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No Threshold for Free Trade
By Deng Yaqing | NO. 50 DECEMBER 15, 2016

 

A freight ship with containers at Lianyungang port, east China's Jiangsu Province, on August 8 (XINHUA)

 
In commemoration of the 15th anniversary of China's accession to the WTO, Beijing Review reporter Deng Yaqing interviewed Xue Rongjiu, Vice Chairman of China Society for WTO Studies, on China's gains from and contributions to the multilateral trading system, market economy status, surrogate country issues and mounting anti-globalization and trade protection. Edited excerpts of the interview follow:

Beijing Review: How has China fulfilled its commitments since joining the WTO 15 years ago? What did China gain from the WTO membership?

Xue Rongjiu: The WTO was established in 1995, and China joined it in 2001. In order to join the WTO, China had to agree to all of the WTO's existing agreements, covering goods trade, service trade and intellectual property rights.

Since China was one of the largest economies in the world, it was not treated completely as a developing country when it joined the WTO. Back then, China was transforming from a planned economy to a market economy. Therefore, in addition to the nearly 30 multilateral agreements, China was required to follow some special terms and rules, including transitional period examination, special safeguard measures and Article 15.

Transitional period examination requires China to report its policy implementation and accept examination by other member states. Special safeguard measures may be taken when other countries are affected by imports from China. These WTO members restrain imports from developing countries such as China in order to protect their domestic industries. The restraint methods include growth rate restriction and export quotas. The restriction was due to be canceled after the General Agreement on Trade in Services was added. Developed countries took 10 years (1995-2005) to remove the restriction. However, when it came to 2005, they specially postponed by three more years canceling the restriction on China. And China accepted it. Article 15 was exploited to use the surrogate country method against Chinese exports. Under the method, authorities determine whether or not to impose tariffs on the basis of reference prices in a third country rather than product prices in the exporting country. The protocol, however, says that "in any event," WTO members may not use the surrogate country method against Chinese exports beyond the 15-year transition period following China's WTO accession.

Since China joined the WTO in 2001, it has adhered to WTO rules and thus benefited from the mechanism.

First, by following WTO rules, Chinese enterprises have been protected in the international trading environment. Second, foreign enterprises are more willing to develop business in China because they can be safeguarded by regulations in a more developed trading environment. Third, domestic awareness of abiding by laws and regulations has been enhanced, so that further progress can be made in political, economic and social development.

Besides, as China has become the world's largest goods trader and the second largest economy, the nation has reached a higher international position by virtue of which it can participate to a greater extent and have a larger say in global economic governance.

 

A merchant selects bathroom products at the 120th Canton Fair in Guangzhou, capital of south China’s Guangdong Province, on October 15 (XINHUA)

On November 8, the European Commission released a new legislative proposal, replacing the "market economy" standard with the principle of "market distortion." What do you think of this new proposal?

Apparently, the European Union (EU) is trying to please both China and European industries vulnerable to imports from China.

China has been paying close attention to Article 15 since the beginning of this year, with several senior government officials stating that the EU should fulfill its due obligation after the article's expiration on December 11. Unfortunately, the United States and the EU don't want to terminate the clause. The European Parliament has even passed a proposal to deny China's market economy status. The Chinese Government and Chinese scholars don't think the European Parliament's decision is appropriate. Now the EU, partly influenced by China's attitude, has passed this new proposal in which the EU has removed China from its list of non-market economies but still sticks to using the surrogate country method for countries with market distortions. They may terminate the clause while planning to extend it through domestic legislation.

China deems it inappropriate for the EU to extend the clause under a new cover. If the EU passes the domestic legislative proposal after the clause is ended, China can sue the EU in the WTO and solve problems via the WTO dispute settlement mechanism. If the EU does not accept the WTO verdict, China can adopt counter measures authorized by the WTO.

If the EU does not use the domestic legislative proposal as a method to extend the surrogate country method, Sino-EU economic and trade relations will be advanced; otherwise, the relations will be harmed.

Why do you think some countries are reluctant to admit China's market economy status?

First, no consistent concept of market economy exists globally. According to the WTO's General Agreement on Tariffs and Trade, if prices in a country are completely manipulated by the government, the country is defined as a non-market economy. Nowadays, 90 percent of prices in China have been liberalized, so China should not be defined as a non-market economy.

Second, there's no unified definition of a market economy in the United States and the EU. Besides, their standards are often politicized, making the situation even more complicated.

China's market economy, to some extent, is in accordance with those of the EU and the United States because they function well in resource allocation. However, when market failures occur, people's lives are deeply affected. The 2008 global financial crisis, which exposed lots of problems and weaknesses of those market economies, first started in the United States, the most developed market economy in the world. Therefore, China should learn to avoid such problems and establish its own market economy with Chinese characteristics.

A market economy with Chinese characteristics has two sides: on the one hand, we admit the basic functions of a market economy; on the other hand, the government will stand out as a "visible hand" in case of market failures. Both visible and invisible hands are employed in our market economy.

Although China has its own problems and is faced with a slow global economy, it can maintain economic growth of 6 to 7 percent, which will also benefit the global economy.

Since the reform and opening-up policy was implemented in the 1970s, nearly 90 countries have acknowledged China as a market economy, but some countries are still reluctant to admit it in order to restrain China's economic development. Article 15 and the surrogate country method are all methods employed by these countries to restrain China's development.

Do you think the WTO multilateral trading system has been or will be affected by mounting anti-globalization and trade protection?

The rise of trade protectionism happened after the eruption of the global financial crisis in 2008 because some countries tried to protect their own manufacturers by not allowing products made by foreign rivals to enter their domestic markets.

The WTO functions as follows. Firstly, if one randomly violates trade rules,

others can report the violation to the WTO, which can censure the perpetrator and bring it onto the right track. Secondly, if one's behavior goes against the rules, other countries can complain through the dispute settlement mechanism. The defendant must accept the verdict given by the WTO panel.

Among all international economic organizations, the WTO is playing the biggest role in fighting against anti-globalization and trade protection.

China has grown into a core WTO member and will continue to embrace the WTO-based multilateral trade system in the future. Abiding by rules of the system and helping the WTO grow into a better organization is good for the global economic recovery.

Copyedited by Chris Surtees

Comments to dengyaqing@bjreview.com

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