Systemic Collision and Convergence under the WTO reform

This thinkpiece is written on the basis of Professor Xiankun LU’s speech at the themantic seminar “Collision and Convergence-Commemorating the 20th Anniversary of China’s Accession to the WTO” held by Shanghai WTO Affairs Consultation Center on November 11, 2021.

Full text of the article is as below (translation for information only).

Systemic Collision and Convergence under the WTO reform

Prof. Lu Xiankun

Themantic Seminar: “Collision and Convergence – Commemorating the 20^th Anniversary of China’s Accession to the WTO”

Shanghai WTO Affairs Consultation Center

November 11, 2021

Currently, the WTO is in deep crisis, with the three major functions of monitoring, negotiation and dispute settlement completely paralysed, facing challenges unprecedented in the more than 70-year history of the multilateral trading system. There are many reasons for this situation, and the systemic conflict between China and the United States is one of the main reasons, which was most intense when Trump was in office and soon extended to multilateralism and endangered the multilateral trading system. It was probably a few years ago that I talked about the issue of the “systemic conflict” between the United States and China and alerted the domestic academic community, including through the Shanghai WTO Affairs Consultation Center, to be prepared for this problem.

The systemic conflict between China and the U.S. takes root in the differences in their economic systems, and this issue has been around for a long time, since the negotiations on China’s accession to the General Agreement on Tariffs and Trade (GATT) and its subsequent accession to the WTO. The concern of developed members such as the U.S. and the EU at that time was “whether China’s formulation of its own (socialist market) economic system was consistent with the requirements of the GATT”. China’s relevant expressions have also changed from “planned economy combined with commodity economy” and “planned commodity economy” until 1992 when the 14th National Congress of the CPC proposed to build a “socialist market economy”¹. The concerns of other members and China’s relevant statements are recorded in the Report of the Working Party on the Accession of China, in which China stated that its “consistent efforts to resume its status as a contracting party to GATT and accession to the WTO Agreement were in line with its objective of economic reform to establish a socialist market economy as well as its basic national policy of opening to the outside world”², and that “since 1979, China had been progressively reforming its economic system”, especially in the banking, finance, taxation, investment, foreign exchange and foreign trade sectors in 1994. The reform “had brought about major breakthroughs in China’s socialist market economy”³. This report also explained in detail the achievements of the reform in state-owned enterprises, the tax and financial system, financial and monetary policies, prices of consumer and producer products³. The discussions also specifically addressed monetary and fiscal policies, the investment regime, state-owned enterprises and state-invested enterprises, technical barriers to trade, and the application of the market economic system to “China’s entire customs territory” including the Special Economic Zones (“SEZs”). China stated that the relevant policies and measures will be “consistent with the WTO Agreement”⁴. In addition, the economic system in question also includes the methods and duration of the anti-dumping and countervailing investigation of the well-known “non-market economy”⁵.

Of course, the expectations of other WTO members for China’s systemic reform did not stop there, but they hoped that accession to the WTO would promote further changes in China’s economic and even political system. On March 9^th 2000, in a speech on the U.S.-China bilateral market access agreement and the granting of permanent normal trading status to China, then-President of the U.S. William Jefferson Clinton argued that this was the best opportunity to “create positive change” in China that would bring about economic and social transformation⁶. On November 11^th 2001, the day the WTO adopted China’s accession to the WTO, then-President of the U.S. George Walker Bush made a similar statement that in the long run, accession to the WTO would lead to an open and rules-based economic system in China and would be “an important underpinning for Chinese democratic reforms”⁷.

However, after the “honeymoon” during which China fulfilled its commitments for about the first 10 years since its accession to the WTO, and with the Doha Round in trouble, the contradictions between the Chinese and foreign systems gradually came to the fore, and the U.S. tone began to shift. China’s 3^rd trade policy review at the WTO in May 2010 reflected “China’s historic yet unfinished transition from a centrally planned economy to a free-market economy governed by rule of law”⁸. At China’s 4^th trade policy review in June 2012, the U.S. again criticised China for intensifying government intervention and further adopting “state capitalism”⁹. By the time Trump took office in 2013, the systemic conflict between the U.S. and China reached its peak, with the Trump administration labelling China as “a strategic competitor”¹⁰, accusing it of adopting “state capitalism” and “non-market economy”, and engaging China in disputes on economic, trade and technology issues. At the multilateral level, the Trump administration submitted a document entitled “China’s Trade-Disruptive Economic Model”¹¹ to the WTO General Council, challenging China’s economic system and development model, and at the same time submitting a Draft General Council Decision¹² calling for the formulation of relevant rules in this regard, which was naturally strongly opposed by China¹³.

After the Biden administration took office, the overall economic and trade policy  towards China is more of an inheritance than an adjustment of that of the Trump adimistration. Secretary of State Antony Blinken stated that the relationship with China would be “competitive when it should be, collaborative when it can be, and adversarial when it must be”¹⁴. On October 4^th, U.S. Trade Representative (USTR) Katherine Tai announced the Biden administration’s trade policy toward China in the U.S., accusing China of having “doubled down on state-centered economic system” and saying that China will “not include meaningful reforms”, that the U.S. would engage China on its “non-market economy” policy practices. In addition, Katherine Tai suggested to promote an alliance of “market-based, democratic economies” to this end¹⁵.

In addition to the U.S., in March 2019, the European Commission launched the EU Strategy for China, which for the first time described China as “a negotiating partner, an economic competitor and a systemic rival”, completely overturning the previous bilateral “strategic partnership”¹⁶. Later, in its new trade policy document “Trade Policy Review – An Open, Sustainable and Assertive Trade Policy”, published in February 2021, the European Commission accused China of pursuing “a distinct statecapitalist model” that “has fundamentally changed the global economic and political order”. It said that addressing the “negative spillovers” of the Chinese model would be “central to the EU’s efforts to rebalance the bilateral trade relationship”¹⁷. In the annex to this document, “Reforming the WTO: towards a Sustainable and Effective Multilateral Trading System”, the EU largely shared the U.S. view that the current WTO rules cannot address China’s systemic problems and that new rules must be developed for this purpose¹⁸. In addition to the EU, the statements of the three trade ministerial meetings of the Group of Seven (G7) which the UK hosted this year, all focused on China’s “non-market economy” policies and practices, and pledged to take joint action to counter these “unfair trade practices”¹⁹.

Systemic differences have become a focal point in WTO reform, as reflected in the WTO reform proposals of developed members such as the U.S. and the EU, and in specific issues related to state-owned enterprises, industrial subsidies, overcapacity, compulsory technology transfer, intellectual property protection, as well as the recently proposed “forced labour”, etc. The core concern is government intervention in markets and enterprises. This involves two issues, one of which is the very sensitive nature of the systems behind these issues. In this regard, during high level talks in Tianjin not long ago, the first of the three bottom lines that China proposed to the U.S. was that the U.S. should not challenge, slander or even attempt to subvert the socialist path and system with Chinese characteristics²⁰. In its WTO reform-related documents, China also made it clear that the WTO should “respect the diversity of development models among Members” to “strengthen the inclusiveness of the multilateral trading system”²¹.

The 12^th WTO Ministerial Conference (MC12) will be held soon at the end of this month, and the WTO reform is one of the key issues. The EU and several other members are preparing a proposal to set up a “Working Group on the WTO Reform” at MC12 to comprehensively discuss the three major functions of the WTO, and to set up sub-groups to negotiate on some specific issues²². Establishing this working group will help to discuss the WTO reform in a systematic and institutionalized manner, to balance the interests of all parties. The above-mentioned issues within the concept of systemic differences will also be the main content of such discussions.

Even under WTO reform, systemic differences and related specific issues are undoubtedly sensitive. According to some think tanks, the central challenge of the current WTO reform is “whether the system of rules to be reconstructed is not one that, while striving for convergence, accepts and preserves coexistence”²³. From the experience of previous years, if the violent collision between different systems is not controlled, it will be very detrimental to both the members concerned and the WTO. However, in view of the current political reality, it is unrealistic to force different systems to integrate in the WTO, and the WTO as a trade organization cannot deal with such political issues. The only way out is to formulate rules to regulate the spillovers of different systems, which naturally cannot only focus on China’s system and related issues, but must also discuss those of other major members in order to achieve a balance of interests.

Notably, Biden said in his speech at the United Nations General Assembly on September. 21^st that the U.S. “is not seeking a new Cold War”²⁴ and in a media interview on November. 2^nd, he stated that “This is competition. It does not have to be conflict”²⁵. U.S. National Security Adviser Jake Sullivan also said in a media interview on Novemer. 7^th that the U.S. objective “is not seeking a fundamental transformation of the Chinese system” but rather to make the U.S and China “to operate in an international system for the foreseeable future”, in which “the terms of that kind of co-existence” is “favorable to American interests and values”, so the future rules must reflect “an open, fair, as well as free international economic systems”²⁶. Earlier, in Katherine Tai’s speech on Oct. 4th, she also said that the U.S. and China should “recouple”²⁷. What’s more, in the aforementioned EU document, the European Commission stated that “The issue is not the role of the state as such. Public intervention may be needed to achieve legitimate goals, and the WTO should accommodate different degrees of public ownership in the economy”²⁸.

These new statements show some positive attitudes of the U.S. and the EU in the interactions between China and other members. China should seize the opportunity to respond positively and promote the healthy development of the dialogue on systemic issues under WTO reform and the steady progress of WTO reform.

Notes：

1. “20 years since China’s Accession to the WTO: Milestones and New Changes”,Gao Yuan, Shanghai Observer, November 6^th, 2021: https://www.shobserver.com/news/detail?id=421523
2. Report of the Working Party on the Accession of China, WT/ACC/CHN/49, October 2001, para. 4
3. Report of the Working Party on the Accession of China, WT/ACC/CHN/49, October 2001, para. 6
4. Report of the Working Party on the Accession of China, WT/ACC/CHN/49, October 2001, para. 24-26, 41-42, 43-49, and 188
5. Report of the Working Party on the Accession of China, WT/ACC/CHN/49, October 2001, para. 147-153
6. President Clinton’s speech at the Paul H. Nitze School of Advanced International Studies of the Johns Hopkins University, 9 March 2000:  https://www.iatp.org/sites/default/files/Full_Text_of_Clintons_Speech_on_China_Trade_Bi.htm

7.George W. Bush’s Statement on the Ministerial Decision to Admit the People’s Republic of China and Chinese Taipei into the WTO, 11 November 2001: https://www.govinfo.gov/content/pkg/PPP-2001-book2/html/PPP-2001-book2-doc-pg1387.htm

8. Statement by Ambassador Michael Punke, U.S. Permanent Representative to the WTO, at the WTO’s Trade Policy Review of China, 31 May 2010: https://geneva.usmission.gov/2010/05/31/tpr-china/
9. Statement by Deputy USTR Michael Punke at the WTO’s Trade Policy Review of China, 12 June 2012: https://ustr.gov/about-us/policy-offices/press-office/speeches/transcripts/2012/june/punke-statement-tpr-china

10.“Trump labels China a strategic ‘competitor’”, Financial Times, 18 December 2017: https://www.ft.com/content/215cf8fa-e3cb-11e7-8b99-0191e45377ec

11. “China’s Trade-Disruptive Economic Model”, Communication from the US, WT/GC/W/745, 16 July 2018
12. “The Importance of Market-Oriented Conditions to the World Trade System”, Draft General Council Decision, Communication from the US, WT/GC/W/796, 20 February 2020
13. Remarks of Mr. Zhang Xiangcheng, then-Permenant Representative of China to the WTO in July 2018 and October 2018: http://wto.mofcom.gov.cn/article/hyfy/201807/20180702770570.shtml, http://wto.mofcom.gov.cn/article/hyfy/202010/20201003007643.shtml
14. “A Foreign Policy for the American People”, Speech by Anthony J. Blinken, US Secretary of State, Ben Franklin Room Washington DC, 3 March 2021: https://www.state.gov/a-foreign-policy-for-the-american-people/
15. “New Approach to the U.S.-China Trade Relationship”, speech by Katherine Tai, US Trade Representative, at the Center for Strategic and International Studies (CSIS), 4 October 2021: https://ustr.gov/about-us/policy-offices/press-office/press-releases/2021/october/remarks-prepared-delivery-ambassador-katherine-tai-outlining-biden-harris-administrations-new
16. “EU-China – A strategic outlook”, European Commission and HR/VP contribution to the European Council, 12 March 2019: https://ec.europa.eu/info/sites/default/files/communication-eu-china-a-strategic-outlook.pdf
17. “Trade Policy Review – An Open, Sustainable and Assertive Trade Policy”, European Commission, COM(2021) 66 final, 18 February 2021: https://eur-lex.europa.eu/resource.html?uri=cellar:5bf4e9d0-71d2-11eb-9ac9-01aa75ed71a1.0001.02/DOC_1&format=PDF
18. “Reforming the WTO: Towards a Sustainable and Effective Multilateral Trading System”，European Commission, COM(2021) 66 final, 18 February 2021: https://trade.ec.europa.eu/doclib/docs/2021/february/tradoc_159439.pdf
19. Three Articles on G7 Trade Ministers’Meeting pulished under the WeChat Official Account “Lu Xiankun”: “G7 Intensifies WTO Reform Efforts and Focuses on China”, “G7 Refines Its WTO Reform Vision and Continues to Focus on China”, “G7 Continues to Focus on China”
20. “Wang Yi: Underline Three Bottom Lines of China’s Relations with the United States”, July 26^th2021: https://www.fmprc.gov.cn/web/wjbzhd/t1895157.shtml

21.China’s Proposal on WTO reform, WT/GC/W/773, May 13^th 2019: http://images.mofcom.gov.cn/sms/201905/20190524100740211.pdf

22. Article on G7 Trade Ministers’Meeting pulished under the WeChat Official Account “Lu Xiankun”: “EU Proposes to Build a Working Group on WTO Reform”
23. “In defense of multilateralism and the reform of the World Trade Organization”, Group of Punta del Este (GPE), February 2019: https://grupopuntadeleste.com/en/wp-content/uploads/2019/06/Manifesto-PEG-rev-1203-FINAL-FINAL.pdf
24. “President Biden urges unity in first UN speech amid tensions with allies”， BBC, 21 September 2021: https://www.bbc.com/news/world-us-canada-58642139
25. “Biden says he’s not concerned with possibility of armed conflict with China”, CNN, 3 November 2021: https://edition.cnn.com/2021/11/02/politics/china-russia-biden-cop26-g20/index.html
26. “Sullivan’s remarks suggest softer tone on US-China ties, but ‘words alone are not enough”, Global Times, 8 November 2021: https://www.globaltimes.cn/page/202111/1238448.shtml
27. “New Approach to the U.S.-China Trade Relationship”, speech by Katherine Tai, US Trade Representative, at the Center for Strategic and International Studies (CSIS), 4 October 2021: https://ustr.gov/about-us/policy-offices/press-office/press-releases/2021/october/remarks-prepared-delivery-ambassador-katherine-tai-outlining-biden-harris-administrations-new
28. “Reforming the WTO: Towards a Sustainable and Effective Multilateral Trading System”，European Commission, COM(2021) 66 final, 18 February 2021: https://trade.ec.europa.eu/doclib/docs/2021/february/tradoc_159439.pdf