How the WTO Changed China

How the WTO Changed China

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When China joined the World Trade Organization in 2001, the event was hailed as a pivotal development for the global economic system and a bold marker of the country’s commitment to reform. It took 15 long years of negotiation to reach the deal, a reflection of the challenge of reconciling China’s communist command economy with global trading rules and of the international community’s insistence that China sign on to ambitious commitments and conditions. U.S. officials had high hopes that those terms of entry would fix China on the path of market liberalization and integrate the country into the global economic order. U.S. President Bill Clinton called Beijing’s accession to the WTO “the most significant opportunity that we have had to create positive change in China since the 1970s” and argued that it would “commit China to play by the rules of the international trading system.”

Chinese President Jiang Zemin and Chinese Premier Zhu Rongji evinced similar resolve in securing WTO membership. In their view, joining the organization was not only appropriate for a country of China’s size and economic potential; it would also force China to move forward on necessary domestic reforms. Chinese state media noted at the time that entry into the WTO would “expedite the process of China’s reform and opening up”; spur the “cleaning up of laws, regulations, and policies”; facilitate the establishment of an “impartial, efficient judicial system”; and bring much-needed external competition to the country’s inefficient state-owned enterprises (SOEs). China accepted far more stringent terms than any other new member before or since. These commitments included not just large cuts to tariffs on imports into China but also a sweeping overhaul of domestic institutions and policies to allow market forces freer rein within the economy. Beijing pledged to improve the rule of law by strengthening courts and increasing protections of intellectual property rights, to allow firms greater autonomy and limit the government’s interference in their affairs, and to revamp regulation to make governance more transparent.

Such commitments generated widespread anticipation that China’s accession to the WTO would bring about major change and tie a rising China more tightly to global economic networks and institutions. But these hopes now seem like wishful thinking. In 2018, the office of Robert Lighthizer, the U.S. trade representative, proclaimed that the United States had “erred in supporting China’s entry into the WTO,” arguing that China’s “state-led, mercantilist trade regime” was “incompatible with the market-based approach expressly envisioned by WTO members.” Kurt Campbell and Ely Ratner, two former Obama administration officials, claimed in these pages in 2018 that “the liberal international order has failed to lure or bind China as powerfully as expected.” By most accounts, in Washington and more broadly, China’s economic model has not turned toward market liberalism since 2001 but instead consolidated into a form of state capitalism that Beijing hopes to export globally. WTO membership, the new consensus goes, has allowed China access to the American and other global economies without forcing it to truly change its behavior, with disastrous consequences for workers and wages around the world. China seems to pay lip service to international norms and still play by its own rules, taking advantage of loopholes and naive policymakers abroad.

But as China fulfilled its WTO commitments on schedule, pro-liberalization forces lost momentum; swiftly meeting the terms of China’s accession had the effect of sapping the urgency of reform. Without the outside pressure that WTO entry first provided in 2001, it was difficult for reformists in Beijing to keep up the push for greater liberalization. Instead, rival agencies that oversaw industrial policy gained the latitude to expand their influence.

This shift in bureaucratic power dovetailed with a change in leadership in 2003 from Jiang and Zhu to President Hu Jintao and Premier Wen Jiabao. The leaders differed less in their essential views on reform than in their abilities to control the state bureaucracy. Hu and Wen did not have their predecessors’ political strength to discipline the state. Wen, in particular, had spent the majority of his career within the central government. He rose to the top with support from networks deeply embedded in the Beijing bureaucracy. Although this milieu might have given him some advantage in understanding the inner workings of the central state, it also left him beholden to that bureaucracy. Unlike Zhu, who was able to halve the size of the central government in 1998, Wen’s attempt at administrative restructuring in 2003 was relatively unsuccessful. Reports at the time indicated that Wen planned to whittle down the number of ministries by as many as seven, but he eventually axed only one central agency. Instead, agencies dedicated to industrial policy, such as the National Development and Reform Commission, gained greater influence: the NDRC became informally known as the “mini State Council.” In 2008, the newly created Ministry of Industry and Information Technology added to the central government’s increasingly activist role in enacting statist industrial policies.

Dysfunction in the WTO dealt a blow to the cause of pro-market reform.
The cause of pro-market reform was dealt a further blow by the failure of WTO members to agree to another comprehensive package for trade liberalization as part of the Doha Round of negotiations in Geneva in 2006. The disagreement over farm subsidies and import taxes underlined tensions within the trade body, and the ensuing impasse strengthened the hand of agencies in Beijing that oversaw industrial policy and did not subscribe to the market-friendly imperatives of the WTO. Dysfunction in the trade body meant that Chinese reformists could not repeat the success of 2001, lacking renewed external impetus for domestic liberalization.

The central government’s new policy trajectory started to become clear in the 2006 iteration of the Five-Year Plan, China’s periodic policy blueprint. It emphasized domestic innovation and reducing China’s reliance on foreign technology, reaffirming the dominant role of the state in the economy—and inevitably dispiriting foreign firms doing business in China. According to the American Chamber of Commerce in the People’s Republic of China’s annual surveys of its members, positive sentiment among U.S. firms operating in China fell to an all-time low in 2006.

The 2008 global economic crisis and its aftermath reinforced the regime’s statist turn by setting the stage for greater government intervention and laying bare the weaknesses of free-market capitalism. China responded to the downturn with a $580 billion fiscal stimulus and channeled the funds largely through SOEs and local governments. This spending strengthened the central state’s hand and boosted the ideological justification for statism. While many wealthy countries that had also enacted large fiscal stimulus programs soon shifted back to economic austerity (and a diminished role for the state), China continued on the path that it had embarked on before the crisis, toward greater state control of the economy. The state-owned sector had steadily shrunk in the years following China’s accession to the WTO. In 2001, 40 percent of all jobs in China were in the state sector. That figure had fallen to 20 percent by 2008, but this decline came to a halt in the years after 2008 and showed little change up to the end of the Hu-Wen administration, in 2012. Between 2008 and 2012, assets managed by state firms rose from over 12 trillion yuan to more than 25 trillion yuan.

Since Xi’s ascent to power in 2012, the state’s role in the economy has only become stronger and more pronounced. Private investment had for many years expanded at a faster pace than investment by state entities, but this dynamic began to weaken after 2012, and it even reversed from 2015 to 2016. China has continued to pursue free trade in its foreign relations, inking numerous deals with countries far and near, but the political energy for domestic market reform has all but disappeared. Recent years have seen the country’s SOEs become stronger and larger than before, boosted by national policies that reaffirm the dominant role of the state and the overarching supremacy of the CCP over the economy. China’s overseas economic footprint has also expanded significantly, most notably through Xi’s vast infrastructure and investment program known as the Belt and Road Initiative, sparking fears that China is seeking to export its brand of state capitalism globally. Such fears, however, are overblown.

China may have dashed the hope that it would become a liberal free-market economy, well integrated into the international economic system. But even now, its model of state capitalism is not the juggernaut that many make it out to be. In many respects, China still lives under the shadow of its entry into the WTO. Ultimately, the Chinese system is not likely to prove strong enough to completely resist the liberalizing effects of globalization or coordinated enough to effectively pursue its ambitions on the global stage through its SOEs.

In some ways, WTO membership reinforced the central government’s inability to prevent local governments from interpreting higher-level directives to serve their own interests. WTO entry brought a new surge of foreign capital into China, reducing the reliance of subnational governments on funding from Beijing and providing them with alternative resources to pursue their own goals—and the flexibility to disregard dictates from the capital. For example, despite Beijing’s desire to orient economic growth around increasing productivity, boosting technological development, and training a more skilled workforce, subnational governments have fixated on a quantitative approach to growth that relies on capital investment and high-profile development projects, undermining the overarching national effort. Instead of making long-term investments to raise the productivity of firms and their capacity for innovation, local officials seek out foreign direct investment to expand output for short-term gains, leading to projects that duplicate the work of others and generate problems of excess capacity.

China’s policy on so-called new-energy vehicles (electric and hybrid cars) illustrates this divide. In 2012, the central government’s State Council issued an industrial policy on such vehicles that stressed the importance of promoting innovation and explicitly warned local governments against “blindly making low-quality investments and duplicating construction.” But that same year, Hubei Province issued its own policy, which ignored the central government’s focus on technological innovation and high-quality production and instead stressed the need for “investment promotion” and “large-scale production” to scale up the manufacturing of the vehicles. Nor was Hubei alone in pushing for rapid expansion and disregarding the longer-term imperative of improving technological capacity. By 2017, the central government had to issue a new directive to curb the overinvestment of local governments in the production of new-energy vehicles.

The sweeping liberalization that China’s central government embarked on at the beginning of this century showed the positive effects of the country’s joining the WTO. But it was naive then to expect China to fully open up its economy and integrate it into the international trading system, just as it is simplistic now to think that China has abandoned liberal reform for the more familiar comforts of state capitalism. The Chinese economy is neither entirely marketized nor completely state-controlled, and any sensible China policy cannot treat the system as a monolith.