Keep politics away from economics


On Dec 11, 2001, following 15 years of complex negotiations, China acceded to the World Trade Organization. That event, occurring midway in the nation’s four decades of economic reform and opening-up, was transformative for both China and the global economy. Over the subsequent 20 years, the country embarked on a period of prodigious and unparalleled economic growth, with exports, imports and GDP all rising at average annual rates in a neighborhood of 13 percent (in constant US dollars).

From the perspective of policymakers in the United States, the European Union, and other Western nations, China’s rapid economic rise has been a mixed blessing. Certainly, Western consumers are happy to purchase relatively inexpensive products from Chinese manufacturers, and farmers have benefited from a huge new market for their goods. However, Western factories often failed to compete with the lower costs and greater efficiencies of their Chinese counterparts, leading to a rapid decline in the number of manufacturing jobs and attendant political fallout in North America and Europe.

Unable to redistribute the gains and losses arising from the new paradigm, both US and EU leaders often addressed domestic discontent by attributing China’s manufacturing success to improper government subsidies and producer dumping. This led to numerous WTO complaints against China over the years (a total of 32 from the US and EU combined from 2004 to 2018), and a refusal by both members to recognize the reality of China’s market economy upon the expiration of Article 15(a) of China’s WTO Protocol of Accession in 2016.

Although the US was successful in all of its WTO complaints against China during the first decade of the 21st century, it lost most disputes filed by China (as well as other complainant countries) during the same time period. This record, in conjunction with specific frustrating losses at the appeal level, led the US to begin a series of actions to undermine the WTO’s stabilizing role in global trade.

Naturally, when one thinks of US assaults on the WTO, the combative image of former president Donald Trump immediately comes to mind. After all, Trump made his disdain for that body — and his intent to circumvent it — quite clear. Nevertheless, it actually was Trump’s quieter predecessor, Barack Obama, who launched the first political attack on the WTO by blocking appointments to the Dispute Settlement System’s Appellate Body. This policy, initiated in 2011, persisted throughout the remainder of the Obama administration and was continued by Trump following his inauguration in 2017.

Since the seven members of the WTO’s Appellate Body serve fixed terms, the political obstruction of the US completely eliminated the panel by the end of 2020. To address this vacuum, a limited number of WTO members (including the EU and China) now employ a temporary, voluntary alternative to the Appellate Body: the Multiparty Interim Appeal Arbitration Arrangement. However, this stopgap measure does not enjoy the status of a court of final appeal, and is unlikely to make a major dent in the number of unresolved WTO disputes that has grown steadily since 2011.

During his first 10 months in office, US President Joe Biden has done little to clarify his administration’s position on WTO reform. Although the US has not formally linked its displeasure with the WTO’s Appellate Body to its criticism of China as a non-market economy, the two issues were conflated in practice by Trump’s unnuanced approach. Therefore, until the Biden administration signals an explicit unraveling of the two lines of attack, many analysts will continue to view the US position as holding Appellate Body appointments hostage to the promulgation of new rules designed to label China as a non-market economy.

At one level, a comprehensive overhaul of WTO rules and procedures might seem welcome and possibly even beneficial to China. After all, any reasonable formal definition of a non-market economy should exclude China’s market-based approach, as did the second note to Article VI, 1 of GATT 1994, “a country which has a complete or substantially complete monopoly of its trade and where all domestic prices are fixed by the State”.

Unfortunately, however, when one contemplates the type of language proposed by the US to define a market economy, it becomes clear the intent is not economic (to ensure prices are set by market forces) but political (to invalidate economies with a significant State-owned sector). For example, the US Trade Representative’s 1988 memorandum to the WTO General Council specifically required “there is no significant government interference in enterprise business decisions”.

Of course, such restrictive political labels make little economic sense and are unlikely to gain the support of most WTO members. Despite the presence of numerous State-owned enterprises, China’s economy relies heavily on its private sector for economic development, as statistics show that roughly 60 percent of GDP, 70 percent of innovation, 80 percent of urban employment, and 90 percent of new jobs in China are attributable to non-government business activity. Quite candidly, few EU economies enjoy a comparable level of private-sector competition and innovation.

In 2019, China submitted a four-point reform proposal to address the major issues currently facing the WTO. The first point identified the Appellate Body crisis as one of several “existential” problems requiring immediate attention, and the fourth point emphasized the need to recognize the validity of a broad spectrum of economic systems, including those embraced by developing nations as well as those characterized by both State-owned enterprises and market-based prices.

For the WTO to regain its effectiveness in resolving disputes, it is crucial the Appellate Body panel be restored to its full seven-member complement as quickly as the appointment process allows. With this basic arbitration function secured, the WTO members will be free to debate the merits of various governance and procedural proposals within a more relaxed time frame. One would hope that, with the dark cloud of crisis removed, policymakers from around the world will be able to see clearly that it is economic market forces, not political labels, that are necessary to set prices appropriately.

The author is the Zurich Group chair professor of Finance at the School of Economics and Management of Tsinghua University. The author contributed this article to China Watch, a think tank powered by China Daily. 

The views do not necessarily reflect those of China Daily.