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.

Transparency, China and the WTO - What next?

A lot is written about the rise of China in the multilateral trading system. It is heralded as an example of how a developing country utilised the international trade rules to further its national agenda. Critics argue that China has not done much in terms of reforming its own systems as per WTO rules. So while it benefits from the advantages the multilateral system offers, it does not abide, to the extent necessary, by it WTO and WTO plus (due to the Accession protocol) obligations. I have blogged extensively about China's role in the WTO here, here, here, here and here.

How much of the above criticism about China's reluctance to abide by WTO obligations is true? The recent Trade Policy review of China brought to the fore these issues with both the US and EU reacting strongly. I have blogged about the US response here. The EU reacted similarly here:

"In his statement at the WTO, the Ambassador pointed out the following areas of concern:

- The EU's main concern is related to a lack of transparency, which makes China's trade and investment policies – in the words of the WTO's report - "opaque and complex". More needs to be done to make key WTO principles like transparency and non-discrimination the norm in China's legislative system. The EU also calls on China to honour its WTO notification commitments in particular in the area of subsidies.

- State interference in the economy leading to distortion of competition: The EU shares the remark in the Secretariat's report that "despite all the reforms, state-owned enterprises still tend to benefit from lower cost of and better access to capital than non-public-sector enterprises". We therefore urge China to increase its efforts to ensure a level playing field amongst market operators, regardless of their ownership structure or origin.

- Excessive regulatory and technical obstacles to trade in goods, services, investment and public procurement and other non-tariff barriers: according to the WTO, only 46% of the more than 20 000 national standards in force in China are adopted from international or advanced foreign standards. In some areas, the participation of foreign and foreign-invested companies to standard-setting work is still restricted.

- Intellectual Property Rights (IPRs) protection and enforcement: despite China's efforts, serious problems remain and need to be tackled, notably in terms of violations of copyrights, trademarks, patents, and trade secrets.

- Raw materials: since all countries are interdependent and rely on the free supply of raw materials, the EU calls on China to remove all its export restrictions."

Are these reactions mere accusations in the context of a rising trading power or do they have some substance? China's State capitalism too doesn't help matters and obsfuscates the line between permissible State support and actionable subsidies in the context of the WTO.

Leila Choukroune has summarised the issues about China's adherence to the WTO in this special article titled "The Compromised Rule of Law by Internationalisation" in China Perspectives. Has WTO membership help "internationalise" the rule of law in China? Has it helped reform the Chinese legal system? Are the WTO plus obligations in the Chinese Accession Protocol being complied with? The author has noted that significant progress has been made by China in amending its domestic legal regime in consonance with international obligations. Primary among them is in the arena of transparency. Nevertheless, the author concludes that substantial effort still needs to be made in terms of fully complying with the WTO mandate:

"The syncretic nature of China’s legal system no longer evokes surprise. Although drawn from foreign rules and practices, China has sinicised these norms to better integrate them. China’s accession to and participation in the WTO is a fascinating illustration of this ability to adapt and perpetuate a given system without fundamentally challenging its basis. While Chinese legal reform has clearly benefited from the WTO engine, the changes in leadership witnessed since the mid-2000s have not led to the “rule of law via internationalisation” some Chinese rulers were themselves calling for. As discussed above, this incomplete transformation originates in the limits of Chinese law itself, from law-making to law implementation, and creates tensions between WTO Members as evidenced by an increasing number of disputes directly pinpointing the lack of transparency of the Chinese legal regime.

A diligent student of international trade law, which plays with international norms and seemingly abides by them, China has not been able to overcome the serious contradictions that have not only hindered a genuine political evolution, but have also taken legal reform backward, by favouring stability over change. It is to be hoped a different political elite may soon be able to approach legal and political reform in a less fragmented and hence more coherent way that could bring about the long-awaited transformations."

This is an interesting debate about how WTO rules influence domestic law making mandating changes in the national legal regimes. While this does not limit policy space in terms of adopting a "particular" developmental paradigm within the WTO rules, the primacy of transparency, need for a strong judicial review system of administrative acts as well as inviolability of the national treatment and non-discrimination principles severly influences domestic policy making. While no one can argue with the need for increased transparency in rule making and notifications to the WTO, the problem arises in interpretation and action. China, in its responses, has constantly argued that it is on the path of reform and is complying with all WTO obligations. It also argues that State led capitalism is not per se against WTO principles and is a justifiable exercise of national sovereignty within WTO rules. The Chinese examples portrays how a country has made its engagement in the multilateral system a centre piece of its developmental strategy. To what extent the former has influenced the latter is a matter of continuing debate!