China, WTO and challenging international law

An interesting piece in a Chinese Daily highlighted the angst of "unfair" trade rules and how a country needs to "protect" its national interest even in the context of globalisation. This is in the aftermath of the WTO decision on export bans by China which went against China. The comments may seem surprising to many, especially when China is pictured as this emerging economy taking advantage of the WTO rules in 10 years of its enrty into the WTO but subverting many of them to further its interests.

"China has generally been following WTO regulations and rulings. But it should find the best balance between applying WTO rules and protecting its national interests. Getting approval from the West is not our top concern. 

Admittedly, joining the WTO has boosted China's rise. However, entry was granted at the cost of China accepting some unfair terms, from which the aftereffects have gradually emerged, including this ruling. They may become a hidden problem for China's economy.

... 

The WTO body seems to have forgotten the basic principle that mutual benefit is the basis of trade, which cannot take place if it is not present. China can consider putting up market barriers in response to the ruling. 

The intention is certainly not to disrupt the WTO system, but at the same time, there is no need for China to be a model member. Conflict and compromise are part and parcel of the global trade mechanism. Every country seeks to maximize its benefits, and self-imposed sacrifices will not bring any gratitude. 

China has benefited from globalization, but China's rise is first of all the result of Chinese hard work, not taking advantage of the trade system. Squeezing China through WTO loopholes will be futile."

In this blog piece in China Hearsay Stan Abrams summarises the situation well,

"Look, there certainly are self-imposed sacrifices in the world trading system. China agreed to certain things when it joined WTO, deciding at the time that the advantages outweighed those drawbacks. That decision was a huge success no matter how one looks at the math.

If China no longer thinks that WTO membership is worth the sacrifices, it can quit. The same goes for the anti-globalization crowd in the U.S. and elsewhere. But if it decides that it enjoys the benefits, then it cannot merely pick and choose what rules it feels like following.

Why does this Op/Ed bother me more than the usual protectionist blather? Because it’s different. Usually when China, or the U.S. (or any WTO member) breaks the rules, it says: 1) we didn’t think we were breaking the rules; and 2) now that WTO has said we were wrong, we will remedy the situation.

This Op/Ed not only says that China should not feel obligated to follow WTO rules, but that such activity should increase over time. Not a happy vision of the future of international trade, folks.

I really hope that this line of thinking is not shared by many in Beijing."

Is it that easy for a country to not follow trade rules? Can it opt in and out of treaty obligations? Should a loss in a dispute at the Dispute Settlement mechanism be seen as an opportunity to question the "unfair system"? China could be on the winning side of another dispute someday. Will the trade system be fair then? In a national context, we do not see parties questioning judicial decisions on grounds of the system being unfair and unjust. That could lead to chaos. While there may be no doubt that there is a need to have a re-look at certain trade rules to address new realities and equations of powers, the only way probably to do this is to negotiate and renegotiate. Threatening non-compliance is a double-edged weapon. Tomorrow the other side can do this which would result in the "rule-based" system to collapse. It would be back to the "survival of the fittest".  

China, international trade rules and democracy

The Chinese President Hu Jintao warned recently the West was waging a "cultural war" against China and was attempting to Westernise it. The Telegraph reported,

"Mr Hu called on the 80 million-plus Party members to fight "hostile international powers" and meet the "cultural demands" of the people.

"Hostile international powers are strengthening their efforts to Westernise and divide us," Mr Hu wrote in the latest edition of Communist Party's magazine, Seeking the Truth"

Another cultural revolution in the making? China's entry into the WTO heralded its entry into the multilateral trading system.Will the multilateral trade rules provide the impetus for China to adopt a democratic form of governance?

Predicting the fall of the Communist party of China in 2012, this piece says,

"Today, social change in China is accelerating. The problem for the country's ruling party is that, although Chinese people generally do not have revolutionary intentions, their acts of social disruption can have revolutionary implications because they are occurring at an extraordinarily sensitive time. In short, China is much too dynamic and volatile for the Communist Party's leaders to hang on. In some location next year, whether a small village or great city, an incident will get out of control and spread fast. Because people across the country share the same thoughts, we should not be surprised they will act in the same way. We have already seen the Chinese people act in unison: In June 1989, well before the advent of social media, there were protests in roughly 370 cities across China, without national ringleaders.

This phenomenon, which has swept North Africa and the Middle East this year, tells us that the nature of political change around the world is itself changing, destabilizing even the most secure-looking authoritarian governments. China is by no means immune to this wave of popular uprising, as Beijing's overreaction to the so-called "Jasmine" protests this spring indicates. The Communist Party, once the beneficiary of global trends, is now the victim of them.

So will China collapse? Weak governments can remain in place a long time. Political scientists, who like to bring order to the inexplicable, say that a host of factors are required for regime collapse and that China is missing the two most important of them: a divided government and a strong opposition.

At a time when crucial challenges mount, the Communist Party is beginning a multi-year political transition and therefore ill-prepared for the problems it faces. There are already visible splits among Party elites, and the leadership's sluggish response in recent months -- in marked contrast to its lightning-fast reaction in 2008 to economic troubles abroad -- indicates that the decision-making process in Beijing is deteriorating. So check the box on divided government.

And as for the existence of an opposition, the Soviet Union fell without much of one. In our substantially more volatile age, the Chinese government could dissolve like the autocracies in Tunisia and Egypt. As evident in this month's "open revolt" in the village of Wukan in Guangdong province, people can organize themselves quickly -- as they have so many times since the end of the 1980s. In any event, a well-oiled machine is no longer needed to bring down a regime in this age of leaderless revolution."

Predicting a less gloomy picture for China in the coming years, Stephen Roach in this Project Syndicate Idea commentary says,

" For China, there is a deeper meaning to recent global developments.  A second major warning shot in three years has been fired at this export-led economy.  First, the United States, and now Europe – China's two largest export markets are in serious trouble and can no longer be counted on as reliable, sustainable sources of external demand. As a result, there are now major questions about the sustenance of China's long powerful export-led growth model.

Accordingly, China has no choice but to move quickly to implement the pro-consumption initiatives of its recently enacted 12th Five-Year Plan. Strategic transition is what modern China is all about. That’s what happened 30 years ago, when economic reform began.  And it needs to happen again today.  For China, a soft landing will provide a window of opportunity to press ahead with the formidable task of increasingly urgent economic rebalancing."

While differing opinions about the impact of multilateral trade rules on the Chinese economy in the coming years straddle the debate, its impact on the Chinese political spectrum is less written about. Are they mutually exclusive domains not influencing each other's trajectories? To suppose that would be naive considering the complex interlinkages.


An interesting insight into international trade rules, internet freedom and political freedom is brought out by Anupam Chander in 2010 in this article titled "International Trade and Internet Freedom". Arguing that international trade rules related to GATS in the context of internet freedom could have a great impact on liberalizing political freedoms, he notes,

"International trade law puts pressure on state repression of information through two principal mechanisms. First, the transparency obligations of GATS require what is often absent in authoritarian states—a set of public rules that governs both citizens and governmental authorities. WTO member states must publish regulations governing services and establish inquiry points where foreign service providers can obtain information about such regulations.A publication requirement written for the benefit of foreigners may prove useful for local citizens, who will be given the opportunity to understand the rules that bind them—and the opportunity therefore to challenge those rules or their interpretation.

Second, the market access and  national treatment commitments provide opportunities for foreign information service providers to disseminate information that local information service providers might eschew. Censorship by itself may not necessarily constitute either a market access or a national treatment violation. But consider three scenarios: what if a country (1) declared foreign blogging sites off-limits, or (2) required foreign information service providers to route their offerings through  special traffic cops,  or (3) required local Internet service providers to deny access to certain foreign services in toto? In cases like these, the censorship measures would likely run afoul of a country’s market access and national treatment obligations."

The issue whether the WTO should at all be treading into the minefield of human rights and political freedoms is a tricky one with conflicting viewpoints. Would it be stretching its mandate and diluting it's efficacy in addressing issues of trade and development. One is not questioning the primacy of the values of free speech, political freedom and human rights. The issue is whether a multilateral trade body is the right forum to decide on its limits and enforceability.

China-US trade relations - Seesaw Battle

China-US trade relations are seeing an interesting trend in the context of the trading system. While both countries effectively use the WTO dispute settlement mechanism to their national advantage, they have been increasingly embroiled in trade disputes in recent years. From tyres to solar panels to automobiles, the disputes have centered around dumping and subsidies.

A testimony before the Congressional-Executive Commission on China of the Assistant USTR For China Affairs makes interesting reading,

"China's WTO membership offers an important tool for managing the increasingly complex U.S.-China trade relationship. A common WTO ‘rule book’ and an impartial body in Geneva have helped the two sides resolve differences when dialogue fails. The United States has not hesitated to pursue its rights with China through WTO dispute settlement. In the last 3 years alone, the United States has brought five cases to the WTO to address harmful subsidies in wind power, concerns about misuse of trade remedy law, discriminatory barriers in the electronic payments sector, and trade-distortive export restraints on crucial raw materials."

It is clear that both member countries use the dispute settlement mechanism to further the interests of their economy and domestic interests.The testimony referred to above states :

 "These disputes – combined with the enforcement work we pursue in the Joint Commission on Commerce and Trade, the Strategic and Economic Dialogue, and through other trade tools like Special 301 – help ensure that U.S. businesses, workers, farmers, ranchers, service suppliers, and consumers derive the full promise of China’s WTO membership." (emphasis added).

Domestic interests do clearly stand out.

The recent decision by China to impose new tariffs on imported automobiles reported here, here, here and here is seen as part of an increasing trend of retaliation and use of the "WTO" rule book to further domestic economic interest. Without going into the merits of the case in any of these instances, what lessons does this have for other countries in the WTO? Membership in the WTO is seen as a surrender of national interests to an international, free trade propelled multilateral system. However, this is a simplistic understanding of the system. The WTO  rule book allows members to exercise their rights and obligations in the context of the Agreements. Whether a claim to a right is justified under the Agreement would depend on the facts of each case, but the use of the rules to pursue one's economic interest should not be viewed as per se "protectionist". Regarding China's moves to invoke rule book, it has been aptly commented that China is capable of intervening "politically" in it's markets. An interesting piece about China acting according to its own interest is found here.

Case of political economy in the international legal system ?

China - A decade in WTO

China's entry into the WTO multilateral trading system completes a decade. The entry, its impact on China as well as the impact on the world economy is a subject of intense scholarly research.

An interesting piece in the New York Times summarised the ten year ascendancy of China in the multilateral system.



The article suggested that China has been able to take advantage of the multilateral rule based system to its own advantage due to the special terms on which it entered the WTO. this has implicitly protected its domestic producers while taking full advantage of the reduced barriers to trade in other markets. While the products it exports are priced very low in the international market, imported products into China (especially automobiles) are priced high due to high tariffs, amongst other reasons. It noted,

"Sunday is the 10th anniversary of China’s joining the World Trade Organization — a membership that helped turn China into the world’s biggest economy after the United States. Companies and consumers worldwide have benefited from China’s emergence as a top trading partner. And yet, because of special breaks and loopholes for China when it joined the W.T.O., it still shields its domestic markets from foreign competition much more than any other big nation."


The devil is always in the details. And in this case, the details are the accession agreements and commitments China agreed to when it entered the WTO, which were specific to it as a developing country (now the 2nd largest economy). The piece states,

"After negotiating for 15 years to be admitted to GATT and then to the W.T.O., China was finally let in after agreeing to accept the W.T.O.’s broad free trade rules. But as all new members do, Beijing also had to negotiate a lengthy document, known as an accession agreement. It spelled out thousands of details tailored to the specifics of the economy of China, which then was still very much a developing country.

The agreement required China to lower its tariffs to levels below those of many other developing countries. But compared with most industrialized countries, China was allowed to impose considerably higher tariffs — tariffs China has retained even as its economy has subsequently grown to No. 2 in the world.

The clearest example of W.T.O. ascendance China-style may be in automobiles. Even though China’s auto manufacturing industry and car market are now both the world’s largest, China continues to shelter them behind the highest trade barriers of any large industrial economy.

It retains a prohibitive tariff of 25 percent on imported cars, for example, which helps explain why imports represent only 4 percent of the light vehicles sold in China."

The Economist has a series of articles on China's accession. This piece has argued that the tariffs in China are much lesser compared to other developing countries. However, tariffs in specific sectors (that China wants to protect have prohibitively high tariffs) are high.





There is also a view that the entry of China into WTO would further lead to "democratisation" and opening up of the Chinese State. China as opened up many sectors of the economy to foreign competition. An interesting parallel is the FDI in retail, a debate that was raging in India a week ago. It would surprise many that Wal-Mart has 353 outlets in China. It would be interesting to study the conditions under which the supermarket store has been allowed access in China.


It is clear that China has made the best of the WTO system and has used it to its "national advantage". Well, don't all countries attempt to do just that? While agreeing to the principles of free trade and reduction of barriers, member countries constantly seek to protect local, national interests in the multi-lateral forum.


The ascendancy of China is perhaps historic. The critics argue that it hs gained more than given to the multilateral system and that it continues to use various methods (like currency undervaluation0 to protect its domestic industry. Aaditya Matoo and Arvind Subramanian's article has argued that unless China becomes the focal point of future negotiations, the Doha round would not mean much.

China and US trade ties

An interesting debate about US and China trade ties. China is a "relatively" new member to the WTO. Russia is all set to become one. I wonder if all the issues raised in the debate can be resolved by the WTO Dispute Settlement mechanism. Atleast the one on artificially pricing one's good may fall under the scanner of the anti-dumping regulations.