Thursday, June 14, 2012

Trade Policy, China and the US

China's Trade Policy Review at the WTO was held in June 2012. It has been reported in the Chinese press here. Trade Policy Reviews are extremely informative processes which highlight the trade policies as presented by the member country as well as the WTO Secretariat. It provides a bird's eye view of the trade policies pursued by the country as well as the steps being undertaken to bring law and regulations in conformity with the WTO rules.

China, in it submission to the WTO at the Trade Policy Review, had many interesting points:
         "(1)  Continuing to Deepen the Reform Steadfastly
1.                  Reform is China's basic state policy.  The Chinese Government handles properly the relationships among reform, development and stabilization, steadily and steadfastly advances the reform and eradicates obstacles embedded in various systems and mechanisms constraining development and constantly improves the socialist market economy, so as to provide a great driving force for acceleration of the transformation of the economic growth pattern and for promotion of the comprehensive, balanced and sustainable economic and social development.

(i) Establishment of the socialist system of laws with Chinese characteristics
2.                  Rule of law is a fundamental principle for China to effectively govern the country.  China needs to bring into being a comprehensive system of laws with Chinese characteristics so as to ensure that there are laws to abide by for the carrying on of state affairs and social life.  This is a precondition and foundation for China to implement the fundamental principle of rule of law and an institutional guarantee for China's development and progress."
"Establishment of the socialist system of laws with Chinese characteristics" and still in conformity with the WTO? Is this another example of creative use of "domestic policy space" within the WTO by an emerging economy? There is little doubt that China has benefitted immensely with its participation in the WTO system since 2001. Has it don eso on its own terms much more than other developing countries? If yes, what can other developing countries learn from this experience?

The issue of support by China of its State owned enterprises is often a subject of intense discussion and debate. Several countries allege that China unfairly supports its State Owned Enterprises contrary to WTO rules. While China's "socialist" model adopts adopts a strong involvement of the public sector in its developmental paradigm, whether the modes of support and incentives to the State Owned Enterprises is permissible under relevant WTO rules is a source of constant disagreement. While listing out its "reform" efforts in this sector, China strongly defends its State Owned enterprises in its Report:
"Supporting the development of SMEs, especially small low-profit enterprises, is an important part of the work of the Chinese Government to promote the common development of economic entities of diverse forms of ownership.  In addition to the structural tax reductions in favour of small low-profit enterprises, the Chinese Government expanded the funds for promoting the development of SMEs.  It will also continue making efforts in broadening financing channels of SMEs, gradually expanding the size of issuance of collection notes, collection bonds and short-term financing bills by SMEs, and actively and steadily introducing private equity investments and other financing vehicles."
The Report also lists three gains for China by actively engaging with the WTO : Promoting the growth of the world economy, improving the welfare of people in all countries (by providing inexpensive and quality products)  as well as providing broad market for trading partners. The Report concludes by reiterating China's "commitment" to reform:

"More importantly, with the more than 1.3 billion population, China has a huge market and its development potential will be constantly unleashed.  The fundamental impetus for economic growth will not diminish in a fairly long period of time.  In the historical course of constantly improving the livelihood and well-being of more than 1.3 billion Chinese people and realizing the development goal of building a moderately prosperous society set by the Chinese Government, there will be a steady flow of effective demands to support China's strong and sustainable economic growth.

 Accelerating the transformation of the economic development pattern needs to rely on furthering the reform.  The Chinese Government will be more resolute and courageous in advancing the reform in all fields in an all-round way.  China not only needs to vigorously press ahead with reform of economic system, but also needs to prudently advance political reform and accelerate reform of the cultural and social management systems in order to eradicate deep-seated institutional barriers hindering the development of productivity and improve constantly the socialist market economy."
It is interesting to note that the Chinese submission has no reference to subsidies that often comes up in the critique of China's trade policy. The WTO Secretariat's review of China's Trade Policy has reflected on this:
" Subsidies and other government assistance are important features of China's trade policy and industrial policy making.  China submitted a new WTO notification of its subsidies in 2011, listing programmes providing government assistance at  the central government level between 2005 and 2008.  However, in many cases there are no figures on the magnitude of support provided, and no information is available on subsidies and other government assistance provided at the provincial level, which are believed to be considerable."
The US in response to the Trade Policy has, expectedly, come out with a stronger questioning of some of the Chinese policies. Apart from questioning the level of "protection" of IPRs in China, the US Statement which has been reported here on the Trade Policy made at the WTO is here:

" Subsidies and other government assistance are important features of China's trade policy and industrial policy making.  China submitted a new WTO notification of its subsidies in 2011, listing programmes providing government assistance at  the central government level between 2005 and 2008.  However, in many cases there are no figures on the magnitude of support provided, and no information is available on subsidies and other government assistance provided at the provincial level, which are believed to be considerable.


The Secretariat’s Report also explains that the use of subsidies is “an important feature of” China’s trade policy regime.  The Report notes that China submitted a subsidies notification under the Agreement on Subsidies and Countervailing Measures in October 2011, but adds that “in many cases there are no figures on the magnitude of support provided, and no information is available on subsidies . . . provided at the provincial level, which are believed to be considerable.”  It is also disturbing that, in several instances, China failed to provide information requested by the Secretariat for its Report.  In a similar, disturbing vein, the United States notes that it filed a counter notification under Article 25.10 of the SCM Agreement in September 2011, detailing 200 central and sub-central government subsidies – including subsidies that appeared to be prohibited – that had never been notified by China.   In these circumstances, Article 25.10 called on China to notify those subsidies promptly.  However, in its subsequent subsidies notification, China included only 10 of the 200 subsidies identified in the U.S. counter notification and has not taken any further action.  In addition, China has failed to notify large fisheries subsidies, even though China is the world’s greatest fishing power and the Secretariat’s Report cites a study indicating that the Chinese Government’s support of this industry has exceeded $4 billion per year.  The United States expects China, commensurate with its fishing status, to notify all of its fisheries subsidies promptly and to make a significant contribution in the WTO’s ongoing work toward ambitious and effective disciplines on fisheries subsidies.

The United States would like to underscore that these concerns about China’s subsidies practices are far from trivial.  During China’s tenure as a WTO Member, investigatory work by the United States has led to the filing of three WTO disputes involving allegations that China has employed scores of prohibited subsidies, both at the central government level and the sub-central government level.  In each dispute, China subsequently withdrew the challenged subsidies or removed export contingencies or local content requirements."
The official submission of China in the Trade Policy review, the WTO Secretariat's version as well  as the US response raise important points. Can a country pursue its "own development" paradigm (in this case a socialist path) and still be in conformity to the WTO? Does WTO restrict ideological diversity? While the rules of the game within the various WTO Agreements need to be followed in terms of National Treatment and following the Most Favoured Nation principle, is there a prohibition from following one's own economic model of development?

Does the WTO rules mandate that a country must be "capitalist"? Can a "socialist" country be a pioneer in reduction of trade barriers and enhanced transparency? Can a "capitalist" country have many instances of subsidies that are prohibited by the WTO? Should we not go beyond terminologies and ideologies to see actual policies that either are in consonance or contravene the WTO? Does the WTO provide a country domestic policy space to pursue its own "ideological" path as long as the provisions of the various Agreements are adhered to or is it implicit that a country will have to follow a "particular" model of development if it is a WTO member? Is developmental autonomy a myth in the multilateral trading system? 

Having said this, there is no doubt that "transparency" in policies must be the cornerstone of any system of government. The WTO has a number of provisions that require notifications and measures to be made available to other countries. While some countries follow it in letter and spirit, others are seen lacking. Transparency enhances accountability as well as throws open one's policies to increased scrutiny. It also increases the need to logically justify your policies against a challenge since it is open to scrutiny. There is also greater awareness of the measures within the country and policies are not seen to be made behind closed doors to reflect vested, domestic or international, interests.There is no doubt that the best practises of countries that follow this well must be replicated in the WTO system

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