Nonmarket economies

WTO Reform – Addressing The Disconnect Between Market and Non-Market Economies

The GATT and the WTO were created by market economy countries, and the rules embodied within each reflect an effort to identify principles and rules that would promote reciprocal trade among its members. While there have long been members of the GATT and now the WTO that have not been market economies in fact, the problem of the distortions that occur to the global trading system from state-directed or non-market economies has come into sharp focus in the last twenty years with the accession and rapid growth of China and the accession of a number of other countries or the emulation of China’s model by existing members with substantial state direction, state ownership of business, state planning, forced technology transfer and massive subsidization.

While a number of WTO members have been concerned about the disconnect between the WTO rules-based system and such non-market economies where various conduct is not actually addressed by WTO rules, the United States has led the effort to obtain a reaffirmation of the market-oriented nature of the WTO and the need to address the distortions that exist but are not addressable under the WTO.

The European Union, Japan and the United States since the 11th Ministerial Conference in Buenos Aires in 2017 have been working on addressing the massive industrial subsidies, challenges from state-owned or invested enterprises and forced technology transfer. The recent joint declaration with identified changes to the Agreement on Subsidies and Countervailing Measures was the subject of a prior post. See https://currentthoughtsontrade.com/2020/01/14/wto-reform-joint-statement-of-january-14-2020-of-japan-the-u-s-and-the-eu/

The U.S. Raises the Issue of Nonmarket Economies in 2018

But the United States has led on the broader issue. The U.S. teed the issue up in a presentation to the General Council during the summer of 2018 with the submission of a fourteen page paper. China’s Trade-Disruptive Economic Model, Communication from the United States, WT/GC/W/745. The paper was broken down into four sections. The first dealt with “non-market oriented conditions set by the government and the party” looking at the objectives of control and at control at the firm level. The second section deal with “non-market allocation of resources” and covered non-market allocation of key means of production, industrial policies, and the use of law as an instrument of the Party State. The third section reviews the “costs to WTO Members of China’s economic model” covering topics like non-reciprocal and protected markets, excess capacity created by the Chinese model and the extensive use of forced technology transfer. The forth section looked at “benefits to China of its economic model”. The U.S. paper and the additional document submitted by the U.S. (2017 Report to Congress on China’s WTO Compliance) are included below.

WTGCW745

WTGCW746

While the effort of the U.S. has been vigorously opposed by China and other like minded Members of the WTO, to the United States and other major players like the European Union and Japan, there cannot be meaningful WTO reform without addressing the distortions flowing from economic systems that are not premised on market principles or where the state has a large role.

The March 3-4, 2020 General Council Meeting

The first meeting of the WTO’s General Council in 2020 will be on March 3-4 (an informal meeting was held on February 21st). On the agenda will be the United States paper in the form of a draft General Council Decision titled “The Importance of Market-Oriented Conditions to the World Trading System”. WT/GC/W/796. The text is copied below:

“THE IMPORTANCE OF MARKET-ORIENTED CONDITIONS TO THE WORLD TRADING SYSTEM DRAFT GENERAL COUNCIL DECISION

“Communication from the United States

“The following communication, dated 20 February 2020, is being circulated at the request of the delegation of the United States.


“The General Council decides to adopt this declaration on the importance of market-oriented conditions to the world trading system.

“The General Council recalls that the World Trade Organization (WTO) was established to promote Member economies’ participation in a world trading system ‘based on open, market-oriented policies and the commitments set out in the Uruguay Round Agreements and Decisions’.1

“The General Council also recalls that the establishment of the WTO reflected Members’ ‘desire to operate in a fairer and more open multilateral trading system for the benefit and welfare of their peoples’ and, during the period of time during which the Uruguay Round was being negotiated, ‘significant measures of economic reform and autonomous trade liberalization were implemented in many developing countries and formerly centrally planned economies’.2

“The General Council expresses its serious concerns with non-market-oriented policies and practices that have resulted in damage to the world trading system and lead to severe overcapacity, create unfair competitive conditions for workers and businesses, hinder the development and use of
innovative technologies, and undermine the proper functioning of international trade.

“The General Council affirms that market-oriented conditions are fundamental to a free, fair, and mutually advantageous world trading system, to ensure a level playing field for Members’ workers
and businesses.

“The General Council affirms Members’ citizens and businesses should operate under market-oriented conditions and notes the following elements indicate and are important so that market-oriented conditions exist for market participants:3

“i. decisions of enterprises on prices, costs, inputs, purchases, and sales are freely determined and made in response to market signals;

“ii. decisions of enterprises on investments are freely determined and made in response to market signals;

“iii. prices of capital, labor, technology, and other factors are market-determined;

“iv. capital allocation decisions of or affecting enterprises are freely determined and made in response to market signals;

“v. enterprises are subject to internationally recognized accounting standards, including independent accounting;

“vi. enterprises are subject to market-oriented and effective corporation law, bankruptcy law, competition law, and private property law, and may enforce their rights through impartial legal processes, such as an independent judicial system;

“vii. enterprises are able to freely access relevant information on which to base their business decisions; and

“viii. there is no significant government interference in enterprise business decisions described above.

“The General Council agrees to reaffirm Members’ commitment to open, market-oriented policies in order to achieve market-oriented conditions that are critical to ensure a level playing field for workers and businesses and a fairer and more open world trading system that benefits their peoples.

“1 Marrakesh Declaration of 15 April 1994, fifth preambular paragraph.
“2 Marrakesh Declaration, paras. 2 and 4.
3″ This decision is without prejudice to the rights or obligations of any Member under the Marrakesh Agreement Establishing the World Trade Organization.”

Conclusion

While a lot of attention remains on reform to the dispute settlement system to permit a return to a two-tiered level of review of Member actions, there has been a growing recognition that significant reform is needed for the WTO to restore its relevance in a rapidly changing global environment. While reform needs to address updating of rules to cover new areas and making existing rules more effective, there cannot be meaningful reform without addressing the disconnect between Members who operate on market economy principles and those that don’t.

While it is highly unlikely that in a consensus based system Members with economic systems that are not premised on market principles will agree to address the massive distortions their economic systems create, the future of the WTO depends on finding ways to address the differences and distortions. Look for a contentious General Council meeting on this topic.