China and the World, Talking Point

All in the line of duties

This weekend marks China’s tenth anniversary as a WTO member

All in the line of duties

Former premier Zhu Rongji was the architect of China’s WTO entry

“When I opened this business, the reaction of my friends and family was ‘Are you crazy?’” says Lee Jae. The firm in question is Georgia Chopsticks and incredibly enough Lee hopes to be exporting 10 million pairs of American chopsticks to China (a day) by the end of this year.

It’s the sort of statistic that few would have predicted a decade ago. Certainly, it would have been unthinkable in the years before China joined the World Trade Organisation (WTO) – a step that promised to boost world commerce and open much of China’s fast-growing market to international companies.

December 11 marks the tenth anniversary of China’s accession to the WTO. As the milestone is reached, it seems timely to assess the impact of China’s WTO membership, both on its own economy, as well as those of its trading partners.

First, the numbers…

In the decade since it joined the world trade club, China’s GDP has surged from Rmb11 trillion to almost Rmb45 trillion (that’s HSBC’s estimate for 2011), growing from the world’s sixth biggest economy to its second largest.

According to China News Week, this has brought great benefits for the rest of the world. China’s annual imports have reached $750 billion, creating “more than 14 million jobs for trade partners”. The magazine adds that “cheap Chinese goods bring tremendous benefits for foreigners. Over the past 10 years American consumers have saved $600 billion and EU savings per family are €300 per year.”

Of course, China’s export machine has been the biggest beneficiary of all. WTO membership has helped exports surge from $266 billion in 2001 to $1.57 trillion last year, reports China Comment, a magazine published by the Xinhua news agency. In the period between 2000 and 2008, average annual growth in world exports was 12%. But China’s exports grew by 24.4% annually, “more than twice the average increase in world exports”.

Cast your mind back a decade…

Surprisingly enough – given those healthy numbers – plenty of Chinese policymakers were against signing up with the WTO in 2001.

“It is easy to forget how contentious this issue was in China at the time,” writes Damien Ma in a column for The Atlantic, a US magazine. “Premier Zhu Rongji had to spend considerable political capital to complete the historic deal, likely making a few enemies in the process.”

Why? Having only recently restructured most of its larger state-owned firms, and not yet having listed its biggest banks, there were concerns that the Chinese economy was too fragile for a free trade environment.

The worry was that foreign companies would overrun their Chinese competitors, taking advantage of their superior balance sheets and global economies of scale.

In this respect, WTO entry was viewed as a gamble.

But for Zhu himself China’s accession to the club was intricately linked to the reform and opening up process. Competition would force Chinese firms to up their games. Zhu also argued that WTO entry would get China “equal treatment” and allow it to sue other countries in trade disputes.

The former prime minister says he soon felt vindicated after a dispute with Japan over tariffs on Chinese onion exports. “We felt the Japanese action violated WTO rules, and so we reciprocated by slapping tariffs on imports of Japanese cars, mobile phones and air conditioners,” recalls Zhu. “Our onions weren’t worth a lot of money, but their cars were much more valuable. We negotiated over this issue 19 times and we would not back down. Ultimately, Japan abolished their tariffs. Once they cancelled, we slashed ours too.”

Zhu concludes: “After entering the WTO we were no longer so easy to bully around.”

Not all gone China’s way?

China may be harder to bully, but few would dispute it is the most contentious WTO member.

According to its own Ministry of Commerce statistics, between 2001 and 2010 China was subject to 692 trade remedy investigations. And since joining the WTO, it has ranked top of the list for countries being investigated for anti-dumping.

China’s WTO status is also somewhat peculiar. When its entry was being negotiated, it agreed to retain ‘non-market economy status’ until 2016. That makes it more difficult to defend against international dumping allegations as foreign countries are entitled to use price or production data from a third country (rather than take them from China) to determine how costs or margins should be calculated.

That is not the only disadvantage. China is also subject to what is termed a ‘Transitional Review Mechanism’, which allows WTO members to voice their concerns about its compliance with the rules on an annual basis.

This is the final year such a review will be undertaken, so other countries may be especially keen to go on record with their objections.

In fact, China has grown accustomed to serving as a defendant in suits taken out by others. It has initiated action itself in only eight cases, perhaps most famously in its suit accusing the US of dumping its chicken products in China (see WiC49). That situation remains ongoing, with the Chinese having slapped tariff duties on US broiler chicken products. In September the US filed a counter-complaint with the WTO, stating that its poultry exports to China were down 90% this year as a result of the tariff.

US Trade Representative Ron Kirk said this had cost American farmers $1 billion in lost sales and told a news conference: “The United States is prepared to take every measure necessary to stand up for American workers by ensuring that China or any of our other trading partners does not misuse laws to prevent exports of US products.”

According to Bloomberg, the two parties have held two months of consultative talks over the issue – a practice that the WTO mandates in such situations.

The stand-off points to the rising frustration in Washington with China’s trade policies.

So has China played by the rules since joining the WTO?

At the recent APEC summit in Hawaii President Barack Obama didn’t think so, chiding China for often evading WTO regulations.

It was a fair comment, reckons South China Morning Post columnist Tom Holland, who says that China’s trade partners believe that it “continues to ride rough-shod over the letter and the spirit of the WTO accession agreement.”

Holland says foreign companies are openly discriminated against in China, and that “well-connected domestic companies” continue to benefit from anything but a level playing field.

Another concern? “China has placed much of its giant public procurement market off-limits to foreign companies,” reports the Financial Times. That smacks of protectionism on a grand scale, given the huge sums being spent.

A recent report from the European Union Chamber of Commerce in China identified 10 main industries where barriers to entry for overseas companies remain “formidable”.

Visa and Mastercard, for example, are both miffed by their exclusion from the domestic payments business, which is dominated by state-backed UnionPay (according to the Economic Observer almost all of China’s 2.4 billion bank and credit cards carry the UnionPay logo).

The EU Chamber of Commerce report gives another example of a protectionist practice. It says that to apply for a licence to provide design services to the construction sector, foreign companies are required to present a portfolio of their Chinese projects. However, without a licence, they are forbidden from working on local projects in the first place, meaning they’ve got no portfolio to show.

Little wonder, then, that foreign executives often express frustration at their treatment, although rarely in public. Jeff Immelt was reported as doing just that last year. “I really worry about China,” he griped. “I am not sure that in the end they want any of us to win or any of us to be successful.”

Open for dispute?

There is little evidence of trade tensions with China lessening. If anything, quite the contrary. Michael Punke, the US Ambassador to the WTO, spoke last week of a “troubling trend” in increased Chinese government intervention in the economy over the past five years despite its WTO commitments to open its markets.

The latest confrontation is over solar panels, with the US International Trade Commission voting to support an action brought by US panel producers. According to Reuters, the vote allows the Commerce Department to continue with an investigation that could lead to anti-dumping and anti-subsidy duties on Chinese manufacturers of solar cells and panels.

Points out the FT’s Lex column: “The effect of China’s subsidies, while benign for consumers today, will be harmful in the long run if US and European panel makers are wiped out. As with rare earth minerals, China could one day be a price maker, not a price taker, for a vital energy source – a solar Opec.”

Of course, the political temperature is also running higher in the US, with 2012 an election year. And as reported in WiC126, the US Senate also made China’s trade policy a focal issue in October, when it passed the Currency Exchange Rate Oversight Reform Act.

This legislation – if it becomes law – would allow Washington to slap tariffs on countries that undervalue their currencies. The target was unmistakeable: China.

Is the US now bypassing the WTO?

There are tangible signs that Washington has become increasingly disillusioned with the WTO’s capacity to police Beijing’s trade policies. Hence its touting of the Trans-Pacific Partnership (TPP), a new free trade zone that will include nine countries. If Japan also joins – as it has hinted – the TPP would cover an area with a combined GDP of $22.3 trillion. Notably, the US hasn’t invited China to apply for membership. Commentators saw that as a sub designed to ‘contain’ China.

Does that mean Washington’s goals are changing in trade policy terms? Certainly, it can be argued that Chinese objectives have also moved on since Zhu Rongji first pushed for WTO membership, with a focus on improving domestic competitiveness. Today there is also a focus on competing internationally and “going out” to the world, often around a core group of strategic industries, like green technology.

And here the state continues to play much more of a role, setting priorities and allocating resources over a longer term plan intended to support homegrown champions. Ironically, it’s a philosophy that has sometimes been praised overseas, especially for investment in infrastructure. But when it comes to international trade, the state-directed model gets a rougher reception, especially amidst a global slowdown and a persisting financing crunch.

Hence the outlook indicates more tensions ahead, with even the man who served as China’s chief negotiator for WTO entry expressing his concerns.

“After 10 years, it seems China is getting farther from the WTO,” Long Yongtu told a recent conference to mark the anniversary of China’s accession.

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