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China Trends #1 - China, the Reluctant WTO Reformer

China Trends #1 - China, the Reluctant WTO Reformer
 François Godement
Special Advisor and Resident Senior Fellow - U.S. and Asia

Introduction of China Trends #1 
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China’s 2001 entry into WTO was an epochal step in China’s reform and opening up. As the transition ended in December 2016, China had skyrocketed to become the world’s first trading nation. It is not hard to understand why Chinese sources (described in this issue by Pierre Sel) recognize the benefits to China from WTO membership.

In 2017, Donald Trump came to power with a program to restore the pre-eminence of the US economy. Mammoth trade deficits with China are an obvious target. Europeans, as the sources seen by Mathieu Duchâtel politely tell it, are experiencing "growth pains" in their relationship with China, now a global competitor in many sectors.

The formerly "developing" Chinese economy is reaching mid-level income levels (nearly 10,000 USD per capita GDP in 2018), with several hundred million Chinese close to European levels of income. Yet it has not become a market economy. It is an even more state-led and politically driven economy, where huge saving rates are captured by state banks for state-owned enterprises. This is capital that fuels growth and subsidizes the industries of the future. Our Chinese sources, as seen by Viviana Zhu, are not blind to the changing perceptions from the outside world. Yet, China remains as a birth right the status of a developing economy under present WTO terms. The asymmetry of rules that this statute provides seems unshakable.

Between the lines, we grasp that developing China should "take up new commitments".

This makes WTO the jewel on the crown for China. There is some awareness of a need for "adjustment". But what concessions is China ready to accept? Between the lines, we grasp that developing China should "take up new commitments". And yes, subsidies and state enterprises "in some countries" are an issue of interest for WTO reform. We should not expect that a published source is going to reveal China’s negotiating position on such a key issue: we are left to ambiguity.

Towards Europeans, the concessions under consideration appear very limited. There is a non-specific prospect of more market opening, but "controlled", "layer after layer". One expert suggests cooperation in third countries and more greenfield investment in Europe.

More broadly, if WTO is so valuable to China, what kind of reform can it propose or accept in order to save the multilateral trading system? Its December 2018 position paper on WTO reform is defensive, centering on the importance of the developing country status. Our sources are clear on what China does not want, but remain cryptical about what it could live with. Logically, in this period of negotiations with the Trump administration, these sources also dismiss US threats to leave the WTO as empty rhetoric. There is an echo here of China’s boasts in the spring of 2018 that the US economy would suffer more than China from a trade war. The defense of the status quo at the WTO extends to pointing out the downside of a bilateral US-China trade deal. Indeed, large promises to buy from the US and to reduce the trade deficit with the US would violate WTO rules and hurt other trading partners, among them Europe.

In short, China will only participate in talks on WTO reform from a very conservative base line. We are reminded indirectly that China’s professions of multilateralism are often a thin veneer, beneath which its national interest and assessment of relative strength prevail. This is perhaps not surprising, but it is also an indication of how tough the global trading game is likely to remain in coming years.

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