China in the World Trade Organisation
Since joining the WTO, China has formally fulfilled many of its accession obligations, drastically increased its economic power and risen to become the world’s leading exporter of goods. German companies and consumers have strongly benefited from these developments.
Sluggish Enforcement of WTO Rules
According to its WTO accession protocol, China is to be treated as a market economy since the end of 2016. However, the widespread expectation that the country would indeed develop into an open and mainly market-based economy has not been fulfilled. The Chinese government expertly uses the room for manoeuvre offered by WTO rules to serve its advantage and often only does the minimum to fulfil obligations (e.g. when notifying trade policy measures such as new subsidies) or to advance negotiations. The country has still not made an acceptable offer to join to the Government Procurement Agreement (GPA) as announced when it joined the WTO some 19 years ago. Moreover, the Chinese government still exerts excessive influence on economic activities for example through price controls, subsidies, judicial intervention and management of market activities of state-owned enterprises and of market shares.
99 of the 100 largest publicly traded companies in China are state-owned. Many WTO Members regularly use trade defence instruments to protect their own markets from dumping or unfairly subsidised goods from China with the help of tariffs and quantitative restrictions. As of July 2021, 47 complaints have been filed against China. This number is only higher for the EU and the United States. On a positive note, the Chinese government largely has complied with the arbitration rulings.
China: A Pillar of Multilateralism?
In the public debate on the modernisation of the WTO, China likes to present itself as a pillar of multilateralism as well as free and fair trade. The government is unilaterally shifting the blame for the current WTO crisis onto the United States. Indeed, the Chinese position was strengthened in September 2020 by a WTO decision in which an expert panel judged the U.S. punitive tariffs to be a violation of WTO rules. But even this cannot distract form fundamental problems: on one hand, China is considered a developing country in the WTO, which means that it enjoys many exceptions to WTO rules. Beijing vehemently rules out the demand to abandon this status.
However, this undifferentiated status seems less and less justified for a country that officially maintains a military budget of around 180 billion U.S. dollars, wants to invest 1 trillion U.S. dollars globally in infrastructure projects as part of the Belt and Road Initiative, invests in technology companies worldwide as part of the industrial policy plan Made in China 2025, or subsidises key industries in its own country in the triple-digit billion range. On the other hand, China also rejects proposals for greater transparency (e.g. sanctioning for violating notification obligations) or clear rules for dealing with state-owned enterprises within the WTO.
Indeed, in its WTO reform initiative of May 2019, China proposed expanding the range of recognized subsidies for state-owned enterprises and to recognize state-owned enterprises as equal market participants. Regarding the issue of subsidies, Beijing points to the agricultural sector and calls for greater opening of the markets of industrialized countries. But the main problem in China is subsidies in the industrial sector. Even in areas such as chemicals, where Chinese companies are already among the world market leaders, China rejects participation in tariff reduction initiatives.
What Needs to be Done
In its policy paper on China (January 2019), the BDI made it clear to what extent competitive conditions and market access in China are restricted by the strong role of the state in the Chinese economy. The BDI called upon China to considerably reduce the share of state-owned enterprises, as well as reduce industrial subsidies and end to favouritism of state-owned enterprises, e.g. in public procurement. China is one of the most isolated markets for Internet-based platform providers; digital protectionism due to localisation constraints should come to an end. German industry advocates a binding market opening, e.g. through the abolishment of joint-venture requirements, significant reduction of the negative list for foreign investment and accession to the GPA. German industry also expects more meaningful offers by China in the negotiations for an EU-China investment agreement, both in terms of investment protection and market access for investors.
As far as the WTO is concerned, the BDI supports the broad and inclusive modernisation approach advocated by the EU. All main functions of the WTO must be reformed, allowing the organisation to continue to serve as central mechanism for the development and enforcement of international trade rules. For example, BDI supports the proposal of the Trilateral Initiative (EU, Japan, U.S.) to regulate state subsidies for industrial goods and their exports more precisely. China must play a constructive and responsible role in the reform process – one that manifests itself in concrete steps. China has become a dominant trade power and the world's second-largest economic power behind the U.S. It should thus no longer hide behind the undefined status of a developing country, which addresses nations with a considerably lower development level and per capita income. Otherwise, important Members might further reduce their engagement in the WTO and weaken multilateralism in the long term. This would ultimately serve the interests of neither Europe nor China.