Many problems plague China's 'market-socialist' economy, especially the inefficiency of state-owned enterprises, the large number of non-performing loans held by the four big state-owned banks, high unemployment and widespread corruption. If the leadership's goal is to achieve sustainable growth, those problems must be tackled. What is needed is institutional change that expands the role of the market and reduces the misallocation of resources endemic to the state sector. China's leaders have come to accept the growing importance of the non-state sector. Economic growth rates are much higher in the market-oriented coastal areas than elsewhere in China. According to Long Yongtu, vice- minister of foreign trade, 'China's economy must become a market economy in order to become part of the global economic system.' Private ownership, the sine qua non of a free market, is now explicitly sanctioned in China's constitution, although it is not afforded the same protection or status as state ownership. China's accession to the World Trade Organisation in December 2001 was seen as an opportunity to expand the private sector and improve long-term growth. However, under pressure from the United States and the European Union, China committed itself to 'WTO-plus' rules, which may slow its progress towards a free-market economy. According to Nicholas Lardy, the author of Integrating China into the Global Economy, the terms that China agreed to with regard to safeguards and anti-dumping are 'more onerous than those accepted by any other member''. In China's protocol of accession, the transitional product-specific safeguard clashes with normal WTO practice. Instead of having to show 'serious injury' from Chinese exports, members need show only 'market disruption'. US trade law defines market disruption as an increase in imports that is 'a significant cause of material injury, or threat of material injury, to the domestic industry'. When a WTO member proves that low level of injury, it may single China out and use a quota or other protective measure to slow the entry of Chinese goods into the domestic market. In a worst-case scenario, Lardy warns: 'China could face a quantitative restriction on its exports of a product for 12 years with no liberalisation over time on the restriction. These restrictions would start in one country but would probably quickly cascade to all significant markets. They could be imposed even if the increased inflow of Chinese goods were only displacing goods from other countries and when only the country initially imposing the safeguard had carried out an investigation establishing the existence or threat of material injury to the domestic industry.' Until the end of 2008, China will also be subject to a special textile safeguard, which allows WTO members to impose a limit of 7.5 per cent a year on the growth of textile and apparel imports from China. Under the WTO Agreement on Textiles and Clothing, all quantitative restrictions on textiles and apparel were to end next year. Such anti-liberal trade practices unfairly discriminate against China and slow its progress towards becoming a full-fledged market economy. China has also agreed to be treated as a non-market economy (NME) for 15 years after joining the WTO. In doing so, it faces the risk of being shut out of those markets in which it has a comparative cost advantage. Although the US has criticised China for not moving fast enough towards a market economy, the prolonged use of NME methodology in anti-dumping cases fails to recognise the large steps China has taken to liberalise prices and harms the private sector. There is a strong case for dropping the NME classification altogether, rather than extending it for 15 years. Under the Agreement on Subsidies and Countervailing Measures, China agreed to forego being classified as a developing country and, thereby, became ineligible for favourable treatment regarding subsidies associated with privatisation. China will not be allowed to treat debt-for-equity swaps as 'non-actionable' subsidies; newly privatised firms therefore face the possibility of countervailing duties. The west's insistence on this issue undermines the privatisation process in China and clashes with the primacy of property in a market-liberal order. The US in particular should not attempt to exploit the WTO-plus measures for its own advantage. Engagement is a win-win strategy and should be energetically implemented. The key challenge will be for the WTO to adhere to the rules for a liberal international order and to keep markets open. If developed countries try to protect their own markets and to stem China's growth, economic freedom will be eroded and both China and the west will lose. James Dorn is a China specialist at the Cato Institute in Washington
