The Debate Over China and Market-Orientation at the WTO

During the Trump administration, the U.S. government raised the issue of the role of the state in the Chinese economy and the implications for how China fits within the world trading system. The administration also started a broader discussion of market orientation as a principle at the WTO. This post summarizes the Trump administration's actions and the reactions of various WTO Members, and then briefly discusses the prospects for this issue under the Biden administration.

Targeting China and Its Place in the WTO

Under Trump, the U.S. government took a number of actions against China's trade practices. It did so unilaterally, bilaterally, plurilaterally, and multilaterally at the WTO.

The Trump administration began with unilateral actions. In March of 2018 the Trump administration released its Section 301 report on "China's Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation." The findings in this report became the basis for the U.S. imposition of tariffs on China, which triggered a U.S.-China trade war and led eventually to the bilateral "Phase One" trade agreement.

Then in May of 2018, the United States, the European Union and Japan met outside of the WTO context to discuss various issues related to non-market oriented countries, including specific issues such as industrial subsidies and state-owned enterprises. Among other things, they agreed to “find effective means to address trade-distorting policies of third countries.” This effort did not mention China by name, but it was widely perceived as being an effort to address Chinese trade practices.

Soon after this meeting, the United States brought the discussion into the WTO. In July of 2018, it submitted a communication entitled "China's trade-disruptive economic model," along with USTR's "2017 Report to Congress on China's WTO Compliance." The first communication covered the following issues: "Non-Market Oriented Conditions Set by the Government and the Party"; "Non-Market Allocation of Resources"; "Costs to WTO Members of China's Economic Model"; and "Benefits to China of its Economic Model." These two documents were discussed at the General Council meeting of July 26 (WT/GC/M/173). (The full U.S. statement at this meeting is here).

The United States began the discussion with criticism of China’s trade protectionism, as follows (paras. 6.2-4):

Few issues were as critical to the future viability of the institution as the economic system embraced by China. … the goal was not to upset or provoke but to shed light and perhaps even educate. … the most critical issues facing the WTO membership was China's failure to fully embrace the open, market-oriented policies on which the institution was founded. Despite China's repeated portrayal of itself as a staunch defender of free trade and the global trading system, China was in fact the most protectionist, mercantilist economy in the world. …

The United States then explained the purposes of its effort:

6.25. First, the United States wanted to ensure that Members truly understood that change was necessary if the WTO was to remain relevant to the international trading system.

6.26. Second, the United States wanted to make clear that the best solution from a WTO perspective was for China finally to take the initiative to fully and effectively embrace open, market-oriented policies like other WTO Members. As the United States had explained during China's recent trade policy review, the WTO itself did not currently provide the tools needed to bring about that change. If the necessary change was to take place, it would be up to China.

The Chinese reaction to this direct criticism was not surprising, starting off this way:

6.27. The representative of China said that the remarks by Ambassador Shea had made the air smell like gunpowder in the Council room. …

Broadening the Debate to Market-Orientation More Generally

Following this meeting, the Trump administration modified its approach by broadening the debate to non-market practices more generally. At the December 2019 General Council meeting (WT/GC/M/181), it put the following item on the agenda: "Challenges Posed to the WTO by Non-Market Policies and Practices." (The full U.S. statement is here). China was not explicitly mentioned, but given the previous U.S. submissions, it was clear who the main target was. At this meeting, the United States highlighted the importance of resolving the “challenges” at the WTO: "The issue was the challenges posed by non-market policies and practices to the WTO. The distortions caused by non-market practices threatened the goals Members shared for a free, fair and mutually advantageous trading system. Non-market practices in which governments intervened to distort competition and drove preferred outcomes to benefit certain domestic actors undermined the public's confidence in the WTO." (Para. 12.2) It further stated that: "Members needed to return the institution to its core mission of promoting fair, market-oriented outcomes. … In sum, the current challenges posed to the WTO by non-market policies and practices called for Members to recommit the WTO to promoting a world trading system based on open, market-oriented policies." (Paras. 12.8-10)

In reaction, China tried to turn the debate back to the United States: "For China, it was the ban of foreign products and companies from normal trade under the disguise of national security without any substantive proof. Reference had also been made to distortion of trade – which for China was the blatant disregard of the WTO rules and one's own commitments and the unilateral raising of tariffs." (Para. 12.12) More generally, it noted that "[e]very Member had its unique economic system and no one should have a monopoly in determining what a market economy was and was not." (Para 12.13)

In February of 2020, the United States then submitted a communication entitled "The importance of market-oriented conditions to the world trading system," in the form of a Draft General Council Decision, in which it put forward a number of elements that it said were "important so that market-oriented conditions exist for market participants." (One example: "decisions of enterprises on prices, costs, inputs, purchases, and sales are freely determined and made in response to market signals").

The United States put this communication on the agenda of the March 3, 2020 General Council meeting (WT/GC/M/182). (The full U.S. statement at this meeting is here). In setting out its Draft Decision, the United States said: "if workers and businesses were subject to market constraints and disciplines, it was fundamentally unfair to force them to compete with another Member's enterprises that were not subject to those same constraints and disciplines"; "[f]or the United States, the WTO was and should be a place where countries came together to work towards developing and enforcing rules that promoted the common goal of free and fair trade on the basis of openness and market principles"; "[a] shared commitment to open, market-oriented policies across the WTO membership was critical to restoring and building confidence in the organization as a defender and promoter of free and fair trade"; and "[t]he absence of market-oriented conditions in one or more WTO Members could have devastating consequences for others." (Para. 9.5-9)

The reaction of other WTO Members varied. On the more supportive side, Canada said it "understood the motivation behind the proposal and agreed with the principle that the world trading system should be based on open, market-oriented policies" (Para. 9.13); Japan said the "proposed elements comprised necessary pre-conditions for free and fair multilateral trade which heavily depended on the functioning of the price adjustment mechanism in an efficient market" (Para. 9.14); Brazil "agreed with the United States that it was essential that market-oriented conditions prevailed in Members' market in order to guarantee a level playing field" (Para. 9.17); Colombia said it "shared the principles mentioned in the proposal and had always based its participation in international trade on them" (Para. 9.18); Australia "shared the view that the WTO represented a fundamental commitment by Members to an open trading environment underpinned by market-oriented principles" (Para. 9.24); and the European Union said it had "repeatedly expressed its concerns with non-market-oriented policies and practices that had resulted in damage to the world trading system and a lack of level playing field" (Para. 9.25).

Other Members reacted more skeptically. Nigeria "had concerns on the likely scope of application of a draft decision and its potential implication on the rights of a State to regulate economic activities within its sovereign territory especially during market failures" (Para. 9.22); South Africa noted that "[a]lmost all WTO Members had mixed economies where Governments intervened in the economy or had State-owned enterprises which carried out specific functions to achieve a developmental mandate" (Para. 9.29); Pakistan said "it was ironic that while Members debated market orientation, they were contemplating regulations in the wake of a pandemic that threatened to have a lasting impact on the global economy," and also that: "Market-orientation was an ambiguous concept. Pakistan asked whether there was such a thing as a free market and whether any country could claim to have always been a completely free market economy" (Para. 9.41); Russia said "[t]here was always a certain degree of state regulation and intervention in the economy even if policies were generally market-oriented" (Para. 9.47); and India said: "The debate over market-versus-State had been settled a long time ago and State intervention in economic activities occurred in every country of the world, without an exception." (Para. 9.56)

China spoke last, noting its past "debate" with the United States on the issue, and stated: "whatever development path a Member could choose, whatever model a Member could adopt for its own economy, it was entirely up to that Member, and the WTO was in no position to interfere with that decision." (Para. 9.64) In response to a follow-up comment from the United States, China added that it "did not want to discuss the issue of market economy and did not think that the WTO had the mandate to do that." (Para. 9.68)

The next development was in July of 2020, when Brazil joined the United States in stressing the importance of market-oriented conditions for the world trading system. Brazil and the United States submitted a joint statement on the issue that mostly mirrored the Draft Decision previously offered by the United States (although it did add this statement: "We recognize the importance of a Member's right and ability to regulate in the public's interest"). This joint statement was discussed at the July General Council meeting, with governments reacting in roughly the same way. (The full U.S. statement at this meeting is here).

Then in September of 2020, Japan joined the effort, and signed onto a joint statement with Brazil and the United States. This statement was discussed at the October and December General Council meetings. (The full U.S. statements at these meetings are here and here.)

What will Biden/Tai Do?

The election of Joe Biden as president has left some general uncertainty about the U.S. approach to addressing China's trade practices, and also specific uncertainty about the push from the United States and its allies on the issue of market-orientation at the WTO. Biden's U.S. Trade Representative, Katherine Tai, has a good deal of experience with trade issues related to China, but so far has not tipped her hand on an overarching strategy going forward, or what she will do with the policies leftover from the Trump administration. The broader issue of how the Biden administration will approach China's trade practices remains unresolved, as is the narrower one of how China's economy fits within WTO norms.

At the first several General Council meetings of 2021, the United States did not put the issue of market orientation on the General Council agenda. It is possible that the Biden administration will emphasize other issues instead; it is also possible that they will continue to push this issue, but use a different approach. One thing missing from the Trump administration's efforts was specific proposals. For example, a prominent issue raised in this context was the role of state-owned enterprises in China's economy (see para. 1.6 here: "there also are serious concerns over how [the Chinese government/CCP] exercise influence over the operations and investment decisions of state-owned enterprises (SOEs)." However, the Trump administration did not follow up with any new rule proposals or specific actions on SOEs at the WTO (there are new rules in this area in the "Phase One" trade agreement though).

It is worth noting that there are provisions in China's accession working party report that address this issue:

46. The representative of China further confirmed that China would ensure that all state-owned and state-invested enterprises would make purchases and sales based solely on commercial considerations, e.g., price, quality, marketability and availability, and that the enterprises of other WTO Members would have an adequate opportunity to compete for sales to and purchases from these enterprises on non-discriminatory terms and conditions. In addition, the Government of China would not influence, directly or indirectly, commercial decisions on the part of state-owned or state-invested enterprises, including on the quantity, value or country of origin of any goods purchased or sold, except in a manner consistent with the WTO Agreement. …

As a more concrete strategy, the Biden administration might consider raising these obligations and explaining its view of how exactly China is in violation and what actions are needed to come into compliance. It is possible, however, that the administration considers this obligation to be insufficient and would prefer to push, alone or with allies, for broader provisions on SOEs to apply to China, either at the WTO or elsewhere.

While the Biden administration has been quiet at the WTO with regard to China trade issues, it has been working with allies outside of the WTO to address market-distorting practices. In late May, the G7 discussed the issue briefly in their Trade Ministers’ Communiqué, along with other trade related issues. In the coming months and years, we will see how the Biden administration decides to address these issues and whether it will bring the conversation back to the WTO.