On October 14, 2021, Amb. Alan Wolff (former Deputy Director General of the WTO, former Deputy U.S. Trade Representative and now Distinguished Visiting Fellow at the Peterson Institute for International Economic Policy) spoke to the PIIE-CF40 Young Economist Forum on the topic “China in the World Trade System, The Role of China in WTO Reform”. Amb. Wolff’s paper provides an interesting overview of the many areas where China could provide positive leadership at the WTO to achieve meaningful reform. The paper also identifies what China has identified as its priorities for reform, most of which cut against positive leadership. His paper can be found here. Ala Wm. Wolff, China in the World Trading System, The Role of China in WTO Reform, October 14, 2021, https://www.piie.com/commentary/speeches-papers/china-world-trading-system.

Amb. Wolff, when he was Deputy Director General at the WTO made points on the need for reform, key values of the WTO, some of which to be continued would require China to make some important adjustments to its economic system. See November 10, 2020:  The values of the WTO – do Members and the final Director-General candidates endorse all of them?, https://currentthoughtsontrade.com/2020/11/10/the-values-of-the-wto-do-members-and-the-final-director-general-candidates-endorse-all-of-them/. As DDG, Amb. Wolff spoke often on the future of the WTO, reforms needed, and more. He has continued that since leaving the WTO. See, e.g., May 1, 2021:  Alan Wolff’s vision for saving the WTO — aspirational but is it achievable?, https://currentthoughtsontrade.com/2021/05/01/alan-wolffs-vision-for-saving-the-wto-aspirational-but-is-it-achievable/.

Among the values of the WTO identified by Amb. Wolff while serving as DDG were two that remain critical in the continued relevance of the WTO:

“The primacy of market forces — Commercial considerations are to determine competitive outcomes.

“Convergence —The WTO is not simply about coexistence; differences among members affecting trade which deviate from the principles governing the WTO, its core values, are to be progressively overcome.”

These two issues are among the areas where Amb. Wolff identifies the opportunity for China to take an active role in ensuring WTO relevance and WTO reform. But there are many areas where China could be active in a positive maner.

Many of the suggested areas for Chinese action are straight forward. For example, China is not a member of the Pharmaceutical Agreement but is now a very important producer and trader of pharmaceutical products. Joining would be an important step. Similarly, Amb. Wolff urges China to participate in updating the Information Technology Agreement to include medical equipment and eliminate duties on such equipment.

On the negotiating function, Amb. Wolff states,

“There are a number of important opportunities for Chinese leadership in negotiations.

“A positive substantive outcome is necessary in the fisheries subsidies negotiations, which it is hoped will be concluded shortly. China has by far the world’s largest long distance fishing fleet. China’s full and active participation is essential to attaining this objective.

“Another marine issue in which China is prominent is its co-sponsoring with Fiji of an environmental initiative targeting the problem of plastic waste in the oceans. This is a praiseworthy endeavor in which all should join.

“China should also take a lead in re-starting and concluding an Environmental Goods Agreement (EGA).” (pages 10-11).

On the Joint Statement Initiatives, China has the ability to determine the level of ambition in the e-commerce negotiations on issues like privacy, cross border data flow and forced localization of servers. It also is involved in JSIs on Investment Facilitation for Development and on Domestic Regulation of Service. Amb. Wolff notes that China will need to take a position on whether JSIs become part of the WTO acquis or not –

“Any results from the JSIs will add to the world trade rule book and constitute reform. It remains to be seen how valuable these agreements will be, and it is not yet clear how they will be incorporated into the WTO acquis. Either the WTO will be a venue for the negotiation of these crucial open plurilaterals or it will not, and China will have to make a choice as to its position on
the subject. Open plurilateral agreements are essential to the future health of the international trading system.” (page 12)

On WTO reform, both in terms of new rules and restoring the dispute settlement system, Amb. Wolff notes that the two areas will be intertwined and will require addressing “industrial subsidies, state intervention in the economy and technology transfer.” China views these issues defensively which will not help restore the system.

“As a major economy and important stakeholder in the multilateral trading system, China has a pivotal role to play which it should approach positively and constructively – rather than defensively, engaging actively in deliberations on reform. There is a choice between seeing areas of emerging rules as targeting or threatening China’s practices or, more fruitfully, seeing how they can serve the trading system more broadly. Either the WTO will be the venue for setting the rules of engagement or it will be done regionally, bilaterally or unilaterally. It should be in China’s interest to seek resolutions where it has a seat at the table.” (page 13)

On transparency, China will play an important role in whether the WTO 12th Ministerial Conference requires greater transparency and whether Members requires the Secretariat to “independently and aggressively report on all measures affecting trade flow, those that impede trade and those that facilitate it.” (page 14)

Amb. Wolff then addresses several sensitive issues: self-designation of developing country, “market-oriented policies” (what the U.S. would term China’s non-market economy). Amb. Wolff views the self-designation issue as less important for China since China “states that it will accept obligations commensurate with its capacity.” (page 14)

On the question of “market oriented policies,” Amb. Wolff has a long section.

“More serious than the rhetorical issue of whether China is or is not a developing country is the heated discussion over ‘market-oriented policies’. The Riyadh Initiative for the Future of the WTO reached a highly interesting outcome in its November 2020 G20 meeting. The Saudi chair reported that all members agreed to the following list as part of the principles of the WTO under the heading of ‘Rule of Law’:

“o Transparency

“o Non-discrimination

“o Inclusiveness

“o Fair competition

“o Market openness

“o Resistance to protectionism

“o Reciprocal and mutually advantageous arrangements, acknowledging that agreements provide for differential and more favorable treatment for developing economies, including special attention to the particular situation of least developed countries

“The Saudi chair reported that Members could not reach agreement that ‘market-oriented policies’ is a principle of the WTO.

“China defends the role of the state in its economy. However, whether it should be as sensitive as it is to the adoption of this principle is questionable. China already committed in the Working Party Report accompanying its Protocol of Accession that its state-owned enterprises (SOEs) would behave in effect in a market-oriented manner:

“‘44. In light of the role that state-owned and state-invested enterprises played in China’s economy, some members of the Working Party expressed concerns about the continuing governmental influence and guidance of the decisions and activities of such enterprises relating to the purchase and sale of goods and services. Such purchases and sales should be based solely on commercial considerations, without any governmental influence or application of discriminatory measures. . . …

“‘46. The representative of China further confirmed that China would ensure that all state-owned and state-invested enterprises would make purchases and sales based solely on commercial considerations, e.g., price, quality, marketability and availability, and that the enterprises of other WTO Members would have an adequate opportunity to compete for sales to and purchases from these enterprises on non-discriminatory terms and conditions. In addition, the Government of China would not influence, directly or indirectly, commercial decisions on the part of state-owned or state-invested enterprises, including on the quantity, value or country of origin of any goods purchased or sold, except in a manner consistent with the WTO Agreement. The Working Party took note of these commitments.‘

“This commitment already applies to government influence over private or quasi-private enterprises as well, foreign or domestic, where the role of the state is even less overt, because any government intervention that favors national goods, services, or IP, or treats one foreign supplier less favorably than another, violates fundamental and binding WTO non-discrimination rules: National Treatment and the Most-Favored Nation Principle. The hurdle is often not the legal principle involved but adducing proof of the influence.

“China’s Accession Protocol itself, providing other Members with additional flexibilities to restrict imports from China, indicates a belief of the negotiators for China’s entry into the WTO that there would be continuing progress toward China allowing market forces to determine competitive outcomes in its market, to determine investment, and to avoid artificially supporting
its exports.

“The golden rule of the multilateral trading system is that competitive outcomes should be determined by market forces and not state intervention. Without this rule, the system cannot function as intended. As the world’s largest exporting country, China should recognize that this fundamental principle is in its commercial interest. Its enterprises require access to markets around the world. That market forces are to determine competitive outcomes is the basis for the WTO and the GATT before it. Were this precept not accepted and applied, there would no effective alternative but to adopt additional interface mechanisms, far beyond the transitional antidumping and safeguard flexibilities applied to China in the first 12-15 years of its WTO membership under the terms of its accession.” (pages 15-16)(Emphasis added)

Amb. Wolff flags climate change and how WTO Members chose to deal with it as a possible third major area of disagreement, focusing on carbon border adjustment measures.

Amb. Wolff then looks at what the WTO would look like if China’s proposals for reform were adopted. See page 17-19. While some of the proposals are noncontroversial, China argues for self-designation of developing country status, right to have as much state involvement in the economy without WTO scrutiny as a Member wishes, selective reductions in agricultural subsides (US and EU but not China or India), no disciplines on industrial subsidies among others which clearly are contrary to what Amb. Wolff has identified as the necessary course for maintaining WTO relevance.

The paper identifies a series of statements on “What can and should be anticipated going forward with respect to WTO reform, including China’s role in it?” (page 21; nine statements). The list identifies both what needs to be done and what is likely if such actions are not achieved.

“1) Despite the valuable everyday work of the WTO — from standards notifications, assisting developing countries with a wide variety of challenges posed by trade, to trade policy reviews that are among the most civilized interactions of sovereign nations in accepting scrutiny of their policies — absent negotiation of new agreements the WTO will continue to lose credibility. In particular the WTO Members must act to allow their organization to rise to the trade challenges of pandemics and climate change and conclude the fisheries subsidies negotiations. China is central to making the WTO responsive to current challenges.

“2) China is active in JSIs. It should press for open plurilaterals to become a regular and accepted feature of the WTO system.

“3) There will be no restoration of an appellate function for dispute settlement without dealing with issues surrounding China’s trade practices. This will of necessity include addressing substantive rules, and not just how the appellate and panel functions are managed. It will be a difficult negotiation.

“4) The WTO must adopt and implement an explicit rule that market-forces will determine competitive outcomes. China is already pledged to this. This prospective fight can be avoided because it is unnecessary and because it cannot be won by China.7 But then China would have to have its economy be consistent with any resulting new rules that might be constructed. China is not the only economy with state involvement, although it is more pervasive and has more global systemic relevance than is true for any other country. For the sake of the future of the WTO, for the multilateral trading system, this challenge, however daunting, must be met for the WTO to survive as an effective system of rules for global trade.

“5) China, the U.S. and the EU each need to recognize the essential value of the WTO and invest in it accordingly. (This goes for India, South Africa, and others as well.)

“6) De-globalization, were it more than a correction for overly lean and extended supply lines, is not in the interests of any of the WTO Members, least of all, China. It is, avoidable. Re-balancing too far inward, over-emphasizing near-shoring, will hurt all
economies, disproportionately for the largest trading WTO Members. Some shortening of supply lines as a hedge against disruptions can be expected but will be limited by the need to avoid unnecessary costs.

“7) International agreements function on trust. It is up to the Members with the largest trade to increase the level of trust in the system. Trust is not created by stipulating it; it must be earned by experience. To say that there is a trust deficit between the two
largest trading nations would be a gross understatement. Within the WTO, it is time to consider how they can engage in putting into place confidence-building measures.

“8) If the WTO is not able to function, regional agreements will be where serious trade negotiations take place. This will be against the interests of all, including the big three.

“9) China needs to become an effective champion in the cause of preserving and enlarging the scope and effectiveness of the WTO. A major objective of China’s national interest must remain integration into, not retreat from, the world economy.
This can only be achieved through investing in the multilateral trading system. “

“7 Two distinguished academics, Mavroidis and Sapir, have written that the WTO Members must reinforce the
WTO’s fundamentals, which means market-based trade. They say that China must evolve its system to be
compatible. There is little belief in academia that this will occur. It does not seem to be the direction of change in
China at present.” (pages 21-23)(Emphasis added)

Amb. Wolff adds “A cautionary note” several paragraphs of which are copied below

“The life span of any trade agreement, including the WTO acquis, depends on the underlying evolution of the commerce of the parties toward greater openness. If there is stasis, or retreat from openness, then the duration of the agreement will be short.

“The WTO is about convergence not coexistence. That is why transition periods exist to deal with differences rather than permanent exclusions. The rules emerging from a process of ‘WTO reform’ will either trend toward reinforcing convergence or increasing the use of interface mechanisms, the safeguards against governmental measures that distort the market. There is no middle ground if the WTO is to be effective. What we do not know is how long the multilateral trading system can endure if convergence is not going to take place.” (page 24)(Emphasis added)

Comments and Conclusion

Trade and the WTO have obviously been highly beneficial to China and to many other Members. Nonetheless, China has been working hard not to have its economic system evolve to a market-based one. It has generally not pursued liberalization that benefits all versus favoring China. It insists on coexistence vs. convergence. It uses the consensus system to prevent evaluation of its practices which distort trade It has limited transparency of its actions and has engaged in actions against individual Members that are retaliatory and coercive. As the world’s largest exporter, China has a critical role in global trade. But the dangers Amb. Wolff has outlined in his speech where market principles and convergence are not the core values are manifesting themselves in the world marketplace as countries look for alternative approaches to deal with China’s trade distortions.

Amb. Wolff’s speech outlines a number of ways that China can improve the functioning of the WTO and exhibit leadership in WTO reform. His speech is an important one which hopefully has had a receptive audience in China. Unfortunately, while there are some identified actions that China may take, it is unlikely that China will do anything to address the critical differences that its economic system poses to the survival of the global trading system.