Fifteen Eighty Four

Academic perspectives from Cambridge University Press


Disciplining China’s State Capitalism through International Trade Rules: Regaining the Missed Opportunity

Henry Gao, Weihuan Zhou

China’s state capitalism is one of the most controversial issues in today’s international trade governance. While China has undergone unprecedented market liberalization and economic reforms in past decades, in recent years it has consolidated its state capitalism through reforms of state-owned enterprises (SOEs). The ongoing reforms have strengthened the leadership of the Chinese Communist Party (CCP or Party) in the economy and created some of the world’s largest and most influential state entities. Through SOEs, Chinese leaders have advanced industrial policies and strategic, economic development goals progressively and significantly.

State sectors remain significant in the economies of many countries. However, the Party/State’s intervention in the Chinese market, using SOEs as a principal policy instrument, has provoked unparalleled criticisms by China’s trading partners, largely due to China’s size and growing influence in the global economy. Combating China’s state capitalism and resultant unfair trade practices and impact on foreign economies is at the top of trade policies of the United States and the European Union. Their criticisms have centered on the so-called non-market-oriented policies and practices of China which undermine the proper functioning of the rules of the World Trade Organization (WTO), and the failure of the WTO to push China to make fundamental changes to its state-led growth model. Consequently, they believe that there is a pressing need to update the WTO’s rulebook to provide more tools to constrain China’s state capitalism. These criticisms and proposals, however, are highly questionable.

While China may not have a free market economy, it is not unique: SOEs play a significant role in many economies and regulatory intervention in markets is widespread. The current expansive use of subsidies and other trade and economic instruments for industrial, protectionist or other policy goals in almost all major economies, including through SOEs, is strong evidence.

The WTO does not mandate any particular type of economic and political structure or model of development. Its members are at various stages of economic development, with different economic structures, policy priorities and regulatory regimes. Nor does the WTO require members to change the structure of their markets or patterns of ownership. To enter the WTO, China paid an extraordinarily high price by undertaking extensive and rigorous obligations that go far beyond standard WTO rules. These WTO-plus obligations include some broad commitments of China to restrain the conduct of SOEs and to ensure domestic prices for goods and services are determined by market forces. However, none of these obligations require China to abandon its state sector/entities, industrial policies and subsidies or political system and economic growth model. These obligations are more specific than systemic, focusing on addressing specific issues of the Chinese economic model identified in China’s accession negotiations.

China’s WTO-plus obligations, coupled with the standard disciplines on subsidies, already provide some tools to constrain China’s state capitalism. In short, these existing rules can be used to challenge the market-distortive behaviour and conduct of SOEs, the provision of subsidies to advance industrial policies and strategic goals, and related non-transparent practices of the Chinese government and state entities. While WTO litigation takes time and can induce changes to domestic policies and practices only gradually, over time it can facilitate more systemic changes. For governments concerned about China’s economic system and trade-related policies and practices, it has been a missed opportunity as they have failed to make use of these existing rules. In the absence of a functional Appellate Body, it is now even more difficult for countries like the United States to push China to change behaviour and practices through the WTO’s dispute settlement system.

Whether the missed opportunity can be regained largely depend on how major economies in the WTO would re-invigorate and strengthen the negotiation and dispute resolution functions of the multilateral trading system. Here, one must note that unilateral and confrontational approaches, such as those taken by the United States in the bilateral trade war with China, have failed badly to achieve its intended outcomes.

In contrast, SOE rules developed under regional trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and bilateral treaties such as the China–EU Comprehensive Agreement on Investment (CAI) are widely regarded as the most advanced to date. However, compared with China’s WTO-plus obligations, there rules are not more rigorous or workable and are subject to more exceptions. If these rules are used as a model for multilateral negotiations, it would provide an opportunity for China to soften its existing obligations by seeking to, for example, limit the coverage of state entities and create a range of exceptions that are not available to it under the current WTO rules. China’s recent application for entry into the CPTPP suggests strongly that it is well prepared to meet the “high” standard, likely based on major exceptions that it may obtain from negotiations.

At the end of the day, multilateralism remains the preferred way to engage with China. To use existing rules to challenge China’s state capitalism, WTO members first work to restore a fully functional and binding dispute settlement system. Where new rules are needed, negotiations must target the common problems caused by SOEs or state intervention in markets more broadly rather than just focusing on China-specific issues. In this regard, the recent success of the 12th WTO Ministerial Conference provides some glimpse of hope. Major WTO Members such as the US was able to resolve their differences with China through creative drafting skills such as footnotes, which could serve as useful precedents for future negotiations. Moreover, the fact that China and the US have both been constructively engaged in the negotiations of various joint statement initiatives on issues ranging from services domestic regulation and electronic commerce also provide encouraging signs. WTO Members shall grasp the new window of opportunity to solve the challenges of state capitalism, rather than to miss it again.

Between Market Economy and State Capitalism by Henry Gao, Weihuan Zhou

About The Authors

Henry Gao

Henry Gao is a Senior Fellow at the Centre for International Governance Innovation and Professor of Law at Singapore Management University. He sits on the Advisory Board of the WTO...

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Weihuan Zhou

Weihuan Zhou is Associate Professor and Director of Research at the Faculty of Law and Justice, UNSW Sydney and the Faculty's HSF CIBEL Centre. He is the author of China's Implemen...

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