China Must Recommit to the WTO | CHINA US Focus

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China Must Recommit to the WTO

James Bacchus
December 19, 2011
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Of all that has been said lately to mark the tenth anniversary of China’s admission to the World Trade Organization, the most remarkable statement is one from a surprising source.  Long Yongtu, the Chinese diplomat who labored for years negotiating China’s entry into the WTO, is worried that “essentially, after 10 years, it seems China is drifting away from the WTO.”

Long’s candid expression of concern about China’s future as a Member of the WTO should serve as a cautionary warning for all those with a shared interest in the continued rise of China as a successful trading state within a strong WTO-based world trading system.  And it should serve especially as a warning for China, which has benefited enormously from its first decade as a WTO Member, and can benefit all the more from adherence to WTO rules and allegiance to the WTO system in the decades ahead.

Since entering the WTO in 2001, China has profited substantially from WTO concessions that lower tariff and non-tariff barriers to international trade for all WTO Members, and that require freer competition in a more open and marketplace.  China has profited perhaps even more from WTO rules that prevent WTO Members from engaging in trade discrimination against other WTO Members.  Without the legal entitlements and the legal protections of these WTO rules, China’s export boom might have gone bust, and Chinese exports would surely have been singled out worldwide for discriminatory protectionism.

WTO membership has done much to help fuel China’s rise and historic return to global economic preeminence.  The Chinese had to reduce more than 7,000 tariffs, quotas, and other trade barriers as their price of admission to the WTO.  That price has proven more than worth it for China.  Since 2001, China’s GDP has increased fourfold, and China’s exports have increased sixfold.

Why then would China start “drifting away” from the WTO?  Given all that belonging to the WTO has done for China, why would China turn away now from freer and more open markets instead of continuing to turn toward them?

The answer lies partly in the shock of the global financial crisis, which has shown convincingly that, to continue to grow, China must climb up the global ladder of comparative advantage by relying much less on exports and much more on domestic demand from an expanding middle class of Chinese consumers.  The answer lies partly, too, in the mounting economic pressures confronting China in the ongoing aftermath of the global financial crisis, which seem to have caused some to forget that China has risen rapidly by casting aside inwardness and connecting with the complex supply chains of the wider world.

China has grown at an average annual rate per capita of nearly eight percent since entering the WTO.  With hard work and with relatively low wages, China has become the world’s leading exporter and the world’s second largest economy next to the United States. 
But for all its many accomplishments, China faces many more challenges.  In 2009, roughly 150 million Chinese were still living in extreme poverty on less than $1.25 per day, according to the World Bank.  Millions more live on not much more than that.

China has a large and widening income gap and an aging population.  China has no social safety net, no old-age insurance, and no universal health insurance. Rising prices are contributing to rising wages, and so to the loss of the advantage of lower labor costs that has helped fuel much of China’s rise in the global economy.  China’s efforts to continue to create jobs and growth while also fighting inflation are complicated by overly-aggressive lending by politically-influenced state-run banks, local government debt totaling 27% of GDP, and a massive real estate bubble that may be about to burst. 

Making matters worse, China’s economic growth has slowed for three straight quarters, and a slowdown in exports due to diminished demand in Europe and the United States is hollowing out the Chinese economy and feeding increasing and intensifying social and labor unrest.  The hopes of China for continued stability and increased prosperity depend on finding the right way forward to sustainable economic growth.

Reacting to all these pressures, Chinese leaders have acted in a number of ways that alarm foreign traders and investors:  Export restrictions.  “Indigenous innovation” policies and “strategic industries” initiatives that discriminate against foreigners.  Renewed state control seems to have supplanted market-oriented reforms, and China seems to have shifted away from a commitment to freer trade and investment in a more open marketplace and toward a policy of protectionism. 

The temptation to retreat from the uncertainties of the market to the soothing solace of the state is rampant in our anxious world, and there should be little wonder that China, with such scant experience with a freer and more open marketplace, would be among the first to seek sanctuary in the inviting illusion of the oxymoron called “state capitalism.”

This is precisely what worries Long Yongtu.  Like many Chinese, he fears that a retreat to statism could stall China’s growth by stifling fair competition for all enterprises, foreign and domestic.  “We cannot only have large-scale and state-owned enterprises,” he said.  “That is only the skeleton of the economy.  We need thousands upon thousands of small and medium-sized private enterprises.  They are the flesh and blood of the Chinese economy.” 

These are indeed precisely the kinds of enterprises that are most needed to enable China to make the needed transition from an export platform to a fully modern economy.  Yet, all too many of the most competitive Chinese companies are being crowded out of the marketplace by resurgent statism.  According to Long Yongtu, many provincial leaders in China support freer markets and a further opening of the Chinese economy to the wider world.  This is the vision needed to help China continue to climb the ladder of comparative advantage. 

Ending the Chinese drift away from the WTO can do much to help make this vision a reality. The commercial openness and transparency mandated by WTO rules will help continue to open up the Chinese economy. This in turn will help create the freer and more open society that is essential to the establishment of the innovative, value-added economy so much needed by the Chinese people.

James Bacchus is a former trade negotiator for the United States, a former Member of the Congress of the United States, and a former Chairman of the Appellate Body of the World Trade Organization.  He chairs the global practice of the Greenberg Traurig law firm.  He is the author of Trade and Freedom (London: Cameron May)

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