Thursday, July 26, 2012

State led economies and WTO - Incompatible?

Can a country embrace "state capitalism" and still abide by the WTO? Does the WTO impose any particular model of economic development? Does a country necessarily follow the liberal, market economy with minimalist State intervention to be an adherent of WTO rules? Does the WTO provide the "domestic policy space" to follow one's own ideological framework consistent with multilateral trade rules? Are they irreconcilable or is there a middle path? Or is ideology irrelevant in the context of multilateral trade rules as long as one conforms to its mandate?

Leila Choukroune has in a special editorial in Chinese Perspectives dwelt on the aspects of China and it's role in the WTO especially with its "state-led" growth model.
She avers in this editorial:
"The China miracle is also that of an unparalleled country that has been able to abide by the rules while playing with them. The apparent conformity of the Chinese model with international rules hides a much more complex situation in which the state is ambiguously engaged in the economy. This may not be completely new, as many other countries, including the EU and the US, have by no means embraced a pure liberal capitalist model, but the China paradigm nevertheless remains unique in its reach and implications. Indeed, over the past 30 years, China’s GDP has grown at an average rate of 9.5 percent a year and its international trade by 18 percent in volume. (11) From holding shares in the biggest companies to SOEs’ foreign direct investment in strategic resources

and specific loans and currency policies, the Chinese state is present in every sector and at every level of the economy. So why is this rise coinciding with a certain liberal capitalism crisis, and what does it tell China’s competitors? It may be that the current policies of the US and the EU and, for instance, their industrial policies have to be revised in a critical manner against the free market dogma of the 1980s and 1990s. The world will have to count China in, and so will it have to reconsider the role of the state in the economy in order to better balance different actors’ interests and create a level playing field for Beijing and other emerging economies. In doing so, the WTO will matter, but so will the many Foreign Trade Agreements (FTA) (12) that countries are now adopting on a bilateral and regional basis. The complexity of the trade scenario will only strengthen the need for political vigilance and clarification of the state’s objectives for economic development. As long as China’s trade growth will not benefit all equally, and the Chinese population to start with, this transformation will demand not only admiration, but also legitimate concern."
While Chinese State does play an active role in its development agenda, is this in itself prohibited by the WTO or international trade rules? If principles of transparency, national treatment, most favoured nation treatment and providing of subsidies is as per WTO rules, does it matter that the State plays a dominant role in the economy? On the contrary, do capitalist countries not support private sector at all? The examples of Boeing and Airbus definitely do not point to this conclusion. Further, though a State may not be directly involved in the economy in terms of ownership and control, it may indirectly be playing a pivotal role which is  unrelated to it being captialist or socialist. Hence, should not the analysis of China in the multilateral trade context be whether it is following the terms of its Accession Protocol in terms of transparency, predictability and rule of law instead of an analysis of the extent of state involvement in the economy. Countries may play an active role in industrial policy in terms of the involvement of State enterprises. However, whether this ipso facto is a violation of WTO law is debatable. Does the Chinese Accession protocol have any provisions that forbid or limit State involvement?  Do any provisions of the various WTO Agreements limit State involvement? In the US response to the Trade Policy Review of China, the US had raised the issue of "state capitalism.
"Since China’s 2010 TPR, it appears the trend toward state intervention in the Chinese economy has intensified.  China’s tighter embrace of state capitalism now runs directly counter to the economic reform goals that originally drove its pursuit of WTO membership, goals that had offered real leadership and real promise for China’s future economic growth.  The United States continues to urge the Chinese government to reconsider its divergence from the path of reform."
China responded strongly as reported in the Reuters here that the WTO did not bar it from practicing State Capitalism.
"U.S. Ambassador to the WTO Michael Punke levelled a wide-ranging salvo of criticisms during the two-day Trade Policy Review (TPR), which every WTO member has to undergo on a periodic basis, and said China was falling back into a "tighter embrace of state capitalism".
But China swatted aside many of the criticisms, which included complaints about its failure to disclose subsidies and a lack of transparency and intellectual property enforcement.
China's Assistant Minister of Commerce Yu Jianhua said he regretted that during the TPR process some WTO members had deemed China was practising state capitalism.
"The term cannot be found in ... WTO documents. It has nothing to do with the TPR or WTO rules. We strongly believe TPR should not be abused for the purpose of domestic politics," he said."
Nevertheless, the need for ensuring transparency of measures adopted is fundamental to the WTO system. It provides a level playing field as well as provides the basis for objective scrutiny of trade policy. Neither a state led economy nor a capitalist liberal economy can afford to ignore the principles of transparency in application of trade rules and national laws.

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