How influential is China in the World Trade Organization?

How influential is China in the World Trade Organization?
How influential is China in the World Trade Organization?
How influential is China in the World Trade Organization? Top

    China’s accession to the World Trade Organization (WTO) in December 2001 was heralded by the international community as a victory for free trade and economic liberalization. During its arduous, 15-year accession process, China made extensive commitments to reform domestically and reduce trade barriers. Since joining the WTO, China has been one of the organization’s most active members and its economy has become an integral link in global supply chains. Yet, Beijing has not instituted deep, systematic reforms and its mixed compliance with WTO dispute rulings has at times challenged the WTO’s underlying norms.

    The WTO serves three main functions: facilitating trade negotiations, monitoring compliance, and arbitrating trade disputes. The dispute settlement system (DSS) is the WTO’s legal mechanism for resolving trade conflicts between members. Members may be involved in the DSS in one of three ways. They can bring a dispute against another member as a complainant, or be the subject of a complaint as a respondent. Countries with “substantial trade interests” in a dispute may also join as a third party. All final rulings of the DSS are binding and mandatory.1

    World Trade Organization Disputes

    China’s Accession to the WTO

    Prior to joining the WTO, China had long been a member of other major international organizations, including the United Nations since 1971 and the World Bank and International Monetary Fund since 1980.2 Nonetheless, joining the WTO proved a prolonged and challenging process for Beijing. Unlike many other economies, China’s membership was not grandfathered in, as was the case with “original members” that joined in 1995 through their membership in the WTO’s predecessor, the General Agreement on Tariffs and Trade (GATT). When China acceded in December 2001, it became the 143rd member of the WTO.

    China experienced explosive trade growth after joining the WTO. Driven in part by tariff reductions, China’s trade in goods jumped from $516.4 billion in 2001 to $4.1 trillion in 2017. In 1992, China’s average weighted tariff rate of 32.2 percent far surpassed the global average of 7.2 percent. By 2002, this rate dropped to 7.7 percent. Since then, however, Chinese tariffs have remained largely unchanged, averaging 4.8 percent between 2003 and 2017.3 Amid ongoing trade tensions, China began ramping up tariffs on the US in 2018.

    During accession negotiations with China, WTO members required Beijing to make significant reform commitments to reduce the level of government intervention in its domestic economy. These commitments, found in China’s lengthy accession protocol, included lowering tariffs on goods, opening trade in services, allowing markets to set prices, removing export subsidies and taxes, ending state influence over the commercial operations of state-owned enterprises, and implementing reforms to boost accountability.

    Safeguards were included in China’s accession protocol to protect other WTO members. Most notably, China was labeled as a non-market economy for 15 years after its accession, which made it easier for other countries to bring anti-dumping cases against Beijing. This became a major source of tension when China filed disputes against the US and EU in 2016 seeking recognition as a market economy.4 In June 2019, Beijing requested to end the legal proceedings without a decision being announced, suggesting that it may have expected the WTO to reject its claims.

    China’s accession protocol also included a Transitional Review Mechanism (TRM), which mandated a regular review of China’s compliance during the first decade of its membership.5 The TRM is unique to China and has not been a component of other accession protocols. The US Trade Representative established its own annual review of China’s WTO compliance, which it still reports to Congress.

     Accession Length for Selected Article XII Members
    Country Length of negotiations (years)
    Kazakhstan 19.8
    Russia 19.2
    China 15.4
    Saudi Arabia 12.4
    Vietnam 12.0
    Article XII average 10.3
    Source: WTO

    The commitments and concessions that China made were deeper than those made by almost all other WTO members. Countries that joined the WTO after 1995, including China, acceded through the process outlined in Article XII of the Marrakesh Agreement. These “Article XII members” have typically been required to make more extensive commitments than original members that joined through GATT. China’s reform commitments were deeper than all other Article XII peers, except for Russia, which acceded to the WTO in August 2012. Kazakhstan and Vietnam faced similarly stringent, but less extensive, concessions due to heavy government intervention in their respective economies.

    Non-trade issues further compounded China’s accession process. Following government crackdowns on the Tiananmen Square protests in 1989, the United States and other WTO members working on China’s accession suspended negotiations with China until 1992. When talks resumed, members called for additional concessions that significantly delayed the process.

    China’s Experience in the Dispute Settlement System

    Figures in this section are based on disputes filed through the end of 2018.

    Examining China’s activity in the dispute settlement system, which plays a central role in the WTO’s functioning, offers insight into China’s complex relationship with the WTO.6 Between 2002 and 2018, China was involved in 63 disputes – 20 times as a complainant and 43 times as a respondent. This makes China the third most active member within the DSS over this period, behind the US and EU, which were involved in 275 disputes and 184 disputes, respectively. Canada (62 disputes) and India (49 disputes) round out the top five.

    In the first five years (2002-2006) of its membership, China was only involved in five disputes, notably less than most of its BRICS peers. India, for instance, was involved in 21 disputes in its first five years of WTO membership, while Russia was involved in 11 cases. China’s very first dispute came in 2002 when it was one of several countries that launched a series of complaints against US steel tariffs. The WTO ultimately ruled that the tariffs were illegal, which exposed the US to trade countermeasures from other countries.

    China spent much of its early years in the WTO as a third party participant, which Beijing viewed as an opportunity to gain experience in the DSS. Between 2002 and 2006, China was a third party to 51.8 percent of all disputes filed.7 China has remained active as a third party participant and joined 50.3 percent of all disputes filed between 2002 and 2018. By comparison, the EU was a third party to 34.7 percent of cases filed through 2018, while the US was a third party to only 26.1 percent of cases.

    The bulk of China’s 63 disputes – 82.5 percent – have been with the US (38) and EU (14). The US alone has filed 53.5 percent of all complaints against China, which itself has filed 75 percent of its 20 disputes against the US. In disputes between the two economic superpowers, the US generally fares better. Of the 23 disputes filed by the US against China, 10 were unable to be resolved during consultations and therefore progressed to a panel investigation. According to a study by the Peterson Institute of International Economics, the US won all 10 of these disputes. In comparison, eight of China’s 15 complaints against the US progressed to a panel investigation, where it won four, tied three, and lost one.8

    Disputes filed against the US and EU tend to differ from those filed against China. Complaints against the US and EU typically target their anti-dumping and safeguard measures, which aim to protect their domestic industries from lower-priced foreign goods. These are often aging industries such as agriculture, textiles, and steel.

    Meanwhile, disputes against China frequently target government efforts to support and subsidize its manufacturing and high-tech sectors. In 2004, the US filed the first-ever dispute against China, accusing it of illegally applying higher value-added taxes to foreign integrated circuits than to domestic ones. The US won the case and by October 2005 China demonstrated full compliance with the ruling.

    More recently in 2018, the EU filed a complaint against China for forcing European companies to transfer technology to Chinese firms in exchange for market access. Given the centrality of forced technology transfers in broader tensions between China and other major economies, Beijing’s response to the pending ruling could have significant ramifications for the global economy.

    China’s Impact on the WTO

    In other international organizations, size and influence directly afford major countries specific privileges. China, for instance, holds veto power in the UN as a permanent member of the Security Council. In the International Monetary Fund, China wields the third-largest voting share (6.09 percent), after the US (16.52 percent) and Japan (6.15 percent). This is not the case in the WTO, where size and power manifest themselves indirectly. Winning a trade dispute is costly and requires significant technical and legal expertise, which often compels less-developed members to forego filing complaints.

    Unsurprisingly, the five most active members within the DSS – the US, EU, China, Canada, and India – are five of the world’s largest economies. Together they accounted for roughly two-thirds of global GDP in 2018. By comparison, the WTO’s 30 least-developed members had a combined GDP of less than one percent of the global total in 2018,9 and have only ever been involved as a complainant or respondent in one dispute – a complaint by Bangladesh against India in 2004.

    The economic policies of the world’s second-largest economy have been a source of tension between WTO members. The US and EU have long accused the Chinese government of providing subsidies that have led to overcapacity and subsequently the dumping of goods – including solar panels, aluminum, and steel – in markets around the world. In a smaller economy, these policies would be less consequential, but subsidies provided by Beijing can reshape the global marketplace. For example, Chinese aluminum subsidies caused world aluminum prices to plummet 46 percent between 2007 and 2015.

    The scale of China’s economy also weighs heavily on other WTO members. Taiwan and South Korea, which both rely heavily on trade with China, have refrained from filing any disputes against China. Fear of retribution from Beijing likely factors into this hesitancy. Seoul did voice a complaint in March 2017 claiming that China had retaliated against South Korean companies after Seoul deployed the THAAD missile system, but a formal complaint was never filed.

    How Beijing responds to DSS rulings can present additional challenges for the WTO. In many cases, China has shown a willingness to comply with rulings it views as unfavorable. However, it has also found creative ways of demonstrating sufficient legal compliance while sidestepping the spirit of certain decisions.

    In one of the most well-known WTO disputes, China was found to have inadequately opened its market to foreign electronic payment services, such as Visa and Mastercard. The WTO determined that China had violated WTO rules by making China Union Pay a monopoly supplier for the clearing of RMB-denominated payment card transactions. In accordance with the ruling, China’s State Council announced in 2014 that it would open its markets to foreign payment services, yet the People’s Bank of China has still not acknowledged applications by Visa and Mastercard to operate in China.

    China’s status as a “developing” country has likewise heightened tensions within the WTO. About two-thirds of all WTO members, including China, designate themselves as developing economies in order to receive “special and differential treatment.” This provides developing members with several benefits, such as extended windows for implementing WTO commitments and assistance with handling disputes and technical matters.

    Several advanced economies have pushed back against China’s self-designation as a developing country. In February 2019, the US proposed reforms to the WTO that would create stricter eligibility requirements for this designation. China responded by teaming up with India and seven other developing members to refute the US proposal and voice support for the WTO’s practice of allowing members to self-designate their status.

    In some aspects, China has space to improve, like services commitments and also some domestic policies. I think the problem is these commitments are not so clear-cut – not like tariff reductions.

    Dr. Tu Xinquan

    In May 2019, China submitted its own WTO reform proposal that (among other points) criticized a “certain member” (the US) for blocking appointments to the WTO’s Appellate Body. For years, the US has challenged the Appellate Body due to concerns that it has at times over-stepped its authority.10 The Trump administration escalated the situation in September 2018 by blocking the re-appointment of an Appellate Body judge, setting in motion an unprecedented crisis that could effectively shut down the DSS by the end of 2019.11

    Issues with the Appellate Body are part of broader disagreements among WTO members over how to address underlying problems within the organization. These divisions, coupled with ongoing US-China trade tensions, offer Beijing an opportunity to cast itself as a defender of global trade and elevate its role within the WTO. Given China’s mixed record of compliance with WTO dispute rulings, Beijing’s role in addressing these issues will significantly shape the organization’s future. ChinaPower

    1. A member that loses a dispute must bring its laws and procedures into compliance with the rulings, pay compensation to damaged parties, or face WTO-approved penalties for noncompliance.
    2. China was previously a member of all these organizations, but was represented by the Republic of China rather than the People’s Republic of China.
    3. The available World Bank data does not include tariff rates for China for years 2012 and 2013.
    4. China only continued with its dispute against the EU.
    5. The TRM occurred for eight consecutive years starting in 2002 with a final review of China’s compliance in the tenth year following its accession.
    6. Other analyses focus on China’s engagement with WTO negotiations. We focus more specifically on China’s activity within the DSS.
    7. This excludes four disputes in which China was a third party because these disputes were filed prior to China’s accession. China joined these disputes as a third party after they were filed.
    8. A “tie” means that the panel’s ruling was split, with each member wining certain claims.
    9. The WTO uses the UN’s designation for Least Developed Countries.
    10. The US has also complained that the Appellate Body has ignored rules mandating the completion of cases within a specified time period.
    11. Only three of the Appellate Body’s seven seats are now filled and two of these judges’ terms end in 2019. A minimum of three judges are needed to rule on cases, so if their seats are not filled the Appellate Body will be unable to function.