Inside Out

Trade war an opportunity for China to address concerns of mainland-based foreign firms and open up further

Beijing has complied with the letter of its WTO commitments, but it must look at behind-the-border regulations, licences and other barriers

PUBLISHED : Sunday, 01 July, 2018, 3:03pm
UPDATED : Sunday, 01 July, 2018, 8:13pm

The Japanese call it gaiatsu. The Chinese call it wai ya. It is the positive use of foreign pressure to drive domestic reforms that might otherwise be difficult or impossible. Nowhere has it been used more helpfully than in driving trade liberalisation in the face of entrenched domestic lobbies and vested interests.

The Japanese government used the power of gaiatsu to help open up the domestic farm sector, in particular, fiercely protected rice farms. China exploited wai ya more comprehensively when it joined the World Trade Organisation in 2001, using WTO treaty obligations to force the liberalisation of large parts of its tightly controlled state-owned enterprises network. Tariffs were cut and barriers to the entry of foreign companies and their goods were brought down.

Whatever the distastefulness – or inappropriate focus – of Donald Trump’s tariff war with China (and with most of the US’s allies and trading partners), wai ya is being put to powerful use again today. Hence the publication in Beijing late last week by the State Council Information Office of an 18-page audit of “China and the World Trade Organisation”.

Look at the report’s four chapter headings – “China has Faithfully Fulfilled its WTO Accession Commitments”, “China Firmly Supports the Multilateral Trading System”, “China’s Significant Contribution to the World after Accession to the WTO” and “China is Actively Advancing Opening-up to a Higher Level” (the capital letters are the State Council’s, not mine).

Propaganda, yes. But also a calm and meticulous factual response to US government allegations that China conned its trading partners by signing up to a wide range of WTO reforms, used WTO membership to its own advantage, and then systematically failed to reform as promised.

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“Since its accession to the WTO, China has been a strong advocate for free trade. China has comprehensively fulfilled its commitments to the WTO, substantially opened its market to the world, and delivered mutually beneficial and win-win outcomes on a wider scale. Through these efforts, China has lived up to its responsibility as a major country,” says the report. “China’s door will not be closed and will only open up even wider.”

With the plodding meticulous empiricism of an engineer (and China is nothing if not a government of engineers), the report ticks off China’s record of compliance. It reduced average tariffs from 15.3 per cent in 2001 to 9.8 per cent in 2010, and on to 4.4 per cent in 2015, “only 1.5 percentage points higher than those of developed economies such as the US and the EU”. And so on: eliminating import quotas, import licences and import tendering requirements; opening up to foreign investment – in 54 sectors, no less; opening up the services market in 100 subsectors of the 160 subsectors “under the 12-sector WTO classification”.

The report checks off how comprehensively – and conscientiously – China has complied with the letter of its WTO commitments. It makes its point – and misses the point too.

The Trump administration is talking loosely and inaccurately when it claims China failed to live up to its promises. But it is voicing a general complaint that they hoped China would comply with the spirit, and not just the legal letter, of its WTO entrance promises, and – given the huge and growing importance of the Chinese economy – would by now have become an easier and more transparent economy in which to do business.

Look at the World Bank’s “Ease of Doing Business” rankings, and China still sits in an embarrassingly low 78th position. That is better than India (which ranks 100) but attracts criticism nevertheless. First, because India jumped 30 places in the year, from truly dreadful to not quite so dreadful, and because in brutal truth India is not as important as a trade and investment partner, nor does it attract the hopes and aspirations of international companies as China does.

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The State Council report is valuable less because of its point-by-point rebuttal of claims that it has failed to live up to its promises, but more because of evidence that it takes the outside world’s complaints seriously, and its reassertion of commitments to stand by the WTO’s multilateral rules-based system, and to continue liberalisation.

It is also a reminder that US complaints have little to do with 1990s compliance demands, and the more recent recognition that it is behind-the-border liberalisation that stands as the highest barrier to foreign competitors in an open market.

The sins for which China is being attacked involve behind-the-border regulations, licences and other barriers that even today have not been captured by the WTO. It is fair to complain, but unfair to single out China, since no deal has yet been cut in the WTO on such barriers. The US cannot be criticised for pointing fingers, but the truth is that the finger can just as reasonably be pointed back at the US.

The report should give no comfort to Trump in his bilaterally biased tit-for-tat tariff war, but it should give significant comfort to the frustrated and impatient US (and European) companies based on the mainland trying to compete and build their businesses there.

Take William Zarit, chairman of the US Chamber of Commerce in Beijing, who complained in last Saturday’s South China Morning Post : “China is claiming the world championship for globalisation, even while doubling down on shielding domestic industries from foreign competition, especially for industries of the future … Market access remains the main obstacle to US companies.”

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It must surely be everyone’s hope that China is taking advantage of wai ya, not to bow to Trump’s tariff demands, but to take seriously – and open up in response to – the complaints of foreign businesses operating on the ground in China.

Such liberalisation should be multilateral – open to all – and not a set of special deals for US companies, capitulating to Trump’s bullying bilateralism. They should give substance and new momentum to the various podium promises made by Xi Jinping in recent months about further opening up. It seems we are being encouraged to prepare for significant change around November’s China Import Fair in Shanghai. Let us hope wai ya provides substance behind the promising rhetoric.

David Dodwell researches and writes about global, regional and Hong Kong challenges from a Hong Kong point of view