CHINA AND THE WTO:AN ACTIVE PLAYER IN FORMULATING NEW RULES FOR GLOBAL ECONOMY

PANG ZHONGYING

Special-term Professor and Director,Institute of Marine Development at the Ocean University of China

WTO Reform against the Backdrop of Global Trade Tensions

The discussion surrounding the reform of the World Trade Organization (WTO) is hardly new. The WTO reform has occupied a central position in the discussion of its member states and prestigious think tanks for more than two decades since the organization commenced and especially in the past decade. Among them, the “WTO crisis”,“WTO failure” and other diagnoses and warnings suggest the grave challenges facing the WTO.

Roberto Azevedo, the incumbent WTO Director-General, believes that the WTO is facing an urgent task of reform.Azevedo has thus initiated “crisis dialogues” with member states. Prior to the Donald Trump administration, the United States and the European Union had proposed WTO reforms that demanded the abolition a WTO fundamental principle of “consensus-based decisionmaking”, believing that this move could make the WTO more efficient. But these proposals pose the threat of jeopardizing the legitimacy of the WTO.

Since Donald Trump took office as the President of the United States in 2017 and especially since the US waged “trade wars” against its largest trade partners(including North American countries,the EU and China), the global trade regime represented by the WTO has been faced with mounting crisis. The Trump administration attempted to resort to its global superpower (hegemony) to pressure its trade partners to make a compromise, instead of relying on global trade order bolstered by such institutions as the WTO to resolve its trade disputes with its largest trading partners. The actual effects of such a move are levying tax globally with the US hegemony.

The outbreak of “trade wars” between major economies while the WTO is still in place is itself an irony for the organization and the current global trade order.The WTO, with its purposes, principles and institutions, is designed to resolve trade disputes, especially those among major powers. However, rather than preventing “trade wars”, the WTO is being damaged by the “trade wars”.

The WTO is part of the “trade war” between China and the US. The two countries both claim that they have abided by the global competition rules represented by the WTO, while accusing each other of violating the same rules. The representatives of China and the US engaged in battle of words and gave tit for tat in the WTO. Certainly, the China-US confrontation on the WTO issue has been looming all along. The US has adopted the Trade Policy Review Mechanism(TRM) to review China’s compliance with the WTO.

As China’s economy has grown rapidly since its accession to the WTO, the US, EU and other economies that used to dominate the intergovernmental body have felt growing impacts from China. The US and the EU share certain common positions and interests against China in the WTO. The Trump administration accused China of “economic aggression” and the EU “expressed the shared concern over China”. As questioned by Cecilia Malmstrom, the European Commissioner for Trade, “how can we reconcile China’s state-owned enterprises model with a global level playing field?”

The European Union has played a leadership role in the WTO reform and has sought China’s support for its efforts. As showed in the picture, Chinese President Xi Jinping meets with European Council President Donald Tusk and European Commission President Jean-Claude Juncker, who are to attend the 20th China-EU leaders’ meeting at the Diaoyutai State Guesthouse in Beijing on July 16th, 2018. (Photo source: Xinhua News Agency)

The tripartite debate among China,the US and the EU in the WTO is itself a central issue facing the WTO and will impose direct impact on WTO’s future.Such debate has attracted the attention of internationally renowned scholars.Dani Rodrik, an expert on international political economy at Harvard University,believes that “the US and European policymakers are asking the wrong question.The problem is not with China’s policies as much as it is with the world trading regime. The World Trade Organization and every trade agreement ever since have been predicated on the idea that economic practices in different nations would eventually converge. This has not happened, as China’s example amply indicates. More importantly, there is no good reason for national economic models to converge in the first place”.His conclusion is that “if the WTO has become dysfunctional, it is because our trade rules have over-reached. A fair world trade regime would recognize the value of diversity in economic models.It should seek a modus vivendi among these models, rather than tighter rules”.

The WTO does embody the highest ideal, the global economic integration.However, reality and ideals work on different tracks. In reality, countries still pursue their own paths of development.China, on the one hand, is increasingly connected to the global economy and on the other hand, still adheres to its own development path. The Trump administration gives proof from a different angel that even the US also adheres to its own path of development, which is the“economic nationalism” that Trump and his team have repeatedly reiterated.

As a global organization, the WTO has outreached into the borders (sovereignty)of individual countries to impact and restrict their domestic policies, but it failed to take into consideration of their domestic conditions. It is precisely due to its overreach that the WTO and its partner organizations became the targets of attacks launched by nationalism and populism in the wave of “anti-globalization”and “de-globalization”. Global economic integration is thus experiencing at least a temporary interruption or slowdown and the WTO, as the most important organization championing global economic integration, is in an embattled situation.

The EU is currently leading the WTO reform

Like the United States, the EU is also a key player in formulating and manipu-macy and effectiveness of the WTO, believing that the principle of “consensusbased decision-making” can only be modified on the basis that the legitimacy of the WTO is not challenged.

The moves the Trump administration is making suggest that the country seeks a host of bilateral trade arrangements through two-way trade talks while not attempting to explain whether these new bilateral trade arrangements violate the WTO principles (the principle of nondiscrimination, for example) and further lay down the solutions in cases of the violation of WTO principles. Even when the WTO is out of the picture, these bilateral trade arrangements, if not being able to reconcile with one another and avoid contradictions (such as those existing between the US-EU trade arrangement and the US-Japan trade arrangement), may create new trade issues for the US.

On the issue of the WTO reform generally, besides managing to reach consensus within the bloc, the EU still confronts multiple challenges, including resolving the disagreement with the US,harmonizing the differences with such emerging countries as China which is neither “rich” nor “poor” and meeting the demands of developing countries to maintain and strengthen the inclusiveness of the WTO. These challenges make it difficult for the EU to devise a WTO reform plan that attracts the majority support from the WTO members.

The fact that China firmly supports the multilateral trading system assures China’s support for the EU.lating the world trade rules. In the WTO reform, the EU has played a leading role and sought Chinese support. In the Joint Statement of the 20th China-EU Summit(hereinafter referred to as the China-EU Statement) published in Beijing on July 16, 2018, it is stated that “the two sides are strongly committed to fostering an open world economy, improving trade and investment liberalisation and facilitation,resisting protectionism and unilateralism, and making globalization more open, balanced, inclusive, and beneficial to all. Both sides firmly supported the rules-based, transparent, non-discriminatory, open and inclusive multilateral trading system with the WTO as its core and are committed to complying with existing WTO rules. They are also committed to cooperating on the reform of the WTO to help it meet new challenges and establish a joint working group on WTO reform, chaired at Vice-Ministerial level, to this end”. It also stated that “the two sides recognized the important role that the High-Level Economic and Trade Dialogue has played in guiding and promoting the development of China-EU economic and trade relations. The EU took note of China’s recent commitments to improving market access and the investment environment, strengthening intellectual property rights and expanding imports, and looks forward to their full implementation as well as further measures. The two sides committed to ensuring a level playing field and mutually beneficial cooperation in bilateral trade and investment, and will work together to solve the market access issues facing businesses on both sides”.The fact that China firmly supports the multilateral trading system assures China’s support for the EU.

In fact, the EU and the US hold different opinions on the approaches to the WTO reform. The Trump administration initiated a WTO reform proposal different from that of the EU. Its proposal would lead to the removal of clauses concerning developing countries and the abolishment of the WTO principle of the “consensus-based decision-making”,which would definitely trigger a strong earthquake within the WTO. In contrast,the EU has taken into account the legiti-

China and the WTO Reform

As “globalization” advanced triumphantly in the late 1990s and early 2000s, the WTO needed new members,especially China. China’s accession to the WTO is not only the result of Chinese efforts but also the push by the US and the EU. An interesting comparison has recently been made between how the Clinton administration welcomed China into the WTO back then and how the Trump administration is currently accusing China in the WTO, reflecting the tremendous changes in China-US relations over the years. But why has the US changed so dramatically in its attitude towards China at the WTO? Sheng Hong, an eminent economist and a professor at the Shandong University, believes that “China was just a ‘small country’ back in 2001” and that “with a GDP accounting for only 4.1% of the world total”, “China was merely a freshmen in the global market”. The US and the EU relaxed certain conditions for China as preferential and favorable treatment for this developing country, such as differential tariffs. “But 15 years later, China has grown from a small country to a giant on the global stage, with its economy ranking the second in the world and accounting for 15% of the world total.”Foreign companies feel anxious in front of China’s strong competitiveness. “Even the United States, the world’s largest economy and technology power, feels restless.” The Americans openly raised doubts about the “Made in China 2025”and demanded China to drop the plan on the ground that the governmentsubsidized upgrading of manufacturing technologies violates the principle of fair trade.

A white paper titled China and the World Trade Organization published by the Chinese government on June 28,2018 attracted global attention. As China’s first white paper on the WTO since China joined the organization in 2001, it provides a systematic review of China’s relationship with the WTO over the past 17 years and reaffirms China’s basic position that China opposes trade protectionism and calls on countries around the world to respect the multilateral trade rules represented by the WTO. But this white paper does not touch on the topic of the WTO reform.

The WTO reform stands as a big challenge for China. The absence or failure of reform will deprive the WTO of the ground for future existence. China needs to comprehend and study the reform of the WTO and contribute a Chinese solution. The first step for China to take is to admit that China today is different from what it was at the time of its accession to the WTO in 2001. In fact, this difference is one of the main reasons for the current EU-led and US-approved WTO reform.

As all parties are now having their eyes on the new rules governing the global economy, the WTO reform is a process of formulating new global trade rules. China was not a player in such a process when it joined the WTO, but the WTO reform provides China with a historic opportunity to participate in establishing global trade rules in the new international system. Living through the “trade wars”, the Trump administration may come to the realization that“America First” and “rules-based” global economy are not contradictory. For the US to maintain dominance in the world,rules have a critical role to play, even in Trump’s logic. It’s just that Trump wants to ditch the rules that are claimed to screw the US. Trump administration intends to scrap such rules that it believes to be “unfair” to the US. The reform in Trump’s words is to turn these “unfair”rules “fair” to the US. The “trade wars”started with the lack of rules keeping pace with the global economic growth,but may end with the formation of new global economic rules in favor of the US.

How should we view the controversies and disputes about the “new rules for global economy”? Jim O’Neill, the incumbent Chairman of the Royal Institute of International Affairs who coined the term BRIC received an interview on the new rules for the new global economy. He suggested in the interview that as the existing international rules failed to adapt to the new global economy, global economic governance had increasingly become an acute challenge. In the future, global economic rules cannot be formulated by a single economic bloc.Instead, to effectively govern the new global economy, all parties shall participate in the formulation.

The author generally agrees with Jim O’Neill. Two suggestions have been put forward for China: Firstly, China has an indispensable role to play in shaping new rules for global economy and it is impossible to lay down such new rules without China’s participation. China can accomplish many major and crucial things. The most important thing that China can do is to prevent the slide into a rule-less or less rules-based world. We draw from the experience of the developed and advanced economies that a rules-based world is important for China,which is progressing towards modernization, high-quality development and a better life. Secondly, China must maximally seek common ground with the US, the EU, Japan and other major economies while shelving differences to draw up new rules for the world economy and prevent the “New Cold War” on the political front.

The fundamental issue in the debate on the new rules for global economy is exactly the same as the issues facing China in the process of further deepening reform and opening wider to the outside.The WTO reform will undoubtedly be conducive to China’s deepening reform and opening up. And the former and the latter will work in full accord.

As to the relationship with major trading partners, the WTO still serves as the fundamental platform for addressing bilateral challenges. A consensus China and the US should reach in their trade talks is both countries should return to the WTO and that the WTO is exactly the solution to the China-US dispute. If any solutions proposed by either China or the US work against the WTO principles, they will cause new problems while solving the existing ones and as a result,the two countries have to return to the WTO eventually. This is because both China and the US are players in the globalized world and thus some so-called bilateral issues are multilateral in essence.

Conclusion

It is an international consensus to reform the WTO, which once again becomes urgent upon the backdrop of trade tensions between major powers.The key issues in focus are the principles, purposes and approaches to the WTO reform. On the whole, the fundamental principle remains the combination legitimacy and effectiveness in the process of reform. In terms of goals,attempts should be made by countries in the world to identify moderate reform goals, since ambitious and radical goals are barely within reach and small and incremental goals are hardly effective in resolving the current global trade tensions. Once the goals are established,the WTO Secretariat and major member states, China, the US and the EU in particular, need to coordinate their positions and draft a roadmap or plan for reform.

Today’s world economic system consists of three types of countries, including the developed economies represented by the G7 and the OECD (“rich countries”); the developing countries (“poor countries”) and “emerging economies”positioned between the “poor countries”and “rich countries” and represented by such countries as China, India and Brazil.Such a composition reflects the diversity of the world economy. “A fair global trading system cherishes the diversity of economic models and the system should find a way to reconcile these models.”However, will the Trump administration,which has sought “fair” trade, recognize the diversity of the world economy and will it pursue fairness in trade as such?Will the EU accept the diversity of the world economy and reform the WTO accordingly? After going through such reform, will the WTO remain similar to the GATT? And will such global trade governance provide new rules that adapt to the world economic competition in the 21st century?

Since China and the EU have set up working groups on the WTO reform,the two sides need to coordinate their positions as soon as possible and work towards the initiation of a joint reform plan. The WTO should convene a general assembly focusing on its reform and planning for its future. The WTO reform shall be on top of the agenda of the G20 summit and other global economic fora to be held in 2018 and beyond.