China, Accession Protocol and WTO

Leila Choukroune (et al.) in this report titled "EU-China Trade relations" details out the EU-China trade landscape  (EU is the largest export destination for China) and the context in which China's growth in the WTO should be studied. The Report makes a threadbare, realistic analysis of China's trade policies in the context of its WTO obligations. It also recommends the position EU should take with respect to China and how it needs to engage China in its policy discourse.

An interesting aspect highlighted in this report is the Chinese Protocol of Accession to the WTO. China has acceded to many conditions that other developing countries have not while joining the WTO in 2001. Some of them are as follows:

"WTO-plus commitments include:  

“Rule of Law” obligations 

Transparency, judicial review and uniform administration of trade: these are the special commitments developed in China’s Protocol under the article X of the GATT 1994 (Publication and Administration of Trade Regulations).  These special provisions have never been used before and remain quite unique in their nature and implications. Of course, it was the nature of the Chinese authoritarian regime that explains the instance of US and EU negotiators on inserting such atypical provisions. For many years the rule of law or governance issues had represented a major hurdle in trade relations with China and remain as complex as problematic today. 

Obligations to progressively practice a market economy 

WTO rules assume a market economy, but nothing in the Agreement prescribes the participation of non-market economies (NME). China’s Protocol of Accession, in contrast to what is (not) imposed on other Members, establishes special market economy obligations for China. China is obliged to allow the market to determine prices for a number of domestic goods and prohibited from using price controls except for specifically listed categories of products. Moreover, China has to liberalise foreign trading rights and not influence decisions of the State Owned Enterprises (SOEs). This, of course, is particularly tricky to implement in a “socialist market economy” in which the role of the State still pervasive. So it is easy to understand the complexity and, to some  extent, hypocrisy involved in implementing such 

provisions.

Obligations to eliminate export tariffs 

WTO Members are free to levy tariffs/taxes on their exports. But in a departure from this general rule,China is required to “eliminate(s) all taxes and charges applied to exports except for those specifically provided in the Annex 6 of the Protocol”.  

Special obligations on foreign investment 

Here again, the China Protocol departs from normal WTO disciplines. China, for instance – and this is very controversial today - may not make approval of foreign investment conditional upon the existence of domestic competitors or, more importantly, on any performance requirement including technology transfer or obligations to conduct research and development activities in China. Furthermore, foreign investors and foreign owned enterprises are entitled to national treatment  with respect to all their China activities. As will be shown below in the section on trade barriers, these requirements have yet not been fully accepted nor applied by China.  

Additional Transitional Review Mechanisms 

A special transitional review mechanism is  established  by  the  Protocol  to  review  China’s 

implementation every year during the first eight years after accession as well as year ten.  This special scrutiny regime was unique and was additional to regular trade policy reviews conducted for all WTO Members at regular intervals.   

WTO-minus provisions cover the following issues:  Special anti-subsidy 

China’s Protocol permits an importing WTO Member to use non-market economy (NME) methodologies to calculate Chinese subsidies and possibly take measures against them. This is not subject to a time limit. There are also special rules for government subsidies to state owned enterprises (SOEs) that again depart from normal WTO rules. These include an  additional ownership criterion when defining the specificity of government/public support. Under this criterion, subsidies granted to Chinese SOEs are considered to satisfy the requirement of specificity thus making them actionable under WTO rules on subsidies. Curiously, China is not allowed to make use of a very interesting WTO provision allowing developing countries to provide subsidise to companies that are directly linked to a privatisation programme, even though one could imagine such a  rule would promote the existing privatization policy for Chinese SOEs. The lack of coherence in these measures makes application of China’s Protocol of Accession more difficult. 

Special anti-dumping rules 

China’s Protocol allows WTO Members to treat China as a non-market economy (NME) for 15 years .i.e. until 2016. In WTO law, dumping is determined when a product is exported at less than its “normal value” and causes or threatens to cause material injury to an industry of the importing country. As long as China is considered as a NME, importing WTO Members can argue that the Chinese domestic prices cannot be used to assess the dumping margin and that generally higher priced equivalents in a third country should be used.  Tensions over the NME status of China seem set to continue as there is no clear definition of a non-market economy in WTO law and  WTO Members applying anti-dumping measures have the right to determine whether the exporting country is or nor a market economy. China is likely to see itself as a victim of unfair anti-dumping methodologies while the EU  and US will more often target China for anti-dumping measures. It is equally easy to understand why China is pushing the EU and the US to obtain a market economy status.  

Special safeguards 

The China Protocol contains a special set of safeguard provisions in addition to the existing WTO safeguard regime that can be invoked until 2013. WTO members can apply safeguards selectively against products of Chinese origin if they can show “market disruption” and causality with increased imports, an easier test than the normal injury test for safeguards under the WTO. Furthermore, an importing country does not even have to prove the “injury” and “causal link” if it argues that there is “trade diversion” as a result of another member’s safeguards against China. One can clearly see the risks of this sort of spillover effects. There was also a special safeguard mechanism applicable to textile and clothing products of Chinese origin up to 2008. This allowed WTO members to impose quotas if they could show that imports of Chinese textile and clothing products caused …”market disruption, threatening to impede the orderly development of trade in these products.” This safeguard provided the basis for bilateral textile agreements between China and the EU and US in 2005. Of course, these rules were accepted by China during the course of the WTO accession negotiations and one need to bear in mind that they are extremely difficult to implement for both technical and political reasons."

While it is argued that China does not fully comply with its accession protocol, it is interesting to analyse the extent to which China agreed to special terms and conditions, even some would argue which is detrimental to Chinese interests,  to gain accession to the WTO. Several of these obligations are not even followed by other WTO members. It would be an interesting analysis to study the degree of compliance of there special provisions in the past ten years of China's accession. With the China raw material case being decided as well as the request for consultations in the rare earth case against China, the increasing impact of the obligations undertaken by China in its Accession Protocol will be open to scrutiny. This piece in the Hindu Business Line highlights the Chinese strategy within the WTO. Does Russia, which is the latest entrant into the WTO have similar WTO plus commitments? The website of the WTO has a list of protocol accessions of members since 1995. Would be worthwhile to do a comparative analysis of accession protocols.