China now exports ‘global order,’ and its decisions reverberate around the world. It wants to influence international prices and shape global rules. But it has evident difficulty in acting like a rule-setter and system-shaper — in other words, like a leader (or co-leader) of the world economy. This creates uncertainty and instability for China and the rest of the world.

But there is much positive news. China’s membership in the WTO has been a resounding success. It has become a strong WTO stakeholder, implementing the bulk of its huge commitments in a timely fashion, and actively participating in multilateral rule-enforcement and dispute settlement. This has defused manifold international trade tensions and smoothed China’s rapid integration into the global economy.

The US does accuse China of breaching its WTO commitments in numerous key areas, leading to several cases being taken to WTO dispute settlement. China has also been a conspicuously passive and marginal player in the Doha Round.

In contrast to Doha, Beijing has been very active in FTA negotiations. As the driving force behind FTAs in East Asia, China is clearly more comfortable with proactive bilateralism than multilateralism. With the former, it feels it can better shape its external order, especially in its neighbourhood. But China’s FTAs are ‘trade light,’ not extending beyond tariff elimination to tackle the non-tariff and regulatory barriers that constrict bilateral trade.

China’s policy shift over the past decade is most evident in its unilateral trade policy (measures undertaken at home). Here the big news is that China’s historic opening to the world economy has stalled since about 2006, essentially to promote SOEs. The Hu-Wen leadership is much more cautious than its Jiang-Zhu predecessor. Anti-liberalisation interests — ministries, regulatory agencies and resurgent state-owned enterprises — are more powerful. Policy-making is more complex and tends to take place in regulatory silos. Not least, China’s greater global economic clout translates into unwillingness to open markets unilaterally and to haggle hard over reciprocal concessions — just like the USA and EU.

Export restrictions have increased. The decision to cut export quotas on rare-earth metals by 40 per cent is a blatant attempt to shift international terms of trade to raise world prices and lower domestic input prices. Tax incentives, subsidies and price controls, as well as administrative ‘guidance’ on investment decisions, are used to favour domestic sectors over imports. China-specific standards, for example on 3G mobile phones, create high compliance costs for foreign enterprises, and services barriers, notably in financial and telecommunication services, have come down very slowly.

Internet restrictions have increased, benefiting local providers (such as Baidu) over foreign competitors (such as Google). Foreign-investment restrictions have been tightened in a range of sectors where SOEs operate. Joint-venture and technology-transfer requirements on foreign multinationals are used to promote national champions in high-speed rail, electric cars and renewable-energy sectors. And resource-based SOEs are buying up foreign assets with cheap capital provided by state-owned banks.

Externally, surplus savings plus an undervalued exchange rate spill over into large current-account surpluses and generate extra trade tensions, especially in post-crisis conditions of depressed global demand.

China’s crisis response was a supercharged fiscal and monetary stimulus, mainly directed to SOEs via state-owned banks, bolstering the public sector and state power at the expense of the private sector. But this exacerbates China’s structural fault-line of over-investment and under-consumption, and its command-and-control mechanisms take market reform backwards. Further, there is the real risk of surplus manufacturing capacity flooding into anaemic export markets in Europe and North America, thereby inviting protectionist retaliation against China.

China has a clear-cut stake in open and stable global markets. As one of the Big Three, its policy signals are now critical. If it doesn’t contain its own protectionism others won’t contain theirs. Hence it is in China’s own interests to restrain its industrial-policy activism and its protectionist spillover.

China should proceed with ‘WTO-plus’ reforms. It could further reduce applied import tariffs, especially on industrial goods. It should reverse export controls on raw materials and agricultural commodities. But its more substantial — and politically very tricky — challenge is to tackle high trade-related domestic regulatory barriers in goods, services, investment and public procurement.

The primary thrust of trade-related reforms must be unilateral — outside trade negotiations, hitched firmly to domestic reforms to improve the business climate and ‘rebalance’ the economy, making it more consumption- and less investment-oriented. But China should also play an active co-leadership role in the WTO, and clean up its weak FTAs, making them more compatible with multilateral rules.

At the same time it behoves China’s main trading partners — especially the USA — to strengthen ‘constructive engagement’ with China while containing protectionist forces at home. This will encourage Beijing to reciprocate. But the American obsession with a quick fix on the RMB and the Chinese current-account surplus, with threats of retaliation, do not display constructive engagement; they are misguided and dangerous.

Most of this wishlist is not on Beijing’s agenda today. They are ‘second-generation’ reforms ‘behind the border’ and at the heart of domestic economics and politics. They are much more difficult, politically, than ‘first-generation’ reforms, such as the earlier phase of trade and FDI liberalisation ‘at the border.’ In China, needed reforms go to the core of the Communist Party–government–public sector nexus and its grip on power. It is unlikely to happen soon.

But there is a silver lining. China’s dynamic private sector, economic globalisation, embeddedness in multilateral rules and institutions and regional and bilateral trade relationships all hem in aggressive mercantilist tendencies. Up-front protectionism increased marginally during the crisis, but it was heavily constrained by China’s integration in global supply chains and its strong WTO commitments. Fundamental market reforms have not been reversed. FDI continues to increase and Beijing remains pragmatic and internationally engaged.

Hence pro-market reformers should work to make the wishlist tomorrow’s, or the day-after-tomorrow’s, agenda in preparation for when the political conditions are ripe.

Razeen Sally is Director of the European Centre for International Political Economy (ECIPE).