China’s Role in the WTO

On the 10th anniversary of China’s World Trade Organization entry, WTO Director-General Pascal Lamy highlights the significance of the country’s membership.

Established in 1995, the World Trade Organization (WTO) is the only global international organization that manages trade rules between countries. By providing a forum for governments to negotiate trade agreements and settle trade disputes, the organization aims to help governments solve their trade problems. The WTO is a rules-based, membership-driven organization with 153 member countries. China joined the WTO on December 11, 2001.

To mark the tenth anniversary of China’s WTO entry, WTO Director-General Pascal Lamy recently discussed China’s role in the WTO with CBR Editor Paula M. Miller. The fifth director-general of the WTO, Lamy began his first four-year appointment in September 2005 and his second four-year term in September 2009. He was commissioner for trade at the European Commission in Brussels, Belgium, from 1999 to 2004.

The first 10 years of China’s WTO membership coincided with remarkable economic and trade growth in the country. How much of the boom can be directly tied to China’s WTO membership?

Lamy: This is a very difficult question to answer. What we know is that from 2001 to 2010, China’s exports rose nearly 6 times to roughly $1.57 trillion, while imports rose by nearly the same order of magnitude to $1.39 trillion.

Surely, the market access that China received as a result of its accession to the WTO contributed to its trade performance. Lower tariffs on imports would have stimulated purchases of foreign goods as well. But other factors have helped. The reforms that China undertook as part of its accession process have improved economic efficiency and boosted growth. Membership in the WTO also provided foreign investors with assurances that China was part of a system of international rules and disciplines. In addition, foreign investors found a huge domestic market in which to offer their goods and services. Inflows of foreign direct investment rose exponentially from practically zero in the early 1990s to $108 billion in 2009. This is important because more than half of China’s exports come from subsidiaries or branches of foreign-owned companies in China. Sales of these affiliates increased from $10 billion in 1990 to $545 billion in 2009. So, defining precisely the impact of China’s WTO accession is difficult, but undoubtedly the contribution to China’s growth has been significant.

What has China’s WTO membership meant for the global trading system?

Lamy: Just as the WTO has had a significant impact on the development of China’s economy, China’s accession has made the organization stronger. Surely, the accession contributed to China becoming the world’s largest exporter of merchandise goods and the second-largest importer of such goods. This latter point is important because the crisis that hit the global economy in 2008-09 led to a severe contraction of the economies of Western Europe and North America. With those markets consuming less, exporters needed to look to other countries for export growth. This was true of US, Japanese, and European exporters, but it was also true of developing country exporters. China picked up a great deal of slack, and this was an important factor in keeping the global recession from widening and deepening.

China’s WTO entry has also facilitated greater South-South trade [trade between developing countries]. Today South-South trade comprises more than 20 percent of global trade, and this figure is rising rapidly. In 2010, for example, total trade by developing countries expanded by around 17 percent (compared to 13 percent for developed countries). In 2011, WTO economists forecast an overall trade expansion of 6.5 percent, with general trade by developing countries to all trading partners expanding by 9.5 percent—far higher than the 4.5 percent predicted growth in the developed world. So in terms of trade expansion and shifting trade flows, China’s accession has had a dramatic impact. Other developing countries—such as Brazil, India, South Africa, and Indonesia—are also rising rapidly and exuding greater influence in the WTO arena. This rise of developing countries—with China at its center—has changed the balance of power within the WTO.

Having another trade power in the WTO has also led to some frictions. China, for instance, is the third most active participant in the WTO’s dispute settlement process, after the United States and the European Union.

What are some of the most significant trade-related changes you have seen China make during its WTO membership? What is the most significant WTO commitment that China has implemented?

Lamy: There have been a great many such changes. Among the significant changes are the expansion of trade from foreign-owned subsidiaries and branches, China’s role in the center of the increasingly large global supply and production chain, and the country’s move up the value chain in terms of production. China’s labor costs are rising and its minimum wage is scheduled to double by 2015. Even now, China’s labor costs are higher than most other developing countries in Asia—only Malaysia’s and Thailand’s are higher. This means that Chinese companies are starting to look to other locations to produce their goods. Chinese textile investment in Africa and Bangladesh is growing rapidly, for instance.

In terms of commitments that China has undertaken, I would not want to rate them in order of significance, but agreeing to implement a tariff schedule in which the average tariff on manufactured goods is 9 percent [down from 24 percent before China’s WTO accession] and the average tariffs on agriculture imports is 15 percent [down from 24.6 percent before China’s WTO accession] was highly significant. These figures are much lower than those of many other developing countries and the farm tariff rate is even below that of many developed countries.

What are the most significant WTO commitments that China has failed to implement or to implement fully?

Lamy: As a neutral director-general it is not for me to assess this. China has done really well in terms of implementing its long list of commitments. But no country is above criticism. Our trade policy review [TPR] mechanism provides the opportunity for WTO members to assess and criticize the trade policies of those under review. China, as one of the four largest traders, has a TPR review every two years. What I can say is that members have complained about certain services sectors not being open sufficiently and that intellectual property rights [IPR] protection needs to be improved.

How does China compare to other WTO members as a user of trade remedy measures, such as antidumping and countervailing duties?

Lamy: China refrained from using trade remedies in the first few years of its WTO accession. In recent years, however, we have seen the frequency increase. China is among those countries that initiated the most antidumping investigations. In 2009, China ranked fifth among WTO members in the initiation of antidumping actions. In 2010, China ranked sixth, but the number of initiations in 2010 (8 cases) was much lower than in 2009 (17 cases). Of course, there is a distinction between cases initiated and final measures applied. It is clear that China has become a frequent user of trade remedy instruments.

It is also clear that in 2009 and 2010 China was by far the biggest target of antidumping investigations (77 investigations in 2009 and 43 in 2010) and countervailing measures (13 measures in 2009 and 6 in 2010) applied to allegedly subsidized Chinese exports.

China offered its second bid to join the WTO Government Procurement Agreement (GPA) last year. Though the second bid was considered better than its initial 2007 offer, some issues remain. When do you think China will join the GPA, and what are the greatest barriers it faces in seeking to do so?

Lamy: I never make predictions on timing for matters such as this, but I guess the sooner the better. China has made initial offers and is now preparing a revised one. Becoming part of the GPA is part of the commitments taken by China upon accession. And it is a win-win scenario: Good for China because it will get value for its money in public purchases, and good for the rest of the WTO membership because it will give countries access to China’s huge public procurement market. In terms of barriers, perhaps one complicating element is China’s vast size and complex web of national, provincial, and local procurement practices and policies.

China’s formal WTO accession also made it a signatory to other agreements, including the WTO agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). Despite China’s accession to that agreement, however, IPR protection remains a highly contentious issue between China and other countries. How would you evaluate China’s progress on IPR since joining the WTO, and what role do you envision TRIPs and the WTO playing in future IPR progress?

Lamy: As we know, intellectual property enforcement poses significant challenges to many countries. China is a huge country, with many decisions in the hands of provincial and municipal authorities. It is therefore not difficult to imagine the challenges of IPR enforcement. My own sense is that China has improved its IPR protection and enforcement recently, but I also believe that more can be done. I believe this is a sentiment shared by the Chinese government itself—an important reason for this is the fact that protecting IPR is also in China’s own interest. China is rapidly developing patents, trademarks, and copyrights of its own. As a means of encouraging innovation and invention, incentives are required. This means the inventor needs the assurance that he or she will retain ownership rights and that if it is a success, the inventor will benefit.

As to your last question, I see the TRIPs agreement as a big step forward in the overall IPR progress. And I believe WTO members will continue to review and improve the TRIPs agreement’s provisions to keep up with the rapid development in technology.

Recently, many observers in the United States have focused on the role of state-owned enterprises and “state-supported enterprises” in China’s economy. Chinese companies often benefit from preferences such as favorable financing regardless of their ownership structure, however. What role does the WTO have in addressing these types of benefits that affect whether there is a level playing field in China?

Lamy: The WTO has specific agreements that spell out the manner in which subsidies can be used. Generally speaking, the rule is that subsidies cannot undermine the position of foreign competitors in either China or third-country markets. As to the specifics of the Chinese situation, this has been a subject of dispute settlement activity so as a matter of prudence I will refrain from comment.

What do you expect to see from the next 10 years of China’s WTO membership? What role do you envision China playing in the continued evolution of the WTO and the world trading system the WTO helps to arbitrate?

Lamy: China will continue to grow and its influence will expand. This much is true. China is unique, and in some ways it resists conventional definition. It is a developing country with world-class cities on its coast that offer everything you could find in a developed country. China is the world’s largest exporter and second-largest economy, but average income is still far below that of advanced economies. Wages are rising and people are prospering, but 36 million households remain below the poverty line. Due to this complexity, it is of vital importance for China to think that its role in the multilateral trading system, with its newly gained strength, also comes with new responsibilities. As a key player in the WTO, other countries have high expectations for China, and I hope China will continue to play a constructive role in the evolution of the WTO. It is in China’s fundamental interest to do so.

What major developments do you see in the WTO’s future, and when do you expect the Doha round (the current trade negotiation round of the WTO) to end?

Lamy: I believe that the WTO’s work in surveillance and monitoring and its dispute settlement activity will remain vibrant and active in the coming years. The WTO’s coordinating role in the Aid for Trade program will remain important as well. As far as the negotiating function of the WTO, and in particular the Doha Round, the picture looks less clear. We are witnessing an impasse in the negotiating role of the WTO. This impasse is evident between developed and emerging economies. Developed countries believe that emerging economies must make further contributions. Emerging economies believe further concessions should not mean aligning themselves with developed countries. It is important that we examine together the causes that have led to this situation and the role we think the WTO should play in the twenty-first century.

What role do you think sub-global trade agreements such as the Asia-Pacific Economic Cooperation (APEC) play in shaping the WTO agenda?

Lamy: APEC has played an important role in support of the WTO and the Doha Development Agenda. In the case of APEC, it’s clear that the roles of this group and the WTO are complementary. One good example of this is trade facilitation where APEC has done some very good work in streamlining and harmonizing customs procedures. This has led to faster clearance times, more trade, and faster growth.

There are some 300 regional, plurilateral, and bilateral preferential trade agreements in place at the moment that differ in nature and content. As we have said in our recently released World Trade Report, governments enter into preferential trade agreements (PTA) such as this for a variety of reasons, but what is increasingly evident is that seeking preferential tariff treatment alone cannot explain the PTAs. Nearly 85 percent of world trade takes place at the WTO tariff rate rather than a lower PTA rate… It is clear, however, that such forums are being used to develop regional rules and regulations, and that this web, or noodle bowl, of regulations can confuse many entrepreneurs who find the cost and hassle of trading under so many different sets of rules simply not worth it. This explains why an Asian Development Bank survey found that only a quarter of businesses surveyed actually used the trade preferences available to them.

Having said all this though, it is evident that as long as the Doha Round continues to struggle, governments will seek to open markets through other means. Eventually we will have to move from co-existence with PTAs to greater coherence. Meanwhile, it is crucial to gain a better understanding of what these agreements contain by making full use of the WTO transparency mechanism.