Those two events were turning points in the global geopolitical landscape. China’s accession to the WTO transformed the global economy as well.
Over half a billion Chinese people were lifted out of poverty in two decades and China is now the largest economy in purchasing power parity terms, second largest measured at market exchange rates, and the world’s largest trading nation. China is the largest trading partner for 120 countries, including the United States. The growth of Chinese manufacturing meant that consumers in the rest of the world could enjoy better living standards. As the factory of the world, China vacuumed up resources to fuel its production, including intermediate inputs, energy and raw materials from other countries.
The vast structural adjustments in China and around the global economy have been disruptive. Those countries that had flexible markets, strong social safety nets or high growth that facilitated change and spread the gains across society did well. The maldistribution of the gains from trade in the United States with stagnant middle-class incomes combined with the lack of an effective social safety net meant it suffered the ‘China shock’ in a way that many other countries didn’t.
Countries in Southeast Asia that were worried about direct competition with China, given similar incomes levels and manufacturing ambitions, in fact saw a sustained lift in living standards from deepening economic integration with China through supply chain specialisation.
The shift from factory of the world to a major market for consumption with its burgeoning middle class is underway in China and the scale of that is now causing more disruption for the global economy.
While they’ve brought huge benefits, the adjustment pressures and costs of China’s growth in trade and economic weight have also put enormous pressure on the global system. Global institutions have not been able to keep up with the change. China has 6.08 per cent of the voting share in the IMF — one-third of the United States — while accounting for over 18 per cent of the global economy in purchasing power parity terms and 13 per cent in market exchange rate terms.
The inability to keep up with changes is most obvious in the WTO. The WTO is still the scaffolding that keeps global trade together but its rulemaking has not kept up with the nature of modern commerce and is under pressure. The United States and many Western countries blame China with its different political system and its transgressions from the spirit of the rules.
As Tom Westland argues in this week’s feature article, ‘China’s record in the WTO is much better than Western narratives suggest’. China ‘implemented its WTO accession protocols not only because it agreed to them but because they propelled the domestic reforms the leadership wanted to put in place’.
That the trade rules have not kept up is ‘a problem that is not entirely China’s fault’, Westland explains. China’s not the only major power abusing the rules as the ‘United States itself has opted out of playing by the old WTO rules and forging new ones’.
US trade coercion against China saw retaliation and a trade war that led to a managed trade deal that’s counter to the rules and spirit of the WTO. Japan, the European Union and many other US allies were also subject to US tariffs and the threat of tariffs under the guise of national security. US calls for China to be a responsible stakeholder in the global system ring hollow when the United States is itself undermining the system.
Chinese trade coercion against Australia since 2020 and more recently against Lithuania is a more blatant use of economic coercion for political purposes.
The global trading system is under threat from the two largest trading nations and political powers. Their zero-sum strategic competition needs to be transformed into positive-sum economic competition through multilateral rules that protect the global trading system as well as the interests of other countries.
That will mean developing new multilateral rules — not just rules among like-minded partners — and economic integration that constrains abuse of economic power for political purposes. Open contestable markets have blunted the impact of China’s trade restrictions on Australia as its exporters found alternative markets. The multilateral system is in this way a source of trade resilience.
China can no longer hide behind its developing country status in the WTO and needs to accept that some of its domestic distortions and economic practices are actively damaging other countries.
China appears willing to make some of those changes. Its bid to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) would mean significant disciplines on industrial subsidies to its state-owned enterprises, liberalisation of its data and cyber barriers and lifting its labour and environmental standards. As with WTO accession 20 years ago, China’s reform agenda aligns with CPTPP rules. To be accepted into the CPTPP, China would also need to lift its coercive trade restrictions on Australia and bind itself to eschew such arbitrary measures in the future.
The irony, of course, is that Washington has given up the chance to make any substantive input into China’s entry into the CPTPP — and the market-driven liberalisation this will require — by abandoning the deal itself, just as its refusal to allow the appointment of new judges to the WTO’s dispute system has deprived it of a meaningful defence against Chinese trade coercion.
The leadership the world needs from the United States now is to fix its problems at home and to recommit to strengthening the multilateral system. That includes investing in the domestic institutions that will help to share the gains from trade and technological developments across society. Less focus on stopping China and more on bettering itself is the leadership that other emerging market economies and developing countries need.
The US strategy of undermining the WTO while pursuing economic agreements with ‘like-minded’ countries fails to wrap China in more rules and constrain it in international markets, while the opportunity is there. Concerns about Chinese abuse of rules and its leveraging of raw economic power for political purposes are an opportunity for the United States to lead in the reform of multilateral institutions and rules, rather than retreat from its global role into exclusive groupings.
There are signs that China might be willing to forgo its developing country ‘special and differential’ treatment in the WTO that countries can claim — including not-so-developing Singapore and South Korea until recently — for unilateral exemption from some agreements. That would boost confidence in China’s preparedness to accept the responsibilities of trade policy leadership.
Much more is expected of Chinese leadership now: clear and wholesale embrace of the agenda for WTO reform; rejection of economic coercion as an instrument of international political control; retreat from managed trade with the United States; and engagement in building a multilateral digital trade regime. Commitments and active progress on all four fronts would rebuild confidence in China’s own reform agenda and lay the foundations of renewed trust in its capacity for economic leadership within the global community.
The EAF Editorial Board is located in the Crawford School of Public Policy, College of Asia and the Pacific, The Australian National University.