China and global trade governance: The need for reform

We have grown used to a globalised economy. It started with the opening of trade and the lowering of barriers. This led to the construction of global value chains, the relocation of production, increasing efficiencies and cost gains. It also led to economies becoming more and more intertwined, and of course, to a spread of technological development — more automatization, more digitalization, and servicification of the economy. The US economy is pretty much services these days, and the same holds true for most countries, even developing ones, and services are very much at the centre of today's global trade.

These developments have brought about a fundamental change in the way in which global business is conducted. Fifty years ago, global business was dominated by multinationals. With digitisation, even SMEs can now participate world trade. With the rise of China, state-owned enterprises are now competing in global markets, as well.

One result of these changes is that world trade is now quite resilient. Although the pandemic initially caused a steep decline in exports and imports, there was a recovery well underway before the Russian aggression in Ukraine. The rebound was quicker than, for instance, from the financial crisis in 2008 and 2009. WTO researchers attributed this increased resilience to the increased interdependence of the global economy. Despite the initial restrictions on supply of PPE, and later vaccines, the pandemic has in general prompted more trade facilitating measures around the globe than restrictive measures. By and large, governments around the world have hence understood the value of keeping borders open.

During much of the last decade, amongst G20 nations — which, between them, account for the bulk of world trade — about 90% of trade was free; only 10% was restricted. Some of the 10% was probably protectionist in nature, and such protectionist restrictions were undoubtedly hampering global growth before 2017. Since 2017, the US-China trade war has been increasing the number of trade restrictive measures.

This raises the question: what sort of globalisation are we going to have in the 2020s?

We have unilateral measures, including 301 US trade measures that are targeting China. An increasing volume of Chinese-American trade is now hampered by tariffs. We have economic nationalism of all sorts around the globe — protectionism, which is probably going to get worse. And then we have all the coordinated measures arising from the Russian invasion of Ukraine, which will be probably visible in the statistics when the next world trade report comes out. There has been more state intervention in markets following the pandemic, and we shall probably see more of that, too.

The effect of all of this has been a sort of a slowbalisation. Since 2012, the OECD have been recording the shortening of global value chains by 50 kilometres per year — a shortening of 500 kilometres in the last decade. Although the full reasons for this are not yet entirely certain, it seems clear at least that trade is becoming more regional. There are regional trade agreements, the CPTPP, the RCEP, the AfCFTA in Africa, and of course, even the Eurasian Economic Union, the Russian framework. It’s fair to say that the liberalisation of world trade has regionalised quite a bit since the early 2000s.

At the same time, we have seen the increasing weakness of the international institutions — particularly the WTO. The permanent negotiating body that the WTO was supposed to become has failed to deliver for the most part. The consensual decision-making nature of the WTO has proved to be a major challenge, and there has been a notable unwillingness on the part of big players to enter into new commitments. This was evident in the DDA negotiations, which went nowhere. As a result, the system of rules is not up to date; most of the current rules stem from the 1980s, which means that 21st century trade challenges are pretty much left unaddressed.

Then, you have the other pillar of the WTO: the administration of treaties. Here, we suffer from a lack of transparency — problems with monitoring how countries abide by their commitments. Monitoring of trade is sometimes really difficult because of lack of transparency of members' policies. Beyond this, there is a disregard by some countries of their obligations. Some members fall short due to genuine administrative capacity constraints; others due to more questionable reasons. The more this happens, the more the system is being eroded. And finally, you have the jewel in the crown, as it was said — the dispute settlement system. This system is in limbo at the moment, because of the dispute settlement body lacking any final stage where you can resolve trade disputes. That final stage, the Appellate Body, and the dispute settlement system in general, needs to be restored and reformed.

In addition, we have theoretical challenges to the emerging institutional framework from multilateralism purists who view the plurilateral arrangements as anathema. Such purist objections are not constructive. Plurilateralism, in and of itself, is nothing new. And increased plurilateralism is inevitable, given the inability to strike multilateral deals. It's only natural that those members who want to continue down the path of liberalising or facilitating trade should be allowed to do so through deals amongst themselves. But the purists don’t agree.

Additionally, there's the question of the special and differential treatment. This is a major challenge to global free trade, given the fact that, in the WTO, you can designate yourself as a developing country if you like. Even President Trump, when he was in power, toyed with the idea that perhaps the US should designate itself also as a developing country, so that it could make use of the possibilities of the special and differential treatment. Even without moving to such absurdities, the problem is evident, because some countries which have designated themselves as developing countries are much wealthier than some developed countries on the basis of their per capita GDP. Furthermore, the most advanced developing countries are not sufficiently backward to require much additional leeway in terms of obligations. I fully accept that China is a developing country. On the other hand, in terms of structure and aggregate wealth, the Chinese are totally able to assume the same obligations in the WTO as the developed countries.

The EU and the US have made proposals to solve these problems by moving to a needs-based agreement on case-by-case special and differential treatment. But it remains to be seen whether these proposals will garner sufficient consensus to fly. There's very little empirical evidence that the special and differential treatment actually gives anybody a massive competitive advantage in world trade. But it's the optics that count; and the optics are difficult.

Finally, we have the current challenge of the disruption caused by war in Ukraine. We don't know yet what sort of spillover effects on global trade it has, but there will be impact. What sort of conclusions trade-wise or trade policy-wise countries will draw from it, is far from clear. Would there be more regionalisation? It's not impossible. Would there be more closing up of borders? More strategic autonomy? It's not impossible either. But would there be a possibility to organise world trade in such way that recovery could be felt speedily and widely across the globe? Again, that is not impossible either, but the history has not been kind in the sense that this sort of sentiment has not had too lasting effect in the past. But we'll see about that. I'm personally optimist by nature.

Turning from these general issues about the governance of world trade, to the specific case of China, there are various complaints in the WTO; that China is not opening up, is not becoming market economy, is not playing its part or playing by the rules, and also, that (so far as the case of China is concerned) the rules are not working.

But the fact of the matter is that world trade really opened up after China joined the WTO — both in terms of imports and exports. It's true that the economic development in China has not been that of continuous liberalisation of markets since the WTO accession, but there have been efforts to liberalise the economy. And one cannot deny that China is a market with fierce internal competition. True, there has been also a slowing down of liberalisation in China in recent years, and a certain increase in the role of state in the economy. But, having said that, it's not as if the WTO as a whole has experienced massive liberalisation during the time when China has been participating. And the truth is that the trade of other countries has benefited from the opening up of China.

Has China played its part? So far as diplomatic participation is concerned, there is no doubt that it has. China is major player in the WTO and wields considerable power in the corridors of the Organisation. And China has been vocal in defence of multilateral rules-based system.

True, in some respects, China has not quite walked the walk. China was reluctant to engage in further liberalisation in the early 2000s, following the new commitments it had been required to make as part of its demanding accession negotiations. As a result, China formed part of the recently acceded members group that wanted to limit new commitments in the Doha Round, on NAMA sectorals — for example in chemical goods liberalisation. And China’s accession to the government procurement agreement has taken a massive amount of time; having promised to join the agreement at the time of accession, it's still in the making 20 years after the fact.

On the other hand, China has signed up to the ITA-2 expansion on information technology products, and China has taken part in a range of negotiations, both multilateral and plurilateral — through so-called joint statement initiatives. On some topics, the Chinese have been the main instigators of progress — for example, in relation to development investment facilitation, or the plastics initiative. And they did sign up to the recent services domestic regulation agreement.

Some WTO members have insisted that China should stop considering itself a developing country in the WTO context, and should take on commitments as ambitious as those of developed countries. Interestingly, although China is reluctant to let go of its status as developing country, it has been open to voluntarily not availing itself of special and differential treatment, for instance, with regard to the fisheries negotiations — although, as those negotiations have not been yet concluded, we cannot, as of now, assess as how constructive the Chinese will ultimately be in terms of their commitments. So China’s record on playing its part in the WTO is mixed.

Then there's the question of whether China has been playing by the rules. I think it's fair to say that China has been underperforming in the committee work, where members keep track of the implementation of each other's obligations, with regard to specific agreements, like domestic support obligations in the agreement on agriculture, where China was found to be in breach of its domestic support obligations not too long ago.

Notifications have not been submitted on time, and have sometimes taken years to materialise. There has sometimes been a lack of transparency about Chinese policies, and some unwillingness to respond to members' questions — in the trade policy review, for instance. There has also been some petty politicisation. For example, Hong Kong is currently preventing a Taiwanese colleague from becoming the chair of the Government Procurement Agreement committee, where China is not a member, but Hong Kong is. And then there are breaches of WTO commitments and obligations that have been heavily criticised by the United States, the EU and others. China has been found to have acted inconsistently with its obligations in multiple trade disputes.

But has China been worse than other major trading nations? The answer depends on whom you ask.

China has certainly been the target of a lot of complaints, it takes second place to the US in terms of complaints in the WTO since 2004. When the Chinese have been found to be in breach of their obligations, they have generally sought to comply with the dispute settlement body recommendations. True, this has sometimes taken time, and sometimes it's work in progress still; but it would be difficult to claim that China has been more problematic in terms of honouring dispute settlement recommendations than other major players. China is also party to the MPIA, which is a form of arbitration solution to the problem created by the lack of an appellate function within the WTO; this shows that they have an interest in trying to resolve disputes in a rules-based fashion.

On the other hand, there are cases in which China has been using trade defence instruments as a retaliation tool, which is not something that the US or the EU have been guilty of, in the past anyway. So, the Chinese have not really been keeping up with the rules-based ethos in that regard. And then, we have the recent cases that seemed to be about economic coercion for political ends, as in China-Lithuania, China-Australia and China-Philippines trade. Other member states of the WTO have been forced to address those problems through tariffs and by amplifying trade defences, like the anti-coercion instrument that is being prepared by the EU.

At least some of these problems stem from the fact that the trade rules of the WTO originate mostly from the late 1980s. There are grounds for hope that the difficulty of dealing with the Chinese can be at least partially remedied through ongoing negotiations about new rules — about e-commerce in particular. And there are other constructive proposals on the table (such as those on trade and sustainable development), which could provide for further liberalisation of environmental goods and services, (even if their future now looks uncertain, given the war). Then we have the Trade and Health Initiative that encompasses not just IP issues, but also export restrictions and the possible opening up of trade in medical goods. We have the whole issue of services negotiations, which went nowhere in the Uruguay Round, but which — if resuscitated — would make the WTO rules more relevant both to China and to modern geo-economics. And finally, we have the possibility of involving China in further plurilateral sectoral market access deals, provided, of course, that there is a critical mass of countries willing to do that.

My point is that one of the ways to manage Sino-Western trading relations, and to deal effectively with interdependence, is for WTO member states to commit to strengthening the trading system and to reforming the WTO. For this, we obviously need to have the US involved — because, without the US, it's really difficult to see the reform work going anywhere. But it's clear that China has to be fully involved as well — because it's difficult to imagine that the Chinese will just accept a diktat from the US and the EU about necessary changes in the rulebook.

For the Chinese to be drawn into negotiations about reform of the WTO, they have to get something in return. What that something is, is an open question. Some of it may be about the West loosening some of our tariffs that are clearly contrary to WTO rules.

In addition, we need to reconsider the present strategic battle over technological hegemony. At the moment, I think part of the problem in Sino-Western relations is that the security concerns are too often being used as a cloak for protectionism. Some forms of competition do carry security implications. There are vulnerabilities and critical dependencies that have been exposed, not just by the pandemic, but by the trade war as well. There are real concerns that need to be addressed, given the situation in China. But it's hard to argue that all Chinese tech or all Chinese acquisitions pose a threat to the West. Dependencies can be mitigated in various ways, including by diversifying sources of supply, strategic stockpiling, creating additional production capacity and all that sort of thing. Companies are doing that all the time. Vulnerabilities can be evaluated via investment screening and in cooperation with other partners and by enacting carefully crafted policies on export controls. The US and the EU are currently discussing the possibilities of working on secure supply chains, and that's one of the topics of the trade and technology council that the EU and the US have established. Yes, there are risks, and yes, there are practices that should be curtailed; but at the same time, we should be allowing the exchange with China of normal, low-risk products and services and investment. Not all trade with China, even in the high-tech sector, is a security threat.

True, there are also issues arising from Chinese state capitalist practices that create market distortions. But, with intelligent reform, and the construction of appropriate instruments, these should be at least partially addressable within the WTO system, in a way that the Chinese can accept.

Although I have concentrated mainly on the WTO mostly, there are of course other economic governance institutions, like the OECD, into which we could constructively try to draw China in. We would probably benefit from having China adhere to more than 260 OECD acts and instruments, from recommendations to best practices. Wouldn’t it be good if China signed up to the anti-bribery convention? Wouldn't it be good if they were following the Multinational Enterprises guidelines, or if they were to join the export credit arrangements? Because these OECD recommendations, decisions and best practices are mostly soft law, it might be easier for China to sign up to them. They haven't in the past, and there are clearly limits at the moment to the Chinese willingness to adhere to OECD instruments; but this is surely one approach that we should be examining in the future.

Finally, there is the question of the G20, and whether that can take a position as a global economic governance body. The results so far are mixed; but if we could find a modus operandi for the biggest economies in the world to operate within the G20 framework, that might also fruitful for managing Sino-Western interdependence.

Pasi-Heikki Vaaranmaa

Ministry of Foreign Affairs, Finland