 National Bureau of Statistics of China, China Statistical Year- book 2012 (Beijing: China Statistics Press, 2012).
China’s Rise – Consequences for Trade Politics
SWP Berlin China’s Trade Policy: Dominance without the Will to Lead January 2014
Figure China’s rise to leading trade power: share of world trade (percent)
and a strong position in the international markets still remain the exception. The dynamism of external investment is conspicu- ous. After joining the WTO, China quickly became the most important global investment destination after the United States. Since about 2005, Chinese state funds and state-owned and private-sector businesses have become increasingly active international inves- tors, too, especially in the energy and resources sec- tors. Even if trade and investment processes occur in parallel and are complementary, the investment sector still has its own specific actors, institutions and lines of conflict. This study therefore concentrates solely on the aspect of trade. China’s export and import dynamism has brought the world considerable welfare gains. Consumers across the world profit from falling prices, while busi- nesses expand manufacturing capacity, create employ- ment and increase sales and profits on the basis of the new marketing and supply possibilities in China; furthermore low-cost Chinese solutions enable nation- al economies to modernise their physical infrastruc- ture more cheaply and quickly. But despite the over- whelmingly positive economic effects of China’s inte- gration into the international division of labour, its trading partners find themselves under considerable adjustment pressure. Favoured by low capital costs, low wages, a modern world-class infrastructure and utilising scale advantages of mass production, China’s industry exposes competing manufacturing locations
to sharp and potentially ruinous competition. As a consequence industrial capacity is scrapped, employ- ment lost and industrialisation processes impeded. Industrialised countries, emerging economies and developing countries alike are all affected by competi- tion from China. All countries, with the notable excep- tions of Japan, South Korea and Taiwan, show large deficits in their industrial trade with China. So given the pressure of adjustment created by the Chinese export offensive, it comes as no surprise to find China entering the arena of trade conflict.
A Growing Weight in
International Trade Politics
Ever since the conclusion of the General Agreement on Tariffs and Trade (GATT) in 1947, the multilateral trade system has been regarded as the superior regu- latory framework for trade between states. The GATT principles – reciprocity of market access, non-discrimi- nation (of third states), binding and enforceable inter- national obligations, and transparency – proved to be durably effective instruments to prevent trade wars and liberalise world trade. The success of GATT earned the liberal paradigm of welfare-generating and peace- promoting free trade a universal validity. However, the inability of the WTO as GATT successor, or the WTO member-states, to bring the current Doha Round to a successful conclusion has plunged the multilat-
China
Germany
United States
China’s Rise – Consequences for Trade Politics
SWP Berlin China’s Trade Policy: Dominance without the Will to Lead January 2014
of many WTO members and shifted the power struc- tures of international trade politics. In the face of powerful Chinese import competition, the emerging economies are practically no longer willing to com- promise on the topic of non-agricultural market access (NAMA), for example when they were called upon to open their markets beyond the existing reductions in unbound tariffs. In the event that the demanded NAMA liberalisations are implemented, many emerg- ing economies fear for the competitiveness or even the very existence of their domestic industries. As Table 1 (p. 9 ) shows, in the first decade of the twenty-first cen- tury global industrial import markets were exposed to successful Chinese export campaigns. Suffering addi- tional pressure from the global financial crisis, many WTO member-states believed they could not withstand any further market opening – nor did they expect im- proved export possibilities to China in return. Firstly, there is little confidence in credible implementation of liberalisation measures because discrimination by local Chinese authorities is rife. Secondly, it is feared that China could compensate possible losses of domes- tic competitiveness by devaluing the renminbi. Under these conditions the functioning of the established principle of reciprocity in trade policy is restricted. Thus fears of Chinese competition prevent necessary progress in the negotiating process.^9 The rise of China and other major emerging econ- omies has broken up the former GATT negotiating monopoly of the “Quad” group (Canada, European Union, Japan, United States). Now Brazil, China and India together form an effective opposition and blocking power that can prevent any conclusion it regards as unfavourable – but is itself not yet capable of shaping trade policy. Furthermore, erosion of the Western capacity to lead also appears to have robbed the United States of the will to take the initiative in multilateral trade policy. The United States burdened the Doha talks with ambitious liberalisation demands and since 2008 has shifted the focus of its trade poli- tics increasingly to the bilateral level. Following the conclusion of free trade agreements with Peru (2007), Panama (2011), Colombia (2011) and South Korea (2011), the United States is currently negotiating Pacif- ic and Atlantic free trade agreements (Trans-Pacific Partnership, TPP; Transatlantic Trade and Investment Partnership, TTIP). The turn to bilateralism reveals a foreign policy strategy of responding to a rising China
9 Mattoo, Ng and Subramanian, The Elephant in the “Green Room” (see note 5 ), 1–4.
by means of trade policy.^10
China has already permanently shifted the coordi- nates of international trade politics. But, in contrast to trade ruptures of the past decades (EU integration, oil price shocks, rise of Japan and the emerging econ- omies), the international community has yet to find a considered and politically convincing response to this challenge. Instead we find ourselves in a transitional phase characterised by frictions and insecurities, where the substantive debate with China follows ste- reotyped patterns. That is the point of this study: to provide a systematic stocktaking and sober assessment of China’s trade politics from the European perspec- tive, and thus present a counterpoint to well-worn per- spectives.
Europe’s trade policy has also taken a bilateral turn, at the latest with the launch of negotiations over free trade agreements with Japan (Japan-EU Free Trade Agreement, JAPEU) and the United States (TTIP).
10 On US trade policy see Claude Barfield, “The Trans-Pacific Partnership: A Model for Twenty-First-Century Trade Arrange- ments?” International Economic Outlook , no. 2 (June 2011): 1–8.
SWP Berlin China’s Trade Policy: Dominance without the Will to Lead January 2014
China’s Trade Policy in the Twenty-first Century:
Developments and Experience
Speaking on 11 December 2011 at the Great Hall of the People in Beijing, President Hu Jintao and WTO Secretary-General Pascal Lamy rightly lauded China’s accession to the WTO ten years earlier as a historic milestone. It was decisive for China’s rapid and suc- cessful integration into world trade and the global economy and symbolises, like the fall of the Berlin Wall, the coming together of a shared global world. WTO membership obliged China to concede extensive market opening measures and permitted in return guaranteed access to the markets, investment capital and technological expertise of the industrialised nations. China’s world-market-driven economic dyna- mism experienced a decisive boost. Reform, opening and integration in the global economy received inter- nal and external institutional and legal backing. Exter- nally, WTO membership depoliticised China’s trade and trade conflicts. From that point on trade with China came under the most favoured nation rule. Bilateral trade disputes had to be resolved by rules, in a form consistent with the WTO and without reference to Beijing’s foreign or human rights policies. Internally the legally binding promises represented a powerful instrument to tame the opponents of reform. The architect of the economic reform process, then Prime Minister Zhu Rongji, was able to push through sweep- ing privatisation and liberalisation measures on the basis of the political and economic necessity of acces- sion. But actual fulfilment of the WTO accession obli- gations lay in the hands of a new state and party leadership. Under the Hu Jintao/Wen Jiabao adminis- tration which took office in 2002, China’s trade policy trade policy was to experience further development and reorientation at the unilateral, bilateral and multilateral levels.
Multilateral Level
Incomplete Implementation of WTO Accession Obligations
Although China joined the WTO as a developing country, it had to make far-reaching commitments on market opening and liberalisation that were without
parallel in the history of GATT and the WTO. Beijing granted considerable tariff reductions (to an average tariff of 9.5 percent on industrial goods and 13.2 per- cent on agricultural commodities), the almost total abolition of import quotas and import licences, and decisive market opening moves in the service sector (such as the complete opening of domestic distribu- tion for foreign operators). In order to enforce the principle of equal legal treatment, the United States and European Union insisted on explicit rule of law obligations in the WTO accession protocol, such as legislative and administrative transparency and the possibility of judicial review. China also agreed to strictly regulate subsidies, generally abolish export subsidies and restrict agricultural subsidies to 8. percent of production value. China granted its trading partners special safeguard clauses. A series of other related agreements also came into force with WTO accession, concerning Trade Related Investment Measures (TRIMS), Trade Related Intellectual Property Rights (TRIPS), the Technical Barriers Treaty (TBT) and Sanitary and Phytosanitary Measures (SPS).^11 It is conspicuous how differently China and its most important trading partners (European Union, United States, Japan) perceived the WTO accession ex ante (2001) and ex post (2011). In advance, the Chinese feared structural dislocations in agriculture, industry and banking, while Europe and America doubted that tariff reductions and market opening would actually be realised. In hindsight, there is a widespread feeling in China that the price of admission to the WTO was unreasonably high and that the global-market-driven dynamism of recent years has unnecessarily sharp- ened economic disparities within the country. Abroad, there are persistent complaints of discrimination vis-à- vis Chinese competitors through state import protec- tion, subsidisation of state-owned businesses, arbitrary regulation and inadequate protection of intellectual property. The question of implementation of the WTO accession conditions is also interpreted very different-
11 The accession documents can be found on the WTO web- site, under “China and the WTO: Accession to the WTO”, http:// www.wto.org/english/thewto_e/countries_e/china_e.htm (accessed 24 February 2012).
Multilateral Level
SWP Berlin China’s Trade Policy: Dominance without the Will to Lead January 2014
Of course it is sensible and necessary to make a transformation country agree to free-market princi- ples on joining the WTO. Ultimately, the WTO ideal of non-discriminatory multilateral world trade demands autonomous, decentralised market decisions at the level of the member countries. To that extent the free- market accession commitments ensure that the struc- tures of the transformation country (China) converge as required with those of the existing free-market WTO members. Compatibility with the free-market world trade order is created, closing a gap in WTO law.^19 One can also take a positive view of the special obligations on rule of law, transparency, implemen- tation and far-reaching national treatment, because the associated market opening and liberalisation measures benefit economic growth and generate wel- fare within China.^20 However, from the development perspective the comprehensive prohibitions on dis- crimination against foreign investors can also be seen critically because they strongly restrict the room for industrial policy and result in avoidance actions.^21 Whereas such “WTO-plus obligations” can certainly be justified on the grounds of China’s status as a non- market economy and their ensuing positive legal and economic effects, this is not possible in the case of the “WTO-minus rights”. 22
World Trade Organization Legal System: An Appraisal of the China Accession Protocol”, Journal of World Trade 37, no. 3 (2003): 483–522 (491–509).
A number of economically dis- advantageous rules discriminate against Chinese ex- ports. Firstly, a special China safeguard clause (Art. 16, Working Party Report paragraphs 247, 248) permits China’s trading partners to impose safeguard mea- sures in the event of market disruption or significant diversion of trade (rather than only after serious mar- ket disruption). Secondly, dumping by Chinese export-
19 Qin, “‘WTO-Plus’ Obligations and Their Implications for the World Trade Organization Legal System” (see note 18 ),
20 For this interpretation see Cattaneo and Braga, Everything You Always Wanted to Know about WTO Accession (see note 18 ), 21; Qin, “‘WTO-Plus’ Obligations and Their Implications for the World Trade Organization Legal System” (see note 18 ), 511f. 21 Dani Rodrik, Making Room for China in the World Economy , paper prepared for the AEA Session on “Growth in a Partially De-Globalized World”, chaired and discussed by Philippe Aghion, Cambridge, MA, 2009. 22 For the term “WTO-minus rights” and this interpretation see Chad P. Bown and Meredith A. Crowley, China’s Export Growth and the China Safeguard: Threats to the World Trading Sys- tem? Policy Research Working Paper 5291 (Washington, D.C.: World Bank, 2010), 1f.; Cattaneo and Braga, Everything You Always Wanted to Know about WTO Accession (see note 18 ), 22.
ers is easier to prove, namely, by comparison with the production costs of comparable market economy producers (as China is still treated as a non-market economy in the WTO, except where market economy status is explicitly recognised in a bilateral agree- ment). Thirdly, countervailing measures can be im- posed on the basis of an expanded definition of sub- sidies (Art. 10). Fourthly, specific safeguards applied until 2008 in the area of textiles and clothing prod- ucts (Working Party Report paragraph 242).^23
The ongoing discrimination against China is plain- ly a systematic breach of the WTO rules. It is, however, unavoidable because in a WTO based on the principle of reciprocity there can be no “free” admission, cer- tainly not for such a large trading nation as China. The existing members inevitably had to demand con- cessions in return for granting China admission to most-favoured treatment.
Each of these restrictions led to market foreclosure measures directed against China.
(^24) This also meant that con- flicts remained inevitable at least for the transition period until 2013 or 2016: China’s export sector remains exposed to discrimination and protectionism and the supposedly universal WTO principle of most- favoured treatment is partially violated.^25
Increasingly Active Participation in the WTO Dispute Settlement Mechanism
But because China also draws great benefits from integration into the world economy, anger and criticism concentrate not on the WTO and the multilateral trading system, but on protectionism directed against China. Interest- driven Chinese trade policy seeks to respond to this pragmatically within and outside the WTO.
China is subject to absolutely no restrictions of its rights and duties with respect to the WTO dispute settlement mechanism, where it is fully equal to the other WTO member-states. Notably, the WTO dispute
23 For the full wording see the accession documents on the WTO website, “China and the WTO: Accession to the WTO” (see note 11 ). 24 Cattaneo and Braga, Everything You Always Wanted to Know about WTO Accession (see note 18 ), 1–7. Before China joined, fears were expressed that “China is not joining the WTO. The WTO is joining China.” In order to protect their rights, the existing WTO members had to place strict obligations on China. 25 Qin, “‘WTO-Plus’ Obligations and Their Implications for the World Trade Organization Legal System” (see note 18 ), 511f.
China’s Trade Policy in the Twenty-first Century: Developments and Experience
SWP Berlin China’s Trade Policy: Dominance without the Will to Lead January 2014
settlement mechanism is the only obligatory and binding international dispute settlement mechanism that China – which is always extremely protective of its sovereignty – has accepted.^26 Nonetheless, China and its trading partners initially used this instrument only very cautiously during the first five years after accession. In view of China’s importance in world trade, more lively participation in WTO dispute settle- ment processes, whether active or passive, would in fact have been quite appropriate. Plainly in this initial phase China still enjoyed a kind of grace period. And China itself shied from allowing trade conflicts to escalate openly as WTO cases, by relenting in response to threats.^27 China did, on the other hand, participate as a third state in a record 89 consultations during its first ten years of membership. During this period China applied more often than any other WTO member to participate in the consultation process. This approach had (and still has) a series of advantages for the Chi- nese. Firstly, they can introduce additional arguments into the dispute settlement mechanism and increase the pressure on the accused country without necessar- ily entering into open confrontation. Secondly, China exercises its right to contribute its own ideas on the development of international trade law. Thirdly, it can use its participation in the consultations to procure information in the difficult and complex field of inter- national trade law and build up its own competence in dispute settlement. And fourthly, through its lively participation China accumulates influence and stat- ure within the WTO. 28 The complaint concerning unjustified import tariffs on car parts brought by the European Union,
26 When it joined the Vienna Convention on the Law of Treaties in 1997 China expressed fundamental reservations relating to judicial settlement, arbitration and conciliation before International Court of Justice (Art. 66 of the Vienna Convention on the Law of Treaties). 27 Henry Gao, “China in the WTO Dispute Settlement Sys- tem: From Passive Rule-Taker to Active Rule-Maker?” in A Decade in the WTO: Implications for China and Global Trade Gover- nance , ed. Ricardo Meléndez-Ortiz, Christophe Bellmann and Shuaihua Cheng (Geneva: International Centre for Trade and Sustainable Development, 2011), 17. 28 For these arguments see Chad P. Bown, “China’s WTO Entry: Antidumping, Safeguards, and Dispute Settlements”, in China’s Growing Role in World Trade , ed. Robert C. Feenstra and Shang-Jin Wei (Chicago: University of Chicago Press, 2010), 329f.; Gao, “China in the WTO Dispute Settlement System” (see note 27 ), 18f.; Marcia D. Harpaz, “Sense and Sensibilities of China and WTO Dispute Settlement”, Journal of World Trade 44, no. 6 (2010): 1166.
the United States and Canada in March 2006 is regarded as a turning point towards active and direct Chinese participation in the WTO dispute settlement mechanism. Although China’s position was legally untenable, it insisted on all stages of the process and fully exploited its deadlines, but then also imple- mented the disadvantageous ruling. In later impor- tant cases, such as those concerning the application of international copyrights, market access for media products, and export restrictions on raw materials, China defended its position with the same assertive tactics.^29
The end of Chinese reservation is also reflected in the country’s growing willingness to initiate dispute settlement cases, especially when the United States or European Union – in Chinese eyes – protect their mar- kets through illegal import restrictions. The first com- plaint actively initiated by China related to US anti- dumping duties on coated paper.
The car parts case also marked the end of the grace period for China, at least on the part of the industrialised countries (European Union, Canada, Mexico, United States). By the end of June 2013 China had been accused 31 times in 19 different cases of having violated either WTO rules or its accession obli- gations. Complaints were lodged most frequently by the United States (15), followed by the European Union (7) and Mexico (4). In all eleven concluded cases China lost the legal argument more or less clearly and had to adapt its trading regime. China is most frequently accused of illegally restricting access to its domestic market through anti-dumping duties or promoting its domestic industry through illegal sub- sidies. But despite their growing number, China faces many fewer complaints than the other large trading powers, which during the same period (January 2002 to June 2013) had to answer before the dispute settle- ment body in 41 cases (European Union) and as many as 273 cases (United States).
30
29 Gao, “China in the WTO Dispute Settlement System” (see note
China’s first com- plaint against the European Union also concerned anti-dumping measures. Although China is confronted with anti-dumping duties and countervailing duties (imposed on illegal subsidies) more often than any other country, it tends to avoid taking action against
27 ), 18f.; Harpaz, “Sense and Sensibilities of China and WTO Dispute Settlement System” (see note 28 ). 30 Strictly speaking, China submitted its first complaint in March 2002, against US measures relating to imports of steel products. But this complaint had been initiated by the EU, which also fought the case to its successful end. China and six other steel-exporting countries joined the complaint.
China’s Trade Policy in the Twenty-first Century: Developments and Experience
SWP Berlin China’s Trade Policy: Dominance without the Will to Lead January 2014
having made considerable concessions in the course of joining the WTO, China claimed the status of a “Recently Acceded Member” (RAM). From the outset China defined clear negotiating positions: offensive interests on industrial goods and wage-intensive agri- cultural products, defensive interests on services and domestic agriculture, and liberalisation and clarifica- tion of anti-dumping provisions. During the negotiat- ing process China placed great political importance on avoiding conflict with the developing countries, where it demonstrated an astonishing ambivalence.^38
China, which must have been interested in a suc- cessful outcome, participated constructively in the negotiating process, but remained reserved and pas- sive at decisive moments. It made no marked de- mands, avoided polarising provocation and rhetoric, but made no major liberalisation proposals of its own either and left the negotiating leadership to the G lead-nations Brazil and India.
For example, China is convinced that the principle of special and differential treatment of developing coun- tries does not promote development but argued that any decision about application of the principle should be left to the developing country concerned. China nonetheless supported the – partially contradictory – positions of the developing countries on agriculture and refrained from making its own proposals and demands. In the area of industry China supported the tariff-cutting “Swiss Formula” out of economic self- interest but insisted on clearly distinct coefficients for industrialised and developing countries. China re- jected the sectoral agreements for services, demanded above all by the United States, out of solidarity with the developing countries. On the “Singapore Issues” of investment, competition, and government procure- ment, by contrast, China adopted a negative stance if only out of defensive self-interest. It was certainly in China’s interest that these topics were excluded from the Doha agenda after the failed Cancún Ministerial Conference. It also suited China that services never really moved to the centre of the talks.
39
38 On the following see Tu, China’s Position and Role in the Doha Round (see note
While China gathered trade policy competence and experience through its participation, its low profile avoided attracting atten- tion and having accusations or demands directed towards it. Public pronouncements, citing the coun- try’s already liberal foreign trade regime and its com-
37 ), 15–18. 39 G20 in the sense of the coalition of developing nations in the WTO.
prehensive accession obligations, emphasised the con- siderable progress it had already made on market opening. Further trade concessions going beyond the tariff reductions already agreed by the emerging econ- omies were rejected.^40 In view of the initially reserved and constructive Chinese approach, their U-turn at the Geneva Minis- terial Conference in July 2008 – where China and India insisted on retaining existing protections for their own agriculture and flatly refused US demands to reduce tariffs for cotton – had to come as a surprise. An agreement that was thought to be tangibly close was scuppered by disagreement between the United States and China/India. With this defensive position- ing China abandoned its constructive stance in the Doha negotiations. But it would not be fair to blame China (and India) for the failure of the talks. 41 More important than China’s position as an actor participating directly in the negotiating process may have been its indirect role as a rising dominant export power. Since the start of the Doha Round, China’s exports have increased almost eight-fold and its shares of the industrial goods imports of all major importing countries have increased to figures between 10 and 40 percent (see Table 1, p. 9 ). Especially critical for the Doha talks are China’s even larger market shares for sensitive industrial imports with high peak tariffs.^42 Worldwide fears of ruinous competition initiated by China have therefore grown. Inevitably, willingness to make concessions in the WTO negotiations in return for better market access in the industrial sector (NAMA) had to decline. This applies in particular to the major emerging economies, which fear for their prospects of industrialisation.^43
40 Paul Blustein, “China’s Impact on the Doha Round”, in A Decade in the WTO , ed. Meléndez-Ortiz, Bellmann, and Cheng (see note
For the European Union and the United States, whose offensive interests
27 ), 7; Razeen Sally, Chinese Trade Policy After (Almost) Ten Years in the WTO: A Post-Crisis Stocktake , Occasional Paper 2/2011 (Brussels: European Centre for International Political Economy, 2011), 9. 41 On the negotiations in Geneva see Blustein, “China’s Impact on the Doha Round” (see note 40 ), 7–9. 42 See Mattoo, Ng, and Subramanian, The Elephant in the “Green Room” (see note 5 ), 2f. 43 Blustein quotes statements made by Brazil’s Foreign Minister Celso Amorim at the G4 ministerial meeting in Pots- dam in 2007: “‘We cannot even think of doing the numbers by the US and EU’, because that would risk ‘deindustrializing Brazil’,” and: “Brazil, [Amorim] argued, needed to keep ‘policy space for dealing with China’.” Blustein, “China’s Impact on the Doha Round” (see note 40 ), 9.
Unilateral Level
SWP Berlin China’s Trade Policy: Dominance without the Will to Lead January 2014
lie in market access for industrial products and ser- vices, it could be said that the commercial basis for the Doha Round disappeared. It is this trade constellation that feeds the funda- mental criticism of China’s behaviour in the Doha Development Round:^44
This criticism has its justification. China’s passivity stands in contradiction to its fundamental interest in a predictable and functioning world trade order.
China is advised that fulfilling its WTO accession conditions does not exempt it from the duty to make concessions and does not justify free- riding in the ongoing Doha talks. Despite robust eco- nomic growth and large export surpluses, critics say, China has failed to disseminate attractive proposals on liberalisation and market opening suitable to achiev- ing a breakthrough. Although China possesses con- siderable mediating potential through its dual role as developing country and leading trading nation, they say, it fails to shoulder responsibility for a multilateral trading system to which it owes its prosperity and development gains of the past decade. China, they say, underestimates the costs of failure of the Doha Round, despite depending more than other trading nations on open markets and secure international trade law. In short, China does not live up to its responsibility as a leading trading nation for the system of multilateral trade.
45
44 See for example Blustein, “China’s Impact on the Doha Round” (see note
The reasons for China’s behaviour become a little clearer if one considers the modest trade gains it could have expected in the event of a successful conclusion of the Doha Round. Implementing the WTO accession obli- gations permitted China to achieve considerable wel- fare gains and its import regime is already compara- tively liberal. Although China’s exporters would ben- efit from a global liberalisation of industrial import markets, the planned reduction of agricultural sub- sidies and the opening of the food import markets would have led to unpopular structural adjustments. On the other hand, China’s agricultural market liber- alisation measures (and the resulting welfare gains)
40 ), 9f.; Andrew L. Stoler, “China’s Role in the World Trade Organization and the Doha Round of Multi- lateral Trade Negotiations”, paper presented at the Second World Forum on China Studies, Shanghai, 21–22 September 2006, 9–11; Yongnian Zheng and Qingjiang Kong, China in the WTO: From Accession to the Doha Failure , EAI Working Paper 147 (Singapore: National University of Singapore, 2009), 12–16. 45 Other major trading nations can also be accused of lack- ing willingness to compromise, but China is more dependent than they on open world markets and a functioning world trade system.
would remain small, because China’s agricultural tariffs are already relatively low and the obligations for developing countries to cut agricultural tariff cuts are not very strict anyway. Moreover, China would have been negatively affected by the deterioration of its terms of trade resulting from Doha, because the liberalisation measures would have brought with them rising agricultural prices and falling prices for manufactured goods.^46 Simulations on the basis of the World Bank’s “Linkage” general equilibrium model already produced disappointing results in the middle of the last decade. In the hypothetical case of a com- plete liberalisation of international agricultural and industrial trade China could have expected an annual rise in prosperity of $16.6 billion (then about 0.2 per- cent of GDP). In the more realistic case of partial liber- alisation this modest growth would have shrunk to zero.^47
Unilateral Level
Assuming a strict orientation on direct income gains, China thus could and can have no great interest in a conclusion of the Doha Round. Like the United States and India, China lacks any immediate economic incentive for making groundbreaking new proposals for rescuing the Doha Round.
In the years before and after WTO accession China drastically reduced its import tariffs, opened its mar- kets and implemented standards of regulation com- patible with a market economy and rule of law. As a result of that strategy it has been able to record enor- mous growth gains. But towards the middle of the last decade the process of unilateral non-discriminatory liberalisation ended. Market opening measures going beyond the accession obligations no longer occur, apart from certain cautious liberalisation steps in the capital markets. On the contrary, the opening process appears to be going into reverse. Foreign investors and importers are confronted with new barriers to market entry, while privileged domestic investors are backed and protected with taxes, subsidies and public con-
46 Kym Anderson, Will Martin and Dominique van der Mensbrugghe, “China, the WTO and the Doha Agenda”, in China and the World Economy , ed. David Greenaway, Chris Milner and Shujie Yao (Basingstoke: Palgrave Macmillan, 2010), 1–18. 47 Kym Anderson, Will Martin and Dominique van der Mens- brugghe, “Doha Merchandise Trade Reform: What Is at Stake for Developing Countries?” World Bank Economic Review 20, no. 2 (2006): 178, 185.
Bilateral Level
SWP Berlin China’s Trade Policy: Dominance without the Will to Lead January 2014
bilateral agreements, stands in negotiations with seven further partners, and is considering the start of talks in five more cases (see Table 2, p. 20 ). Whereas China’s comprehensive economic partner- ship agreements (CEPAs) with Hong Kong, Macao and Taiwan extend beyond pure trade in goods and also include services and investment, the free trade agree- ments (FTAs) essentially cover only bilateral trade in goods, indeed often only in particular sectors. The dismantling of non-tariff trade barriers is not dis- cussed, still less any treatment of the Singapore Issues. The agreements are tailored to the respective partner and therefore differ widely. China’s trade diplomacy is willing and able to pragmatically and eclectically adapt the scope, range and content of the agreements to the profiles and wishes of its trading partners.^53 In general a trade policy prioritising bilateral or regional arrangements is not regarded as an alter- native to the multilateral trading system, but as a complement as long as liberalisation measures cannot be realised within the WTO framework. China’s agree- ments are designed to facilitate smooth and economi- cally efficient trade in goods and services within Asian production networks, and in the medium term to posi- tion the Chinese economy as the central hub supply- ing the Asian markets. By developing regional trade, China hopes at the same time to insure itself against protectionism on the part of the Western industrial- ised countries. Internationally the agreements are in- tended to keep access to foreign markets permanently open, to procure access to energy, raw materials and other resources, and to ensure the recognition of mar- ket economy status. Politically bilateral agreements are to establish China as a leading trade power and regional engine of economic cooperation. In diplo- matic terms the agreements concluded with Asian partners serve neighbourhood confidence-building and establishing a pan-Asian identity; indirectly they constitute reciprocal dependencies. In rivalry to Japan and the United States, China wants to act as the benevolent big neighbour of Southeast Asia. Through generous concessions it hopes to counteract fears of an all-devouring Chinese trade giant. The Chinese are proud of not fully exploiting the full advantage of
53 Agata Antkiewicz and John Whalley, “China’s New Regional Trade Agreements”, in China’s Integration into the World Economy , ed. John Whalley (Singapore et al.: World Scientific, 2011), 100, 118; Ganeshan Wignaraja, Economic Reforms, Regionalism, and Exports: Comparing China and India , Policy Studies 60 (Honolulu: East-West Center, 2011), 53–56.
their power asymmetry.^54
Rival Free Trade Strategies for the Asia-Pacific Region
At the same time both in the Asia-Pacific region and in China there is acute awareness that China’s rise to become the centre of gravity of trade also strengthens its role as a major power.
Despite its fundamental downsides and risks,^55 the trade strategy of bilateralism and regionalism must appear attractive for a China that is in the process of becoming the economic centre of gravity of Asia, if not indeed of the global economy. It is precisely the biggest trading powers that profit most from a shift to bilateralism, because the pull of their import markets lends them asymmetrical negotiating power and puts them in a position to wring concessions from smaller countries. Indirectly, discriminatory bilateral trade policies promote the emergence of centre/periphery structures that favour the businesses and production facilities of the centre.^56
54 For discussion of the motives of Chinese bilateral trade policy see Hanns Günther Hilpert, “Multilaterale und bilate- rale Freihandelsprojekte in Asien”, in Ostasien in der Globalisie- rung , ed. Hanns W. Maull and Martin Wagener (Baden-Baden: Nomos, 2009), 47; Yang Jiang, “China’s Pursuit of Free Trade Agreements: Is China Exceptional?” Review of International Political Economy 17, no. 2 (2010): 238–61 (250–56); Ming Wan, “The Domestic Political Economy of China’s Preferential Trade Agreements”, in Trade Policy in the Asia-Pacific: The Role of Ideas, Interests, and Domestic Institutions , ed. Vinod K. Aggarwal and Seungjoo Lee (New York et al.: Springer, 2010), 44–46; Ka Zeng, “Multilateral versus Bilateral and Regional Trade Liber- alization: Explaining China’s Pursuit of Free Trade Agree- ments (FTA’s)”, Journal of Contemporary China 19, no. 66 (2010): 635–52 (639–45).
Thus China’s free trade agree- ments not only produce competitive advantages for the domestic economy. In the medium term they also reinforce the spatial economic centrality of China, which above and beyond business-to-business trade relations is also becoming ever more important as an importer. A regional free trade zone (East Asian Free Trade Area, EAFTA), comprising the ten ASEAN states plus South Korea, Japan and China, would be even
55 For a fundamental critique of bilateral free trade agree- ments see Jagdish Bhagwati, Free Trade Today (Princeton and Oxford, 2002), 112–19. 56 Richard E. Baldwin, “The Spoke Trap: Hub-and-Spoke Bilateralism in East Asia”, in China, Asia, and the New World Economy , ed. Barry Eichengreen, Charles Wyplosz and Yung Chul Park (Oxford, 2008), 53–61.
China’s Trade Policy in the Twenty-first Century: Developments and Experience
SWP Berlin China’s Trade Policy: Dominance without the Will to Lead January 2014
Table 2 China’s comprehensive economic partnership agreements (CEPA) and free trade agreements (FTA)
In force since Thailand (FTA) 2003 Hong Kong (CEPA) 2004 Macao (CEPA) 2004 ASEAN (FTA) 2005 Chile (FTA) 2006 Pakistan (FTA) 2007 New Zealand (FTA) 2008 Singapore (FTA) 2009 Peru (FTA) 2010 Taiwan (CEPA) 2010 Costa Rica (FTA) 2011 Due to come into force Switzerland (FTA) 2014 Iceland (FTA) 2014 FTAs under negotiation since South Africa (SACU) 2004 Australia 2005 Gulf Cooperation Council (GCC) 2005 Norway 2009 China/Japan/South Korea 2012 South Korea 2012 CEPEA/RCEP (ASEAN+6) 2013 FTAs proposed in year Shanghai Cooperation Organisation (SCO) 2003 India 2003 EAFTA (ASEAN+3) 2004 Mongolia 2010 Colombia 2012 Source: Asian Development Bank, Asia Regional Integration Center, http://aric.adb.org (accessed 9 July 2013).
more advantageous for China than bilateral agree- ments with its neighbours.^57 In the regional context China also possesses a spe- cial political advantage, as it can play out its major
57 For an empirical comparison see the calculations of the resulting welfare effects with consideration of dynamic investment effects in Gemma Estrada, Donghyun Park, Inn- won Park and Soonchan Park, The PRC’s Free Trade Agreements with ASEAN, Japan and the Republic of Korea: A Comparative Analysis , ADB Working Paper Series on Regional Economic Integration 92 (Manila: Asian Development Bank, January 2012), 14–17.
power status better than in the multilateral context. But precisely these are also the reasons why many trading partners regard the Chinese free trade pro- posals with great scepticism. They fear ruinous indus- trial competition and a general reinforcement of Chinese dominance. The EAFTA propagated by China was therefore not able to convince all those invited. Although there is fundamental agreement in the region about the objective of free trade, a trading bloc centred on and dominated by China is rejected. The Japanese counterproposal of a Comprehensive Eco- nomic Partnership for East Asia (CEPEA), to also in- clude the countries of Australia, New Zealand and India and the issues of liberalisation of services and investment, therefore has greater diplomatic support. At its Bali summit in November 2011 ASEAN officially proposed a multilateral free trade agreement of the ASEAN+6 country group (Regional Comprehensive Economic Partnership, RCEP). Two years later the East Asia Summit (EAS) agreed to initiate negotiations on a RCEP agreement. In trade policy, China’s biggest challenge is not Japan, but the United States. At the Asia-Pacific Eco- nomic Cooperation (APEC) summit in November 2011 the United States and eight other Pacific states (Austra- lia, Brunei, Chile, Malaysia, New Zealand, Peru, Singa- pore and Vietnam) agreed to begin negotiations on a multilateral free trade agreement. If successful, they would join the Trans-Pacific Strategic Economic Part- nership, agreed in 2005 by Brunei, Chile, New Zealand and Singapore, nowadays referred to as Trans-Pacific Partnership (TPP). After initial hesitation Canada, Me- xico (October 2012) and Japan (July 2013) also joined the talks. The TPP is designed to go beyond simple tariff preferences and rules of origin, to bindingly regulate the spheres of services, investment protec- tion, right of establishment, competition, public con- tracts, intellectual property rights, and environmental and labour protection standards.^58
58 For detail on the TPP from an American perspective see Ian F. Fergusson, William H. Cooper, Remy Jurenas and Brock R. Williams, The Trans-Pacific Partnership Negotiations and Issues for Congress , CRS Report for Congress, 7-5700 (Washington, D.C.: Congressional Research Service, 19 March 2013); Jeffrey J. Schott, Barbara Kotschwar and Julia Muir, Understanding the Trans-Pacific Partnership (Washington, D.C.: Peterson Institute for International Economics, 2013).
If China were to seek to join the talks or later join the TPP, it would have to observe the complex, newly-drafted trade rules and accept stringent standards in the fields of social affairs, environmental standards, intellectual property