After 10 years, China’s WTO ride could get bumpier

Long Yongtu

BEIJING,  (Reuters) – Rising trade protectionism  and frustration over its domestic subsidies spell trouble for  China and could lead to more friction within the World Trade  Organization than Beijing has grown accustomed to over the past  decade.

Long Yongtu

On the eve of China accession to the WTO 10 years ago this  December, naysayers warned that the country could falter under  the demands of opening up its economy. Now there is little  debate that it has been a boon in making China the world’s  largest exporter and the second largest trading nation.

But China’s next decade in the trade group could be tougher.  That’s partly because while the country has opened many of its  markets as required under the WTO rules, it still heavily  subsidises key industries.

State spending on clean technologies, which has already  drawn ire from China’s trading partners, could continue rising  after last week’s confirmation by Beijing of a massive  investment plan for “strategic industries”.

That can only lead to increased friction as the global  economy slows and countries scramble to boost exports.

“Some aspects of China’s economic system are fundamentally  inconsistent with the market economy-based principles of the  WTO,” said Wang Jiangyu, a law professor and WTO expert at the  National University of Singapore. “In the first few years, they  (WTO members) could tolerate this, but as China’s trade grows  you will see more and more cases against China.”

Experts say a recent WTO ruling that cheap state-supported  financing and land give an unfair advantage may lead countries  to increasingly resort to anti-subsidy cases against China — a  trade weapon that aims at the heart of China’s state-backed  economic model.

 FIRING AT THE CHINESE
“MOTHERSHIP”

To date, WTO members have used anti-dumping cases to target  China’s trade policies.

That’s relatively easy to do, since China is still  considered a “non-market” economy under the terms it negotiated  in 2001. To build a case, another country can substitute China’s  prices with those of another, often pricier market economy.

That clause — which Beijing sees as unfair — expires in  2016.

But a recent WTO decision said state involvement must be  accounted for in bank financing, land prices and production  input prices.

That means the possible use of a similar tactic in  anti-subsidy cases: using higher third country market rates and  prices to show subsidised pricing.

In essence, China must still answer for its non-market  economy subsidies past 2016.

Chin Leng Lim, a law professor at the University of Hong  Kong, said challenging China on cheap land and financing — when  the government owns all the land and banks — is more intrusive  than going after unfairly underpriced goods. It is firing at the  “Chinese mothership”.

“It’s about saying to China: we don’t like the way you  regulate and control your banks. We don’t like the way you  regulate land. We don’t like the support you give to your  state-owned enterprises. So change all of that,” Lim said.

Anti-subsidy retaliation is already happening, and green  technology is a likely battlefield.

In early November, the U.S. government launched an  investigation into imports of Chinese made solar panels after  U.S. solar companies called for anti-dumping and anti-subsidy  duties. In return, China’s commerce ministry said on Friday it  was looking into U.S. renewable energy subsidies.

“That’s what a trade war looks like, when it is  tit-for-tat,” Lim said. “And it is all happening in and around  anti-subsidy law.”

 CHANGING GOALS       

The man who negotiated China’s entrance into the WTO is  worried about his country’s pledges to liberalise the economy.

“Essentially, after 10 years, it seems China is getting  farther from the WTO,” Long Yongtu said at a conference on the  WTO anniversary in October.

WTO clashes are bound to rise, say trade experts, not only  because trade rules are being used differently, but also because  — as the shift away from the WTO shows — China’s goals have  changed.
Scott Kennedy, director of Indiana University’s Research  Center for Chinese Politics and Business, said now the priority  of China’s leaders is not liberalising the market but boosting  competitiveness by moving up the industrial value chain.

“That is a different mission than what Long Yongtu and his  team were pushing for when they were pushing for liberalisation  to improve the Chinese economy,” Kennedy told Reuters in  Beijing, where he is also visiting professor at the University  of International Business and Economics.

During trade talks in Chengdu, China confirmed to  U.S. officials that Beijing plans to pour $1.7 trillion into a  number of strategic sectors over the coming five years.

While officials promised foreign firms would not be  overlooked in the massive spending spree, foreign governments  may see much of the investment as unfair subsidies for  home-grown champions — many in cleaner and hi-tech sectors.

After a decade, the debate has come full-circle, and more of  China’s exasperated trade partners are likely to head to the WTO  dispute resolution system looking for answers.

Lim, the University of Hong Kong law professor, said it is  much like the debate before 2001, when they were deciding  whether to allow a country that is not a free-market economy  into the WTO.

“The counter argument to that was, how can you call it a  world trade organization if China is not in it? So do we need to  change China’s rules, or do we need to change global rules to  accommodate China?” he said.