On Friday, the Trump administration ramped up tariffs on Chinese products, the latest in U.S. potshots against China’s trade practices. But there’s a deeper trade rift that may have more far-reaching consequences if neither China nor the Trump administration changes course.
The World Trade Organization is withering into irrelevance, its rules largely unchanged since the 1994 reform round. Countries instead negotiate Preferential Trade Agreements (PTAs) or bilateral/multilateral agreements that undermine the WTO’s most-favored-nation benefits — and make it less costly to exit the WTO. The United States continues to block new appointments to the WTO’s Appellate Body, which could threaten the WTO’s capacity to resolve trade disputes.
The ball appears to be firmly in China’s court. Trump’s unilateral trade moves are an effort to compel China and others to make concessions. Chinese leaders remain unmoved, and China has its own beef with the WTO.
In December 2016, China filed an explosive dispute insisting the European Union and the United States recognize China has become a market economy. If the United States wins, China will feel that a “promised” expiration of China’s exceptional nonmarket status has been breached. If China wins, neither the United States nor Europe is likely to curtail the use of safeguards, and support for the WTO may be further eroded.
In a recent trip to Hong Kong, Shanghai and Beijing, I asked international legal and trade scholars about three possible scenarios for China and the WTO. Here’s what I found:
Scenario 1 — Not yet ready to lead
Most Chinese scholars echoed Communist Party views that WTO membership has been key to China’s economic boom, that Beijing does not want the WTO to fail and that China constructively engages WTO procedures and initiatives.
The idea that leadership may involve addressing concerns of others, sometimes at the expense of oneself, did not resonate. Nor did scholars seem concerned that in insisting that China is now a market economy while refusing to address the problems generated by China’s economic rise, Beijing may be seen as pressing its advantage rather than leading the world to new heights.
Scenario 2 — Starting to lead, perhaps sooner than China wanted
In the WTO context, “starting to lead” would require mobilizing support for a WTO constitutional bargain that includes new thinking. A new comprehensive agreement could perhaps equalize trade concessions (by ceding some of the extra benefits that early joiners hold), recognize that countries can be both poor and industrially advanced at the same time, and address U.S. and E.U. concerns about intellectual property and dying industries, as well as the BRIC (Brazil-Russia-India-China) trade and development agenda.
Yet no scholar I spoke to seemed to think that a new constitutional bargain was necessary or that China had a role to play in crafting a new constitutional bargain. The implication is that China believes it wins most by pressing its version of the 2001 accession agreement, wherein China was “promised” market economy status if it adopted internal reforms.
Scenario 3 — Pursuing alternatives to the WTO
Few scholars would speak to specific alternatives to the WTO. But China is concurrently pursuing a number of other options that neither protect nor bolster the WTO’s rules-based approach to trade.
1) Promoting regional trade: China has been working to build Japan-China-Korea cooperation and perhaps complete a long-discussed PTA. Beijing also plans to finalize a Regional Comprehensive Partnership Agreement that would include ASEAN countries and six other Asian Free Trade Agreements signatories. These agreements would comprise about a fifth of the world’s trade and promote Chinese security objectives. But like all PTAs, they prioritize member over most-favored-nation trade and lack a formal dispute settlement system.
2) Building global partnerships: China’s Belt and Road Initiative knits together infrastructure, investment and relationships. Experts, world leaders and the IMF worry, however, that the Belt/Road looks a lot like political tutelage with the intended goal of generating economic dependency — these projects often involve significant debts owed to China.
3) Free trade zones (FTZs): In April 2018, Chinese leaders announced the Hainan free trade zone and accompanying port, the latest in a dozen or so FTZs. Beijing hopes to attract foreign investment in these zones with more liberal investment rules, yuan convertibility and preferential customs policies. Critics, though, point out that Beijing’s “negative lists” limit the scope of foreign investment.
None of these plans has been fully articulated or realized. But with this alternative strategy — which many Chinese scholars take as evidence of global leadership — Beijing does not need to make saving the WTO a top priority.
So what is China’s WTO strategy?
The Belt and Road Initiative has emerged as President Xi Jinping’s signature project, crowding out much of the discussion on the WTO. Not one expert I spoke with was worried that China would suffer in any meaningful way from U.S. tariffs or the WTO’s collapse.
There is some sense, however, that WTO membership is valuable to China’s reputation. China wants to be seen as a constructive player in the global economy, and the WTO offers a way for China to demonstrate its willingness to respect international law.
Chinese scholars took at face value Chinese government statements that profess a commitment to win-win economic arrangements and the multilateral trading system, and would not engage in inferences about whether China’s intra-WTO inaction and its activities to build trade relations outside of the WTO might speak louder than words.
Chinese leaders may make small concessions to flatter Trump and buy time. But even in the context of a multilateral institution that has served China’s economic interests, I found little to suggest China will step up to protect the WTO — or replace the U.S. as a leader of the multilateral order.
Karen J. Alter is professor of political science and law at Northwestern University, where she co-directs the Buffett Institute’s Global Capitalism and Law Research Group.