2 Aug 2018
U.S. and Mainland China Spar at WTO Over Mainland China’s Economic Model
The U.S. and mainland Chinese representatives to the World Trade Organisation had a heated discussion at a 26 July meeting of the multi-lateral body in Geneva after the United States submitted a paper characterising mainland’s China economic model as “trade-disruptive.” In remarks delivered to the WTO General Council, U.S. Ambassador Dennis Shea charged that mainland China “is the most protectionist, mercantilist economy in the world” despite attempts by Beijing to portray itself as a staunch defender of free trade and the global trading system. Rather than moving towards a more market-based system since its accession to the WTO in 2001, Ambassador Shea said, mainland China has increased the role of the state in its economy.
Among other things, the U.S. paper contends that mainland Chinese authorities continue to exercise control directly and indirectly over the allocation of resources through instruments such as government ownership and control of key economic actors and government directives, in line with a constitutional mandate echoed in mainland China’s broader legal framework to develop a “socialist market economy.” As a result, the United States argues, the means of production are not sufficiently allocated or priced according to market principles. Instead, the government and the Communist Party ostensibly continue to control or otherwise influence the price of key factors of production, including land, labour, energy and capital. Moreover, state-owned enterprises, which are ostensibly controlled by mainland Chinese authorities through the appointment of key executives and the provision of preferential access to land, energy and capital, continue to play “an outsized role” in the mainland Chinese economy.
The paper also charges that the mainland Chinese system treats law as an instrument of the state, in the sense that it is used to facilitate the government’s industrial policy goals and to secure discrete economic outcomes. In addition, the paper adds, key legal institutions such as the courts are structured to respond to the direction of mainland Chinese authorities. The United States argues that this type of system makes it very difficult for enterprises to act independently of approved industrial policies on a systemic or consistent basis. The paper notes how a key focus of mainland China’s industrial policies is technology development, which Beijing views as integral to its economic development. Currently, mainland China is seeking to attain domestic market dominance and global leadership in a wide range of advanced technologies. Beijing has issued a large number of industrial policies in pursuit of this overarching objective, the paper adds, including the “Made in China 2025” industrial plan.
The United States complains that while mainland China has repeatedly signalled that it is pursuing economic reform, its use of this term “differs from the type of reform that a country would be pursuing if it were embracing market-oriented principles.” According to the United States, for mainland China economic reform means “perfecting the government’s and the Communist Party’s management of the economy and strengthening the state sector, particularly state-owned enterprises.” The United States concludes in its paper that “as long as China remains on this path, the implications for this organization (the WTO) are decidedly negative.”
Mainland China’s representative to the WTO, Dr. Zhang Xiangchen, offered a sharp rebuke to the U.S. argument, describing it as a “heavy cake” that tastes “more like a half-cooked dough than a cake.” The paper is further portrayed as devoid of facts, with Dr. Zhang asserting that “criticism should be based on facts, should refrain from putting labels on others, should use correct facts and correctly use facts, there should be clear logic in reaching conclusions through analysing evidence.”
Dr. Zhang indicated, among other things, that mainland China “has been vigorously exploring a road of market economy which suits China’s own national situation and circumstances” and intends to “march along this road unswervingly” whatever others may say. He insisted that there is “no one-size-fits-all ‘market economy’ standard in the world” and asserted that WTO rules do not allow members to use their own system as the template of “market economy” while characterising those who do not follow that template as a “non-market economy.” Mainland China has recognised the decisive role played by the market in allocating resources, Dr. Zhang said, although that role falls within a broader objective of improving the socialist market economy.
With respect to SOEs, Dr. Zhang stated that mainland China’s Constitution clearly states that these enterprises have decision-making power over their operation and management and contended that the U.S. paper “failed to provide evidence to prove that the government intervenes in the normal operations of the enterprises.” Describing developed countries as “inventors and major users of industrial policies and subsidies,” Dr. Zhang explained that mainland China has also developed some these policies for strategic and planning purposes. However, he cautioned about overestimating the impact that such plans, as fancy as they may be, may ultimately have on economic performance. Dr. Zhang went on to criticise various inconsistencies in the U.S. paper as well as a lack of seriousness in selecting and using evidence, concluding that instead of looking for scapegoats WTO members ought “to curb the spread of unilateralism and protectionism, to bring the dispute settlement to its full function and to stop the trade war.”