Monday, January 2, 2012

Has China outsmarted the WTO?

An interesting piece on China's role in the WTO is found here titled "How China outsmarted the WTO". It states,

"Regulatory developments across the Chinese economy, however, have put into question whether China’s leaders ever had any intention to fully comply with their WTO commitments, even as they embraced globalization. Instead, they have pursued market reforms that promote the development of strategic industries, protect national champions, and retain authoritarian control."

It concludes by presenting a very interesting analysis of the Chinese economy thus,

"Ten years after joining the WTO, China is more liberal and global. At the same time, the Chinese government is in firmer control of developments in the industries and issue areas that matter the most, including telecommunications, renewable energy, financial services, and automobiles. By playing by its own rules, China has managed to defy the traditional tradeoffs between market competition and state intervention, and between foreign ownership and government control.

As the economies around the world assess the effects of neoliberalism – synonymous to deregulated markets and privatization – China has embraced a mixed economy unlike no other we have seen before. Instead of turning China into a liberal market economy, with all its attendant problems, WTO membership has allowed China to achieve steady economic growth in the shadow of the global debt and financial crises of the 2000s. The Chinese leadership has pursued state priorities, including the modernization and management of information infrastructure, hailing free trade yet not complying by its WTO commitments. What the Chinese experience has made clear is that in the age of globalization, it is very possible to have freer markets and more authoritarian rule."

It is admitted that China has made optimum utilisation of the WTO rules to further its domestic interests.


 It has shown that the acceptance of the WTO framework doesn't negate its ability to utilise it innovatively to serve it's national interests. The Economist summarised the Chinese strategy thus,

"It is instead China’s trading partners who now contemplate its WTO membership with furrowed brows (see article). They have a variety of complaints: that China exports too much, swamping their markets with cheap manufactured goods, subsidised by an undervalued currency; that it hoards essential inputs, such as rare earths, for its own firms; and that it still skews its own market against foreign companies, in some cases by being slow to implement WTO rules (notably on piracy), in others by suddenly imposing unwritten rules that are unfavourable or unknowable to foreigners. The meddling state lets multinationals in, only to squeeze them dry of their valuable technologies and then push them out."

The need to engage China constructively in the multilateral trading system was emphasised by this NY Times editorial which stated,

"But the bigger risk could be a trade war. Chinese leaders eager to hang on to power by showing continued economic growth may be tempted to pursue beggar-thy-neighbor strategies and subsidize exports in ways that would further destabilize a fragile world economy already buffeted by a crisis in Europe.

There are worrying signs that Beijing is going the wrong way. Earlier this month, it imposed a volley of duties against American-made sport utility vehicles. It will have little economic importance as few of these vehicles are sold in China. But analysts viewed the move as a warning that China will retaliate against Washington’s efforts to combat its subsidized exports. And the pace of appreciation of China’s currency has slowed markedly.
The Obama administration must also act with care. It is justified in challenging illegal trade practices, including pursuing its case at the World Trade Organization against illegal subsidies of Chinese makers of solar panels. But it should act multilaterally, including mustering other countries to add to the pressure on Beijing to act by the rules. Unilateral initiatives, like those in Congress to punish China for its cheap currency, are likely to cause more harm than good.
The ball is, however, in China’s court. Beijing must understand that it is a bad idea to double-down on an export-led strategy. There are better alternatives, including sensible stimulus measures like investing in low-income housing and expanding government-run health insurance. These would boost consumer spending and growth, reducing China’s dependence on export markets and investment bubbles. A policy switch like this would stimulate global growth. Sticking to the old game plan will drag the world down."
Will 2012 be the year of trade wars or a more nuanced engagement of the world trading powers towards achieving the goals of the multilateral system.
As the Economist piece concluded,
"As for the hurdles foreign firms face in China, they are disgraceful—but sadly no worse than in other developing countries. The grumbles are louder in China chiefly because the stakes are higher. Foreigners may have won a smaller slice of China’s market than they had hoped, but China is a bigger pie than anyone dared to expect. Had China been kept out of the WTO, there would have been less growth for everybody. And the WTO still provides the best means to discipline and cajole. Rather than delivering congressional ultimatums, America and others could make more use of the WTO’s rules to curb China’s worst infractions.
So celebrate China’s ten years in the WTO: we are all richer because of it. But, when it comes to trade, China’s rulers now badly need to grow up. Their cheating is harming their own consumers and stoking up protectionism abroad. That could prove to be economic self-harm on an epic scale."

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