In July 1986, China applied for membership in the GATT, that is, to become a contracting party to the General Agreement on Tariffs and Trade and a member of the GATT, the proto-organization that had grown up around it. Fifteen years later, that organization had become the World Trade Organization, and in a large hall in Doha, Qatar, the members of the WTO voted to accept China's application. The People's Republic of China formally became a member of the WTO on December 11, 2001. All of this and much, much more is contained in the Congressionally mandated
2017 Report To Congress on China's WTO Compliance
, which was prepared by USTR and submitted to Congress earlier this month.
It is a 248-page report plus appendices, and we may never read every word of it. Today's quote is from the Executive Summary, which contains a number of arresting observations. They are startling not because they are new but because they are unusually blunt for an official report. Of the many topics discussed in the report, we would call your attention to six in particular. Here they are along with some relevant passages from the Executive Summary.
Linkages: China, The WTO, and the U.S.
The report underscores the fact that U.S. leadership was critical to the long accession process leading to a successful outcome for China. It says:
Throughout these multilateral negotiations, U.S. leadership in working with China was critical to removing obstacles to China's WTO accession and achieving a consensus on appropriate rules commitments.
As for the importance of WTO membership to China, the reports states:
China has used the imprimatur of WTO membership to become a dominant player in international trade.
The Bilateral Deficit.
This issue gets so much attention that it is worth quoting in full the paragraph in the report that introduces it:
Throughout the many years of high-level U.S.-China engagement since China joined the WTO, the U.S.-China trade imbalance has grown exponentially. While various factors can contribute to a trade imbalance, the size and direction of the U.S.-China trade imbalance evidences a trade relationship that is neither natural nor sustainable.
That passage is followed by numbers that describe the lopsided nature of America's trade in goods with China. The U.S. deficit with China went from $83 billion in 2001 - already a large number - to $274 billion for the first nine months of 2017. (It is likely to come in around $375 billion for the year.)
China's Industrial Policy.
USTR's perspective is expressed clearly in this passage:
China is determined to maintain the state's leading role in the economy and to continue to pursue industrial policies that promote, guide, and support domestic industries while simultaneously and actively seeking to impede, disadvantage and harm their foreign counterparts, even though this approach is incompatible with the market based approach expressly envisioned by WTO members and contrary to the fundamental principles running throughout the many WTO agreements.
Not surprisingly the report includes discussion of the
"Made in China 2025 Industrial Plan,"
which focuses on ten specific industries where
[The] aim is to replace foreign technology with Chinese technology in the China market through any means possible so as to ready Chinese companies for dominating international markets.
China's focus on intellectual property - patents, trademarks, trade secrets, etc. - and its determination to acquire from the U.S. and others what it does not have itself is, in a sense, a component, a major component, of China's industrial policy. Yet, it is so important, so central, that it more than deserves its own heading. In August of 2017, for example, USTR initiated an investigation of certain Chinese practices under Section 301 of the Trade Act of 1974. This passage is illustrative of the practices that the United States is concerned about:
In its initiation notice, USTR identified four categories of reported Chinese government conduct that would be the subject of the inquiry, including ... the use of a variety of tools to require or pressure the transfer of technologies and intellectual property to Chinese companies, depriving U.S. companies of the ability to set market-based terms in licensing negotiations ....
Or, they might have added, to simply keep their technology to themselves, as firms often choose to do when left to their own devices. Coke hasn't traded away the formula.
China and the WTO Dispute Settlement System.
As we have noted in earlier entries, there is a crisis in the WTO dispute settlement system now. Against that background, USTR's China report is noteworthy in its comments on China and dispute settlement. China has been at the center of a number of disputes. Commenting on that, USTR writes:
It was never envisioned that enforcement would play such a large role for any WTO member. Indeed, it is simply unrealistic to believe that WTO enforcement actions alone can ever have a significant impact on an economy as large as China's ... unless the Chinese government is truly committed to market-based competition.
Turning to the nature of the disputes involving China, USTR writes:
The WTO dispute settlement mechanism is narrowly targeted at good faith disputes where one member believes that another member has adopted a measure or taken action that violates a WTO obligation. It can address this type of problem, but it is not effective in addressing a trade regime that broadly conflicts with the fundamental underpinnings of the WTO system
China Doesn't Fit in the WTO
. That, it seems to us, is the fundamental argument of USTR 2017 report on China and the WTO. On the first page of the Executive Summary, USTR writes:
The reality is that the WTO rules were not formulated with a state-led economy in mind.
In the first few years following its accession, China seemed to be making the called for adjustments, adjustments that would set it on the path of a market-oriented economy. But the leadership changes in 2003 and subsequently have effectively reversed that course. The result is that what seemed like a good idea in 2001 no longer does.