China and the norms of trade

Author: Peter Drysdale, Editor, East Asia Forum

China’s accession to the WTO in 2001 entrenched the extraordinary benefits that were already accruing to both the Chinese economy and its international trading partners through its large scale liberalisation of trade on the long march towards admission to the world body.

A man walks past a billboard which celebrates Chinas accession into the WTO in Beijing. (Photo: AAP)

Through the 1990s China joined in the process of unilateral trade liberalisation and, after successive liberalisations (especially that announced at the APEC Osaka Summit in 1995) as staging posts, eventually negotiated accession to the WTO. Commitment to membership involved commitment to the strengthening of market rules, a blueprint for reforms moving forward and increased confidence in the business and investment environment. The act of accession itself, though it brought no significant changes in barriers at the border most of which had been earlier put in place, saw a huge jump in China’s trade and investment with the rest of the world.

It’s entirely plausible to suggest that the WTO is one of the most widely recognised and respected international organisations in China.

After China’s accession, there was a massive effort across China to build the institutions and laws that extended the rule of the market right across the country. This meant dismantling old laws and regulations that segmented markets within China, giving special treatment in some parts of the country (like Guangdong) over other parts of the country, so that Chinese markets for commodities became more fully integrated domestically as well as integrated into international markets, operating according to international rules and norms.

The power and importance of what this did to the way in which the Chinese economy operated post-accession is still widely under-appreciated outside China, even in policy circles that need to have a better understanding. Though a Chinese official or an ideologically backward-looking political leader might wish, deep down, to put the market genie back into the bottle, they are constrained by its disciplines in a million ways.

Both education about the WTO and the palpable experience of the remarkable growth and income gains that it delivered cemented the belief that the WTO was a ‘public good’ of immense importance to China. Membership in the WTO was a driving force for market reforms. Literally thousands of books have been published over the past decade that raised awareness of the norms and rules of the WTO, and explained how modifying Chinese laws and administrative practices to align them with WTO commitments was essential to reaping these benefits.

Of course, the most important factor in reshaping public sentiment toward the WTO in China was the gains the country achieved after joining. Integration into the international economy has been the driving force behind China’s becoming the largest individual trading nation and the second-largest economy in the world. China is now a major source of outbound investment, as well as one of the most attractive destinations for (non-portfolio) foreign investment. WTO accession and integration into the global economy have been pivotal to the country’s progress. China’s commitment to these international norms and rules remains firm, although it has been tested in a number of ways: through the global financial crisis; the attractions as well as the dangers inherent in discriminatory bilateral or regional agreements; and the asymmetries and variations in treatment that still remain under the WTO regime.

In a number of ways, the disciplines that apply to China under the WTO are stronger than those that apply to other countries, including bigger and stronger players such as the United States. Article 11 of China’s protocol of accession to the WTO accession, for example, bound it to remove all taxes and surcharges, in principle, imposed on its export products including foodstuffs and raw materials. China is permitted only in the most exceptional of circumstances to limit or embargo exports, for example by imposing export duties or regulatory restrictions. This is the basis for United States and European action against China under WTO rules for restricting exports of so called rare earths. As the famous US embargo of exports of soybeans in the 1970s (which had profoundly disturbing effects on Japan and other Northeast Asian food importers) demonstrates, these are strictures on export trade that do not apply universally. Indeed, this experience led Australia to enter treaty obligations with Japan, then its principal food and raw materials market, that it would not apply embargoes or restrictions on these exports, thereby covering the incompleteness in assurances on export reliability under the global trade regime.

So too China has learned recently that it is not only necessary to become good at applying internationally established trade systems and rules but also that the international trading norms and rules that are currently in place are incomplete and do not apply rationally or equally to every country, whether by the accident of history or by design.

In an important essay this week, Amy King and Shiro Armstrong look at China’s interventions in the delivery of rare earths to international markets, and specifically to Japan in 2010. ‘The ban of rare earths exports’, they point out, ‘is now commonly cited as an example of Chinese policy-makers using economic levers for geopolitical purposes’. What they show, on the contrary, is that there is no evidence of a link between the restrain on China’s rare earth exports and the incident in the East China Sea with Japan that is supposed to have provoked it and that there was no embargo on supplies specifically to Japan. The Chinese had announced well in advance of that (totally unpredictable) incident that they were going to regulate these industries for environmental and other reasons, and the consequent global tightening of rare earths markets proceeded from that series of initiatives. It is important to get these details right to assess properly the pronouncements that China’s intervention in this affair threatens confidence in China’s role in the trade regime. There may well be those in China who advocated taking advantage of China’s dominant position in international rare earths markets by restricting supplies to domestic markets. And there are others who wanted to clear up a messy industry. But China properly operates under legal constraint in respect of the former. Perhaps the trade regime should better ensure that others are similarly constrained. Whether it does or should in respect of the latter is a proper matter for further consideration under the rules, and that is in train. This constraint should not mean that parties to the WTO should not be able to impose regulations for environmental and other reasons that might have the effect of lowering international supplies and raising price.

What this affair highlights sharply is one of the several important areas in which the WTO trade regime — the global system of governing international trade to which China fulsomely subscribes, however incomplete or unfair it might seem from time to time — needs to be extended or strengthened. While the WTO regime remains of fundamental importance in underpinning confidence in international markets, the asymmetry in rules about the treatment of exports and those for the treatment of imports in the trading system has been a defect from its birth. The reasons for the suspension of the Doha round of trade negotiations and the proliferation of discriminatory trade agreements reveal other areas of weakness, of course. Global leaders, in the G20 for example, might well initiate an early review of these system weaknesses and begin to define the way forward in fixing them.

Peter Drysdale is Editor of the East Asia Forum.